Image source: https://www.investopedia.com/terms/a/amalgamation.asp

This article has been written by Vybhav S, pursuing the Introductory Course to Legal Writing from LawSikho.

Introduction

Elon Musk once said, “My motivation for all my companies has been to get involved in something that I thought would have a significant impact on the world.” Similar to Mr. Musk’s thoughts, today we see a lot of companies form and grow contributing towards the development of several countries and emphasizing the concept of globalization. Today we also see the hunger of the companies to grow speedily. This has led to the emergence of the concept of amalgamation of companies for both the growth of the companies as well as the society it belongs to.

This article will give an insight into the following: what is the amalgamation of companies, what is an amalgamation agreement and why is it important, important provisions while drafting the agreement, and famous examples regarding the amalgamation of companies.

What is the amalgamation of companies?

Amalgamation can simply be explained as two companies joining hands with each other and forming one company. According to the Oxford Dictionary, ‘Amalgamation’ could be defined as, “ the process of joining two or more organizations together to form one large organization.” As per Section 2(1B) of the Income Tax Act 1961, the amalgamation of companies indicates the merger of one or more companies with another company or the merger of two or more companies to form one company. Let’s suppose that there are two companies, Company 1 and Company 2, and through the process of amalgamation, they join together and raise another company called  Company 3. This process of two or more companies joining together is called amalgamation of companies. A completely new company with separate legal existence is formed by combining the assets and liabilities of both companies. Usually, this amalgamation happens between the companies that have the same nature of business or operations.

What is an amalgamation agreement?

An amalgamation agreement is an agreement or a legally binding document between the parties who have agreed to amalgamate their respective companies and the agreement includes :

  • Parties involved – Indicates the parties to the particular agreement.
  • Definitions – Includes all the essential definitions for the agreement to have a clear understanding of the meaning of the given words.
  • Information about the new formation – The agreement includes the new name of the association, the Board of Directors, the Registered office, and the objectives of the new company.
  • Dates – The agreement must include the date from which the new company comes into effect.
  • Value and vesting of the company – The agreement must clearly state the fair and true value the company holds in terms of assets and liabilities. It must also include Intellectual property like patents, exclusive technology, etc.
  • Recitals – The agreement must include recitals., to outline their intention or provide a factual or legal background as to why they are contracting.
  • Legal proceedings – The agreement must include clauses that state the redressal solutions for the disputes that could potentially arise let it be within the company wherein, either one of the Directors sues the company or the company sues one of them or could be external problems wherein an outside party sues the company.
  • Financial Statements – The agreement should have a section showing the financial history of the previous organizations showing the records of at least the past 3 years. It should also include the projects of the organization.

Why is the amalgamation of companies important?

The amalgamation of companies has a lot of benefits when we look into today’s market conditions wherein the market is continuously growing, developing, and changing at a rapid rate. Some of the important benefits are enlisted below:

  • Better Resources – Most of the time, amalgamations lead to companies getting a lot of additional resources like technology, production capacity, man force, managerial ability, etc. that could now be shared as the companies have been unified and could utilize them to the fullest.
  • Competition – Competition plays a vital role in benefitting the amalgamation wherein :
  1. The competition could decrease in the market if the companies used to deal in the same line of business or the same nature of business.
  2. The level of competition could be increased when the newly formed company would be all the more competitive and would force the other companies in the same industry to level up their game to stay relevant in the market.

Let us take the market leader in the car manufacturing industry in India as an example, Maruti Suzuki.  If the companies existed individually, the customers being critical would depend on Suzuki, being a Japan engine makers people and would opt Suzuki for reliability and efficiency and the other group of people would depend on Maruti for excellence in quality. This made them the perfect pair to come together wherein now they are able to provide quality and reliability to their products jointly and the statistics do speak the same by making them market leaders.  

  • Growth – In this case, the companies have united and when these companies work in unison it increases the chance for the growth of not only the company but the society as well. They could use their resources and skills effectively and efficiently to grow. Let’s understand it with the help of an example. When Company A and B amalgamate, even their resources and infrastructures are amalgamated giving rise to better technology and equipment, financial resources, managerial skills and abilities, a better and larger workforce, and a larger market.  

