The
Companies Bill, 2012 has finally become the Companies Act, 2013. See the
official Gazette Notification here. Further,
we already had an overview of the Companies Bill, 2012 here.
But it must be noted that all the substantive sections are yet to be notified
in due course of time by the Central Government. Only section 1 of the
Act has come into effect, and section 1(3) provides:-
This section
shall come into force at one and the remaining provisions of this Act shall
come into force on such date as the Central Government may, by notification in
the Official Gazette, appoint and different dates may be appointed for
different provisions of this Act and any reference in any provision to the
commencement of the Act shall be construed as a reference to the coming into
force of that provision.
Thus, the substantive sections would be notified by the Government later. Now, I would be delineating,
in this post, the key provisions relating to Mergers & Acquisitions in the
new Companies Act, 2013. The new Companies Act, 2013 has sought to streamline
and make M&A more smooth and transparent. The newly added provisions have
made it easier for companies to implement ‘Schemes of Arrangement’
(mergers & acquisitions (M&A), de-merger, corporate debt restructuring
etc) and at the same time impose checks & balances to prevent abuse of
these provisions.
I. Extinguishment of holding of ‘Treasury Stocks’
Before
moving on, let’s first understand what exactly is Treasury Stock? Treasury shares
are those that a company holds in itself and could be created as a result of
buy-backs from the open market or mergers (M&A). Since companies cannot
hold their own stock, they hold it through a trust or Special Purpose Entity
(SPE). Now, this could be better understood through an illustration. In case of a merger and amalgamation it is
created on account of the ‘cross holding’ between the acquiring company and the
target Company. For example Company X and Y are going to merge such that one
company i.e. Company Y would seize to exist and all the shareholders of Y would
be shareholders of Company X. Company X already has shares in the erstwhile
Company Y before the merger took place. While implementing the scheme of
amalgamation if Company X decides to use a method of share swap by which Company
X will be issuing its shares to buy the shares of Company Y. Now, what does
Company X do about the shares it held in erstwhile Company Y which has become
Company X? Company X cannot hold shares in itself. Now, in such a scenario, the
Company X may transfer the shares to a special purpose entity (SPE), usually a
Trust. Therefore, by this method a company is able to hold its own shares. This
provision has been provided in the proviso of the Section 77 of the OLD
Companies Act, 1956. The problem which arises here is that the shares which are being held by the trust has the voting rights and ends up
increasing the control of the promoters’. This further dilutes the interest of the
minority and other shareholders. Also, these shares held by the trust are often sold and the
proceeds are paid to the beneficiary i.e. the Company.
Now, the new Companies Act, 2013 has
sought to put an end to this practice. Any cross holding of shares stands
cancelled. This provision has been provided in Section 232 of the new act.
II.
Objection to the Scheme of Arrangement (Merger, de-merger,
acquisition etc)
Currently,
under the Companies Act, 1956, any shareholder, creditor or any ‘interested
party’ may object to the scheme of the arrangement before a Court if he thinks
that that the proposed scheme is adverse to his interests.
Now, the Companies Act, 2013 has sought
to put a threshold for making an objection to the scheme of arrangement. The
new act puts an arduous requirement that person holding at-least 10 % shares or
at least 5% of the total debt outstanding to the company can only object to the
proposed scheme. While, it is understandable that the chief aim of this
provision is to put an end to the frivolous litigation but, at the same time,
the interests of the minority shareholders and creditors are being undermined.
The Central Government definitely needs to re-consider this provision.
However, there has been some relief
given to the minority shareholders. The minority shareholders have been given
an exit option. But then again the exit option is provided only on the direction
and mechanism as devised by the NCLT and not at the behest of the minority
shareholder. Thus, these shareholders can exit if they are not comfortable with
the proposed scheme i.e. M&A, debt restructuring, de-merger etc.
III.
Cross Border Mergers & Short-Form Mergers
Currently,
under the Companies Act, 1956, while foreign companies can be amalgamated into
an Indian company, the reverse is not permissible i.e. an Indian company cannot
merge/amalgamate with a foreign company. The new Companies Act, 2013 envisages removing
this barrier. It allows for merger both ways. However, it is possible only
with companies in jurisdictions with which reciprocity has been established, as
the Government may notify. This would definitely provide additional
stimulus for cross-border transactions.
