ICSI - MSOP - 15.03.2012 Business Strategy, Corporate Restructuring and Take Overs An Overview By R....

ICSI - MSOP - 15.03.2012ICSI - MSOP - 15.03.2012

Business Strategy, Corporate Restructuring and Take Overs

An Overview

ByR. Ramesh Chandra

PartnerL V V Iyer & Associates

Corporate LawyersBegumpet

Hyderabad


Business StrategyBusiness Strategy

• increase efficiency

• consolidate

• increase market share

• turn around

• increase market capitalization

• entry barrier



• Corporate Restructuring

- Part-IX conversion

- Mergers

- Acquisitions

- Conversion to LLP



Conversion of firm to Company

• Under Part-IX of the Companies Act

• No Stamp Duty

• Tax Neutral (subject to conditions)

• Registration - a vesting order


Mergers & AcquisitionsMergers & AcquisitionsArrangements pursuant to Sec.391/394 Merger De-merger Reverse Merger Hiving off Re-organization of Capital Compromise with Creditors Reduction of capital as part of Composite

Scheme


Mergers & AcquisitionsMergers & Acquisitions• What is a reverse merger ?

A profit making company merges into a loss making company to take advantage of the accumulated losses of the surviving company which shall be set off against the profits of the combined entities


Mergers & AcquisitionsMergers & Acquisitions• De-merger Recognized as a concept under Income – Tax Act,

1961

In place of merging the company as a whole, an undertaking (business division) is spun off to a separate company at book value.

Differs from a hiving off arrangement in that shares of the resulting company is issued to the

shareholders of the de-merged company as opposed to shares being issued to the de- merged company itself in a hiving off arrangement.


Mergers & AcquisitionsMergers & Acquisitions• Hiving offResorted to enable holding the hived off

undertaking in a subsidiary Not recognized for exemption as transfer

under Income Tax Act, 1961 Normal practice is to carry out the hiving

at book value to make it tax neutral


Mergers & AcquisitionsMergers & Acquisitions• Reorganization of capital Consolidation of shares of different

classes Division of shares into shares of different

classes Combination of both the above A typical case is to convert preference

shares into equity or debentures when redemption under Sec.80 is not possible


Mergers & AcquisitionsMergers & Acquisitions• Reduction of Capital Can be attempted as part of a composite

scheme without a need to follow the procedure under Sec.100 to 104

Repaying preference capital when redemption under Sec.80 is not possible

Converting equity capital to preference capital under an arrangement would not amount to reduction of capital.


Mergers & AcquisitionsMergers & AcquisitionsStamp DutyStamp Duty

Applicable only to Applicable only to Amalgamations Amalgamations under AP under AP Stamp Act.Stamp Act.

De-merger and other arrangements De-merger and other arrangements not covered.not covered.


Mergers & AcquisitionsMergers & AcquisitionsTax implications Amalgamations under Sec. 2(1 B) of

Income Tax, Act, 1961 –not a transfer u/s 47

De-merger under Sec.2 (19 AA) of Income Tax Act, 1961 – not a transfer u/s 47


Competition LawCompetition Law

Acquisition by enterprises No Group • Criteria Assets – In India – Rs.1500 cr. Worldwide- USD 750 mn (Rs.750 cr. in India)Turnover – In India – Rs.4500 cr. Worldwide- USD 2250 mn (Rs.2250 cr. in India) Exceptions – Merger between Holding and subsidiary Companies and between wholly-owned subsidiaries belonging to the same Group


Competition LawCompetition Law

Acquisition by GroupGroup • Criteria Assets – In India – Rs.6000 cr. Worldwide- USD 3 bn (Rs.750 cr. in India)Turnover – In India – Rs.18000 cr. Worldwide- USD 9 bn (Rs.2250 cr. in India)


Corporate Restructuring-Case Studies

• `B’ Co.Ltd. to merge with `A’ Co.Ltd.• Average Share Price : A Co.Ltd. B Co.Ltd• Rs 250 Rs 50• Swap Ratio: 1 4• EPS of B Co.Ltd. Rs 5• Net Result: A Co. Ltd adds to itself a

business with an EPS of Rs 20



• B Co.Ltd. to merge with A Co.Ltd.

• Average Share Price : A Co.Ltd. B Co.Ltd.

Rs 200 Rs 8

• B Co.Ltd. has an operating profit but on account of huge debt burden it has a net loss. The merger scheme includes an arrangement by which all the long term debts are extinguished by issuance of shares of A Co.Ltd. at Rs 180 per share.

• Net Result : After merger B Co.Ltd. becomes a viable division of A Co.Ltd.

• Issue: Whether under Section 78 of the Companies Act, 1956, Securities Premium A/c can be credited without receipt of money.



• A Co.Ltd. is a holding company of B Co.Ltd. Both A Co.Ltd. and B Co.Ltd. are listed companies. After the merger in the next two to three years the share price of A Co.Ltd. is supposed to rule quite high.

• Instead of canceling the shares held by A Co.Ltd. in B Co.Ltd. in the process of merger, shares of A Co.Ltd. in the swap ratio to be issued to a Trust.

• The Trust to hold the shares for three years for disposal, the proceeds thereof to go to A Co.Ltd.

• Issue: When the proceeds of the sale of shares by the Trust are received in the hands of the Company, what is the nature of such a receipt – is it a capital receipt not subject to Income Tax ?



• A Co.Ltd. is a closely held family company.

• B Co.Ltd. is a listed company where the family has controlling interest.

• By merging A Co.Ltd. into B Co.Ltd. the shareholding of the family in B Co.Ltd. is increased substantially without having to go through the Takeover Code.



