The Indian economy has been growing at a rapid pace and has emerged at the top, be it Information Technology, Research & Development, pharmaceutical, infrastructure, energy or other major corporate sectors. But this brisk growth has also brought with it great decision making responsibilities for the company. Since 1991, with the introduction of the Indian economy into the foreign market, mergers and acquisitions have become a common phenomenon throughout India. In the highly competitive global environment mergers and acquisitions seem to be the best and the only strategic option which would enable one company to gain a competitive advantage over other companies. As a consequence the companies almost regularly face situations concerning mergers and acquisitions that require strategic decision making and policy planning. The term ‘merger’ has not been given a statutory definition anywhere in the companies Act, 1956 or the Companies Act, 2013, or any other Indian law. The term has always been defined as ‘the combination of two companies where one company merges itself into the other and loses its identity and the other company gains more prominence and absorbs the former company’. The term ‘Amalgamation’ is often used synonymously with the term merger and the Companies Act under sections 390 to 395 provides for arrangements, amalgamations, mergers and the procedure to be followed for getting the arrangement, compromise or the scheme of amalgamation approved in India. The term ‘amalgamation’, however, has been defined under section 2(1B) of the Income Tax Act, 1961 as ‘merger of one or more companies to form one company in such a manner that all the properties and liabilities of the amalgamating company(s) become the properties and liabilities of the amalgamated company, and not less than three-fourth shareholders of the amalgamating company become the shareholders of the amalgamated company’. The Competition Act, 2002 also gives reference of the merging companies located in India or located in India and outside India while defining the term ‘Combination’ under section 5 of the Act.
Companies generally opt for mergers and acquisitions because they are an important way by which the companies can grow and become better organized. One of the major reasons why companies decide to merge or acquire is to increase the cost efficiency of the company. Any kind of merger in general improves the purchasing power of the acquiring company as there is more negotiation with bulk orders. Apart from this, staff reduction also helps a great deal in cutting the cost and increasing profit margins of the company. The increase in volume of production also results in reduced cost of production per unit that eventually leads to raised economies of scale. Moreover, with a merger it becomes easy to maintain the competitive edge because there are many issues and strategies that can be well understood and acquired by combining the resources and talents of two or more companies. A combination of two companies certainly enhances and strengthens the business network by improving market reach. Mergers offer new sales opportunities and provide the chance to explore new areas and the new possibility of business expansion. With all these benefits, a merger and acquisition deal increases the market power of the company which in turn limits the severity of the tough market competition. This enables the merged firm to take advantage of innovative technological advancements against obsolescence and price wars.
However, in order to make the merger advantageous and reap the above mentioned benefits it is important to plan and strategize the merger and acquisition schemes. The company must analyse the market scenario, the company’s status, and the shareholders benefits before deciding to merge with or acquire another company. It is an established fact that the company is an artificial person and works through its Board of Directors and therefore the major decisions taken by the company are in fact taken by its Board of Directors. Thus, when a company involves in an actual or proposed merger or acquisition, it is the Directors who are placed in a volatile environment of decision making and claim settlement; after all, it is the job of management to maximize the shareholder value. Therefore, when a company merges it is the Directors who play a crucial role and are responsible for satisfying all the statutory requirements mentioned under the Indian legislations with regards to mergers.
PROCEDURE OF AMALGAMATION AND THE ROLE OF DIRECTORS
The Companies Act, 1956 under sections 391 to 395 deal with arrangements, amalgamations, mergers and the procedures for getting the schemes of such arrangement or compromise approved.
The first and foremost requirement in a merger or acquisition is for the Memorandum of Association of the Company to provide the Company vise-a-vis its Directors the power to amalgamate in its object clause. If the Memorandum of Association is silent on this point then the same must be amended before an amalgamation can actually take place. If the MoA empowers the Company to amalgamate then the Board of Directors must convene a meeting as the first step in bringing forth an amalgamation. The Directors in the Board Meeting must pass the requisite resolutions with respect to,
· approving the draft scheme of Amalgamation,
· authorizing the filing of application to the court for directions to convene a general meeting and
· Filing a petition for confirmation of the scheme by the High Court.
Even through an application under ss.391/ 394 of Companies Act, 1956 can be made by the members or creditors of a company, the court may not be able to sanction the scheme which is not approved by the company by a Board or members resolution. Therefore in general it is the Directors of the company who normally make the application and in doing so the Directors have the duty to disclose all the material particulars, with respect to the Company, in the application.
