Presented by: CS NESAR AHMAD - PowerPoint Presentation

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Presented by:

CS NESAR AHMAD Tel: +91-11-2953 6312 csnesar367@gmail.com Mob: +91-9810044367‘Sankalp’ C-227, Paryavaran ComplexNew Delhi-110 030

PROCEDURAL ASPECTS OF MERGER & AMALGAMATION BEFORE NCLT

An overview...

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PART – A: INTRODUCTION

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CORPORATE RESTRUCTURING

Corporate restructuring is a process involved in changing the organization of a business. It implies rearranging the business for increased efficiency and profitability.

There are primarily two ways of growth of business organization, i.e. organic and inorganic growth.

Organic growth may relate to business or financial restructuring within the organization that results in enhanced customer base, higher sales, increased revenue, without resulting in change of corporate entity.

Inorganic growth may relate to restructuring through

mergers, amalgamation

etc. Merger and amalgamations constitute one of the most important methods for securing inorganic growth.

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BACKGROUND

The Companies Act, 2013 has brought pragmatic reforms for Merger & Amalgamation, which could make the process, easier, faster and cleaner for companies involved in Merger & Amalgamation.

Some of the highlights include fast track mergers, merger between Indian Companies and foreign companies and setting up of National Company Law Tribunal (NCLT)

 to hear and decide on M&A proposals, cutting down on the probability and scope of objections to M&A’s and easier as well as wider participation of shareholders through postal ballot approval.

Chapter XV of the New Act deals with “Compromises, Arrangements, and Amalgamations”, and consolidates the applicable provisions and related issues. The Old Act required M&A to be sanctioned through a Court process but the jurisdiction of court with regard to such Schemes will now vest with NCLT.

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What is Merger & Amalgamation?

Concept of Merger / Amalgamation:

The terms “merger” and “amalgamation” are synonymous.

In amalgamation the properties, assets and liabilities of one or more company (amalgamating company) are transferred to an existing or a new company (amalgamated company) and the amalgamated company issues share to the shareholders of the amalgamating company in lieu thereof.

Under this process, the amalgamating company is dissolved without going through the process of winding up.

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•The expression “amalgamation” is not defined in the Companies Act, 1956/ 2013.•Section 2 (1B) of the Income Tax Act defines the term “amalgamation” as “Amalgamation”, in relation to companies, means the merger of one or more companies with another company or the merger of two or more companies to form one company…….”Conditions :All properties to be transferred to the amalgamated company

All liabilities to be transferred to the amalgamated companyShareholders holding atleast 3/4th in value of shares of the amalgamating company should become shareholders of the amalgamated company. Definition

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Modes of Merger & AmalgamationHorizontal Merger:

Merger of two or more companies that compete in the same industry. Vertical Merger: Merger which takes place upon the combination of two companies which are operating in the same industry but at different stages of production or distribution system.

Co-generic Merger: Where

two companies are in the same or related industries but do not offer the same products, but related products and may share similar distribution channels, providing synergies for the merger.

Conglomerate Merger:

Conglomerate mergers are merger of different kinds of businesses under one flagship company

. (Diversity of objects of two companies cannot be ground for declining sanction to proposed scheme of amalgamation-(Steel Kingdom Netcom Ltd., in re (2005) 59 SCL 544(Del)/

Mcleod

Russel (India) Ltd., In re (1997) 13 SCL 126 (Cal).

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Companies Act, 2013, (Sec 230-240) SEBI (LODR) Regulations, 2015, (Reg. 11, 37 and 94) Accounting Standard - 14 FEMA (in case of merger of companies having foreign capital) Prior approval of RBI in case of cross-border merger

Competition Act, 2002 Income Tax Act, 1961 Indian Stamp Act, 1899Any other sectoral-regulatory approval.Regulatory Framework

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CONSTITUTION OF NATIONAL COMPANY LAW TRIBUNAL

The Central Government, by notification,

w.e.f

. 01.06.2016, constituted the ‘National Company Law Tribunal and National Company Law Appellate Tribunal under the provisions of Companies Act, 2013. This effectively dissolved the Company Law Board (CLB), constituted under the Companies Act, 1956 from the same day.

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PART – B: PROCESS OF MERGER

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Merger and Amalgamation process Check whether objects clause of Memorandum of Association of both the transferor and the transferee companies authorizes merger.

(Power to amalgamate is a statutory power, notwithstanding the fact that the MOA may not contain express power to amalgamate with another company- EITA India Ltd., In re(2000)99 Com Case 276 Calcutta.) Convene a Board meeting of both the transferor and the transferee companies to consider the proposal of merger.(Advisable) Draft a scheme of

merger/amalgamation.

Convene a Board meeting of both the transferor and the transferee companies to consider the scheme of merger.

