Merger and Acquisition in IndiaMergers and acquisitions (M&A) refers to the aspect of corporate strategy,corporate finance and management dealing with the buying, selling andcombining of different companies that can aid, finance, or help a growingcompany in a given industry grow rapidly without having to create anotherbusiness entity.An acquisition, also known as a takeover or a buyout, is the buying of onecompany (the ‘target’) by another.The acquisition process is very complex and various studies shows that only50% acquisitions are successful.An acquisition may be friendly or hostile. In a friendly takeover a companiescooperate in negotiations. In the hostile takeover, the takeover target isunwilling to be bought or the targets board has no prior knowledge of the offer.Acquisition usually refers to a purchase of a smaller firm by a larger one.Sometimes, however, a smaller firm will acquire management control of a largeror longer established company and keep its name for the combined entity. Thisis known as a reverse takeover.Although merger and amalgamation mean the same, there is a small differencebetween the two. In a merger one company acquires the other company and theother company ceases to exist. In an amalgamation, two or more companiescome together and form a new business entity.Governing Law:The Companies Act, 1956 does not define the term Merger or Amalgamation.It deals with schemes of merger/ acquisition which are given in s.390-394 A,395,396 and 396 A.Classifications of mergersHorizontal merger – is the merger of two companies which are in produce ofsame products. This can be again classified into Large Horizontal merger andsmall horizontal merger.
Horizontal merger helps to come over from the competition between twocompanies merging together strengthens the company to compete with othercompanies. Horizontal merger between the small companies would not effectthe industry in large. But between the larger companies will make an impact onthe economy and gives them the monopoly over the market. Horizontal mergersbetween the two small companies are common in India. When large companiesmerging together we need to look into legislations which prohibit the monopoly.Vertical merger – is a merger between two companies producing differentgoods or services for one specific finished product. Vertical merger takesbetween the customer and company or a company and a supplier. IN this amanufacture may merge with the distributor or supplier of its products. Thismakes other competitors difficult to access to an important componet ofproduct or to an important channel of distribution which are called as "verticalforeclosure" or "bottleneck" problem.Vertical merger helps to avoid sales taxesand other marketing expenditures.Market-extension merger - is a merger of two companies that deal in sameproducts in different markets. Market extension merger helps the companies tohave access to the bigger market and bigger client base.Product-extension merger – takes place between the two or more companieswhich sells different products but related to the same category. This type ofmerger enables the new company to go in for a pooling in of their products so asto serve a common market, which was earlier fragmented among them. Thismerger is between two companies that sell different, but somewhat relatedproducts, in a common market. This allows the new, larger company to pooltheir products and sell them with greater success to the already commonmarket that the two separate companies shared.The product extension merger allows the merging companies to group togethertheir products and get access to a bigger set of consumers. This ensures thatthey earn higher profits.
Conglomeration - Two companies that have no common business areas. Aconglomeration is the merger of two companies that have no related products ormarkets. In short, they have no common business ties.Conglomerate merger in which merging firms are not competitors, butuse common or related productionprocesses and/or marketing and distributionchannels.Congeneric merger: Merger between firms in the same general industry buthaving no mutual buyer-seller relationship, such as a merger between a bank anda leasing company.A merger in which one firm acquires another firm that is in thesame general industry but neither in the same line of businessnor a supplier or customer.Purchase mergers - this kind of merger occurs when one company purchasesanother. The purchase is made with cash or through the issue of some kind ofdebt instrument; the sale is taxable.Acquiring companies often prefer this type of merger because it can providethem with a tax benefit. Acquired assets can be written-up to the actualpurchase price, and the difference between the book value and the purchaseprice of the assets can depreciate annually, reducing taxes payable by theacquiring company.Consolidation mergers - With this merger, a brand new company is formedand both companies are bought and combined under the new entity. The taxterms are the same as those of a purchase merger.A unique type of merger called a reverse merger is used as a way of going publicwithout the expense and time required by an IPO.Accretive mergers are those in which an acquiring companys earnings pershare (EPS) increase. An alternative way of calculating this is if a company witha high price to earnings ratio (P/E) acquires one with a low P/E.
