CORPORATE RESTRUCTURING

– LEGAL FRAME WORK(Concept to Completion)

By - CS Harish K VaidNIRC / ICSI – 26.02.2011 1

Major Issues

• Legal• Technical• Financial

– Stamp Duty on Assets/issue of Shares– Taxation• Valuation & Calculations• Fairness Opinion in cases of Unlisted Cos.• Exchange Ratio

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A. Statutory Provisions

Chapter-V A complete code in the nature of Single window clearance.

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• Chapter V, Sections 390 to 396Aof the Companies Act, 1956– Chapter V relates to Arbitration,

compromises, arrangements, reconstructions.– (includes mergers/demergers/hive-offs/spin-offs

of Public/Pvt/Listed/Unlisted/Indian/Foreign Cos.)

– However, Section 389 relating to power of Companies to refer the matter to arbitration stands omitted since 1960.

– The Companies Act does not use the word ‘merger’. Similarly it does not define ‘amalgamation’, only some reference at places. 4

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• Rules 67 to 87 of the Companies (Court) Rules, 1959

– Prescribe the detailed procedure to be followed for approval of such Schemes.

– All formats are also prescribed.

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• Section 2(1B) of the Income Tax Act.– This Section defines ‘amalgamation’ and stipulates three conditions:

• All properties of amalgamating company should vest with amalgamated company.

• All liabilities of amalgamating company should vest with amalgamated company.

• Shareholders holding not less than 75% shares in the amalgamating company should become shareholders of the amalgamated company.

AS 14 Amalgamation (i) in the nature of Merger, (ii) in the nature of Purchase. 6

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B. Right to amalgamate

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• Though for the purpose of Section 391, ‘company’ means ‘any company liable to be wound up’, yet it does not debar amalgamation of financially sound companies. (Section 390)

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• Section 394 (4)– ‘Transferee Company’ does not include any

company other than a company within the meaning of this Act. (Has to be a company registered under the Companies Act)

– ‘Transferor Company’ includes any body corporate whether a company within the meaning of this Act or not. (Can be a Foreign Co.)

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C. Objects, Reasons and Advantages of Amalgamations

• Disclosed / Undisclosed

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• Synergy of operations

• Economics of Scale

• Reduction in production, administrative, selling, legal and professional expenses.

• Benefits of integration

• Optimum use of capacities and factors of production

• Tax advantages

• Financial constraints for expansion

• Strengthening financial strength

• Diversification 11

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• Advantage of brand equity

• Loss of objectives with which several companies were set up

• Survival

• Competitive advantage

• Eliminating / weakening competition

• Revival of a weak / sick company

• Sustained growth

• More efficient use of larger resources and funds

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Seldom undisclosed

• Reorganization of Business • Increasing the Promoters’ Holding• Listing of Unlisted entity• Induction of Partner• Tax Benefits• Leases (Including mining leases)

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D. Reverse Merger

• Healthy Company amalgamating with a financially weak company.

• Holding Company merging with its subsidiary.

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E. Procedure for seeking approval of Members / Creditors

• Board’s approval • Contents of Scheme

– ‘Appointed Date’– ‘Effective Date’– Capital Structure of both companies– Exchange ratio – Cross holdings - Cancellation / Trust– Transfer of undertaking and liabilities (charges created)– Continuation of legal proceedings– Carrying on of business during intervening period– Services of employees– Allotment of shares in exchange ratio, treatment of fractions

and rights of shareholders to Dividend etc.– Dissolution of transferor company (without winding up on the

effective date)– Conditions subject to which the Scheme is to take effect.– Cooling period of 1 months to Stock Exchanges Clause 24(f)15

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• Drafting of Scheme vis-à-vis Objective

– Specific / Standard Schemes– Clubbing of Authorised Capital– Borrowing Powers– Change of Name– Change of Objects– Reduction of Capital– Flushing of small shareholders– Redemption of Preference Capital– Cancelation of Cross holding Vs Trust

