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LAW CORPORATE LAW Compromise, Arrangement, Reconstruction LAW CORPORATE LAW Compromise, Arrangement, Reconstruction, Amalgamation and Merger of Companies COMPROMISE, ARRANGEMENT, RECONSTRUCTION, AMALGAMATION AND MERGER OF COMPANIES Subject Name: Law Paper Name: Corporate Law Module Id: 16 Pre-Requisites: Knowledge of Companies Act 2013 and Companies Act 1956 Learning Objectives After reading this module, you shall be able to learn about the following: • Concept about corporate restructuring, mergers and amalgamations • Legal Provisions related to mergers under the Companies Act 2013 • Role of Judiciary in sanctioning the scheme. Keywords: Merger, amalgamation, corporate restructuring, companies Learning Outcome: The reader shall be able to understand the concept and need for corporate restructuring and legal provisions for sanctioning a scheme of merger under the Indian Companies Act 2013. 1. Introduction Mergers, amalgamations, acquisitions, compromises, arrangement or reconstruction are all different forms of corporate restructuring exercises in the corporate world. All these activities are governed by regulations in different countries. Corporate restructuring is a collective term for a variety of different business transactions. The companies are required to take approval from various regulatory authorities and adhere to various legal provisions. Considering various issues involved in the cross border mergers & acquisitions, it becomes tedious and difficult to get the approval under every regulation and under every Act. Corporate Restructuring in any form has become a mandatory activity if corporate houses have to survive. Corporate restructuring might results in change generally like change in share capital or capital structure, change of shareholders, change of control, removal of a minority, change of business, change of operating entities etc. If a company has to grow, it has to necessarily restructure itself within its corporate lifetime. Such restructuring can be in the form of reorganization or reconstruction. Corporate restructuring can be either organic or inorganic. Restructuring or changes done within the organ of the company is the organic or internal restructuring. It can be either operational, financial or managerial. Whereas, restructuring or changes introduced with the help of external forces is known as inorganic or external restructuring. Compromises, arrangements, mergers, amalgamations or acquisitions are a form of inorganic corporate restructuring. Announced mergers & acquisitions from 1999-20131 1. Meaning, Need and Scope of Corporate Restructuring Corporate restructuring is basically a business decision. In the words of Justice Dhananjaya Y. Chandrachud, "Corporate restructuring is one of the means that can be employed to meet the challenges and problems which confront business. The law should be slow to retard or impede the discretion of corporate enterprise to adapt itself to the needs of changing times and to meet the demands of increasing competition. The law as evolved in the area of mergers and amalgamations has recognized the importance of the Court not sitting as an appellate authority over the commercial wisdom of those who seek to restructure business."2 It can be categorized under various heads, such as: • debt and capital restructuring • internal and external restructuring • organic and inorganic restructuring 1 http://www.imaa-institute.org/statistics-mergers-acquisitions.html#MergersAcquisitions_India, last accessed on 29th June 2014. 2 Ion Exchange (India) Ltd., In Re (2001) 105 Comp Cases 115 (Bom). • Financial, organizational and operational restructuring Inorganic/ External Restructuring Mergers Amalgamations Acquisitions Various forms which a restructuring exercise may take are as under: 1. Expansion which includes Mergers and acquisitions, tender offers, joint ventures 2. Sell Offs which includes spin offs, split off, split ups, divestitures, equity carve outs 3. Corporate Control which includes premium buy back, standstill agreements, anti-takeover amendments and proxy contests 4. Changes in Ownership Structure through various exchange offers, share repurchase, going private and LBOs in few economies. Fig. 1 Expansion Expansion Tender Offers & Mergers Amalgamations Tender Offers Fig 2 Sell Offs Sell Offs Divestitures Spin Offs Split Offs Split Ups Equity Carve Outs Fig. 3 Corporate Control Corporate Control Anti-takeover Premium Buy Standstill Amendments & Back agreements Proxy Contests Fig. 4 Changes in Ownership Structure Changes in Ownership Structure Share Going Private Exchange offers Respurchase LBOs Corporate restructuring solves different purposes for different companies at different points of time. It may take up various forms such as merger, amalgamation, demerger, reverse merger, spin-off, LBOs and many more. The purpose of each of these restructuring activity is different but each one of them are targeted to rebuild or rearrange the corporate structure. The reason to opt for a restructuring activity whether internal or external may differ from company to company depending on its size, valuation, business needs etc. The simple reasons for a company to restructuring itself through any of the medium mentioned above are as under: 1. To concentrate on areas of core competencies or specialization 2. To achieve economies of scale by expansion 3. For geographical and product diversification by domestic and global markets. 