CORPORATE

RESTRUCTURING

–
NIRC / ICSI – 26.02.2011
LEGAL FRAME WORK
11
(Concept to Completion)
 Major Issues
Legal
Technical
Financial
Stamp Duty on Assets/issue of Shares
Taxation
• Valuation & Calculations
• Fairness Opinion in cases of Unlisted Cos.
• Exchange Ratio

22
 A. Statutory Provisions
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Second level
● Third level

● Fourth level

Chapter-V ● Fifth level

A complete code in
the nature of Single
window clearance.

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CS HKV/26-2-11
 Chapter V, Sections 390 to 396A
of the Companies Act, 1956

Chapter V relates to Arbitration, compromises,

arrangements, reconstructions.
(includes mergers/demergers/hive-offs/spin-offs of
Public/Pvt/Listed/Unlisted/Indian/Foreign Cos.)

However, Section 389 relating to power of Companies to

refer the matter to arbitration stands omitted since 1960.

The Companies Act does not use the word ‘merger’.

Similarly it does not define ‘amalgamation’, only some
reference at places.
CS HKV/26-2-11
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Rules 67 to 87 of the
Companies (Court) Rules, 1959

Prescribe the detailed procedure to be

followed for approval of such Schemes.

All formats are also prescribed.

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Section 2(1B) of the
Income Tax Act.
This Section defines
‘amalgamation’ and stipulates three conditions:
All properties of amalgamating company should
vest with amalgamated company.
All liabilities of amalgamating company should
vest with amalgamated company.
Shareholders holding not less than 75% shares in
the amalgamating company should become
shareholders of the amalgamated company.
AS 14 Amalgamation (i) in the nature of Merger,
(ii) in the nature of Purchase. 66
B. Right to amalgamate

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Second level
● Third level

● Fourth level

● Fifth level

77
Though for the purpose of Section 391,
‘company’ means ‘any company liable to
be wound up’, yet it does not debar
amalgamation of financially sound
companies. (Section 390)

88
Section 394 (4)
‘Transferee Company’ does not include any
company other than a company within the meaning
of this Act. (Has to be a company registered under
the Companies Act)

‘Transferor Company’ includes any body corporate

whether a company within the meaning of this Act
or not. (Can be a Foreign Co.)

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 C. Objects, Reasons and
Advantages of Amalgamations
Disclosed / Undisclosed

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• Synergy of operations
• Economics of Scale
• Reduction in production, administrative, selling, legal and
professional expenses.
• Benefits of integration
• Optimum use of capacities and factors of production
• Tax advantages
• Financial constraints for expansion
• Strengthening financial strength
• Diversification
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Advantage of brand equity

Loss of objectives with which several companies were set up

Survival

Competitive advantage

Eliminating / weakening competition

Revival of a weak / sick company

Sustained growth

More efficient use of larger resources and funds

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Seldom undisclosed

Reorganization of Business
Increasing the Promoters’ Holding
Listing of Unlisted entity
Induction of Partner
Tax Benefits
Leases (Including mining leases)

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 D. Reverse Merger

Healthy Company amalgamating with a

financially weak company.
Holding Company merging with its
subsidiary.

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 E. Procedure for seeking approval
Board’s approval of Members / Creditors
Contents of Scheme
‘Appointed Date’
‘Effective Date’
Capital Structure of both companies
Exchange ratio – Cross holdings - Cancellation / Trust
Transfer of undertaking and liabilities (charges created)
Continuation of legal proceedings
Carrying on of business during intervening period
Services of employees
Allotment of shares in exchange ratio, treatment of fractions and rights of
shareholders to Dividend etc.
Dissolution of transferor company (without winding up on the effective date)
Conditions subject to which the Scheme is to take effect.
Cooling period of 1 months to Stock Exchanges Clause 24(f) 1515
Drafting of Scheme vis-à-vis Objective

Specific / Standard Schemes

Clubbing of Authorised Capital
Borrowing Powers
Change of Name
Change of Objects
Reduction of Capital
Flushing of small shareholders
Redemption of Preference Capital
Cancelation of Cross holding Vs Trust

