MERGER: AN INTRODUCTION

In business or economics, a merger is a combination of two or more companies into one larger company, which might or might not be any of the existing companies. However, there is no formal definition of Merger and Amalgamation in any of the Act laid down by the parliament. The phrase Mergers and amalgamations (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the combining of two or more different companies, which can aid, finance, or synergize, to avail the predetermined purpose. The word amalgamation or merger has not been defined in the Companies Act, 1956. However Section 2(1B) of the Income-Tax Act, 1961 defines amalgamation /merger as follows: Amalgamation in relation to companies, mean the merger of one or more companies with another company or the merger of two or more companies to form one company or companies which so merge being referred to as amalgamating company and the company with which they merge or which is formed as results of the merger, as the amalgamated company, in such manner that: All the properties of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation; All the liabilities of the amalgamating company or companies immediately before the amalgamation becomes the liabilities of the amalgamated company by virtue of the amalgamation; Shareholders holding less than three- fourth in value of the shares in the amalgamating company or the companies (other than shares already held therein immediately before the amalgamation by or by a nominee for, the amalgamated 1

company

or

its

subsidiary)

become

shareholders

of

the

amalgamated company by virtue of the amalgamation.

RATIONALE OF MERGERS
The rationale behind the merger strategy can be highlighted with the help of the following points: Synergistic operational advantages Economies of Scale (scale effect) Benefits of integration Tax and cost advantages Diversification Financial constraints for expansion Reduction in legal and professional expenses. Strengthening financial strength Increased market opportunities Development of a cohesive strategic approach Reduction in production expenses. Reduction in selling expenses. Sustaining growth Survival Other structural reasons

CLASSIFICATIONS OF MERGERS
Mergers can be classified into the following types: Horizontal Mergers take place where the two merging companies produce similar product in the same industry. Vertical Mergers occur when the two firms, each working at different stages in the same good, combine. Co-generic mergers occur where two merging firms are in the same general industry, but they have no mutual buyer/customer or supplier relationship, such as a merger between a bank and a leasing company. Conglomerate mergers occur when the two firms operate in different industries.

ACCOUNTING ASPECTS OF MERGERS

The above-mentioned classifications of merger fall into the following two broad categories, from the valuation point of view in a merger process: Amalgamation in nature of merger Amalgamation in nature of purchase The brief discussion of above is given below: Amalgamation Company(s) pooling not in the nature of Merger This is an the assets of and the amalgamation where all the assets and liabilities of the Transferor become, merely after of the amalgamation, assets and liabilities of the Transferee Company. There takes place genuine liabilities amalgamating companies but also of the shareholders interests and of the businesses of these companies. The business of the Transferor Company(s) is intended to be carried on by the Transferee Company, after the amalgamation. The accounting treatment of such amalgamation should ensure that the resultant figures of assets, liabilities, capital and reserves more or less represent the sum of the relevant figures of the amalgamating companies. Amalgamation in the nature of Purchase These are the amalgamations in which one company acquires another company and, as a consequence, the shareholders of the company that is acquired normally do not continue to have a proportionate share in the equity of the combined company, or the business of the company, which is acquired, is not intended to be continued.

How the Mergers Regulated in India?

The Companies Act, 1956 The provisions relating to merger and amalgamation are contained in Sections 390 to 396A in Chapter V of Part VI of the Act. The summary of the afore-mentioned sections is as follows: Section 390 talks about Interpretation of sections 391 and 393. In sections 391 and 393 the term Company, Arrangement has been defined. Also, it mentions that unsecured creditors who may have filed suits or obtained decrees shall be deemed to be of the same class as other unsecured creditors. Further, Section 391 talks about Power to compromise or make arrangements with creditors and members. This section states that where a compromise of arrangement is being proposed between a company or its creditors/ members (or any class of them), the Court may, on the application of any creditor/ member/ liquidator (as the case may be), order a meeting of the creditors or members (as the case may be), to be called, held and conducted in such manner as the Court directs. The majority needed for making the compromise or arrangement binding on all the creditors/members/liquidators (as the case may be) is 3/4th in value of the creditors/members (as the case may be), present and voting either in person or by proxy, at the meeting,

provided

Court

has

granted

sanction

to

the

arrangement.

