Article explains Meaning Of Corporate Mergers, What Do You Understand By Mergers, Difference between Merger and Acquisition, Reasons For Failures Of Mergers, Bank Mergers and Acquisitions: A Common Phenomenon, Amalgamations Provisions Income Tax Act 1961, Types of Corporate Mergers, Legal Procedure For Corporate Mergers and Benefits Of Corporate Mergers.
Recently the news about two of the best banks in India having recognition I in their won fields namely Allahabad Bank in northern India and the Indian bank in southern India merger is in news. The newly merged entity plans to start its operations from 1 April 2020. This raises questions “WHY DO THEY DO SO”? HOW DO THEY BENEFIT FROM IT? Etc. Let’s delve into the deeper aspects of Mergers and Acquisitions and the reason behind their increase in India.
Mergers and acquisitions (M&A) is a general term used to describe the consolidation of companies or assets through various types of financial transactions, including mergers, acquisitions, consolidations, tender offers, purchase of assets and management acquisitions. The term M&A also refers to the desks at financial institutions that deal with such activity. Mergers, acquisitions, and takeovers have been a part of the business world for centuries. In today’s dynamic economic environment, companies are often faced with decisions concerning these actions – after all, the job of management is to maximize shareholder value. Through mergers and acquisitions, a company can (at least in theory) develop a competitive advantage and ultimately increase shareholder value.
In simple terms, A merger involves the mutual decision of two companies to combine and become one entity; it can be seen as a decision made by two “equals”, whereas an acquisition or takeover, on the other hand, is characterized the purchase of a smaller company by a much larger one.
The concept of merger and acquisition in India was not popular until the year 1988. During that period a very small percentage of businesses in the country used to come together, mostly into a friendly acquisition with a negotiated deal. The key factor contributing to fewer companies involved in the merger is the regulatory and prohibitory provisions of the MRTP Act, 1969. According to this Act, a company or a firm has to follow a pressurized and burdensome procedure to get approval for mergers and acquisitions.
The year 1988 witnessed one of the oldest business acquisitions or company mergers in India. It is the well-known ineffective unfriendly takeover bid by Swaraj Paul to overpower DCM Ltd. and Escorts Ltd.
This combination of “unequal” can produce the same benefits as a merger, but it does not necessarily have to be a mutual decision. A typical merger, in other words, involves two relatively equal companies, which combine to become one legal entity with the goal of producing a company that is worth more than the sum of its parts.
In a merger of two corporations, the shareholders usually have their shares in the old company exchanged for an equal number of shares in the merged entity. In an acquisition, the acquiring firm usually offers a cash price per share to the target firm’s shareholders or the acquiring firm’s share’s to the shareholders of the target firm according to a specified conversion ratio. Either way, the purchasing company essentially finances the purchase of the target company, buying it outright for its shareholders.
Both the terms “Merger and acquisition” are often known to be a single terminology defined as a process of combining two or more companies together. However, fact remains that the so-called single terminologies are different terms used under different situations. Though there is a thin line difference between the two but the impact of the kind of completely different in both the cases.
(1) A flawed intention in terms of unethical motivation or high expectations can eventually lead to failure of the merger. If any company desires high capital gain along with glory and fame irrespective of the corporate strategy defined to fulfill the requirements of the company, the merger fails.
(2) Any kind of agreement based completely on the optimistic stock market condition can also lead to failure as the stock market is an uncertain entity. In such cases more risks are involved with the prevailing merger.
(3) Cultural difference is also a big problem in the case of a merger. When two companies from different corporate cultures come together it becomes a really challenging task to integrate the cultures of both the companies. It is certainly difficult to maintain the difference and move ahead for success with
Hence, an Amalgamation must necessarily be conducted under a scheme of arrangement approved by the High Court.
1. All the properties and liabilities of the amalgamating company must become the properties and liabilities of the amalgamated company by virtue of the Amalgamation; and
2. Shareholders holding at least 3/4th in value of the shares in the amalgamating company (not including shares held by a nominee or a subsidiary of the amalgamated company) become shareholders of the amalgamated company by virtue of the Amalgamation.
3. Transfer of shares in a foreign company in an amalgamation between two foreign companies, where such transfer results in an indirect transfer of Indian shares.3 The criteria to be satisfied to avail of this exemption are the same as above.
