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Procedure required to be followed for the merger of companies

December 09, 2020
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This article has been written by Tanya Gupta, LawSikho Diploma Programme in M&A, Institutional Finance and Investment Laws (including PE and VC transactions) from LawSikho.

Introduction

The Companies Act, 2013 has nowhere defined the term Merger and Amalgamation. The merger is basically the combining of two or more companies, generally by offering the stockholders of one company securities in acquiring company in exchange for the surrender of their stock. The merger means the fusion of two or more than two companies voluntarily to form a new company. Merger and Amalgamation are synonyms of each other. The mutual decision of the companies going through mergers. The purpose to merge the company is to decrease competition and increase operational efficiency. Section 391 to 396A of part 5 of Chapter 6 of the Company Act defines the provisions related to Merger and Amalgamation.

Examination of object clauses

The first step for the merger of companies is to examine the object clauses. In memorandum 

of association of the company there are five types of clauses which are as follows:

Object clause is the most important clause of memorandum of association. It contains the main object of the company and other secondary objectives which the company may pursue. This clause defines the scope and limitations of the activities of the company. The Examination of object clauses of the memorandum of association must be conducted to check and search if the power to amalgamate is available to form a new company. Further, the clauses of amalgamated company( transferee company) should permit it to carry on the business of the amalgamating company(transferor company). In case, if such clauses do not exist necessary approvals from the Board of directors, shareholders and company law board are required.

Intimation to stock exchanges

The Second Step for the merger of companies is that the stock exchanges where amalgamation and amalgamated companies are listed should be informed about amalgamation or merger proposal. From time to time, copies of all notices, resolutions and orders should be properly communicated in good faith as to give correct information to the concerned stock exchanges. It is not mandatory for the prior approval of the stock exchange for the companies. Non-receipt of approval of the stock exchange will not bar the company to file a petition for the approval of the merger scheme because its approval from the stock exchange is just a procedural formality.

Approval of the draft merger proposal by the respective boards

The merger Proposal means any actual or proposed agreement, compromise, arrangement, business combination or understanding the purpose for which the company is to be merged.

For example, There is no requirement for a special meeting of partners in the partnership agreement to consider the merger proposal.

The proposal of draft merger should be approved by the board of directors of both the companies. It is necessary for the board of each company to pass the resolutions giving directions to its directors or executives to continue the matter further.

Application to high courts

Once the approval of the draft merger approval is confirmed by the respective board of directors an application for merger and amalgamation can be filed with the tribunal or High court. Under Section 230-232 of the Companies Act,2013 both the transferor and transferee Company shall make an application in the form of a petition to the Tribunal for the necessity to approve the scheme of the merger in order to summon the meetings of the respective shareholders and creditors to pass the merger proposal.

Joint Application

When more than one company is involved in any type of scheme or proposal like merger then it is the discretionary power of the company to file a Joint Application.

In case, when the headquarters of each of the companies are in different states, then there will be two tribunals having different jurisdiction over those companies hence separate petitions have to be filed by both the companies. It is not necessary in the case when the whole enterprise of the transferor company is passed on to transferee company without affecting the rights of the creditors and members and there is no possibility of reorganisation of the capital of transferee company then there is no requirement of transferee company to file a separate application. In practice, the application is generally filed by the transferee company. The Company makes an application to the National Company Law Tribunal of relevant territorial jurisdiction in form no NCLT-1. The Petition shall be filed along with the following documents:

NCLT-2 – A notice of admission in form no

NCLT-6 -An affidavit in form no 

A copy of the scheme of compromise or arrangements which should include the following rules:

All material facts relating to a company like pendency of any investigation or proceedings against the company, the financial position of the company, auditor’s report on accounts of the company.

If in the amalgamation any reduction of share capital is included. If the reduction of share capital is a part of a scheme of amalgamation then there is no need to file a separate petition under Section 100 of the Company Act. The Court has held that the provisions contained in section 391 are a complete code in itself. Although the approval should be in explicit terms which clearly states that approval is also for reduction is share capital being part of the amalgamation scheme. 

Any scheme of corporate debt restructuring consented to by not less than seventy-five per cent of the secured creditors in value, including—

(1) Form No CAA1 contains a creditor’s responsibility statement,

(2) Safeguards for the protection of other secured and unsecured creditors,

(3) Liquidity test which is based upon the estimates provided by the board should be confirmed by the report by the auditor that the fund requirements of the company after the corporate debt restructuring as approved,

(4) Reserve bank of India provides corporate debt restructuring guidelines which the company is proposing to adopt,

(5) Registered valuer made a valuation report of the Company in respect of the shares and the property and all assets, tangible and intangible, movable and immovable, 

(6) The fee as prescribed in the Schedule of Fees.

