Introduction

Merger has been used for long as a tool for various purposes such as expansion of the business, to gain competitive advantage, for reduction of cost by economies of scale, to unlock values. Mergers are mainly of two types: Merger by absorption and merger by formation of a new company. So far, the mergers of companies in India are being governed by Section 391-396A of the Companies Act, 1956 (“CA 1956”). With the introduction of the Companies Act, 2013 (“CA 2013”), mergers will be governed by Chapter XV- Sections 230 to 240. However the Chapter XV of the Companies Act, 2013 has not been notified yet. But let us have a look at what will be the effect and changes in the governance of mergers once Chapter XV of the Companies Act, 2013 gets notified.

Changes in Process

• Approval of NCLT – The companies will not need approval of the High Court for mergers under CA 2013. The approval shall be granted by the National Company law Tribunal (“NCLT” or “Tribunal”) instead.

• Documents to be given to NCLT along with Application – Now, along with the application, the company will provide to the Tribunal the following documents:

• All material facts such as latest financial position, auditor’s report, pending investigations against the company, etc.,
• Reduction of share capital, if any,
• Any scheme of corporate debt restricting consented by 75% or more of the secured creditors in value, along with certain documents relating to it.

• Details in notice to creditors, shareholders, debenture holders
  • Draft of the proposed terms of the Scheme,
  • Confirmation,
  • The notice of meeting for approval of the Scheme of merger sent to the creditor or shareholder or debenture holder shall now also be accompanied by the valuation report, if any, explaining its impact on the creditors, Key Managerial Personnel, promoter and non-promoter members, debenture holders,
  • It shall also contain the effect of such merger on any material interest of directors or debenture trustees,
  • Supplementary accounting statement if the last annual accounts of any of the merging company relate to a financial year ending are more than 6 months before the first meeting summoned for approving the scheme,
  • The notice and all such documents shall also be placed on the website of the company,
  • If the company is a listed company, these documents shall be sent to SEBI and stock exchanges for placing them on their website.
• Voting through postal ballot allowed – Now, the members can not only vote for the adoption of the compromise or arrangement in person or by proxy, but also by postal ballot within 1 month from the date of receipt of the notice of the meeting.

• Objections – Unlike as per CA 1956, where any member or creditor could raise objection to the compromise or arrangement, under CA 2013, such an objection can be raised only by following:
  • Shareholders holding 10% or more to the total paid-up equity of the company, or,
  • Creditors who have an outstanding debt of 5% or more of the total outstanding debt.

This step under CA 2013 will ensure elimination of frivolous claims and objections.

• Notice to be sent to third parties
  • The notice of meeting for approval of the scheme of merger shall now also be sent to the following:
    • Central Government
    • Income tax authorities
    • Reserve Bank of India (RBI)
    • Securities and Exchange Board of India (SEBI)
    • Registrar
    • Respective stock exchanges
    • Official liquidator
    • Competition Commission of India (CCI)
    • Such other regulators or authorities that are likely to be affected by such merger
  • Any of the above parties, may make representations against the compromise or arrangement within 30 days from receipt of such notice. If they fail to make representations within 30 days, it shall be presumed that they have no representations to make on the proposal.
• Auditor’s certificate regarding accounting standards – As per CA 2013, the Tribunal shall sanction the merger only after receipt of certificate from the company’s auditor that the accounting treatment proposed in the scheme is in conformity with the accounting standards.

• Contents of the order by Tribunal – An order made by the Tribunal shall now contain any one or more of the following details:
  • Where the compromise or arrangement provides for conversion of preference shares into equity shares, the preference shareholders shall be given an option either to receive the arrears of dividend in cash or to accept equity shares equal to the value of dividend payable,
  • Protection of any class of creditors,
  • If the compromise or arrangement results in variation in rights of shareholders, it shall be given effect to under the provisions of Section 48 of CA 2013,
  • If the compromise or arrangement is agreed to by the creditors, any proceedings pending before the BIFR shall abate,
  • Such matters as the Tribunal feels are necessary to effectively implement the terms of compromise or arrangement.

