: February 09, 2012 |
: Company Law
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Role Of Central Government in Mergers And Amalgamations
Mergers, acquisitions and takeovers have been a part of the business world for centuries. In today's dynamic economic environment, companies are often faced with decisions concerning these actions - after all, the job of management is to maximize shareholder value. Through mergers and acquisitions, a company can (at least in theory) develop a competitive advantage and ultimately increase shareholder value. The said terms to a layman may seem alike but in legal/ corporate terminology, they can be distinguished from each other:
A full joining together of two previously separate corporations. A true merger in the legal sense occurs when both businesses dissolve and fold their assets and liabilities into a newly created third entity. This entails the creation of a new corporation.
Taking possession of another business. Also called a takeover or buyout. It may be share purchase (the buyer buys the shares of the target company from the shareholders of the target company. The buyer will take on the company with all its assets and liabilities. ) or asset purchase (buyer buys the assets of the target company from the target company)
In simple terms, A merger involves the mutual decision of two companies to combine and become one entity; it can be seen as a decision made by two "equals", whereas an acquisition or takeover on the other hand, is characterized the purchase of a smaller company by a much larger one. This combination of "unequals" can produce the same benefits as a merger, but it does not necessarily have to be a mutual decision. A typical merger, in other words, involves two relatively equal companies, which combine to become one legal entity with the goal of producing a company that is worth more than the sum of its parts. In a merger of two corporations, the shareholders usually have their shares in the old company exchanged for an equal number of shares in the merged entity. In an acquisition, the acquiring firm usually offers a cash price per share to the target firm’s shareholders or the acquiring firm's share's to the shareholders of the target firm according to a specified conversion ratio. Either way, the purchasing company essentially finances the purchase of the target company, buying it outright for its shareholders
The term amalgamation has not been defined in the Companies Act, 1956. However, the Income-tax Act, 1961 (‘Act’) defines amalgamation as follows:
“Amalgamation”, in relation to companies, means the merger of one or more companies with another company or the merger of two or more companies to form one company (the company or companies which so merge being referred to as the amalgamating company or companies and the company with which they merge or which is formed as a result of the merger, as the amalgamated company) in such a manner that—
· all the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation;
· all the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation;
· shareholders holding not less than three-fourths in value of the shares in the amalgamating company or companies (other than shares already held therein immediately before the amalgamation by, or by a nominee for, the amalgamated company or its subsidiary) become shareholders of the amalgamated company by virtue of the amalgamation,
and not as a result of the acquisition of the property of one company by another company pursuant to the purchase of such property by the other company or as a result of the distribution of such property to the other company after the winding up of the first-mentioned company;
Thus, the above three conditions should be satisfied for a merger to qualify as an amalgamation within the meaning of the Income-tax Act 1961.
Introduction to Legal Procedures for Merger, Amalgamations and Takeovers
The basis law related to mergers is codified in the Indian Companies Act, 1956 which works in tandem with various regulatory policies. The general law relating to mergers, amalgamations and reconstruction is embodied in sections 391 to 396 of the Companies Act, 1956 which jointly deal with the compromise and arrangement with creditors and members of a company needed for a merger.
Section 396 deals with the power of the central government to provide for an amalgamation of companies in the national interest. In any scheme of amalgamation, both the amalgamating company or companies and the amalgamated company should comply with the requirements specified in sections 391 to 394 and submit details of all the formalities for consideration of the Tribunal. It is not enough if one of the companies alone fulfils the necessary formalities. Sections 394, 394A of the Companies Act deal with the procedures and the requirements to be followed in order to effect amalgamations of companies coupled with the provisions relating to the powers of the Tribunal and the central government in the matter of bringing about amalgamations of companies.
After the application is filed, the Tribunal would pass orders with regard to the fixation of the dates of the hearing, and the provision of a copy of the application to the Registrar of Companies and the Regional Director of the Company Law Board in accordance with section 394A and to the Official Liquidator for the report confirming that the affairs of the company have not been conducted in a manner prejudicial to the interest of the shareholders or the public. Before sanctioning the scheme of amalgamation, the Tribunal has also to give notice of every application made to it under section 391 to 394 to the central government and the Tribunal should take into consideration the representations, if any, made to it by the government before passing any order granting or rejecting the scheme of amalgamation. Thus the central government is provided with an opportunity to have a say in the matter of amalgamations of companies before the scheme of amalgamation is approved or rejected by the Tribunal.
