The Companies Act, 2013 (2013 Act) has seen the light of day and replaced the 1956 Act with some sweeping changes including those in relation to mergers and acquisitions (M&A).
The new Act has been lauded by corporate organizations for its business-friendly corporate regulations, enhanced disclosure norms and providing protection to investors and minorities, among other factors, thereby making M&A smooth and efficient. Its recognition of interse shareholder rights takes the law one step forward to an investor-friendly regime. The 2013 Act seeks to simplify the overall process of acquisitions, mergers and restructuring, facilitate domestic and cross-border mergers and acquisitions, and thereby, make Indian firms relatively more attractive to PE investors.
The term ‘merger’ is not defined under the Companies Act, 1956 (“CA 1956”), and under Income Tax Act, 1961 (“ITA”). However, the Companies Act, 2013 (“CA 2013”) without strictly defining the term explains the concept. A ‘merger’ is a combination of two or more entities into one; the desired effect being not just the accumulation of assets and liabilities of the distinct entities, but organization of such entity into one business.
On 7th November, 2016 Central Government issued a notification for enforcement of section 230-233, 235-240, 270-288 etc w.e.f. 15th December, 2016. But still rules were not available till date for CAA.
MCA vide notification dated 14th Dec, 2016 has issued rules i.e. The Companies (Compromises, Arrangements and Amalgamations) Rules, 2016. These rules will be effective from 15th December, 2016. Consequently, w.e.f. 15.12.2016 all the matters relating to Compromises, Arrangements, and Amalgamations (hereafter read as “CAA”) will be dealt as per provisions of Companies Act, 2013 and The Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016.
Where a compromise or arrangement is proposed for the purposes of or in connection with scheme for the reconstruction of any company or companies, or for the amalgamation of any two or more companies, the petition shall pray for appropriate orders and directions under section 230 read with section 232 of the Act.
Section relating to Merger & Amalgamation Section 230 & 232.
In this article COMPROMISE & ARRANGEMENT (C&A) will be read in relation to Merger & Amalgamation only.
In Case of application filing u/s 230 for Compromise & Arrangement in relation to reconstruction of the Company or companies involving merger or the amalgamation of any two or more companies should specify the purpose of the scheme.
|REASON OF M&A
· Expansion and Diversification
· Optimum Economic Benefit
· De-risking Strategy
· Scaling up of operation for competitive advantages
· Increase the Market capitalization
· Cost reduction by reducing overheads
· Increasing the efficiencies of operations
· Tax benefits
· Access foreign markets
Amalgamation – means combination of two or more independent business corporations into a single enterprise
Demerger– means transfer and vesting of an undertaking of a company into another company
Reconstruction- means re-organization of share capital in any manner; varying the rights of shareholders and/or creditors
Arrangement- All modes of reorganizing the share capital, including interference with preferential and other special rights attached to shares
Who can file the application for Merger & Amalgamation propose: Section 230(1)
An application for Merger & Amalgamation can be file with Tribunal (NCLT). Both the transferor and the transferee company shall make an application in the form of petition to the Tribunal under section 230-232 of the Companies Act, 2013 for the puspose of sanctioning the scheme of amalgamation.
Joint Application: Rule 3(2)
Where more than one company is involved in a scheme, such application may, at the discretion of such companies, be filed as a joint-application.
However, where the registered office of the Companies are in different states, there will be two Tribunals having the jurisdiction over those, companies, hence separate petition will have to be filed.
1. Format of Application
Application to the tribunal for Merger & Amalgamation will be submitted in form no. NCLT-1 along with following documents: Rule 3(1)
a) A notice of admission in Form No. NCLT-2
b) An affidavit in form no. NCLT-6
c) A copy of Scheme of C&A (Merger & Amalgmation)
d) A disclosure in form of affidavit including following points Section 230(2)
– All material facts relating to the company, such as
i. the latest financial position of the company,
ii. the latest auditor’s report on the accounts of the company and
iii. the pendency of any investigation or proceedings against the company
– Reduction of share capital of the company, if any, included in the compromise or arrangement
e) Any scheme of Corporate Debt Restructuring consented to by not less than seventy five per cent. of the secured creditors in value, including
i. A Creditor’s Responsibility statement in the form No. CAA-1.
ii. safeguards for the protection of other secured and unsecured creditors;
iii. report by the auditor that the fund requirements of the company after the corporate debt restructuring as approved shall conform to the liquidity test based upon the estimates provided to them by the Board;
iv. where the company proposes to adopt the corporate debt restructuring guidelines specified by the Reserve Bank of India, a statement to that effect; and
v. a valuation report in respect of the shares and the property and all assets, tangible and intangible, movable and immovable, of the company by a registered valuer.
f) The applicant shall also disclose to the Tribunal in the application, the basis on which each class of members or creditors has been identified for the purposes of approval of the scheme.