Preliminary Steps To Be Followed

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Compliance with the regulatory provisions. Rationale for the merger/ amalgamation.Provision under the scheme for protection of interest of creditors and shareholders, employees and all other stakeholders.

Scheme in consonance with public interest.Issues considered by NCLT in a Scheme of Merger/Amalgamation

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Important points to be followed while drafting of a SchemeDrafting of Scheme

Background and description of Companies seeking approvalPurpose of the Scheme

Rationale of the Scheme

General

Part I

Definitions & Interpretation

Part II

Capital Structure

Part III

Accounting treatment,

merger of authorised share capital and matters incidental thereto

Part IV

G

eneral

terms and

conditions applicable to all parts of Scheme

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Drafting of SchemeBackground and description of Companies :

Name of the CompaniesAct under which it is incorporatedDate of IncorporationRegistered office address of the CompaniesPrincipal Objects of the Companies

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Drafting of SchemePurpose of the Scheme

The Scheme shall be consistent with the provisions of Section 2(1B) of the Income Tax Act, 1961 (“IT Act”) whereby: (a)All the property of each Transferor Company immediately before the amalgamation becomes the property of the Transferee Company by virtue of the amalgamation;  (b)All the liabilities of each Transferor Company immediately before the amalgamation become the liabilities of the Transferee Company by virtue of the amalgamation;  (c)Shareholders holding not less than 3/4th in value of the shares in each Transferor Company (other than shares already held therein immediately before the amalgamation by, or by a nominee for, the Transferee Company or its subsidiary, or shares cancelled pursuant to the Scheme) become shareholders of the Transferee Company by virtue of the amalgamation.

 Accordingly, all the provisions of this Scheme will be read so far as circumstances permit to be consistent with the requirements of Section 2(1B) of the IT Act.

 

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Drafting of SchemeRationale of the SchemeConsolidation of business operations

thus resulting in significant impetus to growth. Reduction in overheads, administrative, managerial and other expenditure, which may bring about operational rationalization, efficiency and optimal utilization of various resources. Consolidation of managerial expertise of both the Companies thereby giving additional strength to the operations and management of the Transferee Company.

Elimination of administrative function and multiple records-keeping resulting in reduction in expenditure.

Ultimate obtainment of Synergies.

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Drafting of SchemeGeneral Part

Definitions and InterpretationCapital Structure of Transferor and Transferee CompaniesDischarge of consideration, Accounting-Treatment, Merger of Authorised Share Capital and matters incidental theretoGeneral terms and conditions may contain conditions to effectiveness of the Scheme

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Steps to be followed for merger

Section 230 to 232 of Companies Act, 2013Application (Section -230) First Motion

Transferor & Transferee companies shall file an application to NCLT in Form NCLT-1 along with:Copy of scheme with disclosures u/s 230(2).

A notice of admission in Form No. NCLT-2Affidavit in Form No. NCLT-6NOCs from both creditors and shareholders (seeking dispensing of meetings of shareholders and creditors, by way of affidavit)

A certificate from the Auditor of the Company to the effect that the accounting

treatment in the scheme of compromise or arrangement is in conformity

with the accounting standards prescribed under Section 133.

Upon the application, the Hon’ble NCLT may direct a meeting of the creditors or class of creditors or the members or class of members and debenture holders to consider the scheme of merger/ amalgamation as per Section S.232 (1)(a) & (b), S.230(3)–(6) read with rule 5. Meeting of creditors can be dispensed with if 90% of the value of creditors give their consent under Section 230 (9).

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Steps to be followed for merger Section 230 to 232 of Companies Act, 20132. The transferor & the transferee companies will send notices to the members/ creditors in compliance of the order of Hon’ble NCLT in Form CAA-2, 30 days prior to the date fixed for meeting. (S.230(3)-(6) read with rule 6). Annexure to the notice calling meetings:

Draft schemeExplanatory statement

Confirmation that a copy of draft scheme has been filed with ROC Expert reports on valuation, if anyReport by Directors explaining its impact on each class of shareholders, KMP, promoter and non-promoter etc.Supplementary accounting statement when annual accounts is older than six months before the first meeting of Board for approving scheme.

And other details as per Annexure A.

And other details as per Annexure A.

Publication of notice in one English and one vernacular newspaper having wide circulation or such newspapers as may be directed by the NCLT (Section – 230(3) read with rule 7) and send notice to other applicable authorities i.e. Central Government, IT authorities, ROC as the case may be (Section -230(5) read with rule -8) in Form CAA-3.

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Steps to be followed for merger Section 230 to 232 of Companies Act, 2013

3. The transferor & the transferee Companies shall file an affidavit of service (Section- 232 read with rule -12) to the Hon’ble NCLT not less than 7 days before the date fixed for the members/ creditors meetings along with Statement that the directions regarding the issue of notices and the advertisement have been duly complied with in the affidavit itself.4. Convene the meeting of members & creditors as the case may be at the earliest after filing affidavit of service under Section (S.232(1) read with S.230(3)-(6).

