By : Aparupa Sanyamath
Introduction :
In some past decades there has been a noticeable improvement in the M&A activity both nationally and internationally. Almost everyday there are reports and articles relating to M&A, the forthcoming or the completed one, the Mergers that have fallen through or the ones that appears to be successful or unsuccessful and so on. Many vital strategic plans are accomplished by the transaction of M&A. Along with Economic, Legal, Financial and Political success of an organization, the Human Resources (HR) are also greatly influenced by these transactions.
Definitions :
Both merger and Acquisitions are prominent aspects in the corporate industry (finance, strategy and management) and multidisciplinary fields.
A Merger is the combining of two or more companies into a single entity with the newly created company after taking on a new name. A purchase deal is considered merger when the management of both the companies decides that the merger is the best interest of the shareholders.
An Acquisition is a combination in which one company, the acquirer purchases and absorbs the operations of another, the acquired. When the purchase deal is unfriendly and the takeover is hostile it will always be considered as an acquisition.
Types od M&A :
Horizontal M&A : Horizontal M&A is when two companies comes together with same industry/business i.e with similar products and services. Example : Both Facebook and Whatsapp are from same industry – social media and Facebook acquires Whatsapp. Even after acquiring, Whatsapp still has its own name.
Vertical M&A : Vertical M&A is when one company merges with/acquires either a supplier of raw materials or distributor of its products or the company to which it sells its products i.e two companies coming into force together from similar industry but they are at separate spheres on chain of supply. Example : A clothing company coming together with the source of cotton to have higher control over supply chain.
Conglomerate M&A : Conglomerate M&A is when one company takes over another company from a completely different industry or two companies from separate industries coming into force together. Example : Reliance Industries taking over Hamley’s toy products Company.
Congenric M&A : Congenric M&A is when two companies from same or related industries or markets, not offering same products comes together. Example : Oil industries Exxon and Mobile combining together in 1998.
Objectives of M&A :
Combining the operations of two companies via merger and Acquisition is an attractive strategic option for achieving and operating economics, strengthening the resulting company’s competency and clearing up paths for new market opportunities.
The main few objectives of M&A are categorized below :
Extension of Company’s business : The main objective of M&A is extending company’s business into product categories. Many times a company has gaps in its product line that needed to be filled. In such cases, acquisition can be a quicker way to broaden a company’s product line going through the exercise of introducing a company’s own new product to fill the gap.
Creating more cost efficient operation out of the combined companies : When a company acquires another one in the same industry, there is usually enough overlap in operations that certain inefficient plants can be partly combined and downsized. The combined companies may also be able to reduce the supply chain cost by purchasing ingredients volume from common suppliers.
Expanding geographic coverage : One of the best and quickest way to expand a company’s geographic coverage is to acquire rivals with operations in the desired locations.
Gaining quick access to new technologies : Establishing acquisitions to strengthen a company’s technological know-how or to expand its skills and capabilities allows a company to bypass a time consuming and expensive internal effort to build desirable new sources and capabilities.
Leading the convergence of industries : Leading the convergence of those industries whose boundaries are being blurred by changing technologies and new market opportunities.
Laws regulating M&A :
COMPANIES ACT, 1956 FOR MERGERS AND ACQUISITIONS
Sections 391 to 394 of the Companies Act, 1956 deal with Compromises, Arrangements and Reconstructions and other related issues through schemes of arrangement approved by the High Courts.
Section 391: Amendment in the Companies Act, 1956 in the year 2002 gave powers to National Company Law Tribunal to review and to allow any compromise or arrangement, which is proposed between a company and its creditors or any class of them, or between a company and its members or any class of them. But because of non formation of National Company Law Tribunal, these powers still lie with High Courts and the parties concerned can make applications to high courts. Court’s power under this section are very wide and has discretion to allow any sort of arrangement between the company and members. Scopes of the Jurisdiction of the Court are:
1. The sanctioning Court has to see to it that all the requisite statutory procedure for supporting any scheme has been complied with along with requisite meetings.
2. That the scheme put up for sanction of the Court is backed up by the requisite majority vote.
3. That the concerned meetings of the creditors or members or any class of them had the relevant material to enable the voters to arrive at an informed decision for approving the scheme.
4. That the proposed scheme is not found to be violative of any provision of law and is not contrary to public policy.
Section 392: Under this section, the Court has power of supervising the carrying out of the compromise or an arrangement, or 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 working of the arrangement. If the Court is of the view that a compromise/arrangement sanctioned under section 391 cannot be worked satisfactorily with or without modifications, it may on its own motion or on the basis of an application made by an interested party may order winding up the company under section 433 of the Act.
Section 393: This section prescribes the procedure required for convening the meeting of the members or creditors called under section 391. The notice for the meeting are to be sent along with a statement, setting forth the terms of the compromise and or arrangement and explaining its effect, and in particular, the statement must state all material interest of the Directors, Managing Directors of the company, whether in their capacity as such or as members or creditors of the company or otherwise. Where the compromise or arrangement affects the rights of debenture holders of the company, the statement shall give the information and explanation in respects to the trustees of any deed for securing the issue of the debentures as it is required to give in respect of the Directors. Any default in complying with the requirements under this section may lead to a fine of Rs. 50,000 against the concerned official of the company, who is found guilty.
