Authored by- Shikhar Shrivastava
INTRODUCTION
Mergers and acquisitions involve the coming together of two businesses as well as corporate entities to become one for economic, social, or other reasons. A merger or acquisition is feasible only there’s a mutual agreement between both parties. The agreed-upon terms on which these entities are willing to come together are known as an M&A deal structure.[1]
Mergers are often defined to mean the unification of two players into one entity, acquisitions are situations where one player buys out the opposite to mix the bought entity with itself. It may be in sort of a sale, where one business buys another or management take over, where the management buys the business from its owners. Further, de-mergers, i.e., division of 1 entity into two or more entities also require being recognized and treated on par with the mergers and acquisitions regime as recommended below, and accordingly references below to mergers and acquisitions is also intended to hide de-mergers (with the law & rules as framed duly catering to the same).[2]
Mergers and acquisitions are considered to provide effective growth and are getting accepted by the Indian businesses and became an impediment source of strategy for the business. They are widely utilized in a good array of fields like information technology, telecommunications, and business process outsourcing also as in traditional businesses to realize strength, expand the customer base, cut competition, or enter into a replacement market or product segment. Mergers and acquisitions could also be undertaken to access the market through a longtime brand, to urge a market share, to eliminate competition, to scale back tax liabilities or to accumulate competence, or to line off accumulated losses of 1 entity against the profits of other entity.[3]
MERGERS AND ACQUISITION
A merger is that the combination of two companies to make one, while Acquisitions are one company appropriated by the opposite. M&A is one of the main aspects of the finance world. The reasoning behind M&A generally given is that two separate companies together create more value compared to being on a private stand. With the target of wealth maximization, the companies keep evaluating different opportunities through the route of merger or acquisition. Mergers & Acquisitions can take place by the purchase of assets and common shares or by the exchange of shares for assets or on the other hand by exchanging shares for shares.[4]
REASONS FOR MERGERS AND ACQUISITIONS
The principles of Mergers and Acquisition plays an indispensable role in developing the corporate financial aspects as it provides financial synergy for lower cost of capital which is relevant for improving the company’s performance and accelerate growth which will also result in a positive way for the economies of scale. With such boosting of the financial aspects for the company, it also provides for the diversification for higher growth products or markets which also provides motivation to extend market share and positioning giving expanded market access and subsequently, the growth could be seen by the strategic re-alignment with the technological change also with regards to tax considerations and more focus could be kept by this principle on the undervalued target and on the diversification of the risk.[5]
DIFFERENT KINDS OF MERGERS AND ACQUISITION
From a legal perspective, there are different types of mergers like short-form mergers, statutory mergers, subsidiary mergers, and mergers of equals.
Horizontal Mergers
These involve the merger of two firms operating and competing in the same line of business activity. It is performed with a view to make a bigger firm, which can have economies of scale in production by eliminating duplication of competitions, an increase in market segments, and exercise of better control over the market. It also helps firms in industries like pharmaceuticals, automobiles where a huge amount is spent on R&D to realize a critical mass and reduce unit development costs. Example: India cements acquiring Raasi Cement.[6]
Vertical Mergers
These take place between two or more firms engaged in different stages of production. The main reason for the vertical merger is to make sure the ready begin of the materials, gain control over scarce raw materials, gain control over product specifications, increase in profitability by eliminating the margins of the previous supplier/ distributor, and in some cases to avoid taxation of sales. The company named Tea Estate Ltd. as got merged into the company Brooke Bond Ltd.[7]
Conglomerate Mergers
Conglomerate merger refers to the merger of two or more firms engaged in an unrelated line of commercial activity. A conglomerate firm controls a variety of activities in various industries that need different skills within the specific managerial functions of research, applied engineering, production, and marketing. For the source of example, it could be taken that GNFC acquiring Gujarat Scooters.[8]
Product-extension merger – Conglomerate mergers that involve companies selling different but related products within an equivalent market or sell non-competing products and use an equivalent marketing channel of the production process. As considering example it will be that of Phillip Morris-Kraft; Pepsico- Pizza Hut; Proctor and Gamble & Clorox.
Market-extension merger – Conglomerate mergers wherein companies sell an equivalent product in several markets/ geographic markets. E.g. Morrison supermarkets and Safeway, Time Warner-TCI.
Pure Conglomerate merger- two companies that merge haven’t any obvious relationship of any kind. E.g. BankCorp of America- Hughes Electronics.