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F. Court’s directions for convening
meeting of Members / Creditors
(Rule 69)
(Court may dispense any meeting)
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● Fifth level

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Application in F-34

Judges summon supported by Affidavit in Form 33

Directions of the Court for

Date, time and place of meeting

Appointment of Chairman
Quorum
Notice and manner of giving advertisement
Time for filing of Chairman’s Report
Dispensing meeting of members and creditors in certain cases

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G. Meaning of Class of Members
and Creditors

Based on rights attached

(Equity/Preference holders)

Secured / Unsecured Creditors

(FCCB/GDRs/FDs/Employees)

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 H. Notice of Meeting – UPC

21 clear days in Form 36

Proposed Scheme to be attached
Statement under Section 393 Vs. Sec. 173
Proxy Form in Form 37
Publication in News Papers in Form 38 (Rule
74)
Affidavit of Chairman for service /
advertisement of notice
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 I. Proceedings at Meeting
Voting to be by poll only

Chairman to appoint two scrutineers to count and report

Scheme to be approved by Special Majority

(Principle of Fair Representation)
Majority in number representing 3/4th in value
Majority of members / creditors present and voting
(JP 46 Obj. 5 Pb 2 = 53 – Exclude Promoters)

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 J.Report of result of meeting

Chairman to file report in Form 39 within

seven days of meeting (Rule 78)

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K. Requirements of Listing
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Second level
● Third level

● Fourth level

● Fifth level

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Intimation to SEs within 15 minutes of Board’s decision
In principle approval u/cl. 24(f) – 1 month time
Valuation Report/Fairness Opinion-Cl.24(h) in case of
Unlisted Cos./WOS-if consideration

Intimation to SEs after approval of members / creditors

Copies of notices, circulars etc. to be sent to SEs

Report of Chairman to be filed with SEs

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 L.Explanatory Statement u/s 393
Requirements regarding explanatory statement
Terms of arrangement
Effect of Scheme
Material interest of Directors
Pre/Post shareholding pattern. Fairness report etc.
Principles governing Explanatory Statement u/s 393
Different from Section 173 – material facts
Valuation/Fairness Reports need not be circulated
Providing exchange ratio and not calculations is enough
Directors’ interest has to be special

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 M. Procedure for Seeking
approval of High Court
High Court sanction to the Scheme
In case Scheme involves reduction in capital procedure to be
followed
However, if reduction is part of scheme, no separate petition
under section 100 is required.
Petition to High Court in Form 40 after approval of Members /
Creditors
Notice to Central Government under Section 394A.
● To Regional Director and none else
● Report of OL – 2nd Proviso 394(1)
● Report of ROC – To RD
● - To Court – 1st Proviso 394(1)
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● Hearing on Petition
– Notice of hearing to be advertised (Rule
80)
– High Court Order on petition after hearing
(Rule 81)
● Order under Section 391 in Form 41

● Order under Section 394 in Form 42

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 N. Filing of Order with ROC

Within 30 days in Form 21

Shall have no effect unless certified copy
filed with ROC
Inform Stock Exchanges
Secure Listing of new shares.

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 O. Order to be annexed to MOA

Copy of Order needs to be annexed to each

copy of MOA – Section 391 (4)

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 P. Power of High Court to
enforce comprise /
arrangement

Vast powers under Section 392(1)

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 Q. Stamp Duty on High Court
Order
Transfer / vesting is by virtue of Court Order
without further documents / deeds
Court Order Vs Conveyance
In case duty is payable in the State, same
shall be paid on the Order
‘Litaka Pharmaceutical Limited Vs State of
Maharashtra’
‘HLL Vs State of Maharashtra’ (2003) 117
Cocases SC 758
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 R. Principles evolved for sanctions of
Scheme by Courts
Resolutions are passed by Statutory majority in value and in
number u/s 391(2) at a meeting duly convened and held. Unless
Scheme is so approved, the Courts will have no jurisdiction to
confirm the same.
Those who took part in the meeting to be fair representatives of
the class.
Scheme as a whole should be reasonable one. If so, Courts not
to interfere in collective wisdom of shareholders. Objectors will
have to convince the Court that Scheme is unfair and needs to
be rejected.
Court not to launch an investigation into the commercial merits /
demerits of the Scheme.
There should be no coersion of the minority at the statutory
meeting and no lack of good faith on the part of majority.

