Amalgamation Merger

8/3/2019 Amalgamation Merger

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Amalgamation & Merger


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Corporate restructuring is vital for survival of a Company

in the competitive environment.

Ordinary meaning of the word restructure is toorganize differently, to organise something such as system

or a company in a new and different way.

Expression Corporate Restructuring implies

reorganising a company or its business or its financialstructure in such a way so as to enable it to make it

operate more effectively.


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Corporate restructuring would include both debt

restructuring and capital restructuring.

A Corporate restructuring can also be divided as an

exercise in internal reconstruction and externalreconstruction with or without a scheme of compromise.

Exercise of corporate restructuring is as much a legal

exercise as it is a business exercise.


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Restructure may be of two types (i) Organicrestructure and (ii) Inorganic restructure.

Organic restructure refers to an internal change

without a change in the corporate entity which a

Company owns. On the Other hand under the Inorganic

restructure the Corporate entity itself undergoes a

change.


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Types of organic restructure of a Corporate

entity:A. Capital Restructure

Changes in share capital by issue of shares to public for the first

time.

Changes in share capital by issue of new shares by way of rightsor otherwise

Change in capital employed by issue of debentures or bonds

Restructure to add or create shareholders value- Change in

share capital as part of buy back of shares

Restructuring as part of compromise or arrangement with

members or creditors and consequent reduction in capital or

voting rights.(other than


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B: Business Restructure

Rationalization of work force

Spin off of undertaking or brands etc

Acquisition on new tradeDiversification of new markets

Conversion of a public company to a private company

Joint venture-general or for particular work

Franchising and loan licensing


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Contd.

Conversion of a firm to a company

Conversion of public company to private company

Joint venture.

Under the non-organic restructure of a corporate entity

the most common form is amalgamation or merger or

demerger


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Some of the provisions of the Companies Act facilitate

corporate, business or financial restructure:

Chapter V of the Companies Act comprising section 390 to 396A

contains provisions on Arbitration, Compromises, Arrangements

and Reconstrutions(However no provison on Arbitration sincesection 389 which dealt with Arbitration stands deleted)

Section 100 to 105 of the Act which facilitate reduction of share

capital

Section 106 and 107 of the Act which facilitate variation of

shareholders right

Section 494 facilitates restructuring of a company in course of

winding up.


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Section 391 of the Companies Act,

1956

Initially enacted to facilitate restructuring of

a company facing distress and to wound up but

as an alternative mode for liquidation.

It corresponds to section 153 of the

Companies Act of 1913 and section 206 of the

English companies Act, 1948.

Any scheme of reconstruction of company,reorganization of share capital or

amalgamation with another may be carried

through this section.


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Section 390 to 393 of the Companies Act:

390. In section 391 and 393-

(a) the expression Company means any company liable to be

wound up under this Act

(b) the expression arrangement includes a reorganization ofhare capital of the company by the consolidation of shares of

different classes, or by the division of shares into shares of

different classes or by both these methods.

(c ) unsecured creditors who may have filed suits or obtained

decrees shall be deemed to be of same class as other unsecured

creditors.


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Contd.391(1) Where a compromise or arrangement is proposed-

(a) between a company and its creditors or any class of them; or

(b) between a company and its members or any class of them; or

the Tribunal may, on the application of the company or of any creditor or member of the

company, or, in the case of a company which is being wound up, of the liquidator, order a

meeting of 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 the Tribunal directs.

(2) If a majority in number representing three-fourths in value of the creditors, or class of

creditors or members or class of members, as the case may be , present and voting either in

person or , where proxies are allowed 1(under the rules made under section 643 , by proxy,

at the meeting, agree to any compromise or arrangement, the compromise or arrangement

shall, if sanctioned by the Tribunal, be binding on all the creditors, all the creditors of the

class, all the members, or all the creditors of the class, all the members or all the members

of the class, as the case be and also on the company or in the case of a company which is

being wound up, on the liquidator and contributories of the company

Provided that no order sanctioning any compromise or arrangement shall be made by theTribunal unless the Tribunal is satisfied that the company or any other person by whom an

application has been made under sub section(1) has disclosed to the Tribunal, by affidavit or

otherwise, all material facts relating to company such as latest financial position of the

company , the latest auditors report on the account of company , the pendency of any

investigation proceeding in relation to the company under section 235 to 251, and like.

(3) An order made by the Tribunal under sub-section(2) shall have no effect until a certified

copy of the order has been filed with Registrar.


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Analysisof the Meaning of the various

expressions:

(a) the expression company means any company liable to be wound up

under this Act.

Specific meaning of the term company applicable only for the

interpretation of sections 391 and 393.

The rationale behind a specific definition of the term company is :

Companies Act not only deals with companies but also other

associations which are not companies as generally understood.

The basic objective of the section 391 to 393 of the Act meant to resolve

disputes amongst the members of public be it members of company or

creditors or other associations.

Hence the definition made wider to cover not only a company but such

other associations as well.


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Contd.

Separate definition is to give effect to a compromise

or arrangement in respect of not only a corporate body

formed and registered under the Companies Act but

also other corporate bodies which are not formed and

registered under Companies Act.

