Arrangement, Compromise and Amalgamations

Corporate Law II
Terminology
Business Terminology rather than Legal Overlapping use in Transactions with
often the Same Result. Freedom to structure transactions No proper de nitions in
the Law. Why? Section 230 CA 2013- Arrangements and Compromise Section
232 CA 2013- Amalgamations.

Compromise or Arrangement?
S230- Silent on Definition of Compromise Arrangement de ned as including
‘reorganisation of the share capital of the company by the consolidation of
shares of different classes, or by the division of shares into shares of different
classes or by both of those methods. Are they the same thing? NO (See Re:
Kohinoor Mills) Compromise postulates existence of a dispute and giving and
taking on either side. Arrangement is something by which parties agree to do a
certain thing notwithstanding the fact that there was no dispute between the
parties. Cannot be construed narrowly. (Shares being taken over could
potentially be structured as an arrangement between company and its own
shareholders). “It has now been established that the compromise and
arrangement covered by section 391 are of the widest character ranging from a
simple composition or moratorium to an amalgamation of various companies
with a complete reorganisation of their shares and loan capital.”

Parties to a Scheme of Compromise or Arrangement

Usually an ‘Internal’ Process. But not necessarily so!!! Between a Company and
Members (or any class of them) Between a Company and Creditors (or any
class of them) What is a Class? Homogeneity of Interest, must be affected
identically. Will depend on facts of the proposed transaction Miheer Mafatlal v
Mafatlal Industries -sub-class part of same class if terms of scheme offered to
both is same Why are Classes important? Who decides the Class?

Meeting of Classes
1. Company/Creditor/Member/Liquidator makes application to NCLT to hold
meeting. Must make disclosures.
2. NCLT orders meetings- to be called, held and conducted in such manner as
tribunal decides.
3.Requirements as to notice in S 230(3) must be followed: Notice to creditors,
shareholders, debenture-holders, website and if listed SEBI, Stock Exchanges
and newspapers. Notice to Regulators- S 230 (5) 3. At meeting: 3/4th in value of
shareholders/creditors/class of them must agree to compromise/ arrangement
(Voting in person/proxy/by postal ballot) BUT CONSENT OF CREDITORS/
SHAREHOLDERS/ CLASSES OF THEM IS NOT SUFFICIENT!!!!

When is a Scheme Binding?

CONSENT AT MEETING OF SHAREHOLDERS/ CREDITORS/ CLASSES
OF THEM + SANCTION OF THE NCLT Both Requirements are Mandatory!!!
After Meeting, Scheme is presented to the NCLT to sanction the Scheme.

Sanctioning Power of the NCLT

Re: Kohinoor Mills –
Court has discretion to accord sanction.
To accord such sanction, Court will need to be satisfied of three things:
(i) that the statutory provisions have been fully complied with;
(ii) that the class or classes must have been fairly represented; and
(iii) that the arrangement must be such as a man of business would
reasonably approve.
Limitations on the Sanctioning Power:
(i) The court has no power to sanction something which the parties could
not do by agreement.
(ii) The court cannot sanction an act being done if the law permits it only
subject to conditions and the agreement seeks to dispense with those
conditions.
(iii) The court would not ordinarily sanction a shame which includes
something which can ordinarily be affected by resort to other
provisions of the Companies Act.
Within the limitations set out above, the court will allow the companies the
greatest freedom in devising schemes to suit their requirements and will
approve those schemes if they are fair to all whose interests are affected.
 Statutory Power of NCLT
Section 231 (1) Where the Tribunal makes an order under section 230
sanctioning a compromise or an arrangement in respect of a company, it—
(a) shall have power to supervise the implementation of the compromise or
arrangement; and
(b) may, at the time of making such order or at any time thereafter, give such
directions in regard to any matter or make such modifications in the
compromise or arrangement as it may consider necessary for the proper
implementation of the compromise or arrangement.

Mergers and Amalgamations

Necessitates two or more Companies
Under an amalgamation, merger or takeover, two or more companies are
merged either de-jure by a consolidation of their undertaking, or de facto by the
acquisition of a controlling interest in the share capital of one by the other or of
the capital of both by a new company. (Re Kohinoor)
Types of Mergers:
Section 232, Explanation:
(i) in a scheme involving a merger, where under the scheme the
undertaking, property and liabilities of one or more companies,
including the company in respect of which the compromise or
arrangement is proposed, are to be transferred to another existing
company, it is a merger by absorption, or where the undertaking,
property and liabilities of two or more companies, including the
company in respect of which the compromise or arrangement is
proposed, are to be transferred to a new company, whether or not a
public company, it is a merger by formation of a new company;

