Mergers & Acquisitions under

the Companies Act, 2013

Presentation by

Nitin Potdar M&A Partner

J. Sagar Associates advocates & solicitors

Delhi | Gurgaon | Mumbai | Bangalore | Hyderabad

Introduction

The Companies Act, 2013 (“New Act”) was notified on

August 30, 2013.

Contains 29 chapters, 470 sections and 7 schedules; appears

to be better structured and streamlined as compared to

Companies Act, 1956 (“1956 Act”).

99 sections of New Act have come into effect. Another 183

sections will come in force on April 01, 2014. Rest of the

provisions and corresponding rules are yet to be notified.

1956 Act served Indian corporate world for almost 57 years,

and continues to be in force with respect to certain

sections.

Journey

1991 FDI Policy was introduced, followed by major changes in

the IDR Act, MRTP, FERA to FEMA; establishment of SEBI,

Corporate Governance, Takeover Code, Insider Regulations.

Liberalisation, globalisation and rise of information technology

have transformed the manner in which business is being done

globally.

New businesses emerged including Service Sector like IT/

Telecommunications/ Banking/ Insurance/ Media &

Entertainment/ Hospitality/ Retail.

Journey contd..

Volume of Companies/ Firms increased multiple fold.

Increase of FDI/ Joint Ventures/ Foreign Collaborations/

Cross Border Mergers & Acquisitions/ raising of Capital by

way of ADRs/GDRs/ FCCBs.

Increase in Scams/ Fraud / Minority Protection/ Lack of

Corporate Governance.

Hence, need for a comprehensive New Act to deal with the

emerging scenario and also issues faced in the new economy.

Journey contd..

First Concept Paper on New Act – 4th August 2004;

Expert Committee on Company Law under Chairmanship of

Dr. JJ Irani 2nd December 2004; based on which Companies

Bill 2008 was prepared but could not be introduced as the

14th Loksabha got dissolved;

Reintroduced as Companies Bill 2009 got referred to the

Parliamentary Standing Committee on Finance. With

changes a new Companies Bill 2011 was introduced. Again

referred back to the Standing Committee and with certain

changes was approved by the Cabinet on 4th October 2012 –

Finally approved by Loksabha on 18th December 2012 and

Rajya Sabha on 8th August 2013; again referred to Loksabha

on 13th August 2013 and President’s Assent was obtained on

29th August 2013 and Gazetted on 30th August, 2013.

Challenges

Settled jurisprudence under the 1956 Act will have only

persuasive value. Provisions of New Act to be interpreted

again.

Uncertainty and excessive delegation of powers. Very

significant part of New Act will now be administered by way

of Rules to be framed by the Central Government. There are

approximately 300 matters which would now be covered by

the Rules.

Overlap and regulatory inconsistencies (CCI, SEBI etc.) need to

be addressed ASAP.

Professional bodies / Institutes / Colleges / Organisations

must come forward and assist effective implementation.

Key Changes..

Types of Companies –

Membership: a) Public Company; b) Private Company; c) One

Person Company

Control: a) Holding Company; b) Subsidiary Company; c)

Associate Company

Size: a) Small Company;

Access to capital: a) Listed Company; b) Unlisted Company

Ownership: a) Government Company; b) Foreign Company

Other: a) Dormant Company

Key Changes

Transferability of securities : contract between two or

more persons in respect of transfer of securities of a public

company would be enforceable as a contract (S. 58

(2)proviso).

This legislates on the lines of the ratio laid down by the

Bombay High Court in the case of Messers Holdings Ltd. v.

Shyam Madanmohan Ruia [2010] 98 CLA 325. Thus,

restrictions on transfer of shares such as right of first

refusal should be enforceable.

Entrenchment provision: it is allowed in AOA to the effect

that specified provisions of the articles may be altered only

if conditions or procedures that are more restrictive than

those applicable in the case of a special resolution are met

or complied with (S. 5(3)).

