Corporate Restructuring - Mergers or Amalgamations

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<p>COVER</p> <p>CORPORATE RESTRUCTURING:</p> <p>Mergers or AmalgamationsThe article discusses the most common and acknowledged form of corporate restructuring....NPS Chawla and Hitesh Sablok</p> <p>n their pursuit to grow and to attain certain strategic and financial synergies, companies go for corporate restructuring. Another underlying aim for corporate restructuring is to settle family dispute of the promoters' inter se or to enter into compromise between the company and its shareholders or creditors. The subject 'Corporate Restructuring' is of immense importance to every corporate professional and entrepreneur to understand and apply in the ever changing economic scenario. Corporate restructuring is a wider term, which encompasses a complete set of tools to transform existing organisational structure or capital of a company, in order to achieve its corporate objectives. Some of tools or modes of corporate restructuring are mergers or amalgamations, demergers, slump sale, takeover, disinvestment, joint ventures, buy back and sale of assets simpliciter. The article discusses the most common and acknowledged form of corporate restructuring - Mergers or Amalgamations.</p> <p>I</p> <p>(the 'Act'). However, the procedure to carry out a compromise or arrangement, which includes merger or amalgamation is explicated under the provisions of Sections 391-394A of the Act. In PMP Auto Industries Ltd; the Bombay High Court held that once a scheme of compromise or arrangement squarely falls within the ambit of Sections 391 to 394A of the Act, the same could be sanctioned, even if it involves doing acts for which procedure is specified in other sections of the Act. Therefore, Sections 391-394A of the Act are a complete code in itself. Its object is to effectively implement the scheme of compromise or arrangement or amalgamation (`Scheme') as a single window clearance, which the court sanctions in exercise of its powers under Section 394 of the Act.</p> <p>Dinesh Kaushal CFO &amp; Company Secretary, Tulip Telecom Ltd.</p> <p>BACKGROUND In common parlance, mergers or amalgamations are synonymous to each other and are used interchangeably. Amalgamation means unification or fusion of two or more than two existing companies into one single company. Merger or Amalgamation has not been defined under the Companies Act, 1956</p> <p>"If any one of the companies is a listed company, then the 'Scheme' has to be filed with the concerned stock exchanges at least one month before it is filed in the court. It is to be noted that the Listing Agreement requires that the 'Scheme' be filed with the stock exchange, a month before the same is filed in the High Court for approval, and it does not mandate that the sanction of the Stock Exchange has to be received before filing of the 'Scheme'."WITNESSOCTOBER 2009</p> <p>24</p> <p>COVER</p> <p>Hon%le Justice Gita Mittal Judge, Delhi High CourtGeorge Bernard Shaw stated that "Progress is due to the unreasonable person. The reasonable person adjusts to the world around. The unreasonable person seeks to change that world." This is manifested in the changes witnessed in the corporate sector. The paradigm shift of the Indian economy from a strictly regulatory regime towards liberalisation and the impact of globalisation on it has energised corporate restructuring in this country which includes mergers and amalgamations, de-mergers, slump sales, takeovers and acquisitions, sale of specific assets and capital reconstruction. Restructuring has been found essential for a company to survive a currently adverse economic climate and at times to avoid a takeover by dismantling and rebuilding deficient areas to improve a company's profitability and efficiency to keep pace with the changing competitive environment necessitates. Sections 391 to 394 of the Companies Act, 1956 provide a legal framework for corporate restructuring which vest the court with the power to consider the restructuring scheme and ascertain as to whether the scheme is just, fair, reasonable and not contrary to the provisions of law and it does not violate public policy. The scheme has necessarily to be based on share and asset valuations which can stand the tests of fairness. The exercise has to be tax efficient and take into its purview all implications under the taxing and regulatory statues. The process which is undertaken has to be so designed that it does not in any manner compromise on the core values of the merging entities and is sufficiently concerned with the interests of all stake holders which should include the shareholders, creditors as well as the human resource issues relating to employees.</p> <p>In addition to the aforesaid sections of the Act, Rule 67 to 87 of the Companies (Court) Rules, 1959 (Company Rules) lay down the complete details of the procedure to be followed for giving effect to a 'Scheme'. There are certain clauses of the listing agreement such as 24(f) and 24(h) to be kept in mind while executing a `Scheme' for any listed company. PROCEDURE First of all, a 'Scheme' is formulated between the companies involved in the arrangement. 