Legal and Procedural Aspects of Mergers

Merger is a financial tool that is used for enhancing long-term profitability by expanding their operations. Mergers occur when the merging companies have their mutual consent. The income tax Act, 1961 of India uses the term ‘amalgamation’ for merger.

The procedure of amalgamation or merger is long drawn and involves some important legal dimensions.

Following Steps are Taken in this Procedure

  1. Analysis of proposal by the companies: whenever a proposal for merger or amalgamation comes up then managements of concerned companies look into the pros and cons of the scheme. The likely benefits such as economies of scale, operational economies, improvement in efficiency, reduction in cost, benefits of diversification, etc. are clearly evaluated. The likely reaction of shareholders, creditors and others are also assessed. The taxation implications are also studied. After going through the whole analyses work, it is seen whether the scheme will be beneficial or not. After going through the whole analysis work, it is seen whether the scheme will be beneficial or not. It is pursued further only if it will benefit the interested parties otherwise the scheme is shelved.
  2. Determining exchange ratios: The amalgamation or merger schemes involve exchange of shares. The shareholders of amalgamated companies are given shares of the amalgamated company. It is very important that a rational ratio of exchange of shares should be decided. Normally a number of factors like book value per share, market value per share, potential earnings, and value of assets to be taken over are considered for determining exchange ratios.
  3. Approval of board of directors: After discussing the amalgamation scheme thoroughly and negotiating the exchange ratios, it is put before the respective board of directors for approval.
  4. Approval of share holders: After the approval of the scheme by the respective board of directors, it must be put before the shareholders. According to sec.391 of Indian Companies Act, the amalgamation scheme should me approved at a meeting of the members or class of the members, as the case may be, of the respective companies representing there-fourth in value and majority in number, whether present in person or by proxies. In case the scheme involves exchange of shares, it is necessary that is approved by not less than 90% of the shareholders of the transferor company to deal effectively with the dissenting shareholders.
  5. Consideration of interests of the creditors: The view of creditors should also be taken into consideration. According to Sce.391, amalgamation scheme should be approved by majority of creditors in number and three-fourth in value.
  6. Approval of the court: After getting the scheme approved, an application is filed in the court for its sanction. The court will consider the view point of all the parties appearing, if any, before it, before giving its consent. It will see that the interests of all concerned parties are protected in the amalgamation scheme. The court may accept, modify or reject an amalgamation scheme and pass order accordingly. However, it is up to the shareholders whether to accept the modified scheme or not. It may be noted that no scheme of amalgamation can go through unless the registrar of companies sends a report to court to the effect that the affairs of the company have not been conducted as to be prejudicial to the interests of its members or to the public interest.
  7. Approval of Reserve Bank of India: In terms of sec.19(1)(d) of the foreign exchange regulation Act, 1973, permission of  the RBI is required for the issue of any security to a person resident outside India Accordingly, in a merger, the transferee company has to obtain permission before issuing shares in exchange of shares held in the transferor company. Further, sec 29 restricts the acquisition of whole or any part of any undertaking in India in which non-residents interest is more than the specified percentage.

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