CROSS-BORDER BUSINESS

REORGANIZATION: AN ANALYSIS OF THE

COMPANIES ACT, 1956 AND THE
COMPANIES BILL, 2009.

LAW OF BUSINESS ASSOCIATION – II

PROJECT

NATIONAL LAW INSTITUTE UNIVERSITY,

BHOPAL

SUBMITTED BY: ADHITYA SRINIVASAN

ROLL NO: 2008 B.A. LL. B 55

SUBMITTED TO: PROFESSOR J. KONDAIAH

1
 TABLE OF CONTENTS

INTRODUCTION 3

M&A IN THE FRAMERWORK OF THE COMPANIES ACT, 1956 5

INTERPRETATION 5

PROCEDURE 6

POWER OF TRIBUNAL 7

COMMUNICATION OF INFORMATION 8

RECONSTRUCTION AND AMALGAMATION 8

AN ANALYSIS OF M&A IN THE PROPOSED 2009 BILL 10

PROCEDURE 10

TAKEOVER OFFER 10

VALUATION REPORT 11

SIMPLIFIED MERGERS 11

OVERSEAS MERGERS 12

STRUCTURING AN M&A TRANSACTION 13

DETERMINING THE MERGER VALUE 13

REVERSE MERGER TRANSACTION 14

ASSET PURCHASE 14

STOCK PURCHASE 15

REVERSE TRIANGULAR MERGER 16

FORWARD TRIANGULAR MERGER 16

DEMERGER 17

CONCLUSIONS AND RECOMMENDATIONS 18

BIBLIOGRAPHY 19

2
 INTRODUCTION

Corporations have constantly evolved business stratagem to acquire a comparative competitive

advantage over rival firms. Business reorganization as a concept of corporate economics is a
wide umbrella term for any structural change the corporation engineers towards a term-based
maximization of profits or minimization of losses and other liabilities. The prevalent thrust in
favour of Mergers and Acquisitions (hereinafter: M&A) is a function of a number of factors
which include inter alia the pursuit by a corporation of customers who have ventured into global
markets, the need to acquire economies of scale in an increasing globalized economy and the
general trend towards privatization, liberalization and deregulation of the economy which has
spurred an unprecedented flow of capital across borders. The reallocation of capital among firms
can take place either through the sale of firm assets viz. plant, equipment, etc or through an
acquisition where the transfer of financial claims of the target (i.e. acquired) firm effectively
transfers the underlying assets of that firm.1

The primary motives guiding a corporation in making a business reorganization decision may be
broadly deconstructed into an efficiency motive and a strategic motive.2 The efficiency motive
may be understood in terms of a takeover resulting in increased economies of scale or scope
whereas the strategic motive may be understood in terms of the merger or acquisition resulting in
a qualitative change in market structure in favour of corporation over its competitors.3

M&A activity in India in the early stages focussed on India being an attractive investment
destination. The Indian economy attracts inbound investment since it is seen to be based on
strong fundamentals which include a growing market, world-class scientific, technical and
managerial manpower, cost-effective and highly skilled labour and abundant natural resources. 4
Additionally, the incumbent FDI regulations permit investment (upto specified limits) in a host
of economic categories and sectors. United Nations Centre for Trade And Development
(UNCTAD) reports that M&A sales were to the tune of US$ 4405 million, US$ 10,427 million
1
Coeurdacier, Nicolas, De Santis, Roberto A. and Aviat, Antonin, “Cross-Border Mergers and Acquisitions: Financial
and Institutional Forces”. 14 Aug 2010. < http://ssrn.com/abstract=1336488>
2
Ibid.
3
For instance, a vertical integration enables a corporation to control the market at different stages of production.
Similarly, a horizontal integration allows a company to diversify its selling operations in several markets.
4
PricewaterhouseCoopers. Mergers & Acquisitions - Asian Taxation Guide 2010.

