Mergers And Acquisitions - Nishith Desai Associates

Provided upon request onlyand amalgamations may be of several types,depending on the requirements of the mergingentities. Although corporate laws may beindifferent to the different commercial formsof merger/amalgamation, the Competition Act,2002 does pay special attention to the forms.i. Horizontal MergersAlso referred to as a ‘horizontal integration’, thiskind of merger takes place between entitiesengaged in competing businesses which areat the same stage of the industrial process. Ahorizontal merger takes a company a stepcloser towards monopoly by eliminating acompetitor and establishing a stronger presencein the market. The other benefits of this form ofmerger are the advantages of economies of scaleand economies of scope. These forms of mergerare heavily scrutinized by the CompetitionCommission of India (“CCI”).ii. Vertical MergersVertical mergers refer to the combination oftwo entities at different stages of the industrialor production process. For example, the mergerof a company engaged in construction businesswith a company engaged in production ofbrick or steel would lead to vertical integration.Companies stand to gain on account oflower transaction costs and synchronizationof demand and supply. Moreover, verticalintegration helps a company move towardsgreater independence and self-sufficiency.iv. Conglomerate MergersA conglomerate merger is a merger between twoentities in unrelated industries. The principalreason for a conglomerate merger is utilization offinancial resources, enlargement of debt capacity,and increase in the value of outstanding sharesby increased leverage and earnings per share, andby lowering the average cost of capital.4 A mergerwith an unrrelated business also helps thecompany to foray into diverse businesses withouthaving to incur large start-up costs normallyassociated with a new business.v. Cash MergerIn a ‘cash merger’, also known as a ‘cash-outmerger’, the shareholders of one entity receivescash instead of shares in the merged entity.This is effectively an exit for the cashed-outshareholders.vi. Triangular MergerA triangular merger is often resorted to, forregulatory and tax reasons. As the namesuggests, it is a tripartite arrangement in whichthe target merges with a subsidiary of theacquirer. Based on which entity is the survivorafter such merger, a triangular merger maybe forward (when the target merges into thesubsidiary and the subsidiary survives), orreverse (when the subsidiary merges into thetarget and the target survives).B. Acquisitionsiii. Congeneric MergersA congeneric merger is a type of merger wheretwo companies are in the same or relatedindustries or markets but do not offer thesame products. In a congeneric merger, thecompanies may share similar distributionchannels, providing synergies for the merger.The acquiring company and the target companymay have overlapping technology or productionsystems, making for easy integration of the twoentities. This type of merger is often resorted toby entities who intend to increase their marketshares or expand their product lines.2An ‘acquisition’ or ‘takeover’ is the purchase byone person, of controlling interest in the sharecapital or of all or substantially all of the assetsand/or liabilities, of the target. A takeover maybe friendly or hostile and may be structuredeither by way of agreement between the offeror and the majority shareholders or purchase ofshares from the open market or by making anoffer for acquisition of the target’s shares to theentire body of shareholders.4.Ibid, note 4, at p. 59 Nishith Desai Associates 2020

Mergers and AcquisitionsAcquisitions may also be made by way ofacquisition of shares of the target, or acquisitionof assets and liabilities of the target. In the lattercase, entire business of the target may be acquiredon a going concern basis or certain assets andliabilities may be cherry picked and purchasedby the acquirer. The transfer when a business isacquired on a going concern basis is referred toas a ‘slump sale’ under the ITA. Section 2(42C) ofthe ITA defines slump sale as a “transfer of oneor more undertakings as a result of the sale for alump sum consideration without values beingassigned to the individual assets and liabilitiesin such sales”. The legal and tax considerationsof slump sale vis a vis an asset sale is discussed ingreater detail in Part VI of this Paper.Another form of acquisition may be by wayof demerger. A demerger is the opposite of amerger, involving the splitting up of one entityinto two or more entities. An entity which hasmore than one business, may decide to ‘hiveoff’ or ‘spin off’ one of its businesses into a newentity. The shareholders of the original entitywould generally receive shares of the new entity.In some cases, if one of the business units of acompany is financially sick and the other businessunit(s) is financially sound, the sick business unitsmay be demerged from the company, thereby Nishith Desai Associates 2020facilitating the restructuring or sale of the sickbusiness, without affecting the assets of thehealthy business unit(s). Conversely, a demergermay also be undertaken for moving a lucrativebusiness into a separate entity. A demerger maybe completed through a court process under theMerger Provisions or contractually by way of abusiness transfer agreement.C. Joint VenturesA joint venture is the coming together of two ormore businesses for a specific purpose, whichmay or may not be for a limited duration. Thepurpose of the joint venture may be an entryinto a new business, or an entry into a newmarket (which requires specific skills, expertiseor the investment by each of the joint ventureparties). Parties can either set up a new companyor use an existing entity, through which theproposed business will be conducted.The parties typically enter into an agreement toset out the rights and obligations of each jointventure party and the broad framework for themanagement of the company, and such termsare then incorporated in the byelaws of thecompany for strengthening the enforceability.3