Consolidation Mergers
This involves a merger of a subsidiary company with the parent company. These mergers are considered to stabilize cash flows and to form funds available for the subsidiary. In consolidation mergers, economic gains aren’t readily apparent as merging firms are under equivalent management. Still, the Flow of funds between parents and therefore the subsidiary is obstructed by other considerations of laws like taxation laws, Companies Act, etc. Therefore, consolidation can make it easier to infuse funds for the revival of subsidiaries.[9]
EXAMPLES OF SUCCESSFUL COMPANY MERGERS AND ACQUISITIONS
Google and Android Acquisition
In 2005, Google acquired Android for an estimated $50 million. During the deal, Android, though established but was an unknown mobile startup company. The move made it possible for Google to compete in a market owned by Microsoft with Windows Mobile and Apple’s iPhone. This deal is a successful acquisition example, 54.5 percent, of U.S. smartphone subscribers, use a Google Android device as of May 2018.[10]
Exxon and Mobile Merger
In 1998, Exxon Corp. and Mobil Corp. made news when they announced their plans to merge. At the time, the companies were the first and second-largest U.S. oil producers. The deal closed at a whopping $80 million and since the deal was made; investors have quadrupled their money and shares have gone up 293 percent with dividends reinvested. This deal is a good example of a horizontal merger. Examples of Horizontal Mergers are of Facebook & Instagram in the year 2012, and the other example is of Disney and 21st Century Fox.[11]
Vodafone and Mannesmann Merger
The merger between Vodafone and Mannesmann occurred in 2000 and was worth $180 billion. This is the largest mergers and acquisitions transaction in history. Vodafone, a mobile operator, based within the UK, acquired Mannesmann, a German-owned industrial conglomerate company. This deal made Vodafone the largest mobile operator and aimed to set the stage for future telecom deals.
Ironically enough, even though it is the largest merger in history, it was not successful. America Online and Time Warner- American Online, known by most people as AOL, acquired Time Warner for $164 billion in 2000. During the time of the acquisition, the most common way to access the internet was through their landline phone service provided by AOL. Due to the change in the way Americans accessed the internet and various company cultural issues, the deal only lasted nine years, and Time Warner became an independent company in 2009.[12]
- J. Heinz and Kraft Foods Merger
In 2015, the boards of both companies, along with the approval from shareholders and regulatory authorities, agreed to a merger worth $100 billion. The newly formed Kraft Heinz Company became the third-largest food and beverage company in the United States, and the fifth-largest worldwide. Many household food brands such as Philadelphia, Capri Sun, and Heinz Tomato Ketchup, now fall under one roof.[13]
LAWS REGULATING MERGER
The laws that regulate the merger of the company have been stated under the following heads:-
1.) The Companies Act, 2013
Section 232, 233, and 234 of the Companies Act, 2013 mentions the process which needs to be followed for getting and legal sanction regarding the merger and amalgamation of companies, the merger, and amalgamation of certain companies, the merger, and amalgamation of company with foreign company respectively. All the elaborative sections provide with in accordance with each specification of the sections, the legal procedure is so associated with the particular section, and how the merger and amalgamation are possible with different kinds of companies and will fall under which section for their governance so as to follow the process of merger and amalgamation so involved and prescribed by the legislation of the Companies Act, 2013.
2.) Foreign Exchange Management Act, 1999
The exchange laws which deals with the issuance, as well as allotment of shares to foreign entities, are contained within the statute of the Exchange Management (Transfer or Issue of Security by a private residing out of India) Regulation, 2000 issued by the Reserve Bank of India mainly deals with the issue and acquisition of shares after the merger or demerger has taken place. This regulation provides general guidelines on issuance of shares or securities by an Indian entity to an individual residing outside India or recording in its books any transfer of security from or to such person. RBI has issued guidelines on foreign investment in India as “Foreign Direct Investment Scheme” which are placed in Schedule 1 of the Exchange Management (Transfer or Issue of Security by a private residing out of India) Regulation, 2000.
3.) The Competition Act, 2002
Section 5 (c) of the Competition Act, 2002 deals with the term “Combinations” which explains diligently the combination with regards to assets and turnover exclusively in India and in India and outside India in its sub-clauses.
Section 6 of the Competition Act, 2002 states that nobody or enterprise shall enter into a combination which causes or is probably going to cause an appreciable adverse effect on competition within relevant market settled in India, and such kind of mixture shall be void.
4.) SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1994
The word takeover could be a better understanding as to the acquisition of control of the company through purchase or exchange of the shares. The twentieth century began with the transformation with the businesses functionaries and thus at times mergers and acquisitions were considered to be the best option available for the companies as per to go with the principles as evolved by globalization as well as the process of acquisition and mergers has to be completed in a time-bound manner. The legislation was very effective in making understanding various concepts such as voting rights, also the provisions related to investors, shareholders, etc. Subsequently, after this other legislation came which also functioned in the same way as the present legislation does which is of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011.
