LLB 4th by Deepak Kumar Khatiwada

Amalgamation

Amalgamation is a process of combining or uniting different companies as single entity. If two or

more companies are combined to form a new company that process is called amalgamation. This is
relatively less used term in practice but we find use of this in legal text. Term like merger, acquisition
or takeover are familiar word used to indicate the process of amalgamation.

According to Halsbury's laws of England:

Amalgamation is a blending of two or more existing undertaking into one undertaking, the
shareholders of each blending company becoming substantially the shareholders in the
company which, is to carry in the blended undertaking. There may be amalgamation either by
the transfer of two or more undertakings to a new company, or by the transfer of one or more
undertakings to an existing company.

Amalgamation signifies the transfer of all or some part of the assets and liabilities of one, or more
than one existing company to another existing company or of two or more existing companies to a
new company of which transferee company all the members of transferor company or companies
become, or have the right of becoming, members and generally, such amalgamating is accomplished
by a voluntary winding up of the transferor company or companies.

Amalgamation is a union of two or more companies, made with an intention to form a new company.
In the term of finance amalgamation is an agreement / deal between two or more companies to
consolidate (strengthen) their business activities by establishing a new company having a separate
legal existence.

Merger

Merger is defined as combination of two or more companies in to a single company whether one
survives and the other lose their corporate existence the survivor acquires the assets as well as
liabilities of the merged company or companies.

In a merger two companies come together and create a new entity and the result is a legal
dissolution of one of the companies, i.e. two companies agree to go forward as a single new company,
rather than remaining separately owned and operated.

A merger is combination of two or more business in to one business. Laws in Nepal use the term '
amalgamation' for merger. In Companies Act, 2063 and Bank and Financial Institutions Act, 2073,
there is provision of merger which can be possible only after the consent of both companies. The
Companies Act, 2063 makes some provision in this regard.

Legal Provision of Companies Act,

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 According to Section 177 of the Act following companies can be amalgamated with each other
after fulfilling the condition after passing the special resolution for this effect by the company which
is going to be amalgamated. In case of private company, it is the memorandum and article of
association which determine the process.

If any amalgamation is held between public and private company, the new company will be the public
company. After the decision of both companies to be merged, it is necessary to apply to the office of
the company Registrar for the permission enclosing following documents;

 In Case of public company, the decision of the general meeting and in case of private
companies the provision of memorandum and article of association for this effect.

 Auditors' report and last balance sheet of the company which is going to be amalgamated.

 A copy of written consent of the creditors of both amalgamated and amalgamating company.

 Evaluation of the movable and immovable property, and real particulars of assets and
liabilities of the company which is going to be amalgamated.

 Copy of decisions if any, between two companies about the creditors and employees or
workers of the company which is going to be amalgamated.

 Skim of arrangement for amalgamation.

To end up the word "Merger" may be taken as an abbreviation which means.

M ––––– Mixing

E ––––– Entities
R ––––– Recourses for
G ––––– Growth
E ––––– Enrichment and
R ––––– Renovation

Acquisition

Normally Acquisition means to purchase. In Company law, acquisition denotes all the transaction
whereby amalgamating or transferor company and amalgamated or transferee company are unified
where by way of true merger of the interest of the two companies.

In an acquisition the negotiation process does not necessarily take place. In an acquisition Company A
buys company B. Company B becomes wholly owned by company A. Company B might be totally
absorbed and cease to exist as a separate entity, or company A might retain company B in its pre-
acquired form. In acquisitions the dominant company is usually referred to as the acquirer and the
lesser company is known as the acquired. The lesser company is often referred to as the target up to
the point where it becomes acquired.

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Acquisitions can be friendly or hostile. In the case of a friendly acquisition the target is willing to be
acquired. Hostile acquisitions are sometimes referred to as hostile takeovers. Acquisition in general
sense is acquiring the ownership in the property. Acquisition is the purchase by one company of
controlling intrest in the share capital of another existing company. These means change in the
management of both the firms retain their separate legal identity.

Consolidation

Consolidation is known as the fusion of the existing companies in to a new entity in which both
the existing company extinguish.. Thus consolidation is mixing up of the two companies to make
them into a new one in which both existing companies lose their identity and cease to exist. The mixes
up assets of the two companies are known by a new name and the shareholders of two companies
become shareholders of new company.

