Mergers Under The Companies Act, 2013

Procedure for Mergers

Notice and Approval Requirements

The memorandum of association (MOA) of merging companies must give them the power to amalgamate, and the creditors of the companies must approve the merger scheme.

Companies must serve a notice of the merger on creditors, shareholders, and various regulators. This notice must include the merger proposal and valuation report. These regulators include the MCA, RBI, CCI, and stock exchanges of listed companies. They also include IT authorities and any other sector authority the merger may affect.

Shareholders and creditors can cast their vote through a postal ballot. A party can apply to the Tribunal under section 230 for the sanctioning of a compromise or arrangement. In such cases, the Tribunal can order a meeting of creditors. Shareholders who hold 10% or more equity can raise objections. So can creditors whose outstanding debt is 5% or more of the total debt, as per the last audited balance sheet.

Auditors must certify in advance that the accounting treatment matches accounting standards, and companies must file this certification with the stock exchanges. This requirement applies to both listed and unlisted companies.

Filing and Completion

The Board of Directors approves the draft proposal first. The company then applies to the respective High Court, using Form No. 36. It files this application in the state where its registered office is located. Once approved, the company must file the scheme with the Official Liquidator, the RoC, and the Central Government. If there is “no objection,” the law deems this as approval. The Companies Act, 2013 established the National Company Law Tribunal (NCLT) to handle company law matters. The NCLT has replaced the High Courts in this role.

Once the Court issues its order, the company files certified true copies with the Registrar of Companies.

Under the approved scheme, the acquiring company transfers the assets and liabilities of the acquired company to itself. This transfer takes effect from the specified date. The acquiring company exchanges shares and debentures, and/or cash, for the shares and debentures of the acquired company. These securities are then listed on the stock exchange.

Merging a Listed Company With an Unlisted Company

If a listed company merges with an unlisted company under the Act, the unlisted company does not automatically become listed. Instead, the NCLT can provide an exit route: shareholders of the transferor company who want to opt out of the transferee company receive payment equal to the value of their shares and other benefits.

Fast-Track Mergers

The Act provides for fast-track mergers[1] between two or more small companies, between a holding company and its wholly-owned subsidiary, or between other prescribed classes of companies.

Under the fast-track procedure, companies must notify the Registrar, official regulators, and affected persons about the proposed merger within thirty days. These parties can then raise objections and suggestions. Members holding 90% of shares must approve the merger proposal at a general meeting. Creditors representing nine-tenths of the value of debt must also approve it at a meeting called with 21 days’ notice. The notice for both meetings must include the merger scheme and a declaration of solvency.

The transferee company must file the merger scheme with the RoC within 7 days of the meeting. It must also file the declaration of solvency at this time. It must communicate any objections from the RoC or official liquidator to the Central Government in writing within 30 days. The Central Government then has 60 days from receiving the merger proposal to file objections before the Tribunal. The Tribunal then decides whether the scheme qualifies for fast-track treatment.

Cross-Border Mergers

The Act also permits cross-border mergers[2] between an Indian company and a foreign company. Such mergers must occur in a jurisdiction that the Central Government has notified, in consultation with the RBI. Subject to RBI approval, companies can structure the merger consideration as cash, depository receipts, or a combination of both.

Demerger

A demerger occurs when a “demerged company” transfers one or more undertakings to a resulting company under a scheme of arrangement. Section 2(19AA) of the Income Tax Act, 1961 provides for this arrangement. The demerged company must record any difference in the value of its assets and liabilities in its capital reserve. Alternatively, it must debit this difference to goodwill. Similarly, the resulting company compares the net assets it takes over with the shares it issues as consideration. It credits any excess to its capital reserve, or debits any deficit to goodwill.

Companies must also submit a Chartered Accountant’s certificate to the NCLT, confirming that the accounting treatment complies with the prescribed conditions.

Minority Shareholders

Minority shareholders receive an exit mechanism when majority shareholders notify their intention to buy them out. This mechanism applies when the majority holds 90% or more of shares. Minority shareholders can also offer their shares to majority shareholders on their own initiative. A registered valuer determines the buyback price according to SEBI’s regulations.

