A NOTE ON MERGERS AND AMALGAMATIONS, CLOSURE ETC

Objectives and advantages of amalgamation:--Synergistic operational advantages-Economics of Scale(scale effect)-Reduction in production, administrative, selling, legal and professional expenses-Benefits of integration-Optimum use of capacities and factors of production-Tax advantages-Financial constraints for expansion-strengthening financial strength-Diversification-Advantage of brand-equity-survival-competitive advantage-eliminating competition-Revival of weak or sick company

Merger and amalgamation are not defined under Companies Act, 1956.According to section 391 of the Companies Act, 1956, a compromise or arrangement may be proposeda) between a company and its creditors or any class of them or b) between a company and its members or a class of them.

According to section 394, any such compromise of arrangement may be for the purpose of or in connection with a scheme for the reconstruction of any company or companies, or the amalgamation of any two or more companies which involve the transfer of the whole or any part of the undertaking, property or liabilities of one company(transferor company) to another company(transferee company)

Section 392 deals with the power of the High Court to enforce compromises and arrangements.

The terms “compromise”, “arrangement”, “reconstruction” and “amalgamation”, although used in Companies Act, 1956, are not defined thereunder and has no precise legal meaning. Generally speaking, however, these terms may be regarded as describing any form of internal reorganization of the company or its affairs as well as schemes for the merger of two or more companies or for the division of one company into two or more companies.

In amalgamation the undertaking comprising of property, assets and liabilities of one (or more) company(amalgamating or transferor company) are absorbed by and transferred to an existing company or a new company(amalgamated or transferee company)

Transferor company merges into or integrates with transferee company. The former loses its identity and is dissolved(without winding up). A foreign company may merge with an Indian company but an IndianCompany cannot merge with a foreign company.

In REVERSE MERGER, a healthy company merges in to a financially weak company.

Companies eligible to merge under Cos Act :-- Any company liable to be wound up under the Act.- Company financially sound or unsound or under winding up can merge.- A company incorporated outside India can merge with a company incorporated in India.- A newly incorporated company having no assets and business can merge.- Amalgamation involving a “sick industrial company” as transferor or transferee company is

within the purview of the Companies Act.- A company licensed under Section 25 of the companies Act can merge with a commercial,

trading or manufacturing company.

Amalgamation means two companies are joined as to form a third entity or one blended with and absorbed into another company.It signifies the transfer of all or some parts of assets & facilities of one or more than two existing companies to another existing company or of two or more existing companies to a new company.

Types of Merger:-

- Merger by purchase of share.- Merger through holding company- A scheme of compromise and arrangement

Section 394 of the Companies Act enables the court to provide for :-1) Transfer to the transferee company of the whole or any part of the undertaking, property or liabilities of any transferor company.

2) The allotment or appropriation by the transferee company any shares, debentures, policies or other like interests or any other consideration in that company which under the compromise or arrangement are to be allotted or appropriated by that company.

3) The continuation by or against the transferee company of any legal proceeding pending by or against any transferor company.

4) The dissolution, without winding up of any transferor company.

Procedure:-

-check whether the Memorandum of Association of the company contains the power to amalgamate. If not, alter the objects clause of the Memorandum of Association by following the procedure laid down for the same under Companies Act.

-Preparation of the draft scheme of amalgamation and approve the same in the Board Meeting.

-Apply to the Court for directions to convene the General Meeting supported by an affidavit.

-to send a copy of the application made to the High court to the concerned Regional Director, Ministry of company Affairs.

-the High Court shall give the direction with regard to the meeting including fixation of time, place, quorum of such meeting, appointment of chairman etc.

-send notice of general meeting to the members 21clear days before the meeting, setting forth, the terms of compromise or arrangement and their effect, interest of directors, MD or Manager of the company and the effect of their interest on amalgamation.

-where the amalgamation affects the rights of debenture holders, the said statement shall give the information and explanation as respects the Trustees of any deed for securing the issue of debentures as if it is required to give in respect of company’s directors.

