Mergers and Acquisition: Legal Procedure

In this article, We’ll discuss legal procedures of merger, about board meetings, tribunals, advertisements, scheme of compromise, amalgamation, compromise rules, and a lot more.

If you haven’t read the Introduction to this chapter, refer to the Meaning and Types of Mergers blog post.

Table of Contents

What are the Legal Procedures?

Companies Act, 2013

Mergers & Acquisitions are governed by Section 230-240 of Chapter XV of the Companies Act, 2013. These are a special type of Compromise & Arrangements.
The Ministry of Corporate Affairs, Government of India, vide notification dated 14th December 2016 has issued rules i.e. the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016.

These rules came into effect from 15th December 2016. As a consequence, w.e.f 15th December 2016, all compromises, arrangements, and mergers have been carried out in accordance with the Companies Act 2013 and the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016.

For a merger to take place the entities have to follow regulations as per the concerned rules.

Procedures followed by Transferor & Transferee Company u/s 230 & 232

Board Meeting

Firstly a resolution should be passed by both the companies i.e. the “transferor“ and the “transferee” company, in their board meetings for approval of the merger process.

As per Section 180(1) of the Companies Act, 2013 Resolution should be a Special Resolution in case of public companies and ordinary resolution in case of any other companies.

As per Rule 4 of Companies(Meeting of Board & and its Powers) Rules, 2014 any matter relating to approval of mergers & acquisitions cannot be dealt with in a meeting through video conferencing or other audiovisual means i.e. no Board Members can attend the meeting other than in person himself.

Also as per Section 184 of the Companies Act, 2013 all the directors interested in any transaction or companies to be dealt with in the board meeting should mandatorily disclose such on the starting of the financial year or when they gain interest or before the meeting as applicable.
As per Section 174(1), no interested directors will be counted in the quorum for the board meeting.

Application to Tribunal

The company shall make an application to National Company Law Tribunal (NCLT) of relevant jurisdiction. This application is made in From NCLT-1 accompanied with the following documents:-
1. Notice of Admission (Form No: NCLT-2)
2. Affidavit (Form No. NCLT-6)
3. Copy of Scheme of compromise or arrangement
4. Fees as prescribed in Schedules

The scheme of compromise or arrangement mentioned as aforesaid should include the following disclosures :
(a) All material facts relating to the company, such as the latest financial position of the company, the latest auditor’s report on the accounts of the company and the copy of pending litigation against the company;
(b) Reduction of share capital of the company, if any, included in the amalgamation;
(c) Any scheme of corporate debt restructuring consented to by not less than seventy-five per cent of the secured creditors in value, including—
1. A creditor’s responsibility statement in Form No. CAA. 1;
2. Safeguards for the protection of other secured and unsecured creditors;
3. Report by the auditor that the fund requirements of the company after the corporate debt restructuring as approved
shall conform to the liquidity test based upon the estimates provided to them by the Board
4. Where the company proposes to adopt the corporate debt restructuring guidelines specified by the Reserve Bank of
India, a statement to that effect; and
5. A valuation report in respect of the shares and the property and all assets, tangible and intangible, movable and
immovable, of the company by a registered valuer.

The two companies may at their own discretion make a joint application. The Tribunal may on such application, order a meeting of the creditors or class of creditors or the members or class of members, as the case may be, to be called, held and conducted in such manner as the Tribunal may direct.

It shall essentially give directions pertaining to the following matters :-
(a) Determining the class or classes of creditors or of members whose meeting or meetings have to be held for
considering the proposed compromise or arrangement;
(b) Fixing the time and place of the meeting or meetings;
(c) Appointing a Chairperson and scrutinizer for the meeting or meetings to be held, as the case may be and fixing the
terms of his appointment including remuneration;
(d) Fixing the quorum and the procedure to be followed at the meeting or meetings, including voting in person or by proxy
or by postal ballot or by voting through electronic means;
(e) Determining the values of the creditors or the members, or the creditors or members of any class, as the case may be,
whose meetings have to be held;
(f) Notice to be given of the meeting or meetings and the advertisement of such notice;
(g) notice to be given to sectoral regulators or authorities as required under sub-section (5) of section 230;
(h) The time within which the chairperson of the meeting is required to report the result of the meeting to the Tribunal; and
(i) Such other matters as the Tribunal may deem necessary.