However, no sanctioning order shall be given by the court unless the requisite material facts relating to the company have to be disclosed to it by the applicant. To become effective a certified copy of the aforesaid order has to be filed with the registrar and thereafter, annexed to every copy of the memorandum/ instrument defining constitution of the company (as the case may be), otherwise a fine of one hundred rupees is levied on every officer in default w.r.t. each such copy to which such order is not attached. The court can stay the commencement or continuation of any proceeding against the company, until the application if finally disposed off. An appeal shall lie to the Court empowered to hear appeals from the decisions of the Court, or if more than one Court is so empowered, to the Court of inferior jurisdiction. Section 392 talks about Power of Tribunal to enforce compromise and arrangement The Tribunal making an order under section 391 sanctioning an arrangement, has the power to supervise the carrying out of the arrangement and give directions w.r.t. modifications in the arrangement, as it may deem fit for the proper working of the arrangement and if it is satisfied that such arrangement sanctioned cannot be worked satisfactorily with or without modifications, it may, make an order winding up the company, which shall be deemed to be an order made under section 433 of this Act. Section 393 provides for Information as to compromises or arrangements with creditors and members With every notice calling the meeting of creditors/members (as the case may be), there shall be sent also a statement setting forth the terms of the arrangement and explaining its effect, and in particular, stating material interests of the directors etc., and the effect on those 6

interests on the arrangement, and in every notice calling the meeting which is given by the advertisement, there shall be included either such a statement as aforesaid or a notification of the place at which and the manner in which creditors or members entitled to attend the meeting may obtain copies of such a statement as aforesaid. Where the arrangement affects the rights of debenture holders, the said statement shall give the like information and also explanation as respects the trustees of any deed. The creditors/members entitled to vote at the meeting shall on application, be entitled to be furnished with the copies of statement, where a notice given by advertisement includes a notification that copies of a statement setting forth the terms and explaining its effect can be obtained. The company and its every officer who is in default shall be punishable with fine which may extend to fifty thousand rupees if default is made in complying with any of the requirements of this section. Every director, managing director, or manager of the company, and every trustee for debenture holders of the company, shall give notice to the company of such matter relating to him as may be necessary for the purposes of this section; failing which, he shall be punishable with fine which may extend to five thousand rupees. Section 394 Stipulates the Provisions for facilitating

reconstruction and amalgamation of companies Where an application is made to the Tribunal under section 391 for the sanctioning of a compromise or arrangement proposed between a company and any such persons, the Tribunal may, either by the order sanctioning the compromise or arrangement or by a subsequent order, make provision for all or any of the following matters (i) the transfer to the transferee company of the whole or any part of the undertaking, property or liabilities of any transferor company; 7

(ii)

the allotment or appropriation by the transferee

company of any shares, debentures, policies, or other like interests in that company which, under the compromise or arrangement are to be allotted or appropriated by that company to or for any person; (iii) the continuation by or against the transferee company of any legal proceedings pending by or against any transferor company; (iv) (v) (vi) the dissolution, without winding up, of any the provisions to be made for any person who Such other matters as are necessary to ensure transferor company; dissent from the compromise or arrangement; and that the amalgamation shall be fully and effectively carried out. However, no amalgamation shall be sanctioned by the Tribunal unless the Tribunal has received a report from the Registrar that the affairs of the company have not been conducted in a manner prejudicial to the interests of its members or to public interest: Also, no order for the dissolution of any transferor company shall be made by the Tribunal unless the Official Liquidator has, on scrutiny of the books and papers of the company, made a report to the Tribunal that the affairs of the company have not been conducted in a manner prejudicial to the interests of its members or to public interest. Within 30 days after the making of an order, every company shall cause a certified copy thereof to be filed with the Registrar for Registration, otherwise the company and every officer in default, shall be punishable with fine which may extend to five hundred rupees. Section 394A Notice to be given to Central Government for applications under section 391 and 394 8

The Tribunal shall give notice of every application made to it under section 391 or 394 to the Central Government and shall take into consideration the representations, if any, made to it by that Government before passing any order under any of these sections.

