CORPORATE
RESTRUCTURING
– LEGAL FRAME WORK
(Concept to Completion)
NIRC / ICSI – 26.02.2011
By - CS Harish K Vaid
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Major Issues
• Legal
• Technical
• Financial
– Stamp Duty on Assets/issue of Shares
– Taxation
• Valuation & Calculations
• Fairness Opinion in cases of Unlisted Cos.
• Exchange Ratio
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A. Statutory Provisions
Chapter-V
A complete code in
the nature of Single
window clearance.
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• Chapter V, Sections 390 to 396A
of the Companies Act, 1956
– Chapter V relates to Arbitration,
compromises, arrangements, reconstructions.
– (includes mergers/demergers/hive-offs/spin-offs
of Public/Pvt/Listed/Unlisted/Indian/Foreign Cos.)
– However, Section 389 relating to power of
Companies to refer the matter to arbitration
stands omitted since 1960.
– The Companies Act does not use the word
‘merger’. Similarly it does not define
‘amalgamation’, only some reference at
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• Rules 67 to 87 of the
Companies (Court) Rules, 1959
– Prescribe the detailed procedure to be
followed for approval of such Schemes.
– All formats are also prescribed.
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• Section 2(1B) of the
Income Tax Act.
– This Section defines
‘amalgamation’ and stipulates three
conditions:
• All properties of amalgamating company should
vest with amalgamated company.
• All liabilities of amalgamating company should vest
with amalgamated company.
• Shareholders holding not less than 75% shares in
the amalgamating company should become
shareholders of the amalgamated company.
AS 14 Amalgamation (i) in the nature of Merger, (ii)
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in the nature of Purchase.
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B. Right to amalgamate
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• Though for the purpose of Section 391,
‘company’ means ‘any company liable
to be wound up’, yet it does not debar
amalgamation of financially sound
companies. (Section 390)
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• Section 394 (4)
– ‘Transferee Company’ does not include any
company other than a company within the
meaning of this Act. (Has to be a company
registered under the Companies Act)
– ‘Transferor Company’ includes any body
corporate whether a company within the
meaning of this Act or not. (Can be a Foreign
Co.)
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C. Objects, Reasons and
Advantages of Amalgamations
• Disclosed / Undisclosed
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• Synergy of operations
• Economics of Scale
• Reduction in production, administrative, selling, legal and
professional expenses.
• Benefits of integration
• Optimum use of capacities and factors of production
• Tax advantages
• Financial constraints for expansion
• Strengthening financial strength
• Diversification
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•
Advantage of brand equity
•
Loss of objectives with which several companies were set up
•
Survival
•
Competitive advantage
•
Eliminating / weakening competition
•
Revival of a weak / sick company
•
Sustained growth
•
More efficient use of larger resources and funds
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Seldom undisclosed
•
•
•
•
•
•
Reorganization of Business
Increasing the Promoters’ Holding
Listing of Unlisted entity
Induction of Partner
Tax Benefits
Leases (Including mining leases)
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D. Reverse Merger
• Healthy Company amalgamating with a
financially weak company.
• Holding Company merging with its
subsidiary.
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E. Procedure for seeking approval
of Members / Creditors
• Board’s approval
• Contents of Scheme
– ‘Appointed Date’
– ‘Effective Date’
– Capital Structure of both companies
– Exchange ratio – Cross holdings - Cancellation / Trust
– Transfer of undertaking and liabilities (charges created)
– Continuation of legal proceedings
– Carrying on of business during intervening period
– Services of employees
– Allotment of shares in exchange ratio, treatment of fractions
and rights of shareholders to Dividend etc.
– Dissolution of transferor company (without winding up on the
effective date)
– Conditions subject to which the Scheme is to take effect.
