Module- II

Module- II

Mergers, Takeovers and Restructuring routes Indian scenario Contents Relevant Statutes, Rules and Regulations and regulatory bodies Identification of the statutes having a bearing on Mergers & Acquisition activities and a brief overview of their impact on the transactionsProvisions of the Companies Act 2013 &1956, Securities Contract Regulation Act, 1956, SEBI Act, 1992, SEBI Regulation on Substantial Acquisition of Shares, 2011 - Other Rules and Regulations under SEBI Act,

IDRA 1951, Banking Regulation Act, 1949, SARFAESI Act, Competition Act, 2002, IT Act 1961, Listing Agreement, etc. Regulatory bodies in Merger & Acquisition activities and their role - The Court (Tribunal), SEBI, Takeover Panel, Reserve Bank of India, Stock Exchanges, Competition Commission, Central Government, etc.

The routes of corporate Restructuring Under the Indian lawsBusiness acquisitions under S.180(1)(a ) of the 2013 Act =293(1)(a)of 1956 Act Arrangements other than mergers in Sections 230-231 of the 2013 Act = 391-393 of the 1956 Act Merger through Ss 232 of the 2013 Act = 391 to 394 of the 1956 ActCompulsory merger under S.237 of the 2013 Act=396 of the 1956 Act Take over under S.235 & 236 of 2013 Act= 395 of the Companies Act.,1956 Cross border mergerS.234 of the Companies Act,2013Mergers and Restructuring of banking companies under the Banking Regulation Act, 1949

statutes having a bearing on Mergers & Acquisition activitiesThe Companies Act, 2013- Ss.230-237The SCRA ,1956-SEBI Act, 1992-Chapter VA , s.12A- Prohibition of manipulative and deceptive devices , insider trading and substantial acquisition of securities or controlThe Industries (Development & Regulation ) Act,1951 . See Chapter Chapter III AA & III AB -18FD(2) r/w18FF.The Banking Regulation Act, 1949,( Take over/ acquisition) Part-II C Ss.36 AE-36AG. Merger See S. 44A( Voluntary merger) & S. 45( Compulsory merger)SARFAESI Act , 2002 ( The securitization and Reconstruction of Financial Assets and Enforcement of security Interest Act , 2002) See S. 5 - Acquisition of rights or interest in financial assets.SEBI Takeover Regulations,2011

7. The Competition Act, 2002- Ss. 3, 4, 5, 6 r/w S.19, 20 , 28 etc.8. The Income Tax Act9. Listing Agreement

Regulatory Bodies of M& A and their roleThe CourtSEBI RBI in Bank mergers Competition CommissionStock exchanges Central Govt.,

Role of the court(tribunal) in M & AAIR India Employees v. AIR India Ltd and Union of India (2014)Bharati Jyothindra Sha v. Bombay Stock Exchange Ltd ( Orissa High court), 2012 ( Scheme of arrangement for capital restructuring ) Sehgal M.M v. Seghal Paper Mills Ltd ( 1986) 60 Comp Cas 510 ( P &H)Coimbatore Cotton Mills Ltd and Lakshmi Cotton Mills Co.Ltd , In re ( 1980) 50 ComCas 623 ( Mad)Komal plastic enterprises Ltd v. Roxy Enterprises P Ltd ( 1991) 72 ComCas61Miheer H. Mafatlal v. Mafatlal Industries (1996) 4 CompLj 585Sidhpur Mills Co.Ltd , Re(1980) 50 Comp Cas7( Guj)All India Bluestar Employees Federation v. Blue Star Ltd ( 2000) 27 SCL 265 ( Bom )Sehgal M.M v. Seghal Paper Mills Ltd ( 1986) 60 Comp Cas 510 ( P &H)

The case concerned with take over and management of Segal Papers Ltd , which was in the course of Winding up. An Application was moved by the former chairman of the said company under Ss. 391-394. The same was objected by the Secured creditors . Against which the petitioner approached the court under Rule 79 of the Company Court Rules . main Issue 1) When can the court invoke its jurisdiction under Ss.391-394? S.P.Goyal J., To Invoke the jurisdiction of the court under S. 391 of the Act to sanction the scheme the same must have been approved by the requisite majority as laid down in S. 391 ( 2 ). Unless the scheme brought before was so approved the court will have no jurisdiction to entertain an application under R. 79 of the company court RulesWho can file an application under S. 391of 1956 Act =S. 230 of 2013Act See S. 391(1) =230(1) a) Company or( b) creditor (c ) member ( d) liquidator incase of a company being wound up .Coimbatore Cotton Mills Ltd and Lakshmi Cotton Mills Co.Ltd , In re ( 1980) 50 ComCas 623 ( Mad) J.Padmanabhan