U/S 395 the Act Describes the Power and duty to acquire shares of shareholders dissenting from scheme or contract approved by majority Where a scheme or contract involving the transfer of shares or any class of shares in a company (in this section referred to as "the transferor company") to another company (in this section referred to as "the transferee company"), has, within 4 months after the making of the offer in that behalf by the transferee company, been approved by the holders of not less than 9/10th in value of the shares whose transfer is involved (other than shares already held at the date of the offer by, or by a nominee for, the transferee company or its subsidiary) the transferee company may, at any time within 2 months after the expiry of the said 4 months, give notice in the prescribed manner to any dissenting shareholder, that it desires to acquire his shares; and when such a notice is given, the transferee company shall, unless, on an application made by the dissenting shareholder within 1 month from the date on which the notice was given, the Court thinks fit to order otherwise, be entitled and bound to acquire those shares on the terms on which, under the scheme or contract, the shares of the approving shareholders are to be transferred to the transferee company. Any sums received by the transferor company under this section shall be paid into a separate bank account, and any such sums and any other consideration so received shall be held by that company in trust for the several persons entitled to the shares in respect of which they said sums or other considerations were respectively received. The following provisions shall apply in relation to every offer of a scheme or contract involving the transfer of shares or any class of shares in the transferor company to the transferee company, namely:(i) every such offer or every circular containing such offer or every recommendation to the members of the transferor company by its directors to accept such 9

offer shall be accompanied by such information as may be prescribed; (ii) Every such offer shall contain a statement by or on behalf of the transferee company, disclosing the steps it has taken to ensure that necessary cash will be available; (iii) Every circular containing or recommending acceptance of, such offer shall be presented to the Registrar for registration and no such circular shall be issued until it is so registered; (iv) the Registrar may refuse to register any such circular which does not contain the information required to be given under sub-clause (i) or which sets out such information in a manner likely to give a false impression; and (v) An appeal shall lie to the Court against an order of the Registrar refusing to register any such circular. (b) Whoever issues a circular referred to in sub-clause (iii) of clause (a) which has not been registered, shall be punishable with fine which may extend to [five thousand rupees].

Section 396 tells about Power of Central Government to provide for amalgamation of companies in national interest Where the Central Government is satisfied that it is essential in the public interest that two or more companies should amalgamate, then, notwithstanding anything contained in section 394 and 395 but subject to the provisions of this section, the Central Government may, by order notified in the Official Gazette, provide 10

for the amalgamation of those companies into a single company with such constitution; with such property, powers, rights, interest, authorities and privileges; and such liabilities, duties, and obligations; as may be specified in the order. The order aforesaid may provide for the continuation by or against the transferee company of any legal proceedings pending by or against may transferor company and may also contain such consequential, incidental and supplemental provisions as may, in the opinion of the Central Government, be necessary to give effect to the amalgamation. Copies of every order made under this section shall, as soon as may be after it has been made, be laid before both Houses of Parliament.

Section 396A draws the provisions related to Preservation of books and papers of amalgamated company The books and papers of a company which has been amalgamated with, or whose shares have been acquired by, another company under this Chapter shall not be disposed of without the prior permission, of the Central Government.

The Companies (Court) Rules, 1959 Rules 67 to 87, Applicable Forms 33-42. Listing Agreement

11

Acquisition of shares pursuant to a scheme of arrangement or reconstruction under any law, Indian or foreign exempt from SEBI Takeover Code. o Exemption claimed unsuccessfully by Luxottica in the acquisition of Ray Ban Sun Optics India o Scheme before the Court/ Tribunal must not violate, override or circumscribe the securities laws or stock exchange requirements o Disclosure required o Shares allotted by unlisted transferee company to shareholders of listed transferor company under a HC sanctioned scheme can be listed without an IPO subject to conditions (DIP). o Eg. Dabur Pharmaceuticals o Constitutes Price Sensitive Information in terms of Insider Trading Regulations. o Compliance with Delisting Guidelines if public shareholding below prescribe

Foreign Exchange Management Act, 1999 o Where the amalgamated company is Indian, nonresident shareholders of the foreign amalgamating company require RBI approval to receive shares. o Where the amalgamated company is foreign, the issue of its shares to Indian shareholders requires RBI approval. o Automatic route available where non residents have to be issued shares in a merger of Indian companies.

