Introduction to Compromise Arrangement Mergers

and Acquisition
We have been learning about the companies coming together to from another
company and companies taking over the existing companies to expand their
business.
With recession taking toll of many Indian businesses and the feeling of insecurity
surging over our businessmen, it is not surprising when we hear about the immense
numbers of corporate restructurings taking place, especially in the last couple of
years. Several companies have been taken over and several have undergone
internal restructuring, whereas certain companies in the same field of business
have found it beneficial to merge together into one company.
In this context, it would be essential for us to understand what corporate
restructuring and mergers and acquisitions are all about. The phrase mergers and
acquisitions (abbreviated M&A) refers to the aspect of corporate strategy,
corporate finance and management dealing with the buying, selling and combining
of different companies that can aid, finance, or help a growing company in a given
industry grow rapidly without having to create another business entity.

Compromise and arrangement

Compromise means settlement or adjustment of claims in
disputes by mutual concessions. If members have to give up their
rights entirely it will not be a compromise.

Arrangement is a term of wide import. It includes a

reorganization of the share capital of a company by consolidation
of shares of different classes or by both these methods.

As regards compromises and arrangements, in connection with

companies they may be discussed under two heads:
1. Compromises when company is a going concern; and
2. Compromise when a company is being wound up

Compromise when company is a going concern

According to section 391 of company Act a compromise or
arrangement may be proposed;
a. Between a company and its creditors; or any class of them;
b. Between a company and its members or any class of them;
Procedure to be followed
1. Application to the Tribunal: upon a proposal for a
compromise being made the company or any creditor or
member or where the company is being wound up the
liquidator may apply the tribunal for a compromise.
2. Meeting of members or creditors: the Tribunal shall direct
the calling of the meeting of each class of creditors or each
class of members.
3. Resolution by the three-fourth majority: at the meeting , a
resolution approving the compromise or arrangements, shall
be passed by a majority representing three-fourth in value of
creditors or members present at the meeting.
4. Tribunal’s sanction: the Tribunal shall sanction any scheme
 which is fair and reasonable and for the for the benefit of
each class of members or creditors.
5. Compromise binding on all members and creditors.
6. Appeal: an appeal shall lie from any order made by the
tribunal exercising original jurisdiction under section 391to
the Tribunal empowered to hear appeal.
Compromise during winding of the company
Liquidator’s power to compromise (section 546):
When the company is being wound up the liquidator may
exercise
powers of compromise or arrangements with the sanction of
tribunal . In case of a voluntary winding up , the liquidators may
exercise these powers with the sanction of a special resolution of
a company
Merger or Amalgamation

Mergers or amalgamation and acquisitions (M&A) refers to the aspect of corporate

strategy, corporate finance and management dealing with the buying, selling and
combining of different companies that can aid, finance, or help a growing company
in a given industry grow rapidly without having to create another business entity.
An acquisition, also known as a takeover or a buyout, is the buying of one company
(the ‘target’) by another.
Although merger and amalgamation mean the same, there is a small difference
between the two. In a merger one company acquires the other company and the
other company ceases to exist. In an amalgamation, two or more companies come
together and form a new business entity.

Acquisitions
An acquisition may be only slightly different from a merger. In fact, it may be different in name only. Like
mergers, acquisitions are actions through which companies seek economies of scale, efficiencies and
enhanced market visibility. Unlike all mergers, all acquisitions involve one firm purchasing another - there
is no exchange of stock or consolidation as a new company. Acquisitions are often congenial, and all
parties feel satisfied with the deal. Other times, acquisitions are more hostile.

In an acquisition, as in some of the merger deals we discuss above, a company can buy another
company with cash, stock or a combination of the two. Another possibility, which is common in smaller
deals, is for one company to acquire all the assets of another company. Company X buys all of Company
Y's assets for cash, which means that Company Y will have only cash (and debt, if they had debt before).
Of course, Company Y becomes merely a shell and will eventually liquidate or enter another area of
business.

Methods of Acquisition:
An acquisition may be affected by
a) Agreement with the persons holding majority interest in the company
management like members of the board or major shareholders commanding
majority of voting power;
b) Purchase of shares in open market;
c) To make takeover offer to the general body of shareholders;
d) Purchase of new shares by private treaty;
e) Acquisition of share capital through the following forms of considerations
viz. Means of cash, issuance of loan capital, or insurance of share capital.

Takeover:

A ‘takeover’ is acquisition and both the terms are used interchangeably.

