Changing contours of mergers and acquisitions under Companies Act, 2013
By Anup Koushik Karavadi
The task of enacting a new law to regulate companies in India is complete. The Companies Act, 2013, (“New Act”) in its new avatar, mirrors several changes when compared to the law contemplated under the Companies Act, 1956 (“Old Act”). It brings in a whole new set of expected and unexpected changes to the existing regime governing Indian company law. Under the Old Act, sections 391 to 396 deal with Compromises, Arrangements and Amalgamation, whereas Chapter XV of the Old Act encompasses Sections 230 to 240 governing Compromises, Arrangement and Amalgamations. This article highlights a few key changes made in the New Act on mergers and amalgamations and the likely impact on industry.
Although substantial changes have been incorporated in the New Act, several key provisions remain unchanged. For example, the acceptance of a scheme or merger or amalgamation by three-fourths of the shareholders, like in section 391(2) of the Old Act, is still a pre-condition to a merger or amalgamation. The power of the Central Government to order a merger or amalgamation in the interest of the nation is untouched and is placed in Section 237. Further, the obligation to maintain records of the mergers/amalgamations is retained in Section 239 as its importance cannot be ignored. Other matters like convening meetings, obtaining the permission of the regulatory authorities and the Central Government in cases of mergers or amalgamations remain unaltered.
Mergers and Amalgamations: the distinction remains unexplained
While the Income Tax Act 1961 (“IT Act”) distinguishes clearly between mergers and amalgamations, the Old Act and the New Act the two are used interchangeably and the procedures for both are identical. Section 234 of the New Act states that the provisions of the New Act shall apply mutatis mutandis to both mergers and amalgamations, thus acknowledging that a merger and amalgamation may be conceptually different but are deemed to be the same for all purposes. As a result, no statute, except the IT Act, exists to differentiate a merger from an amalgamation, and the reason explained in the IT Act, shall remain to be the sole provision explaining the distinction between a merger and an amalgamation.
National Company Law Tribunal to perform erstwhile functions of High Courts
Under the Old Act, the High Courts were endowed with the power to sanction a scheme of merger/amalgamation. However, as per the provisions of the New Act the power given to the High Courts would be invested with the National Company Law Tribunal (NCLT). This change should help in shortening the time taken in obtaining sanctions in cases of mergers and amalgamations.
Voting through postal ballot
Under the Old Act, the shareholders or the creditors, as the case may be, may be present either in person or in proxy for approving the scheme of amalgamation/merger. The New Act goes a step further and provides another mode of voting. Sub-clause (4) of Section 230 envisions adoption of a scheme under Chapter XV by postal ballot.
Notice of the meetings
Sub-clause (5) of Section 230 of the New Act obligates companies to send a notice of meeting to approve a merger/amalgamation to various government authorities such as Central Government, the Income Tax Department, SEBI, RBI, Registrar of Companies, the respective stock exchanges, the official liquidator, the Competition Commission of India, and if the need be, to any other regulatory authority likely to be affected by the merger/amalgamation for seeking representations from the respective authorities if any within a period of 30 days from the date of receipt of such notice. Under the Old Act, notices are to be sent mandatorily to the Central Government, Registrar of Companies and Official Liquidator and the concerned stock exchanges. Further, under the Old Act if no report is provided by the authorities then it is not deemed to have been approved. Whereas, as per the New Act, if the representations are not provided within 30 days from the date of receipt of the notice then, it is presumed that the authorities have no representations to make on the proposals.
Further, the ‘thirty days’ requirement might spring up a few procedural inconsistencies For instance, Section 6(2a) of the Competition Act, 2002 allows 210 days for the CCI to pass an order after verifying the proposed merger, whereas the New Act gives only a time period of thirty days to reply for any authority likely to be affected.
Objections to mergers/amalgamations
Sub-clause (4) of Section 230 of the New Act provides that only persons holding not less than 10% of the shareholding; or having not less than 5% of the total outstanding debt can object to a merger/amalgamation. In stark contrast, the Old Act specifies no minimum-ownership-condition to object to a merger/amalgamation. The impact of the New Act is two-fold: genuine claims of shareholders may go unrepresented, while mala fide and frivolous claims will no longer act as dampeners.
An important feature that may delay the merger process is the provision allowing all statutory authorities to intervene in the NCLT process and use this tactic effectively to seek payment of all pending demands, even the disputed amounts.
Indian companies allowed merging into foreign companies
The Old Act allows domestic companies to merge into each other, besides allowing foreign companies to merge into Indian companies. The New Act goes a step further, as it allows foreign companies to merge into Indian companies and vice-versa, meaning Indian companies wanting to merge into foreign companies may press ahead with their intention. The approval of the RBI is a pre-requisite in the both the cases. However, by virtue of Section 234 of the New Act, the license to merge into foreign companies comes with a rider that Indian companies can only merge into foreign companies domiciled in any of the jurisdictions notified by the Central Government.
Fast Track Mergers
Under the Old Act, mergers/amalgamations between group companies and subsidiaries are placed on the same pedestal on which mergers/amalgamations between entirely unrelated companies are placed. This meant that, mergers between group companies, and subsidiaries have to also conform to the normal procedure.
However, under the New Act, Section 233 allows mergers between two small companies and holding companies and their wholly owned subsidiaries may not have to go through the normal procedure. Mergers/amalgamations may be completed, if the official liquidator and the members approve, and if sanctioned by the Central Government, without having to wait for the order of the NCLT confirming the merger/amalgamation. This leeway helps cut costs involved in complying with the procedures, saves time and simplifies the procedure of mergers between two small companies or wholly owned subsidiaries and their parent companies.
Under the Old Act, no takeover can be a part of any Compromise or Arrangement involving a merger or amalgamation. But, under the New Act, a scheme of compromise or arrangement involving a merger/amalgamation may include a takeover offer. Thus, the Central Government is to promulgate rules to govern the takeover offers that may be announced as a part of a merger/amalgamation or change the Takeover Code to suitably govern the takeover offers that may be made under this section.
It appears that the New Act can help deal with the challenges and complexities that the current procedures faces in relation to procedures that were contemplated under the Old Act. The New Act has incorporated various provisions to tackle the problems actually faced in the process of mergers, by taking into consideration the practical aspects of the process. It is an attempt to fine tune the process by making it more efficient and in-turn effective. The New Act no doubt has some ambiguities attached to it, which would need to be sorted out in order to reduce any complexity in the process. It would need to reduce reliance on rules to be specified later and also ameliorate provisions that contravene other legislations.
[ The author is a Senior Associate, Corporate Practice, Lakshmikumaran & Sridharan, Hyderabad ]