By Sayantan Banerjee and Molla Hasan.The advent of the new Companies Bill, 2012 (“Bill”) which was given assent to by the Lok Sabha on December 18, 2012 will lead to significant changes in the rules and processes for corporate restructuring i.e. compromises, arrangements and amalgamations in India. We have set out in this article some of the key changes proposed in company law with regard to mergers and amalgamations under the Bill vis a vis the Companies Act, 1956 (“Act”)..Notice and Voting.Under the Act, shareholders and creditors are required to be present and voting either in person or by proxy in the shareholders and creditors meeting called by the High Court for approving the scheme of amalgamation, while the Bill also allows for voting by postal ballot..The Bill also expressly provides that National Company Law Tribunal (“NCLT”) may dispense with the meeting of the creditors or any class of creditors if 90% in value give their consents to the scheme of amalgamation by way of an affidavit. The constitution of NCLT has been detailed under Chapter XXVII of the Bill. The NCLT which will be established under the aegis of the Bill will replace the original jurisdiction of the High Courts under the Act with respect to mergers and amalgamations. Appeals from the NCLT will be heard by the National Company Law Appellate Tribunal which will be established in New Delhi and further appeals from the National Company Law Appellate Tribunal will be decided by the Supreme Court in New Delhi..The present Act does not expressly contain any provision relating to dispensation of meetings of creditors and different High Courts follow their own practice of dispensation of meetings of creditors based on factors such as undertakings to serve individual notices to creditors at the final hearing stage and also on the basis of consent letters from individual creditors. The new provision under the Bill appears to reduce the flexibility of the High Courts to dispense with creditors meetings by stipulating a fixed percentage of creditors who have to compulsorily provide their consent to the scheme. However as regards dispensation of members meetings, the Bill does not contain an equivalent provision for dispensation..The Bill further requires that a notice of the meeting relating to the arrangement or amalgamation must also be sent to various government authorities such as the Income Tax Department, SEBI, RBI, Registrar of Companies, the respective stock exchanges, Official Liquidator, Competition Commission, if necessary and any other sectoral regulators and authorities likely to be affected by the compromise or arrangement for seeking representations, if any, within a period of 30 days from receipt of notice; failing which it will be presumed that they have no representation to make on such a proposal. Under the Act, whilst notices are mandatorily required to be served upon the Central Government (through the Regional Director), Official Liquidator and Registrar of Companies, such notices are served upon the RBI, SEBI, the respective stock exchanges, Competition Commission on a case to case basis including any other sectoral regulators and authorities likely to be affected by the compromise or arrangement..This 30 days requirement might raise certain procedural inconsistencies and overlaps. For instance, Section 6 (2A) of the Competition Act, 2002 (“Competition Act”) allows 210 days for passing an order of the CCI. Further, Regulation 19 of the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 provides that the CCI is required to give its prima facie opinion within 30 days of receipt of notice under Section 6(2A) of the Competition Act. This may lead to an inconsistency between the provisions of the Bill and the Competition Act and such procedural inconsistency would need to be ironed out..Objections to Compromise/Arrangement.The Bill provides that only persons holding not less than 10% of shareholding; or having not less than 5% of total outstanding debt as per latest audited financial statement can make any objection to a compromise or arrangement. Presently all members and creditors irrespective of their shareholding and outstanding debt are free to object to the scheme of amalgamation or compromise, which ensured that interests of all parties were taken into consideration before the scheme becomes binding on such parties. It appears that the right to object to schemes of amalgamation or arrangement by small shareholders and creditors has been taken away under the new provision in the Bill because NCLT is under an obligation to consider exit options available for dissenting shareholders when it is passing in order. However, it must be noted that such options cannot be exercised without specific provision for approval of the same by the NCLT. Therefore, the interests of minority shareholders and small creditors are not adequately addressed by the new provision. The effect of this clause is to have certain positive as well as negative implications on the merger process since it cuts out frivolous objections by small shareholders and creditors but at the same time also shuts out the door for genuine minority shareholders and creditors who may have a valid objection..Restrictions on Treasury Stock.The Bill specifically targets the practice of treasury stock in case of mergers between companies that have cross holding of shares. Typically, in such cases, the transferee company issues shares under the scheme to a trust to be held for its own benefit. Such a trust could further sell those shares at a later point of time and pay the proceeds thereof to the transferee company. This