Legal Procedure for

Mergers
An Overview
 Basis for Exchange Ratio
 The Merchant Banker should be mandated to
give due diligence opinion on the assumptions
themselves, otherwise the share exchange ratio
will have to be taken as just the management
speaking through him
 Along with the scheme the report of the
Chartered Accountants
Legal Procedure- Introduction
A Scheme of merger or amalgamation
involving two or more companies requires the
approval of the Court.
Sections 390 to 396A of the Companies Act
1956 deals with the provisions relating to
merger/amalgamation. The procedure for
obtaining the approval of the Court is laid
down in the Companies (Court) Rules, 1959.
 Legal Procedures- M and A
Tax aspects of mergers are covered by the
Income Tax Act, 1961, other aspects attract
the provisions of the MRTP Act 1969,
FEMA Acts applicable is also required.
 Formulation of the Scheme

 Once the ‘prospecting phase’ is over, the

companies seek the help of merchant bankers
to finalize the details of the proposed scheme
of merger in accordance with the guidelines of
SEBI, who has the statutory powers to enforce
these regulations.
 Legal Procedure – M and A
 Articles of Association: The object clause of
Articles of association of amalgamated
(transferee) company should be examined to
see if it permits continuation of the business of
amalgamating( transferor) company by it.
 If it does not, then suitable

amendments/alterations must be made in the

manner prescribed in the Companies Act.
 Legal Procedure - Mergers
Intimation to SEBI, Stock Exchange/s and issue
Of Notification:
 On acquisition of 15% OF Voting capital

(includes conversion of debentures), SEBI and

Stock Exchange/s should be informed.
 On acquisition of 15% of voting capital, open

offer should be made to other share holders to

acquire 20% of the floating stock.
 Legal Procedure- M and A
 As soon as the offer of merger is made , the
stock exchanges, where the shares of the
companies are listed should be notified and
the fact of the offer should be announced in
the newspapers, in the form approved by the
Stock Exchange.
 Boards Approvals

The Boards of directors of the companies

involved in a merger negotiate in secrecy and
come to an agreement. The relative values of the
companies are worked out and share exchange
ratio is agreed upon. The help pf financial and
legal experts is taken during this phase. Who
initiates the merger talks has a
bearing on the values put on the companies and
therefore on the share exchange ratio.
 Legal Procedures-M and A
 A Merger Scheme is drawn up with the help of
financial and legal experts in mutual consent.
Inevitably a few support staff of the
two companies have to be taken into confidence
and they should be careful not to be accused of
insider trading. The merger proposal is then
given a legal status by approving it in at formal
board meetings and notifying the stock
exchanges.
 Shareholders Approval

