Several group companies are increasingly thinking 'mergers or demergers', blessed by the Court, now to be by the National Company Law Tribunal (NCLT), (Restructuring) as the most effective way to unlock shareholder value, to create companies operating in niche sectors that would draw private equity players (via demergers) or to consolidate value and create a larger, effective combined entity and achieve economies of scale (via mergers). With Restructuring being the name of the game, it is imperative for an M&A corporate lawyer to be conscious of a few legal and regulatory issues. This article attempts to provide a nuanced understanding of some such issues relevant, prior to commencement of the NCLT processes.
Assessing Transaction Costs
The precursor for a company's board of directors ("Board") to approve any Restructuring Scheme is to ascertain all transaction costs; the primary ones being tax, transfer premium and stamp duty costs. If the Company chooses to implement a tax-neutral Scheme, then the latter 2 costs must be assessed. Stamp duty costs may be substantial if the relevant Companies are registered in State A but have significant property spread out in several other States and of course such costs may multiply if the registered office of each of the relevant Companies are in different States to begin with. Lawyers may need to guide clients in implementing a cost-effective Scheme and may explore: (i) shifting registered office to the State where significant value of immovable property of the demerging / merging Company is situate; (ii) assessing whether from a legal and practical perspective, a set-off of stamp duty is available among the relevant States involved; (iii) assessing whether, in a demerger scenario, the resulting company can be incorporated a wholly owned (or near wholly owned) subsidiary in a State where the 1937 notification1 is effective so as to avail of a stamp duty remission. Stamp duty apart, transfer premium costs must be assessed especially for companies which own / possess properties that are Government / semi-Government owned / controlled. Now with the establishment of the NCLT benches, a bench in State A may hear matters of companies registered in State B. This is likely to create ambiguities from a stamp duty perspective; corporates will have to wait and see how this pans out.
Drafting the Scheme
At first glance, schemes of arrangement / amalgamation ("Schemes") may look similar in their layout and content. However, Schemes must be tailored deftly to factor in situations peculiar to the relevant companies and rationale of the proposed restructuring. The 3 definitions that will figure in every Scheme are the 'Effective Date', the 'Appointed Date' and the 'Record Date'. While the Companies Act, 1956 describes 'Effective Date' as the date on which Order is filed with the Registrar of Companies, law and practice have evolved, giving parties the ability to describe it as the last of the dates by which all important regulatory approvals, creditor, shareholder approvals and ROC filings are procured / complete. This is important in situations especially where the Scheme cannot take 'actual effect' even after the ROC filing due to a pending RBI / FIPB / other Governmental approval. As regards the Appointed Date, the validity of a 'retrospective Appointed Date' may be unsettled following the IndAS accounting standards becoming effective. Also, while a 'prospective Appointed Date' is very rare, there have been few schemes in the past, such as Schemes relating to Polaris Financial Technology Limited and Mastek Limited, which have prospective dates.
The Scheme must also describe the rationale in a well-reasoned manner leaving no room for tax authorities to question the basis for restructuring.
It is advisable for a demerger Scheme to have detailed transition provisions (primarily) under its Contracts and Licenses section, to avoid disruption of business. In essence, such provisions will record that even after the Effective Date, if the resulting company cannot carry on the demerged business due to lack of any consents / licenses, the demerging company should continue to run it on behalf of the resulting company until relevant consents / licenses are procured.
Single Window Clearance
Judicial precedents suggest that Restructuring Schemes are 'a code in themselves' and provide a single window clearance for many processes with Miheer H Mafatlal v Mafatlal Industries Limited2 being the landmark case in point. Given this, several companies attempt to increase / reduce capital, issue shares, change name, change memorandum and articles etc under and as part of Restructuring Scheme approval process. However, one should be wary that the manner of dealing with such processes, varies from State to State.
Listed Company Compliances
Prior to holding a listed company Board meeting to approve a Restructuring Scheme, clients typically seek 3 clarifications: first, is there a requirement under the Listing Obligations to intimate the stock exchanges prior to such Board meeting?; second, is there a need to close the trading window prior to the Board meeting; and third is there a need to disclose such trading window closure, if required, to the stock exchanges. Corporate M&A lawyers must guide clients on such matters, at the outset.
The Companies Act, 1956 mandates a Restructuring Scheme to be approved by majority in number and three-fourth in value of shareholders and creditors. For listed companies, following certain recent SEBI circulars3, listed companies, whose Scheme contemplate certain specific situations, must also procure approval of Scheme by 'a majority of the minority' (i.e public shareholders or shareholders sans the promoters) – objective being to ensure fairness and transparency in Restructuring processes.
For corporate M&A lawyers, the race up to the NCLT is critical in that it involves educating clients about transaction costs, structuring the restructuring, advising listed companies on all disclosure requirements and drafting the Scheme with essential protective clauses. Rendering appropriate advice on such matters is the first key step to achieving an effective Restructuring.
1 This notification sets out that stamp duty may be remitted when transfer of assets is from a company to its subsidiary where its holding is not less than 90%.
2 AIR 1997 SC 506
3 Circular Number CIR/CFD/DIL/5/2013 dated 4 February 2013 read with Circular Number CIR/CFD/DIL/8/2013 dated 21 May 2013 and SEBI Circular CIR/CFD/CMD/16/2015 dated 30 November 2015
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