resulted in a dual advantage to the company, allowing the indirectly holding of such shares in order to create access to liquidity should the company require the same in the future, while still allowing the promoters to retain controlling stake over the Company. Treasury Shares have been issued in numerous schemes, and the same have been approved by the relevant courts. However, the courts have not specifically considered or ruled on the validity of issuance of treasury shares. It must be noted that Section 42 of Act prohibits a subsidiary from holding shares of its holding company and Section 77 of the Act places a prohibition on a company from purchasing its own shares. In light of the aforesaid sections, the validity of issuance of treasury shares has technically not been completely free from doubt. The Bill requires compulsory cancellation of such overlapping shares effectively putting an end to such a practice. This will curb the practice of the promoters creating treasury stock, particularly in listed entities..Cross Border Mergers.The Act only allows foreign companies to be amalgamated into Indian companies and not vice-versa. However, the Bill permits Indian companies to merge into companies located in specific foreign jurisdictions (to be notified) and vice versa. The Bill provides that a foreign company may, with the prior approval of the RBI, merge into a company registered under the Bill or vice versa. However, an Indian company may merge only with foreign companies in such jurisdictions as may be notified by the Government. In such mergers, the scheme may provide for payment of consideration to the shareholders of the merging company in cash, or in Indian Depository Receipts, or partly in cash and partly in Indian Depository Receipts, as the case may be..Fast Track Mergers.At present, all mergers, including those between group companies or between a parent and a subsidiary require compliance with the entire process under sections 391 to 394 of the Act. Under the Bill, the protracted procedures required for mergers and amalgamations have been dispensed with for mergers and amalgamations between two small companies or between a holding company and a wholly owned subsidiary company, by allowing them to proceed with the merger and amalgamation process without the approval of Court or the NCLT. In case the official liquidator and registrar have no objections or suggestions to the scheme of merger and amalgamation and the scheme is approved by the respective members of the companies holding at least 90% of the total shares of the companies in a general meeting and creditors holding 9/10th in value of the total debt after giving a notice of 21 days for the creditors meetings, the Central Government has the power to approve the scheme and effect the merger or amalgamation. This is a welcome move by the government as it will save considerable time and costs generally incurred by companies in winding up wholly owned subsidiaries that will result in administrative and operational rationalization, organizational efficiencies, reduction in overheads and other expenses and optimal utilization of various resources. It will prevent cost duplication that can erode financial efficiencies of the holding structure and the resultant operations would be substantially cost-efficient. However, it is important to note here that the term “small company” does not include “a holding or a subsidiary company”. Therefore, mergers between companies that are not between parents and wholly owned subsidiaries will not be covered under this provision. It is not clear whether the exclusion of mergers between a holding and a subsidiary not being a wholly owned subsidiary company is intentional or a mere drafting lacuna. However, where a holding company and its subsidiary (which is not a wholly owned subsidiary) are small companies (by financial thresholds) and are intending to merge, the exclusion in the ‘small companies’ definition relating to holding companies and their subsidiaries could result in such companies not being eligible for the fast track procedure..Reverse Mergers.In case of a merger of a listed transferor company into an unlisted transferee company, the Bill offers an option to the transferee company to continue as an unlisted company by buying out shareholders of the listed transferor company who may decide to opt out of the unlisted transferee company by paying them the value of shares held by such shareholder. Whilst the intent of this provision is positive, the implementation of schemes of this nature, in the context of applicable SEBI regulations remains to be tested..Buyback of Securities by scheme of compromise and arrangement .While the present Act does not provide any express provision relating to buyback of securities by way of a scheme of compromise or arrangement, the Bill contains a provision for buy back of securities under a scheme of compromise or arrangement provided that the same must be in compliance with the provisions relating to buy back under the Bill..Takeover Offer .The present regulations do not specifically provide for a takeover offer under a scheme of arrangement or compromise or a amalgamation, however the Bill contemplates that a scheme of compromise and arrangement can now include a ‘takeover offer’. The provision in the Bill states that “…..any compromise or arrangement may include takeover in such manner as may be prescribed”. Therefore it appears that the Bill gives scope to Central Government to issue new rules in relation to takeover offers under schemes of amalgamation. Further, the provision under the Bill also states that any takeover