Accounting Standards of ICAI

12

AS Accounting for Amalgamation is done according to Accounting Standard 14 (AS-14) issued by the Institute of Chartered Accountants of India Sales Tax Issues No Sales tax on Amalgamation or demerger. Where effective date is retrospective, any transfers between amalgamating company and amalgamated company retrospectively cease to be liable to sales tax- Mad HC Castrol Oil v. State of TN, 114 STC 468 Some Sales Tax enactments contain specific provisions to tax such transactions eg. S.33C, Bombay Sales Tax Act. No such provision in Central Sales Tax Act. The Income-Tax Act, 1961 Section 2(a) of the Income Tax Act defines amalgamation Transfer of capital assets by amalgamating company to amalgamated company is exempt from Capital Gains Tax provided amalgamated company is an Indian company Capital Gains Exemption in respect of shares issued to members of amalgamating/ demerging company- s. 47 Exemption may not be available if members of amalgamating company receive anything besides shares in the amalgamated company like debentures or cash- Gujarat HC in Gautam Sarabhai v. CIT, 173 ITR 216. In case of fraction shares, issue to trustee who liquidates these and distributes money to shareholders of amalgamating company. Carry forward of losses and unabsorbed depreciation provided the amalgamated company carry on the business of the amalgamating company for at least 5 years s. 72A The Stamp Act 13

Divergences between states: Shopping for beneficial rates usually pointless Duty to be imposed on value of shares transferred not on individual assets transferred: Bom HC in Li Taka AIR 1997 Bom 7 States with Specific entries: Maharashtra, Karnataka, Rajasthan and Gujarat

14

REGULATORY/ STATUTORY AUTHORITIES INVOLVED

There are numerous regulatory authorities involved in a merger process; the most frequently involved are as follows: Stock Exchange
Competition Commission of India

Registrar of Companies Regional Director Official Liquidator High Court Reserve Bank of India

15

Role of Due Diligence in Mergers

Any proposal of amalgamation or merger begins with the process of due diligence, as the proposal for merger without due diligence is like entering a tunnel with darkness growing with each step. The due diligence process is the stepping stone to the journey of Merger. Due Diligence refers to the process of appraising, assessing and evaluating business risk with analysis of cost benefit which is involved in Merger & Amalgamation. The decision to merge or amalgamate has to be based on considered opinion, which can be formed only after scanning of information and records available. Due Diligence embraces the assessment process to judge the benefits vis--vis the troubles that will be faced in post merger scenario. The process of due diligence cannot be sidestepped in Mergers, which is a broader term than financial audit and goes beyond the books of account maintained by the entity and involves analysis of actions of entity assessment of problems faced by the entity, impact of legal cases, tax assessments, hidden liabilities etc. The due diligence process includes review of cash flows past and future, status of tax assessments and its financial impact, valuation of assets, digging out hidden liabilities after an independent assessment, assessment of viability, review of technical feasibility, assessment and analysis of information technology security systems etc. In short, it encompasses 1. 2. 3. 4. Review of Commercial viability Review of Financial liability Review of Tax Assessments Review of Legal cases 16

5. 6.

Review of Manpower Resources Review of compliance of laws

The due diligence process is a team work consisting of chartered accountants, lawyers, valuers having expertise in their own field. The assessment, review, analysis, scrutiny and examination under due diligence process involves specialization and application of mind which goes beyond fact finding exercise i.e. mere checking of records available. The Chartered Accountants play a major role in due diligence process and no meaningful due diligence would be complete without their participation. The team, which has been, assigned the task of due diligence follows the following steps: 1. 2. 3. 4. 5. Identification of the purpose of Merger and Acquisition. Review and Study of past Business operations. Study of Information System within the organization. Collection of Documents. Assemblage of Key Information from Management and

Independent sources. 6. 7. 8. 9. Allocation of review responsibilities amongst team members. Compilation of findings of team members. Assessment of findings. Preparation of due diligence report. 17

18

PROCESS OF MERGER
The following discussion is of importance in understanding how practically a merger process is executed and to have an understanding of the important timelines involved. Merger Checklist - The schedule of activities to be carried out by the Companies involved in restructuring exercise is described here in below:

Section of Compa nies Activity Act/ Clause of Listing Agree ment 1. Preparation of the draft Scheme of Arrangement 2. Convening of a Board meeting for considering following business: a) To approve the scheme b) To authorize Directors/ Company Secretary/ other officers to take following actions: To sign the application, affidavit, notice of the meeting & other relevant documents. To make an application or petition to the High Court To do such acts, deeds and things, as may be necessary or expedient therewith. To carry out any changes in the in connection

Companies (Court) Rules

Remarks Rule Form

Sectio n 286

Provisions of Section 286 should be complied with.

