Introduction

With the increasing magnitude of the company’s business and the commercial activities, there had also been an increase in the diversities of the people who deal with them. Occasions of clashes and conflicts frequently arise which needs to be resolved amicably. And to resolve such conflicts the companies generally have to resort to arbitration or compromises to settle such clashes.

Further, value creation, diversification, and for increasing the financial capacity of the companies or for survival, one company may have to join hands with another company either by way of amalgamation or by the takeover. So the companies act provides for the provisions relating to various methods for the reorganization of a company. Thus is becoming vital to discern the provisions of the Companies Act in relation to Mergers and Acquisition, and the procedure thereof. 

Scheme of mergers, acquisitions and arbitration under the company law

Mergers and Acquisition

Before 2013, Section 391 to 394 of The Companies Act, 1956 dealt with the Mergers and acquisitions of a company. But after 2013, due to some backdrops in the old legislation, these provisions were amended by virtue of sections 230-240 of The Companies Act 2013 so now these sections govern any type of arrangement or mergers and acquisitions. All of these sections were notified on 15th December 2016 except Section 234 which was notified on 13th April 2017. These provisions were amended to bring more transparency to the laws relating to M&A. The amendment empowered the Tribunal (NCLT) to sanction the entire process. The provisions under the Companies Act, 2013 deal with the substantive part only, while the procedural aspects relating to M&A are given under the Companies (Compromise, Arrangements, and Amalgamation) Rules, 2016)

Arbitration 

Prior to 1960, Section 389 of the Companies Act empowered them to enter into arbitration as per the provisions of the Arbitration Act, 1940 . But the Arbitration act did not provide for foreign arbitrations as a result of which the Indian Companies could not enter into an arbitration agreement with foreign companies. In order to remove this lacuna, the Companies Amendment Act, 1960 dropped section 389 from the companies act as a result of which the Indian companies were free to enter into arbitration agreements with foreign companies, provided that such agreements are allowed by the Memorandum.

Compromise and arrangement distinguished

The word compromise has nowhere been defined in the Companies Act. It basically connotes the settlement of a conflict by mutual consent and agreement or through a scheme of compromise. Thus, for a compromise, there has to be some dispute or conflict. On the other hand, the word arrangement has been defined under section 230(1)  of the companies act. The arrangement has a wider connotation than compromise. The arrangement means re-organizing the right and liabilities of the shareholders of the company without the existence of some dispute. A company may enter into a compromise or arrangement to take itself out from the winding-up proceedings. 

Situations under which a company may call for a scheme of compromise:

1. If in the normal course of business, it becomes impossible to pay all the creditors in full.
2. Subsidiaries/Units cannot work without incurring losses.
3. Where liquidation of the company may prove harsh for the creditors or members.

Situation under which a company may enter into arrangements:

1. For the issue of new shares.
2. For any variation in property.
3. Conversion of one class of share to another.
4. For reorganizing the share capital of the company. 

Reconstruction

Reconstruction is a situation where a new company is formed and the assets of the old one are transferred to the newly formed company. Reconstruction is the key technique used for changing the capital structure of a firm. There are a number of reasons due to which a company may go for reconstruction. A few of them are:

1. By reconstruction, the company can simplify the capital structure. 
2. It can eliminate all the past losses.
3. Helps in raising working capital, adjusting cumulated dividends.
4. May result in a reduction of fix charges.

A reconstruction of a company may be done internally or externally. In external reconstruction, the old company is dissolved and a new one is incorporated and the assets of the older one are transferred to the new one. Whereas in internal restructuring, the old company continues, only its capital structure is changed. 

Procedure for compromise and arrangement under the company law

After the enactment of the Companies Act, 2013, the procedure for mergers, acquisitions, amalgamations and restructuring has been simplified by the new provisions. The Act of 2013 has removed all the backdrops of the older legislation and is aimed to bring more transparency. It allowed cross border mergers as well, increasing the horizons for the industries and making it easier for them to expand. In order to speed up the process and to bring more transparency the assistance of tribunal was invoked under the 2013 Act. So below is the stepwise procedure for the scheme of compromise and arrangement:

