PROCEDURAL ASPECTS OF MERGER AMALGAMATION BEFORE NCLT An

PROCEDURAL ASPECTS OF MERGER & AMALGAMATION BEFORE NCLT An overview. . . Presented by: CS NESAR AHMAD Tel: +91 -11 -2953 6312 csnesar 367@gmail. com Mob: +91 -9810044367 ‘Sankalp’ C-227, Paryavaran Complex New Delhi-110 030

PART – A: INTRODUCTION

CORPORATE RESTRUCTURING Corporate restructuring is a process involved in changing the organization of a business. It implies rearranging the business for increased efficiency and profitability. There are primarily two ways of growth of business organization, i. e. organic and inorganic growth. Organic growth may relate to business or financial restructuring within the organization that results in enhanced customer base, higher sales, increased revenue, without resulting in change of corporate entity. Inorganic growth may relate to restructuring through mergers, amalgamation etc. Merger and amalgamations constitute one of the most important methods for securing inorganic growth.

BACKGROUND The Companies Act, 2013 has brought pragmatic reforms for Merger & Amalgamation, which could make the process, easier, faster and cleaner for companies involved in Merger & Amalgamation. Some of the highlights include fast track mergers, merger between Indian Companies and foreign companies and setting up of National Company Law Tribunal (NCLT) to hear and decide on M&A proposals, cutting down on the probability and scope of objections to M&A’s and easier as well as wider participation of shareholders through postal ballot approval. Chapter XV of the New Act deals with “Compromises, Arrangements, and Amalgamations”, and consolidates the applicable provisions and related issues. The Old Act required M&A to be sanctioned through a Court process but the jurisdiction of court with regard to such Schemes will now vest with NCLT.

What is Merger & Amalgamation? Concept of Merger / Amalgamation: The terms “merger” and “amalgamation” are synonymous. In amalgamation the properties, assets and liabilities of one or more company (amalgamating company) are transferred to an existing or a new company (amalgamated company) and the amalgamated company issues share to the shareholders of the amalgamating company in lieu thereof. Under this process, the amalgamating company is dissolved without going through the process of winding up.

Definition • The expression “amalgamation” is not defined in the Companies Act, 1956/ 2013. • Section 2 (1 B) of the Income Tax Act defines the term “amalgamation” as “Amalgamation”, in relation to companies, means the merger of one or more companies with another company or the merger of two or more companies to form one company……. ” Conditions : a) All properties to be transferred to the amalgamated company b) All liabilities to be transferred to the amalgamated company c) Shareholders holding atleast 3/4 th in value of shares of the amalgamating company should become shareholders of the amalgamated company.

Modes of Merger & Amalgamation • Horizontal Merger: Merger of two or more companies that compete in the same industry. • Vertical Merger: Merger which takes place upon the combination of two companies which are operating in the same industry but at different stages of production or distribution system. • Co-generic Merger: Where two companies are in the same or related industries but do not offer the same products, but related products and may share similar distribution channels, providing synergies for the merger. • Conglomerate Merger: Conglomerate mergers are merger of different kinds of businesses under one flagship company. (Diversity of objects of two companies cannot be ground for declining sanction to proposed scheme of amalgamation-(Steel Kingdom Netcom Ltd. , in re (2005) 59 SCL 544(Del)/Mcleod Russel (India) Ltd. , In re (1997) 13 SCL 126 (Cal).

Regulatory Framework Ø Companies Act, 2013, (Sec 230 -240) Ø SEBI (LODR) Regulations, 2015, (Reg. 11, 37 and 94) Ø Accounting Standard - 14 Ø FEMA (in case of merger of companies having foreign capital) Ø Prior approval of RBI in case of cross-border merger ØCompetition Act, 2002 Ø Income Tax Act, 1961 Ø Indian Stamp Act, 1899 ØAny other sectoral-regulatory approval.

CONSTITUTION OF NATIONAL COMPANY LAW TRIBUNAL The Central Government, by notification, w. e. f. 01. 06. 2016, constituted the ‘National Company Law Tribunal and National Company Law Appellate Tribunal under the provisions of Companies Act, 2013. This effectively dissolved the Company Law Board (CLB), constituted under the Companies Act, 1956 from the same day.

PART – B: PROCESS OF MERGER

Merger and Amalgamation process Preliminary Steps To Be Followed Ø Check whether objects clause of Memorandum of Association of both the transferor and the transferee companies authorizes merger. (Power to amalgamate is a statutory power, notwithstanding the fact that the MOA may not contain express power to amalgamate with another company- EITA India Ltd. , In re(2000)99 Com Case 276 Calcutta. ) Ø Convene a Board meeting of both the transferor and the transferee companies to consider the proposal of merger. (Advisable) Ø Draft a scheme of merger/amalgamation. Ø Convene a Board meeting of both the transferor and the transferee companies to consider the scheme of merger.

