Mergers and Acquisitions aim towards Business Restructuring and increasing competitiveness and shareholder value via increased efficiency. In the marketplace it is the survival of the fittest.
World Wide Scenario
USA has seen 20 years long wave of mergers, leveraged buyouts and takeovers that changed USA, Inc. Biggest merger of the world, $190 billion America Online-media giant Time Warner (stock financed deal) became second biggest in one month's time. Previous biggest merger was MCI-world. Europe and Japan also have seen many mergers.
The value of mergers in the global technology sector alone surged a 52 percent to $ 1.2 trillion in 1999 as companies scrambled to adapt their businesses to meet the growing demands of the internet economy. The total number of merger and acquisition transactions in the IT, media and communications sector rose nearly 26% to 6008 globally, according to a report by New-York based investment bank Broadview International.
We have witnessed a storm of mergers and acquisitions in recent years.The Finance Act,1999 clarified many issues relating to Business Reorganisations thereby facilitating and making business restructuring tax neutral. As per Finance Minister this has been done to accelerate internal liberalisation and to release productive energies and creativity of Indian businesses. The year 1999-00 has notched-up deals over Rs. 21000 cr. Which is over 1% of India's GDP. This level of activity was never seen in Indian corporate sector.
Infotech, banking, media, pharma, cement, power are sectors which are more active in mergers and acquisitions.
ACC Gujarat- Ambuja Cement, Lafarge TISCO, Satyam Infoway-Indiaworld, Rajpal E capital-Zee tele-Subir Bhatia-HLL- lakme, HLL Tomco, Sandoz-Ciba,HLL-Lipton,IndiaCements-Rassi, Sun-TDPL,Sun-MJ, Wockhardt demerger,only distribution network- parents' acquisitions- PAL – Peugot, Piramal Sarabhai, Piramal- Crossland,HDFC-Times Bank and many more. Among hostile takeover bids we saw Sterlite’s bid for Indal, Bajoria for Bombay Dyeing and Ballarpur Industries, Dalmia for Gesco and many more.
Tata tea acquisition is the biggest overseas acquisition by an Indian company. The acquisition will make the Tata Tea-Tetley Tea combine one of the largest tea producers and marketers in the world. Tata Tea will deploy the $75 ml. GDR money raised at $ 9.87 per GDR( equivqlent to Rs.430 per share) in its 281 ml. Pound leveraged buyout. Tatas and Birlas have merged their cellular companies to make a Billion $ giant-AT & T has also joined them.
Merger of CA firms-Price Warerhouse –Coopers Lybrand, RSM & CO-merger of Professional Institutes-
Reasons for hectic activity -What's driving the deal mania?
Who are the intermediary professionals involved in M & A activity?
Dealmakers,Merchantbankers, lawyers.CAs,CSs,valuers,Bankers ,etc. are intermediaries involved in M & A activity.
Scope for practice for Chartered Accountants
-Taxation Aspects-Direct and Indirect taxes
-Brands and other Intangible assets.
M & a website-www.themaexchange.com-buyers and sellers can reach each other via this website.
Duck Limited[D] has 3 business divisions. Textiles, Pharma and Machinery manufacturing. The textiles business is incurring losses. The pharma business is flourishing. D wants to exit from Machinery manufacturing division being its non-core business. D is also considering a proposal from a software technologist[S] to join hands in S’s software development business. Crocodile Limited[C] has shown interest in acquiring Machinery business of D .D also has some brands and know-how for each of its line of activity. Stock Market price of Equity shares of D is Rs.10/- and paid-up Equity Capital of Rs.5 Crores divided into 50 lacs Equity shares of Rs.10/ each while that of C is Rs 50/- per share and paid-up Equity Capital of Rs. 5 Crores divided into 50 lacs Equity shares of Rs.10/ each.
Parties in these transactions need your advice from financial, legal, tax and management angle on questions shch as
1.MERGERS AND DEMERGERS
Difference between a merger and an amalgamation.
Difference between a merger and a demerger.
Difference between a demerger and a slumpsale.
Difference between a slumpsale and asset sale.
Difference between a merger and a reverse merger.
Difference between a merger and an acquisition.