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F. Court’s directions for convening meeting of Members /

Creditors (Rule 69)(Court may dispense any meeting)

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• Application in F-34

• Judges summon supported by Affidavit in Form 33

• Directions of the Court for

– Date, time and place of meeting– Appointment of Chairman– Quorum– Notice and manner of giving advertisement– Time for filing of Chairman’s Report– Dispensing meeting of members and creditors in

certain cases

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G. Meaning of Class of Members and Creditors

– Based on rights attached(Equity/Preference holders)

– Secured / Unsecured Creditors(FCCB/GDRs/FDs/Employees)

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H. Notice of Meeting – UPC– 21 clear days in Form 36– Proposed Scheme to be attached– Statement under Section 393 Vs. Sec. 173– Proxy Form in Form 37– Publication in News Papers in Form 38 (Rule

74)– Affidavit of Chairman for service /

advertisement of notice

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I. Proceedings at Meeting– Voting to be by poll only

– Chairman to appoint two scrutineers to count and report

– Scheme to be approved by Special Majority(Principle of Fair Representation)• Majority in number representing 3/4th in value• Majority of members / creditors present and

voting(JP 46 Obj. 5 Pb 2 = 53 – Exclude Promoters)

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J. Report of result of meeting

• Chairman to file report in Form 39 within seven days of meeting (Rule 78)

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K. Requirements of Listing

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– Intimation to SEs within 15 minutes of Board’s decision

– In principle approval u/cl. 24(f) – 1 month time– Valuation Report/Fairness Opinion-Cl.24(h) in

case of Unlisted Cos./WOS-if consideration

– Intimation to SEs after approval of members / creditors

– Copies of notices, circulars etc. to be sent to SEs

– Report of Chairman to be filed with SEs24

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L. Explanatory Statement u/s 393

• Requirements regarding explanatory statement– Terms of arrangement – Effect of Scheme– Material interest of Directors– Pre/Post shareholding pattern. Fairness report etc.– Principles governing Explanatory Statement u/s

393– Different from Section 173 – material facts– Valuation/Fairness Reports need not be circulated – Providing exchange ratio and not calculations is

enough– Directors’ interest has to be special 25

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M. Procedure for Seeking approval of High Court

• High Court sanction to the Scheme– In case Scheme involves reduction in capital

procedure to be followed– However, if reduction is part of scheme, no separate

petition under section 100 is required.– Petition to High Court in Form 40 after approval of

Members / Creditors– Notice to Central Government under Section 394A.

• To Regional Director and none else• Report of OL – 2nd Proviso 394(1)• Report of ROC – To RD

- To Court – 1st Proviso 394(1)

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• Hearing on Petition –Notice of hearing to be advertised (Rule

80)–High Court Order on petition after

hearing (Rule 81)»Order under Section 391 in Form 41»Order under Section 394 in Form 42

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N. Filing of Order with ROC

• Within 30 days in Form 21• Shall have no effect unless certified copy

filed with ROC• Inform Stock Exchanges• Secure Listing of new shares.

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O. Order to be annexed to MOA

– Copy of Order needs to be annexed to each copy of MOA – Section 391 (4)

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P. Power of High Court to enforce comprise /

arrangement

• Vast powers under Section 392(1)

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Q. Stamp Duty on High Court Order

• Transfer / vesting is by virtue of Court Order without further documents / deeds

• Court Order Vs Conveyance• In case duty is payable in the State,

same shall be paid on the Order• ‘Litaka Pharmaceutical Limited Vs State

of Maharashtra’• ‘HLL Vs State of Maharashtra’ (2003)

117 Cocases SC 75831

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R. Principles evolved for sanctions of Scheme by Courts

• Resolutions are passed by Statutory majority in value and in number u/s 391(2) at a meeting duly convened and held. Unless Scheme is so approved, the Courts will have no jurisdiction to confirm the same.

• Those who took part in the meeting to be fair representatives of the class.