5.) The Indian Income Tax Act, 1961
The merger has not been defined under the Income Tax Act, 1961 but has been covered under the term ‘amalgamation’ as defined in section 2 (1B) of the Act. To encourage restructuring, mergers and demergers have been given special treatment within the Income-tax Act since the start. The Finance Act, 1999 clarified many issues concerning Business Reorganizations thereby facilitating and making business restructuring tax neutral. As per the minister of finance, this has been done to accelerate internal liberalization. The other sections are applicable to mergers or demergers areas under the definition of Amalgamation or Merger in section 2 (1B).
Amalgamation means merger of either one or more companies with another company or merger of two or more companies to make one company in such a fashion that:
(1) All the properties and liabilities of the transferor company/companies become the properties and liabilities of the Transferee Company.
(2) Shareholders holding not less than 75% of the value of shares in the transferor company (other than shares which are held by, or by a nominee for, the transferee company or its subsidiaries) become shareholders of the transferee company.
The following provisions would be applicable to the merger as long as the conditions laid down in section 2(1B) concerning merger are fulfilled:
(1) Any transfer in a scheme of amalgamation, of a capital asset by amalgamating company to the amalgamated company if the amalgamated company is an Indian company. [Section 47(vi], also Section 47(via) deals with the amalgamation related to the foreign company
(a) The transfer of shares by the shareholders of the transferor company in lieu of shares of the transferee company on the merger isn’t considered a transfer and hence gains arising from the same are not chargeable to tax in the hands of the shareholders of the transferee company. [Section 47(vii)]
(b) just in case of a merger, the cost of acquisition of shares of the transferee company, which were acquired pursuant to the merger is going to be the value incurred for acquiring the shares of the transferor company. [Section 49(2)]
LEGAL PROCEDURE FOR BRINGING ABOUT MERGER OF COMPANIES
(1) Examination of object clauses:
It is very much important that the Memorandum of the Articles of the Company should be approached to check as to whether there is a specific clause of amalgamation is available or not. Also, further the thing which should be taken into consideration is that the fact that the merging company should be permitted in accordance with its clauses of the object to carry on with the business of the merged company. If such prerequisites that are required are not available, then the permission of the Shareholders, Board of Directors, and Company Law Board have to be complied with.
(2) Intimation to stock exchanges:
The merging company and the merged company shall be intimated with the Merger proposal, where on preferred time being with all the copies of the notices, resolutions pronounced, orders passed shall be preferably be informed to the concerned stock exchanges authorities.
(3) Approval of the draft of the merger proposal in consonance with the respective boards:
The draft so prepared of the merger proposal has to be complied for the signatory intimation or for the approval with the respective Board of Directors and further, the resolution has to be passed taking into consideration the Merger proposal which authorizes its respective Directors of the Companies separately to take the proposal to the above stages.
(4) Application to high courts:
After so the acceptance of the Merger Proposal by the Boards of the respective companies, the companies are entitled to make an application to the Hon’ble High Court of the State where the Company’s Registered Office is being situated, for having a formal meeting of the Shareholders and of the Creditors for the passing of the Merger proposal.
(5) Dispatch of notice to shareholders and creditors:
Now, the prerequisites which need to be followed for convening the meetings of the above-mentioned authorities, a notice and a descriptive declaration of the Conclave, sort of conference and consultation, as ratified by the Respective Hon’ble High Courts whose jurisdiction falls with the Registered Office of the respective Companies, shall be consigned and discharge by both the Companies to the designated members who are Shareholders and the Creditors, forgetting at least 21 days prior notification of the Meeting and the same has to be publicized in form of printed publication as well.
(6) The holding of meetings of shareholders and creditors:
The Conclave for the conference and consultation of the designated members of each of the Company shall be conducted for proceeding with the venture of Mergers where the voting shall be progressed with the majority of seventy-five percent.
(7) Petition to the Supreme Court for confirmation and spending of HC orders:
Soon the Merger venture is been considered by the Shareholders and the Creditors, the Companies shall place a petition before the Hon’ble High Court for its acceptance of the Merger venture and the notice of the same has to be publicized in two printed publications as well.
(8) Filing the order with the registrar:
The Certified true copies of the Hon’ble High Court order must be cataloged with the Registrar of the Companies within the stipulated time period so allocated by the Hon’ble Court.
(9) Transfer of assets and liabilities:
After the ultimate orders are gone by both the High Courts, all the assets and liabilities of the merged company will need to be transferred to the merging company.
(10) Issue of shares and debentures:
The company which is being merged after completing all the requisites provisions of the law should issue share & debentures of the merging company. The new shares and debentures so issued will then be listed on the stock exchange.
