This article is written by Rishabh SenGupta, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.com.
Mergers and amalgamations form an integral part of the world of business we live in today. To put it succinctly, a merger is when two companies agreeing to unite to become one entity; it may be thought of as an agreement taken by two “equals,” while an amalgamation or takeover is characterized by a much bigger corporation purchasing a smaller one. This mix of unequal will yield the same gains as a merger, but it does not have to be a joint agreement. In other words, a conventional merger entails two entities merging to become a single legal entity with the intention of creating a corporation that is worth more than the value of its pieces. When two companies combine, the owners’ shares of the old company are normally exchanged for an equal number of shares of the new entity. During a takeover, the purchasing company normally gives the target firm’s shareholders a cash price per share or the acquiring firm’s shares to the target firm’s shareholders according to an exchange ratio. In any case, the acquiring firm effectively funds the target company’s acquisition, purchasing it outright for its shareholders.
The Central Government has the authority to allow for the amalgamation of corporations in the public interest under the aegis of Section 237 of the Companies Act, 2013 (Section 396 of the Companies Act, 1956). It is through this provision that it may order the compulsory amalgamation of two or more corporations if it is convinced that such amalgamation is essential for the public good. This article has been authored with the purpose of providing insight pertaining to such by examining the driving force behind such amalgamations, legal procedures followed to execute the same, and examining the same through the lens of case studies.
Driving forces behind amalgamations of companies
A prime motivation that drives many mergers of corporations is that the resultant entity will gain more leverage in the relevant market it is operating in instead of having to compete with one another.
Expansion in economies of scale
This is a way of lowering the total cost per unit by increasing volume and fixed costs are also distributed over a larger variety of products. In simple terms, the more goods, the greater the bargaining force. This is only feasible as companies merge, consolidate, or are absorbed, since doing so will also eliminate redundant divisions or operations, lowering the company’s expense compared to the same sales source, and thereby increasing benefit. It also offers a diverse pool of capital for all merging firms, as well as a greater market share on which the resources can be used.
Entry into new markets and increased visibility
Companies procure or merge with other companies in order to expand into new markets and increase turnover and profits. A merger can increase the marketing and distribution capabilities of two companies, opening up new sales opportunities. A merger will often help a company’s reputation among investors: larger companies also have an easier time raising money than smaller companies.
Mergers could lead to an increase in corporate synergy. Complementary resources should be used more efficiently. It could take the form of sales enhancement (generating more revenue than the two predecessor independent companies) or cost savings (to reduce or eliminate expenses associated with running a business).
Improved allocation of resources
Since resources are spread inequitably among firms, mergers and amalgamations may generate value by overcoming knowledge asymmetry or merging scarce resources. For example, layoffs, tax cuts, and so on.
A classic example of this was when in order to establish big state-owned banks, the government had agreed to consolidate 10 public sector banks into 4. The justification for such mergers was to increase risk appetite, strengthen balance sheets, improve credit expansion, boost the declining economy, and help the government meet its goal of a $5 trillion economy by 2024.
Punjab National Bank, Oriental Bank of Commerce, and United Bank combined to become one bank with Rs 18 lakh crore in assets and 11,437 branches. Canara Bank and Syndicate also combined to become the fourth largest state-owned bank, with a revenue of Rs 15.2 lakh crore and a branch network of 10,324 branches. Union Bank of India did the same by combining with Andhra Bank and Corporation Bank to become the fifth-largest public sector bank in India, with a revenue of Rs 14.59 lakh crore and 9,000 branches. Indian Bank and Allahabad Bank combined resulting in the country’s seventh-largest state-owned bank with an Rs 8-lakh crore market capitalization.
The merger of 10 PSU banks into four was required because of the growing non-performing assets of state-owned banks. The steep rise in bad loans or non-performing assets (NPAs) of state-run banks has weighed on the economic development of the country as these banks hold more than two-thirds of deposits and advances in India’s banking industry. With losses mounting because of dodgy loans, the government wants to consolidate and improve its performance. Also, since it is not feasible to reduce the government’s share to below 51% in public sector banks (PSBs), consolidation is the only answer to create strong banks. Moreover, these banks are in dire need of more funds to meet the new capital adequacy norms under the global Basel III norms.
Legal procedures behind amalgamations with focus on ones done in the public interest
Although the term “amalgamation” is not specified in the Companies Act 2013, according to Section 2(1B) of the Income Tax Act 1961, “amalgamation” applies to the merger of one or more companies with another company or the merger of two or more companies to form one company in such a way that firstly, all property of the amalgamated company becomes property of the amalgamated company secondly, all taxable income of the amalgamated company becomes taxable income of the amalgamated company and thirdly, shareholders holding not less than 3/4th shares in the amalgamating companies become shareholders in the amalgamated company.
According to Black’s Law Dictionary, public concern is something about which the general public, or the society at large, has a financial interest, or an interest that affects their civil rights or liabilities. It does not apply to something as limited as a mere curiosity or the desires of individual localities that could be influenced by the problems at hand. The Companies Act, 2013 (Act) has provided the same statutory recognition in Sections 62(4), 129, 210, 221, 233(5), and 237. Despite the approval of management and creditors, Company Law in India acknowledges that public policy priorities must take precedence.
