Mergers and acquisitions (M&A) are strategic moves in the business world that involve the combination or purchase of companies. In company law, these transactions come with legal intricacies and implications that guide the process. Let’s delve into the key aspects of M&A in company law.
A ‘merger’ signifies the amalgamation of two or more entities into a single entity, consolidating their assets and liabilities. Often referred to as ‘amalgamation,’ mergers typically involve companies of equal repute and scale of operations. In the context of the Income Tax Act, 1961, amalgamation is defined as the merging of entities, forming a new company or combining into an existing one. The process involves complex legal procedures, with mandatory approval from the National Company Law Tribunal (NCLT). The NCLT’s supervision is crucial to safeguard the interests of creditors and shareholders during the reorganization of the capital structure. The entire merger process, including approvals, can take 8-12 months. Shareholders of the merging companies may receive consideration in the form of cash or shares, depending on their preference.
Companies A and B merge to create a new entity, C, leading to the cessation of A and B as independent entities. The new company may retain the name of either A or B for strategic reasons.
Acquisition involves the procurement of one company by another. The acquirer, often the larger entity, purchases a significant amount of shares or assets of the target company. Unlike a merger, the acquired company retains its separate legal identity or existence, especially in a stock deal (not in an asset deal). The objectives behind mergers and acquisitions are diverse, including achieving economies of scale, acquiring technologies, and gaining access to various sectors or markets. The buyer company structures the deal based on whether it involves buying shares or assets of the target company.
The acquirer company buys a substantial portion of shares or assets of the target company, influencing the deal’s structure.
In summary, mergers and acquisitions play vital roles in the business landscape, offering companies strategic avenues for growth, diversification, and enhanced market presence.
1. Horizontal Merger:
In a horizontal merger, the merging and merged companies operate in the same industry, business line, and supply chain, often as competitors. The primary goals include expanding customer bases, increasing market share and power, and creating synergy. Examples include the merger of Lipton India and Brooke Bond, and Vodafone and Idea.
2. Vertical Merger:
A vertical merger involves companies operating in the same production line but at different stages of the supply chain. This type aims to achieve economies of scale. Examples include Amazon’s acquisition of Whole Foods and Reliance’s merger with Flag Telecom Group.
3. Reverse Merger:
A reverse merger occurs when a parent company merges with its subsidiary or a profit-making firm merges with a loss-making one. Also known as a triangular merger, an example is the merger of Godrej Soap with Gujarat Godrej Innovative Chemicals Ltd.
4. Conglomerate Merger:
Conglomerate mergers involve companies operating in different lines of business. Such mergers aim to diversify and spread risks. An example is the merger of L&T and Voltas Ltd.
5. Congeneric Mergers:
Congeneric mergers involve companies in the same or connected industries or markets but offering different products. Companies merge for synergies, increased market shares, or expanded product lines due to shared distribution channels, overlapping technology, or production systems.
1. Friendly Takeover:
A friendly takeover occurs when one company acquires another with the approval of both boards of directors. It works towards the shared advantage of both companies, with agreement from shareholders and management on both sides. Examples include the acquisition of Flipkart by Walmart and Facebook’s takeover of WhatsApp.
2. Hostile Takeover:
A hostile takeover happens when the target company does not consent to the acquisition. The acquiring company must gather a majority stake to force the acquisition, typically through a tender offer. In a hostile takeover, shareholders of the target company have limited time to accept the offer. An example is the takeover of Ashok Leyland by Hindujas.
- Companies Act, 2013
- Sections 230-240: Cover Compromise, Arrangement, and Amalgamation (including takeover).
- Section 230: Requires an application to NCLT for a compromise or arrangement, involving disclosure, consent of creditors, and other details. NCLT orders a meeting for members, creditors, and debenture holders. Authorities are notified, and objections must be addressed within 30 days. The approved resolution goes back to NCLT for a final order.
- Section 232: Deals with mergers and amalgamations, extending the process outlined in Section 230. Additional requirements include providing a draft scheme, reports on the impact, valuation, and other disclosures.
- Section 233: Facilitates fast-track mergers for specific companies with simpler steps and approvals.
- Section 234: Governs mergers or amalgamations involving small companies, holding companies, and wholly-owned subsidiaries.
- Section 235: Empowers the transferee company to acquire shares from dissenting shareholders.
- Securities and Exchange Board of India (SEBI)
- Takeover Code (2011): Regulates acquisition of shares in listed companies. Mandates open offers for substantial acquisitions.
- Listing Obligations and Disclosure Requirements (2015): Imposes conditions on listed companies for NCLT scheme applications, including filing with stock exchanges and compliance with securities laws.
- ICDR Regulations (2018): Governs preferential allotments with provisions for pricing and lock-in periods.
- PIT Regulations (2015): Prohibits insider trading, ensuring communication and acknowledgment of unpublished price-sensitive information (UPSI) adhere to rules.
- Competition Act, 2002
- Sections 3 & 4: Address anti-competitive agreements and abuse of dominance.
- Combination Regulations: Govern mergers, amalgamations, and acquisitions, requiring CCI notification for approval or denial within 90 working days.
- Foreign Exchange Management Regulations (2017)
- Overseen by FI Regulations and Industrial Policy.
- Cross-border mergers follow FEMA Guidelines, endorsed by RBI.
- FDI framework allows foreign entities to invest directly in India, either wholly owned or through joint ventures.
- Transfer of shares to a person outside India follows specific valuation guidelines and remittance procedures.
- Tax Implications under Income Tax Act, 1961
- ITA defines types of mergers: Amalgamation, Demerger, Slump sale, and Transfer of shares.
- Amalgamation is tax-neutral if conditions are met, exempt from capital gains tax.
- Transfer of shares during a merger is not regarded as a transfer for tax purposes.
- Various taxes apply: Capital Gains Tax, Tax on transfer of Shares, Tax on transfer of Assets/Business, Transfer of tax Liabilities.
- NCLT Approvals
- All mergers require approval from NCLT.
- Jurisdiction lies with the NCLT bench where the transferor and transferee companies have their offices.
- Intellectual Property in M&As
- IP due diligence is crucial for understanding ownership, rights, and restrictions.
- Transfer of IP assets depends on the structure of the deal (stock or asset purchase).
- Unregistered trademarks/copyrights transferable under the scheme, while registered ones require specific Registry applications.
General Radio and Appliances Co. Ltd v MA Khader (1986) – Amalgamation scheme without landlord consent for tenancy rights ruled invalid. Share purchases convey full rights in intellectual property assets.
GrandMet’s acquisition of Pillsbury in 1988, emphasizing the substantial value of goodwill.
Volkswagen’s purchase of Rolls-Royce assets, excluding the brand, later acquired by BMW for $65m.
Mergers and acquisitions are intricate processes in company law, requiring careful consideration of legal, financial, and operational aspects. Navigating the regulatory landscape and addressing challenges are essential for successful M&A transactions, ensuring the creation of value for all stakeholders involved.