- According to Companies Act, 2013 (“COMPANIES ACT 2013”) a ‘merger’ is a combination of two or more entities into one; the desired effect being not just the accumulation of assets and liabilities of the distinct entities, but organization of such entity into one business.
- The possible objectives of mergers are manifold - economies of scale, acquisition of technologies, access to sectors / markets etc.
- Generally, in a merger, the merging entities would cease to be in existence and would merge into a single surviving entity.
- The INCOME TAX ACT, 1961 does however defines the analogous term ‘amalgamation’: the merger of one or more companies with another company, or the merger of two or more companies to form one company. The INCOME TAX ACT, 1961 goes on to specify certain other conditions that must be satisfied for an ‘amalgamation’ to benefit from beneficial tax treatment.
Our laws envisage mergers can occur in more than one way-
- In a situation in which the assets and liabilities of a company (merging company) are vested in another company (the merged company). The merging company loses its identity and its shareholders become shareholders of the merged company.
- Another method could be, when the assets and liabilities of two or more companies (merging companies) become vested in another new company (merged company). The merging companies lose their identity. The shareholders of the merging companies become shareholders of the merged company.
1. Horizontal Mergers
- Also referred to as a ‘horizontal integration’, this kind of merger takes place between entities engaged in competing businesses which are at the same stage of the industrial process.
- For example, if a company producing Luxary Cars merges with another company in the industry that also produces luxary cars, this would be termed as horizontal merger. Recently Vodafone merged with Idea.
- A horizontal merger takes a company a step closer towards monopoly by eliminating a competitor and establishing a stronger presence in the market. The other benefits of this form of merger are the advantages of economies of scale and economies of scope by encouraging cost efficiency.
2. Vertical Mergers
- Vertical mergers refer to the combination of two entities at different stages of the industrial or production process.
- For example, the merger of a company engaged in the construction business with a company engaged in production of brick or steel would lead to vertical integration, since the industry is same, i.e. Real Estate but the stage of production is different: one firm is works in territory sector, while the other works in secondary sector.
- Companies stand to gain on account of lower transaction costs and synchronization of demand and supply. Moreover, vertical integration helps a company move towards greater independence and selfsufficiency. It secure supply of essential goods, and avoid disruption in supply.
3. Congeneric Mergers
- These are mergers between entities engaged in the same general industry and somewhat interrelated, but having no common customer-supplier relationship.
- For Example - A company that produces DVDs mergers with a company that produces DVD players, this would be termed as concentric merger, since DVD players and DVDs are complements products, which are usually purchased together. These are usually undertaken to facilitate consumers, since it would be easier to sell these products together. Also, this would help the company diversify, hence higher profits.
- A company uses this type of merger in order to use the resulting ability to use the same sales and distribution channels to reach the customers of both businesses.
4. Conglomerate Mergers
A conglomerate merger is a merger between two entities in unrelated industries. The principal reason for a conglomerate merger is utilization of financial resources, enlargement of debt capacity, and increase in the value of outstanding shares by increased leverage and earnings per share, and by lowering the average cost of capital. A merger with a diverse business also helps the company to foray into varied businesses without having to incur large start-up costs normally associated with a new business.
5. Cash Merger
In a ‘cash merger’, also known as a ‘cash-out merger’, the shareholders of one entity receives cash instead of shares in the merged entity. This is effectively an exit for the cashed out shareholders.
6. Triangular Merger
A triangular merger is often resorted to, for regulatory and tax reasons. As the name suggests, it is a tripartite arrangement in which the target merges with a subsidiary of the acquirer. Based on which entity is the survivor after such merger, a triangular merger may be forward (when the target merges into the subsidiary and the subsidiary survives), or reverse (when the subsidiary merges into the target and the target survives).
- An acquisition is a situation whereby one company purchases most or all of another company's shares in order to take control.
- An acquisition occurs when a buying company obtains more than 50% ownership in a target company.
- As part of the exchange, the acquiring company often purchases the target company's stock and other assets, which allows the acquiring company to make decisions regarding the newly acquired assets without the approval of the target company’s shareholders.
The Income Tax Act, 1961, stipulates two pre-requisites for any amalgamation through which the amalgamated company seeks to avail the benefits of set-off / carry forward of losses and unabsorbed depreciation of the amalgamating company against its future profits under Section 72-A, namely,
i. all the property and liabilities of the amalgamated company / companies immediately before amalgamation should vest with / become the liabilities of the amalgamated company and
ii. the shareholders other than the amalgamated company / its subsidiary(ies) holding at least 90 percent value of shares / voting power in the amalgamating company should become shareholders of the amalgamated company by virtue of amalgamation.
A hostile takeover occurs when one corporation, the acquiring corporation, attempts to take over another corporation, the target corporation, without the agreement of the target corporation’s board of directors.
A friendly takeover occurs when one corporation acquires another with both boards of directors approving the transaction.
