This article is written by Advocate Shamika Vaidya pursuing Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from lawsikho.com. Here she discusses various steps involved in Court Approved Mergers of Listed Companies.

When does a Merger require approval from court? Which court is that?

Mergers are structured through Scheme Of Amalgamation which need to be sanctioned by the National Company Law Tribunal. In case of fast track mergers, mandatory sanction from NCLT is not required. However, for all other mergers, approval of court is necessary.

Types of Mergers

Merger by Absorption

Where all the companies except one lose their identity and become part of one company then it is Merger by Absorption. This type of Merger is generally seen between a Listed and a Non-listed Company wherein the Non-listed company is absorbed by the listed company. The other companies cease to exist.

Merger by consolidation

Two or more companies come together to form an altogether new company. All the companies are dissolved for the formation of the new entity. The acquired company transfers its assets, liabilities and shares to the acquiring company in exchange of cash or shares.

Steps involved in the court approved merger of two listed companies

• The foremost step involved in a Merger is delivering a letter of intent, from a party proposing an arrangement to the other party, it is also addressed as Memorandum of Understanding and contains a basic idea of the transaction and terms from the proposing party.
• Due- diligence plays a pivotal role in any merger as its purpose is to investigate the other party with whom it would subsequently enter into an arrangement. A party can carry out various types of due-diligences to cross-check the soundness and efficiency of the other party as represented by them. Consequently, it builds surety and trust between the two parties which is instrumental in taking further decisions.
• This is followed by the signing of a term sheet between the parties. A term sheet includes important terms and hypothetical positions of the parties involved in the proposed transaction. A term sheet is non binding on both the parties. However, it contains few clauses that are binding.
• Despite the presence of non-disclosure clause in the term sheet, the parties sign a separate non-disclosure agreement.
• Furthermore, the parties enter into the exclusivity agreement, which refrains them from negotiating the prospective deal with third party and safeguards the possibility of other party outbidding them.

The primary focus of this article is on the external approvals and sanctioning aspect involved and therefore we will not  discuss the above steps in detail.

One of the important steps involved in the merger is internal as well as external approvals.

Internal Approvals

Board Resolution

• Section 179(i) &(j)  of the Companies Act, 2013 states that a resolution by the Board of Directors is mandatory to diversify a business and approve an amalgamation.
• A board resolution have to be passed by all/both the Companies approving the scheme of amalgamation.
• The articles of both the Companies should not in any way refrain them from getting into any arrangement with other companies. Having said that, the company can amend the articles and pursuant to it enter into arrangements.

External Approvals

Approval from Competition Commission of India

• The main objective of the Competition Commission is to keep a check on any transaction or entity causing Appreciable Adverse Effect On The Competition (AAEOC) and promote healthy competition in the market.
• Section 6 of the Competition Act, 2002 states that any combinations having an (AAEOC) are deemed to be void.
• Section 6(2) states that no combination can come into effect unless 210 days have passed from the day of passing of notice to the commission or pursuant to the order passed by the commission. In conclusion, approval from CCI is mandatory for the sanction of merger.
• If the Commission is of the view that (AAEOC) is caused by the combination it issues a show cause notice to the company asking them to show how AAEOC will not be caused pursuant to the merger.
• The commission may call for a report from the Director General and call for the affected people with their written objections also giving a chance to the company to put forward their submissions.
• Commission can propose modification if it is of the opinion that implementing the modifications can eliminate the (AAEOC).

Approval from Securities and Exchange Board of India

• Regulation 94 of the listing obligations states that it is the duty of the stock exchange to forward the draft scheme of arrangement to the SEBI along with its observation whether the draft is in compliance with the securities law.
• The SEBI can thereafter add its observation or comments and the same is incorporated by the Stock Exchange and further forwarded to the company.