Section 394: Where the Court is of the view that the proposed scheme is of such nature that (a) It is for the reconstruction of any company or for amalgamation of any two or more companies; and (b) under the scheme, the whole or any part of the undertaking property or liabilities of any concerned company is to be transferred to another company; the Court may make provision for all or any of the following matters relating to the transfer to transferee company of the property or liabilities of transferor company:
1. The allotment or appropriation by the transferee company of any shares, debentures or other like interest in that company which, under the arrangement, are to be allotted or appropriated by that company to.
2. The continuation of any legal proceeding against the transferee company by the transferor company.
3. The dissolution, without winding up, of any transferor company.
4. The provisions for any dissenting persons. Who are opposing such scheme or any other matter, which the Court deems fit.
COMPETITION ACT, 2002 AND REGULATION OF MERGERS AND ACQUISITIONS
The companies resort to various types of combinations (mergers, acquisitions, alliances, and the like), as strategy, which are legitimate means by which they can grow. This is very much a part of industrial evolution and corporate restructuring. In the process, such combinations can also create market power which may be abused. The consequent concentration of economic power leads to monopolistic and unfair trade practices. As a result, the competition law puts a check on restrictive or unfair business practices by the firms in the market. The need for competition law arises from anti-competitive practices adopted after the M&A to stop free play of competition in the market, and unfair means against consumers and promoting competitive spirit in the market. One of the purposes for which Competition Act, 2002 was enacted is to regulate business combinations in the form of mergers, acquisitions, alliances and the like. Chapter II containing Sections 5 and 6 of the Competition Act, 2002 primarily deals with the subject ‘combination’ that is, mergers, acquisitions, alliances.
THE INCOME TAX ACT, 1961 FOR MERGERS AND ACQUISITIONS
The Income Tax Act, 1961 does not regulate the procedural aspects of the M&A, but it provides for tax concessions or benefits in respect of the following:
1. Amalgamations or mergers of companies
2. Amalgamation or merger of banking company
3. De-merger of a company
4. Slump sale Amalgamation or Merger of Companies.
Unlike the Companies Act, 1956, the Income Tax Act, 1961 has defined amalgamation in section 2(IB), but it has not defined merger or acquisition. As per this Act, certain benefits or concessions are available to both the amalgamating (the target or the acquiree or the merging companies) and amalgamated (post-merger enlarged and the acquired) companies only when they fulfill all the conditions, as mentioned in various sections of the Act.
FOREIGN EXCHANGE MANAGEMENT ACT, 1999 FOR MERGERS AND ACQUISITIONS.
The laws of foreign exchange policies relating to the allotment of shares in foreign entities are contained in the Foreign Exchange Management Act 1999. It basically includes all the schemes related to transfer or issue of Security by a person residing outside India. The Foreign Exchange Regulation Act 2000, issued by RBI vide GSR no. 406(E) dated 3rd May 200, contains some regulations which provide general guidelines on issuance of shares or securities by an Indian entity to a person residing outside India. For such cases RBI has included detailed guidelines on foreign investment in India.
SEBI TAKEOVER CODE :
SEBI was established in 1992 as a regulatory body under the SEBI Act, 1992 with the main objectives of (i) protecting the interest of investors in securities market, and (ii) providing for the orderly development of securities market. Thus while the possibility of takeover of a company through share acquisition is desirable in new competitive business environment for achieving strategic corporate objectives, there has to be a well-defined regulation, so that the interest of all concerned are not jeopardised by sudden takeover threats. The regulations have been amended a number of times to address the changing circumstances and needs of corporate sector. In 1997 SEBI Takeover Code has been rechristened by enacting SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997 substituting SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1994.
CONCLUSION :
There are various laws and regulations relating to various facets of M&A. Due to globalisation, the number of inbound and outbound M&As are increasing making legal environment complicated. Therefore, the government is making efforts to modernise the various laws, and in particular the Companies Act to rationalise the legal aspects of M&As.
References:
- Applied Mergers and Acquisitions (Robert F. Burner)
- Research methods (2017) by Sikander Sultan, M&A valuation (volume 2)
- Merger and Amalgamation, Pg 25, Master Guide to M&A in India (Wolters Kluwer)
- Due diligence - Tax perspective, Master Guide to M&A in India (Wolters Kluwer)
- SEBI regulation, Wolters Kluwer, Pg 135.
- Competitions Act 2002 and Financial Exchange Regulation, Pg. 142, Maters guide to Mergers and Acquisitions in India.
- Mergers and Acquisitions (Strategy, Valuation and Integration) by Kamal Ghosh Ray.
- Ministry of Corporate Affairs, Govt. of India (www.mca.gov.in)
- Legal aspects (laws regulations 2021) of Merger and Acquisitions (iclg.com)
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