The Legal Implications of Corporate mergers and Acquisitions in India

Author’s name: Shilpa Sarkar

5^th Year B.A L.L.B

Sureswar Dutta Law College, Howrah, University of Calcutta.

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Abstract:

In the vibrant Indian business and legal landscape, merger and acquisition is pivotal strategies driving business expansion and market dominance. A merger involves the union of two or more companies to form an entirely new entity, operating under a consolidated, expanded brand. On the other hand acquisition signifies the sale of one small company to another big company in most cases, encompassing the complete transfer of ownership between entities. In an acquisition one company takes over another, either through a friendly collaboration or in aggressive, forceful, hostile manner. For business in India, these strategies are important for assessing new markets, eliminating competition, acquiring market shares, gaining expertise and leveraging synergies. In this article we will elaborate deeply into the world of mergers and acquisitions unrevealing their significance and impact with legal implication into corporate law system in lndia.

Introduction:

Mergers and acquisitions (M&A) refer to the consolidation of companies through various strategic transactions such as mergers, acquisition, takeovers and joint ventures. But we need to understand why company merge or acquire another company, primarily companies need to acquire or merge one another company because either they need to drive better efficiency and bringing down costs within the company itself, or another can be to increase their market shares. A process of merging is also understood as company reconstruction which will help to make increasing movement in shares and radical changes in objects. So, merger and acquisition are used in very wide sense its implication are not only limited to corporate work, many fields like Tele communications, business and Information Technology, Tax Formation etc. This is a long process where both the companies have to satisfy the Tribunal for such M&A. [1]

• Meaning: In India merger is also termed as Amalgamation. Amalgamation occurs when two or more companies are joined to form a third entity or one is absorbed into or blended with another.[2] The effect is to wipe out the merging companies and to fuse the all into the new created one. The new company comes into existence having all the properties, rights and powers and subject to all the duties and obligations, or both the constituent companies. Acquisition took place when one entity buying out another or absorbing the same entity. Merger & Acquisition are used interchangeably. For example, in 2002 TATA Group came into news by acquiring Air India, the national Airline. TATA’s strategic move, merging Air India with Vistara Airlines a joint venture between Singapore Airlines and TATA sons.

Types of Amalgamation or Merger & Acquisition:

A corporate reconstruction or Amalgamation and acquisition may take any of the following type:

• Merger: It refers to the combination of two or more companies into a single entity, pulling their assets, liabilities and operations. In India mergers are categorized as Amalgamation or absorption. Amalgamation involves the fusion of two or more companies into a new entity, whereas, absorption occurs when one company absorbs another, and the absorbed company ceases to exist.

1. By sale or Shares: sale of shares is the simplest process of Amalgamation or takeover. Shares are sold and registered in the name of the purchasing company. The selling shareholders received either compensation or shares in the acquiring company.[3]
2. By sale of undertaking: this method involves a sale of whole of undertaking of the transferor company as a going concern.
3. By scheme of arrangement: section 232 applies to every scheme which involves transfer of the whole or any part of the undertaking or liability of a company to another company. Section 230 therefore allies and an application may be made to the Tribunal by any person entitled to move it under that section. The Tribunal may sanction the scheme or may make necessary orders.
4. Horizontal merger: It signifies two companies which have merged in same company horizontal mergers provide companies with amplified market shares and the authority to influence prices.
5. Vertical merger: When two company have buyer seller relationship and they agreed to amalgamation, vertical mergers secures market power by allowing control over the entire supply chain, ensuring productive operations without interruption in supply process.

Acquisition:

It involves one company acquiring another company’s ownership stake, assets or controlling interest. In India, this can occur through various means:

1. Takeovers: A company acquires a controlling interest in another company by buying its shares, gaining management control.
2. Buyouts: Buyout involves the purchasing company’s controlling interest or its entire assets, often resulting in the acquired company losing its independent existence.
3. Joint ventures: Collaboration between two or more entities, to undertake a specific business venture, sharing risk and resources and profits while maintaining separate identities.
4. Power of Amalgamation: there should be power in the company’s name memorandum to amalgamate. It is not there it should be acquired by the altering the memorandum.  It is not necessary that the company adopting a scheme should be in financial difficulties or that it should not be an affluent company.[4]

 Provisions Regarding M&A in India:

There are some regulatory bodies gives us the provisions for M&A to regulate in Indian legal system as follows[5]–