Footnotes:
[1] Section 233, Companies Act, 2013
[2] Section 234, Companies Act, 2013

Frequently Asked Questions (FAQs) on Mergers Under The Companies Act, 2013

1. What is a merger under the Companies Act, 2013?

A merger involves consolidating two or more entities into a single entity, which amalgamates all assets and liabilities under one business.

2. What are the objectives of mergers?

Companies pursue mergers for various reasons, including achieving economies of scale, acquiring new technologies, gaining access to new sectors or markets, enhancing competitiveness, and optimizing resource utilization.

3. What is the procedure for mergers under the Companies Act, 2013?

The procedure involves several steps. Companies must obtain approval from the Board of Directors, shareholders, creditors, and regulatory authorities. They must then file the scheme of merger with the respective High Court, Official Liquidator, Registrar of Companies, and Central Government.

4. What is the role of minority shareholders in a merger?

Minority shareholders receive an exit mechanism. They can sell their shares if majority shareholders, holding 90% or more, decide to purchase them. Alternatively, they can offer their shares to majority shareholders directly.

5. Are there provisions for fast-track mergers?

Yes. The Companies Act, 2013 provides for fast-track mergers in certain cases. These include mergers between small companies, a holding company and its wholly-owned subsidiary, or other prescribed classes of companies. These mergers follow an expedited process with specific requirements and approvals.

6. Can listed companies merge with unlisted companies?

Yes. However, the unlisted company does not automatically become listed. The transferee company can choose to remain unlisted. To do so, it must offer an exit opportunity to the shareholders of the merged listed company.

7. What are cross-border mergers?

Cross-border mergers involve mergers between Indian and foreign companies located in jurisdictions the Central Government has notified, in consultation with the RBI. These mergers require RBI approval and may involve consideration in cash, depository receipts, or a combination of both.

8. What is a demerger?

A demerger involves transferring one or more undertakings from a “demerged company” to a resulting company. Section 2(19AA) of the Income Tax Act, 1961 provides the scheme of arrangement for this transfer. Demergers are subject to specific accounting treatment and regulatory requirements.

9. How is the pricing determined for minority shareholders’ shares in a merger?

A registered valuer determines the pricing for minority shareholders’ shares, in accordance with regulations the Securities and Exchange Board of India (SEBI) prescribes.

10. What are the key regulatory provisions governing mergers under the Companies Act, 2013?

Sections 230 to 240 form the key regulatory provisions governing mergers, covering compromises, arrangements, and amalgamations. Other relevant provisions address corporate governance, taxation, and securities regulation.

Conclusion

Mergers under the Companies Act, 2013 represent a critical aspect of corporate restructuring and growth strategies in India. Chapter XV of the Act, along with associated provisions, outlines an elaborate procedural framework for the merger process. This framework aims to streamline mergers while safeguarding the interests of stakeholders.

Companies pursue mergers for various objectives, including achieving economies of scale, acquiring new technologies, and accessing new markets. The Act provides for different types of mergers, such as fast-track mergers and cross-border mergers. Each type is subject to specific regulatory requirements and approvals.

The Act also affords minority shareholders exit mechanisms, ensuring fair treatment and protection of their interests in merger transactions. It also introduces provisions for demergers, allowing companies to segregate business undertakings in a structured manner.

Overall, the Companies Act, 2013 establishes a robust legal framework for mergers, promoting transparency, efficiency, and investor confidence in India’s corporate landscape. By adhering to the prescribed procedures and regulations, companies can navigate mergers successfully, facilitating corporate growth and development in the country.

Author Note:
This article was authored by Noor Siddiqui, a contributing writer for etaxdial.com. Noor Siddiqui has a background in corporate law and taxation. This experience brings a wealth of expertise to the discussion on mergers under the Companies Act, 2013. As a seasoned professional in the field, Noor has a deep understanding of the intricacies involved in corporate mergers. Noor is dedicated to providing comprehensive insights to readers. For more articles and resources on tax and corporate law, visit etaxdial.com.