5. Filing a representation by the CG, IT authorities, RD as the case may be to the Hon’ble NCLT within 30 days from the date of receipt of notice by the authorities under Section (Section 230(5).

6. Chairperson of the meeting of both the companies shall submit result of the creditors/ members meeting in Form CAA-4 within 3 days of conclusion of meeting. (Section – 230 (6) read with rule 14).

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Steps to be followed for merger

Section 230 to 232 of Companies Act, 2013Second Motion7. Both the Companies shall file the Petition to the Hon’ble NCLT in Form CAA-5 along with an Affidavit in Form NCLT-6 in support of the petition and verifying any matters not provided in any prior affidavit such as advertisement etc. within 7 days of filing of report by chairman (Section 232 read with rule 15).

8. Fixing the date of hearing for the Petition by the Hon’ble NCLT (Section 232 read with rule 16(1).

9. Sending of notice of hearing by the Hon’ble NCLT to the objectors or to their representatives u/s 230(4) and to the CG, IT authorities, ROC as the case may be under Section 232 read with rule 16 (2).10. Transferor/Transferee Company shall publish advertisement in the same newspaper in which the notice of meeting was published before 10 days the date fixed for hearing (Section -232 read with rule 16(1).

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Steps to be followed for merger Section 230 to 232 of Companies Act, 2013Final hearing by the Hon’ble NCLT and order for amalgamation in Form –CAA 7 (Section 232 read with rule 19 & 20).

13. The transferee company shall file the order of the Hon’ble Tribunal to the ROC within 30 days of receipt of order in Form CAA-6. (Section 232 read with rule-17.

14. Both the Company will file statement of compliance until the scheme is fully implemented to ROC in Form CAA 8 duly certified by CA/CMA/CS in practice within 210 days of the end of each financial year (Section 232 (7) read with rule-21).

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Merger of listed with unlisted Company

Transferor

Listed

Transferor

Unlisted

Amalgamated

Unlisted

The transferee company shall remain an unlisted Company until becomes listed Company.

If shareholder of the transferor company decide to opt out of the transferee company, provision shall be made for payment of the value of shares held by them and other benefits in accordance with a pre-determined price formula or after a valuation is made and the arrangements under this provision may be made by the Tribunal:

Provided that the amount of payment or valuation under this clause for any share shall not be less than what has been specified by the SEBI under any regulation framed by it.

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The books and papers of a company which has been amalgamated with or whose shares have been acquired by, another Company under this Chapter shall not be disposed of without the prior permission of the Central Government and before granting such permission, that Government may appoint a person to examine the books and papers or any of them for the purpose of ascertaining whether they contain any evidence of the commission of an offence in connection with the promotion or formation, or the management of the affairs, of the transferor-company or its amalgamation or the acquisition of its shares.

Preservation of books and papers of amalgamated companies (Section -239)

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The liability in respect of offences committed under this Act by the officers in default, of the transferor company prior to its merger, amalgamation or acquisition shall continue after such merger, amalgamation or acquisition.Liability of officers in respect of offences committed prior to Merger, Amalgamation ( Section – 240)

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Scheme of Arrangement for listed entitySEBI (Listing Obligations and Disclosure Requirements), 2015

Applicable Regulations Regulation 11 The listed entity shall ensure that any scheme of arrangement / amalgamation /merger/reconstruction /reduction of capital etc. to be presented to Tribunal does not in any way violate, override or limit the provisions of securities laws or requirements of the stock exchange(s):Provided that this regulation shall not be applicable for the units issued by Mutual Fund which are listed on a recognised stock exchange(s)Regulation 37

Without prejudice to provisions of regulation 11, the listed entity desirous of undertaking a scheme of arrangement or involved in a scheme of arrangement, shall file the draft scheme of arrangement, proposed to be filed before Tribunal under Sections 230-234 and Section 66 of Companies Act, 2013, whichever applicable, with the stock exchange(s) for obtaining Observation Letter or No- objection letter, before filing such scheme with Tribunal, in terms of requirements specified by the Board or stock exchange(s) from time to time.

).

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Scheme of Arrangement for listed entitySEBI (Listing Obligations and Disclosure Requirements), 2015

Regulation 94The designated stock exchange, upon receipt of draft schemes of arrangement and the documents prescribed by the Board shall forward the same to the Board, in the manner prescribed by the Board.The stock exchange(s) shall submit to the Board its Objection Letter or No-Objection Letter on the draft scheme of arrangement after inter-alia ascertaining whether the draft scheme of arrangement is in compliance with securities laws within thirty days of receipt of draft scheme of arrangement or within seven days of date of receipt of satisfactory reply on clarifications from the listed entity and/or opinion from independent chartered accountant, if any, sought by stockexchange(s), as applicable.The stock exchange(s), shall issue Observation Letter or No-objection letter to the listed entity within seven days of receipt of comments from the Board, after suitably incorporating such comments in the Observation Letter or No-objection letter:

Provided that the validity of the ‘Observation Letter’ or No-objection letter of stock exchanges shall be six months from the date of issuance.