If we talk about Maruti Suzuki (India) Limited, before the amalgamation, Maruti Udyog Limited was facing a lot of financial and labor issues and didn’t have a great demand for its products. On the other hand, Suzuki Motors didn’t have any infrastructure in India and was not sure of the potential market in making cars as it was into motorcycle manufacturing with its joint venture with TVS Motor Company. However, today after the amalgamation of the companies, it has grown to a great extent. As of June 2021, Maruti Suzuki owns 48.66% of the market share making them market leaders. They were able to provide price-efficient and quality products to their customers. Thus, the amalgamation not only boosted the growth of the company but also the standard of quality offered in society.

  • Better cost efficiency – The business involves a lot of money to complete the various activities of the company like;
  1. In terms of operating cost (the expenses involved in performing day-to-day activities of the business) could be reduced as the scale of production would have potentially increased leading to lesser wastage and better utilization of resources.
  2. In terms of financial cost (expenses involved in borrowing funds for the organization), it helps them borrow funds at a lesser rate of interest and also increases their creditworthiness.
  • Tax planning – Amalgamation paves way for a lot more options for tax saving like:
  • When one of the amalgamated companies has accumulated business losses.
      1. When one of the amalgamated companies enjoys a subsidized rate of taxation. These two circumstances will benefit the company in reducing the tax amount.
      2. An amalgamated company can get many tax benefits, especially when a loss-making company amalgamates with a profit-making company.
  • Increase in goodwill and market share: Amalgamation helps in increasing the goodwill of a company globally due to the reason that two distinct companies have unified and are working together. It creates a sense of an increase in reputation for the company in the market. In addition, due to the large-scale presence of the company due to its various establishments and its combined selling of goods, there is an eventual increase in its market share. 
  • Diversification and revival of sick units – Due to ample financial strength and capability to take risks it is likely for the company to diversify and venture into a new market and also could potentially revive the sick units with the financial backing and managerial abilities. Thus, these are the various benefits that could be seen through the amalgamation of companies.

Why is the amalgamation agreement relevant in the process of the amalgamation of companies?

An amalgamation agreement, printed on a judicial paper or a stamp paper acts as a legally binding document that specifies the terms and conditions of the amalgamation under its various sections and clauses. Many documents such as the Article of Association, Memorandum of Association, etc. are scrutinized to create this agreement that increases the genuineness of this document.

Since it is two or more companies blending to form one company there might be potential chances of disputes and those could turn messy if such a document does not talk about what has to be done in cases of dispute and also specify the number of assets each company has contributed for the formation of the company. Thus, this document acts as a peace maintainer for the companies. 

Important provisions while drafting an amalgamation agreement 

An Amalgamation agreement contains terms and conditions that are going to legally bind the companies for the coming times. An amalgamation agreement contains:

  • Preamble: The Preamble of the agreement contains :
  • Title of the agreement – here Amalgamation Agreement.
    1. Date of execution – the date when the agreement was executed, for example, let us take it as the 3rd day of July 2021.
    2. Abbreviations – it includes the various abbreviations and their definitions used in the agreement. Like “Board” or “Board of Directors” means the board of directors of the Amalgamated Corporation.
    3. Place of execution – This shows the place at which the said agreement is signed. For example Bengaluru, India.
    4. Name and address of the people associated – the agreement should have the name and the detailed address of the people associated with the firm (partners).  Like their name Mr.XXXX and their complete address including their house number.
    5. The Parties – The parties involved are clearly mentioned and also the word used to refer to them in the agreement is also mentioned, If the agreement is between EFG Corporation and HIJ Corporation then not only are their names mentioned but also there in the bracket it is mentioned as “(hereinafter referred to as “EFG”)” for EFG Corporation or any such term that could be used to identify them.
  • Recitals: The recitals contain a brief story of this amalgamation which includes their business background, history, the objective behind the agreement, their relation, and the story is explained in the recital. Like The parties intend to effect a merger of the shareholdings and operations of EFG and HIJ
  • Sourced through the amalgamation of EFG and HIJ under the provisions of the Business Corporations Act and on the terms and subject to the conditions      hereof;
  • In consideration of the premises and the respective covenants and agreements contained.
  • Clauses: As we all are well aware this is the most looked upon a part in any agreement wherein these clauses help the company survive through both good as well as turbulent times. These clauses not only solve the problems but also protect the parties. It is to be noted that these clauses are legally binding and it is necessary to draft these clauses with utmost precision. The clauses could be those that would help in operating the company in a better or providing a solution mechanism when the company faces a certain said problem that could have been forecasted while drafting the agreement. For example “Termination. Notwithstanding the approval of this Agreement by the shareholders of either or both of the Amalgamating Corporations, at any time before the issuance of a Certificate of Amalgamation, this Agreement may be terminated:

