The Bill, yet to be passed by the Rajya Sabha, has the potential to make mergers simpler and quicker to implement in the future The Companies Bill, 2012, which is expected to be passed by the Rajya Sabha in the 2013 Budget Session of the Parliament, contains a number of significant and welcome changes that have the potential to make mergers significantly simpler and quicker to...
The Bill, yet to be passed by the Rajya Sabha, has the potential to make mergers simpler and quicker to implement in the future
The Companies Bill, 2012, which is expected to be passed by the Rajya Sabha in the 2013 Budget Session of the Parliament, contains a number of significant and welcome changes that have the potential to make mergers significantly simpler and quicker to implement in the future.
On December 18, 2012, the Companies Bill, 2012 (the "Bill") was passed by the Lok Sabha. Once passed by the Rajya Sabha, the Bill will replace the Companies Act, 1956 (the "1956 Act"). One of the long stated objectives of bringing in a new company law statute has been to amend the statutory framework governing mergers and amalgamations and to enable corporate reorganizations to be undertaken with greater speed and efficiency. This article briefly examines some of the provisions of the Bill that relate to mergers and amalgamations, focusing in particular on how these differ from the current framework set out in the 1956 Act. Except where otherwise specified, references to “Clauses” and “Sections” in this article are references to clauses of the Bill and sections of the 1956 Act, respectively.
Under the new framework, the merger process will be overseen by the National Company Law Tribunal (the "Tribunal"). While the 1956 Act also contemplates the Tribunal playing such a role, the Tribunal is yet to be established and it is the High Courts that are currently performing the role of the Tribunal in reviewing and approving merger schemes.
Contractual Mergers
One of the key changes introduced in the Bill is the provision that allows contractual mergers to take effect without a court/tribunal process in certain cases. Under Clause 233, in the case of mergers between “small companies” or between a holding company and its wholly owned subsidiary, where a scheme has been approved by at least 90% of the shareholders as well as the creditors in value and subject to certain other conditions (including the Registrar of Companies, the Official Liquidator or the Central Government not having raised any objections during the prescribed period), the scheme will take effect upon registration by the Central Government, without the need for any order of the Tribunal and the transferor company shall be deemed to be dissolved.
Where objections are raised by the Registrar of Companies, the Official Liquidator or the Central Government, the scheme may be referred to the Tribunal, which will then consider it under the regular process set out in Clause 232. The Bill defines a “small company” as one that has a share capital of less than INR 50 lakhs or a turnover of not more than INR 2 crores or such higher amount as may be prescribed by the Central Government. The Central Government may prescribe other classes of companies to which these provisions will apply.
Given that the existing stamp duty statutes, as well as relevant case law, do not contemplate the possibility of a scheme taking effect without an order of a court/tribunal, one may expect to see States legislating to explicitly make such contractual schemes chargeable to stamp duty.
Approval Thresholds
Under the 1956 Act, where the shareholders and/or creditors of a company are required by the High Court to meet and consider a scheme of arrangement, the scheme will require the approval of 3/4ths in value, as well as a majority in number, of the relevant shareholders and/or creditors. Under the Bill, however, the only relevant approval threshold in such a case will be that of 3/4ths of the relevant shareholders and/or creditors in value and there will be no need for the approval of a majority of the shareholders and/or creditors to also be obtained. On this issue, the view of the Expert Committee on Company Law set up in December 2004 (commonly referred to as the Irani Committee) was that the additional requirement in the 1956 Act for approval of a majority in number of the shareholders and creditors was not only contrary to international practice but was also superfluous where a scheme is approved by 3/4ths in value of the relevant shareholders and/or creditors.
Even though the 1956 Act does not contain any express provisions allowing a court to dispense with the need to hold creditors’ and shareholders’ meetings to consider schemes, courts have in practice been granting such dispensations in certain cases. The Bill now expressly empowers the Tribunal to dispense with calling a creditors’ meeting to consider a scheme if at least 90% in value of the relevant creditors confirm the scheme by way of an affidavit. However, there is no corresponding power to dispense with a shareholders’ meeting and the position that appears to have been taken by the authors of the Bill is that it is essential to ensure the presence and participation of shareholders in a meeting to consider a critical matter such as a merger.
Shareholder Challenges
Under the Bill, a scheme may be challenged only by persons having at least a 10% shareholding or 5% of the total outstanding debt. The 1956 Act contains no such restriction. The intention behind this new provision appears to be to limit the ability of shareholders with miniscule shareholdings to raise frivolous objections against a scheme.
Notification to Authorities
Under Clause 230(5), the notice of a scheme that is to be provided to the shareholders and creditors of a company must also be sent to the Central Government, income tax authorities, the Reserve Bank of India (the "RBI"), the Securities and Exchange Board of India (the "SEBI"), stock exchanges, Competition Commission of India (the "CCI"), “if necessary”, and such other sectoral regulators or authorities that are likely to be affected by such scheme. Should these authorities have any concerns about, or objections to, the scheme, they may make representations to the Tribunal in respect of the scheme within thirty days of receipt of the notice.