1. Preliminary Stage (Preparation of Scheme): This is the first stage, in which a detailed scheme is prepared by the members of the creditors. This scheme must contain all the matters that are of substantial interest, it must also explain or show how the scheme is going to affect the members, creditors and all the other companies. The scheme must also disclose the material interest of the director. 
2. Application to Tribunal: Any member or a creditor of the company (in case the company is winding up, its liquidator) can make an application to the Tribunal i.e. to NCLT proposing the scheme of merger or acquisition between two or more companies. The tribunal can also make the application on a suo moto basis. 
3. Tribunal looks into the application: Once an application proposing the scheme is made, the tribunal will take a look as to whether the application is within the ambit of Section 230-240. It is pertinent to note here that in this stage the tribunal is not concerned with the merits of the application, it will only look as to whether the application is within the ambit of the act or not. It will also see that the application is accompanied by an explanatory statement. 
4. Conveyance of Meeting: Once the tribunal sees the application, it issues a notice for the conveyance of the meeting of the creditors and the members of the company within 21 days. It must be noted that, if the scheme is not going to have any adverse effect on any party, then the tribunal can also avoid the call for the meeting. If the meeting is conveyed then the scheme must be approved by a majority of three fourth members present and voting. 
5. Presentation of the outcome of the Meeting before the Tribunal: Once the scheme is approved by the members or creditors or the liquidator (in case of a winding company) in the meeting, the report of the meeting must be presented before the tribunal within seven days of the meeting. The report must show the confirmation of the scheme of compromise or arrangement.
6. Commencement of Hearings: After the submission of the report the tribunal shall fix a date for hearing. Such data must be notified in the newspaper through advertisement. Such advertisement must be notified before 10 days of the hearing.
7. Sanction of Cases: The tribunal shall after hearing all the objections and concerns of all the parties, if it is deemed fair and reasonable to the tribunal then the tribunal may sanction the compromise or arrangement.
8. Registration of the Scheme with Registrar: Once the scheme is sanctioned by the Tribunal, a certified copy of the order shall be filed with the ROC (Registrar of Company) within 14 days from such sanction order.

Powers and duties of the tribunal

Before understanding the powers and duties of the tribunal (National Company Law Tribunal), it must be understood as to why be the sanction of tribunal important. There are several reasons which necessitate the sanction of the Tribunal; a few of them are listed below:

1. Once the scheme is approved by the Tribunal, the company is bound to abide by it, any avoidance or deviance from the same may bring legal consequences.
2. If the tribunal won’t have interfered, the majority might have suppressed the minority’s right; so Tribunal ensures adequate representation of the minority.
3. Tribunal also has supervisory power, so at any time if NCLT is of the view that the scheme is not in the interest of the member, it may order to modify the scheme or may order winding-up.

The tribunal is empowered with a wide range of powers by the virtue of Section 231. The tribunal has the sole authority either to approve or to reject the scheme of compromise or arrangement. If the tribunal approves the compromise or arrangement, in such a case it further has the following powers:

1. To supervise/monitor the carrying out of the proposed scheme.
2. To modify/amend the scheme to achieve the best result.
3. To order winding up of Company, if it is deemed to the tribunal that the scheme is not workable in the interest of the Company or its member.

Apart from the above powers, the tribunal is also bound by certain duties: So, whenever the tribunal sanctions a scheme, it must make sure that the following factors had been complied with. 

1. That the scheme is within the provisions of the Companies Act.
2. The tribunal must make sure that the class of people, who were to be adversely affected by the scheme, are fairly being represented in the meeting.
3. The proposed scheme must be reasonable; it should not have any adverse effect on society.

Mergers and acquisitions of certain companies – the fast track merger

Under the 1956 act, every company has to follow the same lengthy and time-consuming procedure for compromise and arrangement. The process under the 1956’s act was long and time-consuming because of the intervention of the High Court. So, it may not be economically feasible for ‘certain’ companies to go through such a long procedure. In order to remove this lacuna, the 2013 act introduced the process of Fast Track Mergers. So, Section 233 of the Companies Act covers the substantive part and Rule 25 of the Companies (Compromise, Arrangements, and Amalgamation) Rules, 2016, covers the procedural aspect for the Fast Tack Mergers. This rule 25 of the CAA Rules, 2016 was notified by the Ministry of Corporate Affairs on 15^th December 2016. 

As per section 233 of the Companies Act, 2013, there are three classes of companies who are not required to go through the regular merger process, but can prefer the fast track method, those companies are:

1. Holding and Subsidiary Companies: The Holding companies are defined under Section 2(46)  of the Companies Act, and Section 2(87) of the Companies Act, defines a subsidiary company. 
2. Small Company: Small company has been defined under Section 2(85) as a company other than a public company, having a paid-up capital not exceeding 50 Lakh Rupees or any such amount as prescribed by the government, but shall not, at any time exceed 10 crores. 
3. Other Classes: As prescribed by the Government in the CAA Rules, 2016.

