SUICe,: Fumcmcial UlaMqemEMl

Alutuo: N.C.S uil a B. Das PabSuge let

Chapter 9: Merger and Acquisition 355

XXx. Diverging from core activity: In some cases, a merger reduces buyers' eficiency by
diverting it from its core activity and too much time is spent on new activity
neglecting the core activity.
Expecting results to0 quickBy: Immediate results can never be expected except those
recorded in red ink. Whirlpool ran up a loss $100 million in its Philips white goods
chase. R.P. Goenk's takeovers of Gramophone Company and Manu Chhabria's
takeover of Gordon Woodroffe and Dunlops fall under this category.

Making the mergers work successfully is not that easy as here we are not only just putting the
two organizations together but also integrating people of two organizations with different
cultures, attitudes and mindsets. Meticulous pre-merger planning, including conducting
proper due diligence, effective communication during the integration, committed and
competent leadership, speed with which the integration plan is integrated all this pave for the
success of mergers. While making the merger deals, it is necessary not only to make analysis
of the financial aspects of the acquiring firm but also the cultural and people issues of both
the concerns for proper post-acquisition integration.

9.7 Procedure for Merger

The procedure for merger and amalgamation is different from takeover. Mergers and
amalgamations are regulated under the provisions of the Companies Act, 1913, whereas
takeovers are regulated under the SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations.
The beginning to amalgamation may be made through common agreements between the
transferor and the transferee but mere agreement does not provide a legal cover to the
transaction unless it carries the sanction of the company court for which the procedure laid
down under section 391 of the Companies Act should be followed for giving effect to
amalgamation through the statutory instrument of the court's sanction.
Although chapter V of the Companies Act, 1956, comprising sections 389 to 396A, deals
with the issue and related aspects covering arbitration, compromises, arrangements and
reconstructions but at different times and under different circumstances in each case of
merger and amalgamation application of other provisions of the Companies Act, 1956, and
ruled made thereunder may necessarily be attracted. So, the procedure does not remain simple
or literally confined to chapter V.
The procedure is complex, involving not only the compromises or arrangements between the
Company and its creditors or any class of them or between the company and its members or any
class of them but it involves safeguard of public interest and adherence to public policy. These
aspects are looked after by the central government through official liquidator on the Company
Law Board, Department of Company Affairs and the court has to be satisfied of the same.

9.7.1 Top Management's Commitments

The top management defines the organization's goal and outlines the policy tramework to
achieve these objectives. The organization's goal for business expansion could be accomplished,
inter alia, through business combinations assimilating a target corporate that can remove the
present deficiencies in the organization and can contribute in the required direction to
accomplish the goal of business expansion through enhanced commercial activity, that is,
356 Financial Management

supply of inputs and market for output product diversification, adding up new products and
improved technological process, providing new distribution channels and market segments,
making available technical personnel and experienced skilled manpower, R&D establishments
and so on.These depend upon the specific need andcost advantage with reference to creating
a new set-up or acquiring a well-established set-up firm.

9.7.2 Search for a Merger Partner

The top management may use their own contacts with competitors in the same line of
economic activity or in the other diversified field which could be identified as better merger
partners or may use the contacts of merchant bankers, financial consultants and other
agencies in locating suitable merger partners. A number of corporate candidates may be short
listed and identified. Such identification should be based on the detailed information of the
merger partners collected from published and private sources. Such information should reveal
the following aspects:

a. Organizational history of business and promoters and capital structure

b. Organizational goals
C. Product, market and competitors
d. Organizational set-up and management pattern
e. Assets profile: Movable and immovable assets, land and building
f. Manpower: Skilled, unskilled, technical personnel and detailed particulars of management
employees

9.7.3 Negotiations
The top management can negotiate at a time with several identified short-listed companies
suited to be merger partners for settling terms of merger and pick up one of them that offer
most favourable terms. Negotiations can be had with target companies before making any
acquisitional attempt. The same drill of negotiations could be followed in the cases of merger
and
amalgamation. The following section provides activity schedule for planning
covering different aspects like preliminary consultations with the perspective merger partner
merger,
and seeking its willingness to cooperate in investigations. There are other aspects, too, in the
activity schedule, covering quantification action plan, purpose, shape, and date of merger
profitability and valuation, taxation aspects legal aspects and development plan of the
company after the merger.
The actual procedure to be adopted during the merger process is as follows.

