Mergers and Amalgamations**

Meaning and Types

Mergers and Amalgamations are forms of corporate restructuring where two or more companies combine their businesses. These transactions are typically undertaken for various strategic reasons such as achieving economies of scale, expanding market share, diversifying products or services, gaining access to new technology, reducing competition, or improving financial strength. The Companies Act, 2013, primarily deals with such combinations under the framework of 'Compromises, Arrangements, and Amalgamations' in **Sections 230 to 240**.

While often used interchangeably in common business parlance, the terms 'merger' and 'amalgamation' can have slightly different technical meanings, and other forms like 'absorption' also fall under the umbrella of corporate combinations.

Amalgamation

Legally, **Amalgamation** typically refers to a situation where two or more companies are joined together to form a new entity, or where one or more companies are merged into another existing company. The defining characteristic is that the undertaking of two or more companies becomes the undertaking of one, and the undertakings that are merged or whose undertakings are taken over cease to exist as separate entities.

Forms of Amalgamation:

**Amalgamation in the nature of Merger:** Here, substantially all the assets and liabilities of the transferor company(ies) become the assets and liabilities of the transferee company. Shareholders holding not less than 90% of the face value of the equity shares of the transferor company become equity shareholders of the transferee company by virtue of the amalgamation. The business of the transferor company is intended to be carried on by the transferee company, and no adjustment is made to the book values of assets and liabilities transferred, except to ensure uniformity of accounting policies. This is closer to a pooling of interests method of accounting.
**Amalgamation in the nature of Purchase:** Here, one company acquires another, but the conditions for 'amalgamation in the nature of merger' are not met. The assets and liabilities of the transferor company are incorporated into the books of the transferee company at their fair values, and the difference between the purchase consideration and the net assets acquired is treated as goodwill or capital reserve. This is similar to an acquisition.

In both forms, the transferor company(ies) ceases to exist.

Absorption

**Absorption** is a type of acquisition where an existing, larger company (the acquiring or transferee company) takes over one or more smaller companies (the acquired or transferor company/ies). In absorption, the acquiring company continues its existence, while the acquired company or companies are dissolved and lose their separate legal identities.

Key Characteristics of Absorption:

Only one existing company survives (the absorber).
The acquired company(ies) cease to exist.
Assets, liabilities, and undertaking of the acquired company are transferred to the acquiring company.
Consideration is paid to the shareholders of the acquired company (usually in shares of the acquiring company, cash, or a combination).

Example: Company A acquires Company B. Company A continues to exist, Company B ceases to exist. This is a form of amalgamation in the nature of purchase.

Merger

The term **Merger** is often used as a broad term encompassing various forms of combination, including amalgamation and absorption. Technically, in some definitions, a merger can refer to the combination of two or more companies into a **new** company formed specifically for the purpose. In this case, all the original companies cease to exist, and their assets and liabilities are transferred to the newly formed company.

Comparison Table:

Feature	Amalgamation (General Term)	Absorption	Merger (Specific Definition: New Co.)
Number of Companies Combined	Two or more	One or more acquired by one acquiring	Two or more
Survival of Entities	One existing company survives OR a New company is formed	Only the Acquiring company survives	None of the original companies survive; a New company is formed
Acquiring Entity	An existing company or a New company	An existing company	A New company
Acquired/Transferor Entity	Ceases to exist	Ceases to exist	All combining companies cease to exist

Under the Companies Act, 2013, the term "amalgamation" is used, and the provisions of Sections 230-232 apply to arrangements that include mergers and amalgamations, irrespective of the specific terminology used.

Process of Mergers and Amalgamations

The process of corporate mergers and amalgamations under the Companies Act, 2013, is primarily governed by **Sections 230 to 232**, which deal with 'Compromises or Arrangements'. A scheme of merger or amalgamation is considered a type of arrangement involving the company, its members, and/or its creditors. The process is judicial and requires sanction from the National Company Law Tribunal (NCLT).

