For more then five and a half decades Companies law in India had been governed by Companies Act, 1956. Enactment and introduction of Companies Act, 2013 was a step to rejuvenate the existing corporate legal mechanism in the light of the needs and requirements of the Companies, better governance. In the present article we are dealing with the provisions with regard to the Arrangements, Mergers & Amalgamations; under Companies Act, 2013.
RELEVANT PROVISIONS FOR MERGER & AMALGAMATION
Under Companies Act, 1956 – Section 390-396A.
Under Companies Act, 2013- Section 230-2401
Merger is generally a scheme of arrangement or Compromise between a Company, Shareholders and Creditors , whereas, Amalgamation is defined under section 2(1b) of Income Tax Act, 1961 as a Merger of one or more Companies with another Company or Merger of two or more Companies to form a new Company.
DISCLOSURES IN CONNECTION WITH MERGER & AMALGAMATION
- Under Companies Act, 1956
Tribunal had Power to sanction any compromise or arrangements with creditors and members if satisfied that company or any other person by whom an application has been made (by way of first motion Petition) has disclosed all material facts relating to company with an affidavit such as latest financial position of the Company, accounts of the company, latest auditor's report etc. For the compliance part, the notice of meeting was required to be sent along with statement setting forth the terms of the compromise or arrangement and explaining its affect in particular, the statement must state all material interest of directors of the company, whether in their capacity as such or as member or creditors of company or otherwise. The tribunal should also give notice to Central Government (Regional Director and Registrar of Companies) and shall take into consideration the representations, if any, made to it by that government before passing any order. Also, during the same period there was a requirement of newspaper publication and any objections by any of the shareholders, creditors if any, be raised before the Court during the hearing of the second motion Petition. All disclosure provision under 1956 Companies Act has been stated.2
- Under Companies Act, 2013
The provisions of section 230 of the Companies Act, 2013 provide the additional disclosure if the proposed scheme involves; Reduction of Share Capital or the scheme is of Corporate Debt restructuring; consented not less then 75% in value of secured creditors, Every notice of meeting about scheme to disclose valuation report explaining affection various shareholders. Further, no compromise or arrangement shall be sanctioned by the Tribunal unless a certificate by the company's auditor has been filed with the Tribunal to the effect that the accounting treatment, if any, proposed in the scheme of compromise or arrangement is in conformity with the accounting standards prescribed under section 133 of the Companies Act, 2013.
As per the provisions of Companies Act, 2013 dealing with the Arrangements; notice of meeting to consider Compromise or arrangement to be given to Central Government, Income Tax Authorities, Reserve Bank, Securities Exchange Board of India, Registrar of Companies, respective Stock Exchange, Official Liquidator, Competition Commission of India and other Authorities likely to be affected by the same.
These Authorities can voice their concern within 30 days of receipt of notice, failing which it will be presumed that they have no objection to the scheme3.
CROSS BORDER MERGER & AMALGAMATION
- Under Companies Act, 1956
As per section 394, Court can sanction arrangement between two or more Companies where whole or part of undertaking, property or liability of any company referred to as transferor Company is to be transferred to another company referred as transferee company. According to the provisions of Companies Act, 1956, Inbound merger (Foreign Company merges into an Indian Company) was permissible however, outbound merger (Indian company cannot merge with foreign Company) was not allowed. According to this section only inbound merger is allowed where transferor/target company means any body corporate whether or not registered under 1956 Act, that a foreign company could be transferor or target company. Transferee Company means an Indian Company. Cross Border merger allowed under 1956 Act as long as the Acquirer/transferee is Indian Company.
- Under Companies Act, 2013
In bound and out bond foreign company merger are allowed, which means Foreign Company merging into Indian Company and Indian Company merging into foreign Company could be done with RBI approval. Therefore both these options are open under 2013 Act if foreign companies to be in notified countries, under Exchange Control Regulation, shares can be issued under Automatic route to non- resident, subject to certain consideration, consideration to shareholders of merging Company may include cash, depository receipts or combination of both. This section has widen the scope for Indian Companies as now they have both options of arrangement4.
FAST TRACK MERGER
Fast Track merger or quick form merger is the new provision which is added in Companies Act, 2013. Fast track merger is merger between two or more small companies5, holding company and its wholly own subsidiary and such other company as may be prescribed.