Takeover differs from merger in approach to business combinations i.e. The
process of takeover, transaction involved in takeover, determination of share
exchange or cash price and the fulfillment of goals of combination all are different
in takeovers than in mergers. For example, process of takeover is unilateral and the
offeror company decides

Another type of acquisition is a reverse merger, a deal that enables a private company to get publicly-
listed in a relatively short time period. A reverse merger occurs when a private company that has strong
prospects and is eager to raise financing buys a publicly-listed shell company, usually one with no
business and limited assets. The private company reverse merges into the public company, and together
they become an entirely new public corporation with tradable shares.

Regardless of their category or structure, all mergers and acquisitions have one common goal: they are
all meant to create synergy that makes the value of the combined companies greater than the sum of the
two parts. The success of a merger or acquisition depends on whether this synergy is achieved.
Distinction between Mergers and Acquisitions
Although they are often uttered in the same breath and used as though they were synonymous, the terms
merger and acquisition mean slightly different things.

When one company takes over another and clearly established itself as the new owner, the purchase is
called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows"
the business and the buyer's stock continues to be traded.

In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to
go forward as a single new company rather than remain separately owned and operated. This kind of
action is more precisely referred to as a "merger of equals." Both companies' stocks are surrendered and
new company stock is issued in its place. For example, both Daimler-Benz and Chrysler ceased to exist
when the two firms merged, and a new company, DaimlerChrysler, was created.

In practice, however, actual mergers of equals don't happen very often. Usually, one company will buy
another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a
merger of equals, even if it's technically an acquisition. Being bought out often carries negative
connotations, therefore, by describing the deal as a merger, deal makers and top managers try to make
the takeover more palatable.

A purchase deal will also be called a merger when both CEOs agree that joining together is in the best
interest of both of their companies. But when the deal is unfriendly - that is, when the target company
does not want to be purchased - it is always regarded as an acquisition.

Whether a purchase is considered a merger or an acquisition really depends on whether the purchase is
friendly or hostile and how it is announced. In other words, the real difference lies in how the purchase is
communicated to and received by the target company's board of directors, employees and shareholders.

Start with an Offer

When the CEO and top managers of a company decide that they want to do a merger or acquisition, they
start with a tender offer. The process typically begins with the acquiring company carefully and discreetly
buying up shares in the target company, or building a position. Once the acquiring company starts to
purchase shares in the open market, it is restricted to buying 5% of the total outstanding shares before it
must file with the SEC. In the filing, the company must formally declare how many shares it owns and
whether it intends to buy the company or keep the shares purely as an investment
Working with financial advisors and investment bankers, the acquiring company will arrive at an overall
price that it's willing to pay for its target in cash, shares or both. The tender offer is then frequently
advertised in the business press, stating the offer price and the deadline by which the shareholders in the
target company must accept (or reject) it

The Target's Response

Once the tender offer has been made, the target company can do one of several things:
• Accept the Terms of the Offer - If the target firm's top managers and shareholders are happy
with the terms of the transaction, they will go ahead with the deal.
• Attempt to Negotiate - The tender offer price may not be high enough for the target company's
shareholders to accept, or the specific terms of the deal may not be attractive. In a merger, there
may be much at stake for the management of the target - their jobs, in particular. If they're not
satisfied with the terms laid out in the tender offer, the target's management may try to work out
more agreeable terms that let them keep their jobs or, even better, send them off with a nice, big
compensation package.

Not surprisingly, highly sought-after target companies that are the object of several bidders will
have greater latitude for negotiation. Furthermore, managers have more negotiating power if they
can show that they are crucial to the merger's future success.
• Execute a Poison Pill or Some Other Hostile Takeover Defense – A poison pill scheme can
be triggered by a target company when a hostile suitor acquires a predetermined percentage of
company stock. To execute its defense, the target company grants all shareholders - except the
acquiring company - options to buy additional stock at a dramatic discount. This dilutes the
acquiring company's share and intercepts its control of the company.
• Find a White Knight - As an alternative, the target company's management may seek out a
friendlier potential acquiring company, or white knight. If a white knight is found, it will offer an
equal or higher price for the shares than the hostile bidder.
Mergers and acquisitions can face scrutiny from regulatory bodies. For example, if the two biggest long-
distance companies in the U.S., AT&T and Sprint, wanted to merge, the deal would require approval from
the Federal Communications Commission (FCC). The FCC would probably regard a merger of the two
giants as the creation of a monopoly or, at the very least, a threat to competition in the industry.