19

scheme. c) Appointment & Authorization to Solicitors/ Advocates. 3. The Stock Exchanges, on which the Company is listed, shall be informed as early as possible, about the decision of the Board meeting. 4. The scheme of arrangement shall be submitted with the Stock Exchanges for their approval, at least one month before the filing of scheme with High Court. 5. After obtaining confirmation from Stock Exchanges, application shall be made to High Court for issuing directions to convene meetings:a) Members of the Company b) Members of the each class, if the company shares c) Creditors d) Each class of creditor of the company, if Company has different class of creditors e) For the appointment of Chairman. 6. High Court shall give directions in following respect: a) To determine the class/ class of members and/ or creditors whose meetings have to the be held for considering proposed Rule 69 Form 35 has different class of Section 391(1) Rule 67 Summ on in Form 33 with Affida vit in Form 34 Clause 24(f) This applicable to the Companies is only Listed Clause 36(7)(ii)

This applicable to the Companies

is only Listed

compromise or arrangement b) To fix time or place of the meetings c) To appoint the chairman for the meeting

20

d) Prescribed mode of dispatch and publication of notice. e) Time within which the Chairman should file a report of the meeting f) Any other matter the court may deem necessary.

7. Following documents shall be sent to

the members and creditors for the purpose of meeting not later than 21 clear days before the meeting or as directed by the Court: a) Notice for calling the meeting; b) Form of proxy; c) Scheme of arrangement; d) Explanatory statement; Section 393 Clause 24(h) & Rules 70 & 73 Notice in Form 36 & Proxy Form in Form 37 Normally, 8. Public notices shall be published in one English language and one vernacular language newspaper, as per the directions of the High Court. Rule 74 Form 38 names newspapers which shall published the of in be notices Notices shall be sent under the Certificate Posting of

Court also gives

9. Three copies of the Notice along with

all the annexure shall be sent to the Stock Exchanges simultaneously with the dispatch to the members. 10. Three copies of Notice of the Meeting published in the Newspaper shall be sent to the Stock Exchanges simultaneously with the publication. 11. The Chairman of the meeting shall file an affidavit 7 days before the meeting stating that all the directions regarding the issue of notices have and been the duly Section Rule advertisement Rule 76 Clause 31(e) Clause 31(c) Applicable to companies only listed

Applicable to companies

only listed

Court may direct either chairman or the Advocate of the Company for this purpose Company must

complied with. 12. Convening the meetings of members &

21

creditors: a) Convene the meetings under the Chairmanship of the person appointed by the Court; b) Voting at the meeting shall be done by poll only This 13. Intimation to the Stock Exchange about the result of the meetings. 14. The Chairmen of the meetings shall file the report of proceedings of the meeting within 7 days of the meeting. 15. Form no. 23 w.r.t. the resolutions passed at the meeting shall be filed with office of Registrar of Companies within 30 days of meeting. 16. Petition shall be filed with High Court for approval of the scheme of amalgamation within 7 days of filing of report by the Chairmen in the High Court. Section 391 (2) & Section 394 Court may give 17. The Court shall fix the date & Time of hearing and also order publication of notices in the newspapers. names Rule 80 newspapers which shall of in be notices Rule 79 & 82 Form 40 Section 192 Clause 36(7)(ii) applicable to the Companies Rule 78 Form 39 Form (Central Governments) General Rules & Forms 23 of is only Listed 391(2) 77 prepare papers advance ballot in

Companies

published This task must be 18. The Regional Director and Official handled meticulously. Normally, delays in Court order to occurs due

Liquidator shall submit their reports with the High Court before the date of hearing.