Note: However, in case of Government co. the application is to be submitted to the Central Government instead of Tribunal.

Notice of such Meeting

Notice shall be sent to all the creditors or class of creditors and to all the members or class of members and all the debenture holders of the company, individually at the address registered with the company at least one month before the date fixed for the meeting with all required details and disclosures.

Notice is sent by the chairperson appointed for the meeting in Form No. CAA-2. If the Tribunal direct some other person to send the notice then such other person will send the prescribed notice.

The notice of the meeting to the creditors and members shall be accompanied by a copy of the scheme of compromise or arrangement and a statement disclosing the following details of the compromise or arrangement, if such details are not already included in the said scheme:-

Details of the order of the Tribunal directing the calling, convening and conducting of the meeting:
- Date of the Order;
- Date, time and venue of the meeting.
Details of the company including:
- Corporate Identification Number (CIN) or Global Location Number (GLN) of the company;
- Permanent Account Number (PAN);
- Name of the company;
- Date of incorporation;
- Type of the company (whether public or private or one-person company);
- Registered office address and e-mail address;
- Summary of main object as per the memorandum of association; and main business carried on by the company;
- Details of change of name, registered office and objects of the company during the last five years;
- name of the stock exchange (s) where securities of the company are listed, if applicable;
- Details of the capital structure of the company including authorised, issued, subscribed and paid up share capital; an
- Names of the promoters and directors along with their addresses.
The date of the board meeting at which the scheme was approved by the board of directors including the name of the directors who voted in favour of the resolution, who voted against the resolution and who did not vote or participate on such resolution;
Report of the expert with regard to valuation, if any;
Explanatory statement disclosing details of the scheme of compromise or arrangement including:-
- Parties involved in such compromise or arrangement;
- Appointed date, effective date, share exchange ratio (if applicable) and other considerations, if any
- Summary of valuation report (if applicable) including basis of valuation and fairness opinion of the registered valuer, if any, and the declaration that the valuation report is available for inspection at the registered office of the company;
- Details of capital or debt restructuring, if any;
- Rationale for the compromise or arrangement;
- Benefits of the compromise or arrangement as perceived by the Board of directors to the company, members, creditors, and others (as applicable);
- Amount due to unsecured creditors.
Disclosure about the effect of the compromise or arrangement on:
- key managerial personnel;
- directors;
- promoters;
- non-promoter members;
- Depositors;
- Creditors;
- Debenture holders;
- Deposit trustee and debenture trustee;
- Employees of the company
Disclosure about effect of compromise or arrangement on material interests of directors, Key Managerial Personnel (KMP) and
debenture trustee.
Investigation or proceedings, if any, pending against the company under the Act.
Details of the availability of the following documents for obtaining extract from or for making or obtaining copies of or for inspection by the members and creditors, namely:
- Latest audited financial statements of the company including consolidated financial statements;
- Copy of the order of Tribunal in pursuance of which the meeting is to be convened;
- Copy of scheme of compromise or arrangement;
- Contracts or agreements material to the compromise or arrangement;
- The certificate issued by Auditor of the company to the effect that the accounting treatment, if any, proposed in the scheme of compromise or arrangement is in conformity with the Accounting Standards prescribed under Section 133 of the Companies Act, 2013; and
- Such other information or documents as the Board or Management believes necessary and relevant for making decision for or against the scheme;
Details of approvals, sanctions or no-objection(s), if any, from regulatory or any other governmental authorities required, received or pending for the proposed scheme of compromise or arrangement.
A statement to the effect that the persons to whom the notice is sent may vote in the meeting either in person or by proxies, or where applicable, by voting through electronic means.