Combination

Combination refers to mergers and consolidation as a common term used interchangeably but
carrying legally distinct interpretation. All merger, acquisition, and amalgamations are business
combination

Takeover

Takeover is a general term used to describe the acquisition by one company of control over
another, usually by buying all or majority of its shares. The company which wants to control over
another is called "Offerror Company" and the company which is going to be taken is called "Target
Company". An offer addressed to all the shareholders of a company to buy the share of each member
at a stated price is known as a takeover bid. A takeover bid is a technique for affecting either a
takeover or an amalgamation, in the case of a takeover; the bid is frequently against the wishes of the
management of the "offeree company".

The other way of amalgamation is the takeover. This is a market based mechanism where one
company takeovers the management of other company by purchasing share from market. This process
can be the completed in either of the consent of the later company or without consent. If it is
completed with consent the process is called friendly takeover and if the process completes without
consents is known as hostile takeover.

A takeover generally involves the acquisition of a certain block of equity capital of a company
which enables the acquires to exercises control over the affairs of the company. Normally merger,
amalgamation, acquisition, takeover are used interchangeably.

Bank & Financial Institution 2073 section 69 to 74

Methods of Merger

Merger could be done by various ways. The following types merger are mainly practiced.

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1. Merger by purchase of shares: Under this methods one company will purchase the share of
another company and merged with it.

2. Merger with holding company: Holding company merged with its parent company.

3. Merger under a scheme agreement or compromise: Both companies develop same scheme of
agreement and will merge one company up on another.

4. Merger by scheme of winding up: Under this methods one company will be wound up and
another company will under take the entire assets and transaction of that company.

5. Merger by exchange shares followed by winding up: One will issue its share to the shareholders
of another company in exchange of their share and that company will be wound up.

6. Merger by public interest / By the order of Government: In India central Government may
order companies to merged with another.

In Nepal The NRB shall give order to the problematic BAFIs to transfer its property and liabilities
this order is full and final no any appeal or complain entertain against this order. 86 j / 86 m.

In Nepal mergers are regulated under the Companies Act and BAFI Act. With the
enactment of the CPMPAct 2007, mergers also come within the ambit of this legislation. The
Combination is an umbrella term used in the CPMPAct 2007, which includes every kind of
mergers, amalgamations and acquisitions under its ambit.

The Competition Act has laid emphasis on regulating these combinations in order to
prevent any anti-competitive practices. The Section 5 of the Act defines combination of
enterprises as formed through acquisition, merger or amalgamation. The Combination s has
been defined to mean:

Section 5. Prohibition on merger or amalgamation with intent to control competition:

No enterprise that produces or distributes any goods or services shall, with intent to
maintain monopoly or restrictive trade practices in the market, merge or amalgamate
with another enterprise that produces or distributes the similar or identical goods or
services or purchase, either singly or jointly with its subsidiary enterprise, fifty percent or
more of the shares of such enterprise or take over the business of such enterprise.

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Explanation: For the purposes of this Section, where a merger, amalgamation, share
purchase or take over of persons or enterprises that produce or distribute any goods or
services of a similar nature results in more than forty percent of the production or
distribution of the total production or distribution of such goods or services within the State
of Nepal, such merger, amalgamation or take over shall be deemed to have been made with
intent to control competition.

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Types of Merger and Acquisitions

There are mainly four types of merger and acquisition which are driven by different corporate
strategies. They are categorized into horizontal, vertical ,conglomerate and reverse mergers. Each of
the types possesses characteristics at the outset.

Horizontal Mergers

Horizontal mergers is a combination of two or more firms in the same area of business. Horizontal
merger is a merger of two companies which are essentially operating in the same business. The main
purpose of this merger is to obtain economy of scale in production by eliminating dublication of
facilities, reducing of competition, reduction of cost, increase in share price and market segments.

For example , the joining of Two sugar mills is horizontal merger. The merger of two or more
companies where all of them are producing the same commodity or similar services or trading in same
markets is called horizontal merger. It will simply enhance or expand market for the commodity or
service which they are trading.

Vertical Mergers

Vertical merger is a combination of two or more firms involved in different stages of production or
distribution of the same product. It is a merger of one company with another having different stages of
production / distribution process of the same product / service. In short the merging companies are
engaged in different stages of production or distribution. The main objective is to increase
profitability by the previous of distributors.
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Conglomerate Merger

Conglomerate merger is an amalgamation of two companies engaged in different line of business, in

other words, the merging companies are engaged in divers business activities. For example, any Sugar
mills merger with any Banking company and Cotton Industries merged with Education company.