A] COMPANY LAW ASPECTS of Mergers, amalgamations and demergers
Companies Act, 1956,Chapter V
ARBITRATION, COMPROMISES,ARRANGEMENTS AND RECONSTRUCTIONS
Sections 390 to 396 of the Companies Act, 1956 govern Rearrangements including Mergers, Amalgamations and Demergers.
Interpretation of Sections 391 and 393. Company means any company liable to be wound up-arrangement includes a reorganisation of the share capital of the company by the consolidation of shares of different classes or by division into…….or by both methods-
Power to compromise or make arrangements with creditors and members
-between a company and creditors/any class or member/any class
-the court may on application, order a meeting of……in such manner as the court directs
 if majority in number representing 3/4th in value of creditors/members……present and voting either in person or by proxy[where allowed]agree and if sanctioned by court, shall be binding on all members/creditors…….and company/liquidator/contributories-
provided no order unless court is satisfied about disclosure of all material facts, financial position etc.-
 no effect to court order till the time a certified copy of order is filed with the Registrar of Companies.
 A copy of order of the Court to be annexed to every copy of Memorandum of Association.
 default is punishable
stay of suit or proceedings
Power of High Court to enforce compromises and arrangements
 court has the power to superwise and give directions,
If court is satisfied that scheme is not workable, it can order winding up of the company.
Information as to compromises or arrangements with creditors and members
[a]Explanatory Statement with every notice Setting forth terms of compromise and directors' interest-
trustees' interest to be disclosed.
 statement setting terms and contract to be furnished to members.
default will invite fine.
Provisions for facilitating reconstruction and amalgamation of companies.
 when an application is made u/s 391 for compromise or arrangement and it is shown to the court that[a] compromise or arrangement is proposed for the purpose of a scheme of reconstruction of any company or companies or the amalgamation of any two or more companies and under scheme whole or any part of undertaking, propety or libilities of any company concerned in the scheme [ transferor co] is to be transferred to another co.[transferee co.], court may by order…provide for……….transfer……allotment……….continuation of legal proceedings….dissolution…….provision for dissenting shareholders……incidental matters…
provided company Law Board or ROC and official liquidator report is obtainedwhere order made properties and liabilities to vest to transferee certified copy to be filed with ROC.
Section 394ANotice to be given to Central Government for applications under section 391 and 394.
Power and duty to acquire shares of shareholders dissenting from scheme or contract approved by majority
Power of Central Government to provide for amalgamation of companies in national interest.
Preservation of books and papers of amalgamated company
B INCOME-TAX ASPECTS
In normal parlance, Amalgamation takes place when two or more companies combine and form a new corporate entity after the previous corporate entities are dissolved.
A merger signifies the absorption of one company by another which retains its name and corporate entity with the added capital, franchises and powers of a merged corporation.
Section 2(1B) of Income-tax Act defines Amalgamation as follows.
"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 another 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
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;
There were no specific provisions for demerger under Income-tax Act, 1961 upto Assessment Year 1999-00
Finance Act, 1999 made demergers tax neutral. The Act also distinguished sale of assets from demergers as a going concern.
Accumulated losses and unabsorbed depreciation, in a demerger, are allowed to be carried forward by a resulting company if these are directly relatable to the undertaking proposed to be transferred. In other cases, such losses and depreciation shall be apportioned between the demerged company and the resulting company in proportion to the assets coming to the share of each as a result of demerger.
Section 2(19AA) of Income-tax Act, 1961 defines 'demerger' as "Demerger", in relation to companies, means the transfer, pursuant to a scheme of arrangement under sections 391 to 394 of the Companies Act, 1956 (1 of 1956), by a demerged company of its one or more undertakings to any resulting company in such a manner that –
otherwise than as a result of the acquisition of the property or assets of the demerged company or any undertaking thereof by the resulting company;
Explanation 1- For the purposes of this clause, "undertaking" shall include any part of an undertaking , or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity.