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Scheme of Arrangement for listed entitySEBI (Listing Obligations and Disclosure Requirements), 2015

Regulation 94 contd.The stock exchange(s) shall bring the observations or objections, as the case may be, to the notice of Court or Tribunal at the time of approval of the scheme of arrangement.Upon sanction of the Scheme by the Court or Tribunal, the designated stock exchange shall forward its recommendations to the Board on the documents submitted by the listed entity in terms of sub-regulation (5) of regulation 37.

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Practical & Procedural Aspects of Drafting Petition/ Pleading

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PREPARATORY POINTS Take minute facts from the client.

Lend your complete ears to the client. Put question to the client. Convey to the client about exact legal position. Give correct picture of judicial views.

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DRAFTING OF PLEADINGS Quote relevant provisions in the petition. Do not suppress facts.

Highlights material facts, legal provisions and Court decisions, if any. State important points together with reference.

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PROFESSIONAL ETIQUETTES1. Dressing Etiquettes

Navy Blue suit and white shirt.Saree or any other dress of a sober colour with a Navy Blue jacket.2. Handshake Etiquettes 3. Communication Etiquettes

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CONDUCT AND ETIQUETTEDUTY TO THE TRIBUNAL - Conduct yourself with dignity and self-respect.DUTY TO CLIENT - Don’t withdraw from engagements once accepted, without sufficient cause.

DUTY TO OPPONENT - Do your best to carry out promises made to the opposite-party.

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TIME MANAGEMENT 1.

Being busy isn’t the same as being effective.2. Spend more time on specific activities.3. Use your free time wisely.4. Attempt the assignment on priority basis.

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MYTHSOnly lawyers can draft.I have been practicing as a Company Secretary for 10-20 years. It’s difficult to venture into a new arena.Drafting is a burden.

I have not studied the subject(s).

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Some Important case laws on merger/demerger under

Companies Act, 2013 In the matter of Scheme of Amalgamation of

Apollo Pipes Limited(Transferor Company/Applicant Company No. 1ANDAmulya

Leasing and Finance Limited(Transferee Company/Applicant Company No. 2)withTheir respective Shareholder and Creditor

NCLT Order dated : 03/03/2017

Case Law - 1

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Some Important case laws on merger/demerger under

Companies Act, 2013 In relation to the Transferor Company/Applicant Company No. 1With respect to Equity shareholders

Meeting of Equity shareholders of the Transferor Company/Applicant Company No.1 is dispensed with as there are 7 Shareholders, out of which one is Transferee Company, and other six equity shareholders’ consents have been obtained and is already placed on record.

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Some Important case laws on merger/demerger under

Companies Act, 2013 In the matter of the Composite Scheme of ArrangementBetween

Fortis Healthcare Limited (Demerged Company)ANDSRL Limited

(Amalgamating Company)AND Fortis Malar Hospitals Limited

NCLT Chandigarh Bench at ChandigarhOrder dated : 21.02.2017

We dispense with the convening of the meetings of the secured creditors of all the three applicant companies as each of them is said to have given their consent to the proposed scheme.

.

Case Law - 2

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Some Important case laws on merger/demerger under

Companies Act, 2013 In the matter of

Jaiprakash Associates Limited (Transferor Company/ Applicant No. 1)AND

Jaypee Infrastructure Development Limited(Transferee Company/ Applicant No. 2)Order dated : 08.12.2017

Case Law - 3

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Some Important case laws on merger/demerger under

Companies Act, 2013 The meetings of the shareholders and Secured and Unsecured creditors of the Transferor Company are being dispensed with , with such a direction that instead of meetings their to be obtained through postal ballot with facility of voting through electronic means (e-voting), wherever possible as per provisions of Section 110(1)(b) of the Companies Act, 2013 and provision contained in Rule 20 of Companies (Management and Administration) Rules, 2014.

Physical meetings were dispensed with in order to promote the larger participation of shareholders and Secured and Unsecured creditors in the voting.

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The Companies Act, 2013 contains a number of provisions which have implications on Mergers and Restructurings. There are some pragmatic reforms such as: fast-track schemes, which being cost and time effective will encourage corporate restructurings for small and group companies; merger of an Indian company into a foreign company should give impetus to cross-border M&A activity; introducing the threshold for raising objections to a scheme would deter frivolous objections and postal ballotapproval would ensure a wider participation of the stakeholders.

CONCLUSION

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