of a listed company is required to comply with the provisions of the Takeover Code. Hence once the Bill comes into force, the Central Government will have to issue appropriate rules and provide more clarity on how takeover offers will be made by companies, under schemes of amalgamation. Depending on the new rules, this may result in listed company acquisitions being made through schemes of arrangement..Removal of Charge .The Bill also provides that pursuant to an order by NCLT any liabilities may be transferred from the transferee company to the transferor company. Further pursuant to such order any property may also be freed from charge by virtue of the scheme of arrangement or compromise. This unique provision under the Bill may have some adverse effect on the rights of small creditors of the transferor company who may have secured their loan by charges on the assets of the transferor company and may have refused to give their consent to the scheme, but which charges may be removed through a scheme of amalgamation that has been sanctioned by 75% of the creditors of the transferor company sanctioning the scheme. It is arguable that small creditors whose rights are being affected will be considered as a separate class of creditors for the purposed of the scheme and assent of 75% of those creditors will be required as well under this provision..Purchase of Minority Shareholding by Majority Shareholders .The Bill enlists detailed provisions for the purchase of shares from minority shareholders by an acquirer or persons acting in concert with such an acquirer holding more than 90% of the shareholding of a company by virtue of an amalgamation, share exchange, conversion of securities or for any other reason giving a fair chance to the minority shareholders to exit the company mandatorily at a price determined by a registered valuer in accordance with prescribed rules. Further the Bill also provides that minority shareholders may also offer to the majority shareholders to purchase their minority equity shareholding in the company at a price determined by registered valuer which is not presently contemplated under Section 395 of the Act. .Although the Bill seeks to address all the prevailing issues in corporate restructuring, only time, the implementation of the Bill on-ground and the interpretation of the same by courts of law will reveal its inconsistencies and multiple facets. The Bill does have several noteworthy provisions which once implemented will simplify the process of restructuring through court schemes and reduce lengthy timelines of mergers, however like most provisions of the Bill these provisions will require significant fine tuning through separate rules and clarity from the courts..Sayantan Banerjee and Molla Hasan are Associates at the Mumbai office of AZB & Partners.
By Sayantan Banerjee and Molla Hasan.The advent of the new Companies Bill, 2012 (“Bill”) which was given assent to by the Lok Sabha on December 18, 2012 will lead to significant changes in the rules and processes for corporate restructuring i.e. compromises, arrangements and amalgamations in India. We have set out in this article some of the key changes proposed in company law with regard to mergers and amalgamations under the Bill vis a vis the Companies Act, 1956 (“Act”)..Notice and Voting.Under the Act, shareholders and creditors are required to be present and voting either in person or by proxy in the shareholders and creditors meeting called by the High Court for approving the scheme of amalgamation, while the Bill also allows for voting by postal ballot..The Bill also expressly provides that National Company Law Tribunal (“NCLT”) may dispense with the meeting of the creditors or any class of creditors if 90% in value give their consents to the scheme of amalgamation by way of an affidavit. The constitution of NCLT has been detailed under Chapter XXVII of the Bill. The NCLT which will be established under the aegis of the Bill will replace the original jurisdiction of the High Courts under the Act with respect to mergers and amalgamations. Appeals from the NCLT will be heard by the National Company Law Appellate Tribunal which will be established in New Delhi and further appeals from the National Company Law Appellate Tribunal will be decided by the Supreme Court in New Delhi..The present Act does not expressly contain any provision relating to dispensation of meetings of creditors and different High Courts follow their own practice of dispensation of meetings of creditors based on factors such as undertakings to serve individual notices to creditors at the final hearing stage and also on the basis of consent letters from individual creditors. The new provision under the Bill appears to reduce the flexibility of the High Courts to dispense with creditors meetings by stipulating a fixed percentage of creditors who have to compulsorily provide their consent to the scheme. However as regards dispensation of members meetings, the Bill does not contain an equivalent provision for dispensation..The Bill further requires that a notice of the meeting relating to the arrangement or amalgamation must also be sent to various government authorities such as the Income Tax Department, SEBI, RBI, Registrar of Companies, the respective stock exchanges, Official Liquidator, Competition Commission, if necessary and any other sectoral regulators and authorities likely to be affected by the compromise or arrangement for seeking representations, if any, within a period of 30 days from receipt of notice; failing which it will be presumed that they have no representation to make on such a proposal. Under