• The Competition Commission Act of 2002, aims to regulate business conduct in India, prevents monopolistic practices and develops a compatible market environment. It seeks to ensure consumer interests, and curbs unethical business behavior and deter the abuse of market dominance. The formation of CCI serves as a watchdog, which monitor ethical business practices and prevents anti comparative control.
• The Companies Act 2013, in India the Companies act holds a significant importance in regulating merger & Acquisition. Section 230 to 240 of the companies act governs the provisions relating to M&A involving corporations, reconstructions, shareholders and bondholders. This Act presents a modernized framework compared to its predecessor from 1956, effectively overseeing M&A activities along with CAA rules. Section 231 and 232 of the Act empowers the National Company Law Tribunal (NCLT), to handle insolvency matters. Furthermore, Section 233 and Rule 25 of the companies act, facilitate fast-track mergers, streamlining the approval process by requiring consent solely from directors, shareholders and creditors. This approach significantly reduces administrative burdens, enhancing overall productivity. These measures collectively foster a fair and competitive environment for mergers and acquisitions, safeguarding stakeholder, interests and contributing to the advancement of Indians economy.
• SEBI, SEBI regulates securities markets in India, it mandates disclosure norms, takeover regulations, and provides guidelines for companies involved in M&A, specially, regarding disclosure to shareholders and the public.
• Foreign Exchange and Management Act, (FEMA) in India both the Foreign Exchange and Management Act and Companies Act, have jurisdiction over Cross border mergers. The introduction section of 234 in 2017 specifically addresses international mergers. As per the Rule 25 of Companies (compromises, Arrangement and Amalgamation) rules 2016, obtaining consent from Reserve Bank of India, is mandatory. Both international and national mergers are adhere to international and FEMA regulations.
• The Income Tax Act of 1961: It defines Amalgamation at least margin of one company with another or the merging of at least two companies to form a single entity. According to the Act for a merger to be considered as an Amalgamation under the income tax act, the following conditions must be met:

1. All assets of the merging company become the assets of the merged entity.
2. All liabilities of merging companies become liabilities of the merged entity.

• Shareholders holding at least 75% of the value of shares in the merging company becomes shareholders the merged entity.[6]

The significance of M&A:

Merger & Acquisition plays a crucial role in the business landscape by facilitating growth and foster innovation, diversifying business portfolios, enabling market consolidation and allowing companies to stay competitive in dynamic market environments.  Merger & Acquisitions serves as a strategic tool to elevate market performance. The combined value and performance of the merged entities often surpass the individual capacities of each company. The improvement stems from synergies that may result in cost reduction, increased operational efficiencies or amplified revenues. Switching for inorganic growth via M&A offers a faster process of revenue escalation compared to organic growth strategies. By merging or acquiring another company business gain immediate access to advance credibility without the need for internal development hastening their growth strategy.

Procedure of M&A transfer:

The M&A transaction require approval from shareholders and the company’s board of directors. Shareholders consent is obtained through voting and the board approves the proposed transactions after due diligence and evaluation.

Regulatory filings and documentation: Detailed documentation including merger agreements, due diligence reports, valuation reports, and regulatory filings is mandatory for compliance with the Companies Act, SEBI Regulations and other relevant laws. The legal framework and compliance requirements governing M&A in India are complicated, necessitating adherence to regulatory provisions set forth by various bodies to ensure transparency, fairness and legality in business restructuring and consolidation process.[7]

Cross border Deals:

These pertains to M&A transactions involving companies from different countries. Merger or amalgamation of companies with foreign company are dealt under section 230 to 240 of the Company’s Act, the central government may make rules , in consultation with RBI in connection M&A provided under the section. India witnesses significant cross border deals reflecting global investment interests and the integration of Indian companies into global market. These various forms of mergers and acquisitions serve different strategic purposes, allowing companies to achieve growth, access new markets, gains competitive advantages on their specific objectives and business strategies. India has witnessed an increased in cross-border deals, indicating the interest of foreign investors and Indian companies in global expansion, technology acquisition, and market penetration abroad.[8]

• IT Sectors: India’s IT industry witnesses significant M&A activity driven by technology advancement the pursuit of global market share.
• In Banking Companies: section 44A of the Banking Regulation Act of 1949 is a complete self-contained code on M&A of banking companies. Under Section 44a the power to grant approval to the scheme of M&A of banking companies is with the Reserve Bank of India instead of Tribunal and the RBI is also empowered to determine market-value of shares of the objecting share-holder who voted against the scheme as well to direct payment of the value of the shares to the dissenting shareholders.[9]
• Synergy Creation and value enhancement: operational synergies aligning business operations and extracting synergies from merged entities is essential for achieving the intended value. Value creation strategies identifying and implementing strategies to enhance shareholder value post-merger is a key opportunity for companies.
• Growth Prospects and Emerging Opportunities: M&A can provide access to new Markets, customer segments, and technologies, fostering growth Opportunities. Collaboration and mergers enable to tap into innovative technologies and business models, opening doors to emerging opportunities. Navigating these challenges presents opportunities for companies to strengthen their functions, streamline process, leverage combined expertise, and expand their market reach. Overcoming regulatory hurdles and fostering cultural integrations.