Closing the Deal

Finally, once the target company agrees to the tender offer and regulatory requirements are met, the
merger deal will be executed by means of some transaction. In a merger in which one company buys
another, the acquiring company will pay for the target company's shares with cash, stock or both.

A cash-for-stock transaction is fairly straightforward: target company shareholders receive a cash

payment for each share purchased. This transaction is treated as a taxable sale of the shares of the
target company.

If the transaction is made with stock instead of cash, then it's not taxable. There is simply an exchange of
share certificates. The desire to steer clear of the tax man explains why so many M&A deals are carried
out as stock-for-stock transactions.

When a company is purchased with stock, new shares from the acquiring company's stock are issued
directly to the target company's shareholders, or the new shares are sent to a broker who manages them
for target company shareholders. The shareholders of the target company are only taxed when they sell
their new shares.

When the deal is closed, investors usually receive a new stock in their portfolios - the acquiring
company's expanded stock. Sometimes investors will get new stock identifying a new corporate entity that
is created by the M&A deal.

Demerger

As mergers capture the imagination of many investors and companies, the idea of getting smaller might
seem counterintuitive. But corporate break-ups, or de-mergers, can be very attractive options for
companies and their shareholders.
Advantages
The rationale behind a spinoff, tracking stock or carve-out is that "the parts are greater than the whole."
These corporate restructuring techniques, which involve the separation of a business unit or subsidiary
from the parent, can help a company raise additional equity funds. A break-up can also boost a
company's valuation by providing powerful incentives to the people who work in the separating unit, and
help the parent's management to focus on core operations.

Most importantly, shareholders get better information about the business unit because it issues separate
financial statements. This is particularly useful when a company's traditional line of business differs from
the separated business unit. With separate financial disclosure, investors are better equipped to gauge
the value of the parent corporation. The parent company might attract more investors and, ultimately,
more capital.

Also, separating a subsidiary from its parent can reduce internal competition for corporate funds. For
investors, that's great news: it curbs the kind of negative internal wrangling that can compromise the unity
and productivity of a company.

For employees of the new separate entity, there is a publicly traded stock to motivate and reward them.
Stock options in the parent often provide little incentive to subsidiary managers, especially because their
efforts are buried in the firm's overall performance.

Disadvantages
That said, de-merged firms are likely to be substantially smaller than their parents, possibly making it
harder to tap credit markets and costlier finance that may be affordable only for larger companies. And
the smaller size of the firm may mean it has less representation on major indexes, making it more difficult
to attract interest from institutional investors.

Meanwhile, there are the extra costs that the parts of the business face if separated. When a firm divides
itself into smaller units, it may be losing the synergy that it had as a larger entity. For instance, the division
of expenses such as marketing, administration and research and development (R&D) into different
business units may cause redundant costs without increasing overall revenues.

Restructuring Methods
There are several restructuring methods: doing an outright sell-off, doing an equity carve-out, spinning off
a unit to existing shareholders or issuing tracking stock. Each has advantages and disadvantages for
companies and investors. All of these deals are quite complex.

Sell-Offs
A sell-off, also known as a divestiture, is the outright sale of a company subsidiary. Normally, sell-offs are
done because the subsidiary doesn't fit into the parent company's core strategy. The market may be
undervaluing the combined businesses due to a lack of synergy between the parent and subsidiary. As a
result, management and the board decide that the subsidiary is better off under different ownership.

Besides getting rid of an unwanted subsidiary, sell-offs also raise cash, which can be used to pay off debt.
In the late 1980s and early 1990s, corporate raiders would use debt to finance acquisitions. Then, after
making a purchase they would sell-off its subsidiaries to raise cash to service the debt. The raiders'
method certainly makes sense if the sum of the parts is greater than the whole. When it isn't, deals are
unsuccessful.

Equity Carve-Outs
More and more companies are using equity carve-outs to boost shareholder value. A parent firm makes a
subsidiary public through an initial public offering (IPO) of shares, amounting to a partial sell-off. A new
publicly-listed company is created, but the parent keeps a controlling stake in the newly traded subsidiary.

A carve-out is a strategic avenue a parent firm may take when one of its subsidiaries is growing faster
and carrying higher valuations than other businesses owned by the parent. A carve-out generates cash
because shares in the subsidiary are sold to the public, but the issue also unlocks the value of the
subsidiary unit and enhances the parent's shareholder value.

The new legal entity of a carve-out has a separate board, but in most carve-outs, the parent retains some
control. In these cases, some portion of the parent firm's board of directors may be shared. Since the
parent has a controlling stake, meaning both firms have common shareholders, the connection between
the two will likely be strong.