Approval from Stock Exchanges

• Regulation 37(1) of SEBI (Listing Obligation and Delisting Requirements) Regulations, 2015 states that a company has to file a draft scheme of amalgamation/arrangement in the Stock Exchanges where the stocks of the listed company are traded.
• The Stock exchanges have to check whether the draft is in compliance with the security law and then submit a No objection /Observation Letter to the company.
• The Company has to submit the Observation Letter from the Stock Exchanges along with the scheme of amalgamation in the National Company Law Tribunal.
  
• The Regulation specifically states that the Scheme cannot be filed in the NCLT unless it has been forwarded to the Stock exchanges and observation/NOC is obtained.

Approval from National Company Law Tribunal

• The necessary compliances to apply in the NCLT are mentioned in the Companies Act (Section 230 – Section 240) and Companies (Compromise, Arrangement and Amalgamations) Rules, 2016.
• In Wiki Kids Ltd Vs Regional director South East Region & Ors (AT) No. 285 of 2017,  it was held by the appellate authority (NCLAT), that a scheme of arrangement can be rejected if it is against the public interest.
• A notice accompanied by the draft of Scheme is firstly sent to the shareholders followed by statutory authorities and creditors.
• Rule 9 of the Companies (Compromise Arrangement and Amalgamation) Rules, 2016 specifies that a person receiving the notice can vote within a month by proxy, postal ballot or electoral means.
• The NCLT passes an order for the meeting with creditors or class of creditors on filing of the scheme for arrangement.
• The notice of the meeting has to be published in newspapers and sent firstly to the shareholders followed by authorities and the creditors. An affidavit has to be filed stating that the requirements have been complied.
• Under the Indian company law, amalgamation scheme needs to be approved by majority shareholders and creditors, constituting 75% in value, of those present and voting in the NCLT convened meetings of shareholders and creditors.
• If the conditions mentioned in Section 230(1) & (2) are fulfilled then the NCLT can sanction the scheme and the report of the percentage of the voting has to be sent to the tribunal after the conclusion of the meeting.

 Scheme of Amalgamation: NIIT

• In the Scheme of Amalgamation of NIIT, the tax authorities raised objections stating that the scheme of amalgamation was solely meant to benefit the promoter and the restructuring  could result in misusing the benefit under Section 47 & 56 of the Income-tax Act, 1961, by avoiding the payment of the due capital gains tax / receipt of assets based tax.
• Surprisingly, the NCLT rejected this objection raised by the tax authorities (TA) and ruled that when the TA objects to the NCLT sanctioning any scheme, the onus is on the TA to demonstrate that the sole purpose of the scheme is tax avoidance. The key question that needs to be decided in such situations is whether the scheme is designed solely for avoiding tax or merely adopts a tax efficient way of undertaking the desired transaction. In conclusion, NCLT can sanction a scheme although  objected by the Tax Authorities and this displays its plenary power to sanction the schemes.

Dissenting Shareholders

• There can be few shareholders opposing the prospective arrangement and refuse to sell out their shares. This can be one of the many hindrances the company faces and the here, Companies Act comes to the rescue of the Companies by entrusting them  with some powers.
• Section 235 of the Companies Act bestows the transferre company with power to acquire shares of shareholders dissenting of the transferor company when the scheme is approved by shareholders not less than 9/10th in terms of  value of the shares.
• The transferee company can put forward that it wishes to acquire their shares by sending them a notice. It is entitled to acquire the shares of the shareholders within a month if they have not filed an application in the NCLT.
• If the tribunal on the application does not pass an order in the favour of dissenting shareholder, after the expiry of one month from the date of notice the transferee company can notice send a copy of the notice and instrument of transfer to be executed to the transferor company on behalf of the shareholder.

Registrar of Companies

• A draft of the scheme has to be filed with the Registrar of the Companies before filing it to the NCLT.
• Pursuant to the order passed by the tribunal it’s certified copy has to be filed with the Registrar of the Companies.

