This article has been written by Mahek Patel, a 3rd semester law student from Balaji Law College.
Abstract
Mergers and acquisitions are the one from types of economic condition that helps in expansion, restricting and consolidation of businesses. Mergers and Acquisition as a combine force plays a great role in upholding the growing economic trends and ultimately mergers acquisition as a combination, a unit of companies increases market share, introduces new products or services, carrying big and successful corporate operations plays a significant role in boosting economy and hereafter driving more profit revenue. Behind these merging and uniting businesses the legal system has its own rules safeguarding the merging, acquiring and amalgamation of companies and rights of their shareholders through various acts, rules and regulation with some guidelines as there is involvement of complex requirement of legal aid that helps with variety and diversification of issues related to liabilities, approvals, and that includes regulating and controlling too. Definitely this includes statutory, corporate, and competition laws that maintains the regulation of contracts, transactions, and other related important deeds that helps in forecasting the subjected potential risks and legal aspects related to M&A which involves contracts, non-compete and non-solicits, due diligence and other process that holds the consolidation smoothy and firmly and the legal implications ensures that everything should be processed out in a smooth and well-structured manner.
Introduction to M&A
MERGER
When a business transaction is done to unite or merge two existing companies into a new one basically forming a new legal entity. This process takes place on the
basis of agreement that provides provisions and guidelines related to mergers and companies or entities involve in it. The combing companies are said to be dissolved in each other as the acquiring company take over the liabilities and assets of that targeted company that is merging.
Mergers combines the organizational forces that are on same level to create a new one in which the level and partners are on the same scale which leads to increase their revenues and profit leading them to grow and expand more faster rather than they can grow being a single entity. There are various types of mergers like congeneric, product extension, conglomerate and vertical and horizontal merger.
ACQUISITION
The word “acquisition” is originated from the latin word ‘acquirere’ which means to add, to acquire, or to takeover, so it is subjected to as situation or a process, an economic process where a company, a company that is bigger in size takes over the other small company simply the company that is big in size takes over the assets and liabilities and shares of the other company. In addition, M&A are nothing but consolidation of companies, just the difference merger is combination of 2 or more to form one while, acquisition stand where acquisition stands for 1 company or business takes over by another one only. The main focus of M&A is to evaluate different opportunities and to maximize profit.
M&A plays a significant role in India corporate landscape as merger and acquisition a combination that not only drive economic forces and wealth, but also signifies the strategies that are crucial for the growth of companies. By combining it leads to their growth in an inorganic economic way, hence allowing them to expand their markets and shares, opening access to new technologies and skills and with acquiring and consolidating it diversifies the offerings through which gaining a competitive perspective becomes easy leads to rapid growth in company’s economy.
TYPES OF M&A
Horizontal merger:
The one of the common type of merger is this one, the horizontal merger. When two or more than two companies operating at the same level of the value chain means the companies are providing similar products and services and are direct competitor of one another, merge in order to target and dominate the market and that amounts to building higher economies of scale and that by decreasing market competition.
Vertical merger
Being at different stages of production in the same market the type of merger occurs called as vertical merger. Imagine two businesses that aren’t technically or market rivals, but joining and coming together makes sense as it gives boosts to supply chain and cuts costs but this type of mergers create complexities as it reduces flexibility.
Congeneric merger
Congeneric merger also called as concentric acquisition or product extension merger which simply says that this merger occur when having similar targeted customers the companies operate in subjected business means related segments offering complementary and different products and services at a same time. The mergers here are called as indirect competitors. The key aspects of companies here is to create cross selling opportunities by merging so that they can boost their value creation.
Conglomerate merger
When two business and companies those industries and market businesses are fully different from each other but still combines to achieve a big size company or expand their business in each other sectors this type of mergers are conglomerate merger.
In speaking of real sense conglomerate merger amounts to zero benefit but these mergers upbrings the risks in business diversification, causes culture clashes and decreases the efficiency and face many challenges due todisrupted business operations[i].
GOVERNING M&A: LEGAL FRAMEWORK
COMPETITON ACT 2002
The Competition Act 2002, passed by the parliament in 2002 that regulates combination that is M&A, ensures there are no adverse effects of competition and combining and prohibits anti-competitive agreements. This act was amended by the competition act 2007. In accordance with this CCI – Competition Commission of India was established too. CCI works under the competition act to regulate the market of M&A. The competition act aims against anti- competitive practices or agreements, prohibits the power of position that creates dominance and also foster competition.
HOW CCI GOVERNS M&A:
–BY NOTICE: each combination in mergers or amalgamation requires the notice of CCI before it get finalized to prevent adverse effect on competition or preventing financial thresholds.
–APPROVAL: CCI approves only those mergers and acquisition of companies those exceeds a certain value or includes a company with limited business substantial business operations.
According to CCI’s new regulation for M&A, it states that a turnover of more than 500 CR with generating10% of their global turnover in India are came to be considered as substantial business operations.
