Merger and Acquisition

Miracle Ltd is a company that is registered in Nepal and is listed in Nepal Stock Exchange which
is a subsidiary of a company called Wonder Ltd which is registered in the US. It is going to
merge with Marvel Ltd which is registered in Nepal and is an unlisted company.Here both the
companies have 100 employees.Now we have to under that Miracle Ltd is a public company
while Marvel Ltd is a private company as it is unlisted as mentioned above.
Now, here we are required to identify the laws about the specific provision that the companies
must abide by.
The laws that the company should abide by are
● The Company Act,2063
● Securities Act,2064
● Foreign Investment and Technology Transfer Act,2019
● Income Tax Act,2058
●
First of all we know that a merger is a legal consolidation of two business entities into one,
whereas an acquisition occurs when one entity takes ownership of another entity's share capital,
equity interests or assets. A deal may be euphemistically called a merger of equals if both
CEOs agree that joining together is in the best interest of both of their companies. From a legal
and financial point of view, both mergers and acquisitions generally result in the consolidation of
assets and liabilities under one entity, and the distinction between the two is not always clear.

Acquisition occurs when a new company does not emerge.Instead, the smaller company is
often consumed and ceases to exist with its assets becoming part of the larger
company.Companies may acquire another company to purchase their supplier and improve
economies of scale–which lowers the costs per unit as production increases. Companies might
look to improve their market share, reduce costs, and expand into new product lines.
Companies engage in acquisitions to obtain the technologies of the target company, which can
help save years of capital investment costs and research and development.

But as per the legal definitions merger and acquisition are not separated. However as per the
Company Act,2006 has listed out provisions for the merger of the company.

In Company Act, 2006 (CA,2006), Section 177 has listed out provision for merger. And in the
Bank and Financial Institutions Act,2017, acquisition is defined under the ambit of banks and
financial institutions.

Now for merger, we have to look at Section 177 of the CA,2006 which has listed provisions for
merger of a company.
 Section 177 : Merger of a company

1) A public company may, by adopting a special resolution in its general meeting to that effect,
be merged with another company subject to Sub-section (3).
Provided, however, that, in the case of a private company it shall be as provided in its
memorandum of association, articles of association or consensus agreement.

2) A public company, upon merging into a private company or a private company, upon merging
into a public company shall stand as a public company.

3) If a resolution for merger is adopted pursuant to Subsection(1),such company shall, within

thirty days , make an application, setting out the following matters to the Office for approval:

(a) In the case of a public company, a copy of the decision of the general meeting as referred to
in subsection (1) ,and in the case of private company , copies of the related provisions
contained in the memorandum of the associations, articles of the associations, or consensus
agreement authorizing the merger;

(b) Last balance sheet and auditors report of the merging company;

(c) A copy of the letter of consent in writing, of the creditors of the merging company and of the
merged company;

(d) Valuation of the movable and immovable properties of , and actual details of the assets and
liabilities of, the merging company;

(e) If the merging company and merged company have made a decision as to the creditors and
employees and workers of the merging company, a copy of such decision;

(f) The scheme of arrangement concluded between the companies for merger with each other.

4) Where the information as referred to in Sub-section(3) is given to the Office, it shall study the
matter given information and give its decision within three months .

5) On receipt of an approval from the Officer for merger pursuant to Sub-section (4) , all the
assets and liabilities of the merging company shall be deemed to have been transferred to the
merged company.
6) The office shall maintain separate records of the merging company in the company
registration book.

7) Except as otherwise provided in the memorandum of association, articles of association or

consensus agreement of the company, a shareholder who does not express his/her consent in
writing to the unification or merger or alteration in, or transfer of, shares of the company or the
sale of entire assets of the company shall be entitled to get the company’s assets valuated prior
to such unification, merger or alteration in or transfer of shares or sale of assets and get return
of the amount in proportion to the shares held by him/her from the merging company.

8) Notwithstanding anything contained elsewhere in this Section, the Office shall not give
approval for the merger of a company.

As per the CA,2006, after holding an AGM and passing resolutions, one of the public companies
merged with another company in accordance with the provisions of the Company Act 2063.If an
AGM approves a proposal to merge with another company, the decision must be recorded.The
audit report and the most recent record of the company that will be merged, a photocopy of the
written consent letter of the company owners who will be merged and are merging.Valuation of
the merging and merged companies movable and immovable property, a detailed report on
property and liabilities, workers of the merging and merged companies. The provision states
that if the decision is about employees, a photocopy of the decision must be submitted with the
application within 30 days for approval.

There is also a prohibition on making decisions that are harmful to service conditions, workers,
or employees.OCR must begin its investigation after receiving notice of the merger and notify its
decisions within three months of receiving notice of the merger.

Following approval, the merged company’s assets and liabilities are to be merged into the
company that is merging it.

Also, The Income Tax Act of 2058 (2002), has also listed out some provisions to encourage
merger.