non-submission of report by any of them Representatives of Regional

19. At the hearing, the High Court shall consider the report filed by the

22

Director/ Chairmen of the meetings and shall order for notices to be sent to Regional Director, Ministry of Company Affairs and Official Liquidator attached to the High Court. Registrar Companies Official Liquidator are present at final hearing Court may give due considerations 20. At the final hearing, the Court shall issue order confirming sanctioning of scheme of arrangement. Rule 81 & 84 to objection filed Form 41 by shareholder/ creditor/ employee/ general etc. Order 21. A certified copy of the order shall be filed with the Registrar of Companies within 14 days or such other time as may be fixed by Court, of passing of final order (time obtaining of copy of order shall be excluded) Rule 81 Form (Central Governments) General Rules & Forms Applicable to the Companies Notice to Clause 16 advance fixation only Listed be for of public, shall 21 be of any of and

filed along with Companies

22. The Stock Exchanges shall be intimated about the sanctioning of the scheme.

23. Fixing of record date for allotment of shares as per scheme of arrangement

given 15 days in

record date Filing of Form 2 24. Allotment of shares Sec. 73 with Registrar of Companies Application shall be through designated Stock Exchange made

25. Application to SEBI by the unlisted companies exemption for from listing Rule pursuant 19(2)(b) to of

Securities Contracts (Regulation) Rules

23

26. Application CDSL) for securities

to

Depositories newly

(NSDL/ issued

To be made by existing listed as well as newly listed companies Existing as well as newly listed companies approach Exchanges issues shares to Stock for

admitting

27. Application for listing of newly issued shares to the Stock Exchange

listing of newly

Getting started with Merger: In order to start with the process of merger explained above, there are many documents that are to be taken from the client and many important things that are to be ensured for the smooth flow in the execution of the merger process. Merger Activity Schedule:
S. No. Activity 1. 2. Valuation of Companies shares for exchange of shares to be prepared by independent Chartered Accountants Finalize drafting of (a) Scheme (b) Explanatory statement u/s 393 (c) Petition under Section 391(1) (d) Letters to shareholders 3. (e) Notice to Stock Exchanges Board meetings of companies to be held to: (a) Approve the scheme of amalgamation (b) Accept the report of the CAs on valuation and exchange of shares 0 days Time Frame Before 0 0 day

(c) Authorize directors and company Secretary to take all

action for implementing the scheme of amalgamation

(d) Authorize solicitors to take all actions

4. 5. Advise Stock Exchange on the decision of the board & filing of Copies of Scheme for approval Application u/s 391(1) of the Companies Act to be moved for an order convening meeting of shareholders scheme 1 days 30 days

24

6.

of amalgamation to be annexed. High Court will give order on the application of the company on the following: (a) Date, time and venue of the meeting (b) Appointment of the Chairman (c) Time within which the Chairman of the meetings will give his report Notices of Extraordinary General Meeting of and Listed Company Limited

35 days

7.

40 days

8.

Advertisement for the notice calling for the meeting in Newspapers 21 days before meeting

40 days

9. 10. 11.

Convening the meeting of the members & creditors. Forward to all Stock Exchanges the copies of the minutes of the meeting Petitions to be filed u/s. 391(2) within seven days of the filing of the report of the Chairman to the court for confirmation of the scheme of amalgamation Filing of copies of Petition with ROC, RD & OL Court will fix a date of hearing Notice of hearing shall be advertised in the same papers in which the notice of the meeting was published not less than 10 days before the date of hearing. Date of hearing & High Court to approve amalgamation Notice to Stock Exchanges of the result File copy of the order with the Registrar of the Companies Board Meeting to allot shares File return of allotment Apply to Stock Exchange for listing of shares.

65 days 66 days 80 days

12. 13. 14.

80 day 85 days 100 days

15. 16. 17. 18. 19. 20.

120 days 120 days 150 days 160 days 175 days 177 days

Note: The process of merger can be completed within a period of 4 months but where the meetings of the Creditors/Shareholders is/are held, more time is taken as depicted in the Activity Schedule written above. 25

Documents required - While started with the merger assignment, it is always better to request the client (Transferor and Transferee Company) to provide the following documents so that he merger can be executed smoothly:
NO. OF COPIES 4

S. NO. 1.

DOCUMENTS REQUIRED Copies of the Scheme of Arrangement- Each page stamped and signed on behalf of both the Companies. Latest List of the Shareholders (Name, Address &

2.