This fast track merger eliminates the sanction of the NCLT and brings a more speedy process. The steps involved in Fast track merger are mentioned below:

1. The proposed scheme is served to the Registrar of Company.
2. Holding of the meeting of Creditors or members.
3. Declaration of solvency must be filed by both the companies to their respective Registrar.
4. Filing of the report of the meeting with the Registrar of the Companies, and if the Registrar has no objection then he shall register the company and must issue a confirmation notice. 
5. If, in case there are any objections, then those objections must be presented before the NCLT, and the tribunal shall decide on it.

There are a lot of advantages that this fast track merger process has brought with it, a few of which are: It has simplified the process, no compulsory requirement of NCLT’s approval, short time, Less expensive, it has removed all the secondary opportunities to raise objection which makes the process more expedient, further there are no need to issue public advertisements, it helps in avoidance of serried of hearings, etc. So now if a person/company goes through this fast track merger, the entire process would last for 90-100 days only. 

The Companies (Compromises, Arrangements and Amalgamations) Rules, 2016

In exercise of the powers conferred by sub-sections (1) and (2) of section 469 read with sections 230 to 233 and sections 235 to 240 of the Companies Act, 2013 (18 of 2013), the Central Government hereby makes the following rules, namely:-

Application for order of a meeting. – (1) An application under sub-section (1) of section 230 of the Act may be submitted in Form no. NCLT-1 (appended in the National Company Law Tribunal Rules, 2016) along with:-

(i) a notice of admission in Form No. NCLT-2 (appended in the National Company Law Tribunal Rules, 2016);

(ii) an affidavit in Form No. NCLT-6 (appended in the National Company Law Tribunal Rules, 2016);

(iii) a copy of scheme of compromise or arrangement, which should include disclosures as per sub-section (2) of section 230 of the Act; and

(iv) fee as prescribed in the Schedule of Fees.

(2) Where more than one company is involved in a scheme in relation to which an application under sub-rule (1) is being filed, such application may, at the discretion of such companies, be filed as a joint-application.

(3) Where the company is not the applicant, a copy of the notice of admission and of the affidavit shall be served on the company, or, where the company is being wound up, on its liquidator, not less than fourteen days before the date fixed for the hearing of the notice of admission.

(4) The applicant shall also disclose to the Tribunal in the application under sub-rule (1), the basis on which each class of members or creditors has been identified for the purposes of approval of the scheme.

(5) A member of the company shall make an application for arrangement, for the purpose of takeover offer in terms of sub-section (11) of section 230, when such member along with any other member holds not less than three-fourths of the shares in the company, and such application has been filed for acquiring any part of the remaining shares of the company.

(ii) the fair price of shares of the company to be determined by the registered valuer after taking into account valuation parameters including return on net worth, book value of shares, earning per share, price earning multiple vis-à-vis the industry average, and such other parameters as are customary for valuation of shares of such companies.

(b) details of a bank account, to be opened separately, by the member wherein a sum of amount not less than one-half of total consideration of the takeover offer is deposited.]

4. Disclosures in application made to the Tribunal for compromise or arrangement. – Creditors Responsibility Statement. – For the purposes of sub-clause (i) of clause (c) of sub-section (2) of section 230 of the Act, the creditor’s responsibility statement in Form No. CAA. 1 shall be included in the scheme of corporate debt restructuring.

Explanation. – For the purpose of this rule, it is clarified that a scheme of corporate debt restructuring as referred to in clause (c) of sub-section (2) of section 230 of the Act shall mean a scheme that restructures or varies the debt obligations of a company towards its creditors.

5. Directions at hearing of the application. – Upon hearing the application under sub-section (1) of section 230 of the Act, the Tribunal shall, unless it thinks fit for any reason to dismiss the application, give such directions as it may think necessary in respect of the following matters:-

(a) determining the class or classes of creditors or of members whose meeting or meetings have to be held for considering the proposed compromise or arrangement; or dispensing with the meeting or meetings for any class or classes of creditors in terms of sub-section (9) of section 230;

(b) fixing the time and place of the meeting or meetings;

(c) appointing a Chairperson and scrutinizer for the meeting or meetings to be held, as the case may be and fixing the terms of his appointment including remuneration;

(d) fixing the quorum and the procedure to be followed at the meeting or meetings, including voting in person or by proxy or by postal ballot or by voting through electronic means;

6. Notice of meeting. – (1) Where a meeting of any class or classes of creditors or members has been directed to be convened, the notice of the meeting pursuant to the order of the Tribunal to be given in the manner provided in subsection (3) of section 230 of the Act shall be in Form No. CAA.2 and shall be sent individually to each of the creditors or members.

