Ishita Gupta, B.B.A.,LL.B (Hons) from JIMS SCHOOL OF LAW, GREATER NOIDA, GGSIP University.
INTRODUCTION ON MERGER AND ACQUISITION (M&A)
Until 1988, in India, the concept of merger and acquisition never gained importance as during that period a very small percentage of businesses opted to come together as one with a friendly negotiable deal. The MRTP Act, 1969 used to regularize those key factors that contributed to the successful conclusion of a merger by following a pressurized and burdensome procedure to get approval for the M&A.
The consolidation of two or more companies is primarily known as merger and acquisition. However, from a technical perspective, there is a thin line of difference between the terms merger and acquisition. The combination of two companies into one company is regarded as a merger while the acquisition is the taking over of a company by another company.
THE PROCEDURE OF M&A U/S 230-232
For a successful conclusion of the contract of M&A in India, there is a long court-driven process. Despite that the NCLT plays a major role in this process, the combining or the acquiring companies have to deal with a lot of paperwork and legal documentation for initiating M&A.
Various NCLT forms are supposed to be filled for a legal M&A in India. The following is the procedure u/s 230-232 of the CA (Dr. N.V. Paranjape, Company Law, Company law agency (4th edn.), Pg. 427) that the concerned companies are required to initiate for the contract of M&A in India;
For initiating M&A, the company that wants to merge or acquire another company has to conduct a board meeting for consensually deciding upon the decision to merge or acquire with another company.
APPLICATION TO NCLT
The company after conducting the BM can apply via NCLT Form No. 1 to the National Company Law Tribunal of the relevant jurisdiction along with various documents attached. A joint application of Merger can also be made to the NCLT if the board of directors of both the companies consents to the same.
In Mohan Exports Ltd. V/s Tarun Overseas Pvt. Ltd, it was held that if two companies fall under the same jurisdiction, then they can proceed with a joint application for M&A.
NOTICE OF MEETING
As per Rule 6 of the compromises, Arrangement and, Amalgamations) Rules, 2016, the notice of the meeting with detailed particulars must be sent by the appointed chairman of the meeting to all the creditors or COC including all the shareholders.
Dawson International Plc v. Coats Patons Plc, Lord Cullen stated that, with regard to the disposal of their shares during the takeover, directors are under a fiduciary duty to the shareholders and to act in the best interest of the shareholders. Cases concerned with the issue of directors’ fiduciary duty during a takeover bid was in question (equity or preferential) as well as the debentures holders of the company, to communicate the decision regarding M&A. this notice must be accompanied by the scheme of the M&A as planned by the company.
The scheme must be further accompanied by the order of the Tribunal mentioning the date of order along with the date, time, and venue of the BM. Further, the scheme must accompanied by the absolute details of the company including its CIN, GLN, Name of the company, date of incorporation, nature of company, company’s registered office, summary of main objective of the MOA of the company, any details regarding change of name or registered office since last five years, details of capital structure of the company, and the name and address of promoters of the company.
The other major particulars that are supposed to be mentioned in the notice of the meeting must include the effect of interests post-M&A on the KMP, directors, promoters, non-promoter members, Depositors, Creditors, Debenture holders, Deposit trustee, debenture trustee, and employees of the company.
Further attachment to the notice includes the latest audit report of the company, a copy of the order of the tribunal, contracts relevant for M&A, a copy of the certificate issued by the auditor to the company, and any such document that the company deems fit to attach with the notice.
The notice of BM must be mandatorily advertised in an English newspaper and in a vernacular newspaper which has an expanded circulation in the country so that a large number of people can notice the major step of the company. A copy of such a notice must also be advertised on the official website of the company for wide notice of the public. Two companies can also provide a joint notice for the same.
NOTICE TO STATUTORY AUTHORITY
As per Rule 8 of the compromises, Arrangement and, Amalgamations Rules, 2016, a notice of M&A is to be sent to the Central Govt., the income tax authority, the RBI, the ROC, the OL, CCI, and other authority that can get affected by M&A of that company. If these mentioned authorities are required to make any representation of the company, then they may approach the NCLT for such representation.
In re: Ucal Fuel Systems Ltd. & Another, it was held that “it was laid down that Section 394A of the Companies Act makes it obligatory on the court to give notice to the Central Government of every application made to it under Section 391 or Section 394 and take into consideration the representation made by the Government before passing any order on the proposed scheme of amalgamation.”
AFFIDAVIT OF SERVICE
As per Rule 12 of the compromises, Arrangement and, Amalgamations Rules, 2016, “The Chairperson appointed for the meeting of the company or other person directed to issue the advertisement and the notices of the meeting shall file an affidavit before the Tribunal not less than seven days before the date fixed for the meeting or the date of the first of the meetings, as the case may be, stating that the directions regarding the issue of notices and the advertisement have been duly complied with.”