Facts : A scheme of amalgamation was proposed between two companies which produced the same goods i. e yarn and cloth was approved by the requisite majority under S. 391( 2 ) . But the scheme was opposed by the central govt on the ground that ( a) the ratio of the share exchange was not proper ( b ) no approval or sanction of the MRTP was sought. The High court negatived all the contentions and sanctioned the Scheme.Issue Role of the court under S. 391 of the Act ?- J.Padmanabhan In the absence of any allegation of fraud or malafide on the part of the chartered accountants , the exchange ratio had to be considered as fair and reasonable especially where the scheme has been approved by an overwhelming majority of the shareholders and no shareholders have disapproved the scheme.S. 2 3(3) of the MRTP Act exempt from obtaining sanction of MRTP of those companies which were to be amalgamated produce the same goods. In exercising its discretion under S. 391 & 394 of the Act , the court is not merely acting as a Rubber Stamp . It is the function of the court to see that the scheme as a whole, having regard to the general conditions and background and object of the scheme is a reasonable one and if the courts so finds it , it is not for the court to interfere with the collective wisdom of the shareholders of the company.. However if the scheme as a whole is fair and reasonable it is the duty of the court not to launch on an investigation upon the commercial merits and demerits of the scheme which is the function of those who are interested in the arrangement Sidhpur Mills Co.Ltd , Re(1980) 50 Comp Cas7( Guj) Sidhpur Mills Co.Ltd was order to wind up due to insolvency.Applications were filed by the creditors , members, workers and employers of the company at different occasions for a scheme under S. 391 of the companies Act.The Issue before the court was whether the court can fix any time limit in entertaining applications under S. 391?( Whether the court had the power to adopt such a scheme of action )P.D.Desai, J.,Held that S. 391 confers upon the court discretion to order a meeting of the creditors or the members of the company to be called and held in such manner as the court directs on the application of the company or of any creditor or the liquidator . This rule does not preclude the court from evolving in advance and following certain rules , precedence , standards or policies to guide in it in exercise of its discretion as an when an occasion arises . So far as the discretion under S. 391 is concerned , in the very nature of the things , a scheme of amalgamation etc has to sub serve various conflicting interests and meet with the approval of different classes. There is no legal bar against the court laying down a rule or policy that it will not exercise its discretion under s. 391 of the companies Act and convene the meeting of various classes of creditors and shareholders and workmen to consider a new scheme after a certain limit. Miheer H. Mafatlal v. Mafatlal Industries (1996) 4 CompLj 585( Guj)

In the present case , it was the objection of the petitioner that proper classification of the shareholders from holding separate meeting to the class of shareholders as required under S. 391( 1 ) has not been made , which has affected the validity of approval of the scheme by the court ?C .K. Thakker and R. Balia J J., .. No strait jacket rule can be laid down in which case the court will decide or will not decide on a particular issue . It depends on the totality of the circumstances bearing on the entire controversy and also the fact that whether the jurisdiction exercised its discretionary one or obligatory one It is for the court to proceed in a manner as it deems fit in deciding the issues raised before it. In doing so it commits no irregularity or illegality so as to warrant interference on that ground alone in appeal. Ultimately it rests within the discretion of the court Komal plastic enterprises Ltd v. Roxy Enterprises P Ltd ( 1991) 72 ComCas61( Del)

