Consentia on Multidisciplinary Research

MERGERS AND ACQUISITIONS: NEW RULES OF THE OLD GAME

Introduction of the New Economic Policy, 1991 paved the way for economic liberalization in India. The government relaxed various controls and regulations allowing trade and commerce to flourish, resulting in a robust and progressive economy. Deregulation of industries coupled with participation from foreign investors marked the dawn of the era of large scale mergers and acquisitions (“M&A”) in India. As per Mergermarket, a global deal tracking firm “the aggregate value of merger and acquisition transaction involving Indian entities was $20.8 billion in 2013, down 46.3 per cent over the 2012 figure.” This triggered the need for reconsideration of the existing laws.

The Companies Act, 2013 (“2013 Act”) features some new provisions in the area of M&A, apart from making certain changes from the existing provisions. While the changes are aimed at simplifying and rationalising the procedures involved, the new provisions are also aimed at ensuring higher accountability for the company and majority shareholders and increasing flexibility for corporates. .

This paper touches widespread impacts that the 2013 Act has on M&A activities with recent examples. It also encompasses provisions dealing with streamlining requirements, merger or demergers of companies, certifying accounting standard, simplifying procedures, cross-border mergers and squeeze out provisions.

 

 

  1. INTRODUCTION

“Flaming enthusiasm, backed by horse sense and persistence, is the quality that most frequently makes for success”.

                                                                                                                         – Dale Carnegie

This quote holds good for Merger and Acquisitions  in India, and a credo to which Indian compa­nies seem to subscribe given their successes to date in completing acquisitions. There is little to stop Indian companies that desire to be global names for playing the merger and amalgamation game globally.

Mergers and acquisitions are used as instruments of momentous growth and are increasingly getting accepted by Indian businesses as critical tool of business strategy. They are widely used in a wide array of fields such as information technology, telecommunications, and business process outsourcing as well as in traditional business to gain strength, expand the customer base, cut competition or enter into a new market or product segment. Mergers and acquisitions may be undertaken to access the market through an established brand, to get a market share, to eliminate competition, to reduce tax liabilities or to acquire competence or to set off accumulated losses of one entity against the profits of other entity. Merger and Acquisition (M&A) has always been a sought for transaction in India, as more and more M&A deal is being carried out each and every day in the Indian market. As per Grant Thorton, there have been a total of 480 deals amounting to $27.4 billion during 2013 involving Indian companies.[1]

Thus, Mergers and acquisitions are indeed strong indicators of a growing and robust economy. Legal framework of any country plays a pivotal role in establishing promoting such reconstructions.  As George Bernard Shaw  said “we are made wise not by the recollec­tion of our past, but by the responsibility for our future”. Its true that the New company Law 2013, made considerable positive changes with respect to the scheme of merger and acquisitions, yet a lot has been left undone which has to be catered to. But before proceeding to that, a comparative analysis between  the provisions of the Companies Act 1956 and the provisions of the New Companies Act 2013 with respect to merger and acquisition, is of utmost importance.

  1. CRITICAL DISSECTION OF THE CHANGES BROUGHT BY THE INDIAN COMPANIES ACT 2013
  2. END TO FRIVOLOUS OBJECTIONS- MINIMUM THRESHOLD SET FOR RAISING OBJECTIONS

PRE 2013 ACT SCENARIO

Under the 1956 companies act, individual shareholders  and creditors could harass the company by raising arm-twisting objections to schemes of mergers, acquisitions etc. This often hampered the well being of the concerned company.

POST 2013 ACT SCENARIO

The 2013 Companies Act which provided minimum threshold for raising objections by a shareholder or a creditor can be considered to be nothing but a blessing in disguise. Now right to object to the Scheme of merger, acquisition would no longer be available to any and every person. Objections can be raised by shareholders holding 10% or more equity and creditors whose debt represent 5% or more of the total debt as per the last audited financial statements. By raising the bar, the new law aims to ensure that the frivolous objections/litigation can be avoided.

IMPLICATION

It would prevent frivolous arm twisting strategies used by creditors and individual shareholders which prevent the growth of a company.