the Act, whilst notices are mandatorily required to be served upon the Central Government (through the Regional Director), Official Liquidator and Registrar of Companies, such notices are served upon the RBI, SEBI, the respective stock exchanges, Competition Commission on a case to case basis including any other sectoral regulators and authorities likely to be affected by the compromise or arrangement..This 30 days requirement might raise certain procedural inconsistencies and overlaps. For instance, Section 6 (2A) of the Competition Act, 2002 (“Competition Act”) allows 210 days for passing an order of the CCI. Further, Regulation 19 of the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 provides that the CCI is required to give its prima facie opinion within 30 days of receipt of notice under Section 6(2A) of the Competition Act. This may lead to an inconsistency between the provisions of the Bill and the Competition Act and such procedural inconsistency would need to be ironed out..Objections to Compromise/Arrangement.The Bill provides that only persons holding not less than 10% of shareholding; or having not less than 5% of total outstanding debt as per latest audited financial statement can make any objection to a compromise or arrangement. Presently all members and creditors irrespective of their shareholding and outstanding debt are free to object to the scheme of amalgamation or compromise, which ensured that interests of all parties were taken into consideration before the scheme becomes binding on such parties. It appears that the right to object to schemes of amalgamation or arrangement by small shareholders and creditors has been taken away under the new provision in the Bill because NCLT is under an obligation to consider exit options available for dissenting shareholders when it is passing in order. However, it must be noted that such options cannot be exercised without specific provision for approval of the same by the NCLT. Therefore, the interests of minority shareholders and small creditors are not adequately addressed by the new provision. The effect of this clause is to have certain positive as well as negative implications on the merger process since it cuts out frivolous objections by small shareholders and creditors but at the same time also shuts out the door for genuine minority shareholders and creditors who may have a valid objection..Restrictions on Treasury Stock.The Bill specifically targets the practice of treasury stock in case of mergers between companies that have cross holding of shares. Typically, in such cases, the transferee company issues shares under the scheme to a trust to be held for its own benefit. Such a trust could further sell those shares at a later point of time and pay the proceeds thereof to the transferee company. This resulted in a dual advantage to the company, allowing the indirectly holding of such shares in order to create access to liquidity should the company require the same in the future, while still allowing the promoters to retain controlling stake over the Company. Treasury Shares have been issued in numerous schemes, and the same have been approved by the relevant courts. However, the courts have not specifically considered or ruled on the validity of issuance of treasury shares. It must be noted that Section 42 of Act prohibits a subsidiary from holding shares of its holding company and Section 77 of the Act places a prohibition on a company from purchasing its own shares. In light of the aforesaid sections, the validity of issuance of treasury shares has technically not been completely free from doubt. The Bill requires compulsory cancellation of such overlapping shares effectively putting an end to such a practice. This will curb the practice of the promoters creating treasury stock, particularly in listed entities..Cross Border Mergers.The Act only allows foreign companies to be amalgamated into Indian companies and not vice-versa. However, the Bill permits Indian companies to merge into companies located in specific foreign jurisdictions (to be notified) and vice versa. The Bill provides that a foreign company may, with the prior approval of the RBI, merge into a company registered under the Bill or vice versa. However, an Indian company may merge only with foreign companies in such jurisdictions as may be notified by the Government. In such mergers, the scheme may provide for payment of consideration to the shareholders of the merging company in cash, or in Indian Depository Receipts, or partly in cash and partly in Indian Depository Receipts, as the case may be..Fast Track Mergers.At present, all mergers, including those between group companies or between a parent and a subsidiary require compliance with the entire process under sections 391 to 394 of the Act. Under the Bill, the protracted procedures required for mergers and amalgamations have been dispensed with for mergers and amalgamations between two small companies or between a holding company and a wholly owned subsidiary company, by allowing them to proceed with the merger and amalgamation process without the approval of Court or the NCLT. In case the official liquidator and registrar have no objections or suggestions to the scheme of merger and amalgamation and the scheme is approved by the respective members of the companies holding at least 90% of the total shares of the companies in a general meeting and creditors holding 9/10th in value of the total debt after giving a notice of 21 days for the creditors meetings, the Central Government has the power to approve the scheme and effect the merger or amalgamation. This is