Approval of Board of Directors

The process typically begins internally within the companies involved. The respective Boards of Directors of both the transferor (amalgamating/acquired) company(ies) and the transferee (amalgamated/acquiring) company must approve the proposed scheme of merger or amalgamation. The Board meeting considers and approves the draft scheme, which details the terms and conditions of the merger/amalgamation, including valuation, share exchange ratio (if applicable), treatment of assets and liabilities, employee transfers, etc. The Board's resolution authorises the company to file a petition with the NCLT.

Approval of Shareholders and Creditors

After the Board's approval, the scheme must be approved by the stakeholders whose rights are affected, primarily the shareholders and creditors of each of the involved companies. **Section 230(1)** provides for the Tribunal to order a meeting of creditors or members or any class of them, as the case may be, to consider the compromise or arrangement.

NCLT Direction for Meetings:

The company first files a petition with the NCLT seeking permission to convene meetings of its shareholders and/or creditors. The NCLT, upon being satisfied that the application is in order, issues directions regarding the convening of these meetings. The NCLT Order specifies details such as who should attend (e.g., all equity shareholders, secured creditors, unsecured creditors), how the notice should be sent (including advertisement in newspapers), the date, time, and venue of the meetings, and the appointment of a Chairman for each meeting.

Conducting Meetings and Approval:

Meetings of shareholders and creditors (or relevant classes thereof) are held as per the NCLT directions. The notice of the meeting must be accompanied by a copy of the proposed scheme of compromise or arrangement, a statement disclosing all material facts, and a copy of the valuation report (if any). The scheme must be approved at these meetings by a majority of persons representing **three-fourths in value** of the creditors or class of creditors, or members or class of members, as the case may be, present and voting at the meeting, either in person or by proxy or by postal ballot.

Approval of National Company Law Tribunal (NCLT) (Section 230-232)

The NCLT plays the most critical role in sanctioning the scheme of merger or amalgamation. Its approval is essential to give the scheme legal effect.

1. First Petition for Convening Meetings (Section 230):

As mentioned above, the company first files a petition with the NCLT under Section 230 seeking directions for convening meetings of shareholders and creditors.

2. Convening and Holding Meetings:

Meetings are held as per NCLT directions, and approvals from stakeholders are sought.

3. Filing Second Petition for Sanction (Section 232):

After obtaining the requisite approvals from shareholders and creditors, the company files a second petition with the NCLT under Section 232 seeking sanction of the approved scheme of merger or amalgamation.

4. Notices and Representations:

Notice of this petition for sanction is given to the Central Government (represented by the Regional Director), the Registrar of Companies (RoC), the Official Liquidator (if any of the companies is being wound up), and other sectoral regulators (like SEBI for listed companies, RBI for banking companies, CCI for competition aspects, etc.) as may be necessary. These authorities have the opportunity to make representations to the NCLT regarding the scheme within a specified time (usually 30 days).

5. Hearing and NCLT Order (Section 232(3)):

The NCLT holds a hearing on the petition for sanction. It considers the scheme, the results of the meetings of shareholders and creditors, and the representations made by the statutory authorities and any other objectors. The Tribunal must be satisfied that:

The procedure laid down in the Act and rules has been complied with.
The scheme is just and fair to all parties concerned.
The scheme is not contrary to public interest.

If satisfied, the NCLT passes an order sanctioning the scheme of merger or amalgamation. The order may contain various directions as the Tribunal deems fit.

Effect of Merger/Amalgamation

Once the NCLT order sanctioning the scheme of merger or amalgamation becomes effective (usually from a specified 'Appointed Date' mentioned in the scheme, but legally effective from the date of the NCLT order sanctioning it), it has several significant consequences as laid down in the NCLT order and Section 232(4):

