Recent changes in law towards fast-track M&A

By Kalpataru Tripathy and Kirti Mahapatra, Amarchand & Mangaldas & Suresh A Shroff & Co
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Sections 391 to 394 of India’s Companies Act, 1956, provide a comprehensive legal framework that enables corporate entities to enter into multi-faceted arrangements with their shareholders and creditors by way of a court-approved scheme. The word “arrangement” has been interpreted to include merger/amalgamation/acquisition, demerger/slump sale/hive-off, debt/capital restructuring, and all other forms of corporate restructuring, and courts have declared these provisions to be a complete code in themselves, in relation to giving effect to such corporate restructuring proposals.

Kalpataru Tripathy Partner Amarchand & Mangaldas & Suresh A Shroff & Co
Kalpataru Tripathy
Partner
Amarchand &
Mangaldas &
Suresh A Shroff & Co

The Companies Bill, 2011, which would overhaul the whole act, provides for fast-track mergers among group companies, cross-border mergers, etc. Certain provisions of the bill would facilitate mergers and acquisitions (M&A) between two or more small companies (as defined in the bill) or between a parent and its wholly owned subsidiary, which could be consummated without approaching a high court.

Under this mechanism, a notice of the proposed scheme inviting any objections or suggestions from the Registrar of Companies (RoC), the Official Liquidator (OL) or persons affected by the scheme, is to be issued by the companies proposing the scheme. Any objections or suggestions received within the specified time frame of 30 days must be considered by the companies in their respective general meetings and then the scheme has to be approved by members or classes of members representing at least 90% of the total share capital of the companies.

It is, however, debatable as to whether such changed procedure would shorten the overall timeline for restructurings in practice.

After this stage, such fast-track schemes must once again be filed with the central government, RoC and OL, which may raise any objections. If the central government, either because of the objections or suggestions raised or for any reason of its own, thinks that the scheme is not in the interest of the public or the creditors, it may file an application before the National Company Law Tribunal (NCLT), stating its objections and requesting that the NCLT consider the scheme as per the procedure provided under section 232 of the bill.

The bill further provides that a transferee company, on completion of an M&A, cannot hold any shares in its own name or in the name of any trust, either on its behalf or on behalf of any of its subsidiary or associate companies, and all such shares must be cancelled or extinguished on the merger or amalgamation, thereby eliminating the option of creating treasury stocks.

The above procedure would apply to M&A between Indian companies and companies incorporated in foreign jurisdictions, subject to such rules as may be prescribed by the central government in consultation with the Reserve Bank of India.

The bill also gives companies the power to acquire shares of shareholders who do not consent to a scheme that is approved by the majority of shareholders. An acquirer, or a person or group of persons acting in concert with such an acquirer, that becomes the registered holder of 90% or more of the issued equity share capital of a company, by virtue of such a corporate restructuring process, must notify the company of their intention to buy the remaining shareholding.

Kirti Mahapatra Associate Amarchand & Mangaldas & Suresh A Shroff & Co
Kirti Mahapatra
Associate
Amarchand &
Mangaldas &
Suresh A Shroff & Co

The bill’s focus on group companies and their internal restructuring seems to be shared by the Competition Commission of India (CCI), which issued the Competition Commission of India (Procedure in Regard to the Transaction of Business Relating to Combinations) Amendment Regulations, 2012, on 23 February.

The regulations have introduced key changes, such as widening the scope of exempt transactions, including in relation to intragroup M&As. As a result, intragroup M&As between a parent and a subsidiary that is wholly owned by group companies of the parent, or between two subsidiaries that are wholly owned by companies belonging to the same group, have been added to the list of intragroup acquisitions that are exempt from any CCI approval requirement. However, the amended provisions have not taken into account M&A of a company wholly owned by a group into another company controlled by the same group.

These recent legal developments have made the procedure for legally consummating an M&A transaction less cumbersome. But it is pertinent to note that the powers of the minority shareholders and creditors of a company would be watered down by the provisions of the bill.

Under the current act, any shareholder, creditor or interested person who is adversely affected by a scheme of arrangement can raise objections to it, before the appropriate high court, while under the provisions of the bill, minority shareholders holding less than 10% of the share capital of the company and creditors holding less than 5% of the total debt of the company cannot raise objections against any scheme and therefore, they may, at the most, be bought out by the person acquiring such company.

This change in law may reflect the legislature’s intent to prevent frivolous objections being raised against schemes, which often delay their effectiveness under law.

Kalpataru Tripathy is a partner and Kirti Mahapatra is an associate at Amarchand & Mangaldas & Suresh A Shroff & Co. The views expressed in this article are those of the authors and do not reflect the position of the firm.

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Amarchand Towers

216 Okhla Industrial Estate – Phase III

New Delhi – 110 020

Tel: +91 11 2692 0500

Fax: +91 11 2692 4900

Managing Partner: Shardul Shroff

Email: shardul.shroff@amarchand.com

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