Issues considered by NCLT in a Scheme of Merger/Amalgamation Ø Compliance with the regulatory provisions. Ø Rationale for the merger/ amalgamation. Ø Provision under the scheme for protection of interest of creditors and shareholders, employees and all other stakeholders. Ø Scheme in consonance with public interest.

Important points to be followed while drafting of a Scheme Drafting of Scheme Background and description of Companies seeking approval Part I Definitions & Interpretation Purpose of the Scheme Part II Capital Structure Rationale of the Scheme Part III Accounting treatment, merger of authorised share capital and matters incidental thereto General Part IV General terms and conditions applicable to all parts of Scheme

Drafting of Scheme Background and description of Companies : • Name of the Companies • Act under which it is incorporated • Date of Incorporation • Registered office address of the Companies • Principal Objects of the Companies

Drafting of Scheme Purpose of the Scheme The Scheme shall be consistent with the provisions of Section 2(1 B) of the Income Tax Act, 1961 (“IT Act”) whereby: (a)All the property of each Transferor Company immediately before the amalgamation becomes the property of the Transferee Company by virtue of the amalgamation; (b)All the liabilities of each Transferor Company immediately before the amalgamation become the liabilities of the Transferee Company by virtue of the amalgamation; (c)Shareholders holding not less than 3/4 th in value of the shares in each Transferor Company (other than shares already held therein immediately before the amalgamation by, or by a nominee for, the Transferee Company or its subsidiary, or shares cancelled pursuant to the Scheme) become shareholders of the Transferee Company by virtue of the amalgamation. Accordingly, all the provisions of this Scheme will be read so far as circumstances permit to be consistent with the requirements of Section 2(1 B) of the IT Act.

Drafting of Scheme Rationale of the Scheme • Consolidation of business operations thus resulting in significant impetus to growth. • Reduction in overheads, administrative, managerial and other expenditure, which may bring about operationalization, efficiency and optimal utilization of various resources. • Consolidation of managerial expertise of both the Companies thereby giving additional strength to the operations and management of the Transferee Company. • Elimination of administrative function and multiple records-keeping resulting in reduction in expenditure. • Ultimate obtainment of Synergies.

Drafting of Scheme General Part • Definitions and Interpretation • Capital Structure of Transferor and Transferee Companies • Discharge of consideration, Accounting-Treatment, Merger of Authorised Share Capital and matters incidental thereto • General terms and conditions may contain conditions to effectiveness of the Scheme

Steps to be followed for merger Section 230 to 232 of Companies Act, 2013 Application (Section -230) First Motion 1. Transferor & Transferee companies shall file an application to NCLT in Form NCLT 1 along with: ØCopy of scheme with disclosures u/s 230(2). ØA notice of admission in Form No. NCLT-2 ØAffidavit in Form No. NCLT-6 ØNOCs from both creditors and shareholders (seeking dispensing of meetings of shareholders and creditors, by way of affidavit) ØA certificate from the Auditor of the Company to the effect that the accounting treatment in the scheme of compromise or arrangement is in conformity with the accounting standards prescribed under Section 133. Upon the application, the Hon’ble NCLT may direct a meeting of the creditors or class of creditors or the members or class of members and debenture holders to consider the scheme of merger/ amalgamation as per Section S. 232 (1)(a) & (b), S. 230(3)–(6) read with rule 5. Meeting of creditors can be dispensed with if 90% of the value of creditors give their consent under Section 230 (9).

Steps to be followed for merger Section 230 to 232 of Companies Act, 2013 2. The transferor & the transferee companies will send notices to the members/ creditors in compliance of the order of Hon’ble NCLT in Form CAA-2, 30 days prior to the date fixed for meeting. (S. 230(3)-(6) read with rule 6). Annexure to the notice calling meetings: • Draft scheme • Explanatory statement • Confirmation that a copy of draft scheme has been filed with ROC • Expert reports on valuation, if any • Report by Directors explaining its impact on each class of shareholders, KMP, promoter and non-promoter etc. • Supplementary accounting statement when annual accounts is older than six months before the first meeting of Board for approving scheme. And other details as per A. and one vernacular newspaper having wide Publication of notice in Annexure one English And other details as per Annexure A. circulation or such newspapers as may be directed by the NCLT (Section – 230(3) read with rule 7) and send notice to other applicable authorities i. e. Central Government, IT authorities, ROC as the case may be (Section -230(5) read with rule -8) in Form CAA-3.

