Business Strategy, Corporate
Restructuring and Take Overs
An Overview
By
R. Ramesh Chandra
Partner
L V V Iyer & Associates
Corporate Lawyers
Begumpet
Hyderabad
ICSI - MSOP - 17.03.2010
Business Strategy
•
•
•
•
•
•
increase efficiency
consolidate
increase market share
turn around
increase market capitalization
entry barrier
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Business Strategy
• Corporate Restructuring
-
Part-IX conversion
Mergers
Acquisitions
Conversion to LLP
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Business Strategy
Conversion of firm to Company
• Under Part-IX of the Companies Act
• No Stamp Duty
• Tax Neutral (subject to conditions)
• Registration - a vesting order
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Mergers & Acquisitions
Arrangements pursuant to Sec.391/394
 Merger
 De-merger
 Reverse Merger
 Hiving off
 Re-organization of Capital
 Compromise with Creditors
 Reduction of capital as part of Composite
Scheme
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Mergers & Acquisitions
• What is a reverse merger ?
A profit making company merges into a
loss making company to take advantage of
the accumulated losses of the surviving
company which shall be set off against
the profits of the combined entities
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Mergers & Acquisitions
De-merger

Recognized as a concept under Income – Tax Act,
1961
•

In place of merging the company as a whole, an
undertaking (business division) is spun off to a
separate
company at book value.

Differs from a hiving off arrangement in that
shares
of the resulting company is issued to the
shareholders of the de-merged
company
as
opposed to shares being issued
to
the
demerged company itself in a hiving off arrangement.
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Mergers & Acquisitions
• Hiving off
Resorted to enable holding the hived off
undertaking in a subsidiary
 Not recognized for exemption as transfer
under Income Tax Act, 1961
 Normal practice is to carry out the hiving
at book value to make it tax neutral
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Mergers & Acquisitions
• Reorganization of capital
 Consolidation of shares of different
classes
 Division of shares into shares of different
classes
 Combination of both the above
 A typical case is to convert preference
shares into equity or debentures when
redemption under Sec.80 is not possible
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Mergers & Acquisitions
• Reduction of Capital
 Can be attempted as part of a composite
scheme without a need to follow the
procedure under Sec.100 to 104
 Repaying preference capital when
redemption under Sec.80 is not possible
 Converting equity capital to preference
capital under an arrangement would not
amount to reduction of capital.
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Mergers & Acquisitions
Stamp Duty

Applicable only to Amalgamations
under AP Stamp Act.