  1. GREEN SIGNAL FOR OUTBOUND MERGERS

Globalisation and technological innovations have triggered an era of mergers and takeovers. India is also one of the frontrunners in this restructuring wave.. Even before the 2013 amendment Act, it was a well settled law that “ in the days of globalisation, a liberal view is expected to be taken enabling such scheme of arrangements between domestic and foreign companies[2]”. But with such a plethora of cross-border transactions taking place, it is essential to consider the legal aspects of these deals.

PRE 2013 ACT SCENARIO

Sections 391-394 of the Companies Act 1956 dealt with Mergers. As per sec 394, the provision applies to only Transferee company which is an Indian Company. The Transferor company was defined to include both Indian an foreign company.Thus section 394 prevented merger of any Indian company into a foreign company,

POST 2013 ACT SCENARIO

Companies Act 2013 promises to marry corporate law with globalised business needs[3].The new company law permits inbound as well as outbound cross-border mergers and amalgamations between Indian companies and companies in foreign jurisdictions. However, the Government is empowered to notify, from time to time, the foreign jurisdictions in which such corporate matches would be allowed. It will also frame rules for cross-border mergers in consultation with the Reserve Bank of India. Also, RBI approval is a must.

IMPLICATION

This will provide the opportunity to the Indian company to grow on a global scale.Any Inian company can now amalgamate with a foreign company  or vice versa.

  1. MERGER OF SMALL COMPANIES AND HOLDING WITH WHOLLY OWNED SUBSIDIARIES

PRE 2013 ACT SCENARIO

All companies, irrespective of their size, had to take the permission of the court before merger. This was a time consuming process which often delayed the merger process.

POST 2013 ACT SCENARIO

A separate scheme has been made for the merger of “small companies[4]” and wholly owned subsidiaries under the new companies act 2013. Courts approval is no longer required for the merger of such companies.  Section 233 of the 2013 Act prescribes a simplified fast track procedure for their merger which requires consent of shareholders holding 90% in value and creditors representing 9/10th of debt in value as well as approval of the Scheme by the Regional Director, Ministry of Corporate Affairs in case no objections are received from the Official Liquidator and Registrar of Companies. Approval of the Tribunal is not required for such mergers.[5]

IMPLICATION

1)      The merging entities under this scheme may not be required to:-

a)      File documents required to be filed under the listing agreement, in the case of listed companies.

b)      Give notice to various authorities.

c)       Provide auditor’s certificate of compliance with applicable accounting standards.

2)      It will result in faster disposal of merger matters. It would reduce the extra burden on the court.

  1. SANCTIONING POWER TRANFERRED FROM HIGH COURT TO NATIONAL COMPANY LAW TRIBUNAL: SINGLE WINDOW OPENED FOR CORPORATE JUSTICE

PRE 2013 ACT SCENARIO

Earlier, the  scheme of any merger, or acquisition was sent to the High Court for confirmation. This consumed a lot of time due to the already piled of cases pending in the High courts.

POST 2013 ACT SCENARIO

The power of sanctioning the scheme has been transferred from the High Court to NCLT (National Company Law Tribunal).

IMPLICATION

This can slash the huge number of pending cases from the High court to a specialized body.The establishment and constitution of NCLT and NCLAT as exclusive tribunals for the administration of all matters arising out of the Companies Act will definitely reduce, if not negate the fatal delay involved in the company law proceedings, avoid multiplicity of litigation before various fora, streamline the process of appeal and reduce the burden on High Courts. All this will make India, a more attractive destination for investment.[6]

  1. NOTICE TO REGULATORY AUTHORITIES

PRE 2013 ACT SCENARIO

The regulatory authorities like,  Central Government, RBI, official liquidator, ROC, SEBI, Competition Commission of India etc, used to raise concern suo-moto, or when required under relevant statute. There was no obligation on the companies to give any notice to such authorities about such arrangements.