Apart from the above, it is also disclosed to the tribunal by the applicant the basis on which each class of members or creditors has been identified for the approval of the scheme.

It shall be noted that the joint application is made by the two companies at their discretion. Based on such application the tribunal may order a meeting of the creditors or class of creditors or the members or class of members in such manner or way as ordered by the tribunal. 

Dispatch of notice to shareholders and creditors

A notice and explanatory note of the meeting approved by the NCLT should be dispatched by each company to its shareholders and its creditors with the purpose to call upon the meeting in order to get 21 days in advance. The notice of the meeting should be published at least in two newspapers. An affidavit should also be filed with NCLT giving information that notice has been dispatched by each company to shareholders and creditors and that the same has been published in two newspapers.(Vernacular and English)

Holding of meetings of shareholders and creditors

In order to pass the scheme of merging the companies and to work upon it a meeting of shareholders should be held by each company in which at least 75 percent of shareholders in each class must vote either in person or by proxy must approve the scheme of merging the companies. In the same way, another meeting of creditors of the company must be held in the same manner to pass the scheme of merging the company. Section 391(2) states that ¾ of the majority should be passed i.e a special resolution for the approval of the scheme of merger. Normally, Court appoints a chairperson and alternate for each such meeting. The court has the discretionary power to issue the directions on the following matters:

  1. Date, time, place of meeting.
  2. Appointment of chairpersons and alternate chairperson for the meetings.
  3. Content of notice and manner of service of notice.
  4. Determination of quorum.
  5. Any other matter the court may deem fit.

It is necessary for the chairperson to submit the report to the court of proceedings of meetings on the following matters:

  1. The number of persons present at the voting.
  2. The number of persons voting in person and proxy.
  3. The votes casted in the favour of the resolution.
  4. The votes casted against the resolution.

Petition to the High Court for confirmation and passing of HC orders

When the scheme of merging the companies is passed by the shareholders and creditors then a petition has to be filed to honourable High Court by the companies which are involved in merging the companies for confirming the scheme of merging the companies. The High Court will decide a date for the hearing. A notice has to be published in two newspapers (one vernacular and one English) stating that the scheme of the merger is approved. After hearing of the High Court the parties involved in merger companies state that the scheme is fair, reasonable and in bonafide intention, the High Court must give its verdict approving the scheme. It is the discretionary power of the Court that when creditors and shareholders have given their consent to the scheme of merger the court grants permission. After analyzing the facts and circumstances of the case the court exercises its discretion while approving the scheme. The High Court is authorized to modify the scheme according to their own will and give its verdict according to that. The Court enjoys a vast power related to the scheme of merger of the company which are as follows: 

  1. the transfer of undertaking, property or liabilities of the transferor company to the transferee company.
  2. The transferor appropriation of any shares, debentures, policies or any other like interest in that company or person under the compromise or arrangement by the transferee company.
  3. the continuation by or against the transferee company of any legal proceedings pending by or against any transferor company.
  4. Without winding up the court has the authority to dissolve the transferor company without winding up.
  5. the provisions which are made for any person who, within such time and in such manner as the tribunal directs, dissent from the compromise or arrangement; and
  6. The matters which are mandatory to secure reconstruction of merger shall be effectively carried out such as incidental, consequential and supplemental matters.

Filing the order with the registrar

A true certified copy of the High Court order must be filed with the registrar of companies within the time specified by the High Court. The registrar of the company also makes the report to the Court and it is necessary for the Court to consider the report of the registrar of the company before sanctioning the scheme of merger of the company.

Transfer of assets and liabilities

After the order is passed by the Honourable High Court, then there would be the transfer of liabilities and assets to the merged company which is the third company which will be formed after merging two companies.

Issue of shares and debentures

Once the merged company is formed, then the shares and debentures must be issued by the company which will be listed on the stock exchange.

Conclusion

In the globalized world Mergers and Amalgamation through foreign direct investment are growing more day by day to the top of companies discussing deals of two small companies to form a new company together, as every company wishes to deal and enter into all the aspects of the marketing chain. It is witnessed by the Indian Market a new development for the next generation through merging and amalgamation with other companies to form new entities.


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