After the above-mentioned procedure, the meeting is supposed to be convened in which members, creditors, and classes of creditors are involved. This is an essential step in the procedure to receive the maximum consent of the public for the M&A so that later on no issue arises with such a decision.
In re: W. A. Beard shell &: Co. Pvt. Ltd, it was held that “M&A means within the scope of the decision of the body of shareholders. Such a decision if made by the body unanimously ought not to be lightly interfered with by the court, but these documents not necessarily mean that the consideration of public interest which always figures as a halo ought to be totally ignored.”
ORDER ON PETITION
As per Rule 17 of the compromises, Arrangement and, Amalgamations Rules, 2016, “Where the Tribunal sanctions the compromise or arrangement, the order shall include such directions regarding any matter or such modifications in the compromise or arrangement as the Tribunal may think fit to make for the proper working of the compromise or arrangement.” Hence, the Contract of M&A is highly valued and depends upon the sanctioning of NCLT.
DOCUMENTATION REQUIRED FOR M&A (U/S 230 AND 232)
Section 230 and 232 of the CA, 2013 along with Companies (Compromises, Arrangements or Amalgamation) Rules, 2016 have listed the requirement of various documents that are supposed to be presented before the NCLT for the execution of the contract of M&A. These documents can be mentioned below along with their purposes.
The initial stage of M&A begins with the authorization of the board of the company to proceed with M&A, such authorization is guaranteed by the memorandum or the articles of the company. The next step is to draft a scheme of M&A. This scheme is drafted by the board of directors after calling for a meeting regarding this agenda.
The MCA with reference to the SC judgment Marshall Sons & Co. India Ltd. vs. ITO have highlighted that “every Scheme must necessarily provide for a date w.e.f. which the amalgamation / transfer shall take place. The selected date may precede the date of sanctioning of the Scheme, the date of filing of the carried copy of the order with the ROC etc. The Scheme, however, shall be given effect from the appointed date.”
During the board meeting, various agendas are supposed to be fulfilled such as receiving and approval of the draft scheme by the entire BOD and receiving an authorization of all the directors to proceed to NCLT for filing of an application of M&A.
An application (whether joint or not) is presented to the NCLT for initiating M&A proceedings. It must be noted that if a joint application is presented, then the same must be consented by all the directors of all the concerned companies. This application is filed via form NCLT-1 (Rule 3 of The Companies (Compromises, Arrangements and Amalgamations) Rules, 2016). Further, a notice of admission of the application is filed via form NCLT-2 along with an affidavit via form NCLT-6. This affidavit must be accompanied by the scheme of M&A, along with mandatory disclosures of relevant facts of the company.
After the filing of forms NCLT 1, 2, and 6, the tribunal at its discretion may circulate directions to convene a meeting of shareholders/ creditors of the transferor and the transferee company. (Disclosure of the exchange ratio of shares is a sufficient compliance under the Scheme and the procedure by which it was worked out need not be disclosed in such a statement. Further, the notice (Rule 6, 7, and 8 of The Companies (Compromises, Arrangements and Amalgamations) Rules, 2016) of the meeting is provided to the creditors and the advertisement of the notice of the meeting is circulated in English and a vernacular newspaper under the obligation of form CAA-2. Notice to the concerned statutory authority is circulated via form CAA-3.
The chairman of the meeting is obligated to report the result of the meeting to the tribunal within three days after the conclusion of the meeting via form CAA-4, and there must be a petition filed confirming the compromise or arrangement with the tribunal within seven days of the filing of the report by the chairman via form CAA-5. (Rule 14 and 15 of The Companies (Compromises, Arrangements and Amalgamations) Rules, 2016)
After the filing of all the above documents with the NCLT, for completing the procedure post the completion of the final hearing at the tribunal, the following documents are supposed to be filed before the NCLT:
The concerned companies have to obtain a certified copy of the order u/s 232 r/w section 230 (7) of CA, 2013 (File order to NCLT Rule 20 and 21 of The Companies (Compromises, Arrangements and Amalgamations) Rules, 2016) and file the certified copy that order within 30 days of the date of the receipt of the order via form CAA-7. Further, the statement of compliance in mergers and amalgamation is required to be filed within 210 days from the end of each financial year via form CAA-8 as per the obligation of sec 230(3).
Hence, it can be concluded that for a successful conclusion of the M&A contract in India, there is a long court-driven process. Despite that the NCLT plays a major role in this process, the combining or the acquiring companies have to deal with a lot of paperwork and legal documentation for initiating M&A.