'Scheme' is a document containing complete details of the compromise or arrangement agreed upon between the companies, their members and creditors. The process to make the `Scheme' effective starts with its filing with the High Court of the State, where the registered office of the company is situated and ends with filing of the High Court's order with the Registrar of Companies (ROC). The company that transfers its assets and liabilities to the other company</p> <p>is called the 'Transferor Company' and the company into which the 'Transferor Company' merges or transfers its assets and liabilities is called, the 'Transferee Company'. Valuation of the shares of all the involved companies forms an integral part of the 'Scheme'. On its basis only, it is calculated that how many shares in the `Transferee Company' are to be received by the shareholders of the 'Transferor Company'. Once the 'Scheme' is passed by the board of directors of all the companies involved, the procedure can be initiated. Moreover, Dinesh Kaushal*, CFO and Company Secretary, Tulip Telecom Ltd. explains, "If any one of the companies is a listed company; then the 'Scheme' has to be filed with the concerned stock exchanges, at least one month before it is filed in the court. It is to be noted that the listing agreement requires the 'Scheme' to be filed with the stock exchange. A month before the same is filed in the High Court</p> <p>In the matter of Indo Rama Textiles Limited and Spentex Industries and Others and in the matter of CLC Global Limited and Spentex Industries Limited, the Hon'ble High Court has observed that there is no requirement for taking the consent of the stock exchanges, under the Act or in the Company Rules.25</p> <p>OCTOBER 2009</p> <p>WITNESS</p> <p>COVERfor approval. It does not mandate that the sanction of the stock exchange has to be received before filing of the `Scheme'." In the matter of Indo Rama Textiles Limited and Spentex Industries and Others and in the matter of CLC Global Limited and Spentex Industries Limited, the Delhi High Court has observed that there is no requirement for taking the consent of the stock exchanges, under the Act or in the Company Rules. Besides this, SEBI has, by way of a recent insertion in clause 24(h) of the listing agreement, made it mandatory for obtaining a fairness opinicin from a merchant banker over the valuation done by the valuers. Once the 'no objection' of the stock exchange(s) is obtained or the period of one month after filing the 'Scheme' with the stock exchange(s) has elapsed; a first motion application or petition for convening or dispensing with the meetings of each class of shareholders and creditors of the companies, involved in the `Scheme', is filed with the High Court(s) having requisite jurisdiction. Meetings are convened if ordered by the court, wherein approval of majority representing 3/4th in value of</p> <p>CORPORATE RESTRUCTURING: MERGERS &amp; AMALGAMATIONS</p> <p>Hemant K Batra Lead Partner, Kaden Boriss Legal LLP Vice President, SAARCLAW, Chairperson, IICLAM (Singapore), Advisory Board Member, OIC (USA)Are there any specific countries, where M &amp; A activities are more prevalent? Why?</p> <p>Sushi! Kumar Jain DGM &amp; Company Secretary, HCL Infosystems Ltd.</p> <p>"Interestingly in a scheme of amalgamation where the 'Transferor Company' is a profit making wholly owned subsidiary of the 'Transferee Company', there is no requirement of convening the meetings of shareholders or creditors of the 'Transferee Company' because their rights are not affected by the said amalgamation. In that scenario, the 'Transferee Company' is not even required to approach the Court to get the 'Scheme' sanctioned."26</p> <p>Many Asian (especially, South Asia and Asia Pacific) and East European countries have become major play grounds for M &amp; A activities. These are diverse regions, having strong and ever growing economic growth with a huge natural resource and cheap labour. Even following the principles of economics, M &amp; A thrives more in developing economies as against developed.What are the main factors that affect M &amp; A activities in a country?</p> <p>Improved market access, growth of a country's economy, conducive investment mechanism, efficient regulatory laws, which tend to promote fast track entry as well as exit, growth potential and expected returns post merger or amalgamation can be some of the factors to affect the M &amp; A activities in a country.Do you think recession in the economy has any positive or negative effect on M &amp; A activities in India or elsewhere?