Explanation 2 –For the purposes of this clause, the liabilities referred to in sub clause (ii), shall include –
Explanation 3 – For determining the value of the property referred in sub clause (iii), any change in the value of assets consequent to their revaluation shall be ignored. [applicability of this explanation is restricted only for subclause(iii)]
Explanation 4 – For the purposes of this clause, the splitting up or the reconstruction of any authority or body constituted or established under a Central, State or Provincial Act, or a local authority or a public sector company, into separate authorities or bodies or local authorities or companies, as the case may be, shall be deemed to be a demerger if such split up or reconstruction fulfills the conditions specified in sub clauses (i) to (vii) of this clause, to the extent applicable;such conditions as may be notified in the Official Gazette, by the Central government. This is amended by Finance Act, 2000.w.e.f. 1-4-2000.
Section (19AAA) :
"demerged company" means the company whose undertaking is transferred, pursuant to a demerger, to a resulting company;’.
The recognition of demergers is one of the measures taken by the Finance Act, 1999 to provide that companies are allowed greater freedom to re-organise their business structuring , without suffering additional tax burdens in the process, and so that benefits such as depreciation and set off and carry forward of loss in respect of the transferred undertaking continue to be available to the resulting company.
"resulting company" means one or more companies (including a wholly owned subsidiary thereof ) to which the undertaking of the demerged company is transferred in a demerger and, the resulting company in consideration of such transfer of undertaking, issues shares to the shareholders of the demerged company and includes any authority or body or local authority or public sector company or a company established, constituted or formed as a result of demerger:"
2(22)(v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company(whether or not there is a reduction of capital in the demerged company.)inserted by the Finance Act,1999,w.e.f. 1-4-2000
Provided that the business or profession for which the allowance was originally computed continued to be carried on by him in the previous year relevant for that assessment year. So even if the said business is discontinued, depreciation can be carried forward. This can help slump sales. Section 32(2) refers to set-off and carry forward of unabsorbed depreciation.
Amortisation of expenditure in case of amalgamation or demerger Provides for deduction of an amount equal to one-fifth of expenditure incurred wholly and exclusively for the purpose of amalgamation or demerger of an undertaking, for each of the 5 successive previous years beginning with the previous year in which the amalgamation or demerger takes place-No deduction shall be allowed under any other section.
Explanation 1.-For the purposes of this clause, "undertaking" shall have the meaning assigned to it in Explanation 1 to clause (19AA).
Explanation 2.-For the removal of doubts, it is hereby declared that the determination of the value of an asset or liability for the sole purpose of payment of stampduty, registration fees or other similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities.
Artex engg. Case-227 ITR
Explanation 7A.- Where, in a demerger, any capital asset is transferred by the demerged company to the resulting company and the resulting company is an Indian company, the actual cost of the transferred capital asset to the resulting company shall be taken to be the same as it would have been if the demerged company had continued to hold the capital asset for the purpose of its own business.
provided that such actual cost shall not exceed the written down value of such assets in the hands of demerged company.
(In the case of any block of assets,-(i) in respect of any previous year relevant to the assessment year commencing on 1-4-1988, the aggregate of the written down value of all assets falling within that block of assets at the beginning of the previous year and adjusted,-(A) …………….(B)……………….
(c) in the case of a slump sale, decrease by the actual cost of asset falling within that block as reduced-
so, however, that amount of such decrease does not exceed the written down value.
Say Rs. 500 is written down value of block of assets-less( Rs. 200 actual cost of the asset-less Rs.50 depreciation allowed i.e.Rs.150)=Rs.350 balance.
Explanation 2.- where in any previous year, any block of assets is transferred, (a)…………….(b) by the amalgamating company to the amalgamated company in a scheme of amalgamation and the amalgamated company is an Indian company. ,
then notwithstanding anything contained in clause(10), the actual cost of the block of assets in the case of the amalgamated company shall be written down value of block of assets in the case of amalgamating company for the immediately preceding previous year as reduced by depreciation actually allowed for the said preceding previous year.
-Explanation 2A and 2B have been inserted in clause (6)(c) of sectin 43 with efffect from 1-4-2000 by the Finance Act, 1999 for this purpose.
Explanation 2A specifies that where in any previous year, any asset forming part of a block of assets is transferred by a demerged company to the resulting company, then, notwithstanding anything contained in clause (1), the written down value of the block of assets of the demerged company for the immediately preceding previous year shall be reduced by bookvalue of the assets written down value of the assets transferred to resulting company pursuant to the demerger.