In the case of retirement from services in groups following the merging process, there is a
provision for a 50% discount on the deduction of retirement pay for the additional one-time
payment purpose.

After the two-year merger process is completed, there is no capital gains tax on profits earned
from the sale of a merged institution’s share.There is a provision for no taxation on profits
distributed to its shareholders who remained shareholders before the merger process began,
and the merger process has now lasted two years.

Also we have to see that the Acts that govern banks and other financial institutions, Banks and
financial institutions may be merged or merged with one another under sections 68 and 69 of
paragraph 10 of the Banks and Financial Institutions Act 2063.

There is a provision for submitting a joint application to the Nepal Rastra Bank for approval after
a special resolution is passed at the AGMs of the banks and financial institutions that wish to
merge with the institution.
Some Bylaws Pertaining to Mergers have listed the provisions to ensure a smooth merger
process, Nepal Rastra Bank has introduced the Implementation Act relating to the Merger of
Banks and Financial Institutions 2068.

The Bylaws outline the objectives for merger or merging, such as:

● Increasing public trust and moving the banking and financial systems forward.

● To make the banking and financial system self-governing, secure, healthy, and
competent, as well as to ensure the banking sector’s autonomy and customer protection.
● Increasing competitiveness by strengthening the capital base of the banking system.
● To enhance the banking, financial, human resource, and technical capabilities of banks
and financial institutions.
● To provide the most up-to-date banking services to the general public.
● To protect the interests of investors.
● To make the banking and financial system self-governing, secure, healthy, and
competent, as well as to ensure the banking sector’s autonomy and customer protection.
● Increasing the banking system’s capital base to boost competitiveness.
● To enhance banks’ and financial institutions’ banking, financial, human resource, and
technical capabilities.
● To provide the general public with modern banking services.
● To safeguard the interests of investors.

There is a provision in the law that requires Nepal Rastra Bank to notify applicants whether or
not the merger process will be granted within 45 days of receiving the application from the
institutions that will be merged. There is a provision for waiving some issues based on necessity
and outlined issues to encourage and smooth the merger process. There is a provision to
maintain the capital structure as outlined in current law for possible changes to the capital
structure following the merger of the institutions.

Following the calling of their AGMs, there is a provision for authorizing the promoters’
committee, as well as the proposed work plans, as well as the time frame for the merger
process for institutions that wish to merge.A provision in Nepal Rastra Bank requires a
discussion within 15 days of the joint application’s submission, as well as the decision of the
board of promoters of banks and financial institutions and the proposal of merger of the
participating banks and institutions.

The Securities Board of Nepal has the authority to halt the institutions’ share transactions once
the merger process has begun. The merger of banks and financial institutions promotes the
development of the banking and financial system, as well as healthy competition, and Nepal
Rastra Bank has a provision granting principal mutual understanding to begin the merger
process when it is discovered to have had a positive impact on the observance of current
legislation.
Following the principle of mutual understanding, the merged institutions should conduct a due
diligence audit (DDA) of their property, liabilities, and previous transactions, as well as a detailed
analysis of the impacts of the merged institutions’ stipulated subjects and recommendations.
There is no capital gains tax on profits earned from the sale of a merged institution’s share after
the two-year merger process is completed.

There is a provision for no taxation on profits distributed to its shareholders who remained
shareholders prior to the merger process, which has now lasted two years.

If the promoters’ shareholdings exceed the maximum limit after the merger, they have five years
to bring them back into compliance. The regular loan money that was flowed prior to the merger
process and if it is possible of going against the Nepal Rastra Bank’s directions and whichever
comes first the dates; the payment date or the three years time period until that period a time is
granted.

If the total domestic loan component of resource mobilization (domestic deposits and primary
capital) exceeds 80% after the merger, there is a provision for reducing it to 80% within three
years.

The promoter who owns more than 1% of the promoter’s share or the shareholders of the
promoters group can put their promoter’s share on collateral and take loan then there is a
provision of bringing within the limit of 50% of total shares and it has extended the time period in
such provision by 3 years.

If the disadvantaged groups are unable to comply with the loan-related provisions as a result of
the merger, they are given a three-year grace period.

Following the merger process, if an investment in any of the organized institutions’ shares or
debentures exceeds the 10% limit, a two-year period is provided to bring such investments
within the limit.

If the upper groups want to become working sector institutions after the merger and submit a
quality upgrade application, a priority for the expansion of working areas is granted based on
the infrastructure in place and the necessary processes completed.

There is a provision for implementing the necessary plans relating to current employees or for
removing the impediments that arise as a result of the merger work in the provisions relating to
the Executives’ wages and the institution’s employee benefits.

For the penalty levied on the liquidity benefits after merger approval for a three-year period,
there is a 50% discount along with the benefits of using permanent liquidity for the first 30 days.

