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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