Steps to be followed for merger Section 230 to 232 of Companies Act, 2013 3. The transferor & the transferee Companies shall file an affidavit of service (Section- 232 read with rule -12) to the Hon’ble NCLT not less than 7 days before the date fixed for the members/ creditors meetings along with Statement that the directions regarding the issue of notices and the advertisement have been duly complied with in the affidavit itself. 4. Convene the meeting of members & creditors as the case may be at the earliest after filing affidavit of service under Section (S. 232(1) read with S. 230(3)-(6). 5. Filing a representation by the CG, IT authorities, RD as the case may be to the Hon’ble NCLT within 30 days from the date of receipt of notice by the authorities under Section (Section 230(5). 6. Chairperson of the meeting of both the companies shall submit result of the creditors/ members meeting in Form CAA-4 within 3 days of conclusion of meeting. (Section – 230 (6) read with rule 14).

Steps to be followed for merger Section 230 to 232 of Companies Act, 2013 Second Motion 7. Both the Companies shall file the Petition to the Hon’ble NCLT in Form CAA-5 along with an Affidavit in Form NCLT-6 in support of the petition and verifying any matters not provided in any prior affidavit such as advertisement etc. within 7 days of filing of report by chairman (Section 232 read with rule 15). 8. Fixing the date of hearing for the Petition by the Hon’ble NCLT (Section 232 read with rule 16(1). 9. Sending of notice of hearing by the Hon’ble NCLT to the objectors or to their representatives u/s 230(4) and to the CG, IT authorities, ROC as the case may be under Section 232 read with rule 16 (2). 10. Transferor/Transferee Company shall publish advertisement in the same newspaper in which the notice of meeting was published before 10 days the date fixed for hearing (Section -232 read with rule 16(1).

Steps to be followed for merger Section 230 to 232 of Companies Act, 2013 12. Final hearing by the Hon’ble NCLT and order for amalgamation in Form – CAA 7 (Section 232 read with rule 19 & 20). 13. The transferee company shall file the order of the Hon’ble Tribunal to the ROC within 30 days of receipt of order in Form CAA-6. (Section 232 read with rule-17. 14. Both the Company will file statement of compliance until the scheme is fully implemented to ROC in Form CAA 8 duly certified by CA/CMA/CS in practice within 210 days of the end of each financial year (Section 232 (7) read with rule-21).

Merger of listed with unlisted Company Transferor Listed Transferor Unlisted Amalgamated Unlisted ØThe transferee company shall remain an unlisted Company until becomes listed Company. ØIf shareholder of the transferor company decide to opt out of the transferee company, provision shall be made for payment of the value of shares held by them and other benefits in accordance with a pre-determined price formula or after a valuation is made and the arrangements under this provision may be made by the Tribunal: Provided that the amount of payment or valuation under this clause for any share shall not be less than what has been specified by the SEBI under any regulation framed by it.

Preservation of books and papers of amalgamated companies (Section -239) The books and papers of a company which has been amalgamated with or whose shares have been acquired by, another Company under this Chapter shall not be disposed of without the prior permission of the Central Government and before granting such permission, that Government may appoint a person to examine the books and papers or any of them for the purpose of ascertaining whether they contain any evidence of the commission of an offence in connection with the promotion or formation, or the management of the affairs, of the transferorcompany or its amalgamation or the acquisition of its shares.

Liability of officers in respect of offences committed prior to Merger, Amalgamation ( Section – 240) The liability in respect of offences committed under this Act by the officers in default, of the transferor company prior to its merger, amalgamation or acquisition shall continue after such merger, amalgamation or acquisition.

Scheme of Arrangement for listed entity SEBI (Listing Obligations and Disclosure Requirements), 2015 Applicable Regulations Regulation 11 The listed entity shall ensure that any scheme of arrangement / amalgamation /merger/reconstruction /reduction of capital etc. to be presented to Tribunal does not in any way violate, override or limit the provisions of securities laws or requirements of the stock exchange(s): Provided that this regulation shall not be applicable for the units issued by Mutual Fund which are listed on a recognised stock exchange(s) Regulation 37 Without prejudice to provisions of regulation 11, the listed entity desirous of undertaking a scheme of arrangement or involved in a scheme of arrangement, shall file the draft scheme of arrangement, proposed to be filed before Tribunal under Sections 230 -234 and Section 66 of Companies Act, 2013, whichever applicable, with the stock exchange(s) for obtaining Observation Letter or No- objection letter, before filing such scheme with Tribunal, in terms of requirements specified by the Board or stock exchange(s) from time to time. ).

Scheme of Arrangement for listed entity SEBI (Listing Obligations and Disclosure Requirements), 2015 Regulation 94 The designated stock exchange, upon receipt of draft schemes of arrangement and the documents prescribed by the Board shall forward the same to the Board, in the manner prescribed by the Board. The stock exchange(s) shall submit to the Board its Objection Letter or No-Objection Letter on the draft scheme of arrangement after inter-alia ascertaining whether the draft scheme of arrangement is in compliance with securities laws within thirty days of receipt of draft scheme of arrangement or within seven days of date of receipt of satisfactory reply on clarifications from the listed entity and/or opinion from independent chartered accountant, if any, sought by stock exchange(s), as applicable. The stock exchange(s), shall issue Observation Letter or No-objection letter to the listed entity within seven days of receipt of comments from the Board, after suitably incorporating such comments in the Observation Letter or No-objection letter: Provided that the validity of the ‘Observation Letter’ or No-objection letter of stock exchanges shall be six months from the date of issuance.