Explanation 2B:- where in any previous year, any asset forming part of a block of assets is transferred by a demerged company to the resulting company, then, notwithstanding anything contained in clause(1), the written down value of block of assets in the case of the resulting comany shall be the value of the assets appearing in the books of account written down value of the transferred assets as appearing in the books of account of the demerged co immediately before demerger:
Provided that if the value of the assets as appearing in the books of account of the demerged company immediately before demerger exceeds the written down value of such assets in the hands of the demerged company, the amount representing such excess shall be reduced from the writen down down value of the assets. This proviso is proposed to be omitted by the Finance Bill, 2000 with retrospective effect from 1-4-2000. The proposed amendment seeks to provide that the written down value of the assets, being transferred, shall be the uniform basis of adjustment in the hands of the demerged company as well as the resulting company.
(a) at least twenty-five percent of the shareholders of the amalgamating foreign company continue to remain shareholder of the amalgamated foreign company, and
(b) such transfer does not attract tax on capital gain in the country in which the amalgamating company is incorporated
with effect from 1-4-2000
Section 47(vib) any transfer, in a demerger of a capital asset by the demerged company to the resulting company if the resulting company is an Indian company
provided sections 391 to 394 shall not apply to demergers referred here. The condition of 75% of shareholders was different from similar condition provided in sub-clause(v) of clause (19AA) of section 2 relating to the definition of demerger, which is stipulated at " three-fourts in value of shares", hence the proposed amendment.
Section 47(vid) any transfer or issue of shares by the resulting comany, in a scheme of demerger to the share holders of demerged company , if transfer or issue is made in consideration of demerger of undertaking.
Section 47 (vii)- any transfer by shareholders, in the scheme of amalgamation, of a capital asset being a share or shares held by him in the amalgamating company if—
(a) the transfer is made in consideration of the allotment to him of any share or shares in the amalgamated company, and
(b) the amalgamated company is an Indian company.
Where at any time before the expiry of eight years from the date of a capital asset referred to in clause (iv)[[holding to subsidiary]] or, as the case may be, clause (v) of section 47—
such capital asset is converted by the transferee company into, or is treated by it as, stock-in-trade of its business: or
the parent company or its nominees or, as the case may be the holding company ceases or cease to hold the whole of the share capital of the subsidiary company, the amount of profits or gain arising from transfer of such capital asset not charged under section 45 by virtue of the provision contained in the said clauses, (iv) or, as the case may be, clause (v) of section 47 shall, notwithstanding anything contained in the said clause be deemed to be income chargeable under the head "capital gains" of the previous year in which such transfer took place.
With effect from 1-4-2000
Explanation.- for the purposes of this section"net worth" shall mean the aggregate of the paid up share capital and general Reserves as appearing in the books of account of the demerged company immediately before the demerger..
(1) Any profits or gains arising from the slump sale effected in the previous year shall be chargeable to income-tax as capital gains arising from the transfer of long-term capital assets and shall be deemed to be the income of the previous year in which transfer took place:
Provided that any profits or gains arising from the transfer under the slump sale of any capital asset being one or more undertakings owned and held by assessee for not more than 36 months immediately preceding the date of its transfer shall be deemed to be the capital gains arising from the transfer of short-term capital assets.
(2) In relation to capital assets being an undertaking or division transferrd by way of such sale, the "net worth" of the undertaking or division shall be deemed to be cost of acquisition and cost of improvement for the purposes of sections 48 and 49 and no regard shall be given to the provisions contained in the second proviso to section 48.[indexed cost of acquisition and improvement]
(3)Every assessee, in the case of a slump sale, shall furnish in the prescribed form along with the return of income a report of an accountant as defined in the Explanation below section 288(2) indicating the computation of the net worth of the undertaking or division, as the case may be, has been correctly arrived at in accordance with the provisions of this section. Form No. 3CEA has been prescribed for Report of an Accountant by IT(Twenty-first Amdt.) rules, 199 9w.e.f. 25-6-99
Explanation:- For the purposes of this section, "networth" means the networth as defined clause (ga)of subsection (1) of section 3 of the Sick Industrial Companies (Special Provisions) Act,1985
In section 50B of the Income-tax Act, for the Explanation, the following Explanations shall be substituted, namely:-
Explanation 1.-for the purposes of this section, " net worth" shall be the aggregate value of total assets of the undertaking or division as reduced by the value of liabilities of such undertaking or division appearing in its books of account:
Provided that any change in the value of assets on account of revaluation of assets shall be ignored for the purpose of computing the net worth.