Approval from the Sectoral Authorities

• Companies belonging to a particular sector need an approval from the respective sectoral authorities. Few of the authorities and sectors are mentioned below-

Media & Entertainment                        Ministry of Information & Broadcast

Trading                                                    Department of Industrial Policy & Promotion

Satellite                                                  Department of Space

Telecommunications                                 Department of Telecommunications

Role of Tax authorities

• The Income Tax authorities can disprove the scheme if it believes that the parties are trying to avoid tax. In Vodaphone Essar Gujrat Ltd Vs. Department of Income Tax, it was observed that the effect of any scheme can be to frame transactions in such a way that it saves tax or resulting in tax benefit. Importantly, this cannot be a ground to allege defrauding the Income Tax Department. As long as it is not fraud, it is justified.
• Similarly, the scheme between Ajanta Pharma, Gabs and GIPL was not sanctioned by the NCLT.
• The Tax Authorities can make representations before the NCLT within 15 days from date of them receiving the draft scheme from the tribunal, if they want to raise objections.

Regional Director and Official Liquidator

The Central Government acts through the Regional Director or the Official Liquidator. In Casby Logistics Private Ltd Vs. Regional Director, the High Court held that the regional directors are entitled to raise tax related objections even if there are no objections raised by Income Tax Department.

Other authorities involved-

• DIPP (Department of Industrial Policy)
• RBI (Reserve Bank of India)
• FIFP (Foreign Investors Facilitation Board) (in case of cross border merger)

Stamp Duty on Mergers

State of Maharashtra

Article 25 of Schedule 1 of the Bombay Stamp Act states the stamp duty on conveyance relating to the amalgamation of companies under the Companies Act to be 10 % of the aggregate of the market value of the shares issued or allotted in exchange or otherwise and the amount of consideration paid for such amalgamation. The Article sets an upper cap on the stamp duty;

• It should not exceed 5% of the true market value of the immovable property of the transferor company in Maharashtra.
• Amount equal to (0.7%) of the aggregate of the market value of the shares issued or allotted in exchange. and the amount of consideration paid for amalgamation, whichever is higher.

Taxation on Mergers

Merger is defined under the term amalgamation under Section 2 (1B) of the Income Tax Act.

There are two instances presented –

•  Merger of one or more companies with another company.
•  Merger of two or more companies to form one company

The conditions in the Section are presented as follows –

• By the virtue of amalgamation, all the property of the amalgamating company becomes the property of the amalgamated company.
• By the virtue of amalgamation, all the liabilities of the amalgamating company become that of the amalgamated company.
• Shareholders holding not less than three-fourths (3/4th) in value of the shares in the amalgamating company become shareholders of the amalgamated company, subject to exclusions.

Therefore, for an arrangement to be called as an amalgamation the above mentioned conditions have to be fulfilled.

Tax implication with regards to company

In India, a merger is tax neutral only when the consideration is in the form of shares. If the consideration is paid in form of cash or debentures the transaction is taxed.

• Section 47 (vii) of the Income Tax Act states that transfer of capital asset in a scheme of amalgamation by the amalgamating company to the Indian amalgamated company is not considered a transfer.
• In case if the transfer of capital asset is held by the Indian company by amalgamating foreign company to a foreign company as stated under Section 47(viia) of the Income Tax Act.
• At least twenty five percent of the shareholders of the amalgamating foreign company remain shareholders of the amalgamated foreign company.
• The transfer is not attracting tax on capital gains in the country where the amalgamating company is incorporated.
• Section 72A of the Income Tax Act provides an incentive, that an accumulated loss and unabsorbed depreciation of an amalgamating company can be carried forward by the amalgamated company for set off against its profits. However, this only applies to companies relating to company undertaking business of aircraft, ship, hotel or a bank.

Conclusion

A court approved merger involves an exhaustive list of steps to be carried out and may seem daunting. Moreover, it could be a pathway to series of litigation. Having said that, the economy has witnessed the finest of mergers and the benefits the companies derived out of the synergies. Intermediaries like lawyers, merchant bankers play an important role to get the companies through the deal.

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