Dilutive mergers are the opposite of above, whereby acompanys EPS decreases. The company will be one with a low P/E acquiringone with a high P/E.Merger and Acquisition Procedures:1. Memorandum Of Association (M/A):-The Memorandum of Association must providethe power to amalgamate in its objects clause. It M/A is silent, amendment in M/A musttake place.2. Board Meeting:-A Board Meeting shall be convened to consider and pass thefollowing requisite resolutions:- approve the draft scheme of amalgamation;- to authorize filing of application to the court for directions to convene ageneral meeting;- to file a petition for confirmation of scheme by the High Court.Through an application under s.391/ 394 of Companies Act, 1956 can bemade by the member or creditor of a company, the court may not be able tosanction the scheme which is not approved by the company by a Board ormembers resolution.Directors who are given the necessary powers by the AoA may present apetition on behalf of the company without first obtaining the approval of thecompany in general meeting.3. Application to the Court:- An application shall be made to the court fordirections to convene a general meeting by way of Judges summons(Form No.33) supported by an affidavit(Form No. 34). The proposed scheme ofamalgamation must be attached to such affidavit..The summons should be accompanied by:-A certified copy of the M&A of both companies
-A certified true copy of the latest audited B/S and P&L A/c of transfereecompanyThe application to convene meeting under s.391(1) is required to be made to therespective jurisdictional HC by the company concerned depending on thelocation of its registered office. Similarly an application for the scheme ofarrangement will have to be made to the concerned HC where the company’sregistered office is situated.Person entitled to apply:-(i) U/s.391 & 394, members of the company have right to apply to court(ii) A successor to a share of a deceased member has in the normal course,locus standi to maintain an application u/s.391, 395.(iii) An application can also be made by the transferee of shares.(iv)The creditor also have right to apply to court.(v) The liquidator is also empowered to make an application to the court.4. Copy to Regional Director:-A copy of application made to concerned H.C.shall also be sent to the R.D. of the region. Although, such notice is supposedto be sent by the H.C., usually the company sends it without waiting for theH.C. to send it.5. Order Of High Court(Orders in - Form No. 35):-On hearing of the summons,the H.C. shall pass the necessary orders which shall include:(a) Time and place of the meeting,(b) Chairman of the meeting,(c) Fixing the quorum,(d) Procedure to be followed in the meeting for voting by the proxy,
(e) Advertisement of notice of the meeting,(f) Time limit for the chairman to submit the report to the court regarding theresult of the meeting.Where the court observes that any of the following circumstances exist in thecase of the merger it may not order a meeting when shareholders are few innumber; or where the membership is restricted to a single family, HUF or closerelatives; or where shareholding pattern of transferor and transferee companiesis identical.6. Notice Of The Meeting(Notice in - Form No. 36):-The notice of the meetingshall be sent to the creditors and/or all the shareholders individually(including preference shareholders) by the chairman so appointed by registeredpost enclosing: (a) A statement setting forth the following:- Terms of amalgamation and its effects- Any material interests of the director, MDs or Manager, in any capacity- Effect of the arrangement on those interests.(b) A copy of the proposed scheme of amalgamation(c) A form of proxy,( Proxy in - Form No. 37)(d) Attendance slip,(e) Notice of the resolution for authorizing issue of shares to persons other thanexisting shareholdersComputation: The notice that is required to be given u/s.393 of the Act for themeeting of the members/creditors shall be by 21 clear days notice.7. Advertisement of Notice Of Meeting(Advertisement in - Form No. 38):-Thenotice of the meeting shall be advertised in an English and Hindi Newspapers
as the court may direct by giving not less than 21 clear days notice before thedate fixed for the meeting. However in some instances, the 21 days period canbe condoned if reasons are found jusiticiable.8. Notice To Stock Exchange:- In case of the listed company, 3 copies of thenotice of the general meeting along with enclosures shall be sent to the StockExchange where the company is listed.9. Filing Of Affidavit For The Compliance:- An affidavit not les than 7 daysbefore the meeting shall be filed by the Chairman of the meeting with the Courtshowing that the directions regarding the issue of notices and advertisementhave been duly complied with.10. General Meeting:-The General Meeting shall be held to pass the followingresolutions:(a) Approving the scheme of amalgamation by ¾th majority e.g. if a meeting isattended by say 100 members holding 100 shares, the scheme shall be deemedto have been approved only when it is supported by atleast 51 members holdingtogether 750 shares amounts themselves;(b) Special Resolution authorizing allotment of shares to persons other thanexisting shareholders or an ordinary resolution be passed subject to gettingCentral Governments approval for the allotment as per the provisions ofSection 81(1A) of the Companies Act, 1956,(c) The resolution to empower directors to dispose of the shares not taken up bythe dissenting shareholders at their discretion.,(d) An ordinary/special resolution shall be passed to increase the Authorizedshare capital, if the proposed issue of shares exceeds the present authorizedcapital. The decision of the meeting shall be ascertained only by taking a poll onresolutions.