That said, sometimes companies carve-out a subsidiary not because it's doing well, but because it is a
burden. Such an intention won't lead to a successful result, especially if a carved-out subsidiary is too
loaded with debt, or had trouble even when it was a part of the parent and is lacking an established track
record for growing revenues and profits.

Carve-outs can also create unexpected friction between the parent and subsidiary. Problems can arise as
managers of the carved-out company must be accountable to their public shareholders as well as the
owners of the parent company. This can create divided loyalties.

Spinoffs
A spinoff occurs when a subsidiary becomes an independent entity. The parent firm distributes shares of
the subsidiary to its shareholders through a stock dividend. Since this transaction is a dividend
distribution, no cash is generated. Thus, spinoffs are unlikely to be used when a firm needs to finance
growth or deals. Like the carve-out, the subsidiary becomes a separate legal entity with a distinct
management and board.

Like carve-outs, spinoffs are usually about separating a healthy operation. In most cases, spinoffs unlock
hidden shareholder value. For the parent company, it sharpens management focus. For the spinoff
company, management doesn't have to compete for the parent's attention and capital. Once they are set
free, managers can explore new opportunities.

Investors, however, should beware of throw-away subsidiaries the parent created to separate legal
liability or to off-load debt. Once spinoff shares are issued to parent company shareholders, some
shareholders may be tempted to quickly dump these shares on the market, depressing the share
valuation.

Tracking Stock
A tracking stock is a special type of stock issued by a publicly held company to track the value of one
segment of that company. The stock allows the different segments of the company to be valued differently
by investors.

Let's say a slow-growth company trading at a low price-earnings ratio (P/E ratio) happens to have a fast
growing business unit. The company might issue a tracking stock so the market can value the new
business separately from the old one and at a significantly higher P/E rating.

Why would a firm issue a tracking stock rather than spinning-off or carving-out its fast growth business for
shareholders? The company retains control over the subsidiary; the two businesses can continue to enjoy
synergies and share marketing, administrative support functions, a headquarters and so on. Finally, and
most importantly, if the tracking stock climbs in value, the parent company can use the tracking stock it
owns to make acquisitions.

Still, shareholders need to remember that tracking stocks are class B, meaning they don't grant
shareholders the same voting rights as those of the main stock. Each share of tracking stock may have
only a half or a quarter of a vote. In rare cases, holders of tracking stock have no vote at all.

Merger and Acquisitions may fail ???

Governing Law:
The Companies Act, 1956 does not define the term 'Merger' or 'Amalgamation'. It
deals with schemes of merger/ acquisition which are given in s.390-394 'A', 395,396
and 396 'A'.
 Classifications of mergers

Horizontal merger – is the merger of two companies which are in produce of same
products. This can be again classified into Large Horizontal merger and small
horizontal merger.

Horizontal merger helps to come over from the competition between two companies
merging together strengthens the company to compete with other companies.
Horizontal merger between the small companies would not effect the industry in
large. But between the larger companies will make an impact on the economy and
gives them the monopoly over the market. Horizontal mergers between the two
small companies are common in India. When large companies merging together we
need to look into legislations which prohibit the monopoly.

Vertical merger – is a merger between two companies producing different goods

or services for one specific finished product. Vertical merger takes between the
customer and company or a company and a supplier. IN this a manufacture may
merge with the distributor or supplier of its products. This makes other competitors
difficult to access to an important componet of product or to an important channel
of distribution which are called as "vertical foreclosure" or "bottleneck"
problem.Vertical merger helps to avoid sales taxes and other marketing
expenditures.

Market-extension merger - is a merger of two companies that deal in same

products in different markets. Market extension merger helps the companies to
have access to the bigger market and bigger client base.

Product-extension merger – takes place between the two or more companies

which sells different products but related to the same category. This type of merger
enables the new company to go in for a pooling in of their products so as to serve a
common market, which was earlier fragmented among them. This merger is
between two companies that sell different, but somewhat related products, in a
common market. This allows the new, larger company to pool their products and
sell them with greater success to the already common market that the two separate
companies shared.

The product extension merger allows the merging companies to group together
their products and get access to a bigger set of consumers. This ensures that they
earn higher profits.

Conglomeration - Two companies that have no common business areas. A

conglomeration is the merger of two companies that have no related products or
markets. In short, they have no common business ties.

Conglomerate merger in which merging firms are not competitors, but

use common or related production processes and/or marketing and distribution
channels.