3
and US$ 6,049 million for the years 2007, 2008 and 2009 respectively. 5 Similarly, M&A
purchases were reported at US$ 29,083 million, US$ 13,482 million and US$ 291 million for the
years 2007, 2008 and 2009.6

This research paper aims to understand and assess the law relating to cross-border business
reorganization. The paper first seeks to briefly analyze M&A activity in other jurisdictions.
Thereafter it studies the various considerations that are taken into account while structuring an
M&A transaction. Following this, a thorough analysis is made into the various tax implications
that arise from such a transaction. Further, the regulatory framework governing M&A
transactions is identified and analyzed. Finally the paper examines relevant provisions from the
Direct Taxes Code (DTC) and concludes.

5
“UNCTAD, World Investment Report 2010”. 14 Aug 2010. <http://www.unctad.org/Templates/Page.asp?
intItemID=1465>
6
Ibid.

4
 MERGERS AND ACQUISITIONS IN THE FRAMEWORK OF THE
COMPANIES ACT, 1956

Interpretation
At the very outset, it needs to be stated that the terms “merger” and “acquisition” have not been
defined anywhere in the Companies Act, 1956. The principal revenue statute i.e. the Income Tax
Act, 1961 (“1961 Act”) provides for a fairly elaborate definition under s. 2(1B).

Section 2(1B) of the 1961 Act provides:

“amalgamation”, in relation to companies, means the merger of one or more companies with
another company or the merger of two or more companies to form one company (the
company or companies which so merge being referred to as the amalgamating
company or companies and the company with which they merge or which is formed as
a result of the merger, as the amalgamated company) in such a manner that—
       (i)  all the property of the amalgamating company or companies immediately before
the amalgamation becomes the property of the amalgamated company by virtue of
the amalgamation ;
      (ii)  all the liabilities of the amalgamating company or companies immediately before
the amalgamation become the liabilities of the amalgamated company by virtue of
the amalgamation ;
     (iii)  shareholders holding not less than [three-fourths] in value of the shares in the
amalgamating company or companies (other than shares already held therein
immediately before the amalgamation by, or by a nominee for, the amalgamated
company or its subsidiary) become shareholders of the amalgamated company by
virtue of the amalgamation,
                otherwise than as a result of the acquisition of the property of one company by another
company pursuant to the purchase of such property by the other company or as a result
of the distribution of such property to the other company after the winding up of the
first-mentioned company ;

5
The statutory regime for mergers and acquisitions can be found under ss. 390 – 396A of the
Companies Act, 1956. Section 390 of the Act is essentially an interpretation clause for sections
391 and 393. S. 390(a) provides that company means any company liable to be wound up under
this Act. Importantly, s. 390(b) provides that “arrangement” includes a reorganization of share
capital of company by the consolidation of shares of different classes, or by the division of
shares into shares of different classes or, by both of these methods. Section 391 details the
procedure to be followed with respect to M&A activity among companies.

Procedure
Where a compromise or arrangement is proposed between a company and its members or any
class of them, the Tribunal may on the application of the company or the members order a
meeting of the members or class of members to be conducted in a manner directed by it.7

Furthermore, if a three-fourths majority in value of creditors, class of creditors, members or class

of members present and voting at the meeting (or by way of proxy where the same is permitted)
agree to the compromise or arrangement, such compromise or arrangement shall if sanctioned by
the Tribunal be binding upon all parties to it viz. the company and all members. 8 The Proviso to
s. 391(2) reads that no order providing sanction to any compromise or arrangement shall be made
by the Tribunal unless it is satisfied that the applicant has disclosed all material particulars such
as latest financial position, auditor’s report, etc.9

The order of the Tribunal u/s. 391(2) will have no effect until a certified copy of the Order has
been filed with the Registrar.10 A copy of every such order shall be annexed to every copy of the
memorandum issued after the aforesaid filing of the certified copy of the order. 11 The penalty for
default of s. 391(4) is a fine of up to one hundred rupees and applies to the company and every
officer in default.12

7
See s. 391(1)(b) of the Companies Act, 1956.
8
See s. 391(2) of the Companies Act, 1956.
9
Ibid.
10
See s. 391(3) of the Companies Act, 1956.
11
See s. 391(4) of the Companies Act, 1956.
12
See s. 391(5) of the Companies Act, 1956.