**Transfer of Assets and Liabilities:** All the property, rights, and powers of the transferor company(ies) are transferred to and vest in the transferee company without any further act or deed. Similarly, all the liabilities and duties of the transferor company(ies) are transferred to the transferee company.
**Dissolution of Transferor Company:** The transferor company(ies) gets dissolved without winding up. This is a key benefit as it avoids the lengthy and complex process of formal winding up.
**Transfer of Employees:** The employees of the transferor company usually become the employees of the transferee company on terms and conditions not less favourable than those on which they were employed before the merger/amalgamation.
**Pending Legal Proceedings:** Any suit or legal proceeding by or against the transferor company can be continued by or against the transferee company.
**Shares and Consideration:** The shareholders of the transferor company are typically issued shares or other consideration in the transferee company as per the share exchange ratio or terms defined in the scheme.
**Alteration of MOA/AOA:** The Memorandum and Articles of Association of the transferee company may be altered as provided in the scheme, without needing to follow the usual procedures for such alterations under the Act.
**Filing with RoC:** A certified copy of the NCLT order sanctioning the scheme must be filed with the Registrar of Companies (RoC) by both the transferor and transferee companies within **thirty days** of receipt of the order. The merger/amalgamation becomes effective upon such filing.

The entire process is complex, time-consuming, and involves significant legal, accounting, and financial considerations, requiring expert assistance.

Takeovers**

Meaning and Types of Takeovers

A **takeover** is a corporate action in which one company (the acquirer or offeror) seeks to gain control of another company (the target company). Control is typically acquired by purchasing a controlling stake in the target company's voting shares. Unlike a merger where companies might combine to form a new entity or one company absorbs another through a court/tribunal-sanctioned process (as discussed under Mergers and Amalgamations), a takeover usually refers to the acquisition of a controlling interest in the target company's shares, giving the acquirer management control.

Takeovers are a common strategy for corporate growth, expansion, diversification, or consolidation. They can be broadly classified based on whether the acquisition is consensual or not.

Friendly Takeover

A **friendly takeover** occurs when the acquisition is agreed upon by the management and Board of Directors of both the acquiring company and the target company. The process is usually collaborative, involving mutual discussions, due diligence, and agreement on the terms and conditions of the acquisition.

Characteristics of a Friendly Takeover:

The Board of Directors of the target company recommends the offer to its shareholders.
Negotiations are conducted between the management teams of both companies.
The process is relatively smooth and less contentious, often resulting in a win-win situation or a negotiated settlement for all stakeholders.
Documentation and regulatory approvals are sought cooperatively.

Friendly takeovers are typically structured as schemes of arrangement (requiring NCLT approval) or through negotiated share purchase agreements followed by a mandatory open offer (for listed companies as per SEBI regulations).

Hostile Takeover

A **hostile takeover** occurs when the acquiring company attempts to gain control of the target company **against the wishes** of the target company's management and/or Board of Directors. The offeror bypasses the target company's management and appeals directly to the shareholders or initiates actions to replace the management.

Characteristics of a Hostile Takeover:

The Board of Directors of the target company opposes the takeover bid.
The acquirer makes the offer directly to the shareholders, often at a premium over the market price, through a public offer.
The acquirer might try to remove the existing management by calling an extraordinary general meeting (EGM) and appointing new directors (Proxy Fight).
The target company's management might employ various defensive tactics (often called "shark repellents" or "poison pills") to thwart the bid, such as increasing the acquisition cost, finding a white knight (a friendly acquirer), or restructuring the company.

Hostile takeovers are governed by strict regulations, particularly the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations in India, to ensure fairness and protect the interests of public shareholders.

Example:

Imagine Company PQR Ltd. (listed) wants to acquire Company XYZ Ltd. (listed). If PQR Ltd. first approaches the Board of XYZ Ltd., and they agree on the terms and recommend the offer to their shareholders, it's a **friendly takeover**. If PQR Ltd. makes a public offer to buy shares of XYZ Ltd. directly from the market or through a public announcement, despite the Board of XYZ Ltd. opposing the move and urging shareholders not to sell, it's a **hostile takeover**.

Takeover Code (SEBI Regulations)

In India, takeovers of companies whose shares are listed on a recognised stock exchange are primarily governed by the **Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011**. These regulations, often referred to as the **SEBI Takeover Code**, are designed to regulate the acquisition of shares or voting rights or control over a listed company. The main objective is to protect the interests of minority shareholders by ensuring fair treatment and providing them with an opportunity to exit the company in case of a change in control or substantial acquisition of shares.

Substantial Acquisition of Shares and Takeovers Regulations

The SEBI Takeover Code sets out the framework and rules that acquirers must follow when acquiring shares or control of a listed company. It defines key terms like 'acquirer', 'target company', 'control', 'shares', 'voting rights', and 'persons acting in concert'. The regulations specify the thresholds for mandatory disclosures and the circumstances under which a mandatory open offer must be made to the public shareholders of the target company.