Secondly, certain short form of
mergers are been given procedural relaxation under the new act. Under the
old Companies Act, 1956 any merger between group companies or between a parent
company and subsidiary would attract the compliance with all the procedures
listed in Section 391 to Section 394. (These provisions relates to oversight of
High Court, disclosure norms and other things).
Now, the new Companies Act, 2013 allows
certain kind of mergers to be out-of-court. These short forms of mergers
include mergers between- (a) two or more small companies (b) parent and wholly
owned subsidiary company. Small Company as defined in the new act is-
(i)
paid-up share capital of which does not exceed 50 lakh rupees or such higher
amount as may be prescribed which shall not be more than 5 crore rupees; or
(ii)
Turnover of which as per its last P&L account does not exceed 2 crore
rupees or such higher amount as may be prescribed which shall not be more than
20 crore rupees
Therefore, in these forms of
mergers, no prior approval of the NCLT is required. But the benefit of this
fast track merger/demerger is not available to small public companies
where there is merger/demerger between two or more small companies.( Benefit only applicable to private small companies). However, in case of
merger/demerger between a parent company and its wholly owned subsidiary, these
provisions are applicable for both public and private companies.
IV.
Establishment of NCLT (National Company Law
Tribunal)
Under
the old Companies Act, schemes of arrangement have to be mandatorily approved
by the High Court which has jurisdiction over the concerned companies involved.
This is done to ensure an effective oversight of the scheme and to bring in
fairness but, at the same time, there have been serious concerns regarding huge
delays in approval. For instance, the average time taken for a scheme of
arrangement to be implemented from start to finish is no less than 6 months,
and in numerous cases the schemes of arrangement have taken a couple of years
to be approved by the High Court. Thus, the new provision which grants
jurisdiction to the Tribunal (NCLT) on matters pertaining to oversight of
schemes of arrangement is a very commendable step. This would ensure that a
specialized body dealing with cases under company and related would lead to
greater efficiency, fairness and apt regulation & oversight.
V.
Reverse Mergers
The
Companies Bill appears to plug possible loopholes that may allow backdoor
listing of companies. A reverse merger of a listed company into an unlisted
company may not automatically result in a listing of the resulting entity,
unless it goes through the process of a listing through a public offering.
Moreover, in case of such a reverse merger, the shareholders of the listed
transferor company must be provided an exit at a fair value to compensate for
the loss of liquidity.[1]
VI.
Provisions for streamlining Accounting &
Valuation
Every
scheme of arrangement has huge implications on the accounting and valuation
process of the concerned companies. Now, the new companies act, 2013 has
specific provisions for streamlining the accounting and valuation procedure.
The new act stipulates that the accounting must conform and comply with the
accounting standards. Such compliance with accounting standards has already
been mandated under the listing agreement,
but, it is only mandatory for the listed companies. Now, this new provision in
the Companies Act, 2013 would even require an unlisted company to comply with the
accounting standard norms. Further, the report of the expert valuer must be
disclosed to the shareholders. The chief reason behind incorporating this
provision is that most of the litigation in M&A is primarily concerned with
the valuation and consequently the share exchange ratio. (Share exchange ratio
is the relative number of new shares given to the existing shareholders of a
company that has been acquired or merged with another[2]).
Lastly,
the notice of the scheme of the arrangement must to notified to all the
regulatory authorities concerned like SEBI, Income Tax Department, RBI,
Competition Commission of India (CCI), stock exchanges(as applicable) in order
to ensure that the proposed scheme is complaint with all the regulations and
guidelines as framed and approved by these aforementioned regulations in addition
to the provision of the Companies Act, 2013, NCLT, shareholders, creditors,
etc.
TO
VIEW THE COMPANIES ACT, 2013-Please Click HERE.
I
can also be contacted at- rishabh.a.09@gmail.com
[1]
Available at http://indiacorplaw.blogspot.sg/2011/12/companies-bill-2007-amalgamation-and.html,
last visited 12/09/2013 at 12:26 AM
[2]
Available at http://www.investopedia.com/terms/e/exchangeratio.asp,
last visited 12/09/2013 at 12:45 AM
thanks... that was very helpful :)
ReplyDeleteGreat article :)
ReplyDeleteUseful article.
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