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Power of Tribunal

The language of section 392 very simply indicates that where a tribunal makes an order u/s. 391
sanctioning an arrangement or a compromise, it shall have the power to supervise the carrying
out of the compromise or arrangement;13 and give such directions or make such modifications to
the order either at the time of making it or anytime thereafter as it may consider to be necessary
to the proper working of the arrangement or compromise. 14 These powers of the Tribunal were
formerly invested in the High Court prior to the Amendment to the Companies Act in 2003.

In Miheer H. Mafatlal v Mafatlal Industries Ltd.,15 the Hon’ble Supreme Court made the
following observation:
“However, the further question remains whether the court has jurisdiction like an appellate
authority to minutely scrutinize the scheme and to arrive at an independent conclusion whether
the scheme should be permitted to go through or not when the majority of the creditors or
members or their respective classes have approved the scheme as required by Section 391[2]. On
this aspect, the nature of compromise or arrangement between the company and the creditors and
members has to be kept in view. It is the commercial wisdom of the parties to the scheme who
have taken an informed decision about the usefulness and propriety of the scheme by supporting
it by the requisite majority vote that has to be kept in view by the court. The court certainly
would not act as a court of appeal and sit in judgment over the informed view of the concerned
parties to the compromise, as the same would be in the realm of corporate and commercial
wisdom of the concerned parties. The court has neither the expertise nor the jurisdiction to delve
deep into the commercial wisdom exercised by the creditors and members of the company who
have ratified the scheme by the requisite majority. Consequently, the company court's
jurisdiction to that extent is peripheral and supervisory and not appellate. The court acts like an
umpire in a game of cricket who has to see that both the teams play their game according to the
rules and do not overstep the limits. But subject to that how best the game is to be played is left
to the players and not to the umpire.”

13
See s. 392(1)(a) of the Companies Act, 1956.
14
See s. 392(1)(b) of the Companies Act, 1956.
15
JT 1996 (8) 205.

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In Hindustan Lever Employees’ Union v Hindustan Lever Limited & Ors.,16 the Hon’ble
Supreme Court held that the jurisdiction of the court in sanctioning a claim of merger is not to
ascertain with mathematical accuracy if the determination satisfied the arithmetical tests. A
company court does not exercise appellate jurisdiction.

Communication of Information
Section 393 in effect provides that where a meeting is called of the members of the company in
respect of an arrangement or compromise, a statement setting forth the terms of such
compromise or arrangement, the effect thereof, the material interests of the directors and the
effect of such interest upon the compromise or arrangement, etc.

Reconstruction and Amalgamation

The Companies Act, 195617 provides that an application is made to the Tribunal for sanctioning
an arrangement/compromise and it is shown to the Tribunal that such compromise or
arrangement is in pursuance of a scheme for reconstruction of any company or the amalgamation
of two or more companies, and where the property and liabilities of one company (transferor
company) is to be transferred to another company (transferee company) under the scheme, the
Tribunal is, by order, empowered to make provision in respect the following matters:
(i) The transfer to the transferee company of the whole or any part of the tranferor’s
undertaking, property and liabilities;
(ii) The allotment or appropriation by the transferee company of any shares, debentures
or other interests in that company which are sanctioned under the arrangement;
(iii) The continuation by the transferee company of any legal proceedings by or against
the transferor company;
(iv) The dissolution of any transferor company;
(v) Such other incidental or supplemental matters which are required to secure the
desired reconstruction or amalgamation.

16
[1995] Supp. 1 SCC 499.
17
See s. 394(1) of the Companies Act, 1956.

8
The proviso to s. 394(1) provides that no amalgamation or reconstruction shall be sanctioned by
the Tribunal unless the Court has received a report from the Registrar that the affairs of the
Company have not been conducted in a manner prejudicial to public interest.

Most significantly it is important to note that as per this Chapter, “transferee company” does not
include any company other than a company within the meaning of this Act; but “transferor
company” includes any body corporate whether a company within the meaning of this act or
not.18

In Delhi Towers Ltd. v G. N. C. T of Delhi,19 the Hon’ble Delhi High Court observed that “In that
sense the transferor- company does not die either on amalgamation or on dissolution without
winding-up under sub-s. (1) of s. 394. It is not wound up because it has merged into another.
Winding-up is unnecessary. It is dissolved not because it has died, or ceased to exist, but because
for all practical purposes, it has merged into another forming part of one corporate shell. The
dissolution is the death of its independent corporate shell, because a company cannot have two
shells. It is, therefore, dissolved because the independent shell or corporate name is superfluous.
The company in its essence means its members, who compose it, the assets, property and rights
that it had, its liabilities, its undertaking, business or other activity.”