Shareholding) of all the Companies duly signed by the Authorized Directors of respective Companies Latest List of Secured Creditors (if any), of all the

3.

Companies duly signed by the Authorized Directors of respective Companies Latest List of Unsecured Creditors (if any), of all the

4.

Companies duly signed by the Authorized Directors of respective Companies Latest List of Directors with their shareholdings, of all the

5.

Companies duly signed by the Authorized Directors of respective Companies. Certified Copy of the Resolution passed by the Board of

6.

Directors of all the Companies for approving the Scheme of Amalgamation Certified copies of the Annual Accounts of all the

7.

Companies for last 3 financial years (Notice, Directors Report, Compliance Certificate, if applicable and Auditors Report should form part of the Balance Sheet) Letter of Consent from all the Shareholders of all the Companies Original Letter of Consents from all the Creditors (Secured and Unsecured loan holders) Original Certified copy of Board Resolution authorizing a director to sign the consent letter on behalf of Company(s)

8. 9. 10.

1 1 4

SCHEME OF ARRANGEMENT The Scheme of Arrangement is the most important document and has to be drafted keeping in mind some very important points. The contents of the Scheme of Amalgamation are as follows: 26

 Details of the Transferor and Transferee Company Appointed date and effective date Rationale for the scheme of amalgamation Effect of the scheme on the undertakings, business, contracts, legal proceedings, assets, liabilities and employees of the Transferor Company(s) Share exchange ratio procedure and terms of shares, cancellation of the existing shares Restructuring of the liabilities Accounting treatment Dissolution of the Transferor Company(s) Provisions for modification of the scheme, if directed by the regulatory authorities Pre-conditions subject to which the scheme would operate such as approval of requisite authority, sanction of high court, filing with Registrar of Companies Liability to bear cost, charges, expenses of the merger Details of properties and liabilities to be transferred the issue of new

27

RISKS INVOLVED IN MERGER

Major mergers have to be handled carefully because they have little scope for trial and error and are difficult to reverse. The risks involved are not merely financial ones. A failed merger can disrupt work processes, diminish customer confidence and can have a significant influence on the brand and product loyalty, damage the companys reputation, cause employees to leave and result in poor employee motivation levels. Many mergers fail as the integration stage so it is important to understand the risks involved in integration and to ways to manage these risks. The integration process should be guided by strategic vision, which should be backed by operating strategy which takes into account how the value chain performance can be improved, weather competitors will react aggressively and if they do how they can be dealt with. In some areas the two entities should be tightly integrated while in other they should be left alone and what to leave alone is a matter of judgment.

28

MANAGING THE RISKS

It is necessary to emphasize the need for a comprehensive role for the HR function in the negotiation before a merger deal is finalized. HR managers usually enter the discussions much later, to deal with issues like compensation. Instead, if they join the discussion at an early stage and conduct the cultural audit, potential troubles spots can be identified, very early on. Some of the point should be considered in the integration stage so as managing the risks, these are shown below: The integration team should build organizational capability by the retaining talented manpower. Downsizing activities must be managed with a great deal of sensitivity. Otherwise, they may fuel a large-scale exodus of people. A related issue is finding the right roles for the people. Clarity in specifying the roles for employees and what their new jobs will be after the merger and to whom they will report. Systems and procedures that are implemented must be in line with the strategic intent of the merger.

29

 The integration team must identify the cultural traits that are consistent with the business goals of the merged entity and take steps to spread them across the two or more entities. The team must manage cultural differences by collaborating with the managers throughout the organization. The post merger drift tendencies should be minimized by managing the transition quickly, if decisions and changes are not implemented fast, the transferee company may become focused on the issues and lose sight of the customers, competitors. Internal communication with employees must be made on a regular and timely basis, also communication with external stakeholders such as customers, vendors and the community must be done in a swift manner. Clearly defined integration plans are of lot of help which includes identification of team that will conduct due diligence and of the team which will plan and implement the merger. Checklists must be prepared to indicate the tasks and suggested deadlines.

