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With recession taking toll of many Indian businesses and the feeling of
insecurity surging over our businessmen, it is not surprising when we hear
about the immense numbers of corporate restructurings taking place,
especially in the last couple of years. Several companies have been taken
over and several have undergone internal restructuring, whereas certain
companies in the same field of business have found it beneficial to merge
together into one company.
All our daily newspapers are filled with cases of mergers, acquisitions,
spin-offs, tender offers, & other forms of corporate restructuring. Thus
important issues both for business decision and public policy formulation
have been raised. No firm is regarded safe from a takeover possibility. On
the more positive side Mergers & Acquisition’s may be critical for the healthy
expansion and growth of the firm. Successful entry into new product and
geographical markets may require Mergers & Acquisition’s at some stage in
the firm's development. Successful competition in international markets may
depend on capabilities obtained in a timely and efficient fashion through
Mergers & Acquisition's. Many have argued that mergers increase value and
efficiency and move resources to their highest and best uses, thereby
increasing shareholder value. .
To opt for a merger or not is a complex affair, especially in terms of the
technicalities involved. We have discussed almost all factors that the
management may have to look into before going for merger. Considerable
amount of brainstorming would be required by the managements to reach a
conclusion. e.g. a due diligence report would clearly identify the status of the
company in respect of the financial position along with the networth and
pending legal matters and details about various contingent liabilities.
Decision has to be taken after having discussed the pros & cons of the
proposed merger & the impact of the same on the business, administrative
costs benefits, addition to shareholders' value, tax implications including
stamp duty and last but not the least also on the employees of the
Transferor or Transferee Company.
Merger:
Methods of Acquisition:
(a) agreement with the persons holding majority interest in the company
management like members of the board or major shareholders
commanding majority of voting power;
(b)purchase of shares in open market;
(c) to make takeover offer to the general body of shareholders;
(d)purchase of new shares by private treaty;
(e) Acquisition of share capital through the following forms of
considerations viz. means of cash, issuance of loan capital, or
insurance of share capital.
Takeover:
Types of mergers
The following main benefits accrue from the vertical combination to the
acquirer company i.e.
(j) acquisition of shares of company whose shares are not listed on any
stock exchange. However, this exemption in not available if the said
acquisition results into control of a listed company;
Escrow account
To ensure that the acquirer shall pay the shareholders the agreed
amount in redemption of his promise to acquire their shares, it is a
mandatory requirement to open escrow account and deposit therein the
required amount, which will serve as security for performance of obligation.
The Escrow amount shall be calculated as per the manner laid down in
regulation 28(2). Accordingly:
For offers which are subject to a minimum level of acceptance, and the
acquirer does want to acquire a minimum of 20%, then 50% of the
consideration payable under the public offer in cash shall be deposited in the
Escrow account.
Payment of consideration
Generally, a company with the track record should have a less profit
earning or loss making but viable company amalgamated with it to have
benefits of economies of scale of production and marketing network, etc. As
a consequence of this merger the profit earning company survives and the
loss making company extinguishes its existence. But in many cases, the sick
company’s survival becomes more important for many strategic reasons and
to conserve community interest. The law provides encouragement through
tax relief for the companies that are profitable but get merged with the loss
making companies. Infact this type of merger is not a normal or a routine
merger. It is, therefore, called as a Reverse Merger.
The allurement for such mergers is the tax savings under the Income-
tax Act, 1961. Section 72A of the Act ensures the tax relief which becomes
attractive for amalgamations of sick company with a healthy and profitable
company to take the advantage of carry forward losses. Taking advantage of
the provisions of section 72A through merger or amalgamation is known as
reverse merger, which gives survival to the sick unit by merging it with the
healthy unit. The healthy unit extincts loosing its name and the surviving sick
company retains its name. Companies to take advantage of the section
follow this route but after a year or so change their names to the one of the
healthy company as were done amongst others by Kirloskar Pneumatics Ltd.
The company merged with Kirloskar Tractors Ltd, a sick unit and initially lost
its name but after one year it changed its name as was prior to merger.
Reverse Merger under Tax Laws
(1) Background
Court held that prime facie the scheme of merging a prosperous unit
with a sick unit could not be said to be offending the provisions of section
72A of the Income Tax Act, 1961 since the object underlying this provision
was to facilitate the merger of sick industrial unit with a sound one.
Public announcement:
3. Timings of announcement:
Public announcement should be made within four days of finalization of
negotiations or entering into any agreement or memorandum of
understanding to acquire the shares or the voting rights.
4. Contents of announcement:
Public announcement of offer is mandatory as required under the SEBI
Regulations. Therefore, it is required that it should be prepared showing
therein the following information:
(9) Objects and purpose of the acquisition of the shares and the
future plans of the acquirer for the target company, including
disclosers whether the acquirer proposes to dispose of or
otherwise encumber any assets of the target company:
Provided that where the future plans are set out, the public
announcement shall also set out how the acquirers propose
to implement such future plans;