The scheme of amalgamation was opposed by the secured creditor despite that the scheme was sanctioned by the company court. Y.K.Sabarwal J., The provisions of S. 391( 2) of the Companies Act,1956 are clear and unambiguous . The company court has no jurisdiction to sanction a scheme if it is not approved by a 3/4th majority of the creditors or each class of the creditors . The question of court considering the scheme would arise only if it is been approved by the statutory majority provided for under S. 391(2 ). Where separate meeting are called to consider one composite scheme covering both secured and unsecured creditors , it is necessary that both the meetings should pass the scheme by 3/4th majority ...if the secured creditors on the first meeting reject the scheme the scheme has to be deemed to have been rejected by the creditors generally and cannot be considered for sanctioning by the court. Is it mandatory to call a meeting by the court under S. 391- The court has the discretion to dispense with the formal meeting if consent of the required majority otherwise obtained .In S.M.Holdings Finance Ltd v. Mysore machinery manufacturers Ltd ( 1993) 78 compCas. 432- there is a substantial compliance of the statutory provision if 3/4th of the creditors have agreed to and approved the schemeWhat would be the effect of sanctioning of the scheme has been considered in Re: Europlast India Ltd. A Company Incorporated Under Companies Act, 1956 reported in 2010 (112) BomLR 2812010 Indlaw MUM 349stating the law thus:( Cited by Idea Cellular Ltd v. Union of India (2011)-Judgement by Delhi High court)The question as to what is the scope of power of the Company Court while exercising jurisdiction under Section 391 and 392 of the Act is no more res integra. The Apex Court went on to observe that the Parliament has, in its wisdom, conferred a power of wide amplitude on the High Court in India to provide for its continuous supervision of carrying out of compromise and/or arrangement and also the consequential power to make the supervision effective by removing the hitches, obstacles or impediments in working of compromise or arrangement by conferring power to give such directions in regard to any matter or for making such modification in the compromise or arrangement as it may consider necessary for the proper working of the compromise and/or arrangement. It is further observed that the scheme sanctioned under Section 391 of the Act does not merely operate as an agreement between the parties but has statutory force and is binding not only on the company but even the dissenting creditors or members as the case may be. Court has observed that the effect of the sanctioned scheme is to supply by recourse to the procedure thereby prescribed the absence of that individual agreement by every member of the class to be bound by the scheme which would otherwise be necessary to give it validity. It is also observed that scheme represents a contract sanctified by Court's approval between the company and the creditors and/ or members of the company. It is equally well established that the rights which are enshrined in the scheme of the class of creditors cannot be impaired or superseded unless it is by a new scheme approved in the same way as the earlier one. Further, sanction of the Court operates as a judgment in rem. In the case of Smt. Pramila Devi v. Peoples Bank of Northern India Ltd. (1939) 9 Com Cas. the Court held that the scheme when sanctioned acquires statutory force and has greater sanctity than a mere agreement between the parties affected. It cannot be varied by a mere agreement of the parties. In the case of Krishnanath Sen v. Dinajpur Loan Office AIR 1938 Cal 3371938 Indlaw CAL 8, It is observed that the scheme when sanctioned has the force of judicial pronouncement. It no more remains in the domain of contract but becomes an order of the Court."

Courts power, function & discretion under S. 391-SCs view The sanctioning court has to see to it that all requisite statutory procedure for supporting such a scheme have been complied with and that the requisite meeting as contemplated by S. 391 has been complied with.That the majority decision of the concerned class of voters is just and fair to the class as a whole so as to legitimately bind even the dissenting members of that class.That all necessary materials indicated by s. 393(1) (a) is placed before the voters at the concerned meeting as placed as contemplated by s. 391 sub-section ( 1).That all the requisite material contemplated by the proviso to sub sec ( 2) of s. 391 of the Act is placed before the court by the concerned applicant seeking sanction for such a scheme and the court gets satisfied about the same .

4. That the company court has also to satisfy that itself that the members or class of members or creditors or class of creditors as the case may be were acting bonafide and in good faith and were not coercing the minority in order to promote any interest adverse to that of a latter comprising the same class whom they purported to represent.5 . That the scheme as a whole is also found to be just, fair & reasonable from the point of view of prudent men of business taking a commercial decision beneficial to the class represented by them for whom the scheme is meant.

No power to examine the validity of transactions National organic Industries v. Mihir H.Mafatlal (2004) 118 Com Cas 265 ( Guj)- there is no power in the court in a petition for sanction of a scheme to go into the validity of transfers of shares , or entitlement of shares to shareholders.