Co generic merger: Merger between firms in the same general industry but having
no mutual buyer-seller relationship, such as a merger between a bank and
a leasing company.
A merger in which one firm acquires another firm that is in the same
general industry but neither in the same line of business nor a
supplier or customer.
Purchase mergers - this kind of merger occurs when one company purchases
another. The purchase is made with cash or through the issue of some kind of debt
instrument; the sale is taxable.
Acquiring companies often prefer this type of merger because it can provide them
with a tax benefit. Acquired assets can be written-up to the actual purchase price,
and the difference between the book value and the purchase price of the assets can
depreciate annually, reducing taxes payable by the acquiring company.
Consolidation mergers - With this merger, a brand new company is formed and
both companies are bought and combined under the new entity. The tax terms are
the same as those of a purchase merger.
A unique type of merger called a reverse merger is used as a way of going public
without the expense and time required by an IPO.
Accretive mergers are those in which an acquiring company's earnings per share
(EPS) increase. An alternative way of calculating this is if a company with a high
price to earnings ratio (P/E) acquires one with a low P/E.
Dilutive mergers are the opposite of above, whereby a company's EPS decreases.
The company will be one with a low P/E acquiring one with a high P/E.
Merger and Acquisition Procedures:
1. Memorandum Of Association (M/A):-The Memorandum of Association must provide the
power to amalgamate in its objects clause. It M/A is silent, amendment in M/A must take place.

2. Board Meeting:-A Board Meeting shall be convened to consider and pass the
following requisite resolutions:

- approve the draft scheme of amalgamation;

- to authorize filing of application to the court for directions to convene a general

meeting;

- to file a petition for confirmation of scheme by the High Court.

Through an application under s.391/ 394 of Companies Act, 1956 can be made by
the member or creditor of a company, the court may not be able to sanction the
scheme which is not approved by the company by a Board or members resolution.

Directors who are given the necessary powers by the AoA may present a petition
on behalf of the company without first obtaining the approval of the company in
general meeting.

3. Application to the Court:- An application shall be made to the court for directions
to convene a general meeting by way of Judge's summons(Form No. 33)
supported by an affidavit(Form No. 34). The proposed scheme of amalgamation
must be attached to such affidavit..
The summons should be accompanied by:

-A certified copy of the M&A of both companies

-A certified true copy of the latest audited B/S and P&L A/c of transferee company

The application to convene meeting under s.391(1) is required to be made to the

respective jurisdictional HC by the company concerned depending on the location of
its registered office. Similarly an application for the scheme of arrangement will
have to be made to the concerned HC where the company’s registered office is
situated.

Person entitled to apply:-

(i) U/s.391 & 394, members of the company have right to apply to court
(ii) A successor to a share of a deceased member has in the normal course, locus-
standi to maintain an application u/s.391, 395.

(iii) An application can also be made by the transferee of shares.

(iv)The creditor also have right to apply to court.

(v) The liquidator is also empowered to make an application to the court.

4. Copy to Regional Director:-A copy of application made to concerned H.C. shall

also be sent to the R.D. of the region. Although, such notice is supposed to be sent
by the H.C., usually the company sends it without waiting for the H.C. to send it.

5. Order Of High Court (Orders in - Form No. 35):-On hearing of the summons,
the H.C. shall pass the necessary orders which shall include:

(a) Time and place of the meeting,

(b) Chairman of the meeting,

(c) Fixing the quorum,

(d) Procedure to be followed in the meeting for voting by the proxy,

(e) Advertisement of notice of the meeting,

(f) Time limit for the chairman to submit the report to the court regarding the result
of the meeting.

Where the court observes that any of the following circumstances exist in the case
of the merger it may not order a meeting when shareholders are few in number; or
where the membership is restricted to a single family, HUF or close relatives; or
where shareholding pattern of transferor and transferee companies is identical.

6. Notice Of The Meeting(Notice in - Form No. 36):-The notice of the meeting

shall be sent to the creditors and/or all the shareholders individually (including
preference shareholders) by the chairman so appointed by registered post
enclosing: (a) A statement setting forth the following:
- Terms of amalgamation and its effects

- Any material interests of the director, MDs or Manager, in any capacity

- Effect of the arrangement on those interests.

(b) A copy of the proposed scheme of amalgamation

(c) A form of proxy,( Proxy in - Form No. 37)

(d) Attendance slip,

(e) Notice of the resolution for authorizing issue of shares to persons other than
existing shareholders

Computation: The notice that is required to be given u/s.393 of the Act for the
meeting of the members/creditors shall be by 21 clear days notice.

