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The introduction of the Companies Act, 2013 was a major event in India's corporate law history, replacing the erstwhile Companies Act, 1956. On December 7, 2016, the Ministry of Corporate Affairs (MCA) announced that 90 sections of the Companies Act, 2013 would be effective starting December 15, 2016. These sections included rules about Compromises, Arrangements, and Amalgamations under Chapter XV (Sections 230-240).
In this blog post, we will explore Mergers and Acquisitions under the Companies Act, 2013.
First and foremost, let’s understand what merger and acquisition (M&A) mean.
The term ‘Merger’ has not been defined by the Companies Act, 2013. As a concept, it refers to the joining of two or more entities into a single entity, with the aggregation of their assets and liabilities. Typically, mergers occur between businesses of comparable size and reputation. One notable example of merger is when Lipton India Limited and Brooke Bond India Limited merged in 1994 to form Brooke Bond Lipton India Limited (BBLIL).
'Amalgamation' is another term for mergers. "Amalgamation" has been defined by the Income Tax Act, 1961 (ITA) as the combination of two or more companies to establish a single business, or the combination of one or more entities with another company. It also lists additional requirements that must be met in order for an "Amalgamation" to be eligible for a favourable tax treatment.
Merger is a complex court-driven process. The National Company Law Tribunal (NCLT) must approve the merger before it can actually take place. Further, if the registrar office of the two merging companies are in different states, the state NCLT’s approval is necessary.
X company and Y company merge to form a new company Z. As a result, they no longer exist as independent companies. Sometimes, the new company may retain X or Y company’s name to benefit from its goodwill and brand reputation.
Supervision by the National Company Law Tribunal (NCLT) is important for protecting the interests of shareholders and creditors during a merger.
Acquisition refers to the process whereby one company purchases another company. Two companies are involved in acquisition: the buyer a.k.a the acquirer, which is generally the bigger company, and the seller a.k.a the target company.
The buyer can take control of the target company by purchasing a large number of its shares or assets, depending on how the deal is set up. One key difference between a merger and an acquisition is that in an acquisition, the company being bought often keeps its separate legal identity. However, this usually happens in a stock deal, not in an asset deal.
The goals of mergers and acquisitions are: saving money by operating at a larger scale, gaining new technologies, and entering new markets or industries.
The mergers and acquisitions in India are majorly regulated by the Companies Act, 2013. The CHAPTER XV of the Act titled “COMPROMISES, ARRANGEMENTS AND AMALGAMATIONS” contains 11 sections, all of which contain statutory provisions for governing M&As including arrangements involving companies, their members and creditors.
The main sections governing M&A in India are described herein:
Section 230 of the Act gives companies the power to compromise or make arrangements with creditors and members. This provision enables companies to restructure their debts in order to improve their financial position.
However, the National Company Law Tribunal’s approval regarding the proposal is a must. The tribunal makes sure that the arrangement is fair, does not harm minority stakeholders, and complies with the law.
Section 231 gives the NCLT the power to ensure that a compromise or an arrangement between a company and its creditors/members is carried out in a proper and legitimate manner. After the compromise/arrangement under Section 230 has been approved, the tribunal watches over its implementation to ensure that the company sticks to the plan.
In case any problems arise while carrying out the agreement, the tribunal can step in and give instructions or modify the terms to fix any issues.
If the NCLT discovers that the arrangement isn’t working or cannot be carried out, it has the authority to order the company to wind up. Basically, Section 231 is a follow-up to Section 230. While S. 230 approves the plan, S. 231 makes sure that the plan takes place properly and if it doesn’t, it allows NCLT to take the required action.
Section 232 of the Companies Act, 2013 deals with rules and processes for mergers and demergers (when one company splits into two or more companies). To help the companies to carry out these changes in an organized and legitimate way, this section provides a clear framework.
During a merger or demerger, one company may transform its properties, debts, and shares to another company to ensure that all the assets and responsibilities are passed on to the new or remaining entity in a proper manner.
Important stakeholders must give their approval for merger or demerger. This includes getting consent of creditors, members and NCLT. This ensures the interests of all the involved individuals and entities are protected.
Once the merger or demerged gets approval, the company must file an approved scheme with the Registrar of Companies (RoC) to make the filing process official and ensure compliance with legal and regulatory requirements.
S. 233 of the Act makes the merger process easier for small companies, holding companies, subsidiary companies, and other certain types of companies. Generally, a merger needs to be approved by the tribunal before being carried out. However, Section 233 allows these companies to merge without NCLT’s approval.
But there’s a catch. For the merger to happen, all the stakeholders like shareholders, creditors, etc. must give their approval. This section makes the merger process simpler and quicker for smaller or related companies.
This Section allows Indian corporations to merge with foreign companies, subject to certain conditions. The merger must follow the rules established by the Reserve Bank of India (RBI) and also the laws of the foreign country where the other company is based. This will ensure that the merger respects laws of India as well as the foreign country where the foreign company is based.