The notice sent in Form No. CAA-2 should be advertised in at least one English newspaper and in at least one vernacular newspaper having wide circulation in the State in which the registered office of the company is situated.

A copy of the notice shall also be placed, not less than thirty days before the date fixed for the meeting, on the website of the company.
It may be noted that the two companies may give a joint advertisement.

Notice to Statutory Authorities & Affidavit of Service

Notice shall also be sent to all concerned government authorities like Income Tax, Cental Government, SEBI, Registrar, Respective Stock Exchanges, Competition Commission of India and others in Form No. CAA-3.

If the authorities stated above desire to make any representation, the same shall be sent to the Tribunal within a period of thirty days from the date of receipt of such notice and copy of such representation shall simultaneously be sent to the concerned companies.

Chairperson appointed for the meeting of the company or any 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.

Convene Meeting

Once a notice is sent the next step is to convene a meeting for sanction of the scheme. The meeting is between the members, creditors or a class of them.

The scheme is said to be approved in the meeting where majority of persons representing three-fourths in value of the creditors, or class of creditors or members or class of members, as the case may be, voting in person or by proxy or by postal ballot, agree to it.

Result of the Meeting

The Chairperson of the meeting shall, within the time fixed by the Tribunal, or where no time has been fixed, within three days after the conclusion of the meeting, submit a report to the Tribunal on the result of the meeting in Form No. CAA.4.

He shall state accurately the number of creditors or class of creditors or the number of members or class of members, as the case may be, who was present and who voted at the meeting either in person or by proxy, and where applicable, who voted through electronic means, their individual values and the way they voted.

Petition for confirming compromise or arrangement—

The company (or its liquidator), shall, within seven days of the filing of the report by the Chairperson, present a petition to the Tribunal in Form No. CAA.5 for sanction of the scheme of amalgamation.

In case the company fails to file such petition, it shall be open to any creditor or member as the case may be, with the leave of the Tribunal, to present the petition and the company shall be liable for the cost thereof.

Date and notice of hearing

The Tribunal shall fix a date for the hearing of the petition, and notice of the hearing shall be advertised in the same newspaper in which the notice of the meeting was advertised, or in such other newspaper as the Tribunal may direct, not less than ten days before the date fixed for the hearing.

The notice of the hearing of the petition shall also be served by the Tribunal to the objectors or to their representatives under sub-section (4) of section 230 of the Act and to the Central Government and other authorities who have made representation under rule 8 and have desired to be heard in their representation

Order on Petition

Where the Tribunal sanctions the compromise or arrangement, the order shall also include such directions in regard to any matter or such modifications in the compromise or arrangement as the Tribunal may think fit, for the proper working of the compromise or arrangement.

It shall be in Form No. CAA-6. The company shall also cause a certified copy of the order to be filed with the Registrar for registration within thirty days of the receipt of certified copy of the order

The scheme shall clearly indicate an appointed date from which it shall be effective and the scheme shall be deemed to be effective from such date and not at a date subsequent to the appointed date.

The company shall, until the completion of the scheme, file a statement in such form and within such time as may be prescribed with the Registrar every year duly certified by a chartered accountant or a cost accountant or a company secretary in practice indicating whether the scheme is being complied with in accordance with the orders of the Tribunal or not.