Termination. Notwithstanding the approval of this Agreement by the shareholders of either or both of the Amalgamating Corporations, at any time before the issuance of a Certificate of Amalgamation, this Agreement may be terminated:

(a)by either Amalgamating Corporation upon notice to the other if any condition outlined in Sections 1 and 1.2 becomes incapable of being satisfied and the Amalgamating Corporation for whose benefit the condition is included does not waive such condition;

(b)by either Amalgamating Corporation upon notice to the other if the Amalgamation does not become effective on or before 10th July 2021, or at such other date the parties agree upon, as a result of any act or omission to act by either Amalgamating Corporation which delays the closing of the Amalgamation;

(c)by mutual agreements of the parties, without further action on the part of the shareholders.”

  • Signing and sealing: This includes the signature of the concerned parties, their names, notarization of the agreement, annexures, and the signature of the witness. 

Thus, these are the various sections to be included while drafting an amalgamation agreement.

Famous examples of companies that have amalgamated

Some of the companies that have amalgamated are:

  • Maruti Suzuki (India) Limited: Maruti was formerly known as “Maruti Udyog Limited”, which used to be owned by THE GOVERNMENT OF INDIA till 2003 later amalgamated with the Japanese automotive manufacturer, Suzuki Motor Corporation and this gave rise to “Maruti Suzuki (India) Limited” which as of July 2018 had 53 percent market share in the Indian passenger car market and employees around 15,495 people as of 2020. Today they have also diversified their business into insurance, finance, driving schools, accessories, and end-to-end fleet management industries. This is a perfect example of how growth and diversification could be expected by amalgamations.
  • TATA AIA Life Insurance: Tata Sons Limited has unrivaled strength and position in the Indian market and AIA’s expertise and presence in 18 markets across the Asia-Pacific region has made the amalgamation a perfect one increasing the market share globally and simultaneously growing at a very fast rate. TATA AIA Life Insurance is the fifth largest private Life Insurer amongst 23 private life insurance players in India and has shown a 21 percent year-on-year growth against the growth of the private industry of 5 percent. They also have the highest Employee Engagement score at 87. Thus, we can surely tell that such amalgamation of companies changes the face of the industry and society.
  • Tata Steel Limited: Bamnipal Steel Limited and Tata Steel BSL Limited amalgamated into Tata Steel Limited in 2021. Tata Steel acquired Bhushan Steel in 2018 and renamed it Tata Steel BSL. TATA acquired Bhushan Steel through its wholly-owned subsidiary Bamnipal Steel Limited. In April 2019, the Tata Steel board approved the merger of Bamnipal Steel and Tata Steel BSL (formerly Bhushan Steel Ltd) with itself. This year Tata Steel and Tata Steel Europe have been recognized as Steel Sustainability Champion for the 4th consecutive year by the Worldsteel Association.

Amalgamation agreement

Sample:https://lawsocietyontario.azureedge.net/media/lso/media/legacy/pdf/b/bussampleamalgamationagreement.pdf.

Conclusion

Companies today are considered to be an essential element for the development of our society. We need to understand that these companies have understood the necessity to unite to grow where there is the presence of cutthroat competition. An amalgamation agreement helps them in deciding their endeavors, managing their rights and liabilities and assuring adherence to the legal provisions as well as the code of conduct. Thus, the amalgamation of companies today stands as an instrument or process that could take the company to new heights. They can help in improving the infrastructure, managerial abilities, cost efficiency, level of competition, etc., and can result in changing economies and boosting the business environment.

References

  1. https://www.edupristine.com/blog/amalgamation-explained-detail. 
  2. https://www.oxfordlearnersdictionaries.com/definition/english/amalgamation. 
  3. https://www.marketing91.com/amalgamation/.
  4. http://templates-design.com/amalgamation-agreement-template/. 
  5. https://blog.ipleaders.in/amalgamation-scheme-companies-public-interest/.

 


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