a welcome move by the government as it will save considerable time and costs generally incurred by companies in winding up wholly owned subsidiaries that will result in administrative and operational rationalization, organizational efficiencies, reduction in overheads and other expenses and optimal utilization of various resources. It will prevent cost duplication that can erode financial efficiencies of the holding structure and the resultant operations would be substantially cost-efficient. However, it is important to note here that the term “small company” does not include “a holding or a subsidiary company”. Therefore, mergers between companies that are not between parents and wholly owned subsidiaries will not be covered under this provision. It is not clear whether the exclusion of mergers between a holding and a subsidiary not being a wholly owned subsidiary company is intentional or a mere drafting lacuna. However, where a holding company and its subsidiary (which is not a wholly owned subsidiary) are small companies (by financial thresholds) and are intending to merge, the exclusion in the ‘small companies’ definition relating to holding companies and their subsidiaries could result in such companies not being eligible for the fast track procedure..Reverse Mergers.In case of a merger of a listed transferor company into an unlisted transferee company, the Bill offers an option to the transferee company to continue as an unlisted company by buying out shareholders of the listed transferor company who may decide to opt out of the unlisted transferee company by paying them the value of shares held by such shareholder. Whilst the intent of this provision is positive, the implementation of schemes of this nature, in the context of applicable SEBI regulations remains to be tested..Buyback of Securities by scheme of compromise and arrangement .While the present Act does not provide any express provision relating to buyback of securities by way of a scheme of compromise or arrangement, the Bill contains a provision for buy back of securities under a scheme of compromise or arrangement provided that the same must be in compliance with the provisions relating to buy back under the Bill..Takeover Offer .The present regulations do not specifically provide for a takeover offer under a scheme of arrangement or compromise or a amalgamation, however the Bill contemplates that a scheme of compromise and arrangement can now include a ‘takeover offer’. The provision in the Bill states that “…..any compromise or arrangement may include takeover in such manner as may be prescribed”. Therefore it appears that the Bill gives scope to Central Government to issue new rules in relation to takeover offers under schemes of amalgamation. Further, the provision under the Bill also states that any takeover of a listed company is required to comply with the provisions of the Takeover Code. Hence once the Bill comes into force, the Central Government will have to issue appropriate rules and provide more clarity on how takeover offers will be made by companies, under schemes of amalgamation. Depending on the new rules, this may result in listed company acquisitions being made through schemes of arrangement..Removal of Charge .The Bill also provides that pursuant to an order by NCLT any liabilities may be transferred from the transferee company to the transferor company. Further pursuant to such order any property may also be freed from charge by virtue of the scheme of arrangement or compromise. This unique provision under the Bill may have some adverse effect on the rights of small creditors of the transferor company who may have secured their loan by charges on the assets of the transferor company and may have refused to give their consent to the scheme, but which charges may be removed through a scheme of amalgamation that has been sanctioned by 75% of the creditors of the transferor company sanctioning the scheme. It is arguable that small creditors whose rights are being affected will be considered as a separate class of creditors for the purposed of the scheme and assent of 75% of those creditors will be required as well under this provision..Purchase of Minority Shareholding by Majority Shareholders .The Bill enlists detailed provisions for the purchase of shares from minority shareholders by an acquirer or persons acting in concert with such an acquirer holding more than 90% of the shareholding of a company by virtue of an amalgamation, share exchange, conversion of securities or for any other reason giving a fair chance to the minority shareholders to exit the company mandatorily at a price determined by a registered valuer in accordance with prescribed rules. Further the Bill also provides that minority shareholders may also offer to the majority shareholders to purchase their minority equity shareholding in the company at a price determined by registered valuer which is not presently contemplated under Section 395 of the Act. .Although the Bill seeks to address all the prevailing issues in corporate restructuring, only time, the implementation of the Bill on-ground and the interpretation of the same by courts of law will reveal its inconsistencies and multiple facets. The Bill does have several noteworthy provisions which once implemented will simplify the process of restructuring through court schemes and reduce lengthy timelines of mergers, however like most provisions of the Bill these provisions will require significant fine tuning through separate rules and clarity from the courts..Sayantan Banerjee and Molla Hasan are Associates at the Mumbai office of AZB & Partners.
