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Mergers & Amalgamations under the Companies Act, 1956

>> Jul 29, 2010

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Mergers & Amalgamations under the Companies Act, 1956
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’.
The provisions relating to merger and amalgamation are contained in sections 391 to 396A in Chapter V of Part VI of the Act. Any proposal of amalgamation or merger begins with the process of due diligence, as the proposal for merger without due diligence is like entering a tunnel with darkness growing with each step. The due diligence process makes the journey see the light at the end of the tunnel – the light of wisdom to amalgamate or not.
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The Act and the relevant rules pertaining to amalgamation are to be followed scrupulously. The provisions of the Act also deal with compromise or arrangement within or without amalgamation or merger. Presently, the High Court enjoys powers of sanctioning amalgamation matters under section 394 of the Act though it is a matter of time when this power will be exercised by National Company Law Tribunal, a forum where Chartered Accountants shall be authorized to appear. Not losing sight of this opportunity coming way of the Chartered Accountants, the seminar on this very topic, assumes greater significance and it is imperative that professionals like Chartered Accountants should keep themselves informed of the provisions relating to merger and amalgamations. The role of Chartered Accountants, in any amalgamation case, cannot be undermined as without their uncanny insight within the financial maze, no due diligence, valuation, share exchange ratio etc. can be accomplished.
An attempt has been made in this paper to present the provisions of the Companies Act, 1956 relating to mergers and amalgamations in form of questions and answers for ease of understanding, insight and awareness.
1.            Can a compromise or arrangement between company and creditors and company and members be made and whether it requires approval of the Court?
Yes, compromise or arrangement can be made between a company and its creditors or any class of them and also between a company and its members or any class of them. Such a compromise or arrangement requires sanction of the court, which directs holding of meeting of creditors or members or class of creditors or members, as the case may be. On agreement of creditors or members present in majority representing three-fourth in value (both the conditions are concurrent and cumulative) of creditors or members, the court may sanction any such compromise or arrangement.

2.            What are the powers vested in court in relation to amalgamation of two companies?
The court enjoys vast powers in relation to grant of sanction for amalgamation of companies and can make provisions in the order, in respect of all or any of the following matters: -
(i)           the transfer to the transferee company of the whole or any part of the undertaking, property or liabilities of any transferor company;
(ii)         the allotment or appropriation by the transferee company of any shares, debentures, policies, or other like interests in that company which, under the compromise or arrangement are to be allotted or appropriated by that company to or for any person;
(iii)        the continuation by or against the transferee company of any legal proceedings pending by or against any transferor company;
(iv)        the dissolution, without winding up, of any transferor company;
(v)         the provisions to be made for any person who, within such time and in such manner as the tribunal directs, dissent from the compromise or arrangement; and
(vi)        such incidental, consequential and supplemental matters as are necessary to secure that the reconstruction or amalgamation shall be fully and effectively carried out.
3.            Is it necessary for the Court to consider the report of the Registrar of Companies prior to grant of sanction?
It is mandatory for the court to consider not only report of Registrar of Companies concerned but also the report of Official Liquidator prior to sanctioning the scheme of amalgamation. The Registrar of Companies & Official Liquidators have to make a report to the Court that the affairs of the company are not being conducted in a manner, prejudicial interest of their member or to public interest.
4.            Is it possible to have the merger with retrospective effect?
Yes, a merger can be made effective from a past date, i.e. it can be retrospective. However, effective date, which is too far in the past, can create problems and adverse implication for such a merger in the form of non-compliance of various laws cannot be ruled out.
5.            Can the merger be effective from a future date?
There is no bar to have the effective date of amalgamation in future. Incidentally, majority of the mergers are effective from a future date.
6.            What is the difference between ‘Effective Date’ and the ‘Appointed Date’?
The ‘Appointed Date’ connotes the date of amalgamation i.e. the date from which the undertaking including assets and liabilities of the transferor company vest in transferee company. The ‘Effective Date’ signifies the completion of all the formalities of merger.
7.            Is it possible to have reduction of capital as part of the scheme of amalgamation?
Yes, it is possible to include reduction of capital as part of the scheme of amalgamation provided the Articles of Association of the company authorize such reduction and special resolution to this effect is passed as contemplated under section 100 & 101 of the Act.
8.            In case reduction of capital is inherent in a scheme of amalgamation, is it necessary to obtain separate Court approval after following the laid down procedure?
There have been numerous decided cases which indicate that separate petition under section 100 of the Act for reduction of capital need not be made if the same is covered as a part of scheme of amalgamation. The Courts have held that the provisions contained in section 391 are a complete code in itself. Thus, no separate petition is necessary for reduction of capital which is a part of scheme of amalgamation. However, in the resolution in which the approval for scheme of amalgamation is sought must, in explicit terms, state that this approval is also for reduction of capital, being part of the scheme.
9.            What is ‘Reverse Merger’?
‘Reverse Merger’ is a coined term generally used in those cases of mergers where a company having higher networth is merging into a company having networth lower than it.
10.         Do SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 are applicable to amalgamation or merger or demerger under the Act?
No, in cases of amalgamation or merger or demerger under the Act, SEBI Takeover Regulations have no applicability as laid down in Regulation 3(1)(j) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.
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