The powers and functions of the central government in this regard are exercised by the Company Law Board through its Regional Directors. While hearing the petitions of the companies in connection with the scheme of amalgamation, the Tribunal would give the petitioner company an opportunity to meet all the objections which may be raised by shareholders, creditors, the government and others. It is, therefore, necessary for the company to keep itself ready to face the various arguments and challenges. Thus by the order of the Tribunal, the properties or liabilities of the amalgamating company get transferred to the amalgamated company. Under section 394, the Tribunal has been specifically empowered to make specific provisions in its order sanctioning an amalgamation for the transfer to the amalgamated company of the whole or any parts of the properties, liabilities, etc. of the amalgamated company. The rights and liabilities of the employees of the amalgamating company would stand transferred to the amalgamated company only in those cases where the Tribunal specifically directs so in its order.
The assets and liabilities of the amalgamating company automatically gets vested in the amalgamated company by virtue of the order of the Tribunal granting a scheme of amalgamation. The Tribunal also make provisions for the means of payment to the shareholders of the transferor companies, continuation by or against the transferee company of any legal proceedings pending by or against any transferor company, the dissolution (without winding up) of any transferor company, the provision to be made for any person who dissents from the compromise or arrangement, and any other incidental consequential and supplementary matters to secure the amalgamation process if it is necessary. The order of the Tribunal granting sanction to the scheme of amalgamation must be submitted by every company to which the order applies (i.e., the amalgamating company and the amalgamated company) to the Registrar of Companies for registration within thirty days.
Motives behind M & A
Economies of Scale:
This generally refers to a method in which the average cost per unit is decreased through increased production, since fixed costs are shared over an increased number of goods. In a layman’s language, more the products, more is the bargaining power. This is possible only when the companies merge/ combine/ acquired, as the same can often obliterate duplicate departments or operation, thereby lowering the cost of the company relative to theoretically the same revenue stream, thus increasing profit. It also provides varied pool of resources of both the combining companies along with a larger share in the market, wherein the resources can be exercised.
Increased revenue /Increased Market Share:
This motive assumes that the company will be absorbing the major competitor and thus increase its power (by capturing increased market share) to set prices.
For example, a bank buying a stock broker could then sell its banking products to the stock brokers customers, while the broker can sign up the bank’ customers for brokerage account. Or, a manufacturer can acquire and sell complimentary products.
Better use of complimentary resources. It may take the form of revenue enhancement (to generate more revenue than its two predecessor standalone companies would be able to generate) and cost savings (to reduce or eliminate expenses associated with running a business).
A profitable can buy a loss maker to use the target’s tax right off i.e. wherein a sick company is bought by giants.
Geographical or other diversification:
this is designed to smooth the earning results of a company, which over the long term smoothens the stock price of the company giving conservative investors more confidence in investing in the company. However, this does not always deliver value to shareholders.
Resources are unevenly distributed across firms and interaction of target and acquiring firm resources can create value through either overcoming information asymmetry or by combining scarce resources. Eg: Laying of employees, reducing taxes etc.
Improved market reach and industry visibility :
Companies buy companies to reach new markets and grow revenues and earnings. A merge may expand two companies' marketing and distribution, giving them new sales opportunities. A merger can also improve a company's standing in the investment community: bigger firms often have an easier time raising capital than smaller ones.
Amalgamation and Merger under Companies Act 1956
Section 396: Powers Of Central Government To Provide For Amalgamation Of Companies In National Interest.
If the Central Government is satisfied that two or more companies be amalgamated the same being essential in public interest. Then the Central Government shall provide for the amalgamation of two companies into a single company. The validity of such order shall depend upon the grounds showing that the Central Government is satisfied in issuing an order being essential in public interest. The order of Central Government made so is to be notified in the Official Gazette and shall state company’s constitution, property, rights, interests, authorities and privileges together with its liabilities, duties and obligations.
The order aforesaid may [provide for the continuation of by or against the transferee company of any legal proceedings pending by or against any transferor company and may also] contain such consequential, incidental and supplemental provisions as may in the opinion of the Central Government, be necessary to give effect to the amalgamation.
A member or creditor (including a debenture holder) having interest in the company involved in amalgamation shall have same rights and interest in the newly constituted company and to that extent he receives less than his rights and interests from the new company, he shall be entitled to compensation. The compensation is to be assessed by the prescribed authority.
Any member or creditor, being aggrieved by the award of compensation by the prescribed authority under subsection (3) may file an application to Company Law Board within 30 days of the date of publication of assessment on the Official Gazette prefer an appeal to the [Tribunal] and thereupon the assessment of the compensation shall be made by the [Tribunal].
No order shall be made under this section, unless-
a) A copy of the proposed order has been sent in draft to each of the companies concerned
b) The Central Government has considered ,and made such modifications in the draft order as may seem to it desirable in the lights of suggestions and objections which may seem to it desirable in the lights of any suggestions and objections which may be received by it from any such company within such period as the Central Government may fix in that behalf, not being less than two months from the date on which the copy aforesaid is received by that company ,or from any class of shareholders therein, or from any creditors or any class of creditors thereof.