This type of merger may also reduce the number of smaller firms and increase the merged firm's
political power, thereby impairing the social and political goal of independent decision making centre
guaranteeing small business opportunities and preserving democratic processes.

Reverse Merger

Reverse merger is a merger of an ordinary merger, achieved the same general industry but in the same
line of business. In case of a reverse merger a healthy company mergers into a financially weak
company and the former company is dissolved. For example the merger of machine tool manufacturer
with the manufacturer of industrial conveyor system.

Motives/ Pros and Cons of / for Merger and Acquisition

Merger and Acquisition has become a corporate strategy enabling a firm to strengthen its core
competencies. The factors affecting mergers change with their changing legal, political, economical
and social environments. Firms engage in a merger and acquisitions activity for different economic
reasons. The most common motives of firms for mergers and acquisitions are discussed below:

Synergy

Synergy is commonly used in a merger and acquisitions activity. Synergy has been described as
the combined firms have a value that is greater than the sum of the values of the separate firms.

Hypothetically the underlying principle of synergy is 2+2=5, or 5+5=11 which is technically

incorrect. However, it is believed that the net positive gain will be achieved resulting from the merger
of two separate entities. Synergy can be produced as operational, managerial and financial synergies.

Revenue Enhancement

According to Ross et.al “One important reason for a merger or acquisition is that the combined firm
may generate greater revenues than two separate firms”. The increase in revenue may come from
marketing gains, strategic benefits, and increase in the market power. Enhancing the revenue of
companies can be done by market gains, strategic benefits, and market power.

Cost Reductions

Many merger and acquisition are undertaken with the belief that a merged firm may operate more
efficiently than two separate firms. A firm can obtain cost reductions in several ways through a
merger or an acquisition.

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For example, airline companies have purchased hotels and car rental companies. Vertical integration
of companies may have a significant impact on companies to reduce cost, to improve supply chain
operation, and in increasing the profit margin.

Tax Gains

There are various ways that companies may lower their taxes through merger and acquisition activity.
In many cases, a state government and its corporate bodies encourage companies opting for merger by
imposing a flexible tax rate system. Some firms choose to merge with another company that has net
operating losses. The combined firm will have lower tax liabilities than the two firms operating
separately.

In another case, whenever there is an acquisition of assets rather than shares, the assets of the acquired
company firm will be revalued. If the value of the assets is increased, the tax deductions for
depreciation will be a benefit.

Gain in market Share

Merger and Acquisitions can prove to be really beneficial to the companies when they are weathering
through the tough times. If the company which is suffering from various problems in the market and
is not able to overcome the difficulties, it can go for an acquisition deal. If a company, which has a
strong market presence, buys out the week firm, than a more competitive and cost efficient company
can be generated.

Disadvantage of Merger and Acquisition

In stated above motives/ advantages of merger are by no means inconsiderable and as compared with
them the disadvantages are, indeed very few. Yet some of them, which are in essence complications
arising out of the privilege of merger and acquisitions , deserved to be pointed out.

a. Higher Prices : A merger can reduce competition and give the new firm monopoly power..
With less competitions and greater market share, the new firm can usually increase price for
consumers.

b. Less Choice : A merger can lead to less choice for consumers.

c. Job Losses : A merger can lead to job losses. This is a particular cause for concern if it is an
aggressive takeover by an 'asset stripping' company . A firm which seeks to merge and get rid
of under-performing sector of the target firm.

d. Diseconomies of Scale.: The new firm may experience dis-economies of scale from the
increased size. After a merger, the new bigger firm may lack the same degree of control and
struggle to motivate workers. If worker feel they are just part of a big multinational they may
be less motivated to try hard.

Distinction between Merger and Takeover

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The following Points show the main distinction between
Merger
1. The shareholding in the combined enterprise
will be spread between the share holders of the
two company.
2. Both companies must be active in merger.
3. Generally, it is done with the consent and
desire of management of the company which
merged with other.
4. The terms of negotiation with the shareholders
of target company is settled collectively.
Takeover
1. There will be direct or indirect control over the
assets of the acquired company in the process of
acquiring.
2. One company is active and another is silent,
Target company always silent and bigar company
acquire the assets of target company.
3. Generally, it is against the will or desire of
management of the company which was taken by
another.
4. The term of negotiation with the shareholders
of offeree company is settled individually.