4. Transfer of shares by the shareholders of the amalgamating company in consideration for allotment of shares in the amalgamated company is not regarded as transfer for capital gains purpose. This exemption is available if the amalgamated company is an Indian company.
For such shareholders, the cost of acquisition of shares of the amalgamated company will be deemed as the cost at which the shares other amalgamating companies were acquired by the shareholder.
From the perception of business organizations, there is a whole host of different mergers. However, from an economist point of view i.e. based on the relationship between the two merging companies, mergers are classified into the following:
(1) Horizontal merger- Two companies that are in direct competition and share the same product lines and markets i.e. it results in the consolidation of firms that are direct rivals. E.g. Exxon and Mobil, Ford and Volvo, Volkswagen and Rolls Royce and Lamborghini
(2) Vertical merger- A customer and company or a supplier and company i.e. merger of firms that have actual or potential buyer-seller relationship eg. Ford- Bendix, Time Warner-TBS.
(3) Conglomerate merger- Generally a merger between companies that do not have any common business areas or no common relationship of any kind. Consolidated firm may sell related products or share marketing and distribution channels or production processes. Such kind of merger may be broadly classified into the following:
(4) Product-extension merger – Conglomerate mergers which involves companies selling different but related products in the same market or sell non-competing products and use the same marketing channels of the production process. E.g. Phillip Morris-Kraft, Pepsico- Pizza Hut, Proctor and Gamble and Clorox.
(5) Market-extension merger – Conglomerate mergers wherein companies that sell the same products in different markets/ geographic markets. E.g. Morrison supermarkets and Safeway, Time Warner-TCI.
(6) Pure Conglomerate merger- two companies which merge have no obvious relationship of any kind. E.g. BankCorp of America- Hughes Electronics.
On a general analysis, it can be concluded that Horizontal mergers eliminate sellers and hence reshape the market structure i.e. they have a direct impact on seller concentration whereas vertical and conglomerate mergers do not affect market structures e.g. the seller concentration directly. They do not have anti-competitive consequences.
The Ministry of Corporate Affairs, Government of India, vide notification dated 14th December 2016 has issued rules i.e. the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016 under Chapter XV of the act which came into effect from 15th December 2016 after which all compromises, arrangements, and mergers shall have to be carried out in accordance with the Companies Act 2013 (essentially Sections 230, 231 and 232) and the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016. Following mentioned is the procedure to merge two corporate entities:
1. Board Meeting: At first, the company shall convene a board meeting where it is resolved to amalgamate with another company.
2. Application to Tribunal: The company shall then make an application in Form No. NCLT-1 to the National Company Law Tribunal of relevant territorial jurisdiction. The application shall be accompanied by:
3. Draft :
(i) Notice of admission in Form No. NCLT-2 along with following documents:
(ii) An affidavit in Form No. NCLT-6
(iii) A copy of the scheme of compromise or arrangement, which should include the following disclosures–
(a) All material facts relating to the company, such as the latest financial position of the company, the latest auditor’s report on the accounts of the company and the pendency of any investigation or proceedings against the company;
(b) Reduction of share capital of the company, if any, included in the amalgamation;
(c) Any scheme of corporate debt restructuring consented to by not less than seventy-five percent of the secured creditors in value, including—
(1) A creditor’s responsibility statement in Form No. CAA. 1;
(2) Safeguards for the protection of other secured and unsecured creditors;
(3) 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
(4) where the company proposes to adopt the corporate debt restructuring guidelines specified by the Reserve Bank of India, a statement to that effect; and
(5) 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.
(iv) Fee as prescribed in the Schedule of Fees.
v) Apart from the above, the applicant shall also disclose to the tribunal, the basis on which each class of members or creditors has been identified for the approval of the scheme. It shall essentially give directions pertaining to the following matters:-
(a) Determining the class or classes of creditors or of members whose meeting or meetings have to be held for considering the proposed compromise or arrangement;
(b) Fixing the time and place of the meeting or meetings;
(c) 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;
(d) 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;
(e) 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;
(f) Notice to be given of the meeting or meetings and the advertisement of such notice;
(g) Notice to be given to sectoral regulators or authorities as required under subsection (5) of section 230;
(h) The time within which the chairperson of the meeting is required to report the result of the meeting to the Tribunal; and
(i) Such other matters as the Tribunal may deem necessary.