Powers of Tribunal to sanction the scheme of Amalgamation

Transfer to the transferee company of the whole or any part of the undertaking, property or liabilities of any transferor company.
Allotment or appropriation by the transferee company of any shares, debentures, policies, or other like interests in that company which, under the compromise or arrangement, are to be allotted or appropriated by that company to or for any person.
Continuation by or against the transferee company of any legal proceedings pending by or against any transferor company;
Dissolution, without winding up, of any transferor company.
Provision to be made for any persons who, within such time and in such manner as the Tribunal directs, dissent from the compromise or arrangement.
Where share capital is held by any non-resident shareholder under the foreign direct investment norms or guidelines specifed by CG or in accordance with any law for the time being in force, the allotment of shares of the transferee company to such shareholder shall be in the manner specifed in the order
Transfer of the employees of the transferor company to the transferee company.
Where the transferor company is a listed company and the transferee company is an unlisted company;
- The transferee company shall remain an unlisted company until it becomes a listed company;
- If shareholders of the transferor company decide to opt out of the transferee company, provision shall be made for Payment of the value of shares held by them and other benefits in accordance with a pre-determined price formula or after a valuation is made and the arrangements under this provision may be made by the Tribunal. {The amount of valuation should not be less than what has been specifed in SEBI regulations}.
Where the transferor company is dissolved, the fee ,if any, paid by the transferor company on its authorised capital shall be set off against any fees payable by the transferee company on its authorised capital subsequent to amalgamation; and
Such incidental, consequential and supplemental matters as are necessary to secure that the reconstruction or amalgamation shall be fully and effectively carried out.

Fast Track Mergers

As per Section 233 of the Companies Act, 2013-

Notwithstanding any provisions of Section 230-232, a scheme of merger & acquisitions may be entered into between two or more small companies as defined under section 2(85) of the Companies Act or between a holding company & its wholly owned subsidiary company or such other class or classes of companies as prescribed.

Conditions for Fast Track Mergers :-

Board Resolution passed in Board Meeting Approving the Scheme;
Both Companies need to give notice to Registrar & Official Liquidator of the Proposed Scheme within 30 days for asking their objections or suggestions, if any, in Form CAA-09 aka E from GNL-1;
The objections or suggestions received are considered by the company in their respective General Meetings & approved by respective members or class of members holding at least 90% of the Total No. of Shares.
Each company will file Declaration of Solvency to the Registrar of Companies in Form CAA -10 aka E Form GNL-2
Scheme is approved by majority representing 9/10th in the value of creditors or class of creditors of respective companies indicated in the meeting. 21 days prior notice is to be given along with the scheme to its creditors for this purpose in Writing.

Steps :-

The Transferee company will file a copy of the approved scheme to the Central Government, Registrar & the Official liquidator where registered office of the company is situated in Form CAA-11 aka E Form RD-1.
On receipt of the scheme, the Registrar or the Official Liquidator will share their objections or suggestions, if any. If no objections or suggestions are made, then it will be deemed to be approved and the Central government shall register the same and issue a confirmation thereof to the companies.
If any objections or suggestions are made by the Registrar or the Official Liquidator, they shall communicate the same in writing to the Central Government within a period of 30 days in Form CAA-12.
If the Central Government after receiving objections or suggestions or any other reason thereof is of the opinion that such scheme is not in Public Interest or in the interest of creditors, it may file an application to the Tribunal within a period of 60 days of receipt of the scheme. CG should state its objections and request that the Tribunal may consider the scheme under section 232 of the Companies Act, 2013 in Form CAA-13.
If on receipt of application Tribunal is of the opinion that merger should be carried on as per section 232 then it may direct accordingly or may confirm the scheme by passing such order as it deems fit.

Effect of Registration of the Scheme

The Confirmation Order filed in Form INC 28 shall be deemed to have effect of dissolution of the transferor company without the process of winding up. Effects of Registration of scheme :

Transfer of Properties or liabilities of the transferor company to the transferee company.
The charges, if any on the property of the transferor company shall be applicable and enforceable as if charges were on the property of the transferee company on the part of assets of tranferor company only.
Legal proceedings by or against the transferor company pending before any court of law shall be continued by or against the transferee company.
On merger share capital held by the transferee company in the transferor company would have to be cancelled and cannot be allotted to any trust either on its behalf or on behalf of any of its subsidiary or associate company.

Pooling of the Authourised Share Capital

ROC Fee, if any, paid by the transferor company on its authorized capital prior to its merger with the transferee company shall be set off against the fees payable by the transferee company on its authorized capital enhanced by the merger.