The Directors of the Company are thereafter required to make an application to the Court for directions to convene a general meeting by way of Judge's summons supported by an affidavit. The proposed scheme of amalgamation must be attached to such affidavit and the summons should be accompanied by a certified copy of the Memorandum and Article of Association of both companies along with a certified true copy of the latest audited Balance Sheet and Profit & Loss A/c of the transferee company.
Thereafter the Directors must make an application to convene a meeting under section 391(1) to the jurisdictional HC depending on where the Company’s registered office is located. This application, however, can also be made to the High Court by the Members of the Company; a successor to the shares of a deceased member; the transferee of shares, creditors of the company and the Liquidator also have been empowered by the Act to make an application to the High Court to convene a meeting. A copy of this application must also be sent to the Regional Director of the Region.
Thereafter the High Court shall pass the necessary orders which shall include the time and place where the meeting is to be convened, chairman of the meeting, fixing of the quorum, procedure to be followed in the meeting for voting by the proxy, advertisement of notice of the meeting, time limit for the chairman to submit the report to the court regarding the result of the meeting.
The Chairman so appointed shall thereafter sent the notice of the meeting to the creditors and/or all the shareholders individually, by registered post and enclose with it a statement stating the following information;
· Terms of the proposed amalgamation and its effects,
· Any material interests of the directors, Managing Directors or Manager, in any capacity,
· Effect of the proposed arrangement on those interests,
· A copy of the proposed scheme of amalgamation,
The Company shall have the duty to publish such notice of the meeting by way of an advertisement in a Hindi or English newspaper as directed by the Court. Such notice shall be published a minimum 21 days prior to the date on which the meeting is to be held. Where the company is a listed company, it shall have the duty to send 3 copies of the notice of the General Meeting to the Stock Exchange where the company is listed. The Chairman of the meeting shall thereafter send an affidavit to the Court, 7 days prior to the meeting, showing that all the requirements regarding the issue of notices and advertisement have been duly complied with. Subsequently the meeting shall be held to pass the following resolutions;
Ø Approval of the scheme of amalgamation by ¾th majority.
Ø Special Resolution for getting Central Government’s approval for authorizing the allotment of shares to persons other than existing shareholders, as per the provisions of Section 81(1A) of the Companies Act, 1956.
The Chairman shall then report the results of the meeting to the High Court within the time prescribed or within 7 days from the date of the meeting and shall submit to the Registrar of Companies documents containing the resolution approving the scheme of amalgamation and the Special Resolution passed for issue of shares to persons other than the existing shareholders.
Henceforth, in order to approve the scheme of amalgamation, the company must make a petition to the High Court within 7 days from the date of filing of the report by the Chairman. If the registered offices of the amalgamating companies are in the same State then the companies can move to the court together but if they are in different states then each company must move to different courts having jurisdictions over their respective localities. The Court, after being satisfied that all the requirements have been fulfilled with respect to the scheme of amalgamation, may give its approval to the scheme of amalgamation.
Ones the Court’s approval has been received; it is the duty of the directors to file a certified true copy of the Order with the Registrar of Companies and make sure that a copy of the Order is, from then on, annexed with each copy of the Memorandum of Association that is issued after the Order is filed with the ROC.
Finally the Board of Directors must pass a resolution with respect to the allotment of shares to the shareholders in exchange of the shares they held in the transferor company.
ADDITIONAL DUTY OF DIRECTORS UNDER COMPANIES ACT, 2013
The Companies Act, 2013 has been brought into force but the provisions relating to mergers covered under Sections 230 to 240 are yet to be notified. Until then, the court proceeding will continue to be governed by Section 391-396A of the Companies Act, 1956. The 2013 Act will be incorporating certain changes to the procedure of mergers; e.g. it shall create a new regulator, the ‘National Law Company Tribunal’ ("Tribunal") which, upon its constitution, will assume jurisdiction, in place of the High Courts, for sanctioning mergers. However, as far as the director’s responsibility in conducting the process of merger is concerned, there have been not many changes apart from some additional formalities that the directors will now have to fulfil.
Firstly, according to the Companies Act, 2013, the notice for a meeting, called in pursuance of an order of the Tribunal, shall not only have to be sent to all the creditors or class of creditors, the members or class of members, debenture holders of the company and to the registered address with the company; but the directors now shall also have to send a copy of the notice to the various regulators including the Ministry of Corporate Affairs, Reserve Bank of India, SEBI, Competition Commission of India, Income Tax authorities and other sector regulators or authorities which are likely to be affected by the merger.
