MERGERS AND DEMERGERS OF COMPANY
The legal frameworks relating to mergers and demergers in India are given under the Companies Act 2013. This Act outlines the legal framework, processes, and measures governments must uphold to meet these transactions’ standards of openness and equity. Merger and demerger involves a lot of complexities and it is important to consult a corporate lawyer before finalising the mergers.
At Candour legal, we have an inhouse team of best corporate lawyers in Ahmedabad who have dealt with numerous company law matters including merger and demerger. Led by Mr. Manasvi Thapar, we have become one of the best corporate law firms in Ahmedabad because of our core understanding of corporate law, understanding the needs of the clients and providing legal expertise. Whether it is vetting the contracts, providing corporate legal advice or filing a company law suit, we provide excellent services in all areas of company law, 2013.
Merger and Demerger
Let us understand what a merger is and what a demerger is.
Enterprises may consider various approaches to improve the firm’s competitiveness and growth in the constantly changing environment. We looked at platforms such as Upwork, Peralta, Remote, and others to compile this list. Two major corporate restructuring strategies commonly used today include mergers and demergers. Merge is defined as integrating two or more companies into a more prominent company. At the same time, Demerge is the reverse process, splitting a combined business into two or more different companies. This paper aims to provide an understanding of mergers and demerges.
Under the Income-tax Act 1961, amalgamation has a meaning that refers to the Merger of one or more companies with another company or two or more companies. Merger to form one company (the companies merging being referred to as the amalgamating company or companies and the company with which the amalgamating company or companies merge or the new company forming, as a result, constitute one company) while Demerger means the transfer of one or more undertaking or Both Merger and Demerger can be conducted under fast track procedure, which means that approvals could be rapid and it follows a simple process.
- MERGER:-
Merger is a strategic business act that occurs when two or more firms coordinate their assets, activities, and resources to establish a consolidated organisation. Some of the critical reasons for mergers include getting bigger scale, using entry into new markets, attaining higher market share and encouraging innovation and renovations in technology. Horizontal mergers are used when the firms are in the same industry; vertical mergers are used when the firms are at different levels in the same industry value chain; and conglomerate mergers are used for firms from various sectors for strategic purposes. Some of the benefits of mergers include Efficiencies arising from a large scale of production, increased market share, customer base expansion, and organisational integration leading to the eradication of parallel activities.
There are several types of mergers:
Horizontal Merger: This kind of Merger occurs when several businesses that offer related services or products in their industry join to form a single entity. For instance, if there are two firms in the same industry, like two companies that produce drugs, the Merger between these two firms is termed a horizontal merger.
Vertical Merger: Vertical integrations involve companies working within the same value proposition but at different levels, forming part of a different channel. For instance, a combination of a company that deals in cars with a company that deals with tyres is a form of vertical combination.
Conglomerate Merger: Conglomerate mergers, therefore, relate to two or more companies based on their operational fields of specialisation. This type of Merger may be stratégique for diversification, enabling firms to provide some cushion by venturing into various lines of business.
Rationales for Mergers:
New Opportunities: Mergers may be adopted to develop new business opportunities that may have yet to be achievable by any partner operating individually.
Strategic Development: One merger partner may require funding for expansion or new projects, while another may need new skills and technologies to adapt to a changing market.
Diversification: Mergers can manage risks such as relying on a single market or industry because a firm can expand its product line or business type.
Competitive Advantage: Combining resources and capabilities is beneficial among entities that merge because it allows them to enjoy better strategic positions than competitors; hence, the chances of controlling a more significant proportion of the market share and reaping greater returns will be within their reach.
Benefits:
Synergy: Companies that merge with other firms can combine their financial resources, thus resulting in effective cost control and an ability to produce more than one product at a lesser cost than when each was created individually.
Increased Market Power: Regarding the benefits of operational synergies, mergers can lead to better bargaining power for the merged firm with suppliers and customers.
Access to New Technologies: This dissertation aimed to establish aspects of synergy by integrating resources that may enhance the technological development and innovation of the merging parties.
Risks:
Integration Challenges: Integrating two organisations’ cultures and structures is not easy, and hence, there might be a setback in some instances during the transition phase.
Regulatory Hurdles: Mergers and acquisitions may also attract some form of regulatory control that seeks to impede monopoly formation or foreclosure of competition that may be detrimental to consumers, leading to delays or restrictions.
Merger procedure in India
Here’s a brief overview of the Merger procedure in India:
1. Board Approval: The two companies’ directors consent to the merging plan.
2. Shareholder Approval: The shareholders will vote and agree on the Merger.
3. NCLT Application: Application filed with the National Company Law Tribunal (NCLT).
4. NCLT Approval: NCLT has the authority to examine and ratify the terms of the Merger and review and approve the Merger scheme.
5. Regulatory Approvals: Obtain permits from other departments if necessary.
6. Implementation: Acquire the new company assets required per the approved scheme and transfer the assets, liabilities and obligations of the old/spinning companies.
7. Post-Merger Formalities: Modify the details provided in the corporate records, float new shares, and inform stakeholders about changes.