18
See s. 394(4)(b) of the Companies Act, 1956.
19
[09.12.2009]

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 AN ANALYSIS OF M&A UNDER THE PROPOSED COMPANIES BILL,
2009

The Companies Bill, 2009 was introduced in Indian Parliament. Among the several amendments
to Companies Act was the need to recognize foreign companies as transferees in an M&A
transaction suggested by the J. J. Irani headed expert committee on company law.20

Procedure
The procedure to be followed has been more or less retained from that which was being followed
under the Companies Act. section 201 of the Companies Bill, 2009 lists in great detail the
procedure that is required to be followed and the various subsections from (1) to (10) correspond
to the various provisions given under ss. 391 – 393.

One significant change is that approval for schemes of restructuring under Chapter XV of the
Bill shall be given by a single forum, i.e., the proposed National Company Law Tribunal
(“NCLT”). Presently, if the companies under merger are located in different states, different high
courts are involved, leading to delay in clearances. Since the NCLT is a single body specialized
in company law matters, it will provide expertise and speed in the disposal of such schemes.21

Takeover Offer
Throughout the project thus far, the discussion has been limited to schemes for arrangement or
compromise resulting in amalgamations or mergers. In fact, the Act does not discuss the concept
of takeover within its ambit. Moreover, Regulation 3(1)(j) of the Substantial Acquisition of
Shares and Takeover Regulations 1997 expressly provides that the SAST 1997 will not apply in
the case of M&A schemes.

However, section 201 (10) of the Bill has widened the scope of such schemes by allowing a
takeover offer to be made under the scheme. “Takeover offer” has been defined to mean an offer

20
Bhayani, Rajesh. "Bill Allows Merger of Indian Companies with Foreign Firms." Business Standard. 22 Aug. 2010.
<http://www.business-standard.com/india/news/bill-allows-mergerindian-companiesforeign-firms/366708/>.
21
Singh, Inder Mohan, and Siladitya Chatterjee. "Examination of the Impact of M&A Provisions under the Companies
Bill 2009." Executive View. 22 Aug. 2010. <http://www.executiveview.com/knowledge_centre.php?id=11869>.

10
to acquire all the shares (where there is more than one class of shares, all the shares of one or
more classes) in a company, the terms of the offer being the same in relation to all the shares to
which the offer relates.22

Valuation Report
Section 203 of the Companies Bill, 2009 broadly corresponds to s. 394 of the Companies Act,
1956. The Bill provides that where the scheme is for the reconstruction/amalgamation of two or
more companies, “the Tribunal may on such application, order a meeting of the creditors or class
of creditors or the members or class of members, as the case may be, to be called, held and
conducted in such manner as the Tribunal may direct and the provisions of sub-sections (3) to (6)
of section 201 shall apply mutatis mutandis.”. These sub-sections pertain to the circulation of
information among members.

In addition to the requirements to be fulfilled under ss. 201(3) – (6), section 203(2) also provides
that it is incumbent upon merging companies to circulate some other particulars. In case of
merger of companies, the Bill additionally requires the notice convening the meetings of
members / creditors to have specific information including inter alia a valuation report and
supplementary accounting statement if last annual accounts of either company relates to a
financial year ending more than 6 months before the company’s first meeting summoned to
approve the scheme.23

Simplified Mergers
The Companies Bill, 2009 prescribes a cost-effective, hassle-free procedure for the merger of
small companies or between a holding company and its wholly-owned subsidiary. Under such
circumstances, sanction of the NCLT is not required. The procedure is detailed under s. 204 of
the Bill. Essentially, the scheme for merger must be approved by special resolution of the
members and approved by three-fourths of the creditors; the transferee company will have to file
a copy of the scheme with the Registrar and the Official Liquidator – if there is no object, the
Registrar will register the scheme and issue a confirmation thereof and where the Registrar is of

