M&a Statutory Framework, Drafting of Scheme, Important Aspects & Activities

8/14/2019 M&a Statutory Framework, Drafting of Scheme, Important Aspects & Activities

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Statutory Framework, Draftingof Scheme, Important Aspects& Activities

M & A


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M&A Statutory Framework in India

The Companies Act, 1956 Sections 390 to 396A and

125, 127, 147, 305, 308;

SEBI (Prohibition of Insider Trading) Regulations, 1992

Listing Agreement (LA) 16, 22(a & d), 24(a, f & g),31 (c & e) , 36(7);

The Companies (Court) Rules, 1959(Court Rules)

Rules 67 to 87

Depositories Act, 1996

SEBI (Substantial Acquisition of Shares and Takeovers)

Regulations, 1997 - Regulation 3(1)(j);

Relevant State Stamp Act

The FEM (Transfer or Issue of Security by a Person

Resident outside India) Regulations, 2000Accounting Standard 14

Income-tax Act Section 2(1B), 72AIndustrial Disputes Act, 1947 Section 25FF

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M&A Important Aspects

Approval Mechanism

Board of Directors

Official Liquidator

Stock Exchanges

Shareholders & Creditors

Central Government, Regional Director and Registrar

of Companies

RBI / FIPB, if foreign shareholding beyond

permissible limits

Debenture Trustee / FIs / Lenders

High Court(s) / NCLT

Competition Commission of India (CCI)

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Unique Aspects of 391-394 Provisions

Foreign company can be transferor company but not

transferee company

Complete Code -

Alteration of MOA / AOA;

Issue of Further Shares 81(1A) Approval Not

required

Transfer of investments of Transferor Co

Transfer by Operation of Law 108 compliance

not necessary

The voting at Court convened meetings Through poll

only. Show of hands - NOT permissible

Discretion of Court to dispense with holing of meetings.

Right to amalgamate Inherent Right. Specific

provision in the articles NOT necessary.

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One Person holding proxies

from more than oneMember

Number of Members represented by him will be

counted as the number of members present andvoting.

Joint Members holding

shares in the same order of

names

Only one Member will be counted as present and

voting.

Joint Members holding

shares in different order of

names

Number of Members representing each folio will be

counted as number of members present and voting.

One or more of the Joint

Members common in morethan one folio

Number of Members representing each folio will be

counted as number of members present and voting.

Multiple Proxies Proxy later in date is valid

Execution of Proxy in case

of Joint Holders

Any one of the Joint-holder can execute a proxy.

In case of a proxy executed by one joint-holder andanother joint-holder being present personally, the

joint-holder present personally shall be entitled to vote.

In case of more than one proxy, the proxy executed

by the joint-holder higher in order shall be valid.

Undated proxies A proxy signed in blank and filled in subsequently,

before submission to the company is valid.


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Unique Aspects of 391-394 Provisions

Special Majority -A majority in number AND

3/4th in value;

of Persons Present and Voting.

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Total No. of Members 2000

Total No. Members present 100

No. of members who voted on theresolution

95

Total no. of valid votes 90

Total issued and paid-up share

capital

Rs. 500 Crores (i.e. 50 crore shares of Rs.10/- each)

Total issued & paid-up share

capital held by members whose

votes are valid*

Rs. 300 Crores

Qualifying majority Minimum 46 members holding 22.5 or more shares


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Some Important Process-related Matters

Both proxies & authorisations To be lodged at least48 hours before the meeting.

Directors/ Manager and Debenture Trustees to disclose

their interest in their capacity as a Director/ Manager/

Trustees or as a creditor or otherwise . [Sec 393(5)]

E-filing of forms 61 (serving copy of petition on ROC, as

required under sec 394) & 24A (serving copy of petition

on RD, as required under sec 394A) also to be followed

by physical filing with ROC and RD, respectively.

Order sanctioning the Scheme to include 30 days time

for filing of Court Order with ROC [Refer Rule 81 of

Companies (Court) Rules].