9.7.4 Steps in Merger Processs

Once the merger partner has been identified and terms of merger are settled, the following
procedure is followed (Figure 9.4).

1. Scheme of
Amalgamation: The scheme of amalgamation should be prepared by the companies
that have arrived at a consensus to
merge. There is no specific form prescribed for a scheme
of amalgamation but the scheme should
generally
contain the following information:
a. Particulars about transferee and transferor
b. Appointed date. companies.
 Chapter 9: Merger and Acquisition 357

Process
9.4 Steps in Merger
Figure
Process
in a Merger
SHERA Steps

Planning
Entals the analyss, the acton
plan, and the negotiations
between the pardes Invotved
t Includes:
***V************4n**************t*

************

signing of the letter of Intert

am* *59**aessets*aew** ********n*******es tmbsanera

the appondng of adisors

1 ******
*ooo 3 wwwwwo oononam
The Board of Directors detaling the timetable, share exchange rato,
calls an extraordnary and type oftransacdon
shareholders meeting
expert report on the consistency(
The The extraordnay shareholders of the share enchange ratlo
resolutton meedng is caled to pass
a rescludon on the merger
is the approval
of the prolect by
he management Any oppositon
by creditors and
and the
bondholders
shareholders
Groen Hioht from
the ltallan Antitrust Implementaton
Authornty Marks the star-up ot the
merger process through
enroiment in the
Compary Reglster

Source:
http:/ eng.gruppohera.it/group/corporate_governance/words_understand/page25.html
12 January 2014).
(last accessed

C. Main terms of transfer of

assets from
behalf or
for transferee the transferor to
d. Main terms of transfer deed or documents transferee with power to execue
liabilities from transferor
attached to loans/debentures/bonds/other
being from
liabilities given bank/financial
to
transteree insttuitions
to transferee
trustees and covering any co n
e. listing conditions
Effective date when the attached
f. Conditions scheme thereto.
as to will come into effect.
'appointed carrying
date' and the
on the
business activities by the
'effective date'. the
8 Description of transferor belw
effective date. happenings and consequences of
the scheme
coming into effect o the
358 Financial Management

h. Share capital of the transferor company specifying authorized capital, issued capital
and subscribed and paid-up capital.
i. Share capital of the transferee company covering above heads.
. Description of the proposed share exchange ratio, any conditions attached thereto.
any fractional share certificates to be issued, transferee company's responsibility to
obtain consent of concerned authorities for issue and allotment of shares and listing.
k. Surrender of shares by shareholders of the transferor company for exchange into new
share certificates.
Conditions about payment of dividend, ranking of equity shares, pro rata dividend
declaration and distribution.
m. Status of employees of the transferor companies from the effective date and the status
of the provident fund, gratuity fund, superannuity fund or any special scheme or funds
created or existing for the benefit of the employces.
n. Treatment on the effective date of any debit balance of the transferor company's
balance sheet.
Miscellaneous provisions covering income-tax dues, contingencies and other
accounting entries deserving attention or treatment.
p. Commitment of transferor and transferee companies towards making applications/
petitions under sections 391 and 394 and other applicable provisions of the Companies
Act, 1956, to their respective High Courts.
q. Enhancement of borrowing limits of the transferee company upon the scheme's
coming into effect.
L. Transferor and transferee companies give assent to change in the scheme by the court
or other authorities under the law and exercising the powers on behalf of the
companies by their respective boards.
S. Description of powers of delegate of transferee to give effect to the scheme.
t. Qualification attached to the scheme, which requires approval of different agencies
and so on.
u. Description of revocation/cancellation of the scheme in the absence of approvais
qualified in clause t above not granted by concerned authorities.
V. Statement to bear costs and so on in connection with the scheme by the transferee
Company.
2. Approval of Board of Directors for the Scheme: Respective board of directors of the transferor
and transferee companies are required to approve the scheme of amalgamation.

