M & A CritiqueThe Companies Act 2013 (New Act), which was substantially made effective from April 1, 2014, has the potential and capability to be a historic milestone for implementing Mergers & Amalgamations (M&A). So far, the provisions relating to M&A under the New Act are yet to be notified.
These are pragmatic reforms for M&A under the New Act, which could make the process easier, faster and cleaner for companies involved in M&A. Some of the highlights include fast track mergers, mergers between Indian Companies and foreign companies and, setting up of National Company Law Tribunal (NCLT) to hear and decide on M&A proposals, cutting down on the probability and scope of objections to M&A’s and easier as well as wider participation of shareholders through postal ballot approval.
Chapter XV of the New Act deals with “Compromises, Arrangements, and Amalgamations”, and consolidates the applicable provisions and related issues. The Old Act required M&A to be sanctioned through a court process. The said process will continue under the New Act (with certain exemptions and relaxations) but the jurisdiction of court with regard to such Schemes will now vest with NCLT.
ESTABLISHMENT OF TRIBUNAL – NATIONAL COMPANY LAW TRIBUNAL (NCLT):
The New Act envisages the creation of a new tribunal, National Company Law Tribunal, which will assume jurisdiction of the High Courts for the sanctioning of M&A’s/Schemes. Under the Old Act, a Scheme is required to be approved by the High Court having jurisdiction over the registered office of the companies seeking the approval of the Scheme. This is done to ensure fairness and an effective overseeing of the Scheme. However, in the process, there have been serious concerns regarding huge delays. The New Act seeks to address the concerns of undue delay. NCLT will be a specialized body dealing only with cases under Company and related laws thereby introducing elements of speed and efficiency.
The Companies Act 2013 envisages a paradigm shift in the process of compromise/arrangement. It envisages that all the powers and functions of the Company Law Board, Company Court, BIFR under the Sick Industrial Companies Act will henceforth be exercised by NCLT. The establishment of a single forum which will be dedicated to corporate matters is a welcome move and removes the problem of multiple regulators. However, setting up such quasi-judicial tribunals has been a constant point of litigation, either on its legal competence or non-compliance with the provisions of NCLT with the principles laid down in the past by Apex Court rulings. In this regard a petition was filed by Madras Bar Association as well as by the Union of India in Apex Court challenging the decision of Madras High Court order dated 30th March, 2014 with regard to the validity of the constitution of NCLT and NCLAT and challenging to the prescription of qualifications including term of their office and salary allowances etc. of President and members of NCLT as well as Chairman and Members of the NCLAT and challenging the structure of the Selection Committee for appointment of President/Members of the NCLT and Chairperson. This has delayed the process of recruiting judicial and technical members of NCLT, which could mean further deferral in setting up of NCLT, which found its way into the New Act after almost a decade of a legal battle. However, on 15th May 2015, the apex court has passed an order holding that Constitution of NCLT and NCLAT as perfectly valid and ordered that certain corrections be made in section 409(3) and 411 of Companies Act,2013 with regard to qualifications of Technical member and also ordered that defects in provision of section 412(2) be removed with regard to Selection of Member of Tribunal and Appellate Tribunal by Selection Committee.
The Companies Act 2013 provides that until Government notifies a date for the transfer of all matters, proceedings or cases to be sent to NCLT, the provisions of the Act with regard to the jurisdiction, powers, authority, and function of the current Company Law Board and the Company Court will continue to apply. The 2013 Act does not provide for any transitional provisions to govern the restructuring in progress at the time of notification of such a date. Furthermore, if the restructuring currently ongoing under the 1956 Act is to be continued under the 2013 Act, any non-conformity of the portion of the process completed under the 1956 Act with the provisions of the 2013 Act is a question that remains unaddressed. The implementation of the 2013 Act will also require updates in other laws to link these with the new provisions.
M&A PROCESS:
While the New Act prescribes the normal sanctioning process in respect of a Scheme, with certain positive amendments, the recognition for preferable exceptions is well reflected in the New Act. The normal sanctioning process has been kept largely the same as in the Old Act, involving sanctions to be obtained by NCLT.
One of the glaring differences between the Old Act and the New Act is that the current regulatory framework under the Old Act does not distinguish between M&A’s on the basis of companies involved and the same set of relatively complex and time-consuming processes have to be followed for all M&A’s. On the contrary, in order to take away the problems faced in recent times by companies during the M &A process, the New Act has established a simplified procedure for M&A’s between wholly-owned subsidiary companies and small companies. It also recognises the need for mergers between Indian and foreign companies and provides a relatively transparent procedure, which takes care of approvals from relevant regulatory and government authorities.