Post amalgamation, directors need to give theirdisclosures under sections 305/308 of Companies Act &

Insider Trading Regulations

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Securities Law Requirements

Disclosure under Insider Trading Regulations to begiven by Directors and Officers covered under the

Code

Disclosure to Stock Exchanges-M&A Price Sensitive Information

Advance Intimation of Board meeting convened

to consider M&A proposal NOT requiredOutcome of Board Meeting to be intimated

M&A Exempted from Takeover Regulation;Disclosures to be given at specified threshold

Filing of Scheme with Stock Exchanges Before 30days of Court filing and secure no-objection

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Treatment of Loans / Debentures of Transferor Co. and

Creation of Charge by Transferee Co.

Loans & Deb of Transferor Co become that of

Transferee Co, unless otherwise provided in Scheme

No need to issue new debenture certificates;

endorsement of name (with a reference to the Court

order(s) sanctioning the Scheme) would suffice

Registration of charge under Section 127 of

Companies Act, 1956. E-form 8 to be filed even in

respect of series of debentures, as e-form 10 does not

provide requisite fields

No stamp duty payable.

Transfer of assets in amalgamation being a transfer by

virtue of an order of court & by virtue of the Companies

Act is a transfer by operation of law. [Sailendra Kumar

Ray v The Bank of Calcutta Ltd, 1940 (Cal)]

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Stamp Law Provisions

An Order under Section 394 is based upon arrangement

between two companies by transferring the assets &

liabilities of one to another company and that Order isan instrument as defined under Section 2(1) of the

Bombay Stamp Act which includes every document by

which any right or liability is transferred. [Li Taka

Pharmaceuticals vs. State of Maharashtra, 1996 (Bom)]

High Court Order Instrument of Conveyance

Levy of Stamp Duty State subject

The order passed in the case of Gemini Silk Limited vs.

Gemini Oversees Limited was set aside. The Court held

that in the absence of specific provision in the Stamp

Duty Law of the State, the state shall have no powers to

impose stamp duty on transfer of assets & liabilities of

the Transferor Company to the Transferee Company

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Employees Related Matters

However, on satisfaction of following conditions, it

will not tantamount to retrenchment [Sec 25FF]

Service not intrrupted by transfer

T&C Not less favourable than immediately

before transfer

New Employer would be liable to pay

compensation for retrenchment in future, if any.

Change in ownership & management by operation oflaw is deemed as transfer of workmen from the old to

new employer and treated as retrenchment [Sec 25F

and 25FF]

It is advisable that the Scheme should clearly containthe above stipulations

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Treatment of Overseas Shareholders / GDRs of

Transferor Co.

US Securities Act requires registration of securities

to be distributed to investors residing in USA, unless

the same is exempted 3(a)(10) exemption Auto exemption. SECs Staff

Legal Bulletin No. 3.

Exchange of securities; no cash offer

Court Hearing; notice of which duly given

Fairness to be examined by Court, subject to

specific reliance on 3(a)(10) exemption

Shareholding of persons resident outside India in the

Transferee co. should not exceed the percentage

specified in the approval granted by Central Govt / RBI/

specified in the Regulation. [FEMA Regulation]

Consult Depository and put specific provision in the

Scheme and Petition

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Treatment of Overseas Shareholders / GDRs of

Transferor Co. Activities involved in new GDR issuance

Notice to the GDR holders of the transferor

company about the amalgamation and itsimplication on the GDR programme

Termination of the GDR programme of thetransferor company

Issue of shares by the transferee company to thedepositary bank of the transferor company inlieu of the share underlying GDRs of the

transferor companyTransfer of the above shares from the transferor

depositary to the transferee depositary

Issue of GDRs by the transferee depositary to theeligible GDR holders of the transferor company

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M&A D fti A S h


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M&A Drafting A Scheme

The Scheme should not in any way violate, override or

circumscribe the statutory provisions, in particular the

provisions of securities laws or the stock exchangerequirements. [Cl. 24(g) of LA]

Scheme - formalisation of terms of M&A

No prescribed form or contents statutorily

The Explanatory Statement should contain [Sec 393]

terms of the arrangement and its effect

material interests of directors, MD, manager and

effect of arrangement on those interests if different

from like interest on other persons

Arrangement affecting rights of debenture holders

like interest of the debenture trustees

disclosure of the pre and post amalgamation capital

structure and shareholding pattern. [Cl. 24(i) of LA]

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Appointed Date

Definitions

Particulars of Transferor & Transferee Companies,including the authorised, issued and paid-up capital

Purpose and Rationale

Effective DateTransfer of Undertaking Terms, related details

Issuance of new shares Share Exchange Ratio,

fractional entitlements, ranking of the new equityshares, issue in physical or demat, promoters

shareholding, overseas issue etc.