(2) The notice shall be sent by the Chairperson appointed for the meeting, or, if the Tribunal so directs, by the company (or its liquidator), or any other person as the Tribunal may direct, by registered post or speed post or by courier or by email or by hand delivery or any other mode as directed by the Tribunal to their last known address at least one month before the date fixed for the meeting.

Explanation. – It is hereby clarified that the service of notice of meeting shall be deemed to have been effected in case of delivery by post, at the expiration of forty eight hours after the letter containing the same is posted.

(3) The notice of the meeting to the creditors and members shall be accompanied by a copy of the scheme of compromise or arrangement and a statement disclosing the following details of the compromise or arrangement, if such details are not already included in the said scheme:-

(i) details of the order of the Tribunal directing the calling, convening and conducting of the meeting:-

(a) date of the Order;(b) date, time and venue of the meeting. (ii) details of the company including: (a) Corporate Identification Number (CIN) or Global Location Number (GLN) of the company; (b) Permanent Account Number (PAN); (c) name of the company; (d) date of incorporation; (e) type of the company (whether public or private or one-person company); (f) registered office address and e-mail address; (g) summary of main object as per the memorandum of association; and main business carried on by the company; (h) details of change of name, registered office and objects of the company during the last five years;

(i) name of the stock exchange (s) where securities of the company are listed, if applicable; (j) details of the capital structure of the company including authorized, issued, subscribed and paid up share capital; and (k) names of the promoters and directors along with their addresses.

(iii) if the scheme of compromise or arrangement relates to more than one company, the fact and details of any relationship subsisting between such companies who are parties to such scheme of compromise or arrangement, including holding, subsidiary or of associate companies; (iv) the date of the board meeting at which the scheme was approved by the board of directors including the name of the directors who voted in favour of the resolution, who voted against the resolution and who did not vote or participate on such resolution; (v) explanatory statement disclosing details of the scheme of compromise or arrangement including:-

(a) parties involved in such compromise or arrangement; (b) in case of amalgamation or merger, appointed date, effective date, share exchange ratio (if applicable) and other considerations, if any;

(c) summary of valuation report (if applicable) including basis of valuation and fairness opinion of the registered valuer, if any, and the declaration that the valuation report is available for inspection at the registered office of the company;

(d) details of capital or debt restructuring, if any; (e) rationale for the compromise or arrangement; (f) benefits of the compromise or arrangement as perceived by the Board of directors to the company, members, creditors and others (as applicable); (g) amount due to unsecured creditors. (vi) disclosure about the effect of the compromise or arrangement on:

(a) key managerial personnel; (b) directors; (c) promoters; (d) non-promoter members; (e) depositors; (f) creditors; (g) debenture holders; (h) deposit trustee and debenture trustee; (i) employees of the company:

(vii) Disclosure about effect of compromise or arrangement on material interests of directors, Key Managerial Personnel (KMP) and debenture trustee.

Explanation. – For the purposes of these rules it is clarified that-

(a) the term ‘interest’ extends beyond an interest in the shares of the company, and is with reference to the proposed scheme of compromise or arrangement.

(b) the valuation report shall be made by a registered valuer, and till the registration of persons as valuers is prescribed under section 247 of the Act, the valuation report shall be made by an independent merchant banker who is registered with the Securities and Exchange Board or an independent chartered accountant in practice having a minimum experience of ten years.

(viii) investigation or proceedings, if any, pending against the company under the Act. (ix) details of the availability of the following documents for obtaining extract from or for making or obtaining copies of or for inspection by the members and creditors, namely:

7. Advertisement of the notice of the meeting. – The notice of the meeting under sub-section (3) of Section 230 of the Act shall be advertised in Form No. CAA.2 in at least one English newspaper and in at least one vernacular newspaper having wide circulation in the State in which the registered office of the company is situated, or such newspapers as may be directed by the Tribunal and shall also be placed, not less than thirty days before the date fixed for the meeting, on the website of the company (if any) and in case of listed companies also on the website of the SEBI and the recognized stock exchange where the securities of the company are listed:

Provided that where separate meetings of classes of creditors or members are to be held, a joint advertisement for such meetings may be given.

