03 一月 2017

Mergers & Acquisitions provisions notified in Companies Act

by Kanika Shukla Vidhi Aggarwal

The Companies Act, 2013 (Companies Act) is one of the landmark legislations enacted in recent years to bring forth transparency, ease of doing business and protecting rights of minority shareholders. The Companies Act was, in many ways, perceived as a reaction to the Satyam scam which uncovered several aspects of corporate fraud that inter alia diminished minority shareholder rights. A series of amendments, clarifications and release of rules and procedures have rendered the Companies Act as an effective corporate governance mechanism for regulators as well as shareholders. The Ministry of Corporate Affairs (MCA) has brought in several amendments and notifications to make the Companies Act relevant to changing times and to make it consistent with other applicable laws.

The 90 sections notified by the MCA on December 7, 2016 made effective as on December 15, 2016, include provisions on “Compromises, Arrangements and Amalgamations” provided under Chapter XV (Sections 230-240), and provisions on “Winding Up” under Chapter XX (Sections 270-288, 290-303, 324, 326-365) and Chapter XXI (Proviso to Section 370, Sections 372-373, 375-378) of the Companies Act. Prior to December 15, 2016, the relevant provisions under the Companies Act, 1956 (1956 Act) governed mergers and amalgamations in India. Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, effective from 15-12-2016 have also been notified by the MCA.

Further, Section 434(1)(c) of the Companies Act read with Companies (Transfer of Pending Proceedings) Rules, 2016 and Companies (Removal of Difficulties) Fourth Order, 2016 have also been notified on December 7, 2016 with effect from December 15, 2016. Section 434(1)(c) provides for transfer of all proceedings under the 1956 Act, pending before any District Court or High Court to the relevant bench of the National Company Law Tribunal (NCLT). The transfer of proceedings to NCLT will aid in ushering the regime of faster resolution of corporate disputes, thereby facilitating ease of business besides simultaneously reducing the burden on courts. Certain proceedings, inter alia, where orders have been reserved by the High Courts have not been transferred to the NCLT.

The notified provisions are briefly explained below:

1. Appointment of a Company Liquidator:

In the event of compulsory winding up, a Company Liquidator would be appointed by the NCLT whereas in case of voluntary winding up, a Company Liquidator would be appointed by the company or its creditors.

2. Incorporation by fraudulent means:

In the event a company has been incorporated by fraudulent means, the NCLT, upon receiving an application to that effect, can remove the name of such company from the register of companies or pass an order for winding up of such a company.

3. Disclosures:

If the proposed scheme of arrangement or compromise includes reduction of share capital of the company or a Corporate Debt Restructuring (CDR) scheme consented to by not less than 75% of the secured creditors in value, it has to be disclosed by the entity making such an application to the NCLT. Further, a notice to schedule a meeting of creditors or members, as the case may be, is also required to be sent to the Central Government, income-tax authorities, Reserve Bank of India, Securities and Exchange Board of India (SEBI), Registrar of Companies (RoC), respective stock exchanges, Official Liquidator, Competition Commission of India and any other authority likely to be affected by such an arrangement or compromise. The authorities mentioned hereinabove can make representations within a period of thirty days from receipt of such notice.

4. Valuation Report:

The CDR scheme should contain a valuation report prepared by a registered valuer in respect of the shares, property and assets of the company. A notice of the meeting scheduled should be enclosed with the valuation report.

5. Publication:

The notice of such meeting of creditors or members, as the case may be, along with other relevant documents is required to be published on the website of the company as well as in newspapers. Such documentation is required to be sent to SEBI and the respective stock exchange in case of a listed company.

6. Buy-back of securities:

For a compromise or arrangement with respect to buy-back of securities to be approved by the NCLT, such buy-back should be in accordance with Section 68 of the Companies Act.

7. Objection to the scheme of compromise or arrangement:

In order to expedite and protect the process of compromise / arrangement from frivolous objections, the Companies Act envisages that an objection will only be considered when it is raised by individuals holding at least 10% of the shareholding or by persons having outstanding debt amounting to at least 5% of the total outstanding debt in the company.

8. Fast-track Merger:

In order to streamline the process of merger between two or more small companies or between a holding company and its wholly-owned subsidiary or any other prescribed company, the scheme would need to be approved by members holding at least 90% of shares or by creditors representing nine-tenths in value. This does not require the NCLT’s approval. However, notice of such a scheme needs to be issued to the RoC and the Official Liquidators.

9. Merger of a listed transferor company and an unlisted transferee company:

Such a merger will not compulsorily cause the unlisted company to become listed. In the event that the shareholders of the listed company want to opt out of the unlisted transferee company, they will be paid the value of the shares held by them based on a pre-determined price formula or on valuation.

10. Demerger:

Chapter XV of the Companies Act provides for the schemes of compromise, arrangement, amalgamation and demerger. Demerger or division of companies essentially amounts to division of the undertaking, property and liabilities of a company for transfer to two or more companies.

11. Cancellation of shares:

A transferee company shall not, as a result of compromise or arrangement, hold any shares in its own name or in any trust - whether on its behalf or on behalf of any of its subsidiary or associate companies. In the event of non-compliance of this provision, the shares held by the transferee company shall stand cancelled.

12. Protection of minority shareholders’ rights:

An offer for purchasing the shares of minority shareholders (at a price determined by a registered valuer) has to be made by an acquirer or any person or group of persons who become a registered holder of 90% or more of the issued equity share capital of the company by virtue of an amalgamation.

The notified provisions of the Companies Act strive to simplify and streamline the process of compromises, arrangements and amalgamations. Simultaneously, they seek to implement the principles of good corporate governance by providing for transparency and accountability through additional disclosures in the proposed scheme, protection of minority shareholders, the role of NCLT as a forum for resolution of corporate disputes etc. to name a few. The notified provisions ensure protection of shareholders’ rights while also enabling smaller companies to conduct their business with ease.

[The authors are Senior Associate and Associate, respectively in Corporate Practice, Lakshmikumaran & Sridharan, Mumbai]

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