–ANTI-COMPETITIVE AGREEMENTS: when there is domination or any abusive pressure by one company on another one CCI prohibits this anti- competitive combination or agreement.
The government agency CCI came into force in2009 from there it main objectives were to sustain and promote fair competition in the market, as well as it protects the consumer’s interest and prevents practices that negatively impacts the market competition and this hoe the CCI’s scope regulates the operation of M&A[ii].
Security and Exchange Board of India (SEBI)
- SEBI regulates the securities and commodity market in India, under the Ministry of Finance which comes under the Government of India.
- Established on 12th April,1988, from then it is regulating security and commodity market by its statutory provisions and powers which comes by SEBI Act, 1992.
- APPROVAL: For transaction related to mergers, the companies must seek approval from the stock exchange and shareholders. The draft scheme of M&A is reviewed under the stock exchange and it provides approval to the draft if it complies with the regulations of SEBI and the approval of shareholders must be taken in general meeting.
- TAKEOVER CODE: The taking over of stakes in an Indian Listed Company is regulated by the takeover code which also protects the interests of public shareholders and also ensures that they can enjoy their freedom. Take over code is nothing but the set of rules that regulates and governs how a company can acquire or take over the other one.
- DISCLOSURE: It says that promoters must disclose the creation, invocation including legal claim property, obstruction or hindrance.
NATIONAL COMPANY LAW TRIBUNAL (NCLT)
Under Section 408 the Central Government has constituted the NCLT which stands for National Company Law Tribunal. NCLT is a governmental organization and regulatory body which protects the rights of minority shareholders and has the authority to hear out and act out the cases related to mergers, minority mergers and different amalgamations and acquisitions and also manages the issues related to other corporate laws and issues and deals with disputes related to corporate landscape.
This body holds the power to approve or reject the consolidation of M&A and looks after the matter and action-plan of various corporate Indian companies.
NCLT ensures fair co-ordination between companies and organizations in accordance with Companies Act 2013.
–EVALUATING: The NCLT foresees the impact of proposed merger or acquisition on competition and safeguards the rights of shareholders, basically it evaluates the risks and protects shareholders.
PROCEDURES FOR M&A:
The NCLT proposes and ensures some procedures and guidelines for M&A which includes application, authorization, meeting, schemes and auditor’s reports.
In summary the application of merger and acquisition must be filed with the NCLT by the company, for merger the company must pass a resolution at board of directors meeting, there should be an auditor’s report that mergers follow the guidelines in line with company’s liquidity, Companies Act, and RBI, and a draft of merger scheme must be prepared for overview, and a meeting will be taken by NCLT to ensure that 75% of secured creditors are in favor of merger.
Companies in New Delhi, Ahmedabad, Jaipur, Chandigarh, Chennai, and other several cities in India holds the jurisdiction of NCLT over them.
RESERVE BANK OF INDIA (RBI)
The Reserve Bank of India abbreviated as RBI established on 1st April 1935, approximately 89 years ago and RBI is governed by Ministry of Finance. It is the regulatory body that regulates the Indian Banking System, and is responsible to maintain and control the issues regarding the Indian Rupee and its supply. The RBI plays a vital role in controlling and regulating affairs related to mergers and acquisition.
APPROVAL: Before any merger and acquisition, companies must get the approval of RBI in intention to increase transparency and streamline compliance.
BANK ACQUISITION: RBI holds the power that can approve or deny the applications related to banking acquisitions. Banking Acquisitions is when a larger bank buys smaller ones and RBI approves it as it called a banker’s bank.
BANKING MERGERS: The Banking Regulation Act, 1949 states that 2/3rd of each bank’s shareholders to approve a merger then the proposal is ready to approve from RBI.
MAJOR SHAREHOLDING: The Reserve Bank of India requires a strong approval for taking over the major shareholding in the banking companies and it is defined as more than 5% of the paid-up share capital and voting rights are must,
THE COMPANIES ACT, 2013
How company act regulated M&A:
- Deal Value Threshold (DVT): A new threshold framework that requires notification to the Competition Commission of India (CCI) for transactions valued above INR 2,000 crore ($240 million). The threshold applies if the target has substantial business operations in India, such as an Indian turnover or gross merchandise value (GMV) of over INR 500 crore ($60 million).
- Streamlined timelines: The new rules introduce streamlined timelines for M&A transactions.
- Wider definition of control: The new rules introduce a wider definition of control to enhance regulatory oversight.
- Ease of doing business: The new rules aim to make it easier to do business in India.
- Dematerialization of securities
- Private companies must issue securities in dematerialized form and facilitate dematerialization of existing securities from September 30, 2024[iii].
- Market rumor clarifications
The Securities and Exchange Board of India has mandated listed entities to confirm, deny, or clarify any media reported information that leads to a “material price” movement of shares.