Treatment of GDRs of the transferor company



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Conduct of Business

Employees

Legal Proceedings

Inter se Transactions

Modifications of the Scheme

Scheme conditional upon

Filing of Applications / Securing Necessary Approvals

Costs, charges and expenses

Accounting Treatment

Dissolution of Transferor Company(ies) withoutwinding up

Scheme Complete Code

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Procedure :


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Procedure :I

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Due Diligence Valuation

Determine swap ratio based on valuation report

Board approval of parties to amalgamation

Intimation of the Boards decision approving theScheme to SEs & Depositories

Filing of Scheme with SEs before Court filing

No-objection of SEs

Application to be made to the court(s) fordirection to hold meetings of members/creditors

or obtain dispensation from holding meeting(s)

Procedure :


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Procedure :I

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HC directions Notice of the meetings to members & creditors,

with the Scheme and explanatory statement

Advertisement in newspapers

Filing of Affidavit by the Chairman of the

meeting withy Court(s) proving service of noticeand publication of advertisement

Approval of members & creditors by special

majority

Notices of the meeting to be forwarded to SEs

Intimation of result of the meeting to SEs

Procedure :


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Procedure :

Filing of Chairmans Report on results of meetings

of shareholders & creditors Filing of Petition with the high Court9s) seeking

sanction to the Scheme

Notice to Central Govt. (Regional Director), andOL (transferor company only)

High Court(s) to fix the hearing date

Newspaper advertisement notifying the date of

hearing of the Petition

High Court(s) Order sanctioning the Scheme Filing of the certified copy of HC Order(s) with the

RoC

Dissolution of the Transferor Company, without

being wound up.

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Post Amalgamation Activities :I


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Adjudication and payment of stamp duty on the

High Court Order

Fixing of Record date by the Board

Appointment of Occupier for plants / factories oftransferor company(ies)

Application to Stock Exchanges for in-principal

approval for listing of shares

Annexing copies of the HC Orders to every copy of

the MoA of the Company

Intimation of the Record Date to the Stock

Exchanges and NSDL, CDSL, ODB



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Communication to the Debenture Trustees in

respect of debentures

Transfer of verious Licenses, Permissions, trade

marks, etc. Change the Name and Address of the Registered

Office at the IPCL sites, change in letter-heads etc.

Deactivation of ISINs of securities of transferor

company(ies)

Letter to MCA for appointment / transfer of cost

auditor for products of transferor company(ies)

E-filing of Form 8 under section 127 of the

Companies Act Fixing of Record date by the Board



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Post Amalgamation Activities :

Listing & trading approval of SEs

Completion of despatch of share certificates

Disclosures received from Directors re. theirshareholding

Filing of Form 2 with RoC

Filing of Form FCGPR with RBI

Treatment of fractional entitlements

Delisting of GDRs of transferor company(ies)

Listing of new GDRs

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Sl Compliance TentativeSchedule

1 Hold Board Meeting to approve the proposed merger, the draftScheme of merger and incidental matters.

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2 Obtain Stock Exchanges no-objection X + 5

3 Move an Application u/s 391 (1) of the CA to the Court for an Orderconvening meetings of the shareholders/ creditors or any class ofthem by a Judges Summons supported by an Affidavit, draftMinutes of Order and a copy of the Scheme.

X + 5

4 Meetings of the Shareholders and the Creditors X + 40

5 File Report of the Chairman of each of the Meetings (within seven daysafter the conclusion of the Meeting or the time fixed by the Court)

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6 File Petition seeking Court(s) sanction to Scheme (within 7 days of thefiling of the Report by the Chairman)

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7 Serve Notice on Regional Director, ROC and Official Liquidatorintimating them of the date of hearing of Petition and enclosingtherewith copy of the Petition and Affidavit verifying Petition

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8 High Court(s) Order sanctioning the Scheme X + 70

9 Obtain certified copy of the Order on Petition from the Court - OralOrder to be followed by a Drawn-up Order.

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10 File e-form 21 along with certified copy of Court Order with RoC(s). X + 81