Key governing legislation
The Central Government has the authority to allow for the amalgamation of companies in the public interest under Section 237 of the Companies Act 2013 (Section 396 of the Companies Act 1956). The Central Government has the power to order the compulsory amalgamation of two or more corporations if it is convinced that such amalgamation is essential for the public good.
If it determines that it is in the public interest for two or more companies to merge into a single entity with the constitution, property, rights, powers, interests, privileges, liabilities, and obligations stated in the government’s order, then the merger is valid and in the public interest. Any member of the amalgamating company must be granted the same, or almost equal, interest and rights in the amalgamated company as he or she had in the amalgamating company at the time of the merger. If the amalgamated company fails to satisfy any of these requirements, the member may demand compensation from the amalgamated company.
A copy of the Central Government’s amalgamation order must be given to the companies involved, and any amendments proposed or objected to by the companies are taken into account by the government in the draft order. In order for the government to exercise the authority granted to it under Section 237 of the Companies Act 2013, it must be sure that two or more companies must be combined for the public good or it becomes a legal necessity. A healthy business cannot be compelled to combine with an unsustainable business purely to help the latter. This is not a public-interest merger, but rather a coercive merger.
Procedures that need to be followed to facilitate such amalgamation
The following are the measures that companies must take in order to merge under Section 237 of the Companies Act 2013:
- The first step is for the company to call a board meeting to decide whether or not to merge with the other company; this is done through the power conferred under Section 173 of the Companies Act, 2013.
- The application must be sent electronically to the stock exchanges for clearance. The company must receive a letter of approval from the stock exchanges.
- Application to the tribunal– Under Form-1, the company must submit an application to the applicable jurisdiction’s National Company Law Tribunal (“NCLT”). Such a submission must be followed by the following: Form No. NCLT-2 (notice of admission), Form No. NCLT-6 (affidavit), a copy of the scheme of amalgamation, Fees prescribed in the Schedule of Fees, and the companies must disclose to NCLT the basis on which each class of borrower or member is listed for scheme approval. It should be remembered that the decision to submit a joint proposal is entirely up to the concerned firms.
- The chairperson assigned for the meeting shall provide a notice to all shareholders or classes of members, creditors or classes of creditors, and debenture holders of the corporation in prescribed Form no. CAA 2.
- A copy of the scheme of amalgamation and a statement disclosing the specifics of the NCLT order must be enclosed with the notice. Alongside, details of the company; date of the board meeting; disclosure of the effect of the amalgamation on the directors, key managerial personnel, and the debenture trustee; investigation of proceedings; details of prescribed documents of and for inspection by members and creditors; details of sanctions, approvals, and NOCs by regulatory or other authorities required for the scheme of amalgamation; and a statement to the shareholders.
- Publication of a notice of meeting in one English and one vernacular newspaper in accordance with Form No. CAA 2. A copy of the notice will also be available on the company’s website. It is still up to the firms to decide whether or not to publish one jointly.
- The Central Government, IT authorities, RBI, Registrar of Companies (Form GNL-1), Official Liquidator, Competition Commission of India, and other related authorities will be notified, along with a copy of the scheme. CAA 3 is the form used to submit this notice.
- Affidavit of service– an affidavit must be lodged with the NLCT at least seven days before the meeting date or the first meeting date, confirming that the directions on the issue of notice and advertisement have been observed.
- To give the scheme approval, a meeting of members and creditors will be held. The scheme would be approved if three-quarters of the people involved consent to it, including creditors or classes of creditors and members or classes of members. Within three days of the meeting’s completion, the chairperson shall file the Report in Form No. CAA 4 with NCLT.
- Order on the petition– After the members’ and creditors’ agreement on the scheme, the companies must file Form No. CAA 5 with the NCLT within 7 days of the Chairperson’s report. The NCLT will set the final hearing date. The notice in Form No. CAA 2 should be advertised in the same newspaper as the notice in Form No. CAA 2. The RBI and other authorities must give their approval. The NCLT will issue a final order in the CAA 7 form.
- Stamp duty as affirmed in the State Stamps Duty Acts must be complied with after the final order has been issued. The company must file certified copies of the final order with the ROC within 30 days of receiving them in Form INC-28, along with acknowledgment of payments made to the Official Liquidator and Regional Director. Shareholders will be allocated shares in accordance with the plan; stock exchanges will be notified of the listing of new shares released as consideration, and stakeholders will be notified of the Scheme of Amalgamation’s effectiveness.
