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Merger of a Company

Posted on 09 Jun 2011 by admin | Filled under: regulatory-compliance

Mergers can be defined to mean unification of two players into a single entity. It is not defined under any . Under section 2(1B) of the income tax act, 1961 amalgamation is defined as mixing up or uniting together. It is a process where one company (both being existing companies and carrying on business). Provided that following conditions are met with:

1.All properties are transferred to the amalgamated company.
2.All liabilities are transferred to the amalgamated company.
3.Shareholders holding at least 3/4th in the value of shares of the amalgamating company become shareholders of the amalgamated company.

Definition of amalgamation is generally taken as definition of merger in legal parlance.

Acquisitions are situations where one player buys out the other to combine the bought entity with itself. It may be in form of a purchase, where one business buys another or a management buyout, where the management buys the business from its owners

Reasons of mergers and acquisition :

·access the market through an established brand
·to get a market share
·to eliminate competition
·to reduce tax liabilities
·to acquire competence to set off accumulated losses of one entity against the profits of other entity.

There are three different kinds of mergers:

1.Horizontal mergers: - a merger is said to be horizontal if it involves the merger of two or more companies which are producing or rendering the same product or services or product and/or services which competes directly with each other.

2.Vertical mergers :- a merger is vertical where backward integration is possible. In case one or more companies are the suppliers of some of the basic inputs for the final product to be manufactured by a company, than the latter company mergers with the former company or companies so that it is assured of supplies and is able to control the quality of production of the supplies and also effect economies and improve the profitability of the final product.

3.Conglomerate mergers:- a conglomerate merger is one where two or more companies with different businesses merge to diversify the products marketed. The companies may not be related to each other horizontally.

Procedure for the merger :

1.Adequate provisions must be there in Memorandum of Association and Articles of association of both acquirer and acquiree companies.

2.Approval under section 23 of MRTP Act, 1969 is not required. However, compliance of section 29 of FERA 1973 is required in case of transfer of shares involving foreign nationals or NRIs.

3.Acquirer company has to prepare a scheme of amalgamation under section 393 of Companies Act , 1956. The draft scheme has to be agreed to by offeree company and submitted to High Court.

4.Both companies Board of Directors should approves the scheme and authorize the directors to make an application to the High Court under section 391 of Companies Act, 1956.

5.The proposed merger should be informed to the regional stock exchange where registered office of listed companies involved in the merger are located and to all other stock exchanges where shares of this companies are listed .

6.A press release should be made by both the companies of their decision.

7.The acquiring company has to apply to financial institution and bank who have advanced fund to their projects for their approval.

8.Both the companies have to make an application under section 391 0f Companies Acyt, 1956 and Company (court) Rules,1956 for an order by judge’s summons convening the meeting of members of two companies to approve the scheme(under rule 67). The copy of the order is to be filed with the Registrar of the companies.

9.Notice of the meeting in prescribed form no.36( as per rule 73) are to be printed and advertised in the newspaper 21 days before the date of the meeting.

10.Separate meeting of the equity shareholders, preference shareholders and creditors for their approval are to be held. The reports are to be submitted to the High Court within seven days of holding the meetings.

11.The acquirer company has to submit an application to the prescribed authority in case benefits of section 72 A of Income Tax Act, 1961 are to be availed.

12.The petition and affidavit have to be submitted to High Court for conformation.

13.The copy of order is to be filed with the Registrar of companies within 30 days of passing of orders by the court.