Explanation 2 for computing the " net worth", the aggregate value of total assets shall be.-
(a) in the case of depreciable assets, the written down value of the block of assets determined in accordance with the provisions contained in sub-item (C) of item (i) of sub-clause (c) of clause (6) of section 43; and
(b) in the case of other assets, the book value of such assets.
Slump sale can be effected by non-corporate assessees also.
Slump sale can result in long-term capital loss also.
Section 72A- Provisions relating to carry forward and set off of accumulated loss and unabsorbed depreciation allowance in certain cases of amalgamation or demerger,etc.
Section 72A has been substituted by a new section 72A by the Finance Act, 1999 with effect from 1-4-2000(i.e. for Assessment year2000-01 and subsequent years)
. The new Section is more liberal and additionally covers cases of demergers as well. The old section required Central Govt. to satisfy itself on the recommendation of the specified authority that the following conditions are fulfilled (a) company was not financially viable by reason of its losses, liabilities and other relevant factors (b) the amalgamation was in public interest and(c) that other conditions as may be specified by Central government to ensure that the benefit under this section is restricted to facilitate rehabilitation or revival of the business of the amalgamating company, have been fulfilled. Thereafter Central Govt. may make a declaration to the above effect and then accumulated losses and unabsorbed depreciation of the amalgamatiing company shall be deemed to be the loss or, as the case may be allowance for depreciation of the amalgamated company for the previous Year in which amalgamation was effected and other provisions of this Act relating to carry forward of loss and allowance of depreciation shall apply accordingly.
Besides there were other conditions like carrying on the business without any modification or reorganisation and certificate from specified authority that adequate steps have been taken for revival.
New section 72A
(1)Where there has been………notwithstanding anything contained in any other provision of this Act accumulated loss and unabsorbed depreciation of the amalgamatiing company shall be deemed to be the loss or, as the case may be allowance for depreciation of the amalgamated company for the previous Year in which amalgamation was effected and other provisions of this Act relating to carry forward of loss and allowance of depreciation shall apply accordingly.
(2)not allowed unless the amalgamated company-
(3)where conditions in (2) not complied setoff of loss or allowance of depn made in any previous year to amalgameted company shall be deemed to be income chargeable for the year in which not complied.
(4) Notwithstanding…………the Act, in the case of a demerger, the accumulated loss and the allownce for unabsorbed depreciation of the demerged co. shall-
(a) where such loss/unabsorbed depreciation is directly relatable to the undertaking. transferred to resulting company, be allowed to be carried forward and setoff in the hands of the resulting company
(b)where such loss or unabsorbed Depreciation is not directly relatable to undertaking transferred to resulting company, be apportioned between Demerged and resulting company in the same proportion in which the assets of the undertakings have been retained by demerged company and transferred to resulting company and be allowed to be carried forwad and setoff in the hands of the demerged or the resulting company as the case may be.[[assets will include current assets also here no conditions for holding assets or continuing business----also losses will not be for the previous year in which demeger was effected so appears….only balance period left will be allowed losses.???]]
(5)Central Government may specify conditions for genuine business purpose.
(6) Where there has been…………….. firm or a proprietory concern is succeeded by a company and fulfilling conditions of 47(xiii) or (xiv)…then notwithstanding anything contained in any other provision of this Act accumulated loss and unabsorbed depreciation of the predecessor firm or proprietory concern shall be deemed to be the loss or, as the case may be allowance for depreciation of the amalgamated company for the purposes of previous Year in which business Reorganisation was effected and other provision of this Act relating to carry forward of loss and allowance of depreciation shall apply accordingly .
Provided if conditions of section 47(xiii) or (xiv) not fulfilled, the setoff of loss or allowance of depreciation made in any previous Year in the hands of successor company shall be deemed to be the income of the company in the year in which conditions not complied.
