An Overview On Merger And Amalgamation

Published on 14 Jul 2017 by Team

The term ‘merger’ is not defined under the Companies Act, 1956, and under Income Tax Act, 1961. However, the Companies Act, 2013 without strictly defining the term explains the concept. A ‘merger’ is basically a combination of two or more entities into one; the desired effect being not just the accumulation of assets and liabilities of the distinct entities, but the organization of such entity into one business.

MCA's Notification

Ministry of Corporate Affairs by the notification dated 14 December 2016 had issued rules i.e. The Companies(Compromises, Arrangements, and Amalgamations)Rules, 2016. These rules were to be effected from 15th December 2016. All the matters relating to Compromises, Arrangements, and Amalgamations (hereafter read as “CAA”) are dealt as per provisions of Companies Act, 2013 and The Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016.

Where a compromise or arrangement is proposed for the purposes of or in connection with a scheme for the reconstruction of any company or companies, or for the amalgamation of any two or more companies, the petition shall pray for appropriate orders and directions under section 230 read with section 232 of the Act.

Amalgamation also called as reconstruction occurs when a company transfers the whole of its undertaking and property to a new company consisting substantially of the same shareholders. The object of reconstruction could be to reorganize capital and variations of the right of investors. Talk to the best corporate lawyers in India to know more about amalgamations.

Amalgamation is, therefore, the blending of two or more existing company so as to form a third entity or one company is absorbed into and blended with another company. It implies the creation of a new company by a complete consolidation of combining units. Under amalgamation, none of the existing company retains its entity. A reconstruction or amalgamation may take majorly 3 forms i.e.: 

  1. By a scheme of arrangement.
  2. By the sale of an undertaking.
  3. By the sale of shares.

Conditions for Merger and Amalgamation

According to Section 232, when an application is made to the tribunal under section 230 and it is further shown to the tribunal that compromise has been proposed for the purpose of or in connection with a scheme of reconstruction of any company or companies involving amalgamation of 2 or more companies and that under the scheme of undertaking, property or liabilities of any company is to be transferred to another company or proposed to be divided among ad transferred to 2 or more companies the tribunals can make provisions of all of the following 

  1. The transfer to the transferee company of the whole or any part of the undertaking, property or liability of any transferor company;
  2. 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;
  3. The continuation by or against the transferee company of any legal proceeding pending by or against any transferor company;
  4. The dissolution, without winding up of any transferor company;
  5. The provision to be made for any person who within such time and in such manner as the Court directs, dissents from the compromise or arrangement; and
  6. Such incidental, consequential and supplemental matters as are necessary to secure that the reconstruction or amalgamation shall be fully and effectively carried out.

However, the Court shall not sanction any compromise or arrangement for the amalgamation of a company, which is being wound up, with any other company unless the Court has received a report from the CLB or 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 interests. Consult top corporate law advocates in India to have a better understanding of mergers and amalgamations.

Thus, where the only purpose for which the transferor company was created was to facilitate the transfer of a building to the transferee company without attracting the capital gains tax and the dissolution of the transferor company was sought without winding up, the Court refused to sanction to the scheme. A certified copy of the Court’s order should be filed by the company with the Registrar within 30 days of the passing of the order. In Case of application filing, u/s 230 for Compromise & Arrangement in relation to the reconstruction of the Company or companies involving a merger or the amalgamation of any two or more companies should specify the purpose of the scheme.

Amalgamation and Merger is one of the tools that can help companies avoid competition among them and add to the market offerings. It is to the mutual advantage of the acquirer and acquired companies. It serves as an apt method of corporate restructuring to bring about a change for the better and make business environment competitive.

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