22
Ibid.
23
Ibid.

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the opinion that the scheme is not of public interest, he shall file an application with the NCLT
with a request to consider the merger scheme as per the normal procedure.24

Overseas Mergers
Admittedly, the provisions of the Indian Companies Act, 1956 (hereinafter: Companies Act)
address a fairly narrow range of business reorganization transactions in that it is limited to
arrangements and reconstructions between two or more Indian entities or between a foreign
company and an Indian company provided that the latter is the transferee in respect of assets and
investments. In other words, the Companies Act permits a foreign company to merge with an
Indian company but does not allow an Indian company to merge with a foreign company. 25
Ostensibly, the reason for this is to ensure that Indian businesses are owned by entities regulated
under Indian law.26

The application of s. 394 and related sections is limited in scope to select transactions. This is
evident upon a perusal of section 394(4). S. 394(4)(b) provides that “Transferee company” does
not include any company other than a company within the meaning of the Companies Act; 27 but
“transferor company” includes any ‘body corporate’. This effectively confines the jurisdiction of
the Companies Act to transactions where only an Indian company is the transferee. Differently
stated, the Companies Act in its current form does not allow the amalgamation of an Indian
company with a foreign company where the amalgamated company is not an Indian company.
The proposed Companies Bill, 2009 contains clause 205 which permits the merger of an Indian
company into a foreign company subject to the caveat that the foreign company must be
incorporated in a country which is notified by the Central Government.

24
Ibid.
25
In order for an Indian company to merge with a foreign company, the foreign company is first required to set up an
Indian subsidiary and then have the target Indian company merge with the Indian subsidiary of the foreign company.
26
Singh, Inder Mohan, and Siladitya Chatterjee. "Examination of the Impact of M&A Provisions under the Companies
Bill 2009." Executive View. 22 Aug. 2010. <http://www.executiveview.com/knowledge_centre.php?id=11869>.
27
See s. 3(1)(i) of the Companies Act, 1956 which defines “company” as a company formed and registered under this
Act or an existing company.

12
 STRUCTURING AN M&A TRANSACTION

A business reorganization transaction necessarily involves several legal intricacies which require
to be taken into account. The structure of such a transaction is developed on the basis of the
interplay between financial and legal considerations. In other words, the parties to a transaction
would consider it imperative to arrive at a financially sound transaction that is legally correct.
There are a host of structures that can be imported to a merger/acquisition transaction.

Determining the Merger Value

An important consideration is the value of the proposed merger. The price for the merger
transaction can be paid by the acquirer company to the target company either entirely in cash or
by a combination of cash and securities which may include inter alia subordinated promissory
notes, preferred stock and common stock.28 In the first instance where the adopted structure is a
purely cash-based transaction, unless otherwise agreed to by the companies, the value of the
merger remains unchanged from the date of agreement to the date of consummation of the
merger.29 In the second instance where the monetary value of the securities that constitute the
merger consideration are subject to market fluctuations, either the monetary value of the
securities is held constant or the quantity of security issued is held constant. In other words,
either the quantity of stock sold varies as per price fluctuation or the monetary value of the stock
sold varies but not both.30

The two basic pricing mechanisms in a merger transaction that involves security are fixed
exchange ratio and fixed value pricing. Under the fixed exchange ratio agreement, the acquirer
and the target entity agree upon a rate at which the acquirer’s shares will exchange for the
target’s shares. It logically follows that this approach eliminates variation in terms of quantity of
security that is exchanged between the two entities. Instead, the monetary value for the
transactional equity varies. Contrast this with the fixed value agreement where the acquirer and
target entities agree upon a fixed deal price and allow the quantity of stock exchanged to be

28
Reedy Christopher. “Merger Consideration Structures”. 16 Aug 2010. <http://econ.duke.edu/dje/2001/reedy.pdf>
29
Ibid.
30
Ibid.