De-merger and other arrangements
not covered.
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Mergers & Acquisitions
Tax implications
 Amalgamations under Sec. 2(1 B)
Income Tax, Act, 1961 –not a transfer
47
 De-merger under Sec.2 (19 AA)
Income Tax Act, 1961 – not a transfer
47
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of
u/s
of
u/s
Competition Law
Acquisition by enterprises
No Group
• Criteria
Assets – In India – Rs.1000 cr.
Worldwide- USD 500 mn
(Rs.500 crs. in India)
Turnover – In India – Rs.3000 crs.
Worldwide- USD 1500 mn
(Rs.1500 crs. in India)
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Competition Law
Acquisition by Group
Group
• Criteria
Assets – In India – Rs.4000 cr.
Worldwide- USD 2 bn
(Rs.500 crs. in India)
Turnover – In India – Rs.12000 crs.
Worldwide- USD 6 bn
(Rs.1500 crs. in India)
ICSI - MSOP - 17.03.2010
Corporate Restructuring-Case Studies
• `B’ Co.Ltd. to merge with `A’ Co.Ltd.
• Average Share Price :
A Co.Ltd. B Co.Ltd
•
Rs 250
Rs 50
• Swap Ratio:
1
4
• EPS of B Co.Ltd. Rs 5
• Net Result: A Co. Ltd adds to itself a
business with an EPS of Rs 20
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Corporate Restructuring-Case Studies
• B Co.Ltd. to merge with A Co.Ltd.
• Average Share Price :
A Co.Ltd.
B Co.Ltd.
Rs 200
Rs 8
• B Co.Ltd. has an operating profit but on account of huge debt burden it has
a net loss. The merger scheme includes an arrangement by which all the
long term debts are extinguished by issuance of shares of A Co.Ltd. at Rs
180 per share.
• Net Result : After merger B Co.Ltd. becomes a viable division of A Co.Ltd.
• Issue: Whether under Section 78 of the Companies Act, 1956, Securities
Premium A/c can be credited without receipt of money.
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Corporate Restructuring-Case Studies
• A Co.Ltd. is a holding company of B Co.Ltd. Both A Co.Ltd. and B Co.Ltd.
are listed companies. After the merger in the next two to three years the
share price of A Co.Ltd. is supposed to rule quite high.
• Instead of canceling the shares held by A Co.Ltd. in B Co.Ltd. in the process
of merger, shares of A Co.Ltd. in the swap ratio to be issued to a Trust.
• The Trust to hold the shares for three years for disposal, the proceeds thereof
to go to A Co.Ltd.
• Issue: When the proceeds of the sale of shares by the Trust are received in
the hands of the Company, what is the nature of such a receipt – is it a capital
receipt not subject to Income Tax ?
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Corporate Restructuring-Case Studies
• A Co.Ltd. is a closely held family company.
• B Co.Ltd. is a listed company where the family
has controlling interest.
• By merging A Co.Ltd. into B Co.Ltd. the
shareholding of the family in B Co.Ltd. is
increased substantially without having to go
through the Takeover Code.
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Corporate Restructuring-Case Studies
•
A Company Limited is a listed BIFR Company which has been sanctioned a
Corporate Debt Restructuring package. In terms of this package, 50% of
the equity share capital is converted into preference capital, Part of the
loans are converted into preference capital and promoters bring fresh
money as equity contribution.
•
A Company Limited goes in for a Scheme of Reconstruction & Arrangement
under Section 391 of the Companies Act, 1956.
•
Implications
•
Can such a thing be done under the provisions of Section 391 of the
Companies Act, 1956, when the Company is a BIFR Company?
•
Does it involve reduction of capital?
•
Are the promoters equity contribution exempt under Takeover code?
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Corporate Restructuring-Case Studies
• A Company Limited, B Company Limited and C Company Limited have a
common business i.e chemical business. All these companies also have
other businesses. A new company is formed called D Company Limited. A
Company Limited is a listed company with a share capital of Rs.30 crores.
B Company and C Company are non listed companies with share capital of
Rs.5 crores and Rs.2 crores respectively. D Company Limited is formed
with an authorised capital of Rs.10 crores.
• On the basis of evaluation by experts, the equity capital of D Company
Limited is kept at Rs.10 crores. All the chemical businesses of A Company
Ltd., B Co., Ltd., and C Co., Ltd., are de-merged into D Company Limited.
The net assets remaining in A Co., Ltd., is Rs.12 crores. The capital of A
Co., Ltd., is reduced from Rs.30 crores to Rs.12 crores.
• D Company Limited becomes a listed company with a healthy EPS of Rs.7/as against a combined EPS of Rs.3/- of A Company Limited, B Company
Limited and C Company Limited
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Corporate Restructuring-Case Studies
• A Company Limited has issued Cumulative Preference Shares
amounting to Rs.50 crores redeemable at the end of 10 years.
Since A Company Limited has been able to securitize its future
receivables, it wants to redeem the preference shares now, i.e.
after three years of issue, despite the fact that it does not have
enough profits to redeem the shares nor does it come out with a
new issue of shares for this purpose, under Section 80 of the
Companies Act, 1956.