-Hold the general meeting and pass the following resolution a) Approving the scheme of amalgamation to be passed by a majority in number and three fourth in value of the creditors or class of creditors or members or class of members as the case may be present and voting.

b) increasing the authorized share capital of the company, if necessary

- the notice of the meeting and the proceedings of the meeting should be forwarded to stock exchange.

-The resolution with the explanatory statement should be filed with the Registrar of Companies.

-Ensure that the chairman of the meeting report the resolution of the meeting to the court within the time fixed by the judge or within seven days of the conclusion of the meeting.

-Move the High court for approval through a petition by the directors within seven days of filing the report by the chairman and ensure compliance of Ss 394 and 395 in this regard. The High Court will be moved jointly by the transferor and transferee company. If the registered office of the companies are in different states, then the respective High Courts should be moved for direction.

-The certified true copy of the order should be filed with the ROC within 30 days of the order .

-The copy of the order should be annexed to every copy of the Memorandum of Association issued after the certified copy of the court order has been filed with ROC.-

-Ensure implementation of the scheme of amalgamation as per court order.

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CLOSURE OF AN INDUSTRIAL UNDERTAKING:-

“Closure” means the permanent closing down of a place of employment or part thereof. According to Section 25-FFA of the Industrial Dispute Act, 1947, an employer who intends to close down an undertaking shall serve, atleast 60 days before the date on which the intended closure is to become effective, a notice, in the prescribed manner, to the appropriate Government, stating clearly the reasons for the intended closure of the Undertaking. However, nothing in this section shall apply to

a) an undertaking in which:i) less than 50 workmen are employed or ii) less than 50 workmen were employed on an average per wording day in the preceding

12 months. b) an undertaking set up for the construction of buildings, bridges, roads, canal, dams or for other

construction work or project.

Notwithstanding anything contained above, the appropriate Government may, in exceptional circumstances such as an accident in the undertaking or death of the employer or the like, by order, exempt such undertakings from the above provisions for such period specified in the order.

Under Article 19(1)(g) of the Constitution, the right to close an undertaking is implicit in the right of an employer to carry on business. But Section 25-FFA does not prohibit closure but only requires a notice of at least 60 days to the appropriate Government. The underlying object is to prevent sudden closure and to provide an opportunity to the Government to consider whether it should take any measure in respect of an intended closure.

Compensation for closure:-The compensation is 15days’ average pay for every completed year of continuous service or any part thereof in excess of six months. The workman should be in continuous service for not less than one year in that undertaking immediately before such closure.If an undertaking is closed down on account of unavoidable circumstances beyond the control of the employer, the compensation to be paid to the workman shall not exceed his average pay for 3 months. However the following will not be treated as unavoidable circumstances viz.,:--financial difficulties(including financial losses)-accumulation of undisposed of stock-the expiry of the period of the lease or licence granted to it or -in case where the undertaking is engaged in mining operation, exhaustion of minerals in the area in which such operations are carried on.

Where the closure is on account of vis major or act of God or enemy action or an act of State in exercise of powers of eminent domain, that would undoubtedly be on account of the circumstances beyond the control of the employer.

In case of an undertaking set up for construction of buildings, bridges, roads, dams or other construction work is closed down within two years from the date of set up, no compensation is payable. If it is continued beyond two years, then compensation is payable for every completed year of continuous service or any part thereof in excess of six months.

The Supreme Court in Hathising Manufacturing Co.Ltd’s case observed that closure of an undertaking involves termination of many employees and throws them into the ranks of unemployed. It is with the object of redressing the misery resulting from unemployment and in interest of general public that the legislature has made provisions for payment of compensation etc., to the workmen discharged from service at the time of closure of an establishment. The loss of service due to closure stands on the same footing as loss of service due to retrenchment. In both cases the employee is thrown out of employment suddenly and for no fault of his.