13
varied as per price fluctuations. This arrangement however presupposes that the two entities have
agreed to a fixed price per share of the target’s stock.31

Reverse Merger Transaction

A reverse merger transaction is a reorganization structure that allows a private company to go
public with minimal processes. It fundamentally entails the takeover of a public company by a
private company. Instead of engaging an underwriter to market and sell the shares of a company
in an initial public offering (IPO), a private company engages a “shell promoter” to identify a
suitable, non-operating public company.32 Pursuant to this, the private company merges either
with the identified public company or with a newly formed subsidiary of the public company.
Shareholders in the private company are issued a majority stake in the “public shell company” 33
in exchange for shares of the private company. Importantly, the assets (and liabilities) of the
private company are transferred to the public company but are controlled by the private
company’s shareholders.

Asset Purchase
As mentioned earlier, the business of an Indian company may be acquired either through the
purchase of shares of the business or through the purchase of all or some of the assets of the
business. There are several considerations which directly affect this choice – important among
them being convenience and tax liability. The asset purchase structure may be effected in two
ways viz. “slump sale” and “itemized sale”. Under a slump sale, the entire business is transferred
to the acquirer for a lump-sum consideration whereas under an itemized sale, the acquirer has the
option of choosing and purchasing certain specified assets or liabilities.34

Under a slump sale, the acquirer can allocate the purchase price to the various assets acquired in
a manner that ensures maximum benefit on account of depreciation and amortisation under the
Indian tax laws.35 Where the buyer desires to allocate the consolidated purchase price to the
31
Ibid.
32
Sjostrom, William K. “The Truth About Reverse Mergers". Entrepreneurial Business Law Journal, Vol. 2, 2008. 17
Aug 2010. <http://ssrn.com/abstract=1028651>.
33
A public shell company refers to a company which was earlier running operation but has since ceased operations
and liquidated its assets or to a company which was specifically created for the purpose of being a shell.
34
Ibid.
35
Ibid.

14
acquired assets, the accepted practice is that such valuation be done either at fair value or on a
reasonable commercial basis that is generally adopted by tax authorities or on the basis of the
reports by independent valuers. Another important aspect with regards to an asset purchase is
that the cost paid by the acquirer, subject to certain conditions, may be accepted as the
acquisition cost for accounting and tax purposes.36 In fact this is a widely recognized area of
controversy in that the seller may resist a “stepped-up cost basis” in view of tax risks.37

Stock Purchase
An acquisition of a business may also be conducted through a purchase of stock or shares. It is
fairly clear that there is little possibility of stepping-up the cost basis in a stock purchase
transaction. The transaction transfers control over the ownership of the business entity and not
individual assets. In other words, the transfer of ownership of the target company indicates a
transfer of the assets owned by the company to the acquirer. Consequently there is no scope of
separately revaluing the cost of the assets.

A stock purchase assures certain benefits to both the buyer and the seller. The buyer for instance,
can be certain that it has received all assets that it intended to purchase. The seller can be certain
that it has divested itself of all historic and future liabilities of the company including tax
liabilities.38 A seeming disadvantage in a share purchase transaction is that the buyer cannot
“cherry-pick” specific assets in the target company which he seeks to purchase. 39 Further, as
opposed to an asset sale, contracts between the target entity and third parties need not be novated
or annulled.40 This essentially means that the contracting parties remain the same even after the
acquisition. Consequently business operations need not be restarted.

36
Ibid.
37
The seller is inclined to resist a stepped-up cost basis as he will be required to pay tax on the agreed cost of
acquisition. This is discussed in detail under the section on “Tax Implications”.
38
Jamieson, Bill. “Structuring a successful M&A Deal”. 19 Aug 2010.
<http://www.cnplaw.com/en/files/articles/2008/Structuring_a_successful_deal.pdf>.
39
Ibid.
40
It would be well to mention that notwithstanding the fact that the contracts between the target and third parties need
not be novated, many commercial contracts contain a “change of control” clause which allows the third party to
terminate the contract where control of the other party to the contract changes.

