Checklist for Mergers, Demergers and Slump Sale

Checklist for Mergers and Demergers

There are various modes of business restructuring, such as, mergers, demergers, slump sale, acquisition of shares, etc. Each mode has its own pros and cons and can be adopted keeping in mind the commercial and financial objectives. Further, the following tax and legal aspects also needs to be considered while selecting a particular mode of restructuring:

1. Income-tax implications for the entities and their stakeholders, e.g., capital gains on transfer, exempted transfers, carry forward and set-off of brought forward losses and unabsorbed depreciation, continuity of tax benefits, etc .
2. Stamp duty implications
3. Companies Act, 2013 ('Co. Act, 2013') provisions
4. Competition Law provisions
5. SEBI - Takeover Regulations, ICDR Regulations and LODR Guidelines
6. Foreign Direct Investment Regulations
7. GST Regulations
8. Transfer of tenancies under Rent Control Laws
9. Labour law implications
10. Permissions required under contractual agreements, e.g., lenders, Govt. Ministries in case of infrastructure/telecom projects, etc.
11. Transfer of various licences, Trade Marks, and other intangible assets / registrations in India and abroad
12. Accounting implications

Broad Process for Mergers/Demergers [Sections 230 to 232]

1. Ensure that the Power to merge/demerge is contained in MOA.
2. Board approval for in-principle approval and appointment of chartered accountants / merchant bankers.
3. Prepare scheme of arrangement.
4. Valuation report from independent chartered accountant and fairness opinion from merchant bankers (in case of listed company).
5. Listed companies to place the draft scheme and the valuation report before its Audit Committee. The Audit Committee shall furnish a report recommending the draft scheme, taking into consideration the valuation report.
6. Board to approve the draft scheme and fix the share exchange ratio based on valuation report.
7. Filing of application to National Company Law Tribunal ('Tribunal').
8. Send a copy of the application to the Registrar ('ROC') within 30 days.
9. Send the Notice convening the General Meeting to every member and creditor as directed by the Tribunal along with the Explanatory Statement.
10. Such notice and other documents shall also be placed on the website of the company.
11. The notice of the meeting shall be advertised in 
    such newspapers and in such manner as the Tribunal may direct.
12. Notice for the shareholders/creditors' meeting needs to be accompanied by the following:

• Copy of the scheme;
• Confirmation that a copy of the scheme has been filed with ROC;
• Copy of valuation report and fairness opinion;
• Report of Board of Directors of the merging companies explaining the effect of compromise on each class of shareholders, key managerial personnel, promoters and non-promoter shareholders laying out in particular the share exchange ratio; and
• Supplementary accounting statement, if the last annual accounts of any of the merging company relate to a financial year ending more than 6 months before the first meeting summoned for the purposes of approving the scheme;

13. The notice of meeting along with documents also needs to be submitted to the following regulatory/statutory authorities:

• Central Government;
• Registrar;
• Income tax authorities;
• RBI;
• SEBI and Stock Exchange (in case of listed companies);
• Official Liquidator ('OL');
• Competition Commission of India; and
• Such other regulators or authorities, which are likely to be affected by the compromise or arrangement.

The aforesaid regulatory authorities can make representations within a period of 30 days from the date of receipt of such notice, failing which it shall be presumed that they have no representations to make on the scheme.

14. Hold the Shareholders and Creditors' Meeting and pass Resolutions approving the Scheme. The Scheme needs to be approved by majority of persons, representing 3/4th in value, voting in person or by proxy or by postal ballot or by e-voting.

For some specific instances (as mentioned in the SEBI Circular) in case of listed companies, the scheme shall be approved only if the votes cast by public shareholders in favour of the proposal is more than the number of votes cast against it.

15. File a Petition in for obtaining the Tribunal's sanction to the Scheme.
16. No compromise or arrangement shall be sanctioned by the Tribunal unless a certificate by the company's auditor has been filed with the Tribunal to the effect that the accounting treatment, if any, proposed in the scheme is in conformity with the accounting standards prescribed under section 133 of Co. Act, 2013.
17. Objections to the scheme is permitted :
18. a) By shareholders holding at least 10% stake;
19. b) By creditors having outstanding debt of at least 5% of the total debt as per latest audited accounts.
20. Regional Director's Approval
21. Receive the Tribunal's Order sanctioning the Scheme
22. Payment of Stamp Duty
23. File a copy of the Order of the Tribunal with the ROC within 30 days from the date of receipt of the Order

Additional requirements for Listed Companies under the SEBI Regulations

The draft scheme proposed to be filed before the Tribunal needs to be submitted to the Stock Exchanges for their approval, at least 1 month before it is presented to Tribunal.

Listed companies need to comply with the requirements of the SEBI Circular No. CFD/DIL3/CIR/2017/21 dated 10th March, 2017 which lays down various conditions and procedures for obtaining SEBI and Stock Exchange approval.

Merger of Small Private Companies / Holding Company and its WOS [Section 233]

In case of merger of small private companies or merger of Holding Company and its WOS application can be made to the Central Government instead of Tribunal. Small company means a Private company with turnover not exceeding ₹ 2 crore and paid-up share capital not exceeding ₹ 50 lakh.

Process of merger in brief:

1. The notice of the proposed scheme will have to be given by the Companies to ROC and OLs and/or persons affected by the scheme inviting their suggestions/objections to the scheme.
2. The scheme needs to be approved by the shareholders holding at least 90% of the total number of shares.
3. The scheme needs to be approved by majority representing 9/10th in value of the creditors in the meeting or to be approved in writing.
4. The Companies have to file a declaration of solvency with the ROC.
5. Transferee Company to file the copy of the 
   scheme so approved with the Central Government, ROC and OL.
6. On receipt of the scheme, if the ROC or the OL has no objections or suggestions to the scheme, the Central Government shall register the same and issue a confirmation thereof to the companies. On registration of the scheme by the Central Government, the transferor company shall be deemed to be dissolved.
7. If the Central Government after receiving the objections / suggestions or for any reason is of the opinion that such a scheme is not in public interest or in the interest of the creditors, it may file an application before the Tribunal within a period of 60 days of the receipt of the scheme stating its objections and request the Tribunal to consider the scheme under section 232.
8. Tribunal may either pass the order u/s. 233 or may 
   direct that the procedure laid down u/s. 232 should be followed.
9. File a copy of the Order of the Central Government / Tribunal with the ROC.

Scheme of Amalgamation

The 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 Company;
• Share Exchange Ratio;
• Changes in MOA or AOA, as required;
• Increase in Authorised Capital of Transferee Company, if required;
• Accounting Treatment for amalgamation;
• All contracts, deeds, bonds, instruments, executed by the Transferor Company to be binding on and enforceable against the Transferee Company;
• All legal proceedings, by or against the Transferor Company to be binding on and enforceable against the Transferee Company;
• Transferee Company to carry on Transferor Company's business until the effective date;
• All employees of Transferor Company to become the employees of Transferee Company;
• The approvals/sanctions upon which the Scheme is conditional and effect of non-receipt of such approvals;
• Sharing of merger costs and expenses;
• Dissolution without Winding-Up of Transferor Company;
• Change of name of the Transferee Company, if applicable;
• In case of Demerger, following additional points needs to be considered:
  – Ensure that the Undertaking being Demerged meets the definition of 'Undertaking' as per the Income-tax Act, 1961 ('IT Act') or else the tax benefits granted under the IT Act may not be available.
  – Reduction of Capital of Demerged Company.