Steps for Amalgamation of two or more Companies in India

The Companies Act, 1956 (“Act”) envisages amalgamation of two or more companies by three routes under sections 391 to 394 by High Court sanction, section 395 without High Court (“Court“) sanction and under section 494 in the process of voluntary winding up. Of these three methods, the first method is the most convenient and widespread. Amalgamation under section 395 of the Act is subject to restrictions on the amalgamating company which may not purchase shares in excess of sixty per cent of its paid up share capital and free reserves, or one hundred percent of its free reserves, whichever is more. Amalgamation under section 494 of the Act is sui generis. Set forth below is a broad description of the steps to carry out an amalgamation of two or more non-listed companies under sections 391 to 394 of the Act.

1. The first step is to hold a board meeting of the transferor and transferee companies and obtain in principle approval for the proposed amalgamation. Simultaneously, a due diligence assessment of transferor company’s shares is also approved. Due diligence aims at uncovering information pertaining to the transferor company’s affairs – operational, strategic, technical, environmental, information security, legal, tax, financial, regulatory, etc. Due diligence is within transferee company’s scope of responsibility as the transferor has a vested interest in not disclosing adverse information, which may significantly reduce the valuation of shares. However, transferor company may also carry out due diligence of the transferee to assess the track record of the transferee and its ability to conclude the proposed transfer.

2. Once the transferee has satisfied itself by the due diligence report, the next step is determination of consideration payable by the transferee company to the transferor company, by a chartered accountant by valuation of equity shares of the transferor company by using one or more of the four valuation methods – net asset value, discounted cash flow method, profit earning capacity and market price method for listed companies only. The valuation determines (a) the price per share of transferor company, and (b) the share exchange ratio applicable on exchange or replacement of transferor company’s shares with transferee company’s shares.

3. If the transferee and transferor agree on the consideration as representing a fair price for the proposed transfer, a scheme of arrangement has to be prepared and the same has to be approved by the respective boards along with the valuation report and an explanatory statement giving justification for the proposed amalgamation. At the board meetings, participating companies should authorize a director to sign, file application and accompanying documents in the court, and take all actions incidental and necessary for the purpose. In the scheme, the details of capital structure of transferor and transferee, transferred business, transferred liabilities, and terms and conditions of transfer, etc. are stated.

4. Simultaneously, the transferor company has to apply to financial institutions and debenture trustees and banks for their approval of the amalgamation scheme.

5. The transferor and transferee company file a joint application in the High Court having jurisdiction over the place where registered office of the two companies is located. If registered offices of transferor and transferee companies are located in different states, separate applications are required to be filed in the two Courts with each company being made a party to the other’s application. In the application, the applicant is required to disclose all material facts relating to the company, such as the latest financial position of the company, the latest auditor’s report on the accounts of the company, the pendency of any investigation proceedings in relation to the company, etc.

6. The Court issues a direction for holding meeting of shareholders and creditors of the applicant company chaired by the person nominated by the Court. However, the Court may dispense with the requirement of holding meeting of members and creditors if their individual consent has already been obtained and accompanies the application for amalgamation. The Court also issues directions to the Central Govt. through the concerned Registrar of Companies.

7. Pursuant to the Court direction a 21 day notice is issued to the shareholders and creditors of the transferor company. The notice is accompanied with the proposed scheme of arrangement, and an explanatory note under section 393 of the Companies Act, 1956. The explanatory note gives details of the circumstances that led to the necessity of the proposed amalgamation, the contents of the scheme in brief, etc. The notice of the proposed amalgamation is advertised in English and a local newspaper as per Court’s directions.

8. An affidavit of service of notice and advertisement of the scheme in newspaper is to be filed in the Court by the chairman of the meeting seven days before the date fixed for the meeting.

9. The meeting is to be held as per Court’s directions. Usually different meetings are held for different classes of shareholders – preference or equity, or creditors – secured or unsecured. At the meeting the scheme should be approved by a simple majority (51%) of members or creditors present and voting as the case may be and who should represent at least 3/4^thin value of the paid up share capital and/or 3/4^th in value of total claim of creditors. Voting at the meetings takes place by poll. After this meeting an extraordinary meeting may be held to effect changes in Memorandum of Association if the same does not contain provisions for amalgamation or in the Objects clause if the same does not contain objects similar to those of the transferor company, and consequent changes, if any, under section 31 of the Act, etc.

10. The chairman of the meeting makes a report to the Court on the outcome of the meeting of shareholders and creditors separately. The Court cannot proceed without the required sanction of members and creditors to the scheme.  In case the scheme is approved, the transferee company is to apply to the Reserve Bank of India if share allotment to non-residents is envisaged.

12. Another application is submitted in the Court praying for grant of sanction. The Court fixes a date for hearing and notice thereof is to be advertised in the same newspapers in which notice of the meeting was advertised. The Court hears the applicant and representative of the Central Govt., and any shareholders or creditors. If in view of the Court, the Scheme is just and fair and not prejudicial to transferor company’s members or creditors, it may sanction the scheme. The transferor company will continue in existence till such time as specified in the Court order sanctioning the scheme.

13. To make the sanctioned scheme effective, its certified copy of the sanctioned scheme is filed with the concerned registrar of companies within 14 days of order of the Court excluding the time taken in obtaining the said certified copy. The Court order is liable for stamp duty if provided for in the concerned state stamp duty laws.

@ Rakesh Matwa, Advocate