Reverse Merger: Listed Holding Company merging into WoS

Max Ventures and Industries Limited (MVIL), a listed company has announced Scheme of Amalgamation into its Wholly Owned Subsidiary (WoS) – Max Estates Limited (MEL) i.e. “Reverse Merger.”

Post Approval of scheme by the National Company Law Tribunal (NCLT), MEL will be listed on the stock exchange claiming relaxation under sub-rule (7) of rule 19 of the Securities Contracts (Regulation) Rules, 1957 and MVIL will get dissolved.

MVIL is primarily engaged in the real estate sector through its investments in its subsidiaries and provides management consultancy services to the group companies. MEL is engaged in the development of the real estate, directly and indirectly through its subsidiaries and joint ventures.

Scheme of Amalgamation is proposed for overall re-organization plan to rationalise and streamline the existing group structure, consolidation of businesses which shall create greater operational synergies and efficiencies at multiple levels of business operations and shall provide significant impetus to their growth.

SWAP RATIO: –

Upon Scheme becoming effective, MEL will issue 1 equity share of Rs. 10 each for every 1 equity share of Rs. 10 each held by the shareholders MVIL.

DELISTING OF LISTED ENTITY PURSUANT TO AMALGAMATION: –

Though there is no specific exemption provided under delisting regulations for listed company getting merged with unlisted company, it is observed from the past cases that if unlisted company is getting listed and if there is no change in promotors, controlling interest, management or the shareholding pattern, then there should be no further compliances required and an observation letter is issued by Stock Exchange/SEBI. Considering the same, in our view Stock exchange will issue the observation letter in due course without any adverse remarks.

In the year 2015, in case of Scheme of Amalgamation of Zodiac Ventures Limited (ZVL), (Listed Company/Transferor Company) with Zodiac Developers Private Limited (ZDPL) – Unlisted/Transferee Company. SEBI issued observation that it amounts of delisting of ZVL without providing exit opportunity. However, SEBI allowed ZVL to file Scheme with High Court for sanction. We do not have order of the High Court but in this case, High Court might have directed the company to provide exit opportunity to shareholders.

In the year 2017, in the case of scheme of merger of Gloster Limited (Listed Company/Transferor Company) into the Kettlewell Bullen and Company Limited (Transferee Company/Unlisted Company, no adverse observation was issued by the SEBI. SEBI has only commented that Transferee Company shall be listed at least on one national level stock exchange.

Further section 232(3) (h) of the Companies Act covers the situation of Merger of Listed Company into Unlisted Company where it states that exit opportunity be given to shareholders of Transferor Company for payment of the value of shares held by them if they decide to opt out of Transferee Company. Though section is not clear if unlisted company is getting listed as part of the scheme, whether exit opportunity needs to be given to public shareholders.

Further, SEBI Master Circular No. SEBI/HO/CFD/DIL1/CIR/P/2021/0000000665 contains condition that if the unlisted company is an involved in a scheme of arrangement, percentage of shareholding of pre-scheme public shareholders of the listed entity and the Qualified Institutional Buyers (QIBs) of the unlisted entity, in the post scheme shareholding pattern of the “merged” company on a fully diluted basis shall not be less than 25%. Clause no. 20- of the scheme contains a clause that post scheme of merger, public shareholding will not be less than 25%.

Since the transferee company is getting listed and there is no change in the shareholding pattern, stock exchange may not provide any adverse observation on the scheme.

Shareholding pattern of the MVIL post scheme of merger –

*Shares of Transferee Company held by Transferor Company (Promoter) will be cancelled. Pursuant to scheme of merger, even though promoters of Transferor Company are getting more than 25% equity shares in the Transferee Company, they will be exempted from giving open offer under the takeover code pursuant exemption available in the case of scheme of arrangement under regulation 10 of SEBI Takeover Code Regulations.

However, in view of SEBI Master Circular No. SEBI/HO/CFD/DIL1/CIR/P/2021/0000000665 provides Lock-in Period for Shares held by Promoters to extent of 20% post-merger shall be locked in for 3 years from date of listing and remaining shares for one year from date of listing.