3. Approval of the Scheme by Specialized inancial Institutions/Banks/Trustees: The board of

directors should in fact approve the scheme only after it has been cleared by the financial
institutions/banks, which have granted loans to these companies or the debenture trustees to
avoid any major change in the meeting of creditors to be convened at the instance of the
Company Court's under section 391 of the Companies Act, 1956. Approval of the Reserve
Bank of India (RBI) is also needed where the schenme of amalgamation contemplates issue of
share/payment of cash to non-resident Indians or foreign nationals under the provisions of
the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside
India) Regulations, 2000. In particular, regulation 7 of the these regulations provides for
compliance of certain conditions in the case of schheme of merger or amalgamation as
approved by the court.

4. Intimation to Stock Exchange: Listing agreements entered into between company and stock
exchange require the company to comnunicate price-sensitive information to the stock
 359
Chapter 9: Merger and Acquisition

electronic media
when released to press and other
and simultaneously
exchange immediately approval to the scheme.
conclusion of board meeting according
the
on
to
step application under section 39(1)
is to make an
the Court: The next
5. Application to over the Registered Office
of the company, and the
jurisdiction
the High Court having to the High Court. The application
should make separate applications 34
transferee company an affidavit in Form No.
s u m m o n s in Form No. 33 supported by
shall be made by judge's
a
Rules, 1959]. The following documents should
be
rule 82 of the Companies (Court)
[see
submitted with the judge's summons:

company's and articles

memorandum
a. A true copy of the
latest audited balance sheet
b. A true copy of the company's make the application to
resolution that authorises the director to
c. A copy of the board
the High Court.

the High Court shall give

Court Directions: Upon the hearing of the summons,
6. High venue and quorum for the
members' meeting and appoint
directions fixing the date, time and to the court. Similar
over the meeting and submit a report
an advocate chairman to preside
the meeting of creditors in case such a request
directions are issued by the court for calling
has been made in the application.
the
the Meeting of Members/Creditors: Pursuant to
7. Approval of Registrar of High Court for Caling
transferee companies shall submit for approval
directions of the court, the transferor and the the
Courts the draft notices calling the meetings of
to the registrar of the respective High
and explanations, statement
members in Form No. 36 together with a scheme of arrangements
of proxy in Form No. 37 of the Companies
under section 393 of the Companies Act and form
with the said notice. Once the registrar has
(Court) Rules to be sent to members along the chairman appointed for meeting
accorded approval to the notice, it should be signed by
of members.
by the High Court who shall preside over the proposed meeting
to Members/Shareholders: Once the notice has been signed by the
8. Despatch of Notices members
chairman of the forthcoming meeting as aforesaid, it could be despatched to the
under certificate of posting at least 21 days before the date of the meeting.

the issuance of notice

9. Advertisement of the Notice of Members' Meetings: The court may direct
In such case, rule 74 of the
of the meeting of these shareholders by an advertisement.
should be advertised in such
Companies (Court) Rules provides that the notice of the meeting
a newspaper and in such a manner as the court might
direct not less than 21 clear days before
to the
the date fixed for the meeting. The advertisement shall be in Form No. 38 appended
(Court) Rules. The companies should submit the draft for
the notice to
Companies
be published in Form No. 38 in an English daily together with a translation thereof in the
advertisement
regional language to the registrar of the High Court for his approval. The
should be released in the newspapers after the registrar approves the dratt.

10. Confirmation about Service of the Notice: Ensure that at least one week before the date of the
the
meeting, the chairman appointed for the meeting files an affidavit to the court about
service of notices to the shareholders that the directions regarding the issue of notices and
advertisement have been duly complied with.