(11.) Waiting tenure for Merger
International experience shows that 80-85% of mergers and acquisitions don’t raise competitive concerns and are generally approved between 30-60 days. The Indian competition law prescribes a maximum of 210 days for the determination of combination, which incorporates mergers, amalgamations, acquisitions, etc. This, however, shouldn’t be read because the minimum period of compulsory awaits parties will notify the Competition Commission. The legislation enshrines that the compulsory waiting period is either 210 days from the day of filing of the notice or the order of the Commission, whichever is earlier. In the event the Commission approves a proposed combination on the 30th day, it can become on the 31st day. The internal deadlines within the general gap of 210 days are proposed to be inbuilt the regulations that the Commission is going to be drafting, in order that the overwhelming proportion of mergers would receive an approval within a way shorter period.
The timelines prescribed under the Act and therefore the Regulations don’t take cognizance of the compliances to be observed under other statutory provisions just like the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (‘SEBI Takeover Regulations’). SEBI Takeover Regulations require the acquirer to finish all procedures concerning the general public offer including payment of consideration to the shareholders who have accepted the offer, within 90 days from the date of public announcement. Mergers & amalgamations get completed with taking at least 3-4 months’ time. Failure to form payments to the shareholders within the public offer within the time stipulated within the SEBI Takeover Regulations entails payment of interest by the acquirer at a rate as may be specified by SEBI. [Regulation 22(12) of the SEBI Takeover Regulations] it’d, therefore, be essential that the utmost work time for CCI should be reduced from 210 days to 90 days.
CONCLUSION
The basic reason behind mergers and acquisitions is that organizations merge and form one entity to realize economies of scale, widen their reach, acquire strategic skills, and gain a competitive advantage. In simple terminology, mergers are considered as a crucial tool by companies for purpose of expanding their operation and increasing their profits, which in façade depends on the type of companies being merged. Therefore, it’s ripe time for business houses and companies to observe the Indian market, and grab the chance.
The practice of Mergers and Acquisitions and restructuring of business entities has achieved a lot of importance and significance in today’s corporate world. M&A is considered to be an instrument of momentous establishments and processed growth and is increasingly getting much acceptance by Indian businesses as a critical tool of business strategy. They are widely utilized in a good array of fields like information technology, telecommunications, and business process outsourcing also as in traditional business to realize strength, expand the customer base, cut competition, or enter into a replacement market or product segment. Mergers and acquisitions could also be undertaken to access the market through a longtime brand, to urge a market share, to eliminate competition, to scale back tax liabilities, or to accumulate competence or to line off accumulated losses of 1 entity against the profits of other entity.
BIBLIOGRAPHY
Report-
1.) Mergers and Acquisitions, Report of the Expert Committee on Company Law, Ministry of Corporate Affairs, the Government of India, available at http://www.mca.gov.in/MinistryV2/mergers+and+acquisitions.html.
Articles-
2.) Mergers and Acquisitions, EduPristine,
available at https://www.edupristine.com/blog/mergers-acquisitions.
3.) Significance of Mergers and Acquisition in India, UKDiss.com, available at https://ukdiss.com/litreview/significance-of-mergers-and-acquisition-in-india.php
4.) Marsha Lewis, Examples of Most Successful Company Mergers and Acquisitions of All Time, Deal Room, available at https://dealroom.net/blog/successful-acquisition-examples.
Footnotes
[1] EduPristine, Mergers, and Acquisitions, available at https://www.edupristine.com/blog/mergers-acquisitions, last accessed- April 16, 2020, 19:22.
[2]Mergers and Acquisitions, Report Of The Expert Committee On Company Law, Ministry of Corporate Affairs, Government of India, available at http://www.mca.gov.in/MinistryV2/mergers+and+acquisitions.html, last accessed- April 16, 2020, 19:24.
[3] Ibid
[4] Supra note 1.
[5] Ibid
[6]Significance of Mergers and Acquisition In India, UKDiss.com, available at https://ukdiss.com/litreview/significance-of-mergers-and-acquisition-in-india.php, last accessed- April 16, 2020, 19:30.
[7] Ibid
[8] Ibid
[9]Supra note 6.
[10] Marsha Lewis, Examples of Most Successful Company Mergers and Acquisitions of All Time, Deal Room, available at https://dealroom.net/blog/successful-acquisition-examples, last accessed-
[11] Ibid.
[12] Supra note 10.
[13] Marsha Lewis, Examples of Most Successful Company Mergers and Acquisitions of All Time, Deal Room, available at https://dealroom.net/blog/successful-acquisition-examples, last accessed-