The scheme, once approved by the Boards of

Directors, should be placed before shareholders at a
general meeting for their approval. The Companies
get the scheme approved by their shareholders before
they file an application for the sanction of the Court.
At a such a meeting, the transferee (amalgamated)
company can pass such resolutions as are necessary
to implement the scheme, e.g alteration of the articles
of association, rescinding the right to get shares on
priority basis under Sec. 81 of the Co. Act and
increase or decrease in share capital.
 Courts Approval
 Each Company has to file an application under
Section 391(1), with the High Court of the state in
which its registered office is located along with the
merger scheme as approved by the Boards ,of the
Concerned Companies.
 The Court directs the Company to call a meeting of
the shareholders and to place the scheme together
with the explanatory statement before them and
report back to the Court the decision of the
shareholders.
 Courts Approval
 The Chairman of the meeting is appointed by
the Court. The Court also orders the Company
to publish advertisements in various
newspapers about the scheme and the meeting.
In due Course, the Court peruses the report of
the Chairman of the meeting, hears the views
of the Company Law department and any
other person who wishes to be heard and
passes such orders as it deems fit.
 Courts Approval
 Generally, the Courts tend to view the merger
essentially a business decision to be taken by the
shareholders and approve the merger, if the legal
formalities have been properly observed and the
shareholders have voted in favor. This procedure has
to be gone through for each of the companies
concerned. Before finally approving the merger, the
Court calls for a report from the Official liquidator on
the affairs of the transferor company and then orders
the merger as effective .Thereafter the transferee
company is dissolved without winding up.
 Courts Approval
 The Chairman so appointed by the Court sends
individual notices to creditors and members. The
notice is accompanied by a copy of the proposed
merger scheme is sent, under UPC, at least 21 clear
days before the date fixed for the meeting.
Simultaneously, a notice of the meeting is advertised
in such newspapers( at least one English and one
vernacular) as the judge may direct. The Chairman
files an affidavit with the Court, at least 7days before
the meeting , that the Courts directions in this regard
have been compiled with.
 Courts Approval
The proposed merger scheme is taken as
approved if it is passed by a majority
representing three fourths in value of the
members (Creditors at Creditors meeting),
present and voting in person or proxy. The
Chairman shall report the results of the
meeting to the court within 7 days of such
meeting or as directed by the Court.
 Petition for Confirmation of
merger
 If a merger scheme is passed by the creditors and
members, the Company, within 7 days of filing of
report by the Chairman to the Court, has to present a
petition for confirmation of the scheme and
appropriate orders and directions under Section 394
of the Companies Act..
 Date of hearing the petition is fixed.
 Notice of such a hearing advertised in newspapers as
directed by the Court.
 This notice is served on Central Government, The
Registrar, the Company Law Board and the Official
liquidator.
 Petition for Confirmation of
merger
 Order of the Court:
For passing the order, the Court has to receive a report from the
ROC and the OL that the affairs of the Company have not been
conducted in a manner prejudicial to the interests of its members
or of the public.
 Co has to show that all the requisite approvals,
acknowledgements from the Co. Law Board ( For alteration in its
articles of association) , Central Govt (MRTP Act) , the RBI
(FEMA Act) and SEBI have been obtained. The Court on hearing
all the parties satisfies itself that the proposed merger is fair and
treasonable. The Court, if satisfied, shall pass the order,
sanctioning the scheme.
 For the order to be effective, every Company in relation to which
the order is passed should file a certified copy of the Courts’
order with the ROC, within 10 days of the order.
 Evaluation of the Procedure
 There is very little interference by any govt.
agency or authority.
 There is no prescribed format for drawing up the
merger scheme and the explanatory statement to
be issued to the shareholders, except some
guidelines in the Company (Court) Rules, and
procedures, which are generally adhered to.
 This can be done effectively by the Companies
Act and the relevant rules.
 Evaluation of the procedure
 Following rules should be stipulated:
a) The disclosure of the basis for the share
exchange ratio.
b) Publishing in the next 3 to 5 years annual reports to be issued
after the merger becomes effective, the actual benefits realized
on account of the merger as compared to the benefits anticipated
at the time of
framing the merger proposal and determining the share exchange
ratio, so as to be more informative to the shareholders..
c) This should be backed by an effective monitoring system with
provisions for deterrent penalties for defaulters.
 Evaluation of the procedure
 Such monitoring could be by way of requiring,
as a part of the Annual Return, details of the
benefits actually realized and those estimated
earlier, duly certified by the Directors of the
Co. and the Co. Secretary. The Company Law
Board, may reviewed the correctness of these
Annual Returns during inspections.
 Basis for Exchange Ratio
 The Justification for the share exchange ratio,
one of the most important terms of any merger
scheme is generally not provided. The
exchange ratio must necessarily take into
consideration the projected future earnings of
the Companies and the benefits expected from
the merger which will increase the combined
profits.
 Basis for exchange ratio
 The merchant banker should be mandated to
give the due diligence opinion of the
assumptions themselves otherwise the share
exchange ratio shown in the report will have to
be taken just as the management speaking
through him.
 Basis of exchange ratio
 Along with the scheme, the report of the Chartered
Accountants should be circulated
to the shareholders and others entitled to have a say
on the merger proposal. It is not sufficient to make it
available for inspection at its registered office,
because in practice distances and cost of traveling
prevent a shareholder from inspecting. The report of
the chartered accountants who made the valuation and
recommended the share exchange ratio is not among
the documents as available for inspection at its
registered office, making it almost impossible to take
an informed decision on the merger proposal.
 Follow up on benefits of merger
 For 3 to 5 years, after the merger becomes
effective each annual report should be required
to set out in a meaningful manner, with figures
the actual benefits realized from the merger
and compare them with the estimated at the
time of fixing the share exchange ratio.
Explanation must be provided for shortfalls
beyond say 10%.
 Follow up on benefits of merger
 If the variation is more than say 20% any prospectus issued by
the Company/or its associates should disclose this fact so as to
enable the public to form an opinion about the credibility of
the figures put up by the management.

 The nature and extent of disclosure may be approved by the

regulatory authority, on a case by case basis, with enabling
power to them to exempt a company from such disclosure if
there are good reasons. i.e. there is a total change in the
management of the Co. and the regulatory authority is satisfied
that it will be unfair to burden the new management with the
deficiencies of the previous management.
 Conclusion

Thank You