Section 232
• Mandates a Transferor and a Transferee Company
• Requirement that ‘under the scheme, the whole or any part of the undertaking,
property or liabilities of any company (hereinafter referred to as the transferor
company) is required to be transferred to another company (hereinafter referred
to as the transferee company), or is proposed to be divided among and
transferred to two or more companies.’ (S 232 (1)(b))
• Both Companies must make Application in their own jurisdiction.
• Same Requirements as to meetings as in Section 230
• Power of NCLT to make various types of orders (Section 232(3))
• Power and Jurisdiction of NCLT to Sanction amalgamations

Miheer H Mafatlal v Mafatlal Industries Limited [1996]

(SC)
Scheme of Amalgamation approved in meetings. Objection by Mr. Miheer
Mafatlal- Director of MFL, SH of MIL.
5 main arguments made:
1. Explanatory Statement at meeting not a complete Statement (did not disclose
special interests of directors)
2. mainly Mr Arvind Mafatlal who he claimed was at the ‘helm of affairs’).
3. Suppression of Minority Shareholders by majority
4. Mr. Mafatlal constituted a separate sub-class (Class within a class of equity
shareholders) because of the family arrangement of 1979 and so should have
own meeting.
5. Share Exchange Ratio was not suitable Mafatlal Fine Spinning &
Manufacturing Company Limited (Transferor) Mafatlal Industries Limited
(Transferee)

Court’s Decision
1. Court stressed that special interest of directors applicable where the special
interest meant that the director was being put in a different position as a result of
the compromise. A personal family dispute that did not mean director not
affected differently would not be counted as valid here.
2. Arvind Mafatlal could not be considered at ‘helm of affairs’ based on
shareholding structures. Also, Appellant’s actions were looked at- not objected
in Bombay in capacity of director of MFL (Transferor) and not attended
meeting in Gujarat (sent proxy).
3. Minority Shareholders as a class were not affected- their interests not
suppressed.
4. If scheme is offered to a class and no separate scheme is offered to a sub-
class and it does not affect the interests of the sub-class differently, then no
question of constitution a separate sub-class. It is upto the company to constitute
the classes and separate classes when interest are different/ are treated
differently by the scheme.
5. Court will not be involved in deciding the validity of an exchange ratio if an
expert’s view had been involved, unless the party could satisfy the court that the
price offered is unfair. (Set out contours of Court’s Jurisdiction)

Contours of Court’s Jurisdiction (as per Mafatlal).

1. Sanctioning Court must see all statutory proceedings and meetings are
complied with.
2. Must be satis ed that the Scheme is backed by the majority vote.
3. Meetings must have had all relevant material and the majority decision was
‘just and fair’ so as to bind dissenters.
4. All necessary material (disclosures) indicated by 391 (230) had been
provided.
5. Scheme not violative of public policy or any provision of law (can lift the veil
of corporate purpose)
6. Members/Class/Creditors acting bona de and in good faith
7. Scheme is ‘just, fair and reasonable’ from the point of view of a prudent man
of business taking a commercial decision.
8. Once these are established- Court will have no further jurisdiction to sit in
appeal over commercial wisdom of majority of class who have given their
approval. Court’s jurisdiction is peripheral and supervisory, NOT APPELLATE!

Types of Mergers
1. Cross-Border Mergers
2. Fast Track Mergers
3.Merger by absorption
4. Merger by formation of a new company