Demerger:

A scheme of sub-division of an enterprise into smaller units or splitting up the unit into more than one part or separating one or more units from the main enterprise and constituting them into separate units is called demerger. Some of the shareholders would be allotted shares in exchange ratio becomes necessary in such schemes also. But same considerations apply in the case of mergers. In a scheme of amalgamation also involves mergers. As long as the consideration is not against the public interest or illegal the court will not reject the consideration. In the case of Thomas Cook Insurance Services Ltd. Re, 2015 case, the court held that consideration said to company or to shareholder makes no difference, accounting standards complied with name changed according to 2013 company’s act requirement.[10]

Failures of Merger & Acquisition:

After a quite discussion there are various failures which have seen in mergers & Acquisition these are

• unrealistic price paid for target: The process of M&A Involves Valuation of a target company paying a price for taking over the assets Of the company, quite often one finds that the price paid to the target company is much more that what should have been paid. this phenomenon generally noticed by the owner when they revalue the company market price after a certain period.
• Difficulties in cultural integration: here, another thing is that sometimes when two or more companies merged together now one company used to work in her own style in their own way and another company used to working its own culture, then sometimes these two companies came together ad creates a conflict and find difficult to work together because of their different work background.
• over stated synergies: Mergers and acquisitions are looked upon as an important instrument for creating synergies through increased revenue, reduced costs and reduction in networking capital and improvement investment system, over esteemating for these can lead to failures of mergers.
• Integration al difficulties: companies very often face integrational difficulties sometimes it is difficult for two different entities to come together and work together to integrate together because when two entities combined themselves to adopt a new set of challenges given by the changed circumstances. To do this the company has the plan to integrate the operations of the combining entities. If their plan doesn’t work according to the circumstances then it will result as in failure.
• Poor business fit: Mergers & Acquisitions also fails when the products or services of the merging entities do not naturally fit into acquire overall business plan.
• High leverage: sometimes to pay the high price of acquisition acquired may have to borrow heavily from the market. This creates a very high leverage structure and increases the interest burden of the company.
• In United Bank Limited v United India Credit Development Company limited , There was an application made under sections 391, 392, 393 and 394 of the Companies Act, 1956, they were asking for an Amalgamation scheme with other consequential order. That the petitioner of United Bank of India was established in the year of 1918and started banking In Eastern region in India. Later, three other banking companies named Camilla Banking Corporation Ltd, Comilla Union Bank and Hooghly bank Ltd. were merged with the petitioner bank from 1950 according to the procedure of Companies Act 1949. Petitioner argued that the banks were merged with the intention only for Carrying on banking business as in the proposed memorandum.

The Court held that the amalgamation scheme was approved by the majority of shareholders and they voted for such bona-fide with due diligence the petitioner might approve the same. Also held opposite part doesn’t seem to be interested in bona-fide shareholders or petitioner as whole. Thereafter, passing the resolution needs reasonable appearance of the majority of the voter. Lastly court identify that there was no such Wrong in the scheme it was a well recognizer scheme of amalgamation.[11]

• Blue Metal Industry Ltd, v RW Dilley 1970,  [12]In this case court held that the power to acquisition can be exercised only when the offer of takeover is made by a single company. the significance of the 90% figure is on this view that once a company has become closest to the total power or patent of another company as shareholding of the same 90% would represent, but it not convert the other company Into wholly owned subsidiary by so small as 10% or less but should be entitled to holding of that minority. The lordships consider it important to bear the mind that the statutory procedure involves the acquisition by a private interest Of the property of another. An exceptional interference with the rights of individual ownership.

It leads almost certain to the consequence that the powers of the section can only be invoked by a single company for the objective to allow the 90% owned subsidiary to be converted into a 100% subsidiary, that pre-supposes a single owner.