Secondly, in addition to the documents, to be attached with the Tribunal’s notice, as prescribed under the 1956 Act; the directors now have the duty to ensure the following documents are also annexed with the Tribunal’s notice under the 2013 Act –
· The draft of the terms of the scheme drawn up and adopted by the directors of the merging company;
· Confirmation that the copy of the draft scheme has been filed with the Registrar;
· Report adopted by the directors of the merging companies relating to the effect of the scheme on each class of share holders, key managerial personnel and promoters, specifying any special valuation difficulties;
· The report of the expert with regards to valuation of the Company, and
· A supplementary accounting statement if the last annual accounts of any of the merging company relate to a financial year ending more than six months before the first meeting of the company summoned for the purposes of approving the scheme.
GOVERNANCE DUTIES OF DIRECTORS DURING MERGERS
Since Mergers and Acquisitions are a significant event in a Company’s life, a proper governance of the Company and its activities becomes a necessity in order to reduce the risk of failed mergers and acquisitions; and in bringing into place a proper governance mechanism the Board of Directors play an important role.
Ø To begin with, it is the principle duty of the Directors to review the merits and demerits of the proposed merger and acquisition transaction. The first and foremost decision that the directors must take, before approving a scheme of merger or acquisition is how to enhance the shareholder’s value. In doing so the Board of Directors must verify if the proposed deal fits well with the company’s overall strategy. The Board of Directors must further take into consideration the findings of due diligence conducted on the target company and assess in the light of those findings if the proposed merger would be beneficial to the shareholders. The Board of Directors are always placed in a capricious position as they are the ones either acting as the facilitator, if they support the deal or as the hindrance, if they place checks and balances.
Ø Another important duty of the Board of Directors is risk management. This responsibility comes more into play at the time of cross border merger where the acquirer is not only subjected to an alien legal regime but is also faced with a difference in culture. The foreign acquirer company is often faced with unusual compliance risks and therefore it is the duty of the directors to examine the target company thoroughly to avoid such risks. The Board of Directors must check if the target company has operated in compliance with applicable legislations, if it has indulged in any corrupt activities in the course of its business, and also take into consideration compliance risks under statutes such as the Foreign Corrupt Practices Act, Bribery Act, etc. the Board of Directors must systematically judge all these aspects before venturing into a cross border merger.
Ø A decision of mergers and acquisitions are crucial to the future of a company and therefore must be taken with the utmost diligence. It is necessary for the benefit of the company that these activities are monitored in a dispassionate and impartial manner. Since the managers and controlling shareholders tend to get attached with the company, either due to pecuniary interests or a long drawn emotional entanglement, Independent Directors are called upon to perform the role of ‘Watchdogs’. The Independent Directors form a part of the Audit Committee and other special committees in order to access the company’s actual financial status in an impartial manner.
With the emergence of new companies and the diversification and expansion of the existing companies, the number of mergers and acquisitions taking place has also increased in number. In the era of this booming economy the legal norms and legislative frameworks have also become stringent in order to check and curb apprehended mismanagements. The directors therefore now have more duties than ever before, to check and comply with the legislative norms and make sure the company works within the legal framework. The primary duty of the Board of Directors is to enhance the shareholders’ benefits and thus mergers and acquisitions seem a lucrative offer to meet that objective. But in order to make sure that a proposed merger is a beneficial arrangement, the directors must work with extreme dedication and commitment. It is in the hands of the directors’ that any arrangement of the company initiates. However, this responsibility comes with immense risk as well since the directors are always at threat of being sued by the shareholders and creditors if a proposed merger does not reap the results as promised.
 Role of Due Diligence in Mergers and Acquisitions, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2294836. accessed on 30/01/2022.
 Benefits of Mergers and Acquisitions, http://www.mergersandacquisitions.in/benefits-of-merger-and-acquisition.htm. accessed on 30/01/2022.
 Companies Act, 1956, ss. 391-394.
 Kamalpreet Kaur, Merger Regime under the Companies Act, 2013, http://www.mondaq.com/india/x/289180/Corporate+Commercial+Law/Merger+Regime+Under+The+Companies+Act+2013 accessed on 30/01/2022.
 Umakanth Varottil, Corporate Governance in Merger and Acquisition Transactions, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2042307. accessed on 30/01/2022.
 Cliff Wright & Brian Fenske, Visionary Deal Strategies in an Ever Changing M&A Market: Leading Lawyers on Conducting Due Diligence, Negotiating Representations and Warranties, and Succeeding in a Post-Recession Market, M & A DEAL STRATEGIES (2012).
 VAROTTIL, Supra note 4.