Mergers and amalgamation is a corporate restructuring mechanism that plays a vital role in the expansion and diversification of the companies and their businesses. A merger in layman terms means a combination of companies.
The term merger has not been defined under the Companies Act, 2013 (“CA, 2013”) but in commercial terms, a merger is a combination of two or more existing companies which merge their identities to form a different entity which can either be one of the existing companies or may not be the existing company but may form a separate new entity altogether.
Section 233 of the CA, 2013 deals with the concept of a fast track merger of two or more small companies or merger of a holding company and its wholly-owned subsidiary or such other class of companies as may be prescribed. The introduction of this section under the CA, 2013 has simplified the procedure of the approval and registration of a scheme of the merger to a great extent. This section has relaxed the intervention of the National Company Law Tribunal (“NCLT”) and courts in the procedure of registration and approval of a fast track merger.
The transferor and the transferee company shall firstly and most importantly, finalize a scheme of merger/amalgamation.
1. Issuance of Notice:
Upon approval of the scheme of the merger by the companies, a notice of the proposed scheme is issued to invite suggestions or objections to the jurisdictional Registrar of Companies (“ROC”), the Official Liquidator (“OL"), income tax department and to the persons who are affected by the proposed scheme of the merger (for example any sectoral regulators for any companies), in Form CAA-9.
2. Declaration of Solvency by the Companies:
Each of the companies is required to file a declaration of solvency in Form CAA-10 with the jurisdictional ROC. The Form CAA-10 shall be filed with the ROC in e-Form GNL-1 and shall be accompanied by an auditor’s report on the statement of assets and liabilities. The companies are required to ensure that such declaration of solvency of the companies is not negative and there should be a positive surplus.
3. Notice of Meeting:
The companies shall issue a notice for convening a general meeting of all its members and creditors. The notice being issued shall be accompanied by a copy of the scheme of merger, an explanatory statement providing details about the merger, a copy of the latest audited financials, declaration of solvency in Form CAA-10 and other relevant information if any.
4. Approval of the shareholders and the creditors:
The objections and the suggestions to the scheme shall be considered in the meeting convened by the members or class of members of the companies and the scheme is said to be approved when the members holding at least 90% of the total number of shares of the company have consented and agreed to the scheme of merger. A meeting of the creditors or the class of creditors shall be convened and the scheme is said to be approved by the creditors or class of creditors when it has been approved by a majority holding 9/10th value of the creditors.
For the approval of the scheme of merger/amalgamation under Section 233 of the CA, 2013, the consent of the members holding at least 90% of the total number of shares and consent of 9/10th value of creditors or class of creditors shall be required. With respect to the creditors or class of creditors, consent in writing from the creditors or class of creditors is considered to suffice with respect to such approval of the scheme of merger/amalgamation and if the consent by way of no-objection of the required majority is obtained then the meeting of creditors need not be convened.
Section 233, however, does not provide for the obtainment of consents from the shareholders in writing and therefore, the meeting of the shareholders is required to be held for all the companies involved in the scheme of merger, primary for consideration of the objections/suggestions to the scheme raised by the regulatory bodies/affected persons to whom notice is issued in Form CAA-9. Section 233 of the CA, 2013 does not clearly mention as to whether 90% of the total number of shares is to be considered for approval or should it be 90% of those shareholders who are present and voting at the meeting. In this regard, it may be noted that Section 391 of the erstwhile Companies Act, 1956, clearly laid down that the 3/4th majority shall be considered with regard to the creditors or class of creditors or members or class of members, who are present and voting. However, the term ‘present and voting’ is not mentioned in Section 233 of the CA, 2013 and this has led to different interpretations by different offices of the RD across the country as some RDs have taken the interpretation as the consent of ‘90% of the shareholders present and voting’ while there is other interpretation according to which it should be ‘90% of the total number of shares of a company’.
In our view, the consent should always be construed with respect to the shareholders for whoever is present and voting as otherwise this Section 233 will become very difficult to be complied with by listed companies with very large number of shareholders.
For convening the meeting of the creditors, the term 'indicated in a meeting' suggests that if the approval of the creditors by way of a meeting is sought for, then approval by the requisite number and majority of the creditors present and voting in a meeting should suffice. However, some RDs have taken the view that if the creditors present and voting are substantially less than the total value of all the creditors of a company, then the same is being referred to the NCLT on the pretext the same not being in the public interest and in the interest of the creditors.
In our practical experience, the RD generally also looks into and reviews the historical compliances of the companies and in the event of any non-compliances, they require the companies to compound the same. The RD also requires the companies to provide certain additional declarations such as the Foreign Exchange Management Act compliance declaration (if there are foreign shareholders), employee continuity declaration, etc.
5. Post Approval:
Upon the approval of the scheme of merger in the meetings, the transferee company shall file a copy of the approved scheme with the Regional Director (“RD”), ROC and the OL, within 7 days of the conclusion of the meeting of the members or class of members and creditors or class of creditors. The scheme shall be accompanied by the result of the meetings in Form CAA-11. The copy of the scheme shall be filed with the ROC in Form GNL-1 and shall be filed with the OL through hand delivery or registered post or speed post. Upon the receipt of the scheme, and in the event of any objections or suggestions, the ROC or the OL shall intimate the same to the RD, within 30 days.
If the ROC or the OL has not raised any objections, the scheme shall be registered and confirmation of the scheme in Form CAA-12 shall be issued by the RD. However, in the event of such objections or suggestions being raised and the RD is of the opinion that the scheme is against public interest and the interest of the creditors, in such a case, the RD shall make an application before the NCLT within 60 days from the date of receipt of the scheme, expressing the objections. The NCLT shall based on the objections, decide as to whether the scheme shall be considered and approved according to Section 232, i.e., through NCLT route or may pass an order confirming the scheme, as the NCLT may deem fit. The transferee company shall file the confirmation within 30 days from the date of receipt of the order of confirmation in Form INC-128, along with the applicable fees, with the jurisdictional ROC.
7. Post Registration of Scheme:
The registration of the scheme shall be followed by the dissolution of the transferor company without the procedure of winding up; transfer of all the property or the liabilities of the transferor company to the transferee company; charges on the property of the transferor company shall be enforceable as charges on the property of the transferee company; any or all the legal proceedings initiated by the transferor company shall be carried on by the transferee company and all the other additional liability of the transferor company shall become the liability of the transferee company.
The framework governing the corporate restructuring of companies has been simplified and has been made facilitative with the introduction of the concept of fast track mergers and is a welcome move. The erstwhile legal framework, with respect to mergers and acquisitions, required the intervention of courts and was a long drawn and expensive procedure. However, the inability of the regulators to adhere to the timeline of 30 days prescribed under Section 233 of CA, 2013 and lack of consensus, different interpretations of Section 233 by different RDs may make the fast track mergers unattractive as due to which the time taken for a merger under fast track route is at times similar to the time taken by NCLTs under Section 232 of the CA, 2013.
Authors: Anita Dugar, Senior Associate; Kriti Sanghi, Associate.
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Updated as on March 30, 2020.
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