Merger Agreement

A merger agreement is a legal document that establishes the terms and conditions to combine the
two or more businesses in to a new single entity. The owners of the merging companies agree to
sell all of their stocks and assets to the newly established company for an agreed upon price. For
example, when two companies X and Y decides to merge and forms new company XY.
Vodafone Idea Limited is an example of a merger where two companies Vodafone India and
Idea Cellular merged together and formed a new entity Vodafone Idea Limited. The merger was
the result of high competition and price war in the telecom industry.

Stages of Merger Agreement

The process of merger of companies in India is not a simple process. It needs the approval of
National Law Tribunal. The process of merger involves various stages which are states in the
Companies Act, 2013. These stages are:

Stage 1: Preparation or Drafting of Schemes of Amalgamation

This is the very first stage of the merger. This document sets out the terms and conditions of the
entire merger process. It contains the followings:

 Preamble
 Definitions and Interpretations
 Share Capital clause
 Transfer and Vesting Clauses
 Legal Proceedings
 Effective and Operative dates clause
 Employees and Staff of the Transferor Company
 Issue of shares by the Transferee Company
 Accounting Treatment
 Clauses for other and general terms
Stage 2: Approval of the Board of Directors

In this stage the drafted scheme is presented before the board of directors and after their approval
only the further stages are possible.

Stage 3: Filing of the Petition before National Company Law Tribunal

After obtaining consent from the board of directors, a petition is filed before the National
Company Law Tribunal for the approval of Scheme of Amalgamation and merger of the
company.

Transferor and transferee submit before the tribunal documents like Memorandum and Articles
of Association, Consent Affidavits filed by the Equity Shareholders, Auditors Certificate stating
out the no. of Secured Creditors, Consent Affidavit filed by the no. of Secured Creditor and other
documents required by the tribunal.

Stage 4: Meetings of the Shareholders and Creditors

The National Company Law Tribunal may reject the petition for a valid reason or otherwise may
direct for the meetings between the Shareholder and Creditors for getting their consent for
merger

Stage 5: Obtaining approval from Regional Director or official Liquidator

No objection from the Regional Director or the Official Liquidator is needed.

Stage 6: Filing of Final petition for approval of Scheme and obtaining the Order

National Company Law Tribunal looks into the entire process and verifies that the all the
processes has been carried out according to the provisions. After checking all the processes if the
tribunal is satisfied then it approves the merger.

Key ingredients for drafting the Mergers Agreement

These are ingredients upon which the success of above mentioned stages are based. A merger
agreement generally consist the followings ingredients.
1. Price and Payment

Pricing is decided in the early stages of discussion through the pre contractual agreements like
term sheet, letter of intent, head of terms or other suitable agreements. The price payment is also
decided what percentage is to be paid upfront and what percentage is to be paid at the closing.

Mode of payment should be also decided upon which the various conditions can be carried
forward to the closing conditions.

2. Escrow/Hold back arrangement

Buyer sometimes requests for the escrow/holdback amount for post-closing the indemnification
claim.

3. Representation and warranties of seller

Representation and warranty by the seller helps buyer complete the due diligence. Buyer checks
the seller’s representation and warranties at the time of selling as well as at the time of closing. It
should be part of the closing conditions in order to avoid any types of disputes. These warranties
and representation can be:

 Operational: completed agreements, Ongoing agreements, Supplier agreement status,

Inventory, Seller agreements which need to be transferred with the deal.
 Financial: Liabilities, Assets, Working Capital, Stocks, and Listings.
 Intellectual Property: Patent used or owned by the seller.
 Intellectual Property Infringements: Not liability with the use of some certain patent.
 Any legal proceedings pending or completed.
 Sellers Liabilities: applicable other than financial.
 Others as per the nature of merger nature and business.

4. Representation and Warranties of buyer

Similar to checking of seller representation by buyer, seller should also check the buyer’s
representation and warranties. Buyer’s representation and warranties may be about:

 Financial standing of buyer to pay the whole amount.

  Authorized representative from the buyer’s side.
 Legal issues if getting affected with the deal.
 Others as per the type of merger nature and business.

5. Pre Closing covenants of seller like:

 Encumbering of assets, Restriction on borrowing or lending, etc.

 for being reasonable in fulfilling closing conditions
 Shareholder/Board approvals for the transaction
 Seller will continue to operate in the similar fashion between signing and closing as it
was operating prior to the signing.
 exclusivity in relationship between parties restricting seller for any other alternative deals
or even discussing unwanted proposals from third parties.

6. Covenants by buyer

 Buyer should make reasonable efforts to complete the transaction and make required
regulatory compliance.
 Covenants guarantying the funds providing equity capital to guarantee the obligations of
the special purpose entity formed to make the acquisition, if private equity buyers are
involved.
 Buyer following the closing, will continue to protect the existing company officers and
directors under existing indemnification agreements and charter protections
 Post-closing tax administration procedures.
 Limitations on issuance of press releases or public information on the deal without
consent of the seller.
 Notifying obligations with regards to any material developments that can affect the
buyer’s ability to consummate the transaction.
 Others as required.

7. Employee Benefits and issues: directors, senior executives and their benefits in terms of perk,
details regarding retention of seller employee, stock issues, in case the seller employees required
to be re-vested, etc.
8. Closing Conditions: closing conditions are conditions which require to be complied before
closing of transaction. It is explained in more detail in the next section.

9. Indemnification provision: misrepresentation, cap on exposure, joint and in case of breach by

seller, several liability, exclusion, etc.

10. Allocation of various risks: as applicable e.g. material adverse effect. Intellectual Property

11. Guarding against the fraud.

12. Termination provision: it is closely related with closing condition, along with general
condition like with prior notice either party can terminate the deal.

13. Dispute resolution: dispute resolution method and hierarchy, mention place, list down all
alternatives in case of separation and penalty.

In case of Rajasthan Network Pvt. Ltd. vs. Synergy Entrepreneur Solutions Pvt Ltd. [2007] 80
SCL 13 the issue was of amalgamation of the wholly owned subsidiary companies with their
holding company, the court dispensed with the requirement of calling meetings.

Conclusion

There can be various reasons for going for merger of company. Some of them are boosting
existing operation, taking the competition out from the market increasing geographical reach,
acquiring superior technology and others as the necessity may be.

Being a high-value transaction, any merger carries larger risks. To address the risk involved and
obtaining relevant governmental and regulatory bodies approval many transaction takes place.
With so many above mentioned variables operating in any merger, drafting a merger agreement
becomes very important since it is the last check by both the parties before closing and it also
provides the remedy for any change in condition.

By Gaurav Kumar

The ICFAI University, Dehradun