POST 2013 ACT SCENARIO

The M&A scheme have to be sanctioned by various statutory authorities- the Central Government, RBI, official liquidator, ROC, SEBI, Competition Commission of India etc. These authorities have been given a strict timeline to work under. For example, as per section 230 of the Indian Company Act 2013:- “Notice (withrelevantdocuments) required to  be sent  toCentral Government, income-tax authorities, RBI, SEBI,RoC,respective stock exchanges,Official Liquidator ,CCI, if necessary and any  other sectoral regulators or authorities likely to be affected by the compromise  orarrangement”.

 

 IMPLICATION

With the involvement of all these parties, the M&A process are sure to be more cumbersome.[7]

  1. COMPANIES PREVENTED FROM HOLDING TREASURY STOCK

PRE 2013 ACT SCENARIO

Holding of treasury shares was permissible. Treasury shares are those that a company holds in itself and could be created as a result of buy-backs from the open market or mergers. Putting shares as treasury stock and later sell them in the market when the price goes up in the future, which the company is in a better position to predict .This was a practice that was prevalent. This was also Utilized by companies to control voting rights and manage profitability and cashflows.

POST 2013 ACT SCENARIO

       Now, Companies cannot  hold shares in their own name or in the name of any trust, whether on its behalf or on behalf of any of its subsidiary or associate companies.

       Section 232(3):-

“Transferee company cannot, ,hold any shares in its own name or in the name of  any trust whether on its behal for on behalf of subsidiary or associate companies”’

 IMPLICATION

      Now as per Section 232(3), any such shares will be cancelled or extinguished. The companies have to look for other option to retain control and to maintain liquidity as post-merger all the intercompany investment will be cancelled and no further shares will be issued in lieu of the intercompany investment.

  1. APPROVAL OF SCHEME THROUGH POSTAL BALLOT

 

PRE 2013 ACT SCENARIO

 Under the 1956 Act, scheme of compromise / arrangement needs to be approved by majority representing 3/4th in value of the creditors and members or class thereof present and voting in person or by proxy.

 

POST 2013 ACT SCENARIO

The approval of the members and/or creditors can also be taken through postal ballot.

IMPLICATION

       It will ensure more number of members to take part in M&A process.

  1. END TO THE PROCESS OF BACKDOOR LISTING OF UNLISTED COMPANIES

 

PRE 2013 ACT SCENARIO

  Earlier, the unlisted companies used to automatically acquire the status of a listed company after the merger with a listed company even without any IPO. It means the unlisted company could enjoy all the benefits of becoming a listed company without diluting its shares in the public.

POST 2013 ACT SCENARIO

Now as per Section 232 (h), if the transferee company is an unlisted company, it shall not automatically become a listed company by merging with a listed company. It has to follow the process of listing as per SEBI (ICDR) Regulation 2009 in order to become listed. During merger the unlisted company also has to grant an exit opportunity to the existing shareholders of the listed company.

IMPLICATION

The process of backdoor listing will end now.

III. MERGER AND DEMERGER PROCESS MADE ROBUST AND TRANSPARENT[8]

Amendments or New Porvisions Remarks

 

Decision of merger or demerger to be considered in a board meeting only

 

 Scheme cannot be approved by Board by passing a ‘resolution by circulation

 

Dispensation of creditors’ meeting possible

• Discretion available with National Company Law Tribunal to grant dispensation subject to receiving confirmation of at least 90% creditors in value

 

 

• Brings uniformity in practice followed by different high courts while granting approval

• Consent required by way of affidavit from each creditors

• No explicit provision for dispensation from shareholders’ meeting

 

Filing of notice of shareholders’ or creditors’ meeting with various statutory authorities

• Notice to be filed with the income tax department, RBI, ROC, OL, CG, SEBI, stock exchanges (wherever applicable), CCI or any other regulators likely to be affected

• Regulators to make representation within 30 days – else deemed ‘no objection’

 

Notice to accompany the following:

• Copy of Valuation report

•Statement explaining details of compromise/arrangement

•Statement explaining impact of such compromise/arrangement on stakeholders

 

Auditors’ certificate on accounting treatment

 

 

• Ensures accounting treatment in the scheme is in compliance with Accounting Standards

• Provisions brought in line with those applicable to listed companies as per the listing agreement

 

Shareholders or creditors can now vote through postal ballot for approval of the scheme of arrangement

 

 