Scheme of Arrangement for listed entity SEBI (Listing Obligations and Disclosure Requirements), 2015 Regulation 94 contd. The stock exchange(s) shall bring the observations or objections, as the case may be, to the notice of Court or Tribunal at the time of approval of the scheme of arrangement. Upon sanction of the Scheme by the Court or Tribunal, the designated stock exchange shall forward its recommendations to the Board on the documents submitted by the listed entity in terms of sub-regulation (5) of regulation 37.

Practical & Procedural Aspects of Drafting Petition/ Pleading

PREPARATORY POINTS • Take minute facts from the client. • Lend your complete ears to the client. • Put question to the client. • Convey to the client about exact legal position. • Give correct picture of judicial views.

DRAFTING OF PLEADINGS • Quote relevant provisions in the petition. • Do not suppress facts. • Highlights material facts, legal provisions and Court decisions, if any. • State important points together with reference.

PROFESSIONAL ETIQUETTES 1. Dressing Etiquettes • • Navy Blue suit and white shirt. Saree or any other dress of a sober colour with a Navy Blue jacket. 2. Handshake Etiquettes 3. Communication Etiquettes

CONDUCT AND ETIQUETTE DUTY TO THE TRIBUNAL - Conduct yourself with dignity and self-respect. DUTY TO CLIENT - Don’t withdraw from engagements once accepted, without sufficient cause. DUTY TO OPPONENT - Do your best to carry out promises made to the opposite-party.

TIME MANAGEMENT 1. Being busy isn’t the same as being effective. 2. Spend more time on specific activities. 3. Use your free time wisely. 4. Attempt the assignment on priority basis.

MYTHS • Only lawyers can draft. • I have been practicing as a Company Secretary for 10 -20 years. It’s difficult to venture into a new arena. • Drafting is a burden. • I have not studied the subject(s).

Some Important case laws on merger/demerger under Companies Act, 2013 Case Law - 1 In the matter of Scheme of Amalgamation of Apollo Pipes Limited (Transferor Company/Applicant Company No. 1 AND Amulya Leasing and Finance Limited (Transferee Company/Applicant Company No. 2) with Their respective Shareholder and Creditor NCLT Order dated : 03/03/2017

Some Important case laws on merger/demerger under Companies Act, 2013 A) In relation to the Transferor Company/Applicant Company No. 1 (i) With respect to Equity shareholders Meeting of Equity shareholders of the Transferor Company/Applicant Company No. 1 is dispensed with as there are 7 Shareholders, out of which one is Transferee Company, and other six equity shareholders’ consents have been obtained and is already placed on record.

Some Important case laws on merger/demerger under Companies Act, 2013 Case Law - 2 In the matter of the Composite Scheme of Arrangement Between Fortis Healthcare Limited (Demerged Company) AND SRL Limited (Amalgamating Company) AND Fortis Malar Hospitals Limited NCLT Chandigarh Bench at Chandigarh Order dated : 21. 02. 2017 We dispense with the convening of the meetings of the secured creditors of all the three applicant companies as each of them is said to have given their consent to the proposed scheme.

Some Important case laws on merger/demerger under Companies Act, 2013 Case Law - 3 In the matter of Jaiprakash Associates Limited (Transferor Company/ Applicant No. 1) AND Jaypee Infrastructure Development Limited (Transferee Company/ Applicant No. 2) Order dated : 08. 12. 2017

Some Important case laws on merger/demerger under Companies Act, 2013 i. The meetings of the shareholders and Secured and Unsecured creditors of the Transferor Company are being dispensed with , with such a direction that instead of meetings their to be obtained through postal ballot with facility of voting through electronic means (e-voting), wherever possible as per provisions of Section 110(1)(b) of the Companies Act, 2013 and provision contained in Rule 20 of Companies (Management and Administration) Rules, 2014. Physical meetings were dispensed with in order to promote the larger participation of shareholders and Secured and Unsecured creditors in the voting.

CONCLUSION The Companies Act, 2013 contains a number of provisions which have implications on Mergers and Restructurings. There are some pragmatic reforms such as: fast-track schemes, which being cost and time effective will encourage corporate restructurings for small and group companies; merger of an Indian company into a foreign company should give impetus to cross-border M&A activity; introducing the threshold for raising objections to a scheme would deter frivolous objections and postal ballot approval would ensure a wider participation of the stakeholders.