</p> <p>WITNESS</p> <p>OCTOBER 2009</p> <p>Recession in an economy can have both positive as well as negative effects on the M &amp; A activities of any given country. Some of the negative effects of recession can be reduced investment and risk appetite, reduced liquidity in the market, reduction in the value of enterprises, increased gap between demand and supply, thereby less M &amp; A deals may occur. Some of the positive effects can be that companies may try and invest more in knowledge management within their organisation. As a result, the efficiency levels of the employees may increase, cost cutting may lead to reduction in superfluous expenditure and companies may try and manage themselves in a better manner. As I understand from some sources that despite economic slowdown, the total number of M&amp;A deals in India, during the first six months of the year 2009, stands at 123 with an announced value of $4,88 billion as against 269 deals. This has amounted to $16.10 billion during the corresponding period in 2008. fv1erger and acquisition activities in the country have gained momentum with the total deal volume in June, touching $850,62 million, much higher than in May. There were thirteen domestic deals, where both acquirer and target companies were Indian with an announced value of $587.74 million and many crossborder deals valuing at $262.88 million during the month. Three of the cross border deals were outbound deals, where Indian companies acquired business outside India with a value of $139 million.Do you think mergers and amalgamations in India are over regulated?</p> <p>two companies come together to reduce cost of production and thereby increasing their profits per unit of production.What advice would you give to the smaller companies involved in a merger?</p> <p>They must conduct a proper cost benefit analysis before cracking any kind of deal, keeping in mind the long term benefits due to such merger. They must work towards maximising the value for shareholders.</p> <p>Kindly share with us your experience of being instrumental in bringing about merger of a foreign company with an Indian company. What apprehensions regarding Indian laws are there in the mind of the foreign company? How did you allay such fears? What advice did you give?</p> <p>Let me talk about an ongoing M &amp; A, where I am advising a large MNC on acquisition of a medium scale Indian company; the main issues or apprehensions, which strike the acquirer are: (i) HR issues i.e. labour issues; (ii) Credibility of business evaluation; (iii) Title of immovable and movable assets; (v) Corporate compliances; (vi) Synchronisation of federal and provincial laws; and (vii) Enforceability mechanism for contracts. First and foremost, I advise on thorough due diligence; secondly, I advise on a list of conditions precedent to a transaction and finally, structuring a comprehensive but composite documentation with a bank indemnity or bank guarantee (wherever possible) to take care of unforeseen problems.</p> <p>No, I do not think that M &amp; A in India are over regulated. On the contrary, they are adequately regulated. In fact, the M &amp; A regime is automatic in respect of private limited companies; regulations mainly exist for listed companies, which is of paramount importance for the interest of the public shareholders and stakeholders. Regulation governing mergers are more complicated in countries such as the UK and the USA.Do M &amp; A help in increasing output, efficiency and profitability of the transferor company?</p> <p>What are the main sectors in India, which resort to mergers?</p> <p>The main sectors in India, which generally resort to mergers, are Pharmaceuticals, FMCG, FMCD, Banking and Financial sector, Auto and auto components, IT sector, Steel, Aluminium and Textiles.</p> <p>Why domestic M &amp; A are more successful than crossborder M &amp; A? What role does corporate culture difference play in it?</p> <p>Yes, it is true. The value increases for both the transferor as well as the transferee company depending on the motive of the merger or acquisition. The output or efficiency increases depending on the kind of merger, whether it is horizontal or vertical. They help in enhancing competition and increases market control. It is simple economics, where</p> <p>Domestic M &amp; A are more successful than cross-border M &amp; A due to differences in the corporate culture. It is harder for two entities to merge into one when the differences in corporate culture are more. Domestic mergers are not very profit oriented but they are more value oriented and lay more emphasis on the presence in the demand-supply chain in the market or economy.</p> <p>OCTOBER 2009</p> <p>WITNESS</p> <p>27</p> <p>shareholders and creditors present and voting is required. If meetings are dispensed with on the basis of prior written no tion letters of the shareholders and creditors of all the objec companies involved in the 'Scheme', then a second motion petition is filed with the High Court(s), seeking sanction to the</p> <p>'Scheme'. Notice of the final hearing needs to be published in English and in a regional language newspaper of wide circulation in the state, where the registered office is situated. Thereafter, if the court is satisfied that the 'Scheme' is not prejudicial to the interest of shareholders or creditors, is not against the public policy and there are no tenable objections raised by the authorities, then the court tends to sanction the...</p>


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