Legal Aspects of Business

Module V-Mergers and Acquisitions

MBA Batch (2018-20)
 Major M&As Deals 2018-19
1. August 2018: Walmart Inc. bought majority shareholding in Flipkart Group. Flipkart’s existing
management team will continue to lead business. New members from Walmart will join the board.
Walmart now holds 77% of shares in Flipkart. Flipkart’s financials will be reported as part of
Walmart’s International Business Segment.
2. March 2019: Walt Disney Company acquired 21st Century Fox. Before the takeover, Disney already
boasted a fearsome catalogue of content, including its classic cartoons, Star Wars and many of
Marvel Characters. ($72 billion)
3. July 2019: Reliance Brands, a subsidiary of Reliance Industries acquired 100% stake in Hamleys Global
Holdings from Chinese fashion conglomerate C Banner International for about Rs. 620 crore in an all-
cash deal. A special purpose vehicle was set up in UK for cash consideration of GBP 67.96 million.
4. Michael Kors Holdings acquired Versace fashion house for $2.1 billion. The name of luxury group is
now Capri Holdings. The Capri Holdings aims at increasing Versace’s global retail from 200 to 300
stores, accerlate e-commerce and omni-channel development, plus expand accessories and footwear
from 35% to 60% of revenues. The portfolio now includes Michael Kors, Jimmy Choo and Versace.
Definitions and Concepts
1. Amalgamation: Blending of two or more undertakings (companies) into one undertaking, the
shareholders of each blending undertaking becoming substantially the shareholders of the other
company which holds blended undertakings.

A Ltd
SA

AB Ltd
SA BA

B Ltd
BA
Merger: Merger is a form of Amalgamation where all the properties and liabilities of transferor
company gets merged with the properties and liabilities of the transferee company, leaving nothing
behind with transferor company except its name, which also gets removed through process of law.

Company A

Company AB

Company B

Note: Shareholding of the company is spread between the two companies.

1. In a merger, the merging entities would cease to be in
existence and would merge into a single surviving entity.
2. Horizontal Mergers
3. Vertical Mergers
4. Co-generic Mergers
5. Conglomerate Mergers
6. Cash Merger
7. Triangular Merger
 India Limited (Cairn), merged with the metals and mining
giant Vedanta Limited (Vedanta) in an all-share deal
amounting to 2.5 billion USD, whereby the public
shareholders of Cairn would be allotted equity and
preference shares of Vedanta.
Acquisition/Take-over: Where an Acquirer purchase controlling interest in the share capital, or all or
substantially all of the assets and/or liabilities, of the target/acquired. It may be a hostile takeover or
friendly takeover.

A Company

A Company

B Company

B Company
 Nov 2018: Tata Motors filed a scheme to transfer its defense undertaking to
its subsidiary Tata Advanced System via a Slump Sale transaction.
https://mnacritique.mergersindia.com/tata-motors-defence-slump-sale/
 ITA defines slump sale as a “transfer of one or more undertakings as a result
of the sale for a lump sum consideration without values being assigned to the
individual assets and liabilities in such sales”
Demerger: It involves splitting up of one entity into two or more business entities. An
entity which has more than one business, may decide to demerge one its business into a
new entity. The shareholders of original entity would generally receive shares of the new
entity.

Company A Ltd.

Company ABC Ltd.

Company BC Ltd.
 Section 2 (19AA) of Income Tax Act, 1961- “Demerger”, in relation to companies,
means the transfer, pursuant to a scheme of arrangement under sections 391 to 394 of
the Companies Act, 1956 (1 of 1956), by a demerged company of its one or more
undertakings to any resulting company”
 Spin-off – Parent and Resultant Co.; Split-up – Parent company loses itself to form
resultant companies.
 2015: The Board of Max India Ltd. decided to split company into three entities: Max
Financial Services Ltd (insurance); Max India Ltd. (healthcare); Max Ventures and
Industries Ltd. (speciality packaging film business).
Reverse Merger: Merger of a loss making or less profit earning company with a company
with a good track record, to obtain the benefits of economies of scale of production,
marketing network, etc.

Company A

Company A

Company B
Company B

Company B is called a ‘Shell Company’.