Provided upon request only2. Mergers and Amalgamations: Key Corporateand Securities Laws ConsiderationsI. Company LawThe Merger Provisions govern schemesof arrangements between a company, itsshareholders and creditors. The Merger Provisionsare in fact worded so widely that they provide forand regulate all kinds of corporate restructuringthat a company can possibly undertake, such asmergers, amalgamations, demergers, spin-off/hive off, and every other compromise, settlement,agreement or arrangement between a companyand its members and/or its creditors.A. Procedure under the MergerProvisionsSince a merger essentially involves anarrangement between companies, thosecompanies which intend to merge must makean application to the National Company LawTribunal (“NCLT”) having jurisdiction oversuch company for (i) convening meetings ofits respective shareholders and/or creditors;(ii) or seeking dispensation of such meetingsbasis the consents received in writing from theshareholders and creditors. Basis the NCLT order,either a meeting is convened or dispensed with.If the majority in number, representing 3/4thin value of the creditors or shareholders presentand voting at such meeting (if the meetingis held) agree to the merger, then the merger,if sanctioned by the NCLT, is binding on allcreditors and shareholders of the company. TheMerger Provisions constitute a comprehensivecode in themselves, and under these provisions,the NCLT has full power to sanction anyalterations in the corporate structureof a company. For example, in ordinarycircumstances a company must seek theapproval of the NCLT for effecting a reduction ofits share capital. However, if a reduction of sharecapital forms part of the corporate restructuringproposed by the company under the MergerProvisions, then the NCLT has the power to4approve and sanction such reduction in sharecapital and companies will not be required tofollow a separate process for reduction of sharecapital as stipulated under the CA 2013.B. Fast track mergerThe Fast Track merger covered undersection 233 of CA 2013 requires approvalfrom shareholders, creditors, the Registrar ofCompanies, the Official Liquidator and theRegional Director. Under the fast track merger,scheme of merger shall be entered into betweenthe following companies:i. two or more small companies (privatecompanies having paid-up capital of lessthan INR 100 million and turnover of lessthan INR 1 billion per last audited financialstatements); orii. a holding company with its wholly ownedsubsidiary; oriii. such other class of companies as may beprescribed.The scheme, after incorporating any suggestionsmade by the Registrar of Companies andthe Official Liquidator, must be approved byshareholders holding at least 90% of the totalnumber of shares, and creditors representing9/10th in value, before it is presented to theRegional Director and the Official Liquidatorfor approval. Thereafter, if the RegionalDirector/ Official Liquidator has any objections,they should convey the same to the centralgovernment. The central government uponreceipt of comments can either direct NCLT totake up the scheme under Section 232 (generalprocess) or pass the final order confirming thescheme under the Fast Track process.C. Cross Border MergersSection 234 of the CA 2013 permits mergersbetween Indian and foreign companies with Nishith Desai Associates 2020

Mergers and Acquisitionsprior approval of the Reserve Bank of India(“RBI”). A foreign company means any companyor body corporate incorporated outside India,whether having a place of business in India ornot. The following conditions must be fulfilledfor a cross border merger:i. The foreign company should beincorporated in a permitted jurisdictionwhich meets certain conditions.ii. The transferee company is to ensure that thevaluation is done by a recognized professionalbody in its jurisdiction and is in accordancewith internationally accepted principles ofaccounting and valuation.iii. The procedure prescribed under CA 2013 forundertaking mergers must be followed.The RBI also issued the Foreign ExchangeManagement (Cross Border Merger) Regulations,2018 (“Merger Regulations”) on March20, 2018 which provide that any transactionundertaken in relation to a cross-border mergerin accordance with the FEMA Regulations shallbe deemed to have been approved by the RBI.II. Securities LawsA. Takeover CodeThe Securities and Exchange Boa

iii. Congeneric Mergers A congeneric merger is a type of merger where two companies are in the same or related industries or markets but do not offer the same products. In a congeneric merger, the companies may share similar distribution channels, providing synergies for