Changing paradigms in the M&A landscape

Mergers and acquisitions (M&A) are the prime driving force for the growth of any economy. The ease with which M&A can be effected goes a long way in determining the growth of an economy. The Companies Act, 2013, strives to foster such growth by codifying certain concepts which were followed in practice but not contained in law earlier and by bringing about greater transparency and accountability in the age old procedures of M&A, thereby visibly making India’s corporate law friendlier and more acceptable in the global arena.

Key aspects of M&A introduced in the act and the objectives sought to be achieved are analysed below.

Notice for approval to be sent to concerned regulators: The act requires that the notices of meeting for approval of a scheme of merger be sent to the central government and also to various regulatory authorities (Income Tax Department, Reserve Bank of India, Securities and Exchange Board of India, etc.) including sectoral regulators likely to be affected by the scheme. The notice should be accompanied by a valuation report and disclosure statements, explaining the effects of the scheme on key managerial personnel and promoter and non-promoter members.

This procedure was already followed earlier under directions of the court but making it mandatory at the first stage will go a long way in reducing the time required for an M&A transaction as the concerned regulators will have ample time to send their representations, if any, and will also have all the information readily available for them to come to a conclusion.

Minimum threshold for objection: The act enables only persons holding at least 10% shareholding or outstanding debt amounting to at least 5% of the total outstanding debt to raise an objection to a scheme of merger. This should do away with frivolous and unscrupulous litigation objecting to M&A schemes.

Certificate of accounting treatment: The act requires a scheme of merger to be accompanied by a certificate by the company’s auditor certifying the accounting treatment of the scheme to be in conformity with the provisions of the act. This gives assurance to the various stakeholders that the scheme does not use innovative accounting treatment for financial remodelling to their detriment, and also shifts to the company’s auditors the onus to ensure that they do not succumb to pressures of the promoters and other interested parties.

Fast-track mergers: The act has enabled fast-track mergers between holding companies and their wholly owned subsidiaries or between two or more small companies, where a scheme of merger has been approved by members and creditors holding 90% of the total shareholding and debts of the companies respectively. In such cases, the final approved scheme is required to be sent to the central government for its approval, which it may give provided it is of the opinion that no stakeholder is prejudiced by the scheme.

Cross-border mergers: The act has also enabled the merger of an Indian company into a foreign company. This will provide an additional exit route to investors in overseas jurisdictions, which will boost investor confidence and could ultimately lead to increased foreign investment in the country.

Minority share purchase: The act has introduced an exit mechanism for minority shareholders, under which shareholders holding 90% or more of the issued equity share capital of a company (by virtue of amalgamation, share exchange, conversion, etc.) may make an offer to the minority shareholders to buy them out. This will lead to a reduction in litigation with minority shareholders and enable a scheme of merger to sail smoothly.

Other related aspects

In cases where wholly or partly owned subsidiaries merge with holding companies, a transferee company is prohibited from holding treasury shares in its own name or in the name of a trust, in order to provide greater transparency. Moreover, any inter-company investments between companies involved in mergers are now required to be cancelled.

Where listed companies merge with unlisted companies, a transferee company now has an option to continue to be an unlisted company until it gets listed or applies to do so.

Shareholders’ approval of any M&A scheme is now to be obtained by a postal ballot. This will involve wider participation of the shareholders in voting and will protect the shareholders’ interest.

Conclusion

The overall impact of the act on M&A is to introduce certain simple and forward looking concepts and at the same time impose checks and balances to prevent abuse of power by the promoters and enable greater shareholder participation in the overall scheme.

Pankaj Agarwal is a partner, Kunal Rajpal is a principal associate-designate, and Kunal Sharma and Amit Kumar are associates at Amarchand & Mangaldas & Suresh A Shroff & Co (Ahmedabad office). The views expressed in this article are those of the authors and do not reflect the position of the firm.