Merger and Acquisition: Decrypted for Beginners
: Prajval Albuquerque
(Originally
published in Latestlaws.com)
With
so many new Mergers and Acquisition taking place the term M&A has
become common in all Law Schools and at the same time it offers a good avenue
of business to all upcoming Corporate Lawyers and at the same time for
simplifying the Corporate Jargon of M&A to all commoners I am just giving
an Introduction to this topic and cannon fodder for further research to
everyone interested in it.
- Merger:
The
term Merger has not been defined in the Companies Act, therefore, it becomes
necessary to understand it general perspectives. The Oxford Advanced Dictionary
defines 'Merger' as :
"the
act of joining two or more organisations or businesses into one". In legal terminology when the Assets and Liabilities of a company are
vested or transferred to another existing company, the company is said to have merged.
- Acquisition:
Acquisition
in simple terms is a process by which a person obtains a particular thing but
when we talk of it with regards to Companies; it is one company or a person or
a group of persons acquiring interest in another company this may be to rescue
the company from financial distress i.e. Bailout, without the company's consent
i.e. Hostile take over. Let me write in terms of Hostile take over or Bailout
for a later post as there are many other times of Acquisitions too. Lastly,
there is a simple type of Acquisition too i.e. where the company permits a
company or a person or a group of persons to acquire a part of it.
There
are primarily two modes of acquisition:
A]
Acquisition of securities B] Acquisition of Assets
A] Acquisition of securities:
The
securities include preference shares, equity shares and all instruments of debt
i.e. Debentures, Depository slips, Bonds ( as and when issued) etc but
generally speaking the only security that interests the investors of another
company are its equity shares as it allows the acquirer to exercise his rights
in the Management of the Company.
The
acquisition of equity shares may be either by acquiring new freshly issued
shares by any Company or by purchasing them from the existing shareholder
through a purchase of the same from any share market i.e. Bombay Stock Exchange
(BSE) or National Stock Exchange (NSE)
B]
Acquisition of Assets:
It
simply means acquiring Assets of a company and it is generally done by
purchasing the same from that company.
- Authorities
which Govern Mergers, Amalgamation and Demerger(These terms have been
explained below) in India:
1. Securities Exchange
Board of India (SEBI): They have their own regulations in this regard SAST
Regulations 2011.
2. Tax Authorities
3. Reserve Bank of India
(RBI)
4. Foreign Investment
Promotion Board
5. Competition Commission
of India
6. High Court
NOTE:
Except High Court, all the other authorities come into the picture as and when
required.
For
example when a Merger involves a Public Limited Company then permission from SEBI
is required or when one of the entities is a foreign company then permission from
Foreign Investment Promotion Board is required.
- The procedure of Merger, Amalgamation and Demerger in Brief
1. Preliminary Steps.
2. Proposal to Target Co.
3. Valuation Process.
4. Scheme of Merger.
5. (BOD) Board of Directors
Negotiation (Among themselves); of
both Merging Companies.
6. BOD Approval of both Companies.
7. Inform Stock Exchange (Only in case of Public Limited
Company).
8. Apply to High Court.
9. Meetings of members & creditors.
10. Obtaining Consent.
11. Petition to Court.
12. Final Court Order.
13. File Order with Registrar of Companies.
14. Transfer of Assets and Liabilities.
15. Post-Merger Integration.
NOTE: For details on the procedural part of Merger read Chapter XV of Companies Act 2013, Section 230-240.
- Types of Merger:
In all, there are
basically 7 types of Merger.
1)
Horizontal Merger:
Occurs
between companies operating in the same industry and are competitors.
2)
Vertical Merger:
Occurs
between Companies operating in the same industry but at a different level in a
supply chain. It aids in lowering transaction costs
3)
Co generic Merger:
Occurs
between entities engaged in related industries but having no common
product
Ex:
Merger between a company involved in Movie Distribution and the other in Movie
Production.
4)
Conglomerate Merger:
Occurs
between entities engaged in completely unrelated industries
5)
Cash Merger:
Occurs
when Shareholders of merging company i.e. Transferor Company are given Cash
instead of shares in the merged entity.
6)
Triangular Merger:
Occurs
when there is an agreement between three parties i.e. Transferee Company,
Subsidiary of Transferee Company and Transferor Company.
7)
Reverse Merger:
Occurs
when shareholders of a Private Limited Company purchase shares in Public
Limited Company and by reason of this transaction the Private Company and the
Public Company merge with each other.
- Amalgamation:
Amalgamation has been
defined in Section 2(1)(b) Income Tax Act 1961 as
"amalgamation",
in relation to companies, means the merger of one or more companies with
another company or the merger of two or more companies to form one company (the
company or companies which so merge being referred to as the amalgamating
company or companies and the company with which they merge or which is formed
as a result of the merger, as the amalgamated company) in such a manner that-
(i) all the property of the amalgamating company or companies immediately
before the amalgamation becomes the property of the amalgamated company by
virtue of the amalgamation; (ii) all the liabilities of the amalgamating
company or companies immediately before the amalgamation become the liabilities
of the amalgamated company by virtue of the amalgamation; (iii) shareholders
holding not less than nine-tenths in value of the shares in the amalgamating
company or companies (other than shares already held therein immediately before
the amalgamation by, or by a nominee for, the amalgamated company or its
subsidiary) become shareholders of the amalgamated company by virtue of the
amalgamation, otherwise than as a result of the acquisition of the property of
one company by another company pursuant to the purchase of such property by the
other company or as a result of the distribution of such property to the other
company after the winding up of the first- mentioned company
In simple terms, Amalgamation means the consolidation of one or more companies with a separate company or the merger of two or more companies to form one company. Per se it may sound similar to a Merger, the difference lies in the fact that in Merger the transferring Company loses its existence but in the case of Amalgamation this does not happen; A company is not absorbed by another company but merely two entities become one entity.
This entity may be a combination of two:
For example: When the firms A
and B join their assets and liabilities and the new firm may be A&B
OR
Two entities come
together and form a new firm or company:
For example: When the firms A
and B join their assets and liabilities and the new firm may be an
entirely new entity C
- Demerger:
De-merger
means when where the transferor or demerging Company splits and divides a
specific part of its business and transfers it to another company i.e.
Transferee Company.
After the demerger, both Companies simultaneously exist though the transferee company
owns the business division.
- Glossary
1)
Transferor Company and Transferee Company (Merger):
Transferor
Company is
the company which merges into resultant company and transfers all its assets
and liabilities. Once a merger is completed the transferor company ceases to
exist.
The
resultant merged company is called Transferee Company and it
exists after the merger.
2)
Transferor Company and Transferee Company (Demerger):
a) Transferor
Company: The Company which transfers its business division to other
company.
b) Transferee
Company: The Company which purchases the business division
- Further
Reading
http://www.fairobserver.com/region/europe/the-world-this-week-merger-mania-marks-rising-risks-