2. Calling of Meeting by Tribunal:
Upon hearing of the application Tribunal shall, unless it thinks fit for any reason to dismiss the application, give such directions / order as it may think necessary in respect meeting of the creditors or class of creditors, or of the members or class of members, as the case may be, to be called, held and conducted in such manner as prescribed in rule 5 of CAA Rules, 2016 as follow:
i. Fixing the time and place of the meeting or meetings;
ii. Appointing a Chairperson and scrutinizer for the meeting or meetings to be held, as the case may be and fixing the terms of his appointment including remuneration;
iii. Fixing the quorum and the procedure to be followed at the meeting or meetings, including voting in person or by proxy or by postal ballot or by voting through electronic means;
iv. Determining the values of the creditors or the members, or the creditors or members of any class, as the case may be, whose meetings have to be held;
v. Notice to be given of the meeting or meetings and the advertisement of such notice.
vi. Notice to be given to sectoral regulators or authorities as required under sub-section (5) of section 230;
vii. The time within which the chairperson of the meeting is required to report the result of the meeting to the Tribunal; and
viii. Such other matters as the Tribunal may deem necessary.
3. Notice of Meeting: The Notice of the meeting pursuant to the order of tribunal to be give in Form No. CAA-2. Rule 6
Person entitled to receive the notice The notice shall be sent individually to each of the Creditors or Members and the debenture-holders at the address registered with the company. Section 230(3)
Person authorized to send the notice:
Modes of Sending of notice:
Documents to be send along with notice: The notice of meeting send with (i) Copy of Scheme of C&A and (ii) Following below mentioned details of C&A if not included in the said scheme:
a. Details of the order of the Tribunal directing the calling, convening and conducting of the meeting:-
b. Details of the company including:
c. Relationship in case of Combined Application: if the scheme of compromise or arrangement relates to more than one company, then the fact and details of any relationship subsisting between such companies who are parties to such scheme of compromise or arrangement, including holding, subsidiary or of associate companies.
d. Disclosure about effect of M&A on material interests of directors, Key Managerial Personnel (KMP) and debenture trustee
e. Details of Board Meeting:
f. Explanatory Statement disclosing details of the scheme of compromise or arrangement including:
g. Disclosure about the effect of the Merger & Amalgamation (C&A) on: Section 230(3)
h. A report adopted by the directors of the merging companies explaining effect of compromise on each class of shareholders, key managerial personnel, promoters and non-promoter shareholders laying out in particular the share exchange ratio, specifying any special valuation difficulties;
i. Below Mentioned Details: Following below mentioned details
j. Details of avaibility of documents: Details of the availability of the following documents for obtaining extract from or for making or obtaining copies of or for inspection by the members and creditors, namely
k. Some Other documents: Where an order has been made by the Tribunal under section 232(1), merging companies or the companies in respect of which a division is proposed, shall also be required to circulate the following:
 In the case of Kirloskar Electricals Co. Ltd., the Court held that various clauses of Section 394(1) of the Companies Act suggest that both the transferor and the transfer company shall make an application to the Court and under section 391-394 of the Companies Act, 1956 for sanction of the scheme of Compromise or arrangement involving amalgamation of the Companies.
 In the case of Mohan Exports Ltd. V/s Tarun Overseas Pvt. Ltd., it was held that if both the Companies are under the jurisdiction of the same High Court, Joint petition may be made.
 Scheme of Corporate Debt restructuring as referred in section 230(2)(c) means “a scheme that restructures or varies the debt obligation of a company toward its creditors”.
 It is hereby clarified that the service of notice of meeting shall be deemed to have been effected in case ofdelivery by post, at the expiration of forty eight hours after the letter containing the same is posted
Explanation – For the purposes of these rules it is clarified that-
(a) the term ‘interest’ extends beyond an interest in the shares of the company, and is with reference to the proposed scheme of compromise or arrangement.
(b) the valuation report shall be made by a registered valuer, and till the registration of persons as valuers is prescribed under section 247 of the Act, the valuation report shall be made by an independent merchant banker who is registered with the Securities and Exchange Board or an independent chartered accountant in practice having a minimum experience of ten years.
 the valuation report shall be made by a registered valuer, and till the registration of persons as valuers is prescribed under section 247 of the Act, the valuation report shall be made by an independent merchant banker who is registered with the Securities and Exchange Board or an independent chartered accountant in practice having a minimum experience of ten years.
(Author – CS Divesh Goyal, ACS is a Company Secretary in Practice from Delhi and can be contacted at firstname.lastname@example.org)