4. To achieve operational synergy and efficient allocation of managerial capabilities and infrastructure 5. For the revival and rehabilitation of sick industrial units by adjusting losses of the sick unit with profits of a healthy company 6. Vertical integration enables acquiring constant supply of raw materials and access to scientific research and technical knowhow 7. To improve corporate performance to bring it at par with the competitors by taking advantage of each other. The scope of Corporate Restructuring is huge and entails within itself all the benefits of restructuring such as synergy, economies of scale, profitability and improving efficiency. In this era of liberalization, privatization, globalization, and competition, survival and growth has become challenging for companies. 2. Meaning of Compromise, Arrangement, Merger and Amalgamation Compromise and Arrangement The term arrangement has been given a wide scope under the Companies Act 2013. According to section 230 of the Companies Act 2013, an arrangement includes a reorganization of the company’s share capital by the consolidation of shares of different classes or by the division of shares into shares of different classes, or by both the methods. The Act enunciates two possibilities of scheme of arrangement. They are (a) between a company and its creditors and (b) between a company and its members. Despite the tenuous difference, a scheme of arrangement with members (for amalgamation and mergers) is clearly distinguishable from a mere scheme of compromise with creditors. The primary difference between a compromise and an arrangement is that whereas an arrangement is between a company and its members or class of members, a compromise is between a company and its creditors or class of creditors. Another distinguishable feature is that in case of a compromise, there is an element of dispute present as it is done between a company and its creditors. But in case of an arrangement, there is no such element of dispute present. Merger Merger is the combination of two or more companies into a single company where one survives and the others lose their corporate existence. The survivor acquires the assets as well as liabilities of the merged company or companies. Generally, the company which survives is the buyer which retains its identity and the seller company is extinguished. Merger is the fusion of two or more existing companies. The company whose assets & liabilities are transferred is known as the transferor company where as the company to whom those assets, liabilities are transferred is known as the transferee company. All assets, liabilities and stick of one company stand transferred to Transferee Company in consideration of payment in the form of equity shares or debentures or a mix of the two or three modes. Fig. 5 Merger A/B A B Merger Amalgamation Generally, merger and amalgamation are considered to be synonymous with each other Amalgamation is a blending of two or more existing undertakings into one undertaking, the shareholders of each blending company becoming substantially the shareholders in the company which is to carry on the blended undertaking. There may be amalgamation either by transfer of two or more undertakings to a new company or by the transfer of one of more undertakings to an existing company". M.A. Weinberg defines the term “amalgamation" as an arrangement whereby the assets of two or more companies become vested in, or under the control of, one company which may or may not be one of the original two or more companies. The shareholding in the combined enterprise will be spread among the shareholders of the two or more original companies. Fig. 6 Amalgamation Amalgamation A B C 3. Mergers and Amalgamations under the Companies Act Mergers and amalgamations have been dealt widely under the Companies Act 2013. Section 230-240 of the Companies Act, 2013 ("the Act") provide us with a mechanism where in a scheme of arrangement may be entered into between a company, its creditors or and its members. The mechanism envisages a mandatory approval3 of the Tribunal which has replaced the High Court.4 Let us analyse the legal provisions
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