7. Advertisement of Notice Of Meeting(Advertisement in - Form No. 38):-The

notice of the meeting shall be advertised in an English and Hindi Newspapers as
the court may direct by giving not less than 21 clear days notice before the date
fixed for the meeting. However in some instances, the 21 days period can be
condoned if reasons are found justifiable.

8. Notice To Stock Exchange:- In case of the listed company, 3 copies of the notice
of the general meeting along with enclosures shall be sent to the Stock Exchange
where the company is listed.

9. Filing Of Affidavit For The Compliance:- An affidavit not les than 7 days before the
meeting shall be filed by the Chairman of the meeting with the Court showing that
the directions regarding the issue of notices and advertisement have been duly
complied with.

10. General Meeting:-The General Meeting shall be held to pass the following
resolutions:

(a) Approving the scheme of amalgamation by ¾th majority e.g. if a meeting is

attended by say 100 members holding 100 shares, the scheme shall be deemed to
have been approved only when it is supported by at least 51 members holding
together 750 shares amounts themselves;

(b) Special Resolution authorizing allotment of shares to persons other than existing
shareholders or an ordinary resolution be passed subject to getting Central
Government's approval for the allotment as per the provisions of Section 81(1A) of
the Companies Act, 1956,

(c) The resolution to empower directors to dispose of the shares not taken up by the
dissenting shareholders at their discretion.,

(d) An ordinary/special resolution shall be passed to increase the Authorized share

capital, if the proposed issue of shares exceeds the present authorized capital. The
decision of the meeting shall be ascertained only by taking a poll on resolutions.

In case of Transfer company need not to pass a special resolution for offering
shares to the persons other than the existing shareholders.

11. Reporting of Result of the Meeting(Report in - Form No. 39):-The Chairman of

the meeting shall report the result of the meeting to the court within the time fixed
by the judge or within 7 days, as the case may be. A copy of proceedings of the
meeting shall also be sent to the concerned Stock Exchange.

12. Formalities With ROC:- The following documents shall be filed with ROC along-
with the requisite filing fees:

(i)Form No. 23 of Companies General Rules & Forms + copy of Special Resolution,
(there is no need for the transferor company to file Form No. 23 of the Companies
General Rules and Forms with the Registrar of Companies.)

(ii)Resolution approving the scheme of amalgamation,

(iii) Special resolution passed for the issue of shares to persons other than existing
shareholders.

13. Petition (Petition in - Form No. 40):-For approval of the scheme of

amalgamation, a petition shall be made to the H.C. within 7 days of the filing of
report by the chairman.

If the Regd. Offices of the companies are in same state - then both the companies
may move jointly to the High Court.

If the Regd. Offices of the companies are in different states - then each company
shall move the petition in respective High Court for directions.

However in a recent judgment of Jaipur Polypin Ltd. v. Rajasthan Spinning &

Weaving Mills, it was held that when the two companies are at different places, then
no need to file an application at two different places.

14. Sanction of The Scheme:- The Court shall sanction the scheme on being
satisfied that: (i) The whole scheme is annexed to the notice for convening meeting.
(This provision is mandatory in nature)

(ii) The scheme should have been approved by the company by means of ¾th
majority of the members present.

(iii)The scheme should be genuine and bona fide and should not be against the
interests of the creditors, the company and the public interest.
After satisfying itself, the court shall pass orders in the requisite form(Orders in -
Form No. 41).

The requirement of law is permission or approval of court to the scheme.

The application made by the company is to seek court’s approval to the company
scheme of amalgamation and not merely ordering a meeting. The court may order a
meeting of members too.

The court must consider all aspects of the matter so as to arrive at a finding that
the scheme is fair, just and reasonable and does not contravene public policy or any
statutory provision.

While interpreting s.394 r/w s.391, we find that the Tribunal’s power of ordering
amalgamation/reconstruction is limited by two provisos of s.394: Firstly, Tribunal
has to await the receipt of report from the Registrar of Companies about the
manner in which affairs of the Company are conducted. Secondly, when the
transferor company is proposed to be dissolved without winding up, the Tribunal
shall await.
15. Stamp Duty :A scheme sanctioned by the court is an instrument liable to stamp
duty.

16. Filing with ROC: The following documents shall be filed with ROC within 30 days
of order:

-A certified true copy of Court's Order

-Form No. 21 of Companies General Rules & Forms

17. Copy of Order to be annexed: A copy of court's order shall be annexed to every
copy of the Memorandum of Association issued after the certified copy of the order
has been filed with as aforesaid.