In case of Transfer company need not to pass a special resolution for offeringshares to the persons other than the existing shareholders.11. Reporting of Result of the Meeting(Report in - Form No. 39):-The Chairmanof the meeting shall report the result of the meeting to the court within the timefixed by the judge or within 7 days, as the case may be. A copy of proceedings ofthe meeting shall also be sent to the concerned Stock Exchange.12. Formalities With ROC:- The following documents shall be filed with ROCalong-with the requisite filing fees:(i)Form No. 23 of Companies General Rules & Forms + copy of SpecialResolution, (there is no need for the transferor company to file Form No. 23 ofthe Companies General Rules and Forms with the Registrar of Companies.)(ii)Resolution approving the scheme of amalgamation,(iii) Special resolution passed for the issue of shares to persons other thanexisting shareholders.13. Petition (Petition in - Form No. 40):-For approval of the scheme ofamalgamation, a petition shall be made to the H.C. within 7 days of the filing ofreport by the chairman.If the Regd. Offices of the companies are in same state - then both thecompanies may move jointly to the High Court. If the Regd. Offices of the companies are in different states - then eachcompany shall move the petition in respective High Court for directions.However in a recent judgment of Jaipur Polypin Ltd. v. Rajasthan Spinning &Weaving Mills, it was held that when the two companies are at different places,then no need to file an application at two different places.
14. Sanction of The Scheme:- The Court shall sanction the scheme on beingsatisfied that: (i) The whole scheme is annexed to the notice for conveningmeeting. (This provision is mandatory in nature)(ii) The scheme should have been approved by the company by means of ¾thmajority of the members present.(iii)The scheme should be genuine and bona fide and should not be against theinterests of the creditors, the company and the public interest.After satisfying itself, the court shall pass orders in the requisite form(Ordersin - Form No. 41).The requirement of law is permission or approval of court to the scheme.The application made by the company is to seek court’s approval to thecompany scheme of amalgamation and not merely ordering a meeting. Thecourt may order a meeting of members too.The court must consider all aspects of the matter so as to arrive at a findingthat the scheme is fair, just and reasonable and does not contravene publicpolicy or any statutory provision.While interpreting s.394 r/w s.391, we find that the Tribunal’s power ofordering amalgamation/reconstruction is limited by two provisos of s.394:Firstly, Tribunal has to await the receipt of report from the Registrar ofCompanies about the manner in which affairs of the Company are conducted.Secondly, when the transferor company is proposed to be dissolved withoutwinding up, the Tribunal shall await.15. Stamp Duty :A scheme sanctioned by the court is an instrument liable tostamp duty.16. Filing with ROC: The following documents shall be filed with ROC within 30days of order:-A certified true copy of Courts Order
-Form No. 21 of Companies General Rules & Forms17. Copy of Order to be annexed: A copy of courts order shall be annexed toevery copy of the Memorandum of Association issued after the certified copy ofthe order has been filed with as aforesaid.18. Allotment of shares: A Board Resolution shall be passed for the allotment ofshares to the shareholders in exchange of shares held in the transferor-company and to fix the record date for this purpose.