Brain Booster Articles
THE CONCEPT AND TRENDS IN AMALGAMATION AND RECONSTRUCTION
Author: Yashwin Agarwal, III year of B.A.,LL.B.(Hons.) from NMIMS Indore
The evolving business scenario necessitates that businesses not only maintain their internal plans, but also design inorganic business strategies that aid in growth, resource usage, and achieving shareholder expectations. One of these strategies is reconstruction and amalgamation, which tries to change the company's structure to boost its worth.
Concept of Amalgamation
Amalgamation occurs when two or more entities merge to produce a new entity. It differs from a merger in that neither of the parties engaged survives as a legal entity, but a whole new entity is formed. Both entities' assets and liabilities are pooled into this single entity. The term "amalgamation" is not defined in the Companies Act 2013, but according to Section 2(1B)[i] of the Income Tax Act 1961, "amalgamation" means "the merger of one or more companies with another company or the merger of two or more companies to form one company in such a way that I all property of the amalgamated company becomes property of the amalgamated company; (ii) all taxable income of the amalgamated company becomes taxable income of the amalgamated company."
Types of Amalgamation
Amalgamation in nature of merger
Not only are assets and liabilities transferred from the amalgamating company to the merged company in this category of amalgamation but also the shareholders' interests and enterprises of both companies are transferred. The business of the merged firm begins immediately once the merger is completed, with no changes to the book value required. Owners who own at least 90% of the face value of the amalgamating firm's equity shares become shareholders of the company in the merged company.
Amalgamation in nature of purchase
One company is taken by the acquiring firm in this type of merger. Shareholders in the Target Company (or acquired firm) do not continue to own a corresponding piece of the merged company or business's stock.
Advantages of Amalgamation
As a result, market competition is reduced.
Increases the number of research and innovation facilities.
It reduces the cost of the operation.
Disadvantages of Amalgamation
If a monopoly is created, it may result in the elimination of healthy competition from the market.
Inefficiencies may occur in a larger company.
Consumers may have fewer options accessible on the market.
The Central Government has the authority to allow for the amalgamation of businesses in the interest of the public under Section 237[ii] of the Companies Act 2013 (Section 396 of the Companies Act 1956, ‘the Erstwhile Act’). The Central Government has the authority under this clause to order the forced amalgamation of two or more enterprises if it is convinced that such amalgamation is necessary for the public good. If the Central Government determines that it is in the public interest for two or more companies to merge into a single company with the constitution, property, rights, powers, interests, privileges, liabilities, and obligations specified in the government's order, then the merger is valid and in the public interest.
For the first time, the Companies Act defines the phrase and method for merger and amalgamation. Section 232 of the Companies Act 2013, like section 394 of the preceding Companies Act, 1956, is an enabling provision. Section 232[iii] simplifies and clarifies the procedure for merging or amalgamating two or more firms. It specifies that if an application is made to the Tribunal for the approval of a compromise or arrangement, and it is demonstrated to the Tribunal, the compromise or arrangement will be sanctioned. Essentially, a scheme of amalgamation is beneficial to every shareholder and creditor of the company and also the welfare and interest of the public is taken into utmost consideration before entering into any such scheme.
Concept of Reconstruction
Re-Construction of the Company is required for the aim of reorganizing the company’s financial performance to ensure the company's survival, growth, and development. The word "reconstruction" refers to the process of transferring a current business's operations to a new company formed for the same purpose. As a result, reconstruction refers to the establishment of a new firm that takes over the assets of the previous one to continue the same operation. It may entail the reconstruction of claims from both the company's shareholders and creditors.
Types of Reconstruction
Re-construction may be of two types:
In this case, the existing company is dissolved and a new company is formed to take over the business of the existing company, the monetary condition of which is in an awful state.
In this case, the capital composition of the company is reorganised to provide a new life to the company.
Reconstruction of companies may be carried on in any of the following ways:
By sale of undertaking under the powers given by the Memorandum of Association
By the scheme of arrangement under section 391[iv] of the Companies Act.
By acquiring the majority of shares in another company under section 395
By a compulsory amalgamation of companies in the public interest by an order of the central government under section 396
By voluntary winding up by members.
Reconstruction and Amalgamation by Voluntary Winding Up
A compromise is a method of resolving a disagreement. An agreement, on the other hand, is wider and has been deemed significant. Section 494 of the Companies Act 1956, which, like section 287 of the Companies Act 1948, gives a company that “the power to reconstruct or amalgamate using voluntary liquidation, in which the liquidator transfers the company's assets in exchange for shares, can cover any lawful arrangement that touches or concerns the rights and obligations of the company and its shareholders or creditors.”
Issues and Challenges
Several concerns must be addressed ahead of time when analysing an amalgamation and reconstruction, the target organization and the receiving organization should think about the following points. Because the speed and scope of the global agreement have increased, the total number of apprehensions has grown.
Deal Structure: There are three options for establishing an exchange: (a) stock purchase, (b) resource acquisition, and (c) amalgamation. On every previous occasion, the acquirers and the object have challenged genuine security and deliberation. It is critical in determining how to perceive and address subject difficulties while establishing a precise organisational structure. The following are some crucial considerations when it comes to bargaining: (a) transferability of duty, (b) external authority assent requirements, (c) investor approval, and (d) charge results.
Representations and Warranties: The acquirer will be decided to expect that a comprehensive understanding will include itemized depictions and guarantees by the goal on problems such as power, capitalization, licensed innovation, charge, fiscal reports, and consistency through ERISA and matter agreements. Because breaks might quickly gather about reimbursement claims from the acquirer, it is critical for the objective and objective advice to carefully examine these representations.