Through the perspective of Competition Law
The Competition Act, 2002 attempts to guarantee fair competition by regulating mergers. Notably pertaining to the public interest, Section 20(4) (m) and Section 20(4) (n) of the Act set out public interest considerations that the CCI may take into account in its review of a transaction. It provides that while inquiring into a combination, the commission will look into the relative advantage, by way of the contribution to the economic development, by any combination having or likely to have an appreciable adverse effect on competition and whether the benefits of the combination outweigh the adverse impact of the combination if any. To attract the provisions of the 2002 Act, a scheme of merger or amalgamation has to satisfy the prescribed threshold pecuniary limits mentioned in Section 5. If any of the thresholds are exceeded, then the transaction will be considered a “combination” and filing will be required.
Under Section 6, combinations that will cause an appreciable adverse effect on competition (“AAEC”) are prohibited and will be considered void. A notice must be provided by an enterprise to the Competition Commission of India (“CCI”) with the prescribed fee and format either within thirty days of approval by the board of directors of the proposal relating to merger or amalgamation or of execution of any agreement for the acquisition. Under sub-clause (2-A), if after 210 days, the Commission fails to pass an order, the combination shall be deemed to be approved. This is mandatory for any kind of merger. However, these provisions are not applicable to a public financial institution, foreign institutional investor, bank, or venture capital fund.
Also, Schedule 1 of the combination regulations enlists certain categories of combinations that are exempted from filing a notification as they are unlikely to cause an AAEC. The Schedule also prescribes the number of fees to be paid by the parties under the different forms and also specifies the various documents that need to be submitted along with the prescribed form.
Important precedents pertaining to the amalgamation of companies in the public interest
Moon Technologies Limited v. Union of India
In the case of 63 Moons Technologies Limited vs Union of India, to put the facts of the case briefly, after a payment failure, National Spot Exchange Ltd (NSEL), a 99.99 percent affiliate of Financial Technologies India Ltd (FTIL), shut down its operations and was requested by the Forward Market Commission, which is now part of the Securities and Exchange Board of India, not to enter into any new contracts (SEBI). Following the crisis, the Ministry of Corporate Affairs (MCA) used the authority granted by Section 396 of the erstwhile Companies Act, 1956 to order the merger of two organisations, National Spot Exchange Ltd. (NSEL) and 63 moons technologies Ltd. (formerly known as Financial Technologies India Ltd.) (Company) on February 12, 2016. The Corporation appealed the MCA’s ruling, which was rejected by the Bombay High Court. The Company appealed the Bombay High Court’s decision to the Supreme Court. On April 30, 2019, the Supreme Court released its decision.
The court described public interest as the greatest interest of the public at large as opposed to the needs of an individual or a limited group of individuals. The court further stated that a merger would be found in the public interest when it has a beneficial effect on the population in terms of wages, productivity, and the use of goods and services. On the other hand, if a merger between companies obstructs the promotion and development of societies, those mergers are not deemed in the public interest. The court found that the merger would not offer any relief to FTIL’s debtors and shareholders and that the body determining compensation had failed to apply its mind to the creditors’ and shareholders’ needs.
The government contended that-
(i) the amalgamation will restore the faith of the public in the contract;
(ii) business realities will be effective on the combination of NSEL and FTIL assets; and
(iii) NSEL will be facilitated to recover its dues from its defaulters.
For contentions, (i) and (ii) made by the government, the court held that these contentions were not mentioned in the draft amalgamation order and the only intention of the amalgamation of the company was to clear the dues of NSEL, thereby reviving the exchange commodities of NSEL. The court determined that there was no public interest at stake and that the amalgamation order failed to meet the essentiality requirement. The court ruled that the merger order was illegal under Section 396 of the Companies Act of 1956 and Article 14 of the Indian Constitution.
Wiki Kids Ltd. and Avantel Ltd. v. Regional Director, South East Region and Others
In this case, the Transferor and Transferee Companies suggested an amalgamation arrangement, which was refused by the tribunal on the grounds that, according to the valuation analysis, the general promoters of both companies would gain an undue advantage. Both firms filed an appeal because they had met all of the conditions and had received no objections from any officials or the general public. While there were no complaints and all of the compliances were met with, the tribunal found that the traditional promoters had an unfair advantage based on the valuation analysis.
The Transferor Company added more assets to the book, but neither of them had earned any sales or sold a single product since the beginning. Just a few promoters were to benefit financially. The scheme’s goal is to ensure that all shareholders’ expectations are fulfilled and that no one party gains an unfair advantage, which was obviously not the case here. The court ruled that the whole system was designed to favour the developers and that incentives to other owners are contingent on potential sales realization. The appeal was thus dismissed, and the tribunal’s decision to deny the plan was upheld.
Under Company Law, the term “public interest” has a broad definition that includes the wellbeing of all company members as well as the general public. The Indian tribunals and courts have established that only because a scheme of amalgamation is favourable to or in the interests of a certain group of members, it does not imply that the scheme is in the public interest. There is a distinction to be made between exercising powers under Section 237 of the Companies Act 2013 for compulsory acquisition and mergers in the public interest; this distinction should be the government’s primary concern when exercising its control under the above clause.
- JEAN FRANCOIS BELLIES, PORTER ELLIOT, MERGER CONTROL: JURISDICTIONAL COMPARISON 369(2nd ed. 2014).
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