Role of SEBI in M &AListed companies are bound by SEBI RegulationsPre-1992- Listing agreement governed substantial acquisition of shares1992- SEBI Constituted 1994- Take cover regulations notified 1997- Revamped take over regulations notified as per the Bhagavati committee Report2009- TRAC constituted to review the regulations under the chairmanship of Smt Usha Narayan 2011 New take over Regulations came into effect.SEBI Take over ( Regulations) 2011IndiaSEBI is a body corporate created under the SEBI Act , 1992 to protect the interest of the investors in securities , to promote the development of the securities market and to regulate it .( See S. 11(1) of the SEBI Act, 1992).It is statutorily empowered to regulate the Substantial acquisition of shares and takeovers of Companies ( See S. 11(2)(h) of the SEBI Act , 1992)Main features of take over regulations areThe Limits on the acquisition of shares and voting rights Acquisition of control: When and HowExemptions Open offer-Trigger and ConditionsKey obligations of parties during open offerMinimum public shareholding Disclosure requirement

EnglandPanel on takeovers and mergers is an unincorporated association established to develop , administer and interpret the CITY CODE ON Take overs and mergers.Role of RBI in M &AS.44A(4) of Banking Regulation Act, 1949-Voluntary merger-approval of RBIS. 45( B.R. Act, 1949)- Compulsory merger- Approval of RBI.36S.36AE-36AG-Report to be submitted by RBI to central govt. for acquisition undertakings of banking company.Role of Competition Law & CCI in M&ARefer The competition Act,2002- See the ObjectivesSee S.2(a) AcquisitionS.3-Anti-Competitive agreementsS.4-Abuse of dominant positionS.5-Combinations ( Mergers / Acquisition)Competition law forbids abuse of market power.Merger control is not simply about preventing future abuses , it is also about maintaining competitive market structure which lead to better out comes for consumers.Competition authority is called upon to consider whether a merger will lead to harmful effects on competition in the future .Most mergers must be notified to the CCI and cleared before they are put into effect.The competition authority will not only to predict the likely outcome of the merger but also to consider the counter factual , that is to say the position if merger were not to occur.CA,2002& M&AOn 1st June 2011-merger control provisions of the Competition Act ,2002 have come into effect. It is known as The competition Commission of India ( Procedure in regard to the transactions of business relating to combinations ) As a result M &A transactions resulting in certain thresholds need to be notified to the CCI and will not be permitted to carry on business until cleared by the competition commission.Notifications to be made to the CCI within 30 daysIn case of a merger or amalgamation , granting of board approval for merger.For acquisition of any shares , voting rights or assets , execution of any document conveying an agreement or decision to make the acquisition. Obligation to file lies with the acquiring company and sanctions may be imposed for failure to do so within prescribed 30 days period .CCIs review of combinationsCCI has a fixed period of 30 days from accepting the parties notification in which to conduct its initial investigation and issue its prima facie opinion as to whether the combination will or is likely to have an adverse effect on competition in the relevant market in India.However if CCI have any prima facie objection and launches an in depth review the parties have to wait upto further 180 days for a final decision ( Min-30 days maximum of 180 days)Theories of competitive harmMost mergers cause no harm to the competition. However there may be cases where it can be predicted that the changed structure of the market will provide the mergered entity with the incentive and ability to exercise the market power in such a way that will be harmful to the consumer welfare .A competition authority concerned about the particular merger will need to articulate its theory as to how competition will be harmed .Various theories of competitive harm have been developed A. Unilateral or non-coordinated effects Unilateral effects occur where A merges with B and the merged entity AB will be as a result of the merger to exercise market power. There by the company may be able to increase the price , reduction of output, quality, variety or innovationB. Coordinated effects Coordinated effects occur where A merges with B and this result in a situation where AB will be able or more able than when A and B were independent to coordinate their competitive behavior on the market with other firms . C . Vertical effects There may be circumstances in which a vertical merger could produce adverse effects, first, where the possibility of foreclosure of a third party arise and second where the vertical integration of the AB makes it more likely that there will be coordinated effects on the market. D . Conglomerate effectsTheory of harm in the case of conglomerate effect is particularly speculative for example that AB might decide to tie the two complementary products together in a way that will foreclose the competitor or to price a unbundled package of both of them to similar effect. It is possible that tie-in transactions and bundling practices would violate laws that forbid the abuse of dominant position.Illustration: Jayachandran / Mint Updated: Mon, Sep 01 2008. 