(7) defines accumulated loss and unabsorbed depreciation.
Chapter XX-C is attracted when there is a transfer of immovable property for an apparent consideration exceeding the specified amount. Thus one would have to evaluate (I) whether the property, whose value may be assumed to exceed the specified amount, is an immovable property, (ii) whether the vesting under the court order is a transfer and (iii) whether the shares and/or other consideration received by the shareholders of the amalgamating company or demerged company is the apparent consideration.
b) Wealth tax
No special implication for amalgamated Companies
c) Gift Tax
No special implication for amalgamated Companies
d) Stamp Duty
Essentials for levy of stamp duty: -
(a) Not having been previously executed by any person is executed in the "state".
(b) Having been executed outside the states relates to any property situated in the state or to any matter or thing done or to be done in the state AND is received in the state.
Some of the typical instruments, which would be executed in some types of amalgamation, are as follows on which stamp duty is leviable.
By virtue of section 2(g) of Bombay Stamp Act, the order of the Court ordering the vesting of transfer of assets and liabilities of the transferor Company to the transferee Company is deemed to be a conveyance and hence stamp duty is attracted.
Transfer of the property of a partnership firm to a limited company on its conversion was held to be treated as a conveyance and, hence, chargeable to stamp duty, irrespective of the fact the partners of the firm were the shareholders of the company.
DECISION OF BOMBAY HIGH COURT IN LITAKA PHARMACEUTICALS
This landmark decision has serious implications for mergers covered not just by the Bombay Stamp Act, 1958, but also mergers covered by Acts of other States
The following are the major conclusions of the Honourable Court: -
1) An amalgamation under an order of Court under Section 394 of the Companies Act, 1956 is an instrument under the Bombay Stamp Act.
2) States are well within their jurisdiction when they levy stamp duty on instrument of amalgamation.
3) Stamp duty would be levied not on the gross assets transferred but on the "undertaking". When the transfer is on a going concern basis. i.e. on the assets less liabilities. The value for this purpose would thus be the value of assets less liabilities. The value for this purpose would thus be the value of shares allotted. This decision has been accepted in the Act and now stamp duty is leviable on the value of shares allotted plus other consideration paid.
Stamp duty on other documents
Usually in a merger, several other documents, agreements, indemnity bonds, etc. are executed, depending the facts of each case and requirements of the parties. Stamp duty would also be leviable as per the nature of the instrument and its contents
Accounting Standard 14.
Accounting for Amalgamation (Mandatory)
METHODOLOGY OF VALUATION
There are three methods commonly adopted in India for valuation of shares. These are the Net Assets Method, the Earning Capitalisation Method and the Market Price Method. Each method proceeds on different fundamental assumptions, which have greater or lesser relevance, and at times even no relevance, to a given situation. Thus the method to be adopted for a particular valuation must be judiciously chosen.
Business valuation-perpetuity method-
Employee valuation-Infosys-Aptech-Dr. Reddy's Laboratories-Rolta have done employe valuation based on Lev and Scwartz model-juggi's variation-
Valuation of Distribution network-
Valuation of Software
Valuation of Knowhow- Ranbaxy
Valuation of Other intangibles
Valuation of Dot com companies-number of hits/eyeballs-number of sticky eyeballs-number of repeat sticky eyeballs-
2.Capital structure-history-shareholding pattern-top 50 shareholders-depository agreements-stock options agreements-nontransferable, non disposal unsertakings-
2.Stock Exchange filings, other disclosure documents and related items.
3.Government regulations filings.
4.sales of securities and financing
7. management and controlling persons.
8.labour personnel and human resources.
(II) PROCEDURE FOR A DEMERGER/SPIN –OFF
g) SSI/SIA Registration
h) MRTP Act
By concept, merger increases the size of undertakings. If two concerns which have merged are in the same industry industry, normally the market share of the new undertaking would be larger and it is possible that it may move closer to be a monopoly or a near monopoly.