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Important Case LawsM & A

Important Case Laws


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.the jurisdiction of the court in sanctioning a claim of

merger is not to ascertain with mathematical accuracy if thedetermination satisfied the arithmetical test. A company

court does not exercise an appellate jurisdiction. It exercises

a jurisdiction founded on fairness. It is not required to

interfere only because the figure arrived at by the valuer

was not as good as it would have been if another method

had been adopted. .[Hindustan Levers (1995)]

... It has also to be kept in view that which exchange ratio

is better is in the realm of commercial decision of well

informed equity shareholders. It is not for the Court to sit in

appeal over this value judgement of equity shareholders who

are supposed to be men of world and reasonable persons

who know their own benefit and interest underlying any

proposed scheme. With open eyes they have okayed thisratio and the entire scheme.. [Miheer Mafatlals Case]

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Important Case Laws


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the exchange ratio of the shares of the two companies,which were being amalgamated, had to be stated alongwith

the notice of the meeting. How this exchange ratio was

worked out, however, was not required to be stated in thestatement contemplated under section 391(a).[Hindustan

Lever; Jitendra R. Sukhadia v. Alembic Chemical Works Co.]

The methods recognized by courts are (i) net assets value,

(ii) earnings value method and (iii) market value

method. [cases ofHindustan Lever Ltd and Mafatlal

Industries Ltd.]

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Important Case Laws


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unless a separate and different type of scheme ofcompromise is offered to a sub-class of a class of creditors

or shareholders otherwise equally circumscribed by the

class, no separate class of sub-class of the main class ofmembers or creditors is required to be convened.[Miheer

Mafatlal Case; Spartek Ceramics India Limited

Manu/AP/0991/2005 (Del)]

Merely because the Companies Act provides for provisions

like creation of security, debenture redemption reserve etc.,

under Sections 117A 117C, debentureholders will NOT

constitute as a separate class from among the secured

creditors.[In Re: Siel Ltd, 2004 (122) Com Cases 536 (Del),

Manu/DE/0666/2003, and In Re: Spartek Ceramics Ltd.]

Important Case Laws


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. Nothing has been shown under any Act, Rule orRegulation or any other law under which the Company

Court cannot exercise jurisdiction to sanction a Scheme in

the event of a possibility or likelihood of monopoly resultingon the Scheme being sanctioned.. Furthermore, nothing

has been brought on record to show that even if a monopoly

results, it would affect the public interest or the economic

interest of the country adversely, which may be a factor

having relevant bearing. [Reliance Petroleum Limiteds

Case 2002 (Guj)]


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Sanction BeyondSanction IPCL Case StudyM & A

Sanction Beyond Sanction IPCL Case Study


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IPCL Amalgamation with RIL First Stage Sanction

March 9, 2007 PWC and E&Y, valuers gave theirreport

March 10, 2007 Boards of RIL & IPCL approval

March 13/14, 2007 BSE & NSE no-objection

April 14/21, 2007 Members/ Creditors of RIL &

IPCL approval

May 14 / June 1 RD No-objection

June 12, 2007 Bombay HC sanction

June 18, 2007 OL no-objection

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Workers Associations

From Shareholders Ancillary Units

SC/ST Union

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Receipt of Objections

From Employee Shareholders

Share Exchange Ration Not proper

From Workers Association

From Ancillary Units

From SC / ST Unions

Creation of Monopoly Status

Debentureholders Class Separate From Creditors

Diversion of assets

Contrary to Public Policy

Workers participation in negotiation process Future of IPCL workers

LOI Concluded Contracts

Continued supply of bags irrespective of price &

quality

Reservation for SC / ST employees

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Filing of Affidavit-in-reply

Receipt of Rejoinder

Filing of Sur-Rejoinder

Hearing by the Court

Adjournments

Filing of Written Submissions

Final Hearing Court Order

Court Order

Appeal Before the Division BenchHearing

Filing of Written Submissions

Division Bench Order

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SATYEMAVE J AYATEGujarat HC Benc h Dec is ion

Com pl ianc e w i t h a l l fo rmal i t ies No proc edura l lapse Proper Share Ex c hange Rat io Work ers , Anc i l la ry Uni t s & SC / STEm ployees dem ands UnreasonableVALIDITY OF SCHEME - REINFORCED


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M&a Statutory Framework, Drafting of Scheme, Important Aspects & Activities

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