SIMPLIFIED M&A PROCEDURES:
Fast track M&A’s – open to small companies and M&A’s between holding and wholly-owned subsidiaries:
As per the provisions of Section 233 of the New Act, a notice with regard to the proposed Scheme is to be placed before the Registrar of Companies, the Central Government, and the Official Liquidator to invite objections to the Scheme. The objections and suggestions received by the companies should be considered in the respective general meetings and the Scheme must be approved by shareholders at the general meetings holding at least 90 per cent in value and creditors representing nine-tenths of debt in value.
In the event of there being no objection, the Scheme will be approved and each of the Companies involved will be required to file a declaration of solvency with the Registrar of Companies of the place where the Registered Office of the Company are situated.
The Transferee Company shall file a copy of Scheme so approved with Registrar of Companies, the Central Government and the Official Liquidator where the registered office of the Company is situated.
However, in the event of any objection being raised against the proposed Scheme, or in case of the Central Government being of the view that the Scheme is not in public interest, the Central Government may file an application before NCLT stating its objections and request NCLT to consider the proposed Scheme under the normal M&A process. The exclusivity of fast-track mergers is expected to reduce the time elapsed during court proceedings and will result in faster disposal of matters. This is definitely a welcome step, as its intention is to reduce the administrative burden, timelines, and cost for smaller companies when carrying out M&A’s.
The relaxation to fast track M&A’s also includes dispensation from sending out notices to regulatory authorities to seek clearance or submission of compliance reports from the auditors.
NEW ENABLING PROVISIONS:
Cross-border M&As – M& A of Indian Companies and Foreign Companies:
The Old Act does not contain provisions for Mergers of Indian Companies with Foreign Companies. It does permit cross-border mergers, but only when the transferor is a Foreign Company.
On the contrary, the New Act permits a merger between Indian and Foreign Companies located in a jurisdiction that may be notified by the Central Government from time to time in consultation with R.B.I. Such a merger will be subject to RBI approval in respect of a foreign exchange transaction/s that may be involved in the process.
Merger of a Listed Company with Unlisted Company:
The New Act provides for NCLT’s order to state that the merger of a listed company with an unlisted one will not ipso facto make the Unlisted Company Listed. Instead, it will continue to be unlisted until the applicable listing regulations and SEBI guidelines are complied with and it becomes a Listed Company. Further, in the event that the shareholders of a listed company decide to exit, the unlisted company should facilitate the exit with a pre-determined price formula, which should be the price specified by SEBI regulations.
Cleaner Procedure – Regulatory Approvals:
Under the Old Act, the requirement of notice and approval is limited to the shareholders and creditors. The New Act requires service of notice of the Scheme along with other documents to be sent not only to the shareholders and creditors but to various regulatory authorities such as the Reserve Bank of India (where non-resident investors are involved), SEBI (only for listed companies), income tax authorities, the stock exchanges (only for listed companies), the Competition Commission of India (in cases of the prescribed fiscal thresholds being crossed and if the proposed merger could have an adverse effect on competition) and other regulators and authorities which are likely to be concerned with the proposed Scheme. This would ensure compliance of the Scheme with other regulatory requirements imposed on the merging entities.
However, the drafters of the New Act have been careful not to provide the regulators with any reason to delay the process and have prescribed a 30-day time frame for the regulators to make representations.
OTHER EASE OUTS:
Approval of the Scheme through postal ballot:
The Old Act requires the Scheme to be approved by a majority representing three-quarters in value of the creditors and shareholders’ present, and voting in physical meetings, either in person or by proxy, to cast votes for or against the Scheme.
Under the New Act, the shareholders and creditors will have the option of casting votes through postal ballot while considering a Scheme. The Old Act did not allow this as the shareholders and creditors could only cast votes physically.
Valuation Report:
The New Act makes it mandatory for the valuation report to be annexed to the Scheme, as well as to the notice for the meetings in order to make it readily available to the shareholders and creditors. The said mandatory requirement of annexing the valuation report with the Scheme will enable the shareholders to understand the business rationale of the transaction and make an informed decision.
Objections:
The New Act provides that objections can be raised by shareholders holding 10 per cent or more equity, and creditors whose debt represents five per cent or more of the total debt as per the last audited financial statements.
In view of the above, the said threshold limit for raising objections and concerns with respect to the Scheme will protect the Scheme from small shareholders and creditors raising frivolous litigation and objections.
Accounting standards:
The New Act provides that no Scheme, whether for a listed company or an unlisted one, shall be sanctioned unless a certificate by the company’s auditor has been filed with the tribunal to the extent that the accounting treatment of the proposed Scheme is in conformity with the prescribed accounting standards. Thus, the significance given to accounting standards and audit compliance is reflected in the New Act as opposed to the Old Act, which did not contain said requirement.
CONCLUSION:
The establishment of NCLT is expected to help in reducing the time that is usually taken in obtaining sanctions from High Court in M&A cases.
In view of the aforesaid discussions on the provisions of the New Act, the idea or proposal behind introducing certain simple and forward-looking concepts is to simplify and enable the process of M&A’s.