Fast Track merger does not involve Court or Tribunal, approval of National Company Law Tribunal is also not required. For fast track merger board of directors of both the Companies would approve the scheme. However, notice has to be issued to ROC and official liquidator and objections / suggestions has to be placed before the members. The scheme needs to be approved by members holding at least 90 percent of the total number of shares or by creditors representing nine-tenths in value of the creditors or class of creditors of respective companies.6 Once the scheme is approved, notice would have to be given to the Central Government, ROC and Official Liquidator. NCLT may confirm the scheme or order that consider as normal merger under section 232 of Companies Act, 2013.
Therefore Fast track merger will be a speedy process as it does not require approval for NCLT available to certain kind of truncations. It opens the scope for small companies who wanted to merge and can propose the scheme of Merger or Amalgamation through their Board of directors. There is also no requirement for sending notices to RBI or income-tax or providing a valuation report or providing auditor certificate for complying with the accounting standard.
OBJECTION TO SCHEME OF AMALGAMATION
Scheme of Amalgamation can be objected as per section 230(4) of Companies Act, 2013, only by shareholders having not less than 10% holdings or creditors debt is not less than 5% of total outstanding debt as per the last audited financial statement. whereas earlier under Companies Act, 1956 there was no such limit which state that person holding even 1% in the company can object the scheme which was not fair at all therefore the new threshold limit for raising objections in regard to scheme or arrangement will protect the scheme from small shareholders' and creditors' unnecessary litigation and objection.
MEETING OF CREDITORS/SHAREHOLDERS TO APPROVE THE SCHEME
- Under Companies Act, 1956
Scheme to approved by 3/4th value of creditors or members, agree to scheme, then it will be binding, if sanctioned by court as stated under section 391(2), voting in person or a proxy at meeting. E-Voting is not permitted under 1956 Act.
- Under Companies Act, 2013
Scheme is to be approved by 3/4th of creditors or members, agree to scheme, then it will be binding, if sanctioned by National Company Law Tribunal as stated under section 230(6)(1). The 2013 Act additionally allows the approval of the scheme by postal ballot. Postal ballot gives an equal opportunity of vote to all stake holders. E-Voting is permitted under new 2013 Act. Therefore concept of E-Voting is introduced under new Act and section 108 of the Companies Act, 2013 read with rule 20 of Companies(Management and Administrative) rules, 2014 deal with exercise of right to vote by member by electronic means. Therefore postal ballot system and introduction E-Voting will protect the shareholders interest and will also increase the participation of shareholders of the company in voting.
MERGER OF A LISTED COMPANY INTO UNLISTED COMPANY7
The Companies Act, 2013 requires that in case of merger between a listed transferor company and an unlisted transferee company, transferee company would continue to be unlisted until it becomes listed. Shareholders of listed Company have the option to exit on payment of value of their shares, as otherwise they will continue as a shareholder of the unlisted company. the Payment to such shareholders willing to exit shall be made on pre-determined price formula or after valuation. Whereas; under Companies Act, 1956 there was no such provision. Therefore reverse merger of listed Company into an unlisted Company does not automatically result in a listing of surviving entity, which may be the unlisted Company.
BODY OF APPROVING MERGER
Approval of scheme requires an independent body of oversight and fairness. According to 1956 Companies Act , scheme of arrangement was to be approved by respective High Court which has jurisdiction over Acquirer and Target companies. Whereas; under Companies Act, 2013 National Company Law Tribunal will deal with matters related to Merger & Acquisition.
NCLT would be one specified body dealing with cases opposed to multiple High Court in case of the companies falling under the jurisdiction of different high courts.
VALUATION REPORT
The 2013 Act makes it mandatory that notice of meeting to discuss a scheme must be accompanied by valuation report prepared by an expert whereas, Companies Act,1956 Act is silent on disclosing the valuation report to the stakeholders, as a matter of transparency and good corporate governance. Courts also required annexing of the valuation report to the application submitted before them.
CONCLUSION
It seems that Companies Act, 2013 makes merger process more efficient but it also has some obscurity which need to be modified in order to reduce or avoid any complexity in the process which can be identified once the corresponding sections are notified. The outbound mergers now being allowed (when notified) open an opportunity towards globalization.
Footnotes
1. yet to be notified
2. Section 391, 393 and 394 A of Companies Act, 1956
3. Section 230(5) of Companies Act, 2013
4. Section 234 of Companies Act, 2013
5. Small companies is defined in section 2(85) of Companies Act, 2013
6. Section 233 of Companies Act, 2013
7. Section 232(3)(h) of Companies ct, 2013
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