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– Cooling period of 1 months to Stock Exchanges Clause 24(f)
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• Drafting of Scheme vis-à-vis Objective
– Specific / Standard Schemes
– Clubbing of Authorised Capital
– Borrowing Powers
– Change of Name
– Change of Objects
– Reduction of Capital
– Flushing of small shareholders
– Redemption of Preference Capital
– Cancelation of Cross holding Vs Trust
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F. Court’s directions for
convening meeting of Members /
Creditors (Rule 69)
(Court may dispense any meeting)
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• Application in F-34
• Judges summon supported by Affidavit in
Form 33
• Directions of the Court for
–
–
–
–
–
–
Date, time and place of meeting
Appointment of Chairman
Quorum
Notice and manner of giving advertisement
Time for filing of Chairman’s Report
Dispensing meeting of members and creditors in
certain cases
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G. Meaning of Class of Members
and Creditors
– Based on rights attached
(Equity/Preference holders)
– Secured / Unsecured Creditors
(FCCB/GDRs/FDs/Employees)
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H. Notice of Meeting – UPC
– 21 clear days in Form 36
– Proposed Scheme to be attached
– Statement under Section 393 Vs. Sec. 173
– Proxy Form in Form 37
– Publication in News Papers in Form 38 (Rule
74)
– Affidavit of Chairman for service /
advertisement of notice
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I. Proceedings at Meeting
– Voting to be by poll only
– Chairman to appoint two scrutineers to count
and report
– Scheme to be approved by Special Majority
(Principle of Fair Representation)
• Majority in number representing 3/4th in value
• Majority of members / creditors present and
voting
(JP 46 Obj. 5 Pb 2 = 53 – Exclude Promoters)
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J. Report of result of meeting
• Chairman to file report in Form 39 within
seven days of meeting (Rule 78)
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K. Requirements of Listing
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– Intimation to SEs within 15 minutes of Board’s
decision
– In principle approval u/cl. 24(f) – 1 month time
– Valuation Report/Fairness Opinion-Cl.24(h) in
case of Unlisted Cos./WOS-if consideration
– Intimation to SEs after approval of members /
creditors
– Copies of notices, circulars etc. to be sent to
SEs
– Report of Chairman to be filed with SEs
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L. Explanatory Statement u/s
393
• Requirements regarding explanatory statement
–
–
–
–
–
–
–
–
–
Terms of arrangement
Effect of Scheme
Material interest of Directors
Pre/Post shareholding pattern. Fairness report etc.
Principles governing Explanatory Statement u/s
393
Different from Section 173 – material facts
Valuation/Fairness Reports need not be circulated
Providing exchange ratio and not calculations is
enough
Directors’ interest has to be special
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M. Procedure for Seeking
approval of High Court
• High Court sanction to the Scheme
– In case Scheme involves reduction in capital
procedure to be followed
– However, if reduction is part of scheme, no separate
petition under section 100 is required.
– Petition to High Court in Form 40 after approval of
Members / Creditors
– Notice to Central Government under Section 394A.
• To Regional Director and none else
• Report of OL – 2nd Proviso 394(1)
• Report of ROC – To RD
- To Court – 1st Proviso 394(1)
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• Hearing on Petition
–Notice of hearing to be advertised (Rule
80)
–High Court Order on petition after
hearing (Rule 81)
»Order under Section 391 in Form 41
»Order under Section 394 in Form 42
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N. Filing of Order with ROC
• Within 30 days in Form 21
• Shall have no effect unless certified copy
filed with ROC
• Inform Stock Exchanges
• Secure Listing of new shares.
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O. Order to be annexed to MOA
– Copy of Order needs to be annexed to each
copy of MOA – Section 391 (4)
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P. Power of High Court to
enforce comprise /
arrangement
• Vast powers under Section 392(1)
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Q. Stamp Duty on High Court
Order
•
•
•
•
•
Transfer / vesting is by virtue of Court
Order without further documents / deeds
Court Order Vs Conveyance
In case duty is payable in the State,
same shall be paid on the Order
‘Litaka Pharmaceutical Limited Vs State
of Maharashtra’
‘HLL Vs State of Maharashtra’ (2003)
117 Cocases SC 758
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R. Principles evolved for sanctions of
Scheme by Courts
• Resolutions are passed by Statutory majority in value
and in number u/s 391(2) at a meeting duly convened
and held. Unless Scheme is so approved, the Courts will
have no jurisdiction to confirm the same.
• Those who took part in the meeting to be fair
representatives of the class.
• Scheme as a whole should be reasonable one. If so,
Courts not to interfere in collective wisdom of
shareholders. Objectors will have to convince the Court
that Scheme is unfair and needs to be rejected.
