Steps in mergers and acquisitions of a company

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Steps in Mergers and Acquisitions of a

Company

Lakshminarayanan AlagurajaAdvocateAltacit Global



Chennai - 600 004.Tel: +91 - 44 - 2498 4821



Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

[email protected]


Merger

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. The possible objectives of mergers are manifold - economies of scale, acquisition of technologies, access to sectors / markets etc. Generally, in a merger, the merging entities would cease to be in existence and would merge into a single surviving entity. Merger is also defined as amalgamation.

Example: Company A+ Company B= Company C.



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Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

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Acquisitions

An ‘acquisition’ or ‘takeover’ is the purchase by one person, of controlling interest in the share capital, or all or substantially all of the assets and/or liabilities, of the target. A takeover may be friendly or hostile, and may be effected through agreements between the offeror and the majority shareholders, purchase of shares from the open market, or by making an offer for acquisition of the target’s shares to the entire body of shareholders.

Example: Company A+ Company B= Company A.



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Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

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Way of Acquisition

Acquisitions may be by way of acquisition of shares of the target, or acquisition of assets and liabilities of the target. In the latter case the business of the target is usually acquired on a going concern basis. Such a transfer is referred to as a ‘slump sale’ under the ITA and benefits from favourable taxing provisions vis- à-vis other transfers of assets/liabilities (discussed in greater detail in Part VI of this Paper). Section 2(42C) of the ITA defines slump sale as a “transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales”.



Chennai - 600 004.Tel: +91 - 44 - 2498 4821



Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

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Consideration

All assets, liabilities and the stock of one company stand transferred to Transferee Company in consideration of payment in the form of:(i) Equity shares in the transferee company,(ii) Debentures in the transferee company, (iii) Cash, or (iv) A mix of the above mode



Chennai - 600 004.Tel: +91 - 44 - 2498 4821



Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

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Types of Mergers

i. Horizontal Mergersii. Vertical Mergersiii. Congeneric Mergersiv. Conglomerate Mergersv. Cash Mergervi. Triangular Merger



Chennai - 600 004.Tel: +91 - 44 - 2498 4821



Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

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Difference between Merger and Acquisition

Merger Acquisition

Merging of two organization in to one. Buying one organization by another.

It is the mutual decision. It can be friendly takeover or hostile takeover.

Merger is expensive than acquisition (higher legal cost). Acquisition is less expensive than merger.

Through merger shareholders can increase their net worth.

Buyers cannot raise their enough capital.

It is time consuming and the company has to maintain so much legal issues.

It is faster and easier transaction.

Dilution of ownership occurs in merger. The acquirer does not experience the dilution of ownership.



Chennai - 600 004.Tel: +91 - 44 - 2498 4821



Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

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Merger - Company Law

Section 230 to 234 of Companies Act 2013 govern mergers and schemes of arrangements between a company, its shareholders and creditors.1. Section 230-231 deals with compromise or arrangements.2. Section 232 deals with mergers and amalgamation including demergers.3. Section 233 deals with amalgamation of small companies (also called fast track mergers)4. Section 234 deals with amalgamation with foreign company (also called cross border mergers)



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Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

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NCLT to perform erstwhile functions of High Courts

Under the Old Companies Act, the High Courts were endowed with the power to sanction a scheme of merger/amalgamation. However, as per the provisions of the New Companies Act the power given to the High Courts would be invested with the National Company Law Tribunal (NCLT). This change should help in shortening the time taken in obtaining sanctions in cases of mergers and amalgamations.



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Objections to mergers/amalgamations

Sub-clause (4) of Section 230 of the Companies Act 2013 provides that only persons holding not less than 10% of the shareholding; or having not less than 5% of the total outstanding debt can object to a merger/amalgamation. In stark contrast, the Old Act specifies no minimum-ownership-condition to object to a merger/amalgamation.



Chennai - 600 004.Tel: +91 - 44 - 2498 4821



Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

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Fast Track Mergers

Under the Companies Act 2013, Section 233 allows mergers between two small companies and holding companies and their wholly owned subsidiaries may not have to go through the normal procedure. Mergers/amalgamations may be completed, if the official liquidator and the members approve, and if sanctioned by the Central Government, without having to wait for the order of the NCLT confirming the merger/amalgamation. This way helps cut costs involved in complying with the procedures, saves time and simplifies the procedure of mergers between two small companies or wholly owned subsidiaries and their parent companies.



Chennai - 600 004.Tel: +91 - 44 - 2498 4821



Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

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Cross Border Merger

The Companies Act allows foreign companies to merge into Indian companies and vice-versa, meaning Indian companies wanting to merge into foreign companies may press ahead with their intention. The approval of the RBI is a pre-requisite in the both the cases. However, by virtue of Section 234 of the Companies Act, the license to merge into foreign companies comes with a rider that Indian companies can only merge into foreign companies domiciled in any of the jurisdictions notified by the Central Government.



Chennai - 600 004.Tel: +91 - 44 - 2498 4821



Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

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Acquisition – Companies Act 2013

Under the Companies Act 2013, if a person or group of persons acquire 90% or more of the shares of a company, then such person(s) have a right to make an offer to buy out the minority shareholders at a price determined by a registered valuer in accordance with prescribed rules. The provisions in the Companies Act 2013 aim to provide a fair exit to the minority shareholders, as the price offered must be based on a valuation conducted by a registered valuer. However, it is not clear whether the minority shareholders can choose to retain their shareholding.



Chennai - 600 004.Tel: +91 - 44 - 2498 4821



Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

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Competition Law

1. Anti - Competitive Agreements (Section 3)2. Abuse of Dominant Position (Section 4)3. Regulation of Combinations (Section 5, 6, 20,

29,30 and 31)



Chennai - 600 004.Tel: +91 - 44 - 2498 4821



Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

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Income Tax Act, 1961

The Income Tax Act contemplates and recognizes the mergers and acquisitions including activities amalgamation, slump sale, Transfer of Shares, etc.



Chennai - 600 004.Tel: +91 - 44 - 2498 4821



Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

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