• Scheme as a whole should be reasonable one. If so, Courts not to interfere in collective wisdom of shareholders. Objectors will have to convince the Court that Scheme is unfair and needs to be rejected.

• Court not to launch an investigation into the commercial merits / demerits of the Scheme.

• There should be no coersion of the minority at the statutory meeting and no lack of good faith on the part of majority.

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• Court must not act as a rubber stamp. It has a duty to scrutinize but scrutiny is not with the eye of an expert of exactness of an accountant.

• Court to ensure that requisite statutory procedure has been complied with.

• Scheme to be backed by requisite majority under Section 391(2)

• The meetings had relevant material to enable taking informed decisions.

• All requisite material required by proviso Section 391(2) is placed before the Court and Court is satisfied. (Latest Financial Position/Pendency of Inv. proceedings u/s 235 to 251 and the like. Judgement in AIR 2006 SC 2287 The Chairman SEBI Vs Shriram Mutual Fund & Anth has included Sec 209 A also.

• Scheme as a whole is found to be just fair and reasonable from the point of view of prudent men of business taking a commercial decision.

• Once the above parameters are met, the Courts will have no further jurisdiction to sit an appeal over the commercial wisdom of the majority.

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S. Handling of Objections• SOURCES OF OBJECTIONS• A - Shareholders

• Unfair Exchange Ratio• Absence of Fair Representation• Clubbing of Authorised Capital – Revenue Loss• Violation of Take Over Code• Change of Name through Scheme• Reduction of Capital not permitted• Collusion of Regulators with Companies• Non disclosure of Latest Financial Position/Investn• Regular mergers/demergers

– Report of ROC not received

• Provide Transport34

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– B. Creditors• Security may get diluted• Merged company won’t honour commitments• FCCB holders – Website/Advt in Foreign Papers

– C. Central Govt. (RD)• Clubbing of Authorised Capital – Loss of Revenue• Borrowing Powers clubbing not permissible• Change of Name – separate procedure• Reduction of Capital – separate procedure• Exchange Ratio – calculations not provided• (Shardul Shroff Committee Report, Calculations to

be confdl., Double Lock with one key to ROC).• Business not covered by Objects Clause 35

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– D. Official LiquidatorInspection/Audit of Records of Transferors

– E. SEBI• Investigation in Progress under TO Code• Don’t sanction till action is completed

– F. Stock Exchanges• Exchange Ratio• Public shareholding falling below minimum

– G. Employees

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Merger of JIL with JRC(2004)2CLJ105(ALLD.)

1. Merger of JAPL with JRCL = JIL2. Hive-off Cement Plant by JIL to BCL (u/s

293(1)(a)3. Hive-off Cement Business of JIL to BCL

(name changed to JCL) u/s 391/3944. Merger of JIL with JCL (JAL) u/s 391/394

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Merger ofJaiprakash Industries Ltd. & Jaypee

Rewa Cement Ltd.Law laid down for the First Time – as

reported in (2004)2CLJ105(Alld).1.Meaning of “Fair Representation” in meetings

while considering the Scheme.2.Right of shareholders not constituting the

requisite strength u/s 399 to file suit instead of approaching CLB in case of Oppression & Mismanagement

3. Impact of pending litigation on Scheme.38

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Post Merger Activities

• Necessary Press notices for all concerned• Notices to SEs/Depositories• Fixing Record Date• Allotment of shares in Exchange Ratio • Credit/Listing of newly allotted shares• Effecting Change of Name/A.Capital,if any• Revised Resolution to Banks/Clients

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• Change of ownerships of Moveable Properties

• Mutation of Immovable properties• Mining & other leases/agreements etc.• IPRs – necessary changes to be effected• Names to be changed in all

Licences/Permits etc.• Changes, if any, in Occupiers/Managers

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FOR SUCH SCHEMES WE NEED TO PLAN

• “If we fail to plan, we are planning to fail”• “Better to prevent and prepare rather than

to repent and repair”• “Irretrievable corporate actions –• “You can make omlette from an egg, but

not egg from the omlette”

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