In the process, considering legal and regulatory procedures is always important.
- DEMERGER
A demerger, or spin-off or divestiture, is a situation whereby a particular company’s business units or assets are separated and become separate entities. This structural change management strategy seeks to foster the establishment of organisations with sound strategic objectives and operational direction. There are various reasons why demergers may be done, including separating complex businesses and enhancing efficiency after demerging different businesses that were initially under one company.
Spin-off: A spin-off is a scenario where a parent company decides to split a part of its business and thus issues stock of the new company to its existing investors. This can help the new entity conduct its operations and have different strategic goals from the parent company.
Carve-out: In a carve-out, the parent firm sells a separate public subsidiary through an IPO while maintaining majority ownership. The subsidiary acquires a legal personality, meaning it is independent. However, it bears a link with the parent company.
Divestiture: Divestment, on the other hand, is the process by which an organisation releases or sells a part of its assets or a specific business segment to another organisation. This strategic direction aims to streamline the operations around the core business and divest the less relevant or unprofitable businesses.
Rationales for Demergers:
The break-up of Corporate Activity: Demergers ensure that business organisations’ strategic plans concentrate on the execution of definite activities related to central business processes rather than a wide range of activities that could, most times, hamper business growth.
Value Creation: These stand-alone entities may receive even greater market focus from investors and could create more excellent shareholder value because of their stand-alone operations to be assessed in terms of their performance.
Risk Mitigation: It minimises the stock price volatility since nondiscretionary operations should have a competitive edge, so the firm narrows its focus.
Benefits:
Improved Operational Coordination: Affiliates can optimise resources for their individual goals and aims, improving operational focus.
Greater Financial Transparency: Mergers have the disadvantage of obfuscating accounts, while demergers offer better financial reporting to vindicate the performance of specific entities.
Value Realisation: This is especially true because businesses are pretty distinct by nature. This separation can allow for the appropriate valuation of specific operations and even attract new investors.
Risks:
Loss of Synergy: The demerged entities may lose the synergies and economies of scale they once shared as part of a larger organisation.
Asset Distribution: Dividing assets and liabilities between the demerged entities can be complex and may lead to disputes.
Here’s a concise overview of the Demerger procedure:
1. Board Approval: The board of the company approves the demerger proposal.
2. Scheme Preparation: Generally, a demerger underlining the terms and conditions of such a Demerger is also prepared.
3. Shareholder Approval: Shareholders approve the demerger scheme by resolution of the company and bank’s general meetings.
4. NCLT Application: The applicant recently applied to the National Company Law Tribunal (NCLT).
5. NCLT Approval: The scheme needs to be approved by the NCLT for a demerger.
6. Regulatory Approvals: Obtain necessary approvals from Regulatory Authorities.
7. Implementation: Intangible assets, financial resources, operating segments, and other investments should be transferred based on the agreed-upon scheme.
8. Post-Demerger Formalities: Follow and perform all the necessary standing operating procedures and update the files accordingly.
Several vital laws regulate mergers and Demergers of companies:
1. Companies Act, 2013: This legislation offers the most basic guidelines under which corporations operating in India may do so, including mergers and demergers. The rules and regulations regarding such stylised transactions are explained under sections 230-240.
2. Securities and Exchange Board of India (SEBI) Regulations: SEBI regulates corporate consolidation, specifically those involving listed companies. Legal rules that may apply to these activities include the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, among others.
3. Competition Act, 2002: This Act controls trading relations that impact competition; it demands that mergers and demergers be reported to the Competition Commission of India (CCI) and that approval be sought for combinations in situations where a certain amount is exceeded.
4. Income Tax Act, 1961: Legal regulation of mergers and demergers: Mergers and demergers are especially regulated by the Income Tax Act, as tax considerations are very relevant in such transactions, while the Act contains provisions regarding the taxation of mergers and demergers, certain exemptions or concessions may be allowed under certain circumstances.
5. Stamp Duty Laws: Every state government in India levies stamp duties on various kinds of transfers, including mergers and demerges. Companies must make provisions for stamp duties where such deal structures are implemented.
6. Foreign Exchange Management Act (FEMA): FEMA records foreign exchange transactions, such as those relating to mergers or demergers of foreign entities or foreign investments.
7. National Company Law Tribunal (NCLT): The NCLT sits as a forum for approving schemes of arrangement in terms of the Companies Act 2013, which includes merger and demerger activities. Implementing such schemes requires National Company Law Tribunal (NCLT) approval.
Conclusion
Besides such laws, other authorities like the Reserve Bank of India (RBI), the concerned sector regulators, and the Registrar of Companies (ROC) might also have laws or norms that may be required for carrying out Mergers and Demergers.
Violations of these laws and regulations can result in penalties, fines, or legal consequences for the companies involved, including:
– Fines charged by regulatory bodies such as SEBI, the CCI, or the RBI, as applicable to the particular case.
– This means the NCLT is empowered to invalidate the Merger or Demerger made by defaulting companies.
– Unfavorable legal actions that may be conducted by the affected parties or shareholders due to non-compliance with the company rules.
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