(ii) Notice Of The Meeting:
(i) Details of the order of the Tribunal directing the calling, convening and conducting of the meeting:
(a) Date of the Order;
(b) Date, time and venue of the meeting.
(ii) Details of the company including:
(a) Corporate Identification Number (CIN) or Global Location Number (GLN) of the company;
(b) Permanent Account Number (PAN);
(c) Name of the company;
(d) Date of incorporation;
(e) Type of the company (whether public or private or one-person company);
(f) Registered office address and e-mail address;
(g) Summary of the main object as per the memorandum of association; and main business carried on by the company;
(h) Details of the change of name registered office and objects of the company during the last five years;
(i) name of the stock exchange (s) where securities of the company are listed, if applicable;
(j) Details of the capital structure of the company including authorized, issued, subscribed and paid-up share capital; an
(k) Names of the promoters and directors along with their addresses.
(iii) The date of the board meeting at which the scheme was approved by the board of directors including the name of the directors who voted in favor of the resolution, who voted against the resolution and who did not vote or participate on such resolution;
(iv) Explanatory statement disclosing details of the scheme of compromise or arrangement including:-
(a) Parties involved in such compromise or arrangement;
(b) Appointed date, effective date, share exchange ratio (if applicable) and other considerations, if any
(c) summary of valuation report (if applicable) including basis of valuation and fairness opinion of the registered valuer, if any, and the declaration that the valuation report is available for inspection at the registered office of the company;
(d) Details of capital or debt restructuring, if any;
(e) The rationale for the compromise or arrangement;
(f) Benefits of the compromise or arrangement as perceived by the Board of directors to the company, members, creditors, and others (as applicable);
(g) Amount due to unsecured creditors.
(v) Disclosure about the effect of the compromise or arrangement on:
(a) Key managerial personnel;
(d) Non-promoter members;
(g) Debenture holders;
(h) Deposit trustee and debenture trustee;
(i) Employees of the company:
(vi) Disclosure about the effect of compromise or arrangement on material interests of directors, Key Managerial Personnel (KMP) and debenture trustee.
(vii) Investigation or proceedings, if any, pending against the company under the Act.
(viii) Details of the availability of the following documents for obtaining an extract from or for making or obtaining copies of or for inspection by the members and creditors, namely:
(a) Latest audited financial statements of the company including consolidated financial statements;
(b) Copy of the order of Tribunal in pursuance of which the meeting is to be convened;
(c) Copy of scheme of compromise or arrangement;
(d) Contracts or agreements material to the compromise or arrangement;
(e) the certificate issued by Auditor of the company to the effect that the accounting treatment, if any, proposed in the scheme of compromise or arrangement is in conformity with the Accounting Standards prescribed under Section 133 of the Companies Act, 2013; and
(f) Such other information or documents as the Board of Management believes necessary and relevant for making a decision for or against the scheme;
(ix) Details of approvals, sanctions or no-objection(s), if any, from regulatory or any other governmental authorities required, received or pending for the proposed scheme of compromise or arrangement.
(x) A statement to the effect that the persons to whom the notice is sent may vote in the meeting either in person or by proxies, or where applicable, by voting through electronic means.
iii) Advertisement: The notice of the meeting shall be advertised in Form No. CAA. 2 in at least one English newspaper and in at least one vernacular newspaper having wide circulation in the State in which the registered office of the company is situated. A copy of the notice shall also be placed, not less than thirty days before the date fixed for the meeting, on the website of the company .It may be noted that the two companies may give a joint advertisement.
iv). Notice To Statutory Authorities: The aforesaid notice along with a copy of the scheme of compromise or arrangement, the explanatory statement and the aforementioned disclosures, shall also be sent to the Central Government, the income-tax authorities, the Reserve Bank of India, the Registrar of Companies, the Official Liquidator, the Competition Commission of India and such other sectoral regulators or authorities which are likely to be affected by the amalgamation in form CAA-3.If the authorities stated above the desire to make any representation, the same shall be sent to the Tribunal within a period of thirty days from the date of receipt of such notice and copy of such representation shall simultaneously be sent to the concerned companies
vi) Affidavit Of Service.— The Chairperson appointed for the meeting of the company or other person directed to issue the advertisement and the notices of the meeting shall file an affidavit before the Tribunal not less than seven days before the date fixed for the meeting or the date of the first of the meetings, as the case may be, stating that the directions regarding the issue of notices and the advertisement have been duly complied with.
vii) Convene Meeting: The next step is to convene a meeting of members, creditors or a class of them to accord sanction to the scheme. The scheme is said to be approved in the meeting where the majority of persons representing three-fourths in value of the creditors, or class of creditors or members or class of members, as the case may be, voting in person or by proxy or by postal ballot, agree to it.