Fast Track Mergers

Section 233 of the Companies Act, 2013 introduces the globally accepted
concept of Fast Track Merger Process which introduces a slightly simpler
procedure for mergers and amalgamations of certain classes of companies
including small companies, holding and subsidiary companies. Under this
process, it enables these companies to undergo merger and amalgamation
procedures quickly, simply and within fixed time duration. The Companies Act,
2013 clearly notifies that it applies to all kinds of compromise and arrangements
that involve these companies.
The draft scheme requires:
1. Approval of Board of Directors of both companies.
2. 90% of shareholders (in number) and 90% of creditors (in value).
3. Central Government (power delegated to Regional Director)
The following are the mandatory requirements for the facilitation of the fast-
track merger process:
The scheme must be filed with the Jurisdictional Registrar of Companies (ROC)
as well as the official liquidator. Convening a meeting of members and creditors
to obtain approval. The creditors meeting can be avoided if they readily provide
their consent in writing. The filing of a declaration of solvency by both the
involving companies. Fast Track Merger process has facilitated the procedure
by removing the following requirements There is no requirement to submit an
auditor’s certificate. Now, there is no need to file the scheme before the
National Company Law Tribunal (NCLT). The estimated period for the fasttrack
procedure has been allotted to 90-100 days. The procedural details for the Fast
Track Merger process are set down under the Companies (Compromises,
Arrangement & Amalgamation) Rules, 2016.
CLASSES OF COMPANIES COVERED UNDER THE FAST-TRACK
MERGER ROUTE (APPLICABILITY AND ELIGIBILITY)
A scheme of merger or amalgamation under section 233 of the Act may be
entered into between any of the following class of companies, namely: —
Two or more start-up companies; or
One or more start-up company with one or more Small Company;
Merger between two or more Small Companies;
Merger between a Holding Company and its Wholly-owned Subsidiary
Company.
Explanation: For the purpose of this sub-rule "Start-up Company" means a
private company incorporated under the Companies Act, 2013 or Companies
Act, 1956 and recognised as such in accordance with Notification number
G.S.R. 127 (E), dated 19th February, 2019 issued by the Department for
Promotion of Industry and Internal Trade.
"Small Company" means a company other than a public company paid up share
capital of which does not exceed fifty lakh rupees or such higher amount as may
be prescribed which shall not be more than ten core rupees and turnover of
which as per profit and loss account for the immediately preceding financial
year does not exceed two crore rupees or such higher amount as may be
prescribed which shall not be more than one hundred crore rupees.
Provided that nothing in this clause shall apply to – A Holding company or a
subsidiary company A Company registered under Section 8. A company or body
corporate governed by any special Act.

Acquisitions (Takeovers)
Takeover laws have been enacted by most of the countries, prescribing a
systematic framework for acquisition of stake in listed companies, thereby
ensuring that the interests of the shareholders of listed companies are not
compromised in case of an acquisition or takeover. Protection of the interests of
minority shareholders is a fundamental corporate governance principle that
gains further significance in case of listed companies. Highest standards of
corporate governance and transparency ought to be ensured in the management
and operation of companies that have public participation as the public
shareholders rely on the management and the promoters while investing in the
company. The takeover regulations ensure that public shareholders of a listed
company are treated fairly and equitably in relation to a substantial acquisition
in, or takeover of, a listed company thereby maintaining stability in the
securities market. It is also the objective of the takeover regulations to ensure
that the public shareholders of a company are mandatorily offered an exit
opportunity from the company at the best possible terms in case of a substantial
acquisition in, or change in control of, a listed company.
Securities and Exchange Board of India (Substantial Acquisition of Shares and
Takeovers) Regulations, 2011 (often referred to as the “Takeover Code”),
regulate the acquisition of stake in Indian listed companies and ensure
transparency in the affairs of the company. Further, the interests of the public
shareholders are protected by the Takeover Code by obligating the acquirers to
mandatorily provide an exit opportunity to the public shareholders in case of a
takeover or substantial acquisition. Also, the Takeover Code seeks to ensure that
the securities market in India operates in a fair, equitable and transparent
manner.
Defining Acquisition –
The occurrence of an ‘acquisition’ is the pivotal determination under the
Takeover Code pursuant to which the obligations under the Takeover Code are
triggered. Despite being a term of such pertinence, the takeover legal regime in
India never had a formal definition for the term till the Takeover Code came
into effect; probably because the regulators then deemed it appropriate to define
the term on a case-to-case basis. Through Regulation 2(1) (b) of the Takeover
Code, SEBI has newly introduced the definition of “acquisition” as “directly or
indirectly, acquiring or agreeing to acquire shares or voting rights in, or control
over, a target company”. Further, the Takeover Code identifies an “acquirer” as
any person who, directly or indirectly, acquires or agrees to acquire whether by
himself, or through, or with persons acting in concert with him, shares or voting
rights in, or control over a target company.
Obligations when there is an acquisition –
1. Mandatory open offer obligations: The crucial obligation under the
takeover regulations is the requirement to make an ‘open offer’ to the
public shareholders of the target company upon a substantial acquisition
of shares or voting rights or acquisition of control of the target company,
directly or indirectly.
Making of an ‘open offer’ in effect means making an offer to buy shares from
the public shareholders of the target company. One of the objectives of the
Takeover Code is to provide the public shareholders an opportunity to exit their
investment in the target company when a substantial acquisition of shares in, or
takeover of the target company takes place, on terms that are not inferior to the
terms on which substantial shareholders make their investments. 2 The
Takeover Code sets out in more detail the manner in which the open offer is
required to be carried out. Key changes in the Takeover Code include: (i)
Pricing of the offer, (ii) Timing of the offer especially where indirect
acquisitions are concerned, (iii) the manner in which the open offer is conducted
and withdrawn, and(iv) role and duties of the intermediaries in the open offer
process
2. Disclosure Obligations