• Court not to launch an investigation into the commercial
merits / demerits of the Scheme.
• There should be no coersion of the minority at the
statutory meeting and no lack of good faith on the part of
majority.
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• Court must not act as a rubber stamp. It has a duty to
scrutinize but scrutiny is not with the eye of an expert of
exactness of an accountant.
• Court to ensure that requisite statutory procedure has
been complied with.
• Scheme to be backed by requisite majority under
Section 391(2)
• The meetings had relevant material to enable taking
informed decisions.
• All requisite material required by proviso Section
391(2) is placed before the Court and Court is
satisfied. (Latest Financial Position/Pendency of Inv.
proceedings u/s 235 to 251 and the like. Judgement
in AIR 2006 SC 2287 The Chairman SEBI Vs Shriram
Mutual Fund & Anth has included Sec 209 A also.
• Scheme as a whole is found to be just fair and
reasonable from the point of view of prudent men of
business taking a commercial decision.
• Once the above parameters are met, the Courts will
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have no further jurisdiction to sit an appeal over the
commercial wisdom of the majority.
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S. Handling of Objections
• SOURCES OF OBJECTIONS
• A - Shareholders
•
•
•
•
•
•
•
•
•
Unfair Exchange Ratio
Absence of Fair Representation
Clubbing of Authorised Capital – Revenue Loss
Violation of Take Over Code
Change of Name through Scheme
Reduction of Capital not permitted
Collusion of Regulators with Companies
Non disclosure of Latest Financial Position/Investn
Regular mergers/demergers
– Report of ROC not received
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• Provide Transport
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– B. Creditors
• Security may get diluted
• Merged company won’t honour commitments
• FCCB holders – Website/Advt in Foreign Papers
– C. Central Govt. (RD)
•
•
•
•
•
•
Clubbing of Authorised Capital – Loss of Revenue
Borrowing Powers clubbing not permissible
Change of Name – separate procedure
Reduction of Capital – separate procedure
Exchange Ratio – calculations not provided
(Shardul Shroff Committee Report, Calculations to
be confdl., Double Lock with one key to ROC).
• Business not covered by Objects Clause
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– D. Official Liquidator
Inspection/Audit of Records of Transferors
– E. SEBI
• Investigation in Progress under TO Code
• Don’t sanction till action is completed
– F. Stock Exchanges
• Exchange Ratio
• Public shareholding falling below minimum
– G. Employees
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Merger of JIL with JRC
(2004)2CLJ105(ALLD.)
1. Merger of JAPL with JRCL = JIL
2. Hive-off Cement Plant by JIL to BCL (u/s
293(1)(a)
3. Hive-off Cement Business of JIL to BCL
(name changed to JCL) u/s 391/394
4. Merger of JIL with JCL (JAL) u/s 391/394
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Merger of
Jaiprakash Industries Ltd. & Jaypee
Rewa Cement Ltd.
Law laid down for the First Time – as
reported in (2004)2CLJ105(Alld).
1. Meaning of “Fair Representation” in meetings
while considering the Scheme.
2. Right of shareholders not constituting the
requisite strength u/s 399 to file suit instead of
approaching CLB in case of Oppression &
Mismanagement
3. Impact of pending litigation on Scheme.
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Post Merger Activities
•
•
•
•
•
•
•
Necessary Press notices for all concerned
Notices to SEs/Depositories
Fixing Record Date
Allotment of shares in Exchange Ratio
Credit/Listing of newly allotted shares
Effecting Change of Name/A.Capital,if any
Revised Resolution to Banks/Clients
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• Change of ownerships of Moveable
Properties
• Mutation of Immovable properties
• Mining & other leases/agreements etc.
• IPRs – necessary changes to be effected
• Names to be changed in all
Licences/Permits etc.
• Changes, if any, in Occupiers/Managers
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FOR SUCH SCHEMES WE NEED
TO PLAN
• “If we fail to plan, we are planning to fail”
• “Better to prevent and prepare rather than
to repent and repair”
• “Irretrievable corporate actions –
• “You can make omlette from an egg, but
not egg from the omlette”
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