In line with the new and liberal Industrial Policy announced in 1991, substantial amendments have been made in the MRTP Act, more particularly with respect to mergers, amalgamations and takeovers and important provisions governing such transactions have been omitted. While, as ruled by the Supreme Court the Act may not hamper mergers before and at the time of the process, post merger regulation is possible and while deciding on a merger as well as while as during the operation of the new undertaking, care would have to be taken to ensure that the provisions are not contravened.
Sick Industrial Companies (Special Provisions) Act, 1985
As per Regulation 3(1)(j), Regulation 10,11 and 12 of Takeover Code do not apply to (transfer of shares) pursuant to a scheme-(i) framed under Section 18 of the SICA,1985.
Difference between Mergers and Acquisitions-
Acquisitions versus takeovers-
Law relating to acquisition and takeover of listed companies
General Considerations for Acquisition/takeover
Before deciding on a takeover, the Acquirer has to consider some or all of following factors
f) Special Considerations on deciding a strategy for takeover :
LEGAL ASPECTS OF ACQUISITIONS
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.
-Indirect acquisitions now covered.
-Takeover process made smoother.
-Acquisition of control without acquiring voting rights included
-New definitions introduced
-Protection of shareholders through escrow, etc.
2(e)-Person acting in concert-
Regulation 3 Applicability of the Regulations[10,11 and 12]
First checkup whether the proposed acquisition will be hit by Regulation10,11,or 12-then checkup whether you are entitled for exemption-Exemption from Takeover code under Regulation 3.
+3[1[a]allotment in a public issue-full disclosures for firm allotments-
*+3[c]Preferential allotments-acquisition via preferential allotment is possible-
3[d]allotment to underwriters pursuant to any underwriting agreement-
*+3[e]inter se transfer of shares among I]group companies, ii]relatives and iii][a]Indian promoters and collaborators iii][b] promoters
3[f]stock-brokers for clients, market maker during market making,Public Financial Institutions on their own account, Banks and FIs as pledges.
3[g]transmission on succession or inheritance.
*3[h]acquisition by government companies.
*+3[i]from state level FIs and their subsidiaries to co-promoter(s) pursuant to an agreement.
3[j]pursuant to a scheme under SICA or arrangement or reconstruction or merger or demerger under any law or regulation, Indian or foreign.
3[k]shares of unlisted companies.
3[l]such cases as may be exempted from applicability of chapter III by the Board.
*intimate to the exchange where shares are listed, of the proposed transactions at least 4 working days in advance in case of acquisition exceeding 5% of the voting share capital of the company.
+submit a report to SEBI within 21 days of acquisition if acquirer alongwith PAC and alongwith existing holding gets 15% or more of the voting rights
CHAPTER II-DISCLOSURES OF SHAREHOLDING AND CONTROL IN A LISTED COMPANY
Regulation 6 Transitional provision-intimation of existing shareholding on intimation of new code-
Regulation 7 Acquisition of more than 5% shares or voting rights in a company(taken together with shares or voting rights, if any, held by him) shall disclose the aggregate of his shareholding or voting rights to the company-
Regulation 8 Continual disclosures-(1)yearly disclosures by every person who holds more than 15% , within 21 days from 31st March(2) by promoters and persons having control within 21 days of 31st March and record date(3) by Company
CHAPTER III-SUBSTANTIAL ACQUISITION OF SHARES OR VOTING RIGHTS IN AND ACQUISITION OF CONTROL OVER A LISTED COMPANY
Regulation 10 No acquirer shall acquire shares or voting rights which (alongwith held by him or by PAC with him) entitle him to exercise 15% or more of the shares or voting rights in a company-unless such acquirer makes a Public Announcement to acquire shares of such Company in accordance with the Regulations-limit increased to 15% from 10% wef 28-10-1998-trigger off point-Regulation 10,11 and 12 are embargo-acquire v/s agreeing to acquire-
Regulation 11 Consolidation of holdings-(1)applies to acquisition of additional shares or voting rights by an acquirer with PAC-creeping acquisition- no acquirer who has acquired 15%(earlier 10%) or more but not more than 75%(earlier 51%) shall acquire either by himself or through or with PAC additional shares entitling himto exercise more than 5 % (earlier 2%) in any period of 12 months unless such acquirer makes a Public Announcement to acquire shares of such Company in accordance with the Regulations unless such acquirer makes a Public Announcement to acquire shares of such Company in accordance with the Regulations -running period of 12 months-Reliance and Tatas(2) additional shares beyond 75% can not be acquired without PA.