8. Notice to statutory authorities. – (1) For the purposes of sub-section (5) of section 230 of the Act, the notice shall be in Form No. CAA.3, and shall be accompanied with a copy of the scheme of compromise or arrangement, the explanatory statement and the disclosures mentioned under rule 6, and shall be sent to. –

(i) the Central Government, the Registrar of Companies, the Income-tax authorities, in all cases; (ii) the Reserve Bank of India, the Securities and Exchange Board of India, the Competition Commission of India, and the stock exchanges, as may be applicable ; (iii) other sectoral regulators or authorities, as required by Tribunal.

(2) The notice to the authorities mentioned in sub-rule (1) shall be sent forthwith, after the notice is sent to the members or creditors of the company, by registered post or by speed post or by courier or by hand delivery at the office of the authority.

(3) If the authorities referred to under sub-rule (1) desire to make any representation under sub-section (5) of section 230, the same shall be sent to the Tribunal within a period of thirty days from the date of receipt of such notice and copy of such representation shall simultaneously be sent to the concerned companies and in case no representation is received within the stated period of thirty days by the Tribunal, it shall be presumed that the authorities have no representation to make on the proposed scheme of compromise or arrangement.

9. Voting. – The person who receives the notice may within one month from the date of receipt of the notice vote in the meeting either in person or through proxy or through postal ballot or through electronic means to the adoption of the scheme of compromise and arrangement.

Explanation. – For the purposes of voting by persons who receive the notice as shareholder or creditor under this rule-

(a) “shareholding” shall mean the shareholding of the members of the class who are entitled to vote on the proposal; and (b) “outstanding debt” shall mean all debt owed by the company to the respective class or classes of creditors that remains outstanding as per the latest audited financial statement, or if such statement is more than six months old, as per provisional financial statement not preceding the date of application by more than six months.

Amalgamation of companies by central government in public interest

Section 237 of the Companies Act, 2013 deals with the M&A in Public Interest, this provision is similar to Section 356  of the Companies Act of 1956. The change brought through the amendment enlarges the scope of government power for amalgamation in the public interest. 

Since Mergers and Acquisitions affect the revenue of the Companies and ultimately the economy of the nation, so these mergers can have both positive and negative impacts on the economy. So at any time, if the central government feels that it is important and expedient in the public interest to amalgamate certain companies, the government may order mergers of such companies. 

A few of the provisions relating to M&A in the public interest are as follows:

1. The central government may at any time order for the merger of a company, by notification in the official gazette.
2. Generally there are some background checks in mergers, but when M&A is in the public interest, then the central government may avoid such checks.
3. The government will make sure that the protection of rights of minority shareholder.
4. If any person is aggrieved by compensation then they can within 30 days from the publication in the gazette appeal to the tribunal.
5. The section further inserts few more provisos that curtail the above rights under 237(5).
6. Copy of such M&A must be laid before the parliament. 

Protection of the dissenting shareholder’s rights

As a general presumption, the majority members enjoy supreme authority in controlling the affairs of the company. And the minority is forced to concede the decision of the majority. Thus, there might be a possibility that the majority oppresses the minority. In order to protect the interest, the 2013’s act introduced Section 235 and 236. Both of these sections were notified in 2016. 

As per the Majority’s Rule and Minority’s Right rule as laid in the case of Foss vs. Harbottle (1843) the will of the majority shall prevail and even the court should not interfere in such case, but such rules must be within a reasonable limit. So, Section 236 introduces the concept of Squeezing out Minority Shareholder. So, this means squeezing out the minority shareholder to free the dissenting shareholders. So how these minority shares are purchased is provided under Section 236.

Minority Shareholders are the ones whose issued capital doesn’t exceed 10%. The majority will offer a price to the minority that is reasonable; such an amount needs to be deposited in a separate bank account. The amount from that separate bank account is to be transferred to minority shareholders within 60 days. 

Now, after the Ministry of Corporate Affair’s Notification of 2020, as notified on 3^rd February, the scope of minority shareholders is now increased from 10% to 25%. And now if the majority (75%) wants to purchase minority shareholders then they need to go to SEBI (in case of listed Company) or to NCLT (if unlisted). 

References

1. Dr. N.V. Paanjape, Company Law, Central Law Agency, 10^th Edition, 2020
2. Mergers Regime under Company Act, Mondaq,
3. CS Divesh Goyal, Mergers and Amalgamation under Companies Act, Tax Guru.

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