Because of Section 234 of the Companies Act, the Indian companies can work with companies from other countries as long as both sides follow the rules.
This section deals with the process of acquiring a company’s remaining shares after a majority stake has already been purchased. If a company has acquired 90% or more shares of another company, it has the legal right to force the remaining shareholders (minority shareholders) to sell their shares.
Because of this provision, the acquiring company can achieve full ownership without being blocked by a small group of dissenting shareholders. The acquiring company must notify the remaining shareholders of its intention to purchase their shares in order to exercise this right. In order to ensure that minority shareholders receive fair and reasonable equitable compensation, the notice should contain details such as the offer price. If the minority shareholders feel that the offer is unfair, they can challenge it under this section.
The purchase of a company’s minority shareholding by its majority shareholders is governed by Section 236 of the Companies Act, 2013. If the majority shareholders of a company acquire 90% or more of the total, then they have the legal right to buy out the remainder of shares held by the minority shareholders. This provision allows the majority shareholders to gain full ownership of the businesses and eliminates any complexities arising from minority holdings.
However, this section does not only favour the majority shareholders. It also protects the minority shareholders’ rights. If the minority shareholders wish to exit the company, they have the right to sell their shares to the majority shareholders. Further, the minority shareholders can demand that their shares must be purchased by majority shareholders at a fair price, ensuring that they aren’t forced to stay in a company wherein they no longer have major control or influence.
The shares’ valuation is conducted by a registered valuer. This ensures that the price offered to minority shareholders is fair and according to the market standards. Because of the registered valuer’s role, both parties are protected and exploitation is prevented.
This section gives the Central Government the power to order the amalgamation of two or more companies if the same is deemed necessary in the public interest. Generally, this provision is used in order to address larger economic or social problems, and ensures that the greater good is served by corporate restructuring.
To protect public welfare, the government can make a decision to merge companies in accordance with this section. For example, the government may mandate an amalgamation to preserve employment, guarantee business continuity, or stabilize a severely troubled industry. This authority is frequently used when private businesses are unable to handle their operational or financial problems on their own and their failure could have a detrimental effect on the economy or society.
An order detailing the specifics of the merger, including the implications for the firms' shareholders, obligations, and assets, will be issued by the government. In order to guarantee that the reorganization benefits the public without unjustly hurting the participating enterprises, the terms of the merger must be fair and equal to all the stakeholders.
Section 238 of the Act requires any scheme involving the transfer of shares, such as during a merger, acquisition or arrangement, to be properly registered and compliant with the law.
When shares are transferred as part of a scheme approved under the Act, the offer for such a transfer shall be formally registered. This guarantees that the process is recognized by the law and the rights of shareholders and stakeholders involved are protected.
Proper registration prevents disputes and ensures the transfer is binding on all the parties. By making registration mandatory, S. 238 helps to uphold the integrity of corporate transactions and makes sure that the shares’ transfer takes place in a manner which is legal and streamlined. To make sure the rules are followed by the companies, and the stakeholders’ interests are taken into account, this section serves as a checkpoint.
This section specifies that upon the completion of merger or amalgamation, the books of account, records and documents of the companies involved must be kept for a certain period of time. For future reference, audits or legal purposes, these details are crucial and hence, must be preserved.
The merged or resulting company is responsible for preserving these records. The rules prescribed under the Act determine the period for which the records must be kept. These records include operational data, financial documents, and other important papers that were part of the merged companies.
This requirement helps to maintain transparency and accountability upon corporate restructuring. When these documents are preserved, stakeholders, auditors and regulatory authorities can access historical information when required.
The Companies Act’s Section 240 explains that if an offense was committed by a company before its merger or amalgamation, the officers responsible at that time are still held legally accountable even after the merger has taken place.
This means that restructuring does not absolve the individuals or original company of their legal liabilities. Section 240 is designed to ensure that corporate reorganizations cannot be used as a way to escape the consequences of unlawful activities. Regardless of changes to the company's structure, it guarantees that justice is served and maintains consistency in the enforcement of the law.
The Companies Act, 2013 introduced provisions for mergers and acquisitions of companies in India, as outlined in Sections 230–240. For any merger or acquisition to take place, NCLT’s approval is required unless the merging companies are small companies. The Act facilitates cross-border mergers, allowing Indian companies to merge with foreign entities, with the Reserve Bank of India (RBI) playing a regulatory role. Overall, the Act establishes a balanced framework to protect the rights of acquiring companies while safeguarding the interests of minority shareholders, ensuring transparency and fairness throughout the M&A process.
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Hey there, I'm Dushyant Sharma. With the extensive knowledge I've gained in past 8 years, I have been creating content on various subjects such as banking, insurance, telecom, and all the important registration and licensing processes for various companies. I'm here to help everyone with my expertise in these areas through my articles.
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