Companies Act, 1956
Sections 390 to 394 of the Companies Act govern a merger of two or more companies under Indian law. The Merger Provisions are in fact worded so widely, that they would provide for and regulate all kinds of corporate restructuring that a company may possibly undertake; such as mergers, amalgamations, demergers, spin-off / hive off, and every other compromise, settlement, agreement or arrangement between a company and its members and / or its creditors.
Scheme of Mergers and Acquisitions
Procedure for merger and amalgamation is different from takeover. Mergers and amalgamations are regulated under the provisions of the Companies Act, 1956 whereas takeovers are regulated under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations.
Although chapter V of the Companies Act, 1956 comprising sections 389 to 396-A deals with the issue and related aspects covering arbitration, compromises, arrangements and reconstructions but at different times and under different circumstances in each case of merger and amalgamation application of other provisions of the Companies Act, 1956 and ruled made there-under may necessarily be attracted.
A scheme of compromise or arrangement must be approved by a resolution passed by not less than three-fourths in value of the total creditors (or class of creditors) or members (or class of members), as the case may be, present and voting either in person or through proxies. There is no rigid formula for determining a class of creditors or members. It is the discretionary power of the court to determine these classes. Essentially, ‘class’ means persons whose rights are so similar that they can be combined together with a view to achieve a common interest. Generally, secured creditors and unsecured creditors could form distinct classes of creditors and members can be categorized into preference shareholders and common equity shareholders.
Subsequent to the scheme being approved by the members and/or creditors, a petition for sanctioning of the scheme is filed with the appropriate court within whose jurisdiction the registered office of the transferor and the transferee company is situated. The approved arrangement is, unless prejudicial to public interest or interest of the creditors, sanctioned by the court and a certified copy of the order is required to be filed with the Registrar of Companies.
Procedure under the Merger Provisions
Since a merger essentially involves an arrangement between the merging companies and their respective shareholders, each of the companies proposing to merge with the other must make an application to the Company Court having jurisdiction over such company for calling meetings of its respective shareholders and/or creditors. The Court may then order a meeting of the creditors/shareholders of the company. If the majority in number representing 3/4th in value of the creditors/shareholders present and voting at such meeting agrees to the merger, then the merger, if sanctioned by the Court, is binding on all creditors/ shareholders of the company. The Court will not approve a merger or any other corporate restructuring, unless it is satisfied that the company has disclosed all material facts. The order of the Court approving a merger does not take effect until the company with the Registrar of Companies files a certified copy of the same.
The Merger Provisions constitute a comprehensive code in themselves, and under these provisions Courts have full power to sanction any alterations in the corporate structure of a company that may be necessary to effect the corporate restructuring that is proposed. For example, in ordinary circumstances a company must seek the approval of the Court for effecting a reduction of its share capital. However, if a reduction of share capital forms part of the corporate restructuring proposed by the company under the Merger Provisions, then the Court has the power to approve and sanction such reduction in share capital and separate proceedings for reduction of share capital would not be necessary.
Applicability of Merger Provisions to Foreign Companies.
Section 394 vests the Court with certain powers to facilitate the reconstruction or amalgamation of companies, i.e. in cases where an application is made for sanctioning an arrangement that is:
- For the reconstruction of any company or companies or the amalgamation of any two or more companies; and
- Under the scheme the whole or part of the undertaking, property or liabilities of any company concerned in the scheme (referred to as the ‘transferor company’) is to be transferred to another company (referred to as the transferee company’). Section 394 (4) (b) makes it clear that:
As per the ICDR Regulations, if the acquisition of an Indian listed company involves the issue of new equity shares or securities convertible into equity shares by the target to the acquirer, the provisions of Chapter VII contained in ICDR Regulations will be applicable in addition to the provisions of the Companies Act mentioned above. We have highlighted below some of the relevant provisions of the Preferential Allotment Regulations.
Approvals for the Scheme
The scheme of merger / amalgamation is governed by the provisions of Section 391-394 of the Companies Act. The legal process requires approval to the schemes as detailed below.
Approvals from Shareholders
In terms of Section 391, shareholders of both the amalgamating and the amalgamated companies should hold their respective meetings under the directions of the respective high courts and consider the scheme of amalgamation. A separate meeting of both preference and equity shareholders should be convened for this purpose. Further, in terms of Section 81(1A), the shareholders of the amalgamated company are required to pass a special resolution for issue of shares to the shareholders of the amalgamating company in terms of the scheme of amalgamation.
Approval from Creditors / Financial Institutions / Banks
Approvals are required from the creditors, banks and financial institutions to the scheme of amalgamation in terms of their respective agreements / arrangements with each of the amalgamating and the amalgamated companies as also under Section 391.
Approval from Respective High Court
Approvals of the respective high court(s) in terms of Section 391-394, confirming the scheme of amalgamation are required. The courts issue orders for dissolving the amalgamating company without winding-up on receipt of the reports from the official liquidator and the regional director, Company Law Board, that the affairs of the amalgamating company have not been conducted in a manner prejudicial to the interests of its members or to public interests.
Report of Chairman to the Court
The chairman of the meeting must within the time fixed by the court or where no time is fixed within 7 days of the date of the meeting, report the result of the meeting to the court. The report should state accurately the number of creditors or class of creditors or the numbers of members or class of members, as the case may be, who were present and who voted at the meeting either in person or by proxy, their individual values and the way the voted.