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Court must not act as a rubber stamp. It has a duty to
scrutinize but scrutiny is not with the eye of an expert of
exactness of an accountant.
Court to ensure that requisite statutory procedure has been
complied with.
Scheme to be backed by requisite majority under Section
391(2)
The meetings had relevant material to enable taking informed
decisions.
All requisite material required by proviso Section 391(2) is
placed before the Court and Court is satisfied. (Latest
Financial Position/Pendency of Inv. proceedings u/s 235
to 251 and the like. Judgement in AIR 2006 SC 2287 The
Chairman SEBI Vs Shriram Mutual Fund & Anth has
included Sec 209 A also.
Scheme as a whole is found to be just fair and reasonable
from the point of view of prudent men of business taking a
commercial decision.
Once the above parameters are met, the Courts will have no
further jurisdiction to sit an appeal over the commercial3333
wisdom of the majority.
 S. OF
SOURCES Handling of Objections
OBJECTIONS
A - Shareholders
● Unfair Exchange Ratio
● Absence of Fair Representation
● Clubbing of Authorised Capital – Revenue Loss
● Violation of Take Over Code
● Change of Name through Scheme
● Reduction of Capital not permitted
● Collusion of Regulators with Companies
● Non disclosure of Latest Financial Position/Investn
● Regular mergers/demergers
– Report of ROC not received
● Provide Transport
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B. Creditors
● Security may get diluted
● Merged company won’t honour commitments
● FCCB holders – Website/Advt in Foreign Papers

C. Central Govt. (RD)

● Clubbing of Authorised Capital – Loss of Revenue
● Borrowing Powers clubbing not permissible
● Change of Name – separate procedure
● Reduction of Capital – separate procedure
● Exchange Ratio – calculations not provided
● (Shardul Shroff Committee Report, Calculations to be confdl., Double
Lock with one key to ROC).
● Business not covered by Objects Clause

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D. Official Liquidator
Inspection/Audit of Records of Transferors

E. SEBI
Investigation in Progress under TO Code
Don’t sanction till action is completed

F. Stock Exchanges
Exchange Ratio
Public shareholding falling below minimum

G. Employees

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 Merger of JIL with JRC
(2004)2CLJ105(ALLD.)
1. Merger of JAPL with JRCL = JIL
2. Hive-off Cement Plant by JIL to BCL (u/s
293(1)(a)
3. Hive-off Cement Business of JIL to BCL
(name changed to JCL) u/s 391/394
4. Merger of JIL with JCL (JAL) u/s 391/394

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 Merger of
Jaiprakash Industries Ltd. & Jaypee
Rewa Cement Ltd.
Law laid down for the First Time – as reported in
(2004)2CLJ105(Alld).

1. Meaning of “Fair Representation” in meetings while

considering the Scheme.
2. Right of shareholders not constituting the requisite
strength u/s 399 to file suit instead of approaching
CLB in case of Oppression & Mismanagement
3. Impact of pending litigation on Scheme.
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 Post Merger Activities

Necessary Press notices for all concerned

Notices to SEs/Depositories
Fixing Record Date
Allotment of shares in Exchange Ratio
Credit/Listing of newly allotted shares
Effecting Change of Name/A.Capital,if any
Revised Resolution to Banks/Clients
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Change of ownerships of Moveable
Properties
Mutation of Immovable properties
Mining & other leases/agreements etc.
IPRs – necessary changes to be effected
Names to be changed in all
Licences/Permits etc.
Changes, if any, in Occupiers/Managers

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FOR SUCH SCHEMES WE NEED
TO PLAN
“If we fail to plan, we are planning to fail”
“Better to prevent and prepare rather than to
repent and repair”
“Irretrievable corporate actions –
“You can make omlette from an egg, but not
egg from the omlette”

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THANK YOU

CS HKV/26-2-11 4242