11. Holding the Shareholders' General Meeting and Passing the Resolutions: The general meeting8
should be held on the appointed date. Rule 77 of the Companies (Court) Rules prescribes that
360 Financial Management

the decisions of the meeting held pursuant to the court order should be ascertained only by
scheme should be approved by the members, by a majority
taking a poll. The amalgamation
or on proxy and voting on the resolution and this
in number of members present in person
must representat least three-fourths this in value of the shares held by the members
majority
who vote in the poll.

12. Filing of Resolutions of General Meeting: Once the shareholders' general meeting approves
the amalgamation scheme by a majority in number of members holding not less than three
fourths in value of the equity shares, the scheme is binding on all the members of the
the shareholders approving the scheme of
company. A copy of the resolution passed by in Form No. 23
amalgamation should be filed with the Registrar of Companies (ROC)
appended to the Companies (Central Government's) Gerneral Rules and Forms, 1956, within
30 days from passing the resolution.
the date of

of the
13. Submission of Chairman's Report to Court: The chairman of the general meeting
shareholders is required to submit to the court within seven days from the date of the meeting
out therein the number
a report in Form No. 39 of the Companies (Court) Rules, 1959, setting
of shareholders who
of persons who attend either personally or by proxy, and the percentage
voted in favour of the scheme as well as the resolution passed by the meeting.

on which the chairman has

14. Submission of Joint Petition: Within seven days from the date
should
submitted his report about the result of the meeting to the court, both the companies
of amalgamation. This
make a joint petition to the High Court for approving the scheme
Rules. The court will fix a
petition is to be made in Form No. 40 of the Companies (Court) advertised in the same
date of hearing of the petition. The notice of the hearing should be
was advertised or in such other newspapers as the
papers in which the notice of the meeting
court may direct, not less than 10 days before the date
fixed for the hearing (rule 80 of
Companies (Court) Rules.

15. Issue of Notice to the Conmpany Law Board: On receipt of the petition for amalgamation
notice of the petition to
under section 391 of the Companies Act, 1956, the court will give a
the Regional Director, Company Law Board, and will take into consideration the representations,
if any, made by him.

- 16. Hearing of Petition and Confirmation of Scheme: Having taken up the petition by the court
for hearing, it will hear the objections first and if there is no objection to the amalgamation
is entitled to oppose the
scheme from the regional director or from any other person who
of amalgamation in Form No. 41
scheme, the court may pass an order approving the scheme
or Form No. 42 of the Companies (Court) Rules. The court may
also pass order directing that
the schedules
all the property, rights and powers of the transferor company specified in
and
annexed to the order be transferred without further act or deed to the transferee company
without further act
that all the liabilities and duties of the transferor company be transferred
or deed.

and transferee
17. Filing of Court Order with ROC by Both the Companies: Both the transteror and tilee
companies should obtain the court's order sanctioning the scheme of amalgamation of the
the same with ROC with their respective jurisdiction as required vide section 394(3)
in Form No. 21
Companies Act, 1956, within 30 days after the date of the court's orderThe
prescribed under the (Central Government's) General Rules and Forms, 1956. amalgamation
will be given effect to from the date on which the High Court's order is filed with the registrar.
 Chapter 9: Merger and Acquisition
Court to
High
Liabilities:
Section 394(2)
vests power
transferor
in the
Company to the
order for
tran
and the
18. Transfer of Assets
from
liabilities properties and liabilities of the
property or
such order such
transfer of any of without anu.
the
company.
In pursuance
of and by
stand
virtue
transferred to
t r a n s f e r e e company
further act
ROC.
transferor shall
automatically with the
court's order is filed
from the date the
or deed
scheme of amalgamation,
the sharai.
t r a n s t e r e e company in the eve
sanctioned
Pursuant to the
19. Alotment of Shares: shares in the