Even though there is a limited period within which authorities may raise objections, there still is scope for mergers to be delayed, especially where any regulatory filings with authorities have not been completed.
The provision does not clarify when it is “necessary” to notify each of these authorities and when this is not required. For example, should it be assumed that a notice to the SEBI and stock exchanges is not required in the case of mergers that do not involve listed companies and is a notice to the CCI required regardless of the size and turnover of the merging companies?
No Treasury Stock
The proviso to Clause 232(3) prohibits the retaining of any treasury stock pursuant to a merger and requires all such shares to be cancelled or extinguished. Clause 233(10) also applies similarly in the case of merger schemes that take effect without an order of the Tribunal. The view of the Ministry of Corporate Affairs in this regard is that such a ban on treasury stock is necessary to ensure good corporate governance and prevent market manipulation by companies indulging in trading their own shares.
Cross-border Mergers
The most anticipated and talked about change to the merger regime has been to allow mergers of Indian companies into a foreign company. Under Section 394 of the 1956 Act, while a foreign company can merge into an Indian company, the reverse is not possible. Clause 234 will permit mergers of Indian companies into companies incorporated in jurisdictions that have been notified for this purpose by the Central Government as well as vice versa. The provisions applicable to mergers exclusively between Indian companies will also apply to such cross-border mergers. The Central Government, in addition, is empowered to make specific rules in consultation with the RBI to govern such mergers.
As per Clause 234, the consideration paid to the shareholders of a merging company can include depository receipts. Where an Indian company merges into a foreign company, shareholders in the Indian company can, therefore, receive as consideration, Indian depository receipts issued by the foreign company.
Mergers of Listed Companies
Clause 232(3)(h) now provides that in the case of a merger between a listed transferor company and an unlisted transferee company, the transferee company shall remain unlisted after the merger. This expressly excludes the possibility of “backdoor listings” through reverse mergers. Clause 232 also stipulates that in the case of such a merger, the shareholders of the listed transferor company must be given an exit option at a price not less than what may be specified by the SEBI for this purpose.
Squeeze Outs
The provisions relating to the squeeze out of dissenting minority shareholders, currently set out in Section 395 of the 1956 Act, have been incorporated into Clause 235. One relevant change introduced in the Bill is with respect to the acceptance thresholds that are required to be met in order to enable a squeeze out to be effected. Under the 1956 Act, in the case of a merger, where the transferee company has held more than a 10% stake in the transferor company prior to the merger, not only must the scheme have been accepted by 90% in value of the shareholders in the transferee company whose shares are sought to be transferred but in addition, these accepting shareholders must also constitute a majority of 3/4ths in number. In the Bill, however, the only acceptance threshold stipulated is that of 90% in value of the shareholders whose shares are sought to be transferred.
It should be noted that, as with the 1956 Act, in order to effect a squeeze out under Clause 235, in the first instance, a scheme or contract for the transfer of shares must have been made to the shareholders of a company and accepted by a prescribed number of them. What the Companies Bill does not still provide for is a wide-ranging squeeze out option that may be exercised in all cases where a majority shareholder acquires a stake of 90% or more in a company.
Other Changes
Accountants’ Certificate
Any scheme filed with the Tribunal must be accompanied by the relevant companies’ statutory auditors stating that the accounting treatment proposed in the scheme complies with the prescribed accounting standards. A similar provision already applies to listed companies. In addition, until the completion of the scheme, each company must file annually a statement certified by a chartered accountant, cost accountant or company secretary to the effect that the scheme is being complied with in accordance with the orders of the Tribunal. While the Bill does not explicitly clarify the meaning of the term “completion of the scheme”, one would assume that this is a reference not to the mere filing of a Tribunal order sanctioning a scheme with the Registrar of Companies (or, in the case of a contractual merger, the registration of a scheme by the Central Government) but, rather, to the completion of all steps and the satisfaction of all conditions (particularly those as set out in the scheme) as may be necessary in order to complete the proposed merger process.
Buybacks
In light of Clause 230(8) of the Bill, where a scheme involves a buyback of securities, such a buyback must be in accordance with Clause 68, which is the provision governing buybacks (corresponding to Section 77A of the 1956 Act). While courts have, in the past, approved schemes involving buybacks where the buybacks were not in accordance with Section 77A, this will not be possible under the provisions of the Bill.
Postal Ballots
Where a meeting has been called for the shareholders or creditors to consider a scheme, votes may now be cast by postal ballot, in addition to the option of voting in person or through a proxy, as is already provided under the 1956 Act.
Closing Thoughts
The provisions of Clauses 230 to 240 of the Companies Bill 2012 contain a number of significant and welcome changes that have the potential of making mergers significantly simpler and quicker to implement in the future. Looking ahead, the Government would also need to issue notifications and introduce certain rules in order to give effect to some of these provisions, particularly those relating to cross-border mergers. The success of the intended reforms would depend, to a significant degree, on the content and framework of these rules and notifications and also the extent to which the various authorities and regulators are able to work together to give effect to the new merger framework.
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