INTRODUCTION
Over the period of time, a business grows and expands itself. Companies can either internally restructure the company, or amalgamate with some other company, in order to bring about a change. This growth can be organic or inorganic depending on the way the business chooses to grow. When the company grows over the time in the normal course of the business, this could be through acquisition of new assets, replacement of old technologies that are there, advancement of the technology by research and development, or by establishing new lines of product growth, in such cases it is a organic growth. The company can even have an inorganic growth, where it acquires another business which is running, and through this it grows overnight. In such growth, there is no thing as advancement of technology by research and development, rather, the company acquires shares of other business or merges, and grows. Such combinations can be in the form of mergers, acquisitions, takeover, amalgamations, etc. The inorganic form of growth is one of the form in which most of the leading business over the world has grown.
COMPROMISE
Compromise is an amicable agreement between the parties in which they make mutual concessions in order to solve the differences between them.
ARRANGEMENT
Arrangement is the process by which the share capital of the company is reorganised either by consolidation or division of the shares, or doing both.
Arrangement is a set and compromise is a subset of arrangement.
AMALGAMATION
Amalgamation is the process where two business who are willing to combine or carry out their business together, come together. The businesses or the companies, which are coming together, are the amalgamating companies, and the new alliance formed is the amalgamated company.
REORGANISATION
Reorganisation is the process by which a company restructures itself, in order to adapt to the new environment of business.
MERGER
Merger is the joining together of two separate entities. A merger occurs when two businesses fold their businesses and form themselves into a newly formed legal entity.
Company A + Company B = Company C
TYPES OF MERGERS
- Horizontal Merger: It is the combination between those business which have the same area of business. Its is mostly done in order to reshape the market structure and eliminate sellers.
Eg: Merger of two Telecom Companies
- Vertical Merger: As against the horizontal merger, it is the combination of business in the same line of business, i.e, business engaged in different stages of production/distribution of the same product.
For example, car manufacturing company merging with tyre manufacturing companies.
- Conglomerate: It is the combination between those business which have the different area of business. They are those companies which are in different areas of business but are coming together for some reasons.
For example, merging of cement manufactures with an insurance company.
Conglomerate Mergers can be for different types:
1. Product Extension Conglomerate:
When conglomerate mergers of those companies take place which are selling :
- Different but related products in the same market
- Non competing products in the same market
Or of those companies which are use same marketing channels of production process, then it is a product extension conglomerate.
For example, Pepsico and Pizza Hut, etc.
2. Market Extension Conglomerate:
When conglomerate mergers of those companies take place which are selling same product in different markets, it is a market extension conglomerate.
For example, Morrison Super markets and safe way.
- Pure Conglomerate:
When the conglomeration takes place between two entities of any kind which have no comman/similar/related business, i.e, there is no relationship between the business of the entities, then it is a Pure Conglomerate.
REGULATORY ASPECTS:
- Income Tax (DTC): when a company comes together with a loss making company, in order to avoid tax
- Stamp Duty
- FEMA: When Indian companies come together with foreign companies
- Indirect Tax
- SEBI & Stock Exchanges
- Accounting Standards
- Takeover Regulations
- Competition Commission of India
- Companies Act, 2013
COMPROMISE AND ARRANGEMENT
Compromise is a narrower set of things, whereas Arrangement is a larger set of things. As per Section 230 of the Companies Act, 2013, Compromises and Arrangements can take place between:
a. a company and its creditors/any class of them, or
b. a company and its members/any class of them
As per the said act, the application for the Compromises and Arrangements can be filed before the tribunal, i.e, NCLT by any of the following people:
- Company
In case more than one company is involved, joint application can be filed at the discretion of the company.
- Creditor
- Members
- Liquidator (in case of winding up)
On the basis of the application received by the Tribunal by Company/Creditors/Members/Liquidator, it orders a meeting of the class involved. The class meeting of separate class is called. Clubbing of the classes is not allowed. Only if a separate or a different type of compromise is offered to a subclass of a class, then separate meeting for the subclass of a class is allowed.
However, as per Section 230, the tribunals does not look into the matters of entitlement of brands, trademarks, names, etc, until and unless there are some implications. Else these are the matters of civil court.
If at the meeting, at least 3/4th of the members/creditor either in value or number, agree to compromise or arrangement, either in person or by postal ballot, then the compromise or arrangement will be binding on all credits/class of creditors or members/class of members.
In those cases, where the company is being wound up by the liquidator or by contributors of the company, then the compromise or arrangement will be binding on all credits/class of creditors or members/class of members.
Once the scheme of arrangement is finalised and accepted by different class of people it goes to the tribunal then the tribunal looks into it. After which the Tribunal has to act in supervisory capacity and then the scheme. In case an arrangement regarding de-mergers has been finalised, it will be binding on all the creditor, irrespective of whether they agreed or not.
Before sanctioning the scheme, the tribunal has to check if the statutory provisions have been complied with. It has to be satisfied that the company has submitted to the tribunal the following information by means of an affidavit:
1. All material facts relating to the company’s financial status, audit reports, pending investigations if any
2. Reduction of share capital included in the compromise/arrangement
3. Any scheme of re-structuring which has a consent of 75% of secured creditors n value
4. A statement, if the company proposes to adopt any debt restructuring guidelines as per RBI
5. Valuation report of properties both tangible and intangible by a registered valuer.
The tribunal further needs to check if all the class have been fairly represented. Moreover as was laid out in the case of Miheer H Mafatal v. Mafatal Industries (1997), the tribunal needs to make sure that the scheme is fair and reasonable. This case lays out the various points according to which the tribunal checks the scheme.
POWERS OF TRIBUNAL
The tribunal has wide powers when it comes to Compromise or Arrangements.
1. It has the power to modify or supervise the carrying out of Compromise or Arrangements.
2. It has the power to delete certain approved clauses, if it is important in its opinion to do so.
3. It has power to order for winding up of the company.
4. However, when the majority does not sanction the scheme, the tribunal cannot sanction it.
5. It has the power to recall the meeting, if it receives the information that the correct facts were not provided.
6. It has the power to order for repayment of dues of creditors or depositors.
7. It has the power to recall its ex-pate passed order, if the intervenor proves that the order passed u/s 230 was illegal or passed under misconception.
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