Transferee Company shall follow same steps as provided under section 61 of the Companies Act 2013 for increase of the authorized share capital.

Additional Documents required by Central Govenrment

Certified Copy of list of Directors, shareholders and creditors of both the transferor and transferee companies.
Verified Facts regarding the subject companies having relationship of Holding and Wholly owned subsidiary company.
Shareholding Pattern of pre and post-merger of Transferee Company.
Audited Financial Statements and Directors’ reports of both the transferor and transferee companies for preceding three years.
Memorandum and Articles of Association of both the companies containing a clause empowering merger and amalgamation.
Details of Related Party Transactions entered into by both the companies.
Undertaking from the directors of the Transferee company that no employees shall be adversely affected and accounting policies will not be altered.
A Certificate issued by Auditor of the Company to the effect that accounting treatment, if any, proposed in the scheme of merger is in conformity with the Accounting Standards prescribed under section 133 of the Companies Act, 2013.
a. Present Paid up Share Capital of the Company
b. Cross Holdings to be cancelled.
c. Remaining paid up Capital of the Company
d. Amount of shares to be allotted to the members of the Transferor Companies by the Transferee Company.
e. Consolidated Statement of Authorized Capital and Paid up capital of Transferee Company after issuing shares to the members of
Transferor Company.

Merger & Amalgamation of an Indian Company with a Foreign Company

On 13 April 2017, MCA issued the following notifications:

Notification of Section 234 of the 2013 Act (merger or amalgamation of a company with a foreign company)
Insertion of new sub-rule 25A (merger or amalgamation of a foreign company with a company and vice-versa) in the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (Compromises Rules)

Section 234 of the 2013 Act: Merger or amalgamation of a company with a foreign company

Prior approval of the RBI: A foreign company* (incorporated in the jurisdictions of such countries as may be notified) may merge into a company registered under the Companies Act, 2013 or vice-versa after obtaining prior approval of the Reserve Bank of India.
Payment of consideration: The terms and conditions of the scheme of merger may provide, among other things, for the payment of consideration to the shareholders of the merging company in cash, or in depository receipts, or partly in cash and partly in depository receipts, as the case may be, as per the scheme.

Rule 25A of the Compromises Rules: Merger or amalgamation of a foreign company with a company and vice-versa

Prior approval of RBI and compliance with other sections of the 2013 Act: A company may merge with a foreign company (incorporated in any of the jurisdictions) after obtaining prior approval of the RBI and after complying with the provisions of the following sections of the 2013 Act and related Rules:
- Section 230: Power to compromise or make arrangements with creditors and members
- Section 231: Power of National Company Law Tribunal (NCLT) to enforce compromise or arrangement
- Section 232: Merger and amalgamation of companies.
Specified jurisdictions of a foreign company: A company can merge with a foreign company* which is incorporated in the following jurisdictions:
- Securities market is a signatory to International Organisation of Securities Commission’s MultilateralMemorandum of Understanding (Appendix A Signatories) or a signatory to bilateral Memorandum of Understanding with Securities and Exchange Board of India (SEBI)
- Central bank is a member of Bank for International Settlement (BIS) and
- Jurisdiction which is not identified in the public statement of Financial Action Task Force(FATF) as:
  - A jurisdiction having a strategic anti-money laundering or combating the financing of terrorism deficiencies to which counter measures apply or
  - A jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the FATF to address the deficiencies.
Valuation conducted by valuers as per international standards: The transferee company would need to ensure that valuation is conducted by valuers who are members of a recognised professional body in the jurisdiction of the transferee company and further that such valuation is in accordance with internationally accepted principles on accounting and valuation. A declaration to this effect would be required to be attached with the application made to RBI for obtaining its approval.
Application to NCLT: After obtaining the approval of the RBI and complying with the provisions of the above mentioned sections and the related Rules, the concerned company may file an application with the NCLT for approval of the merger.

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