3/12/2019 Merger and Amalgamation Under Companies Act, 2013

Merger and Amalgamation Under Companies Act, 2013

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TG Team
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CS Divesh Goyal

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.

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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 TERMS

· Expansion and Amalgamation – means combination of two or more independent
Diversification business corporations into a single enterprise
· Optimum Economic
Benefit Demerger– means transfer and vesting of an undertaking of a
company into another company
· De-risking Strategy
Reconstruction- means re-organization of share capital in any
· Scaling up of manner; varying the rights of shareholders and/or creditors
operation for competitive
advantages Arrangement- All modes of reorganizing the share capital, including
interference with preferential and other special rights attached to
· Increase the Market shares
capitalization

· Cost reduction by
reducing overheads

· Increasing the
efficiencies of operations

· Tax benefits

· Access foreign
markets

Who can file the application for Merger & Amalgamation propose: Section 230(1)

[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)

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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.

[2]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.

Process

It must be ensure that the companies under amalgamation should have the power in
the object clause of their Memorandum of Association to undergo amalgamation
though the absence may not be an impediment, but this will make matters smooth.

A draft scheme of amalgamation shall be prepared for getting it approved in Board

meeting of each company.

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 [3]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.
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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:

Chairman of the Company, or

If tribunal so direct- by the Company or its liquidator or by any other person

Modes of Sending of notice:

By [4]Registered post, or by Speed post, orby courier, or

By e-mail, or by hand delivery, or by any other mode as directed by the tribunal

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:

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a. Details of the order of the Tribunal directing the calling, convening and conducting of the
meeting:-

Date of the Order;

Date, time and venue of the meeting.

b. Details of the company including:

Corporate Identification Number (CIN) or Global Location Number (GLN) of the

company;
Permanent Account Number (PAN);
Name of the company;
Date of incorporation;
Type of the company (whether public or private or one person company);
Registered office address and e-mail address;
Summary of main object as per the memorandum of association; and main business
carried on by the company;
Details of change of name, registered office and objects of the company during the
last five years;
Name of the stock exchange (s) where securities of the company are listed, if
applicable;
Details of the capital structure of the company including authorised, issued,
subscribed and paid up share capital; and
Names of the promoters and directors along with their addresses.

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 [5]interests of directors, Key Managerial

Personnel (KMP) and debenture trustee

e. Details of Board Meeting:

The date of the board meeting at which the scheme was approved by the board of
directors
The name of the directors who voted in favour of the resolution,
The name of the directors who voted against the resolution and
The name of the directors who did not vote or participate on such resolution

f. Explanatory Statement disclosing details of the scheme of compromise or arrangement

including:

Parties involved in such compromise or arrangement;

Appointed date, effective date, share exchange ratio (if applicable) and other
considerations, if any;
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;
Details of capital or debt restructuring, if any;
Rationale for the compromise or arrangement;

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Benefits of the compromise or arrangement as perceived by the Board of directors

to the company, members, creditors and others (as applicable);
Amount due to unsecured creditors.

g. Disclosure about the effect of the Merger & Amalgamation (C&A) on: Section 230(3)

Key Managerial Personnel;

Directors;
Promoters;
Non-Promoter Members;
Depositors;
Creditors;
Debenture holders;
Deposit trustee and debenture trustee;
Employees of the company:

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

Investigation or proceedings, if any, pending against the company under the Act.
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
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
A copy of the [6]valuation report, if any Section 230(3)

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

Latest audited financial statements of the company including consolidated financial

statements;
Copy of the order of Tribunal in pursuance of which the meeting is to be convened
or has been dispensed with;
copy of scheme of Merger & Amalgamation ( C&A);
Contracts or agreements material to the Merger & Amalgamation ( C&A);
The certificate issued by Auditor of the company to the effect that the accounting
treatment, if any,
Proposed in the scheme of Merger & Amalgamation ( C&A) is in conformity with the
Accounting Standards prescribed under Section 133 of the Companies Act, 2013;
and
Such other information or documents as the Board or Management believes
necessary and relevant for making decision for or against the scheme;

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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:

The draft of the proposed terms of the scheme drawn up and adopted by the
directors of the merging company;
Confirmation that a copy of the draft scheme has been filed with the Registrar;
The report of the expert with regard to valuation, if any;

[1] 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.

[2] 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.

[3] 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”.

[4] 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

[5]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.

[6] 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 [email protected])

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