• In view of this, A Company Limited goes in for a reduction of
capital under Section 80 of the Companies Act, 1956. Can this
be made possible in law?
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Take Over
 Regulation – 10 - Trigger for open offer
No acquirer shall acquire shares or voting rights
which (taken together with shares or voting
rights, if any, held by him or by persons acting in
concert with him), entitle such acquirer to
exercise 15% or more of the voting rights in a
company, unless such acquirer makes a public
announcement to acquire shares of such
company in accordance with the regulations.
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Take Over
• The term ‘acquirer’ covers
(i) Persons – both individual and juristic person
(ii) who either directly or indirectly, acquires or
agrees to acquire
– a. Shares
– b. voting rights
– c. control of the target company
(iii) by himself or with any person acting in concert.
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Take Over
• Acquirer includes a person acquiring
shares under blank transfers which are yet
to be registered – as decided by Bombay
High Court in Sreenivasulu Reddy’s case
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Take Over
• The SEBI Tribunal in Kiron Margadarsi’s
case held that in the case of a pledge of
shares with blank transfer forms there is no
case of acquisition by the pledgee since the
intention of the pledger is only to pledge the
shares and not to sell them and also since in
the case of pledge only the special property
in the pledged goods including shares would
pass to the pledgee while the legal
ownership of the same still remain with the
pledger.
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Take Over
• The SEBI Tribunal in Ashwin Doshi’s case
held that in order to arrive at the
percentage of voting rights, the shares
which are frozen or attached by a special
court cannot be excluded from the total
voting power in relation to the company
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Take Over
• Creeping Acquisition upto 5% of voting rights in
any financial year ending 31st March – limited to
Acquirer along with persons acting in concert
(PAC) holding shares or voting rights of 15% or
more but less than 55%.
• Any creeping acquisition of Acquirer holding
55% but less than 75% to trigger open offer
(75% to read as 90% for minimum 10% public
holding companies) to trigger open offer
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Take Over
• Regulation – 12 – Trigger for Open Offer
• Acquisition of control with or without acquisition of
shares or voting rights shall trigger an open offer
unless such change in control is in pursuance to a
special resolution passed by the share holders of the
target company in a General Meeting by postal
ballot.
• Explanation: Acquisition shall include direct or
indirect acquisition of control of target company by
virtue of acquisition of companies whether listed or
unlisted and whether in India or abroad.
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Take Over
• SEBI Tribunal in the Gujarat Ambuja Case
held the term ‘control’ would mean
effective de facto control and not dejure
control alone
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Take Over
• The term ‘Control’ includes
The right to appoint majority of the directors; or
(ii)To control the management or policy decisions exercisable by a
person or persons, acting individually or in concert, directly or
indirectly, by
(a) virtue of their shareholding
(b) management rights
(c) shareholding agreements, or
(d) voting agreements, or
(e) in any other manner
In order to come within the definition of ‘control’ it is not necessary
that one should have actually appointed majority of directors, it
would be enough if such a right of appointment is vested in him.
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Take Over
Exempted Categories
• Rights Issue to the extent of one’s
entitlement and upto ceiling in Regulation11 i.e. 5%. No ceiling in respect of
persons in control for portion of undersubscription, provided disclosures are
made and no change of control of
management results.
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Take Over
Pursuant to a scheme framed under Section 18 of SICA
 of
arrangement
or
reconstruction
including amalgamation or merger or demerger
ICSI - MSOP - 17.03.2010
Take Over
• SEBI Tribunal held in Mega Resources’
case otherwise known as Bombay Dyeing
case that for the purpose of disclosure the
holdings of the acquirer along with his
associates and persons acting in concert
have to be taken into account.
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• (1)“Shares” means shares in the share
capital of a company carrying voting rights
and includes any security which would
entitle the holder to receive shares with
voting rights (but shall not include
preference shares)
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• The SEBI Tribunal in Modipon case held
that there is no legal presumption that
every promoter is an acquirer or a person
acting in concert with another promoter
unless the facts are otherwise.
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Thank you
ICSI - MSOP - 17.03.2010