APPOINTMENT OF MANAGING DIRECTOR OF TRANSFEROR COMPANY INTO TRANSFEREE COMPANY FOR REMAINING TERM: –

Clause No. 11 of the scheme contains clause for appointment of Mr. Sahil Vachani, Existing Managing Director (MD) and Chief Executive officer (CEO) of the MVIL, who will be appointed as MD and CEO of the Transferee Company on the similar terms and conditions (within the limits of remuneration approved by the shareholders of MVIL) as in the case of Transferor Company as the MD and CEO of the Transferee Company. Even though scheme contains clause for transfer of employees, Director of the Transferor Company cannot become director in Transferee Company unless scheme provides for his appointment.

Mr. Sahil Vachani is son of Mr. Ravi Vachani who is shown as promoter group in clause no.4.1 of the scheme. Mr. Sahil was re-appointed as Managing Director with effect from 15^th January 2021 to 14^th January 2026 in Transferor Company. Transferee Company (MEL) has incurred losses in FY 2019-20 and FY 2020-21. Since existing remuneration (Six Crores) will be payable by Transferee Company and profits of the Transferee Company will be inadequate pursuant to Schedule V of the Companies Act 2013 approval of shareholders of Transferee Company by passing special resolution is required separately after effectiveness of this scheme. This might be one of the reasons that they have included clause of appointment of MD as part of scheme.

Pursuant to section 203 of the Companies Act, 2013 states that MD is Key Managerial Personnel (KMP) and sub-section (3) of section 203 of the Companies Act, 2013 provides that a Managing Director can be appointed as KMP(MD) of subsidiary at the same time.

Further, since the appointment of MD is being made through the scheme of merger, which has been approved by the Board of Directors of both the companies in their respective board meeting, no separate approval of Board of Directors or Nomination and Remuneration Committee as mentioned under Schedule-V of the Companies Act, 2013 will be required.

Pursuant to section 203 of the Companies Act, 2013 MVIL will have to appoint other Key Managerial Personnel like CFO, CS separately by-passing board resolution.

PERMISSION TO RAISE CAPITAL

Clause no. 32 of the Scheme permits Transferor and Transferee Companies to raise capital by issuing equity shares to the financial and strategic investors (No definition of Financial and Strategic Investor has been provided in the scheme).

Normally the clause for increasing the capital by companies are not provided in the scheme. It is unique to have the options for both companies. In effect, management does not want to lose the opportunity to invite and raise funds till the scheme is completed. The impact of this should be considered while getting listed post-merger and shareholding pattern and as a result compliances under LODR regulations and SEBI regulations for preferential issue to the extent applicable. Clause 20 of the scheme in fact provide for compliance.

CONCLUSION

Reverse amalgamation is done to minimise compliances relating to various project approvals and transfer of immovable properties. In a way, the present listed company gets delisted no doubt with shares allotted in the company which is proposed to be listed post scheme of amalgamation. There is no specific exemption in delisting regulations for such reverse merger nor it provides for any restrictions. However, if specific exemption or clarification is provided by the SEBI that will facilitate such commercial transaction. Further, in current transaction SEBI has not issued its observation letter till now, it may take more time for issuance of observation letter considering reverse merger. Also, it may contain adverse remarks in the observation letter.

To have continuity of top management and specifically Managing Director on the same terms, the scheme provides for appointment of the Managing Director for remaining of the tenure on the same terms in the Transferee Company. This will not require compliances of Section 197 and Schedule V of the Companies Act,2013 by the Transferee Company to continue to pay the same remuneration.

One more unique clause in the scheme is regarding liberty to both companies to raise equity during pendency of the scheme. As the company continues to expand its business and buy new land parcels, if necessary either of the company can raise the funds compliance of applicable provisions to both the companies. However, post raising of such funds, public holding needs to be more than 25% of total paid-up capital and the Scheme through Clause 20 ensures the same.