the transferor company

are entitled
to get
three different
situations in which which allge
allotmen
of scheme. There
are
the said
ratio provided under
could be given effect.
the formalities Drescri
not a listed comparny,
a l l o t m e n t could take place withu
transferor company is
a. Where the exist and the hout
under the listing agreement
do not to s h a r e h o l d e r s except askin

date or giving any

advance notice
the new ones.
asking
setting the record old share certificates for exchange by
them to surrender their t r a n s f e r o r company is a listed
different where the
b. The second situation will emerge
is to be intimated of the record
date
the stock exchange
company. In this case, as provided in
the listing agreement.
notice or such notice
giving at least 42 days' where allotment to non-resident Indians is involved and
C. The third situation is
allotment will take place only on receipt of RRI
of the RBI is necessary. The
permission 7, 9 and 10B of the Foreien
In this connection, refer to regulations
permission. a Person Resident Outside
Exchange Management (Transfer or Issue of Security by
India) Regulations, 2000, as and where applicable.
the ROC with
transferee company is required to file with
Having made the allotment, the to the Companies (Central
Governmentsi
return of allotment in Form No. 2 appended
section 75 d
date of allotment in terms of
General Rules and Forms within 30 days from the and
the Act. The transferee company shall, having
issued the new share certificates in lieu of
in exchange of old ones, surrender by transferor's
shareholders should make necessary entris
in the register of members and index of members for the shares so
allotted in terms of section
150 and 151, respectively, of the Companies Act, 1956.

20. Listing ofthe Shares at Stock Exchange: After the amalgamation is effected, the company
akes over the assets and liabilities of the transferor company should apply to tn
exchanges where its securities are listed for listing the new shares allotted to the shareno
of the transferor company.

21. Court Order to Be Annexed to latory

Memorandum of Transferee Company: It 1s tne
requirement vide section 391(4) of the Companies Act, 1956, that after ter the certified cop
the court's order sanctioning the scheme of amalgamation is filed with the registrar, it shou
Failure t
be annexed to every copy of the
memorandum issued by the transferee
comply with this requirement renders the company and its officers liableconphment.
to pun15i

22. Preservation of Books and requie

that the books and
Papers of Amalgamated Company: Section 396A Or dthe Act
and
and
n o te

papers of the amalgamated company should be

disposed of without prior permission of the central government. preseiv
23. The Post-merger Secretarial Obligations: There are plied
after various formalities off shares
amalgamation of the
companies is given effect and shares tot
shareholders of the transferor to
allotment
W i t

company is over. These of returns

formalities include
fillg
362 Financial Management

the ROC, transfer of investments of the transferor company in the name of the transferee,
intimating banks and financial institutions, creditors and debtors about the transfer of the
transferor company's assets and liabilities in the name of the transferee company and so on.

24. Withdrawal of the Scheme Not Permissible: Once the scheme for merger has been approved
by the requisite majority of shareholders and creditors, the scheme cannot be withdrawn by
subsequent meeting of shareholders by passing resolution for withdrawal of the petition
submitted to the court under section 391 for sanctioning the scheme.

Court in J.K.
25. Canceliation of the Scheme and Order of Winding-up: It was held by the Supreme
is that
(Bombay) (P) Ltd v. New Kaiser-1-Hind that the effect of a winding-up
order except for
certain preferential payments provided in the Act, the property
of the company is applied in
made in satisfaction of its
be
satisfaction of its iabilities pari passu. Pari passu distribution is to
the commencement of the winding-up.
liabilities as they exist at creditors, the
So the scheme is in operation and is binding on the comnpany and its
long as
are undoubtedly governed by its
rights and obligations of those on whom it is binding
cancelled under section 392(2) on the ground that it cannot
provisions. But once the scheme is
order is deemed to be for all
be satisfactorily worked and a winding-up order is passed, such an
been
433. It is not because as if the scheme has
under section
purposes to be one made order under section 392(2) cannot be made.
sanctioned under section 391 that a winding-up