18. Allotment of shares: A Board Resolution shall be passed for the allotment of
shares to the shareholders in exchange of shares held in the transferor-company
and to fix the record date for this purpose.

Purpose of Mergers & Acquisitions

The purpose for an offeror company for acquiring another company shall be
reflected in the corporate objectives. It has to decide the specific objectives to be
achieved through acquisition. The basic purpose of merger or business
combination is to achieve faster growth of the corporate business. Faster growth
may be had through product improvement and competitive position.
Other possible purposes for acquisition are short listed below: -

(1) Procurement of supplies:

1. To safeguard the source of supplies of raw materials or intermediary
product;

1. To obtain economies of purchase in the form of discount, savings in

transportation costs, overhead costs in buying department, etc.;
 2. To share the benefits of suppliers economies by standardizing the materials.

(2) Revamping production facilities:

1. intensive utilization of plant and resources;
2. To standardize product specifications, improvement of quality of product,
expanding

3. Market and aiming at consumers satisfaction through strengthening after sale

Services;
4. To obtain improved production technology and know-how from the offered
company
5. To reduce cost, improve quality and produce competitive products to retain
and
Improve market share.

(3) Market expansion and strategy:

1. To eliminate competition and protect existing mar

2. To obtain a new market outlets in possession of the offeree;

3. To obtain new product for diversification or substitution of existing products
and to enhance the product range;
4. Strengthening retain outlets and sale the goods to rationalize distribution;
To reduce advertising cost and improve public image of the offeree company
(4) Financial strength:
1. To improve liquidity and have direct access to cash resour1. To enhance
gearing capacity, borrow on better strength and the greater assets backing;
 2. To avail tax benefits;
3. To improve EPS (Earning Per Share).

(6) Own developmental plans:

The purpose of acquisition is backed by the offeror company’s own
developmental plans.
A company thinks in terms of acquiring the other company only when it has
arrived at its own development plan to expand its operation having examined its
own internal strength where it might not have any problem of taxation, accounting,
valuation, etc. But might feel resource constraints with limitations of funds and
lack of skill managerial personnel’s. It has to aim at suitable combination where it
could have opportunities to supplement its funds by issuance of securities, secure
additional financial facilities, eliminate competition and strengthen its market
position.
(7) Desired level of integration:
Mergers and acquisition are pursued to obtain the desired level of integration
between the two combining business houses. Such integration could be operational
or financial. This gives birth to conglomerate combinations. The purpose and the
requirements of the offeror company go a long way in selecting a suitable partner
for merger or acquisition in business combinations.
]Advantages of Mergers
Mergers and takeovers are permanent form of
combinations which vest in management complete control and
provide centralized administration which are not available in
combinations of holding company and its partly owned
subsidiary. Shareholders in the selling company gain from the
merger and takeovers as the premium offered to induce
acceptance of the merger or takeover offers much more price
than the book value of shares. Shareholders in the buying
company gain in the long run with the growth of the company
not only due to synergy but also due to “boots trapping
earnings”.

Mergers and acquisitions are caused with the support of

shareholders, manager’s ad promoters of the combing
companies. The factors, which motivate the shareholders and
managers to lend support to these combinations and the
resultant consequences they have to bear, are briefly noted
below based on the research work by various scholars globally.

(1) From the standpoint of shareholders

Investment made by shareholders in the companies

subject to merger should enhance in value. The sale of shares
from one company’s shareholders to another and holding
investment in shares should give rise to greater values i.e. The
opportunity gains in alternative investments. Shareholders may
gain from merger in different ways viz. From the gains and
achievements of the company i.e. Through

(a)Realization of monopoly profits;

(b)Economies of scales;
 (c)Diversification of product line;
(d)Acquisition of human assets and other resources
not available otherwise;
(e)Better investment opportunity in combinations.

One or more features would generally be available in each

merger where shareholders may have attraction and favour
merger.

2) From the standpoint of managers

Managers are concerned with improving operations of the

company, managing the affairs of the company effectively for
all round gains and growth of the company which will provide
them better deals in raising their status, perks and fringe
benefits. Mergers where all these things are the guaranteed
outcome get support from the managers. At the same time,
where managers have fear of displacement at the hands of
new management in amalgamated company and also resultant
depreciation from the merger then support from them becomes
difficult.