Explanation-for the purpose of Regulation 10 and 11 acquisition shall mean and include direct acquisition in a listed company as well as indirect acquisition of holding companies, whether listed or unlisted whether in India or abroad
Regulation 12 Acquisition of control over a company-applies even when no shares are acquired -Public announcement and acquisition of shares necessary-Gujarat Ambuja ACC controversy-control may change by a resolution of shareholders-
Explanation [i]cessation of control from joint owners to one or more persons shall not be deemed change in control-change in nature and quantum of control shall also not constitute change in control-
if transfer from joint to sole control is at less than market value special resolution to decide mode of disposal by a letter o offer or by block transfer to the existing shareholders in control-
[ii] if any person or persons are given joint control, such control shall not be deemed to be a change in control so long as the control given is equal to or less than the control exercised by person[s] presently having control over the company- not happily worded
Regulation 13 Appointment of a merchant banker-before making PA-category I-unrelated-
Regulation 14 Timing of the public announcement of offer-by MB not later than 4 working days
Regulation 15 Public announcement of offer-newspapers-two working day before issuance, copy to SEBI, SEs and target company-
Regulation 16-contents of Public announcement of offer-
Regulation 17-brochures-PA, etc. not to contain misleading information-prosecution-penalty section 15H Rs. 5 lacs-
Regulation 18-submission of draft letter of offer to Board within 14 days-
Regulation 19-specified date-like a record date-not later tan 30th day from PA-
Regulation 20-Minimum offer price-highest of -negotiated price,highest price paid for any acquisition in last 26 weeks prior to PA by acquirer or PAC,price paid ina preferential offer during 12 months upto closure of offer,average of weekly high-low of closing prices at most frequently traded exchange, during 26 weeks preceding date of PA.
Regulation 21-Minimum number of shares to be acquired-
Regulation 22, 23 and 24 General obligations of acquirer, Board of Target company and Merchant banker.
Regulation 25-Competitive bid-a tool for takeover defence-also a process of price discovery-sterlite, Indal takeover bids-
Regulation 26-Upward revision of offer
Regulation 27-withdrawal of offer
Regulation 28 Provision for escrow
(I) Procedure for friendly Takeover of a Listed Company
C) POST OFFER
44. Acquirers to open special Account and transfer funds for payment to seller. (Reg.29)
45. LM to allow Transfer of Escrow money to special Account.
46. Registrar to Issue to receive forms, certificates and other documents.
47. Registrar to Issue to verify transfers. Target company to cooperate. (Reg.)
48.Decide on the proportionate basis of acceptance of offer, if offer is oversubscribed. (Reg. )
49.Make payment to those whose offers are accepted.
50.LM to file Report with SEBI.
Section 108A to 108I of the Companies Act, 1956 govern purchase of shares and takeover.
Restriction on acquisition of certain shares-prior approval of Central Government when acquisition exceed 25% of equity capital-
Restriction on transfer of shares
Restriction on the transfer of shares of foreign companies
Power of Central Government to direct companies not to give effect to the transfer
Time within which refusal to be communicated
Nothing in Sections 108A to 108D to apply to Government companies, etc.
Applicability of the provisions of sections 108A to 108F-applies to exiting or would be dominant undertakings
Construction of certain expressions used in sections 108A to 108G
Section 108 I
Penalty for acquisition or transfer of share in contravention of sections 108A to 108D
Section 293 -Restriction on powers of Board
Section 372A- Loans,and Investments
Section 371- Penalties for contravention of section 369,370 or 370-A
Section 372- Purchase by company of shares, etc., of other companies
Section 373 –Investments made before commencement of Act
Section 374- Penalty for contravention of section 372 to 373
Section 376- Condition prohibiting reconstruction or amalgamation of company except on continuance of managing agent, etc., to be void.
Securities Contracts( Regulation) Act, 1956.
Section 22A of SCRA was enacted for free transferability and registration of transfer of listed securities of companies, which was omitted in pursuance to enactment of Depositories Act,1956.