Example: a company incorporated outside India (

Section 584 of the Act) or an unregistered company

which approaches the court for seeking winding up

directions( Section 582 of the Companies Act)


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Concept of Company liable to be wound up:The word liable predicates a further possibility or probability which may

or may not actually occur.

Bombay High Court in Khandelwal Udyog Limted and Acme Mfg Ltd(1977)

has interpreted the term as If a Company is within the reach of theprovisions of the Act pertaining to winding up such a company must be held

to be a company Liable to be wound up under this Act. and section 391 can

be invoked by such company.

A confusion prevailed in view of above judgment and also with a prior

judgment in Seksaria Cotton Mills Ltd that section 391 not applicable to a

financially sound company.Confusion was resolved by the later interpretations of the courts in Delhi

High Court in Telesound India Ltd(1983) 53 Com Cas 926 941(Delhi)

The expression liable to be wound up has nothing to do with the

satisfaction of the conditions for a winding up order or the objective of

conditions of a company and the expression must be construed to mean a

company which, on the conditions for winding up being satisfied, could bewound up under the Act

All that it meant to be included by the words liable to be wound up is that

it must be a company which is subject to the laws of winding up as provided

in the Companies Act.

It is settled law that section 391 to 393 would equally apply to both a

financially weak company as to financially heallty company.


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Meaning of Compromise

The term compromise unlike the word arrangement is not

defined.

Oxford dictionary gives meaning as agreement attained by

mutual concession; adjust by mutual concession.

Compromises implies existence of a dispute which needs to be

resolved through a give and take action by the parties

concerned unlike arrangement which may be due to dispute or

otherwise..

Pennington on Company Law observed a compromise as an

agreement terminating a dispute between the parties as to therights of one or both of them,, or modifying the undoubted

rights which he has difficult in enforcing( Quoted in Navjivan

Mills Ltd case).


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Meaning of arrangement

Arrangement is defined under an inclusive definition as

a reorganization of the share capital of the company by the

consolidation of shares of different classes, or by the division of

shares into shares of different classes, or by both these methods.

The term arrangement is in no way analogous to compromise( as

quoted in Kohinoor Mills case) and will include agreements which

modify rights about which there is no dispute.

Arrangement not only cover reorganization of share capital by

consolidation of shares etc but also any other arrangement between

member members and/or creditors in relation to reorganization of

the company.


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Member

Member will include both equity share holders , preference

shareholders as also all other class of shareholders whose name is

recorded in the register of members.

Creditor

A creditor is not defined under the Companies Act but in case

Seksaria Cotton Mills Ltd(1967) the Honble High Court held that a

creditor include a person who may have contingent claim against the

company. The analogy drawn from section 528 of the Companies Act.

In this case sales tax department had a claim against the company,

even though claim might have been a future claim or even a

contingent claim.


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Class

Supreme Court in Mihir H Mafatlal Vs Mafatlal Industries (1996)held If there are different groups within a class the interests of

which are different from the rest of the class, or which are to be

treated differently under the scheme, such groups must be treated

as separate class for purpose of scheme.

Delhi High Court in Siel Ltd has held A group of persons would

constitute one class when it is shown that all of them have a

common interest and they are not adversely situated.

The court generally do not decide whether a particular group of

members or creditors forms a separate class and order conveningof meeting based on avertments made in application but Company

generally proposes the classification at the risk of scheme being

rejected ultimately in cae court at hearing finds classification as

improper.


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Contd.

Section391 not only provides for procedural mechanism

for a scheme of compromise or arrangement to be

sanctioned but also makes a sanctioned scheme binding

on all concerned, including the members and creditors of

the Company .

The most outstanding facet of section 391 is that neither

of the two crucial terms used therein namely compromise

and arrangement put in straight jacketed artificialdefinition and on the contrary left to wider interpretation.

Section 391 is a complete code for single window

clearance.


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Section 394 of the Companies Act, 1956

Section covers special provisions in connection with any

Compromise or arrangement in connection with

amalgamation of two or more companies, involving transferof whole or any part of undertaking, property or liabilities

Merger or amalgamation are synonymous but none

defined under the Act

Merger means fusion or absorption of one company by

another and latter retaining its own name, identity andacquiring assets, liabilities of the other.

SC in Saraswati Industrial Syndicate summarized : An

amalgamation or reconstruction has no precise legal

meaning. In amalgamation tow or more companies are fused

into one by merger or by taking over by another or two

companies are merged or joined to form a third Company.


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Contd.

Amalgamation may be in the form of Vertical

Merger, Horizontal Merger or conglomerate

merger or merger by way of absorption

Objects and reasons for merger may be to

synergize operations, economies of scale,

reduction in costs, optimize capacities, tax

advance, strengthening financial strength or

advantage of brand equity or competitiveadvantage


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Contd.

Amalgamation is a sort compromise or

arrangement therefore it requires compliance

with provision of 391 & also 394 of the

companies Act

Both orders under section 391 and section 394

of the companies Act needs to be obtained

from High Court


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Approval of creditors or members

When separate meetings were called for one composite

scheme covering both secured and unsecured creditors it

become absolutely necessary that both meetings should pass

the scheme by a scheme by a three-fourth majority.