(3) Promoter’s gains

 Mergers do offer to company promoters the advantage of
increasing the size of their company and the financial structure
and strength. They can convert a closely held and private
limited company into a public company without contributing
much wealth and without losing control.

(4) Benefits to general public

Impact of mergers on general public could be viewed as

aspect of benefits and costs to:

(a)Consumer of the product or services;

(b)Workers of the companies under combination;
(c)General public affected in general having not
been user or consumer or the worker in the
companies under merger plan.

(a) Consumers

The economic gains realized from mergers are passed on

to consumers in the form of lower prices and better quality of
the product which directly raise their standard of living and
quality of life. The balance of benefits in favour of consumers
will depend upon the fact whether or not the mergers increase
or decrease competitive economic and productive activity
which directly affects the degree of welfare of the consumers
through changes in price level, quality of products, after sales
service, etc.

(b) Workers community

The merger or acquisition of a company by a

conglomerate or other acquiring company may have the effect
on both the sides of increasing the welfare in the form of
purchasing power and other miseries of life. Two side sidepact
as discussed by the researchers and academicians are: firstly,
mergers with cash payment to shareholders provide
opportunities for them to invest this money in other companies
which will generate further employment and growth to uplift of
the economy in general. Secondly, any restrictions placed on
such mergers will decrease the growth and investment activity
with corresponding decrease in employment. Both workers and
communities will suffer on lessening job

Opportunities, preventing the distribution of benefits resulting

from diversification of production activity.

(c) General public

 Mergers result into centralized concentration of power. Economic power is
to be understood as the ability to control prices and industries output as
monopolists. Such monopolists affect social and political environment to tilt
everything in their favour to maintain their power ad expand their business
empire. These advances result into economic exploitation. But in a free
economy a monopolist does not stay for a longer period as other companies
enter into the field to reap the benefits of higher prices set in by the
monopolist. This enforces competition in the market as consumers are free
to substitute the alternative products. Therefore, it is difficult to generalize
that mergers affect the welfare of general public adversely or favorably.
Every merger of two or more companies has to be viewed from different
angles in the business practices which protects the interest of the
shareholders in the merging company and also serves the national purpose
to add to the welfare of the employees, consumers and does not create
hindrance in administration of the Government polices.

Power of Central Government to provide for amalgamation of

companies in national interest (Sec.396)
(1) Where the Central Government is satisfied that it is essential in the 1[public
interest] that two or more
companies should amalgamate, then, notwithstanding anything contained in
sections 394 and 395 but subject to the provisions of this section, the Central
Government may, by order notified in the Official Gazette, provide for the
amalgamation of those companies into a single company with such constitution;
with such property, powers, rights, interests, authorities and privileges; and with
such liabilities, duties, and obligations; as may be specified in the order.

(2) 2[The order aforesaid may provide for the continuation by or against the
transferee company of any legal proceedings pending by or against any transferor
company and may also] contain such consequential, incidental and supplemental
provisions as may, in the opinion of the Central Government, be necessary to give
effect to the amalgamation.

(3) Every member or creditor (including a debenture holder) of each of the

companies before the amalgamation shall have, as nearly as may be, the same
interest in or rights against the company resulting from the amalgamation as he
had in the company of which he was originally a member or creditor; and to the
extent to which the interest or rights of such member or creditor in or against the
company resulting from the amalgamation are less than his interest in or rights
against the original company, he shall be entitled to compensation which shall be
assessed by such authority 3[as may be prescribed and every such assessment shall
be published in the Official Gazette],
4
(3A) Any person aggrieved by any assessment of compensation made by the prescribed authority under
sub-section (3) may, within thirty days from the date of publication of such assessment in the Official
Gazette prefer an appeal to the 5[Tribunal] and thereupon the assessment of the compensation shall be
made by the 5[Tribunal].]

(4) No order shall be made under this section, unless-

(a) a copy of the proposed order has been sent in draft to each of the companies concerned; 6[***]
4
[(aa) the time for preferring an appeal under sub-section (3A) has expired, or where any such appeal has
been preferred, the appeal has been finally disposed of; and]

(b) the Central Government has considered, and made such modifications, if any, in the draft order as
may seem to it desirable in the light of any suggestions and objections which may be received by it from
any such company within such period as the Central Government may fix in that behalf, not being less
than two months from the date on which the copy aforesaid is received by that company, or from any
class of shareholders therein, or from any creditors or any class of creditors thereof.
(5) Copies of every order made under this section shall, as soon as may be after it has been made, be laid
before both Houses of Parliament.