Checklist for Mergers and Demergers

Factors to be considered

Business restructuring may be achieved by a variety of methods, such as, Merger, Demerger/Spin off, Slump sale, Acquisition of shares, etc. Each method has its own pros and cons and must be selected keeping in mind the objectives to be achieved. While adopting a particular method, the following legal factors, wherever applicable, need to be considered, in addition to the commercial and financial justification:

Income-tax impact on the Companies and their shareholders, e.g., capital gains on the transfer, set-off of losses and depreciation, transfer of deduction, cost of assets to the Transferee, etc.
Stamp duty, e.g., levy, concessions, etc.
Companies Act provisions
Competition Law provisions
SEBI’s prior permission
SEBI Takeover Regulations and SEBI DIP Guidelines
Listing Agreement provisions and procedural requirements
FEMA and FIPB Policies
VAT – Transfer of Exemption Schemes and tax on the transfer of business
Transfer of CENVAT Credit and Excise Registration
Transfer of Licences under EPCG (Export Promotion Council Guarantee) Scheme, Project Import Regulations, etc.
Transfer of tenancies under Rent Control Laws
Labour law implications, e.g., Govt. permission for closure of a unit with more than 100 workers
Permissions required under contractual agreements, e.g., lenders, Govt. ministries in case of infrastructure / telecom projects, etc.
Transfer of environmental licences
Accounting implications of a particular method

Broad Checklist for Mergers

Examine whether a Forward Merger or a Reverse Merger is more beneficial : the factors to be considered are tax benefits, listing, etc.
In case of Listed Companies, obtain SEBI’s prior permission
Ensure that the main objects or the incidental objects of the Memorandum of Association contain the power to amalgamate.
Ensure that the Scheme does not violate, override or circumscribe the provisions of securities laws or the stock exchange requirements.
Consider whether the merger would be covered under the Competition Act and hence, one which requires the permission of the Competition Commission.
Valuation of shares for fixing the Share Exchange Ratio.

Fairness Report from a Merchant Banker on the Valuation Report in the case of Listed Companies.

Convene a Board Meeting to approving the Scheme of Amalgamation.
Obtain the consent/approvals, if any, required prior to the merger.
Prepare the Scheme of Amalgamation and Explanatory Statement.
The Explanatory Statement forwarded must disclose the pre and post-merger capital structure and shareholding pattern
•File the scheme/petition proposed to be filed before the Court or Tribunal with the Stock Exchanges, for their approval, at least a month before it is presented to the Court or Tribunal.

Listed companies must also submit to the stock exchange, an Auditors’ Certificate to the effect that the accounting treatment contained in such schemes is in compliance with all the applicable Accounting Standards.

Listed companies must comply with the requirements of the SEBI Circular which lays down various procedures for obtaining SEBI’s permission. These include, obtaining shareholders’ approval through postal ballot and eVoting in certain cases, e.g., where the promoters would be issued additional shares under the Scheme, where related parties are involved in the Scheme, etc.

Receive the approval of the Stock Exchange and the SEBI
Apply to the High Court/National Company Law Tribunal in Form Nos. 33 and 34.
Send a copy of the Application to the ROC within 30 days
Send the Notice (in Form No. 36) convening the General Meeting to every member and creditor as directed by the Court along with the Explanatory Statement and Form of Proxy (in Form No. 37). Ensure that the Notice reaches the members at least 21 days before the date of the GM.
If the Court directs give an advertisement of the notice meeting (Form 38).
Hold the Meeting and pass Resolutions approving the Scheme. Listed Companies may need postal ballot and eVoting as explained above.
File the Report of the Meeting’s Chairman (in Form No. 39) with the Court.
Prepare a Petition in Form No. 40 for obtaining the Court’s sanction to the Scheme.
At least 10 days before the date fixed by the Court for the hearing of the Petition, advertise the date of hearing.
Obtain the Official Liquidator’s Report.
Receive the Court’s Order sanctioning the Scheme.
File a copy of the Order of the Court with the ROC within 30 days from the date of receipt of the Order.
Allot the securities to the shareholders of the Transferor Company.
Attach a copy of the Court Order with every copy of the Memorandum and Articles of Association.

Merger Scheme

The Merger Scheme/Scheme of Amalgamation must cover the following:

Definitions of important terms such as Appointed Date, Effective Date, Record Date for issue of shares, etc.
Background, capital, history, etc., of the Transferor and Transferee Company
Rationale of the Scheme
Amalgamation of Transferor with Transferee Company and vesting of its undertaking, assets and liabilities in the Transferee Company. Reduction of capital, if any, of the Transferee
Issue of securities, etc., by Transferee to shareholders of Transferor, Share Exchange Ratio, Valuation Report, etc.
Increase in Authorised Capital of Transferee, if required
The date from when the Scheme comes into operation
Accounting Treatment of the amalgamation by the Transferee
All contracts, deeds, bonds, instruments, executed by the Transferor to be binding on and enforceable against the Transferee
All legal proceedings, by or against the Transferor to be binding on and enforceable against the Transferee
Transferee to carry on Transferor’ business until the Effective Date
Applications to relevant High Courts for their approval
All employees of Transferor to become the employees of Transferee
No dividends, bonus, rights, further shares to be issued by either company without prior approval of the other company
The approvals/sanctions upon which the Scheme is conditional and effect of non-receipt of such approvals
Sharing of merger costs and expenses
Change of Board of Directors of Transferee, if any
Dissolution without Winding-Up of Transferor
Change of name and registered office of the Transferee, if applicable

Additional Checklist for Demergers

Ensure that what is being Demerged is an Undertaking as per the Income-tax Act or else the tax benefits may be jeopardised
Decide whether the Resulting Company would be a New Company or an Existing Company.
Reduction in capital of the Demerged Company
Accounting Adjustments, if any
Resulting Company to take over the assets and liabilities of the Demerged Company
Allot the securities to the shareholders of the Transferor company

Checklist for Slump Sale

Ensure that what is being sold satisfies the conditions of an ‘undertaking’ under the Income-tax Act
Ensure that the main objects in Memorandum of Association of Transferor contain the power to sell a business undertaking and in case of Transferee contain object(s) for carrying on such business
Audited Balance Sheets of the undertaking / business to be sold
Decide upon the lump sum consideration and its mode of payment
Compute the tax impact u/s. 50B of the Income-tax Act
Ascertain the stamp duty and VAT impact, if any, on the sale
Draft the Slump Sale Agreement
U/s. 180 of the Companies Act, 2013, a sale of an undertaking (as defined) requires a Special Resolution of the Members. Private / Public Companies with more than 200 members and all Listed Companies require a postal ballot.

Draft the postal ballot notice + Draft Resolution + Explanatory Statement to be sent to the Members.

File special resolution with ROC.
Execute the Slump Sale Agreement
Give possession of the undertaking/business to the Transferee
Prepare a letter of possession
Board Resolution for giving and receiving the possession of the business
Pass Accounting entries for sale of business undertaking in the books
Take steps for transfer of CENVAT Credit

NOTE: The Checklist for Mergers/Demergers has been prepared as per the provisions of the Companies Act, 1956 since the relevant provisions of the 2013 Act have not yet been notified.