Merger of flipkart myntra,

One notable acquisition in India involves the collaboration between Flipkart, a prominent e-commerce platform based in Bangalore and Myntra, a renowned fashion porta. In May 2014 Flipkart the well-established Bangalore based e-commerce platform acquired the fashion portal Myntra for an undisclosed amount. Although Industry analysts speculated the deal to be around Rs. 2000 crore, flip karts co-founder emphasized that the acquisition wasn’t driven by Distress. Unlike several smaller e-commerce players that either shut down or been acquired recently. Leaders from both the companies Aimed to create one of the largest e-commerce stores highlighting their strategic collaboration.[13]

Tata motors acquisition of jaguar and Land Rover,

it was a case of cross border M&A in 2008 Tata group completely acquired the Jaguar and Land Rover which were US based companies. This acquisition led Tata Motors with a boost in the global market. The company got more sale after such transaction, but Morgan Stanly reported that the acquisition of JLR resulting negative to the Tata motors, and they again give an expenditure of $1 billion US dollar, after such comeback the company cured the hope and value of the expenditure And have impact Profit.[14]

 Conclusion

The future of M&A in India appears promising markets by evolving trend and potential market strategies with regulatory changes. The landscape can ripe with opportunities for Companies seeking growth innovation and market expansion. Adaptation to new industry norms, alignment with global standards and strategic collaboration are expected to shape the trajectory of M&A activities in India. Merger and Acquisition encompasses various Strategic transactions like mergers, acquisitions and alliances and reconstructions aiming to achieve synergies growth and market expansion. Trends in reflects sector wise activities, domestic and cross border deals, economic influences and noteworthy transaction in sectors like IT, healthcare and finance. M&A activity plays a pivotal role in fostering economic growth and technological achievements market consolidation and Innovation within India. These activities contribute to the expansion of businesses and employment opportunities thereby stimulating economic development.

[1] Merger and Acquisitions https://www.mca.gov.in/content/mca/global/en/data-and-reports/reports/other-reports/report-company-law/mergers-and-acquisitions.html

[2] Somayajula v. Hope Prudhomme & Co Ltd. 1963, thelaws.com https://www.the-laws.com/Encyclopedia/Browse/Case?CaseId=403691420000&Title=S-S-SOMAYAJULU-Vs.-HOPE-PRUDHOMME-and-CO-LTD

[3] Tata Oil Mills Co Ltd v Hindustan Lever Limited 1994, thelaws.com https://www.the-laws.com/Encyclopedia/browse/Case?caseId=314991331000&title=tata-oil-mills-company-limited-vs-hindustan-lever-limited

[4] Hari Krishna Lohia v Hoolungooree Tea Co Ltd Air 1969 https://vlex.in/vid/hari-krishna-lohia-vs-571711238

[5]  merger and acquisition law  https://iclg.com/practice-areas/mergers-and-acquisitions-laws-and-regulations/india

[6]  Tax implications

https://www.dpncindia.com/m-a-transactions-and-their-legal-and-tax-implications

[7] procedure of M&A https://corporatefinanceinstitute.com/resources/valuation/mergers-acquisitions-ma-process/

[8] merger and acquisition, Manupatra https://corporatefinanceinstitute.com/resources/valuation/mergers-acquisitions-ma-process/

[9]  The Laws.com,  Bank of Madura Shareholders Welfare Assn v. RBI 2001, 105 https://www.the-laws.com/Encyclopedia/Browse/Case?CaseId=211002081000&Title=BANK-OF-MADURA-SHAREHOLDERS-WELFARE-ASSOCIATION-Vs.-GOVERNOR-RESERVE-BANK-OF-INDIA

[10]  The Laws.com,   Thomas Cook Insurance Services Ltd. Re, 2015  https://www.the-laws.com/Encyclopedia/browse/Case?caseId=315102154100&title=in-re-thomas-cook-insurance-services-india-limited-vs-state

[11]The Laws.com, In United Bank Limited v United India Credit Development Company limited   https://www.the-laws.com/Encyclopedia/browse/Case?caseId=503791361000&title=united-bank-of-india-ltd-vs-united-india-credit-and-development-company-ltd

[12] casemine, Blue Metal Industry Ltd, v RW Dilley 1970,  https://www.casemine.com/judgement/uk/5b2897b62c94e06b9e1991ff

[13] merger of flipkart and Myntra  https://www.scribd.com/document/529903657/SM1

[14] Tata motors acquisition of jaguar and Land Rover, https://www.mbaknol.com/management-case-studies/case-study-of-tata-motor-acquisition-of-jaguar-and-land-rover/