(1) The voting at the meeting shall take place by poll or by voting through electronic means.
(2) Report of the result of the meeting— The Chairperson of the meeting shall, within the time fixed by the Tribunal, or where no time has been fixed, within three days after the conclusion of the meeting, submit a report to the Tribunal on the result of the meeting in Form No. CAA.4.
vii) Petition for confirming compromise or arrangement—The company (or its liquidator), shall, within seven days of the filing of the report by the Chairperson, present a petition to the Tribunal in Form No. CAA.5 for sanction of the scheme of amalgamation. In case of the company’s failure, it shall be open to any creditor or member as the case may be, with the leave of the Tribunal, to present the petition and the company shall be liable for the cost thereof.
viii) Date and a notice of hearing— (1) The Tribunal shall fix a date for the hearing of the petition, and notice of the hearing shall be advertised in the same newspaper in which the notice of the meeting was advertised, or in such other newspaper as the Tribunal may direct, not less than ten days before the date fixed for the hearing.
(2) The notice of the hearing of the petition shall also be served by the Tribunal to the objectors or to their representatives under sub-section (4) of section 230 of the Act and to the Central Government and other authorities who have made representation under rule 8 and have desired to be heard in their representation.
ix) Order On Petition—
(1) Where the Tribunal sanctions the compromise or arrangement, the order shall include such directions in regard to any matter or such modifications in the compromise or arrangement as the Tribunal may think fit to make for the proper working of the compromise or arrangement.It shall be in Form No. CAA. 6, with such variations as may be necessary.
(2) The company shall cause a certified copy of the order to be filed with the Registrar for registration within thirty days of the receipt of a certified copy of the order.
(3) The scheme shall clearly indicate an appointed date from which it shall be effective and the scheme shall be deemed to be effective from such date and not at a date subsequent to the appointed date.
(4) The company shall, until the completion of the scheme, file a statement in such form and within such time as may be prescribed with the Registrar every year duly certified by a chartered accountant or a cost accountant or a company secretary in practice indicating whether the scheme is being complied with in accordance with the orders of the Tribunal or not. 9) Merger and amalgamation of a company with a foreign company: The merger and amalgamation of a company with a foreign company shall be effective upon-
(a) Sanction of the scheme by the Tribunal in India in accordance with the Act and these Rules; and
(b) Sanction of the scheme by the relevant adjudicating and regulatory authorities of the notified countries having jurisdiction over the other companies who are party to such scheme, in accordance with the law applicable to sanction of such schemes in those countries, if applicable.
d) For the purposes of this rule, a “company‟ means a company as defined under section 2(30) of the Act and a „foreign company‟ means a company or a body corporate as defined under section 2(42) of the Act, incorporated outside India in jurisdictions as may be notified by the Central Government from time to time for the purpose of section 234 (Levi 2007).
Corporate mergers bring lots of benefits for the business concerned. The basic reason behind mergers and acquisitions is that organizations merge and form a single entity to achieve economies of scale, widen their reach, acquire strategic skills, and gain competitive advantage. In simple terminology, mergers are considered as an important tool by companies for the purpose of expanding their operation and increasing their profits, which in the façade depends on the kind of companies being merged.
The general advantage behind mergers and acquisitions is that it provides a productive platform for the companies to grow, though much of it depends on the way the deal is implemented. It is a way to increase market penetration in a particular area with the help of an established base. As per Mr. D.S Brar (former C.E.O of Ranbaxy pharmaceuticals), few reasons for the formation of Manda’s are:
1) Access to new markets
2) Maintaining growth momentum
3) Acquiring visibility and international brands
4) Buying cutting edge technology rather than importing it
5) Taking on global competition
6) Improving operating margins and efficiencies
7) Developing new product mixes
In real terms, the rationale behind mergers and acquisitions is that the two companies become more valuable, profitable, better equipped in its operations rather than standing solely in the market and that the shareholder value is also over and above that of the sum of the two companies.