General loans are offered a 1% discount off the current interest rate for the three years of the
merger process. Both voluntary and involuntary mergers have been incorporated into the
bi-regulations. If unfavorable financial relations persist as a result of investments from the same
groups.

When it is determined that the current operation of any institution is having a negative impact on
the overall financial system, and when one or more institutions of systematic importance are
merged, the overall financial system improves, relevant directions or recommendations are
provided for the merger process in accordance with Section 12.

So here as per our case, Miracle Ltd, a public company

should conduct a general meeting for the merger process while for Marvel Lyd, clauses for
merger or merger to be allowed have to be listed in their companies’ Article of Association (
AoA) and Memorandum of Association ( MoA) or should finalize it by consensus calling. In
public companies there are large numbers of stakeholders whose rights are prioritized highly. In
private companies, AoA, MoA and consensus agreements will have signatures from each board
member which provide confirmation in the decision of a company.
The office should maintain a separate record of merging companies in the company registration
book whose aim is to keep record of the target company.

Alao under Foreign Investment and Technology Transfer Act,2019, foreign ownership in local
companies are regulated and depending on size and nature of investment
approval is required from the Department of Industry. Certain fields where foreign investment is
not allowed are :
● Poultry,fishing,bee-keeping, and such agro products,
● Cottage and small scale industries,
● Personal services businesses,
● Real estate companies,
● Arms,ammunition manufacturing companies.

More laws are also looked upon depending upon the circumstances, such as:
● Foreign Investment Laws
● Industry Regulations
● Competition Laws
● Arbitration Laws
● Merger Bylaws, 2068.

B.

The authorities that the merger company have to approach are as follows:

● Nepal Stock Exchange

● SEBON
● Nepal Rastra Bank
● OCR
 ● Department of Industry

SEBON:

Following the merger of these two companies, the newly formed company will be a public
company, and SEBON will play a critical role. It operates under the Securities Acts . SEBON has
been given the power to regulate and manage the activities of the securities markets and
persons involved in the business of dealing in securities by regulating the issuance,
purchase,sale and exchange of securities for the purpose of protecting the interests of investors
in
securities, by developing the capital market to mobilize necessary capital for the economic
development.SEBON has authority to halt the institutions’ share transactions once the merger
process has begun.
Some of its characteristics are : :
● To register the securities of any corporate body established with the authority to make a
public issue of its securities.
● To regulate and systematize the issue, transfer, sale and exchange of registered
securities
● To regulate and make transparent the act of acquiring the ownership of a company
thereby gaining control over its management by purchasing its shares in a single lot or
in several lots.
● To grant a permission to operate collective investment schemes and investment fund
programmes, and to regulate and monitor the same.
● To monitor the post transaction integration and performance of the merged or acquired
company to ensure compliance with securities laws and regulations.

Nepal Rastra Bank:

Nepal Rastra Bank (NRB) has undertaken the financial consolidation policy in order to
overcome these problems. Merger and Acquisition (M&A) is one of the efficient
measures of consolidation in the financial system. The Government of Nepal has been
promoting mergers as a means to achieve efficiency through economies of scale and scope by
facilitating a consolidation between weaker and stronger banks to create an efficient and robust
merged entity.

Merger and Acquisition is a relatively new concept to the Nepali Banking and Financial
Institutions (BFIs). Nepal Rastra Bank introduced the Merger Bylaw 2068 (B.S)
grounded on the Company Act 2063(B.S) article 177, BAFIA 2063 (B.S) article 68 and 69, and
encouraged all the BFIs to undergo merger as a consolidation. Laxmi Bank,
Nepal Bangladesh Bank, and Narayani National Finance were among the few institutions to
have undergone the merger process before the announcement of the bylaws. Through the 2015
monetary policy, NRB announced a four-fold hike in the minimum paid up capital of the
commercial banks and up to twenty-four-fold increment in the same for the development banks.
This required the commercial banks to increase their paid-up capital to Rs. 8 billion while the
national level development bank would have to increase to Rs.2.5 billion. The requirement
imposed by the banking regulator has further enhanced the conditions to foster the merger and
acquisition process; the wave of M&A, that started as early as 2011, has hit Nepali BFI sector.
As of June 2016, 96 BFIs have taken part in the merger process to become 35 (NRB, 2016).

OCR:

Since OCR is the regulatory body, the approval from OCR is most important for the merger
process. The power and function of OCR in the merger process is illustrated in company act
section 177. As per sub section 4, after submitting the necessary document as stated above,
OCR will give its decision within three months.Sub section 5 states that on receipt of the
approval from OCR, all the assets of Miracle Ltd will be deemed to have been transferred to the
Marvel Ltd.

OCR will now maintain the separate record of the company in the registration book so as to
acquire the data whenever required. As per subsection 8, OCR has power to reject the merger
process if such merger appears to create a monopoly or unfair trade restriction or to be contrary
to public interest.