- Another form of acquisitions may be by way of demerger. A demerger is the opposite of a merger, involving the splitting up of one entity into two or more entities.
- An entity which has more than one business, may decide to seperate one of its businesses into a new entity. The shareholders of the original entity would generally receive shares of the new entity.
- If one of the businesses of a company is financially sick and the other business is financially sound, the sick business may be demerged from the company.
- This facilitates the restructuring or sale of the sick business, without affecting the assets of the healthy business. Conversely, a demerger may also be undertaken for moving a lucrative business into a separate entity. A demerger may be completed through a court process under the Merger Provisions or contractually by way of a business transfer agreement.
- A joint venture is the coming together of two or more businesses for a specific purpose, which may or may not be for a limited duration.
- The purpose of the joint venture may be for the entry of the joint venture parties into a new business, or the entry into a new market, which requires the specific skills, expertise or the investment of each of the joint venture parties.
- The execution of a joint venture agreement setting out the rights and obligations of each of the parties is a norm for most joint ventures.
- The joint venture parties may also incorporate a new company which will engage in the proposed business. In such a case, the bye laws of the joint venture company would incorporate the agreement between the joint venture parties.
Sale of Majority of Assets
In a merger / acquisition of one by another company, one company buys out the majority of assets of the other company. The control is transferred to the acquirer after approval of majority of shareholders of the target company. The acquirer usually only takeover liabilities that are attached to the purchased assets, which means that other liabilities are retained by the target company and paid off by them through their own means. Acquirer may, at times, decides to take up liabilities too. Shareholders have the same rights after the merger, since they are entitles to a divided, which is usually higher after the merger.
Stock for Assets
In this type of transaction, one entity buys outs the other one for a certain number of shares. The target company dissolves, passing all its assets to the acquirer. The control is established after approval from acquirer Company’s management. For the target company, vote of approval from majority shareholders is required for the dissolution. All the liabilities attached to the assets of Target Company are passed on to the acquirer company, while all other liabilities are retained by the target company unless acquirer volunteers to take them on as well. Shareholders after the merger are likely to receive a higher dividend.
Stock for Stock
Stock for stock transaction involves two companies, where one entity buys shares in another company from its shareholders. The target’s company’s assets are passed on to the acquirer, while the target company is run as a subsidiary of the acquirer. A new stock has to be created for this kind of merger, which means that the majority of the acquirer company’s shareholders are required to approval the merger. The shareholders of the target company are able to individually decide whether they want to participate or not. The merger entails limited liabilities for the acquirer in terms of target’s company liabilities. If shareholders decide not to sell their shares, they might be frozen out.
This kind of transaction requires the presence of two companies. One company purchased the other, or alternatively both dissolve and become a new company. In this case, both companies require approval from majority of shareholders. The company or the acquirer takes up all rights and all liabilities, some of which are unknown to both corporations. Shareholders retain the right to receive dividends, in addition to retaining dissenter’s appraisal rights. This is the most common sort of merger, which basically means that one company is absorbed into the other one. Assets are taken over, while liabilities are cleared at the time of the merger or takeover the acquirer.
Dissolution involves only one corporation, since the company is being dissolved. If the company wants to dissolve voluntarily, it needs the majority vote by shareholders in addition to filing with the state. At times, courts order involuntary dissolution in certain cases such as a deadlock situation. The control is usually held by majority vote by shareholders. In the case of dissolution, all liabilities must be cleared, although any future liability is absolved. Dissolution usually means that the company does not exist anymore, which means its operations are wrapped up during the process dissolution.
In this case, the majority shareholders attempt to buyout the shares of the minority of shareholder. Only one company is involved, and control is defined by the majority through board approval. The liabilities in this case remain with the company as there is no other party involved. This is mostly done to reaffirm control by the majority shareholders over the operations of the company, since they face no obstacles once the deal goes through.
This merger is similar to stock for stock, the only difference being the shareholders are offered money in exchange for their shares, after which the target company is dissolved, merged or run as a subsidiary. Management approval is needed since the acquirer usually borrows to finance the merger. While individual shareholders of Target Company may sell at their will, although a controlling percentage of target company’s shared is required for this mergers. After the purchase of shares, the acquirer has limited liability in terms of target’s company financial obligations. After the merger, shareholders can expect a higher dividend, while shareholders of target have no right, since they are no hold shares.
LAWS FOR MERGERS AND AMALGAMATIONS -
Sections 390 to 394 of the COMPANIES ACT1956 (the “Merger Provisions”) and Section 230 to 234 of COMPANIES ACT2013 govern mergers and schemes of arrangements between a company, its shareholders and/or its creditors.
A. Procedure under the Merger Provisions –
Each of the companies proposing to merge with the other(s) must make an application to the Company Court5 having jurisdiction over such company for calling meetings of its respective shareholders and/or creditors. The Court may then order a meeting of the creditors/shareholders of the company. If the majority in number representing 3/4th in value of the creditors and shareholders present and voting at such meeting agrees to the merger, then the merger, if sanctioned by the Court, is binding on all creditors/shareholders of the company.