Key Changes..

Corporate Social Responsibility (“CSR” – S.135 notified)

– All companies got covered,

– Language suggests that it is mandatory,

– But no specific punishment prescribed in the Provision.

Board Composition – (S.149):

– One director who has stayed in India for a period of 182

days (S.149 (3)).

– Independent Director defined (S.149 (6)).

– Women Director – at least one women director on the

Board of certain companies (S.149(1)).

– Role and functions of Independent Director defined in

Schedule IV – Extremely onerous.

M&A Process

Chapter XV of New Act in Clauses 230 – 240, deal with the

provisions of Compromises, Arrangements and Amalgamations

(corresponding with the erstwhile framework under Sections

391- 394 of 1956 Act).

Process:

The company, or any creditor, or a member or the liquidator

(in case of company which is being wound up) may make an

application to the National Company Law Tribunal (“NCLT”)

for a scheme of compromise or arrangement (“Scheme”).

(S.230(1)).

M&A Process – Contd..

Convening Meeting: Company to apply to Tribunal to order

meeting of creditors or members as the case may be.

Documents to be submitted with the application: latest

financial position, auditors' report, certificate of the

company’s auditor confirming that the accounting

treatment, disclosure with respect to pendency of any

investigation, reduction of share capital of the company (if

any) included in the scheme, any scheme of corporate debt

restructuring (S.230(2)).

On receipt of application, NCLT may order a meeting of

company’s various creditors or members as the case may

be.

M&A Process – Contd..

Notice of meeting to be sent to all the creditors and to all

the members and debenture holders along with copy of

Scheme, valuation report, report adopted by directors

explaining the effect of the Scheme on various stakeholders,

etc. Such notice and other documents also to be displayed on

Company website and to be sent to SEBI and stock exchanges

in case of listed companies (S.230(3)). Draft Rules require

such notice to be sent in a prescribed form, at least four

weeks before the date fixed for the meeting as against 21

clear days notice required earlier.

The Tribunal may dispense with a meeting of a creditors

where such creditors, holding 90% in value of the debt, give

their confirmation to the proposed compromise or

arrangement through an affidavit (S.230(9)).

M&A Process – Contd..

Notice to Authorities: Copy of notice in a prescribed form

also to be sent to Central Government, Income Tax

authorities, RBI, SEBI, ROC, Official Liquidator, respective

Stock Exchanges, Competition Commission of India (“CCI”),

if necessary, and such other sectoral authorities likely to

be affected by Scheme (S.230(5)).

Draft Rules under New Act require notice to be sent to

above mentioned authorities forthwith after notice has

been sent to members, creditors.

Concerned authorities to make representation within 30

days, failing which it shall be presumed that they have no

representation to make (S.230(5)). This may clash with

the CCI time of 210 days.

M&A Process – Contd..

Approval: Where the Scheme is approved by majority

representing 3/4th in value of the creditors or members,

voting in person or by proxy or by postal ballot (S.230(6)),

the Tribunal may sanction such compromise or arrangement.

Draft Rules under New Act do not mention any provisions

regarding postal ballot.

The order of the Tribunal binds the company and its

creditors and members. The Scheme order to be filed with

ROC within 30 days of receipt of the order (S.232).

Changes in M&A

Accounting Standard: No compromise shall be sanctioned

unless accompanied by Company’s auditors certificate to the

effect that it complies with the accounting standards (S. 230 (7)

Proviso).

SEBI Prescribed Auditors’ Certificate: Clause 24(i) of the

Listing Agreement requires that the company, while filing a

draft Scheme of amalgamation / merger / reconstruction,

etc. with the stock exchange shall also file an auditors’

certificate to the effect that the accounting treatment

contained in the scheme is in compliance with all the

Accounting Standards specified by the Central Government.

SEBI has provided a standard format for such auditor’s

certificate (SEBI circular dated March 25, 2014).