• Gives equal opportunity of vote to all the stakeholders

 

Set-off of fees paid on authorised capital by transferor company

• Set-off of fees paid, if any, on authorised share capital by dissolving transferor against any fee payable by transferee company on its authorised share capital post amalgamation

 

 

• Practice followed by different courts codified into law

 

Minimum threshold for raising objection to the scheme of arrangement

 

 

• Limits frivolous litigations by few small shareholders or creditors

 

 

Persons holding at least 10% of shareholding or 5% of the total outstanding debt as per the latest audited financials eligible to raise objections

 

 

Will result in efficiency in implementation of the scheme

 

Introduction of National Company Law Tribunal for approving mergers, demergers etc.

 

 

• Single forum to decide on the matters relating to Compromise, arrangement and amalgamation (including demerger)

• No more approval of High Court required

 

  1. WHERE INDIA STOOD BEFORE ENACTMENT OF THE NEW LAW

It is evident from the below mentioned chart that the total number of M&A transactions in 2001, 2005, 2008 and 2011 in the BRIC countries has increased at different pace in different countries. It also shows growth rates in M&A transactions for the entire period. The BRIC countries as a whole saw their total number of transactions increase from 2001 to 2011 from 346 to 7654, i.e. a growth rate of 2112%. For the US, the growth rate was 82%, but from a much higher base of 8531 (US) transactions in 2001. Of the BRIC countries, Russia had the highest percentage increase (3265%) while Brazil registered the lowest increase (511%) and India placed at the second lowest increase (1682%).

  2001 2005 2008 2011 Growth (%)

(2001-2011)

Brazil 99 220 470 605 511
Russia 77 469 1608 2591 3265
India 50 577 805 891 1682
China 120 1097 2596 3567 2873
BRIC 346 2363 5479 7654 2112
US 8531 10114 11329 15565 82

Chart: Comparison of M&A in BRIC and US.[9]

While absolute numbers of transactions in the BRIC countries increased throughout the 2001-2011 period but even that number is far too low as compared to the number (8531) of M&A activities that took place in the US in 2001. Talking particularly about India, the number is not satisfactory. The gloomy state of affair is reflected too vividly with a growth rate of 1682% which is not at par to the growth rate of BRIC countries which stands at 2112%. India being a country which promises a lucrative market and astonishing prospects does not seem to be true after taking a look at the numbers as it does not support the credentials India claims for herself. Although the Indian story of growth and development is not baseless in entirety but changes which could add on to the growth of market and more friendly policies are always a welcome step. The New Act has sought to take care of such complexities which acted as impediments to M&A in a free market economy.

 

  1. ANOMALIES IN THE 2013 INDIAN COMPANY ACT WITH RESPECT TO MERGERS AND ACQUISITIONS

 

1)      AMBIGUITY REGARDING SETTING UP OF NCLT

The act proposes constitution of the National Company Law Tribunal which will replace company law board. It will assume the jurisdiction of the High court as a sanctioning authority in relation to restructuring. This is proposed to speed up the restructuring process. But in the act, there is no clarity as to when will NCLT be constituted and by when will it become operational.

2)      ABSENCE OF TRANSITIONAL PROVISIONS TO GOVERN  RESTRUCTURING IN PROGRESS 

 The new Act provides that after the constitution of the NCLT, all restructuring in progress shall be transferred form the High Court to NCLT. But the act is silent on the matter that whether NCLT will complete those matters on the basis of the provisions of the new act or the old act. There is absence of transitional provisions to govern the restructuring taking place at the time of replacement of the old act. Ambiguity may arise beacause any restructuring typically tale 3 to 6 months and in absecne of any transitional provision, it is difficult to state whether such process of restructuring would continue as per the provisions of the old act or as per the provisions of the new act

 

3)      NO CLARITY WHETHER FAST TRACK MERGER WILL BE ALLOWED BEFORE THE NCLTBECOMES OPERATIONAL OR NOT ,because as per the new companies act, the CG may transfer the scheme of such merger  to the NCLT for application of normal merger provisions

4)      APPLICATION OF NORMAL MERGER PROCEDURE IN CASE OF SMALL COMPANIES IN CERTAIN CASES

2013 act provides a scheme for fast track procedure for merger of small or wholly owned subsidiaries. This could be good news for the merging entities who may not be required to (i) file documents required to be filed under the listing agreement, in the case of listed companies, (ii) give notice to various authorities, (iii) provide auditor’s certificate of compliance with applicable accounting standards
But if  the Regional Director is of the opinion that the Scheme is not in the interest of the stakeholders, he may approach the Tribunal who could follow the merger procedure prescribed under the 2013 Act.