The three-fourth majority refer only to person who are

present and voting at the meeting called for in terms of

section 391 of the Companies Act.

The twin requirements are (i) majority in number and (ii)

such majority should be three-fourth in value.


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Court Power in Regard to meetings and

Procedure involved: Court refers to the jurisdictional High Court.

Filing of an application before the jurisdictional High court )referred to as

first motion) under Section 391(1) of the Act for proper directions for

convening the meeting to obtain the approval of interested persons.

It is important to note that in cases scheme does not affect the rights of

the members of the transferee company or its creditors or to do not involve

any reorganization of share capital of transferee company, no need file an

application by the transferee company.

Application to be supported by Judge summons(Form 33) and Affidavit(

Form 34).

First motion is moved with annexures comprising (i) board resolution and(ii) draft scheme and other documents like memorandum and latest financial

position.

The application for convening meeting is moved ex-parte under Rule 67 of

Company Court rules.


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Court may dispense with meeting:

Where consent of all or virtually all the shareholders have been given

outside a meeting

Where it is a wholly owned subsidiary and the company and its holding

company are involved in a merger

Where shareholders are few in number where the membership is

restricted to a single family.

No meeting of the class whose interest is not part of the arrangement.

This is equally applicable for preference shareholder or creditors.

Major creditors agreed to the scheme and transferee creditor also in

beneficial position then not necessary to hold separate meetings


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Contd.

Ordinarily convening a meeting of members and creditors

is a must but discretion to waive only under exceptional

circumstances.

Similarly convening a meeting may be refuses if scheme

proposed is unfair.


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Basic criteria for the scheme

It mush be fair and reasonable

Scheme will yield to smooth and satisfactory working

Scheme does not offend public or commercial morality

Scheme is not detrimental to the interests of creditors

or members

The scheme is not violative of the

Companies(Acceptance ofDeposit) Rules, 1975


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Contents of the scheme of amalgamation

Appointed date(or transfer date) of amalgamation.

Effective date of amalgamation

Capital structure of transferor company and transferee company

Share Exchange ratio

Transfer of undertaking and liabilities of transferor company to

transferee company from the appointed date

Continuance of legal proceeding of transferor company by thetransferee company after effective date.

Transferor company to carry on business on behalf of the transferee

company

Effect of amalgamation on contracts, services of employees,

conditions, effects on retirement benefits

Main objects of transferor company and dissolution of transferor

company without winding up.

Conditions subsequent and Conditions precedent


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Standard Schedule

Convene a meeting of board of directors to consider and approve in principle

amalgamation and to appoint an expert for valuation of shares.

Hold the meeting of board of director

Convene a board meetings to approve the scheme of amalgamation

Hold the meeting of the board of directors

Intimate to Stock exchanges where the shares of the company are listed

Apply the High court concerned seeking directions for holding

shareholders/creditors meetings alone with an affidavit

Obtain summons for directions and minutes of the order from High Court for

holding the meetings.

Dispatch notice of meetings


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Contd.

Advertise in newspapers regarding the proposed amalgamationMake an affidavit of service of individual notices to shareholders and

creditors as well as publication of notice in newspapers, to be filed

with the High Court

Hold the meetings of shareholders and creditors

Apply for approval from RBI for issue and allotment of shares to non-residents under the FEMA

File reports of the Chairmen of the shareholders and creditors

meetings with the High Court

File Petition and Affidavit with the High Court

Obtain an order for admission of Petition

File E form 23 electronically with ROC

Obtain RBI approval for issue of share to non-resident


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Contd.

Send individual notices to creditors (in case High court

allowed exemption from holding of creditors meeting)

Arranging notices to be published in the newspapers

Arrange for seven days before hearing an affidavit as to the

service of individual notices to creditors and publication o

notices in newspapers.

Attend hearing and passing of orders in the high court

Obtain order from the High CourtFile the copy of the order of High court sanction the scheme

of amalgamation with the concerned ROC


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Supervisory Power of the Court:

It comprises:

Compliance with the formalities of the statute

Scheme backed by the requisite majority vote

Creditors or members had the relevant material to enable the voters

to approve at an informed decision for approving the scheme

All necessary material indicated like (i) basis of valuation (ii) nature of

consideration (iii) Mode of payment (iv) Manner of surrender/receipt

of shares or securities (v) time schedule which in which shares etc to

be surrender/received and payments to be made (vi) Tentative date by

which scheme would become effective(vii)Details of approvalsobtained/to be obtained/sought from creditors, authorities like stock

exchange and under Companies Act(vii) Dates of Board meeting when

the proposal was to be considered (ix) Any other material details


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That proposed scheme not violative of any provisions of

law

That the Company court has also to satisfy itself that

members or class of members or creditors were acting bona

fide and in good faith and no coercing the minorityCompany court also seeks report from the official

liquidator.

Further a copy of the Petition to be served to Regional

Director and he submits his affidavits with his objections to

the scheme.

Court has further powers to stay all suits or proceeding

against the company once an application is filed

Amalgamation Merger

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