Changes in M&A

Buy-back of securities under a Scheme cannot be done

unless relevant provisions of buy-back are complied with

(S.230(10)).

Takeover offer may be included as a part of the Scheme

in the manner prescribed and in case of listed companies

such takeover offer shall be as per the guidelines issued

by SEBI (S.230 (11)).

Draft Rules under New Act prescribe certain compliances

regarding such offer of takeover of a company other than

a listed company as a result of compromise or

arrangement e.g. person making takeover offer has to

enter into memorandum of understanding with the

shareholders etc.

Changes in M&A

Fast Track Mergers Fast track merger between (a) 2 or

more small companies (b) holding company & wholly

owned subsidiary would require approval of ROC, members

holding at least 90% of total number of shares and majority

of creditors representing 9/10th in value. This does not

require NCLT approval (S. 233).

Merger with Foreign Companies: Indian companies can

merge with foreign company of country with reciprocity

and vice versa subject to prior approval of Reserve Bank of

India (S. 234). Subject to the rules to be made by Central

Government in consultation with RBI.

Changes in M&A - Contd..

Merger of Listed Company with Unlisted Company: In case

of unlisted transferee company, NCLT may provide that it

shall remain unlisted until it becomes listed and

shareholders are to be given an exit option (S.232(3)(h)).

Prohibition on Treasury Stocks: Holding of shares in

company’s own name or in the name of trust not allowed

(Section 232 (3)(b) proviso).

Postal Ballot: Companies may seek approval by postal ballot

(S. 230 (4)).

Minority Squeeze out

Minority squeeze out: Acquirer and/or Person Acting in

Concert or person or group of persons who holds 90% or

more of the issued equity capital by virtue of

amalgamation, share exchange or for any other reason,

can notify the company of his intention to purchase the

remaining equity shares of the company from minority

shareholders. Also, the minority shareholder(s) can also

offer to sell their shareholding to the majority

shareholder at a price determined on the basis of

valuation by a registered valuer in accordance with rules

as may be prescribed (S.236).

Tribunal may order exit offer to dissenting shareholders

(Section 230(7)(e).

Changes in M&A - Contd..

Threshold for Objection: Persons holding not less than

10% of the shareholding or having outstanding debt of not

less than 5 % of total outstanding debt as per the latest

audited balance sheet (S. 230 (4) proviso). Time limit

prescribed under Draft Rules to convey the objections is a

month from the date of receipt of notice

Objections by Employees etc: provisions with regards to

objections by employees or any third party remains

unchanged.

SEBI Guidelines for Court Schemes

SEBI vide circular dated February 04, 2013 and circular

dated May 21, 2013 prescribed the following

requirements for stock exchanges and listed companies :

Listed companies must file with the stock exchanges, the

draft Scheme along with valuation report, report of audit

committee, fairness opinion of merchant banker,

compliance with Clause 49 of Listing Agreement, audited

financials, complaints report and shareholding pattern.

Stock exchanges to forward the draft Scheme received from

companies to SEBI within 3 days and thereafter forward its

‘Objection/No-Objection’ letter within 30 days of receiving

the Scheme.

SEBI to provide its comments to stock exchanges within 30

days.

SEBI Guidelines for Court Scheme

The stock exchanges will have to issue an

Observation Letter to the listed company based on

SEBI’s comments,

Listed companies will include such Observation

Letter in the notice to be sent for shareholder

approval and also to notify the High Court.

Listed companies need to publish on their website,

all the documents submitted to the stock exchange

SEBI Guidelines for Court Schemes

– SEBI introduced concept of approval of public

shareholders through postal ballot and e-voting to

listed companies.

– SEBI vide its circular dated May 21, 2013 stated that in

cases which involve alterations in promoter

shareholding (promoters or Promoter Group entities),

the votes cast by the public shareholders must be

considered and such votes cast in favour of Scheme

must be more than the number of votes cast by the

public shareholders against it.

THANK YOU Nitin Potdar

nitin@jsalaw.com