This ability to transfer to the Tribunal has the potential to change fast-track to a normal merger and make such mergers less appealing.

  1. CONCLUSION

 

The Companies Act, 2013 has sought to bring several noteworthy changes and streamline M&A in India. Although it aims at making M&A smoother, transparent and economically viable, corporations could perceive the need to get multiple approvals from different regulators as onerous. However, the thirty days, time limit imposed on the regulators will, hopefully, ensure that they respond in a time bound manner. On the face of it, the 2013 Act offers comprehensive and better transparency ensuring protection of stakeholders’ interest, while simultaneously avoiding frivolous objections. The exact time frame that the entire merger process would involve will be known once it is tested and which will happen after the Tribunal is constituted and the rules implemented. It appears that the New Act can help to deal with the challenges and complexities that were faced in procedures that were contemplated under the old Act. The New Act has incorporated a number of provisions to deal with problems actually faced during the process of mergers and acquisitions, by taking into consideration the practical aspects of the process. The New Act has incorporated a plethora of changes like placing restriction on multi-layer investment subsidiaries, allowing merger of Indian company with a foreign company, introducing fast track merger for small companies and between holding company and its wholly owned subsidiary etc. One of the several noteworthy changes added to the New Act allows person or a group of persons holding 90% or more equity shares by virtue of amalgamation etc. to purchase the remaining equity shares of the company from minority shareholders. It also disallows reverse merger of a listed company with that of an unlisted one. The new provisions should make it easier for corporations proposing mergers and acquisitions as it spears to have a good system of checks & balances to prevent abuse of the process of law. The New Act certainly has some ambiguities attached to it, which would need to be dealt with in order to reduce complexities involved in the process.

Author Details

Akshay Pathak
3rd Year,
Amity Law School,  Delhi (GGSIPU)
Email Id:- akshaypathak.123@gmail.com

[1]Yogesh Malhan, “Mergers And Acquisitions”, available at http://www.lexology.com/ , last accessed on April 14th, 2014.

[2] Moschip Semiconductor Technology Ltd., 120  Comp. Caes 108 (AP),  Bank ofMuscat, (2004) 120 Comp. Cases 340 (Kar)

[3] Shashishekhar, “Green signal for outbound mergers”, The Hindu, October 27th 2013

[4] See Section 2(85) of the 2013 Act which defines “Small Companies” as a private company, with a paid-up capital of maximum INR 5 million or a prescribed amount up to INR 50 million or with a turnover of maximum INR 20 million or a prescribed amount up to INR 200 million. It excludes (i) holding and subsidiary companies; (ii) a company or a body corporate governed by a special Act or (iii) charitable companies formed under section 8 of the 2013 Act

[5]Supra Note 2

[6] Vyapak Desai, Vivek Kathpalia and Arun Scaria,”Supreme Court upholds the constitutionality of National Company Law Tribunal”, available at http://www.indialawjournal.com/, last accessed on April 14th ,2014

[7]Yogesh Malhan, “Mergers And Acquisitions”, available at http://www.lexology.com/ , last accessed on April 14th, 2014.

[8]Companies Act 2013: Impact on Transactions and Corporate Reconstructions” available at www.pwc.in, last accessed on 5th April, 2014

[9]Karel Koll, “Merger Control in the BRIC Countries vs. the EU and the US: The Facts”,available at  http://knowledge.insead.edu/blog/insead-blog/merger-control-in-the-bric-countries-vs-the-eu-and-the-us-the-facts-2742?nopaging=1#rvQ4fYk0KFCkuMFg.99 last accessed April 13th 2014.

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