Timing Issues: When it comes to any transaction, the gatherings should evaluate long-term lead items as early as possible. For example, the gatherings should investigate to discover if Hart- Scott-Rodino[v] recording has been decided and asked to be completed, as well as if this is true when such documenting would be accomplished (at times it is documented later than the letter of goal is implemented yet is frequently documented upon the implementation of authoritative understanding). Even though the 30-day waiver up period can be deferred.
Working in Global Environment: Amalgamation and reconstruction are most commonly carried out between firms with headquarters in separate countries. This hampers the transmission of practice because managers often believe that their expertise is the greatest and that it applies globally, forgetting that performance factors differ by culture.
Language Barrier: The greatest issue is perceived to be inter-employee communication. Because the amalgamated firms are from separate nations and speak different languages, the workers of the merged companies appear to be prevented from interacting. Employees from other cultures must be adequately educated in other languages for effective communication amongst workforces to be imposed.
Planning Integration: A major challenge is to ensure that the new business entity is not affected by the amalgamation and reconstruction activities. And is to scrutinize employees’ performance to ensure that customer requirements continue to be met. Integration planning and operation should begin before time as feasible before the deal closes.
Recent Trends in Amalgamation and Reconstruction
The amalgamation of LLP into Company (Cross-entity): National Company Law Tribunal, Chennai bench (“Tribunal”) recently passed a landmark order in the matter of scheme of amalgamation between M/s. Real Image LLP with M/s. Qube Cinema Technologies Private Limited[vi] paved a way for the merger of LLPs with a private company. The current provisions for the merger in both the Limited Liability Partnerships (“LLP”) Act[vii], 2008 and the Companies Act, 2013 (“Act”) which are the governing statutes of LLPs and companies respectively does not permit expressly such cross-entity mergers. The Tribunal stated that “If Parliament intends to permit a foreign LLP to merge with an Indian company, then it would be wrong to presume that the Act prohibits a merger of an Indian LLP with an Indian company.”
Reverse Merger: For firms that want to go public without having to raise money, reverse mergers are more appealing. They can avoid an IPO by simply reverse merging with a publicly traded business. Furthermore, the losses of a weaker firm might be carried forward, allowing the organization to pay reduced taxes in the long run. The Vodafone Idea merger is anticipated to start on a shaky foundation due to heightened competition and disrupted telecom industry in the nation.
Public Interest Matters: The government's move to merge such businesses is beneficial since it gives investors peace of mind by ensuring that the holding company, 63 Moons[viii], is not immune from the losses suffered by its fully owned subsidiary. This demonstrates the government's involvement in topics of public interest, intending to primarily assist the entity's investors. 63 Moons and its promoters have appealed to the Supreme Court of India, citing the same Bombay High Court ruling, and the matter will be heard in late September.
Deemed approval for Cross-border mergers: The Reserve Bank of India ("RBI") issued the much-anticipated Foreign Exchange Management (Cross-Border Merger) Regulations ("Regulations") on March 20th, 2018, providing precise information on both in-bound and out-bound mergers. Before these Regulations, Section 234 of the Act required a foreign business (incorporated in a notified country) to get prior RBI clearance before merging with a company registered under the Act or vice versa. With the implementation of these Regulations, any merger transactions that comply with them would be considered "deemed authorized" by RBI.
Special Approvals: Insurance Regulatory and Development Authority of India’s (IRDAI) Guidelines for Listed Insurance Companies, 2016 restricts ownership of listed insurance companies to fifteen percent of the paid-up capital of entities operating in the financial sector. An exception to this rule is observed by the Life Insurance Corporation (LIC) and Industrial Development Bank of India (IDBI Bank) merger in which LIC is permitted to take a 51% stake in the entity. IRDAI approved the deal on the condition that LIC will reduce its stake in the coming years. This approval will infuse capital in the debt-laden bank and help both entities to strengthen financially as well as their subsidiaries which offer financial products such as housing finance and mutual funds.
During the contemporary business world, Amalgamation and reconstruction procedures have grown substantially. This process has been thoroughly designed to renovate the commercial relations. In India, the idea of mergers and acquisitions is genuine and is being implemented by government agencies. Some well-known fund-related organizations accepted mergers and acquisitions agreements, which helped to rebuild India's commercial sector. Since 1991, India's fiscal reform has unlocked and brought up a slew of issues in both domestic and international arenas. Because of the intense competition in the global marketplace, the Indian business has turned to mergers and acquisitions as a critical decision. Under company law, the term "public interest" has a broad definition that includes the welfare of all company members as well as the general public. The Indian tribunals and courts have established that simply because a plan of amalgamation is beneficial to or in the interests of a certain set of members, it does not imply that the scheme is in the general interest. There is a distinction to be made between exercising powers under Section 237 of the Companies Act 2013 for forced mergers and mergers in the public interest; this distinction should be the government's primary emphasis when exercising its authority under the aforementioned clause.
[i] Income Tax Act 1961, Sec.2(1B), NO.43, 1961(INDIA)
[ii] Companies Act,2013, Sec.237, No.121-C, 2013(INDIA)
[iii] Companies Act,2013, Sec.232, No.121-C, 2013(INDIA)
[iv] Section 391 of the Companies Act, 2013, states “that the provisions of Chapter XX shall apply mutatis mutandis for closure of the place of business of a foreign company in India as if it were a company incorporated in India.”
[v] The Hart–Scott–Rodino Antitrust Improvements Act of 1976 (Public Law 94-435, known commonly as the HSR Act)
[vi] M/s. Real Image LLP with M/s. Qube Cinema Technologies Private Limited, Company Appeal (AT) No.352 of 2018
[vii] The Limited Liability Partnership Act, 2008
[viii] [viii] 63 Moons Technologies Ltd v. Union Of India, SLP(C) No./4210/2018