Open Offer Triggers

Across the globe, the jurisprudence of Takeover Regulations revolves around
offering an exit opportunity to the public / minority shareholders of a company
in the event of any substantial change in shareholding or change in control of
the company. It is only fair and equitable that the public stakeholders who have
invested in the company, relying on the management or the promoters of the
company are given an opportunity to withdraw their investments when there is a
change in the management or promoter shareholding. Therefore, the Takeover
Code obligates an acquirer, whose acquisition fulfils the prescribed conditions,
to make a mandatory offer to acquire shares from the existing shareholders of
the target company prior to consummating his acquisition. To protect the
economic interests of the existing shareholders, it is mandated that the
mandatory open offer should be at the best possible terms for the shareholders.
To that extent, the terms of the mandatory offer inter alia including timing, price
discovery mechanism, minimum offer size etc. are prescribed under the
Takeover Code. While the mandatory open offer is a critical legal obligation, the
Takeover Code also permits voluntary open offers, at the absolute option of the
acquirer.
Mandatory Open Offer Triggers:
The crucial obligation under the takeover regulations is the requirement to make
an ‘open offer’ to the public shareholders of the target company upon a
substantial acquisition of shares or voting rights or acquisition of control of the
target company, directly or indirectly. The thresholds for acquisition of shares
have been redefined by the Takeover Code from those under the 1997 Code.
1. Acquisition of shares or voting rights entitling the acquirer and PAC to
exercise 25% or more of voting rights in the target company; OR
2. Acquisition of additional shares or voting rights entitling the acquirer and
PAC to exercise more than 5% of voting rights in a financial year by an acquirer
who together with PAC already holds 25% or more but less than 75% of the
capital in the target company; OR
3. Acquisition of Control over the target company consummation of value-
increasing takeovers owing to the increased costs and thus it deters a large
number of acquirers from taking control over a company.

Mandatory Bid Rule

1. Acquisition of Shares or Voting Rights –
As per Regulation 3(1) of the Code, the MBR gets triggered in such cases
where the acquirer either purchases shares or voting rights in such a
manner that it entitles him to exercise 25% or even more voting rights in
any such target company. In such cases, the acquirer must make an offer
to other shareholders of the target company to buy their shares at a fair
price at the time of acquisition thus giving the minority shareholder an
opportunity to exit safely.
2. Creeping Acquisition –
As per Regulation 3(2) of the Code, the incumbents already holding 25%-
75% shares in the target company cannot acquire more than 5% shares in
the same target company in any given financial year without triggering
the MBR. Thus, if the acquisition in any financial year exceeds 5% then,
in that case, the acquirer will have to make an offer for the acquisition of
other shares in the target company. This type of acquisition is termed as
creeping acquisition where the acquirer, already holding more than 25%
shares, keeps on buying shares on a yearly basis and thus the MBR is
triggered once it passes the threshold prescribed.
3. Control –
As per Regulation 4 of the Code, the final trigger happens in cases where
the acquirer, irrespective of the shares or voting rights, acquires control
over the target company. In such a case as well, the acquirer taking up
control is required to offer to purchase the shares of such target company.
However, there exists no specific clarity as to what the term “control”
actually means and that is the reason why this issue is still a debatable
one. Regulation 2(e) of the Code defines control to include the following-
“the right to appoint majority of the directors or to control the
management or policy decisions exercisable by a person or persons acting
individually or in concert, directly or indirectly, including by virtue of
their shareholding or management rights or shareholders agreements or
voting agreements or in any other manner.” Thus, as defined statutorily,
the meaning of control for the purposes of takeovers shall imply the right
to appoint directors on the board and to control the management, policies,
& decision-making in the company to an extent. Control over the board
may also arise in situations where the acquirer, despite holding below
25%, is the single largest shareholder in the company. The statutory
definition, however, seems to be a bit unclear as to what the control of
management shall include since it is much easier to ascertain the
existence of a right to appoint directors but not the former The Securities
Appellate Tribunal, in the case of Subhkam Ventures Private Limited vs.
SEBI [2010] relating to the definition of the term ‘control’, held that
control implies some positive power and thus rejected the view taken by
SEBI that affirmative voting rights (AVMs) of the acquirer, found in
shareholder agreements, would amount to taking over control of such
target company. The tribunal held that holding AVMs in the target
company implies negative power and thus it could not amount to the
acquirer being in “control” of the target company. However, in the
intervening period, after an appeal was preferred against this order before
the Supreme Court, the Takeover Regulations Advisory Committee
(TRAC) came up with the new Takeover code recommendations in 2010.
Since the parties had already reached a settlement before the apex court
could take up the matter, the court held that the previous observations of
the SAT would not be counted as precedent.