12 14 AM ISTUnder Indian law, minority shareholders in a company are in a position to challenge the larger shareholders and put forward their agenda for the direction taken by the company on various matters and, accordingly, a trend has emerged whereby the majority shareholders prefer to consolidate their holdings to achieve better control and reap greater economic benefits from the growth of the company. Illustration: Jayachandran / MintIn fact, the Companies Act, 1956, provides for protection of minority shareholders against certain actions taken by the majority shareholders, such as unfair dilution of shares, related party transactions, etc. Apart from deadlock or risks of litigation created by the minority block, the majority shareholders may also want to get rid of the minority shareholders in order to obtain increased administrative flexibility. A majority shareholder would want unfettered rights to conduct the business of the company in the manner it deems fit, and the concept of minority squeeze-outs, well-recognized in many jurisdictions internationally, becomes relevant. A squeeze-out refers to a mechanism that effectively entitles the controlling block to acquire the shares held by the minority shareholders in a companyUnder Indian law, the Securities and Exchange Board of Indias (Sebi) delisting guidelines provide for provisions relating to delisting, which entitle promoters to voluntarily delist a company from the stock exchanges by offering to purchase the shares of public shareholders. This seems to be on similar lines as minority squeeze-out provisions because, upon the company being delisted, the shareholders would lose the liquidity attached to their shares and their exit options would be reduced substantially, making it likely that they would accept the offer of the promoters to purchase their shares. Nevertheless, considering that the shareholders have the right to reject the offer to sell their shares and can continue as shareholders of the company, strictly speaking, these provisions do not have the same effect as minority squeeze-out provisions.In this regard, section 395 of the Companies Act, which provides for compulsory acquisition of shares by the majority shareholders (in certain circumstances), becomes relevant. Under this provision, an acquiring company may make an offer to the shareholders of a target company of a scheme or a contract involving the transfer of shares of the target company. In the event that holders of nine-tenths of the value of the shares of the target accept the offer of the acquirer company (approving shareholders) within a prescribed period, the acquirer company shall have the right to give a notice to the dissenting shareholders (who have not accepted the offer) to acquire their shares also (within a given period). The dissenting shareholders shall have the right to file their objection to the same with the Company Law Board. Unless the Company Law Board orders otherwise, the acquirer shall be entitled to acquire the shares of the target company on the terms on which the shares of the approving shareholders are to be acquired by the acquirer company. It is important to note that section 395 of the Companies Act also specifies that in case the acquirer company or its subsidiary hold more than one-tenth of the value of the shares of the target, then the offer would only be valid if such an offer is approved by the holders of nine-tenths of the shares of the target company (excluding the shares held by the acquirer company or its subsidiary). Additionally, such approving shareholders should constitute not less than three-fourths in number of the holders of those shares. Further, section 395 is the only provision in the Companies Act that deals with the compulsory acquisition of shares of minority shareholders and there are no corresponding rules or guidelines available in relation to this. In the absence of such guidance notes, wide powers of discretion have been conferred on the Company Law Board to allow or reject an offer to squeeze out a minority group under section 395. The judicial trend so far (considering that there are not many cases under this provision) suggests that the Company Law Board would allow the scheme or contract if the fairness standard is met and the onus to prove otherwise shall be on the dissenting shareholders. It is important to note that section 395 does not contain any guiding principles relating to the valuation of shares for the purposes of the takeover offer. Further, the increased majority of nine-tenths of the independent shareholders is only required where the acquirer company or its subsidiary holds shares in the company. The requirement is not extended to cases where related parties to the acquirer hold shares in the target company. This gap has been filled in by the judiciary in some cases like AIG (Mauritius) v Tata Televentures Holdings Ltd, where the Delhi high court rejected the offer of the acquirer company on the basis that on lifting the corporate veil, the acquirer company was really the same as the approving shareholders of the target company. However, some legislative guidance (further to the case law) would make the legal position clearer.To conclude, it can be said that the legislature needs to revisit the provision. Keeping in mind that any takeover offer under section 395 requires the approval of nine-tenths of the minority shareholders, presently section 395 only enables a squeeze-out of the dissenting minority shareholders and not all minority shareholders. It does not provide for a situation where the minority block is against the takeover offer, irrespective of the level of their holding in the company or the fairness of the offer. Therefore, proper minority squeeze-out provisions need to be introduced, providing for a fair exit to minority shareholders and also entitling the controlling block to compulsorily acquire shares held by a minority block.Send your comments to lawfullyyours@livemint.com. This column is contributed by Sachin Mehta of AZB & Partners, Advocates & Solicitors. First Published: Mon, Sep 01 2008. 12 14 AM ISTby Tab