 Examples
1. 2013: Indiabulls Financial Services (Parent Company) completed its reverse merge
with Indiabulls Housing Finance (100% subsidiary) through share by share transfer.
New entity now becomes housing finance company. They cited two reasons: (i) RBI
did not allow Parent Company to invest more than 25% of its capital in subsidiary
company. (ii) The subsidiary was in dire need of funds.

2. 2006: The New York Stock Exchange Group ditched its not-for-profit status and
became public company through its $10 billion acquisition of Archipelago Holdings
Inc. (NYSE Arca) Under Intercontinental Exchange Group now.
 Reasons for Reverse Merger
West
1. The private company does not want to spend the time or money to undergo and IPO.
2. It cannot find an underwriter for its stock, but wants to enter into the capital market.
India:
1. It is the scheme which can be used as a mode of tax savings for a healthy unit.
2. To protect the losses of the sick company as under Income-tax Act, only the person who has
sustained the loss can carry forward the same. (Section 72A of the Income tax, 1961 is meant to
facilitate rejuvenation of sick industrial undertakings by merging with healthier industrial
companies having incentive in the form of tax savings designed with the sole intention to benefit
the general public through continued productive activity, increased employment avenues and
generation of revenue. Sickness among industrial undertakings is a matter of grave national
concern and section 72A provides for reviving financially non viable business undertakings)
3. In essence, they are rehabilitation-oriented schemes aimed at achieving a quick corporate
turnaround.
4. In other cases, the smaller entity may have rights to trademark or assets making it imperative for
it to survive. Or licence agreements signed by a company may be non-transferable — a reason to
hold on to its identity.
 Features of Reverse Merger

The Court laid down the following test to be satisfied before an arrangement can be termed as a reverse
merger:
1. If the value of assets of the healthy company exceeds the value of the loss making or less profit
making company;
2. If the net profits attributable of assets of healthy company exceeds those of loss making or less profit
making company;
3. If the aggregate value of the consideration being issued by a loss making or less profit making
company exceeds the value of net assets of healthy company;
4. If the equity capital to be issued by loss making or less profit making company as consideration for
the acquisition exceeds the amount of the equity share capital of loss making or less profit making
company prior to the acquisition; or
5. If the issue of shares in loss making or less profit making company would result in change in control
of loss making or less profit making company through the introduction of a minority holder or group
of holders.
Companies Act, 2013

 Amalgamation including Demerger – Section 232

 Amalgamation of Small Companies – Section 233
 Amalgamation of Foreign Companies Section 234
 Reverse Merger Process
 Reverse Merger: When a healthy company reverse merges with a loss making or less profit
making company.
 Cross-Border Reverse Merger: When an unlisted private company in one country tries to get
listed on a foreign stock exchange by merging with a public listed company in that foreign
company.
 On December 19th, 2016, Yatra Online Inc., a prominent Indian online travel company
announced its merger with U.S. based Terrapin Acquisition Corp, a special purpose acquisition
company formed for this purpose. (to get listed on NASDAQ)
 Section 232(h) – prohibition of back door entry on stock exchange
Duties of Tribunal with respect to
Amalgamation
1. To see that the scheme is reasonable and fair - It should be in interest of
company, its stakeholders and public at large. There should not be any graud,
unfair practices or tax evasion.
2. To ascertain the wishes of the members – Upon receiving application u/s
231(1), the Tribunal may call creditors or members or any class of them.
3. To see that the scheme is designed to overcome difficulties and re-establish
the business
Section 232, Companies Act, 2013 r/w Companies
(Compromises, Arrangements and Amalgamations)
Rules, 2016
Board Meeting

Application to Tribunal

Tribunal to Hear the Application

Procedure for Convening Meetings

Convening Meetings of Members

Filing of Representations by
Regulatory/Statutory Authorities

Procedure Post Meeting

Filing of Petition before Tribunal

Procedure to be followed before Final

Hearing

Final Hearing and Afterwards Procedure

Section 233, Companies Act, 2013 r/w Companies
(Compromises, Arrangements and Amalgamations) Rules, 2016

Notice of Proposed Scheme

Filing of Declaration of Solvency

Filing of Documents

Approval of Scheme by CG

Afterwards Procedure
Section 234, Companies Act, 2013 r/w Companies
(Compromises, Arrangements and Amalgamations) Rules, 2016

1. Amalgamation with foreign companies

2. Rule 25 A
3. Special approvals of RBI
4. Transferor should obtain valuation report as per international standards and procedures
5. After RBI approval, as per section 232 or 233