Merger and acquisition (M&A) are a term that has become highly common and soared significantly in today’s corporate world. India has seen transactions of $148 billion in the M&A market in 2022, which is 58.9 percent higher than what it was in 2021. Moreover, Private-Equity(PE) backed M&A deals, which account for 28%, have left China behind for the first time since 2008. The importance of M&A is growing, so the interest of experts is. Let’s start with the basic understanding of M&A.
WHAT IS M&A?
It means when two entities come together and form a new entity or continue with either of the existing companies so merged by transferring all the assets and liabilities to the other. This is to obtain the benefits of M&A such as the economics of scale, less market competition, increase in productivity and innovation, exchange of machines and technology, etc. Now, there are different ways of transferring a business undertaking:
- Asset Transfer: In this type of transfer, the assets of a company are valued by the registered valuer, and the transferee chooses the assets it wants to acquire. It is not the transfer of the business undertaking.
- Share Transfer/Acquisition: It is the most common type of transfer of an undertaking. As the name suggests, it is the transfer of shares. It is chosen, when the acquirer aims at acquiring the target entity along with its name in the market as well as the business set-up on a going concern basis.
- Slump Transfer: It is the lump-sum transfer of assets and liabilities of a company. It happens when the transferee company has its eye on the whole set-up of the transferor entity, not on the name.
- Amalgamation: In this, the assets of two companies are transferred to an already existing company or a new company. The amalgamating companies lose their existence and the shareholders become the shareholders of the new or amalgamated companies. It, usually, happens during the internal restructuring of a company where two or more companies are merged into one entity.
- Demerger: it means hiving-off a unit, a division, or a business activity by a company to another company. Companies opt for demergers when the parent company fails to optimize the returns from the hiving off business activity.
This article looks at the relevant regulatory laws and bodies involved in M&A transactions that lawyers have to deal with.
COMPANIES ACT 2013 AND NCLT
Section 230 to 240 of the Companies Act 2013 deals with compromise, arrangement and amalgamations. Section 230 talks about the internal restructuring of the company which is a comprehensive and lengthy procedure. Section 231 deals with the power of the National Company Law Tribunal (NCLT) to implement the scheme of restructuring submitted to it under section 230. Now, Sections 232 and 233 specifically talk about the merger and amalgamation of companies but the former involves a lengthy procedure and the latter is a fast-track procedure applicable in certain cases.
So first, let’s talk about the provisions of section 232:
Section 232(1): It says when an application is made to the NCLT for restructuring under section 230 is related to mergers or amalgamation, the tribunal may direct a meeting of all the creditors, members, and class of creditors as necessary and provisions of Sub-sections (3) to (6) of Section 230 shall apply with all the necessary changes.
Section 232(2): it shall be required to circulate the following for the meeting:
- Draft of the scheme which is drawn up and adopted by the board of directors.
- Confirmation regarding the submission of the draft to the registrar of the companies.
- A report explaining the effect of the scheme on all the parties concerned.
- A valuation report prepared by an expert.
- A supplementary accounting statement.
Section 232(3): NCLT, after ensuring that all the procedures under sub-section (1) and (2) have been complied with, may sanction the scheme.
Now, let’s have a look at the provisions of Section 233 that talk about fast-track mergers of certain companies:
Non-obstante Clause 233(1): it says notwithstanding anything contained in sections 230 and 232 would not apply to the following types of companies:
- Two or more small companies.
- A holding company and its wholly-owned subsidiary company.
- Companies, as may be prescribed 233(1) also lays down a few conditions that the both transferor and transferee companies have to fulfil such as notice inviting objection on the scheme of merger or amalgamation from the registrar and office of the liquidator, consideration of the objection in the general meeting, approval of the scheme from the ninety percent of the shareholders of the company, declaration of solvency from the registrar, and approval from the creditors, constitute at least 9/10 in the value.
- Conditions for transferee company: After fulfilling all the conditions given in 233(1) that is for all the companies involved in the merger, now comes the conditions that have to be met by the transferee company only. Those conditions are:
- Filing of the approved scheme with the registrar, office of the liquidator, and the central government.
- If the registrar and the office of the liquidator have no objection, the central government registers the same and issues confirmation. But, if the registrar and the office of the liquidator have objections to the scheme and communicate the same with the central government, the central government may, within sixty days, request the tribunal to consider the scheme under Section 232.
- But, if everything goes well, the central may register the scheme and send confirmation to the companies. Subsequently, the transferee company would have to file a copy of confirmation to the registrar. On the registration by the registrar of the company, the transferor company shall be deemed to be dissolved without winding up.
In a recent unsuccessful reliance-future group limited M&A deal in which future group ltd. head Kishore Biyani was to sell 19 subsidiary companies to reliance for Rs 24,713. Reliance dropped the deal after the secured creditors did not approve it. This is an example of the M&A procedure under section 232 of the companies act.
COMPETITION ACT 2002 AND CCI
The competition act was passed to halt anti-competitive practices and prevent the use of a dominant position in the market. Section 5 of the act tells what combination means as per this act. As per section 5, the following types of M&A deals would come under the Competition Commission of India (CCI) scrutiny:
- Individual enterprise operating in India: asset value Rs 1,000 cr or turnover Rs 3,000;
- Individual enterprise with global operations: asset value- $500 million or turnover- $1,500 million;
- Group of companies operating in India: Asset value- Rs.4,000 cr. or turnover- Rs.12,000 cr.
- Group of companies with global operations: Asset value-$2 billion or turnover- $6 billion
Section 6(2) of the act allows the party to notify the commission of the combination. Otherwise, the commission can inquire into any combination suo moto upon receiving information within one year of the combination and render it void ab initio under section 6(1), if the combination causes an appreciable adverse effect on the competition. But in both scenarios, the combination must fall within the threshold limit fixed under Section 5 of the act. It is advisable for the parties involved in the merger to notify the commission because the power of the commission to inquire into the deal within 1 year can cause heavy losses to the parties.
So, as per the act, only the combinations defined under section 5 are subject to scrutiny by the competition commission of India. Size is the only criterion to determine if a particular deal falls under the definition of section 5. There might be some M&A deals that pose threat to the competition in Indian markets, but as section 5 doesn’t cover them they go unregulated.
There are different arenas of laws that are involved in an M&A deal. So, for the parties looking for M&A deals or lawyers and experts in the field, the above-mentioned are provisions and procedures that must be considered when pursuing mergers and amalgamation. Apart from this, there are some other sectoral, employment, foreign, tax, etc, related laws that have to be considered. M&A deals are not easy to crack especially when big companies and market players are involved. This is so evident in the reliance-future group limited case which first had back-to-back hurdles from amazon by the way of rulings from the High court, NCLT, CCI, and other bodies involved, and then the secured creditors did not approve the deal in the meeting called under section 232 of the Companies Act, 2013. Even apart from the regulatory issues under company and competition law, there are other important regulations involved under laws like Income Tac Act 1961, FDI and FEMA rules, Industries Disputes Act 1947, etc. So, an M&A lawyer needs to ensure compliance with all the laws and regulations involved for a smooth and successful deal.
Authors Name: Lovesh Mamnani (Campus Law Centre, University of Delhi) & Salonee Sharma (RGNUL, Patiala)