Concept of Mergers and Amalgamation under Companies Act, 2013 | Assignments Corporate Law

CONCEPT OF MERGERS AND AMALGAMATION UNDER THE PROVISIONS

OF COMPANIES ACT, 2013.

The Companies Act, 2013 replaced the 1956 Act and introduced some changes especially

in relation to mergers and amalgamation. The new act enhanced disclosure norms,

providing protection to investors and minorities thereby making M&A smooth and

efficient. It helps in the overall process of acquisitions, mergers and restructuring,

facilitate domestic and cross-border mergers and acquisitions.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.

Chapter XV of the 2013 Act, Sections 230 to 240 deal with “Compromises,

Arrangements and Amalgamations.” In this chapter, the Act consolidates the applicable

provisions and related issues of compromises, arrangements and amalgamations;

however, other provisions are also attracted at different stages of the process. The

dissolution of company/companies involved in a merger takes place without winding up.

The term ‘merger’ is not defined under the Companies Act, 1956, and under Income Tax

Act, 1961. However, the Companies Act, 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.

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. 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.

Objectives on a merger are as follows:

Revenue maximization: If there is a loss making company, and in case if it merges

with a profit making company. Thus, through the merger the target company can

achieve a rise or growth in its business. However if we talk about the other

company then through merger that other company would get the customer base,

product and services that was being used by the loss making company.

Security : When two companies merge, or when one company is being acquired by

another then the dual efforts of both result into a backup or a security to another

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CONCEPT OF MERGERS AND AMALGAMATION UNDER THE PROVISIONS

OF COMPANIES ACT, 2013.

The Companies Act, 2013 replaced the 1956 Act and introduced some changes especially in relation to mergers and amalgamation. The new act enhanced disclosure norms, providing protection to investors and minorities thereby making M&A smooth and efficient. It helps in the overall process of acquisitions, mergers and restructuring, facilitate domestic and cross-border mergers and acquisitions.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. Chapter XV of the 2013 Act, Sections 230 to 240 deal with “Compromises, Arrangements and Amalgamations. ” In this chapter, the Act consolidates the applicable provisions and related issues of compromises, arrangements and amalgamations; however, other provisions are also attracted at different stages of the process. The dissolution of company/companies involved in a merger takes place without winding up. The term ‘merger’ is not defined under the Companies Act, 1956, and under Income Tax Act, 1961. However, the Companies Act, 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. 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. 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. Objectives on a merger are as follows: Revenue maximization: If there is a loss making company, and in case if it merges with a profit making company. Thus, through the merger the target company can achieve a rise or growth in its business. However if we talk about the other company then through merger that other company would get the customer base, product and services that was being used by the loss making company. Security : When two companies merge, or when one company is being acquired by another then the dual efforts of both result into a backup or a security to another

company. Therefore if one company fails the other company will be there in order to support it. Thus it adds to the security of the to the company to deal with the market at a large. Customer recognition: When one company gets merged with the other the loss making company protects it reputation and moves its customer base moves to the newly formed merged company, which ultimately results into customer's recognition. Tax benefits: When M & A takes place many tax benefits are also being enjoyed. For example when a loss making company is being merged or acquired by the profit making company, then surely it does save the loss making company by reducing the tax burden of them. Eliminating competition: When merger and acquisitions are taking place, it substantially reduces the competition in the market, which can prove beneficial for the economic growth of the country as a whole. Therefore they may have the freedom to keep their prices high and supply a variety of goods and services. Synergy effect: Synergy means that when two companies combine together to form a third company, the value of the created third company will be greater than the summation of first two companies. Thus operational synergies are also achieved by combining the functions such as distribution and production. Management synergies refers to the new management styles which are being created and established by the summation of both the previous companies which results into the efficient new working company. Diversification- it gives an opportunity to diversify. 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.

In slump sale the entire business undertaking is being acquired at a going concern basis. Here the acquirer company doesn't get an option to pick and choose. Rather they need to either acquire the business undertaking or the part of the business undertaking. As a general rule, often it will be in the buyer's best interests to purchase assets but in the seller's best interests to sell stock or merge. An application is required to be filed with Tribunal (NCLT). An application shall be made by both the transferor and the transferee company in the form of a petition to the tribunal for the purpose of sanctioning the scheme of amalgamation. In the case where more than one company is involved then at the discretion of such companies, an application may be filed as a joint application. But if the registered office of the Companies is in different states then, in that case, there will be two tribunals having jurisdiction hence separate petition is required to be filed. The memorandum of association of the companies seeking to merge, should give power to companies to amalgamate. Also, the creditors of the companies must approve the merger scheme. Notice of merger along with merger proposal and valuation report etc. needs to be served upon creditors, shareholders, and various and other sector authority likely to be affected by merger. Shareholders and creditors are given option to cast their vote through postal ballot. Tribunal can order meeting of creditors if application is made to the Tribunal under section 230 for the sanctioning of a compromise or an arrangement for merger or amalgamation. Objections can be raised by shareholders who hold 10% or more equity or creditors whose outstanding debt is 5 % or more of the total debt as per last audited balance sheet. Prior certification from auditors saying accounting treatment is in consonance with accounting standards needs to be filed with stock exchanges. The assets and liabilities of the acquired company will be transferred to the acquiring company in accordance with the approved scheme, with effect from the specified date. As per the proposal, the acquiring company will exchange shares and debentures and/or cash for the shares and debentures of the acquired company. These securities will be listed on the stock exchange. The Act also permits ‘Cross border mergers’ between Indian and foreign company located in a jurisdiction notified by Central government in consultation with RBI. The consideration of a merger, which will also be subject to the approval of the RBI, could either be in cash or depository receipts, or partly in cash and partly in depository receipts. Merger and acquisitions gives a new scope for the loss making companies to merge and grow and diversify their company. In a similar way acquisition helps acquirer company to grow and develop by the acquisition of certain specific areas. To be precise, Merger and Amalgamation is corporate restructuring done with a view to diversify business and to exercise increased scale of operations.

Concept of Mergers and Amalgamation under Companies Act, 2013, Assignments of Corporate Law

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CONCEPT OF MERGERS AND AMALGAMATION UNDER THE PROVISIONS

OF COMPANIES ACT, 2013.