• A Company Limited is a listed BIFR Company which has been sanctioned a Corporate Debt Restructuring package. In terms of this package, 50% of the equity share capital is converted into preference capital, Part of the loans are converted into preference capital and promoters bring fresh money as equity contribution.

• A Company Limited goes in for a Scheme of Reconstruction & Arrangement under Section 391 of the Companies Act, 1956.

• Implications

• Can such a thing be done under the provisions of Section 391 of the Companies Act, 1956, when the Company is a BIFR Company?

• Does it involve reduction of capital?

• Are the promoters equity contribution exempt under Takeover code?



• A Company Limited, B Company Limited and C Company Limited have a common business i.e chemical business. All these companies also have other businesses. A new company is formed called D Company Limited. A Company Limited is a listed company with a share capital of Rs.30 crores. B Company and C Company are non listed companies with share capital of Rs.5 crores and Rs.2 crores respectively. D Company Limited is formed with an authorised capital of Rs.10 crores.

• On the basis of evaluation by experts, the equity capital of D Company Limited is kept at Rs.10 crores. All the chemical businesses of A Company Ltd., B Co., Ltd., and C Co., Ltd., are de-merged into D Company Limited. The net assets remaining in A Co., Ltd., is Rs.12 crores. The capital of A Co., Ltd., is reduced from Rs.30 crores to Rs.12 crores.

• D Company Limited becomes a listed company with a healthy EPS of Rs.7/- as against a combined EPS of Rs.3/- of A Company Limited, B Company Limited and C Company Limited



• A Company Limited has issued Cumulative Preference Shares amounting to Rs.50 crores redeemable at the end of 10 years. Since A Company Limited has been able to securitize its future receivables, it wants to redeem the preference shares now, i.e. after three years of issue, despite the fact that it does not have enough profits to redeem the shares nor does it come out with a new issue of shares for this purpose, under Section 80 of the Companies Act, 1956.

• In view of this, A Company Limited goes in for a reduction of capital under Section 80 of the Companies Act, 1956. Can this be made possible in law?


Take OverTake Over

Regulation – 3 - Trigger for open offer

No acquirer shall acquire shares or voting rights which (taken together with shares or voting rights, if any, held by him or by persons acting in concert with him), entitle such acquirer to exercise 25% or more of the voting rights in a company, unless such acquirer makes a public announcement to acquire shares of such company in accordance with the regulations.


Take OverTake Over• The term ‘acquirer’ covers

(i) Persons – both individual and juristic person

(ii) who either directly or indirectly, acquires or agrees to acquire– a. Shares– b. voting rights– c. control of the target company

(iii) by himself or with any person acting in concert.


Take OverTake Over• Acquirer includes a person acquiring

shares under blank transfers which are yet to be registered – as decided by Bombay High Court in Sreenivasulu Reddy’s case


Take OverTake Over• The SEBI Tribunal in Kiron Margadarsi’s

case held that in the case of a pledge of shares with blank transfer forms there is no case of acquisition by the pledgee since the intention of the pledger is only to pledge the shares and not to sell them and also since in the case of pledge only the special property in the pledged goods including shares would pass to the pledgee while the legal ownership of the same still remain with the pledger.


Take OverTake Over• The SEBI Tribunal in Ashwin Doshi’s case

held that in order to arrive at the percentage of voting rights, the shares which are frozen or attached by a special court cannot be excluded from the total voting power in relation to the company


Take OverTake Over• Creeping Acquisition upto 5% of voting

rights in any financial year ending 31st March – limited to Acquirer along with persons acting in concert (PAC) holding shares or voting rights of 25% or more but less than maximum permissible non-public shareholding.


Take OverTake Over• Regulation – 4 – Trigger for Open Offer• Acquisition of control directly or indirectly with or

without acquisition of shares or voting rights shall trigger an open offer unless the Acquirer makes a public announcement of an open offer.

• For the purpose of Regulation – 3 and Regulation – 4, acquisition of shares or voting rights in, or control over, any company that would enable exercise or direct the exercise of such percentage of voting rights in, or control over target company otherwise attracting the regulations would be considered indirect acquisition of shares or control.


Take OverTake Over• SEBI Tribunal in the Gujarat Ambuja

Case held the term ‘control’ would mean effective de facto control and not dejure control alone


Take OverTake Over• The term ‘Control’ includesThe right to appoint majority of the directors; or(ii)To control the management or policy decisions exercisable by a

person or persons, acting individually or in concert, directly or indirectly, by (a) virtue of their shareholding(b) management rights(c) shareholding agreements, or (d) voting agreements, or(e) in any other mannerIn order to come within the definition of ‘control’ it is not necessary that one should have actually appointed majority of directors, it would be enough if such a right of appointment is vested in him.


Take OverTake OverExempted Categories

• Rights Issue to the extent of one’s entitlement and beyond entitlement subject to not having renounced any of the entitlements and the price at which the rights issues made is not higher than the ex-rights price of the shares calculated as per the Regulations.


Take OverTake OverPursuant to a scheme- framed under Section 18 of SICA of arrangement or reconstruction

including amalgamation or merger or de-merger

Pursuant to the provisions of SRFAESI Pursuant to the scheme of CDR not

involving change of control


Take OverTake Over• SEBI Tribunal held in Mega Resources’

case otherwise known as Bombay Dyeing case that for the purpose of disclosure the holdings of the acquirer along with his associates and persons acting in concert have to be taken into account.


• (1)“Shares” means shares in the equity share capital of a company carrying voting rights and includes any security which would entitle the holder to exercise voting rights (including all depository receipts carrying an entitlement to exercise voting rights)


• The SEBI Tribunal in Modipon case held that there is no legal presumption that every promoter is an acquirer or a person acting in concert with another promoter unless the facts are otherwise.


Thank you

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