B. Applicability of Merger Provisions to foreign companies-
Sections 230 to 234 of COMPANIES ACT 2013 recognize and permit a merger/reconstruction where a foreign company merges into an Indian company. The provisions of the Companies Act, 2013 (Act) governing inbound and outbound mergers, amalgamations or arrangements between Indian companies and foreign companies (Cross Border Mergers) were notified by the Ministry of Corporate Affairs on April 13th, 2017. Subsequently, on April 26th, 2017, the Reserve Bank of India (RBI) issued draft regulations to govern Cross Border Mergers (Draft RBI Regulation).
A. Takeover Code –
The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (the “Takeover Code”) restricts and regulates the acquisition of shares, voting rights and control in listed companies. Acquisition of shares or voting rights of a listed company, entitling the acquirer to exercise 25% or more of the voting rights in the target company or acquisition of control, obligates the acquirer to make an offer to the remaining shareholders of the target company. The offer must be to further acquire at least 26% of the voting capital of the company.
B. Listing Regulations-
The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“Listing Regulations”) were notified and has been effective from December 1, 2015. The Listing Regulations provide for a comprehensive framework governing various types of listed securities under the Listing Regulations, SEBI has altered the conditions for the listed companies which they have to follow in the case if a Court approved scheme of merger/ amalgamation/reconstruction has been altered.
Filing of scheme with stock exchange
Listed companies have to file the scheme with stock exchange for ‘observation letter’ or ‘no-objection’.
Compliance with securities law
Listed companies shall ensure that the scheme does violate or override or limit the provisions of any securities law/stock exchange requirements.
Pre and post-merger shareholding
The listed entity shall have to disclose the details with the stock exchange as per the disclosure requirements of stock exchange.
There is no corresponding provision under the Listing Regulation.
Corporate actions pursuant to merger
Listed companies have to disclose to Stock Exchange of all the events which will have bearing on the performance/operations of the listed entity as well as price sensitive information.
LAWS FOR ACQUISITIONS -
A. Transferability of shares-
- With the introduction of Companies Act 2013, share transfer restrictions for public companies have been granted statutory sanction. The articles of association may prescribe certain procedures relating to transfer of shares that must be adhered to in order to affect a transfer of shares.
- While acquiring shares of a private company, The acquirer has to ensure that the non-selling shareholders (if any) waive any rights they may have under the articles of association.
- Any transfer of shares, whether of a private company or a public company, must comply with the procedure for transfer under its articles of association.
B. Squeeze Out Provisions –
Section 395 provides that if a scheme or contract involving the transfer of shares or a class of shares in a company (the ‘transferor company’) to another company (the ‘transferee company’) is approved by the holders of at least 9/10ths (in value) of the shares whose transfer is involved, the transferee company may give notice to the dissenting shareholders that it desires to acquire the shares held by them. Once this notice is issued, the transferee company is not only entitled, but also bound, to acquire such shares.
C. New share issuance-
Section 42, 62 of COMPANIES ACT2013 and Rule 13 of the Companies (Share Capital and Debenture) Rules 2014 prescribe the requirements for any new issuance of shares on a preferential basis (i.e. any issuance that is not a rights or bonus issue to existing shareholders) by an unlisted company.
D. Limits on acquirer-
Section 186 of COMPANIES ACT2013 provides for certain limits on inter-corporate loans and investments. An acquirer that is an Indian company might acquire by way of subscription, purchase or otherwise, the securities of any other body corporate upto
(i) 60% of the acquirer’s paid up share capital and free reserves and securities premium, or
(ii) 100% of its free reserves and securities premium account, whichever is higher.
E. Asset/ Business Purchase –
As against a share acquisition, the acquirer may also decide to acquire the business of the target which could typically entail acquisitions of all or specific assets and liabilities of the business for a consideration. Therefore, depending upon the commercial objective and considerations, an acquirer may opt for
(i) Asset purchase whereby one company purchases all of part of the assets of the other company; or
(ii) Slump sale whereby one company acquires the ‘business undertaking’ of the other company as a going concern i.e. acquiring all assets and liabilities of such business.
A. Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 –
If the acquisition of an Indian listed company involves the issue of new equity shares or securities convertible into equity shares (“Specified Securities”) by the target to the acquirer, the provisions of Chapter VII (“Preferential Allotment Regulations”) contained in ICDR Regulations will apply.
B. Takeover Code –
The key objectives of the Takeover Code are to provide the shareholders of a listed company with adequate information about an impending change in control of the company or substantial acquisition by an acquirer, and provide them with an exit option in case they do not wish to retain their shareholding in the company.
An acquirer who holds between 25% and 75% of the shareholding/ voting rights in a company is permitted to voluntarily make a public announcement of an open offer for acquiring additional shares of the company subject to their aggregate shareholding after completion of the open offer not exceeding 75%.