15
Reverse Triangular Merger
A reverse triangular merger is a variant of the reverse merger transaction. Under the reverse
triangular merger transaction, the subsidiary of the acquiring corporation merges with the target
entity. The character of the merger is such that the subsidiary’s equity is merged with the target’s
stock. Consequently, the target becomes a wholly owned subsidiary of the acquirer company and
subject to the terms of the transaction, the shareholders of the target entity would get shares of
the acquirer.41 It is of critical importance to note that where the subsidiary of the acquirer
company and the target company merge, it is the acquirer’s subsidiary which ceases to exist and
the target company which survives.42 This intricacy is relevant in that it allows the acquirer entity
to maintain contractual relations and to ensure performance of contracts between the target
company and third parties.43

Forward Triangular Merger

The mechanism of a forward triangular merger is fairly similar to that of a reverse triangular
merger except that instead of the acquirer’s subsidiary merging with the target, in a forward
triangular merger transaction, the target entity merges with the acquirer’s original subsidiary.44 In
other words, the target does not become a direct subsidiary of the acquirer company. The target
ceases to exist as a separate entity and is understood as a subsidiary to the acquirer only because
it had merged into the acquirer’s original subsidiary. An important ramification of a forward
triangular merger structure is that contracts between the target and third parties may be subject to
termination since the target entity ceases to exist.

41
"Reverse Triangular Merger Definition." Investopedia.com - Your Source For Investing Education. 20 Aug. 2010.
<http://www.investopedia.com/terms/r/rtm.asp>.
42
Tomasevich, Kerry. "Forward or Reverse: What's Involved in a Merger?" Mass High Tech Business News. 20 Aug.
2010. <http://www.masshightech.com/stories/2002/12/09/focus7-Forward-or-reverse-Whats-involved-in-a-
merger.html>
43
Had the surviving company been the acquirer’s original subsidiary and not the target company, the “change of
control” clause in contracts between the target and third parties would have taken effect and led to the termination of
a number of contracts.
44
"Forward Triangular Merger Definition." Investopedia.com - Your Source For Investing Education. Web. 20 Aug.
2010. <http://www.investopedia.com/terms/f/ftm.asp>.

16
Demerger
A demerger transaction is the diametric opposite of a merger or amalgamation. A single business
entity is divided into two parts. Under a scheme of demerger, 45 all the assets and liabilities of the
demerging company are transferred to the resulting company in consideration for which, the
shares of the resulting company are issued to the shareholders of the demerging company. Where
a company consists of several undertakings, the demerger transaction is an effective way of
dividing the business and providing for its sale to a third party.

45
See s. 391 – 394 of the Companies Act, 1956. See Also s. 2(19AA) of the Income Tax Act, 1961 which defines
“Demerger”.

17
 CONCLUSIONS AND RECOMMENDATIONS

While talking about the law relating to mergers and acquisitions, it is important that we consider
the incumbent principal statute as well as the principal change to the statute i.e. the Companies
Act, 1956 and the Companies Bill, 2009 respectively. Without a doubt, the Companies Bill, 2009
has brought about significant and material changes to the company law and these changes will be
experienced only when the Bill is brought into effect by Parliament.

The first significant change from the context of M&A activity is that by virtue of s. 201(10) of
the Companies Bill, the ambit of arrangement has been widened to include “takeover offers”.
Earlier this was expressly precluded from the Companies Act. The desirability of this change
stems from the fact that there will now exist a single chain of command to monitor amalgamation
schemes whether by way of merger, acquisition or takeover.

A second significant change is that as per s. 203 of the Companies Bill, the “transferee company”
to an M&A transaction can be a “foreign company” as opposed to the Companies Act where
only Indian companies could be transferee companies. This change is important in that it
facilitates a boost in M&A activity by allowing Indian companies to merge with foreign
companies. This imparts a feel-good factor among foreign companies.

There are however some important caveats. The scope of the “valuation report” required to be
attached to notice convening meetings is also uncertain. Minority shareholders holding less than
10% shareholding have no locus under the Bill to raise objections to the scheme. More
importantly, only those countries that have been notified in the Gazette will be eligible to
participate in M&A activity through their companies as transferee companies. This restriction is
unnecessary for the simple reason that any scheme for merger or amalgamation will be
scrutinized by the Tribunal. The Tribunal in turn is in a position to determine whether the
scheme for whatever reason is prejudicial to Indian public interest.

18
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