30

CORPORATE GOVERNANCE IN CONTEXT OF MERGERS

Effective merger governance integrates several keys dimensions: Stewardship - Larger enterprises in particular may try to reduce the governance issue to matters of contracts and laws. But much of governance is informal, embodied in day to day operating decisions and exchanges of critical information. Alliances need stewards, not just contract managers. Excessively detailed contracts actually limit the ability of the alliance to adapt to changing conditions and often create tension and frustration from which the working relationship never recovers. Resource Allocation Successful integration requires employing capital and people to make the effort succeed, including redirecting the resources as priorities change. Alliances are growing more complex, and they increasingly tap the core capabilities of each corporates parent, so flexibility in governance is the key. Changing conditions require a freer exchange of resources, especially skilled people and intellectual property. Decision Facilitation - The complexity of alliances generally preclude governance by a single person or ad-hoc committee. The flow of activities and information is simply too complex and 31

important for narrow ownership. A better model is a governance structure where decisions happen at various levels. Done well, such governance is not bureaucratic. It involves the right people, leverages, the right skills and information, improves communication and eliminates missteps and misunderstandings. The overall result is faster and better decision making. Culture Management Making desperate organizations work as one, committed to acting in the best interest of the venture is a tough job. Explicit actions and programmers are required to harmonize the cultures of the emerging entity. Prescriptions for prevention: employees, managers, board members and shareholders need to address issues of corporate governance at all stages, from pre-acquisition, due diligence to post-acquisition integration. Here are some recommendations: More Comprehensive Due Diligence Assessing the quality of governance practices require going beyond an assessment of the internal control system. Shareholders not on the board should expect a corporate Governance report as part and parcel of M & A information, addressing questions such as whether the target company supports effective governance policies, communication, company ethics and antifraud policies, and whether it can prove it. Better pricing: - Value the Governance issues. An Acquiring business must know how to adjust the price of the potential target. During the negotiating process, managers should set up explicit objectives with their analysts, M & A Advisors and Auditors regarding their assessment of the risk of governance failures. Minimize Leadership Confusions during the transition Periods: In the Transition phase of an M&A, Management should communicate 32

immediately who is in control across the different levels of the organization. employees Leadership should avoid more the confusion and allow to follow the policies easily. Managers should

communicate information not only on the status of the integration, but also on the increased likelihood of the frauds. The fraud prevention system the acquirer has in place is likely to be challenged or ignored while the companies restructure themselves into a single, new entity. Any steps that management can take with respect to clear policies and procedures, communication opportunities or hotlines for reporting problems will be time and effort well spent. Diminish Employee Grievances during the transition period: There is no point in delaying harsh measures for people who do not fit with the new business. Not only do delaying tactics generate, inertia in the implementation process, but they also sow the seeds of employees dissatisfaction, which ultimately increases the chance of fraud. For the remaining people, managers must also be sensitive to the increased pressures generated by the transition period. Transfer of Best Practices during the Integration Phase: Businesses that understand the negative effects of the transfer of systems that facilitate fraud can consciously choose to transfer the systems that deter fraud. To do so it requires a fair assessment of the current governance practices and the humility (notably on the part of the acquirer) to adopt the target companys practices when they are superior. Assess Countrys Governance Practices: As the managers

increasingly pursue cross-border acquisitions, it is important to assess the quality of governance and practices in each national environment, including shareholder protection, creditors protection, accounting reporting standards and level of countrys corruption.

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Managers of a target company from a stronger investor-protection regime can make contractual arrangements so that the merged organization adopts their governance practices to compensate for deficiencies in the acquirer countrys legal environment. The Lessons Merging Companies must devote resources to addressing corporate governance issues associated with the acquisition process. While such efforts add costs and time to the deal, manages should bear in mind that M&As provide organizations with an opportunities to gain greater control of exiting or newly acquired businesses.

VOTE OF THANKS
To Respected Law Makers To The Institute of Company Secretaries of India To NIRC Gurgaon Chapter Staff To Respected Book Authors who Provided Such a nice material to learn so that we would become able to make this Project.

To all the 1st SMTP Participants at Gurgaon Chapter who Provided great co-operation to us.

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Vote of thanks Given by : The Members of The Group IMPACT Gurudatta Ankit Dhanoj Akash Deepak

ITI SHREE

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