Key Regulatory Principles:

**Transparency:** Ensuring that the market and shareholders are informed about substantial share acquisitions and changes in control.
**Fair Treatment:** Providing a fair opportunity and price to public shareholders to exit the company when control or substantial shareholding changes hands.
**Level Playing Field:** Ensuring that all shareholders have access to relevant information and equal opportunity to participate in the offer.

Disclosure requirements

The SEBI Takeover Code mandates various disclosure requirements to bring transparency to shareholding changes and potential control shifts in listed companies. These disclosures are required at different stages and thresholds:

1. Initial Disclosure:

Any person who acquires shares or voting rights in a target company such that their holding of shares or voting rights entitles them to **five per cent or more** shall disclose their aggregate shareholding and voting rights to the target company and the stock exchanges within **two working days** of the acquisition or receipt of intimation of allotment of shares.

2. Continual Disclosures:

Any person who holds shares or voting rights in a target company that entitles them to **five per cent or more** shall disclose their aggregate shareholding and voting rights to the target company and the stock exchanges within **two working days** of any change in such holding if there has been a change of **two percentage points or more** from the last disclosed position.

3. Disclosure by Persons in Control/Promoters:

Promoters of a target company are also required to make disclosures of their shareholding and any changes exceeding a certain threshold.

4. Disclosure in Case of Encumbrance:

Promoters are required to disclose details of any encumbrance (like pledge or lien) on their shares exceeding certain thresholds.

Purpose of Disclosures:

These disclosures help SEBI, stock exchanges, the target company, and the investing public track significant changes in shareholding and potential shifts in control, thereby preventing clandestine acquisitions and providing timely information to the market.

Open Offer

An **Open Offer** is a mandatory public offer made by an acquirer to the shareholders of the target company to purchase a certain percentage of their shares. It is triggered when an acquirer crosses specific thresholds of shareholding or acquires control of the target company. The purpose is to provide the existing public shareholders with an opportunity to sell their shares at a defined price and exit the company if they do not wish to continue holding shares under the new management/control.

Triggers for Mandatory Open Offer (Regulation 3 & 4):

**Acquisition of 25% or more shares/voting rights:** Any acquirer who acquires shares or voting rights in a target company which, taken together with persons acting in concert with him, entitles them to **twenty-five per cent or more** of the voting rights in the target company, shall make an open offer to acquire a minimum of **twenty-six per cent** of the total shares of the target company. This is triggered even if the acquirer previously held less than 25% and crosses the 25% threshold through this acquisition.
**Acquisition of Control:** Irrespective of the percentage of shares acquired, if an acquirer acquires **control** over the target company, they must make an open offer to acquire a minimum of **twenty-six per cent** of the total shares of the target company. 'Control' is generally defined as the right to appoint a majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.
**Acquisition by existing Acquirers:** An acquirer holding between 25% and 75% of voting rights (the public shareholding requirement prevents holding > 75% for non-promoters in most cases) who proposes to acquire more than **five per cent** of the voting rights in a financial year also triggers an open offer to acquire a minimum of 26% of the shares. (This is a cumulative acquisition limit within a financial year).

Process and Pricing:

Once triggered, the acquirer must make a public announcement of the open offer.
A detailed letter of offer is dispatched to the shareholders.
The offer is made at a price (the offer price) which is determined based on specific valuation parameters laid down in the Takeover Code, ensuring a floor price that is generally the highest of certain weighted average market prices, the acquisition price paid by the acquirer, etc. The objective is to offer a fair price to the public shareholders.
The offer must be for a minimum of 26% of the total shares, but shareholders can tender more shares if they wish. If the shares tendered exceed the offer size, the shares are accepted on a proportionate basis.
The offer is managed by a Merchant Banker registered with SEBI.

The SEBI Takeover Code is a complex regulation with detailed provisions covering various aspects of substantial share acquisitions and changes in control, aimed at ensuring transparency and protecting the broader interests of the securities market and the public shareholders.