Digital Personal Data Protection Act
The Digital Personal Data Protection Act, 2023, will have a bearing on M&A activity as it requires fresh consent from individuals whose data is being shared[iv]
Due Diligence and M&A
The process of verifying and evaluating the facts about the company a person or a product and services before making a decision in favour of this process is called as Due Diligence. In Business transaction due to diligence is an important step that helps in identifying the potential risk and liabilities and ensure that the transaction is legal.
Due Diligence , the diligence helps buyers to make accurate decisions and avoid losses and is a critical step in merger an acquisition which identifies risks understanding the workforce, culture, challenges related to company also it ensures protection of investors in long-run.
Due Diligence ensures that deal or investment opportunities meet all the criteria regarding the deed or investment. Some things are considered in due diligence that matters for M&A like the legal diligence that examines the legal aspect of company, such as intellectual property contracts and litigation history that compliance, and helps to understand a company’s commercial prospects.
Simply, it’s an in-depth review of company like it examines the financial property by financial due diligence and number of other process and issues related to tax, commercial, culture and due diligence. The process is done to maximize the value in the transaction and ensure the transparency.
Due Diligence analyses everything like market strategies, competitors technologies, employer and employee relationship and their views, Company funding data, future growth an related perspective, also financial analysis of stakeholders and their value and rights. The goal of this process is to make best decision before merger or amalgamation, so that a turn would to be best.[v]
Shareholders and creditors
The relationship between the creditor and Shareholders is one was that involves potentials risk as shareholder think of high profit but don’t take risks and at the same time. Creditors leading to conflict because high investment could jeopardize a company’s ability to repay to them. This conflict especially arises in Mergers and acquisition impacts financial disrupting of the company.
How shareholders and creditors rights get affected by M&A
Shareholder’s approval
Depending on legal terms, shareholder approval holds a significant place as the approval is requirement for M&A transactions and this can influence deal and terms related and conditions related to it.
Protection mechanisms
M&A agreement may include the guidelines or provisions like to maintain financial ratio assets disposal to avoid potential risk to creditor.
Fiduciary duty
Fiduciary means trust, the duty that is legal obligation for someone to act in some best interest of another party rather than their own, it is called as fiduciary duty board members and shareholders hold fiduciary duty and act in good faith and give their decision during the merger an acquisition.
CONCLUSION
This article helps to understand the importance of legal framework regulating M&A in India and emphasizes the role of legal professionals ensuring compliance to avoid the legal complications with all laws applicable. Both merger and acquisitions are a powerful for business expansion, restricting, and consolidation. It is a highlighted trend in India as it is impact of globalization and liberalization in India economic trends, but they come with complex legal implications and they must be navigated in real- terms by due diligence and evaluating the risks.
But it continues to evolve in Indian corporate landscape ensuring all legal aspects including compliance with Companies Act, SEBI regulations, tax rules and other essential aspects, but M&A will not only grow but also will unlock various opportunities of expansion and diversification and consolidation.
References
- https://cleartax.in/s/compliance-under-companies-act-2013
- https://www.pwc.in/assets/pdfs/publications/2013/companies-act-2013-key-highlights-and-analysis.pdf
- https://www.mca.gov.in/mca/html/mcav2_en/home/actsandrules/companies+act++2013/companiesact2013.html
- https://byjus.com/free-ias-prep/indian-companies-act/https://synoptek.com/insights/it-blogs/due-diligence-in-mergers-and-acquisitions/#:~:text=What%20Is%20the%20M&A%20Due,value%20in%20an%20M&A%20transaction
- https://lawcrust.com/shareholder-rights-in-mergers-and-acquisitions/#:~:text=A%20fundamental%20shareholder%20right%20in,enhancing%20the%20decision%2Dmaking%20process.&text=Shareholders%20deserve%20fair%20treatment%20throughout,to%20safeguard%20minority%20shareholders’%20interests.&text=Appraisal%20rights%20give%20shareholders%20the,on%20valuations%20and%20dispute%20resolution
- https://www.icsi.edu/media/webmodules/CSJ/May/17ArticleJayBhaveshParekh.pdf
- https://www.mca.gov.in/content/mca/global/en/about-us/affiliated-offices/nclt.html#:~:text=NCLT%20is%20a%20quasi%2Djudicial,arising%20under%20the%20Companies%20Act.&text=Pertaining%20to%20claims%20of%20oppression,prescribed%20under%20the%20Companies%20Act
[i] https://singhania.in/blog/types-of-merger-acquisition
[ii] https://www.cci.gov.in/legal-framwork/act
[iii] https://corporate.cyrilamarchandblogs.com/2024/09/fig-paper-no-38-ma-in-fig-space-recent-trends-and-shifts/
[iv] https://law.asia/mergers-acquisitions-india-japan-russia-taiwan/
[v] https://byjus.com/free-ias-prep/indian-companies-act/https://synoptek.com/insights/it-blogs/due-diligence-in-mergers-and-acquisitions/#:~:text=What%20Is%20the%20M&A%20Due,value%20in%20an%20M&A%20transaction