• Dispensing of meeting of creditors – In CA 2013, its been specifically laid out that the Tribunal may dispense with calling the meeting of the creditors, where the creditors having atleast 90% value, agree and confirm the scheme of compromise or arrangement by an affidavit.

• Merger of a listed company into an unlisted company
  • The merger of a listed company into an unlisted company will not ipso facto make the unlisted company listed. It will continue to be unlisted until the applicable listing regulations and SEBI guidelines in relation to allotment of shares to public shareholders are complied with.
  • In case the shareholders of the listed company decide to exit, the unlisted company would facilitate the exit with a pre-determined price formula which shall be within the price specified by SEBI regulations.
• Set off of authorized capital – It has been specifically provided in CA 2013 that where the transferor company is dissolved, the fee paid by the transferor company on its authorized capital shall be set off against any fees payable by the transferee company on its authorized capital subsequent to the merger.

• Filing of report till completion of scheme – Every company in relation to which an order has been made by the Tribunal, shall until the completion of the scheme, file a statement, every year, with the Registrar, certified by a CA or a CS, indicating whether the scheme is being complied with in accordance with the orders of the Tribunal.

• Penalty – The penalties for non-compliance with the provisions of CA 2013 has been increased substantially. The fine for the company shall be a between the range of Rs 1,00,000 to Rs 25,00,000. Every officer in default shall be punishable with a fine between the range of Rs 1,00,000 to 3,00,000 or with imprisonment upto 1 year or both.

• What has been dropped from CA 1956 – The condition that copy of the certified order shall be attached to every copy of MOA issued, after the order has been filed with the Registrar, has been dispensed with.

New types of mergers

• Merger between small companies or between a holding company and its wholly owned subsidiary – CA 2013 carves out a separate procedure for merger between two small companies or between a holding company and its wholly owned subsidiary company.
  • A small company has been defined as a company, other than a public company whose paid-up share capital is not higher than Rs 50 lakh or whose turnover as per the latest financial statement is not exceeding Rs 2 crore.
  • Process for registration of the scheme
    • Notice of the proposed scheme inviting objections and suggestions shall be sent to the Registrar and Official Liquidators within 30 days by the transferee company and the transferor company.
    • The scheme shall be then approved, after considering the objections and suggestions, in a general meeting by members holding atleast 90% of the total number of shares.
    • Both the companies shall file a declaration of solvency with the Registrar
    • The scheme shall be approved by majority representing 9/10th in value of creditors.
    • The scheme so approved by the members and creditors shall be filed with the Central Government, Registrar and the Official Liquidator. If the Registrar or the Official Liquidator has any objections or suggestions to the scheme, they shall convey the same in writing to the Central Government within 30 days. If no such communication is made it shall be presumed that there is no objection to the scheme.
    • If the Central Government, on receipt of the objections or suggestions is of the view that the scheme is not in public interest or interest of the creditors, it may file an application with the Tribunal, within 60 days, to consider the scheme under the normal process. If the Central Government does not have any objection or does not make an application to the Tribunal, it shall be deemed that it has no objection to the scheme.
    • If the Registrar and the Official Liquidator has no objections or suggestions, the Central Government shall register the scheme and issue a confirmation thereof to the companies.
    • The copy of the order confirming the scheme shall be filed with the Registrar, who shall register the scheme and issue a confirmation thereof to the companies.

• Merger or amalgamation of an Indian Company with a foreign company – CA 1956 allows cross border mergers only where the transferor company is a foreign company. However, CA 2013 permits mergers between an Indian company and foreign company with the prior approval of RBI. Such scheme of merger may provide for payment to the shareholders of the merging company in cash or Depository Receipts or both.

Conclusion

CA 2013 seems to have incorporated provisions to deal with the problems actually faced by companies in the process of mergers. The 30 day time limit imposed on the regulators will ensure their response in a timely manner. CA 2013 offers comprehensive and better transparency ensuring protection of stakeholders’ interest, while simultaneously avoiding frivolous objections. It seems that the provisions of CA 2013 shall make the process of mergers efficient and effective.