(5) Copies of every order made under this section shall , as soon as it has been made, be laid before both Houses of Parliament
Companies Act , 1956
Amalgamation in the National Interest-This is a new provision and it is intended to provide at the instance to the Government, for the amalgamation for the amalgamation of two or more companies in the national interest. It has been made clear that any order made by the Government should provide for the old shareholders and the old debenture holders and the creditors having the same interest in the company resulting from the amalgamation as they have in the original companies. Any order made by the Government under this clause will be laid on the table of both Houses of the Parliament and will be subjected to Parliamentary Scrutiny.
Companies (Amendment) Act ,1960
The words ‘public interest’ were substituted for the words ‘national interest’ by section 152 of the Companies (Amendment) Act ,1960.
Companies (Amendment) Act ,1985
Sec 396 of the Companies Act empowers the Central Government to order amalgamation of the company in the national interest.
Companies (Second Amendment) Act ,2002-
The powers of the company law board has been conferred to the tribunal.
Requirement and procedure of Amalgamation in Public Interest
According to the Webster's New World Dictionary, Public interest means "the people’s general welfare and well being; something in which the populace as a whole has a stake."
According to the Random House Dictionary, Public interest is "1. the welfare or well-being of the general public; commonwealth.
In exercise of the powers conferred by section (1) & (2) of section 396 of Companies Act 1956 read with notification of Government of India in the department of company affairs. No.GSR 443(E), dated 18th October, 1972, the Company Law Board made Chandpur Sugar Co. Ltd. and U.P. State Sugar Corporation Ltd. (Amalgamation) Order, 1989 to provide for the amalgamation of two companies into a single company.
SECTION 396A: PRESERVATION OF BOOKS AND PAPERS OF AMALGAMATED COMPANY.
The books and papers of a company which has been amalgamated with , or whose shares have been acquired by another company under this Chapter ,shall not be disposed of without the prior permission of the Central Government and before granting such permission the Government may appoint a person to examine the books and papers or any of them for the purpose of ascertaining whether they contains any evidence of the commission of an offence in connection with the promotion or the formation ,or the management of the affairs ,of the first mentioned company or its amalgamation or the required of its shares.
In general, amalgamation is the process of combining or uniting multiple entities into one form. Whereas Merger means the combining of two or more entities into one, through a purchase acquisition or a pooling of interests. Differs from a consolidation in that no new entity is created from a merger
The terms merger and amalgamation have not been defined in the Companies Act, 1956 (hereinafter referred to as the Act) though this voluminous piece of legislation contains 69 definitions in Section 2. The concept paper recently issued by the Ministry of Company Affairs, the fate of which is still unknown, contained 100 such definitions but still stopped short of defining merger or amalgamation. The terms merger and amalgamation are synonyms and the term ‘amalgamation’, as per Concise Oxford Dictionary, Tenth Edition, means, ‘to combine or unite to form one organization or structure’.
In real terms, the rationale behind mergers and acquisitions is that the two companies are more valuable, profitable than individual companies and that the shareholder value is also over and above that of the sum of the two companies. Despite negative studies and resistance from the economists, M&A’s continue to be an important tool behind growth of a company. Reason being, the expansion is not limited by internal resources, no drain on working capital - can use exchange of stocks, is attractive as tax benefit and above all can consolidate industry - increase firm's market power.
The basic reason behind mergers and acquisitions is that organizations merge and form a single entity to achieve economies of scale, widen their reach, acquire strategic skills, and gain competitive advantage. In simple terminology, mergers are considered as an important tool by companies for purpose of expanding their operation and increasing their profits, which in façade depends on the kind of companies being merged. Indian markets have witnessed burgeoning trend in mergers which may be due to business consolidation by large industrial houses, consolidation of business by multinationals operating in India, increasing competition against imports and acquisition activities
The Government in order to the people’s general welfare and well being amalgamate two companies in the National Interest. Occasionally some cases came up to the Government where such amalgamation was clearly a necessity. The observance of the usual procedure prescribed by the existing Act in such cases will lead to prolonged delays which will be detrimental to the national interest.
# Available at http://wircicai.org/WIRC_REFERENCER/Income Tax & Wealth Tax/Mergers & Aquisitions - Indian Perspective.htm visited on October 2,2011.
# Subs.by Act 35 of 1985,s.(3)(a);(b)
# Joint Director (Accounts) Department of Company Affairs is prescribed authority vide R.12A of Companies (Central Government’s) General Rules and Forms, 1956.
# Subs.for “Company Law Board”by the Companies(Second Amendment)Act,2002(11 of 2003),s.43.
# The word ‘and’ omitted by the Act 35 of 1985,s.(3)(d).
# Ramaiya A.,Guide to the Companies Act,pg.4244.
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