Understanding the meaning of the term Amalgamation

The term “Amalgamation” has not been defined under the Companies Act 2013. Basically, amalgamation is an external form of corporate reconstruction  where two or more companies combine with each other (Transferor Company) resulting into formation of a new entity (Transferee Company). As per Accounting Standard – 14 (AS-14), amalgamation can either be in the form of a merger or a purchase.

Chapter XV of Companies Act 2013 (i.e. Section 230 to 240) consolidates the applicable provisions and related issues of compromises, arrangements and amalgamations.

Understanding the meaning of  Scheme of Amalgamation

The companies that propose to amalgamate must prepare a “Scheme of Amalgamation” (“Scheme“). The Scheme is basically a document that provides for all the terms and conditions of the proposed amalgamation which are finalized by the board of directors of the amalgamating companies.

The Scheme being the most fundamental document in the entire process of amalgamation must be drafted with utmost care and precision by taking into consideration all the possible implications under various laws applicable to the amalgamating companies.

Key Points while drafting a Scheme of Amalgamation under Companies Act 2013

The Scheme of Amalgamation can broadly be divided into three parts, namely – the Preamble, the Scheme of Amalgamation & the General terms and conditions applicable to the Scheme.

A.Preamble of the Scheme:

The preamble of the Scheme is basically the introduction of the Transferor and the Transferee Company wherein the description of the business of the companies is set out. This clause should also mention the rationale (i.e. the purpose) for carrying out such amalgamation. The rationale of the Scheme must be in interests of the shareholders/members of the companies.

B. Scheme of Amalgamation:

The Scheme of Amalgamation sets out important terms and conditions as laid down and agreed between the board of directors of the amalgamating companies.

These are as follows –

i.Definitions:

This clause provides definitions for terms like – Act, Appointed Date, Board of Directors, Effective Date, Record Date, Registrar of Companies, Scheme, Transferee Company, Transferor Company, Undertaking and other terms that are significant in the matter. Such terms should be well framed before the same are finalized.

ii. Share Capital:

This clause provides the details of authorized, issued, subscribed and paid up share capital of the Transferor Company and the Transferee Company.

iii. Transfer & Vesting of Undertaking:

This clause ideally provides the details of –

    • Transfer and vesting of Undertaking (all assets whether moveable or immoveable)
    • Transfer and vesting of Licenses, Permissions, Rights, Approvals (if any)
    • Transfer and vesting of all the debts and liabilities
    • Tax payments by the Transferor Company
    • Transfer and vesting of investments

iv. Legal Proceedings:

This clause provides that upon the Scheme coming to effect, all the legal proceedings shall be enforced by or against the Transferee Company.

v. Date of taking effect and the operative date:

The Scheme, although operative from the Appointed Date, shall become effective from the Effective Date.Such date shall be mentioned herein the clause.

vi. Employees & Staff of the Transferor Company:

 This clause essentially provides that all employees of the Transferor Company shall become employees of the Transferee Company without any break or interruption in service and on such terms and conditions as to remuneration not less favorable than those subsisting with reference to the Transferor Company.  It must also provide for the treatment to the Gratuity Fund, Provident Fund etc of the employees of the Transferor Company.

vii. Issue of shares by the Transferee Company :

This clause provides for the details of the shares issued by the Transferee Company to the Transferor Company in the form of a consideration to the proposed amalgamation.

The Share Certificates in relation to the shares held by the Equity and Preference Shareholders of the Transferor Company whose names are recorded in the Register of Members of the Transferor Company on the Record Date, fixed by the Board of Directors of the Transferee Company, shall be deemed to have been automatically cancelled and be of no effect on and from such Record Date.

 If there is any, cancellation of shares that can also be provided for.

viii. Accounting Treatment:

This clause provides for the method of accounting (as provided under AS-14) adopted for the proposed amalgamation. It provides the manner of treatment of assets and liabilities appearing in the balance sheets of the amalgamating companies, certain individual items like investment, amounts lying in miscellaneous expenditure etc. This clause also contains the provisions relating to treatment of unabsorbed depreciation, discharge if liabilities etc.

ix. Other terms may include clauses relating to – change in authorized share capital of the Transferee company (if any), board of directors, conduct of business by the Transferor Company till the Effective date, treatment to the contract, deeds, bonds and other instrument of the Transferor Company upon amalgamation, declaration of dividend etc.

C. GENERAL & OTHER TERMS & CONDITIONS

The general terms and conditions are applicable to the Scheme as a whole. These terms may include the following clauses –

  • Effect of modification/amends to the Scheme
  • Application to the National Company Law Tribunal and other authorities
  • Dissolution of Transferor Company
  • Approval/Sanctions required for the Scheme to be effective
  • Resolutions subsisting on the effective date
  • Expenses incidental and connected to the Scheme of Amalgamation &
  • Any other such terms which may deem fit for the proposed scheme of amalgamation

To conclude, drafting the Scheme of Amalgamation is the primary yet the most important step towards restructuring the business of any company. The same should be drafted with utmost accuracy taking into consideration all the relevant laws, rules and regulations and their implications on the proposed amalgamation.

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Qualification: Post Graduate
Company: Legalogic Consulting, Pune
Location: Pune, Maharashtra, IN
Member Since: 05 May 2020 | Total Posts: 2
Sapna Sarda (LLM I ACS), Legal Advisor at Legalogic Consulting,Pune. View Full Profile

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