Merger, Demerger, Acquisition by Share

Business restructuring may be achieved by a variety of methods, such as, Merger, Demerger / Spin Off, Slump Sale, Acquisition of Shares, etc. Each method has its own pros and cons and must be selected keeping in mind the objectives to be achieved. While adopting a particular method, we consider the following legal factors, wherever applies to a Private , Public-Unlisted and Public-Listed Companies, in addition to the commercial and financial justification:

  • Income-tax impact on the Companies and their share holders, e.g., capital gains on the transfer, set-off of losses and depreciation, transfer of deduction, cost of assets to the Transferee, etc.
  • Stamp duty, e.g., levy, concessions, etc.
  • Companies Act provisions
  • Competition Law provisions
  • SEBI’s prior permission
  • SEBI Takeover Regulations and SEBI DIP Guidelines
  • Listing Agreement provisions and procedural requirements
  • FEMA and FIPB Policies
  • VAT – transfer of Exemption Schemes and tax on the transfer of business
  • Transfer of CENVAT Credit and Excise Registration
  • Transfer of Licences under EPCG (Export Promotion Council Guarantee) Scheme, Project Import Regulations, etc.
  • Transfer of tenancies under Rent Control Laws
  • Labour law implications, e.g., Govt. permission for closure of a unit with more than 100 workers
  • Permissions required under contractual agreements, e.g., lenders, Govt. Ministries in case of infrastructure / telecom projects, etc.
  • Transfer of environmental licences
  • Accounting implications of a particular method

Broad Checklist for Mergers

  • Examine whether a Forward Merger or a Reverse Merger is more beneficial : the factors to be considered are tax benefits, listing, etc.
  • In case of Listed Companies, obtain SEBI’s prior permission
  • Ensure that the Main Objects or the incidental objects of the Memorandum of Association contain the power to amalgamate.
  • Ensure that the Scheme does not violate, override or circumscribe the provisions of securities laws or the stock exchange requirements.
  • Consider whether the merger would be covered under the Competition Act and hence, one which requires the permission of the Competition Commission.
  • Valuation of shares for fixing the Share Exchange Ratio
  • Fairness Report from a Merchant Banker on the Valuation Report in the case of Listed Companies
  • Convene a Board Meeting to approving the Scheme of Amalgamation
  • Obtain the consent/approvals, if any, required prior to the merger
  • Prepare the Scheme of Amalgamation and Explanatory Statement.
  • The Explanatory Statement forwarded must disclose the pre and post-merger capital structure and shareholding pattern
  • File the scheme/petition proposed to be filed before the Court or Tribunal with the Stock Exchanges, for their approval, at least a month before it is presented to the Court or Tribunal.

Listed companies must also submit to the stock exchange, an Auditors’ Certificate to the effect that the accounting treatment contained in such schemes is in compliance with all the applicable Accounting Standards.

Listed Companies must comply with the requirements of SEBI Cir CFD /DIL/1/2014 which lays down various procedures for obtaining SEBI’s permission. These include, obtaining share holders’ approval through Postal Ballot and eVoting in certain cases, e.g., where the promoters would be issued additional shares under the Scheme, where related parties are involved in the Scheme, etc.

  • Receive the approval of the Stock Exchange and the SEBI in case of Listed Company
  • Apply to the High Court / National Company Law Tribunal in Form Nos. 33 and 34
  • Send a copy of the Application to the ROC within 30 days
  • Send the Notice (in Form No. 36) convening the General Meeting to every member and creditor as directed by the Court along with the Explanatory Statement and Form of Proxy (in Form No. 37). Ensure that the Notice reaches the member at least 21 days before the date of the GM.
  • If the Court directs give an advertisement of the notice meeting (Form 38)
  • Hold the Meeting and pass Resolutions approving the Scheme. Listed Companies may need Postal Ballot and eVoting as explained above.
  • File the Report of the Meeting’s Chairman (in Form No. 39) with the Court.
  • Prepare a Petition in Form No. 40 for obtaining the Court’s sanction to the Scheme.
  • At least 10 days before the date fixed by the Court for the hearing of the Petition, advertise the date of hearing
  • Obtain the Official Liquidator’s Report
  • Receive the Court’s Order sanctioning the Scheme
  • File a copy of the Order of the Court with the ROC within 30 days from the date of receipt of the Order.
  • Allot the securities to the share holders of the Transferor Company
  • Attach a copy of the Court Order with every copy of the Memorandum and Articles of Association

The Merger Scheme / Scheme of Amalgamation must cover the following:

  1. Definitions of important terms such as Appointed Date, Effective Date, Record Date for issue of shares, etc.
  2. Background, capital, history, etc. of the Transferor and Transferee Company
  3. Rationale of the Scheme
  4. Amalgamation of Transferor with Transferee Company and vesting of its undertaking, assets and liabilities in the Transferee Company. Reduction of capital, if any, of the Transferee
  5. Issue of securities, etc. by Transferee to share holders of Transferor, Share Exchange Ratio, Valuation Report, etc.
  6. Increase in Authorised Capital of Transferee, if required
  7. The Date from when the Scheme comes into operation
  8. Accounting Treatment of the amalgamation by the Transferee
  9. All contracts, deeds, bonds, instruments, executed by the Transferor to be binding on and enforceable against the Transferee
  10. All legal proceedings, by or against the Transferor to be binding on and enforceable against the Transferee
  11. Transferee to carry on Transferor’ business until the Effective Date
  12. Applications to relevant High Courts for their approval
  13. All employees of Transferor to become the employees of Transferee
  14. No dividends, bonus, rights, further shares to be issued by either company without prior approval of the other company
  15. The approvals / sanctions upon which the Scheme is conditional and effect of non-receipt of such approvals
  16. Sharing of merger costs and expenses
  17. Change of Board of Directors of Transferee, if any
  18. Dissolution without Winding-Up of Transferor
  19. Change of name and registered office of the Transferee, if applicable

Additional Checklist for Demergers

  • Ensure that what is being Demerged is an Undertaking as per the Income-tax Act or else the tax benefits may be jeopardised
  • Decide whether the Resulting Company would be a New Company or an Existing Company
  • Reduction in capital of the Demerged Company
  • Accounting Adjustments, if any
  • Resulting Company to take over the assets and liabilities of the Demerged Company
  • Allot the securities to the share holders of the Transferor Company
  • Checklist for Slump Sale
  • Ensure that what is being sold satisfies the conditions of an ‘undertaking’ under the Income-tax Act
  • Ensure that the Main Objects in Memorandum of Association of Transferor contain the power to sell a business undertaking and in case of Transferee contain object(s) for carrying on such business
  • Audited Balance Sheets of the undertaking / business to be sold
  • Decide upon the lump sum consideration and its mode of payment
  • Compute the tax impact u/s. 50B of the Income-tax Act
  • Ascertain the stamp duty and VAT impact, if any, on the sale
  • Draft the Slump Sale Agreement
  • U/s. 180 of the Companies Act, 2013, a sale of an undertaking (as defined) requires a Special Resolution of the Members. Private / Public Companies with more than 200 members and all Listed Companies require a Postal Ballot.
  • Draft the Postal Ballot Notice + Draft Resolution + Explanatory Statement to be sent to the Members.
  • File special resolution with ROC.
  • Execute the Slump Sale Agreement
  • Give possession of the undertaking / business to the Transferee
  • Prepare a letter of possession
  • Board Resolution for giving and receiving the possession of the business
  • Pass Accounting entries for sale of business undertaking in the books
  • Take steps for transfer of CENVAT Credit