Mergers and Acquisition
Authored by Harsh Raj
The merger and acquisition of the companies are very complex. It is a very rigid process and is very time taking. The statute makes this process difficult to safeguard the interest of the shareholders, creditors. The company usually employs a huge amount of workforce, to protect the job and livelihood of such people the law provided it to be rigid and to be careful while dealing such matters. The article further deals with the kinds of mergers and the legal procedure regarding merger and acquisition in India.
The mergers and acquisition of businesses are not a new concept, it has been done for centuries by smart, powerful and rich people. In this age, it has just evolved and now it takes place with the involvement of complex laws and procedures. The today's behavior is market driven and people are trying hard to earn money to fulfill their selfish and lavish wishes. Everybody wants to increase their incomes, profits and to increase their brand value in the market and companies use this method to increase their profits, after all the money in the company is invested by the people and people have bestowed the duty to maximize their wealth to the top management experts.
Companies are governed in India according to Companies Act, 2013. Section 234 of Company Act deals with the mergers and acquisition of companies. It defines merger as " collaboration of two or more companies to form new companies" and acquisition as " selling of one company to another". In acquisition, one company buys another company and retains its own identity.
In simple terms, merger can be said as agreement between two companies with the aim to form a new company with the objective to expand business and increase its market share. Merger in fact is done by the mutual consent of both the companies. A true merger happens when both the countries mold their assets and liabilities into a new entity.
Acquisition is an hostile behavior of the rich and powerful companies where they buyouts large shares in the target company or they buy the assets of their target company. Acquisition takes over the target business. However, the benefit of both merger and acquisition is the same but the decision making authority in acquisition is not much in the hands of the previous company, it is majorly decided by the large company who had acquired it.
Reasons for mergers and acquisition
These are the fundamental tools used by businesses all over the globe to expand their business in foreign countries and capture their market share. These businesses use their resources to acquire small businesses in the country where they are trying to expand. If we see in today's contrast, many businesses come into existence and many wind up daily. For the sake of survival, they acquire different companies to force their existence. The big businesses having enough funds use these tools to eliminate competition and to establish themselves as strong brands
Types of mergers in India
There are several types of mergers based on the relationship of two merging parties:
Horizontal merger- Merger between two parties who are rivals to each other and operate in the same fields having direct competition for the same kinds of goods or services.
Vertical merger- Merger between two companies dealing with complementary goods and services.
Conglomerate merger- This is a kind of merger where parties deal in different sectors and have no common business areas. This kind of mergers are entered by the companies to enter into each other's field of business and to increase their market share by using each other's resources. These mergers are also made for starting a new business in a whole different sector.
Reverse merger- It is a kind of merger where a private company becomes a public company by purchasing its share.
Legal procedures for merger and acquisition
The companies Act, 2013 deals with the mergers and acquisition of companies in India. The base law for merger is the company Act but it is workable with many other statutes already in force. There are many complex issues that need to be dealt before proceeding forward. During this process, analysis of company structure is done strategically to lessen the risk and to maximize the profit. All the assets and liabilities of the company are studied in a manner to avoid any kind of uncertainty after the merger.
Steps followed during merger of company in India:-
Analysis of memorandum of company: The paramount requirement before proceeding to the merger is to dig deeply in the memorandum of association of the company to look whether it provides the power to be merged or not.
Word with stock exchange about the merger: it will be excellent to have a word with the stock exchange to provide them details about the merger and to provide notice and all other documents within stipulated time.
Drafting the proposal of merger: it is necessary to pass resolution of merger by board of directors of both the companies and to pass it through all officers and signatories.
Application to High court: After being passed as a resolution for merger by board of directors. The company needs to record and send their application to the high court of the state where the company is registered.
Notice to shareholders and creditors: After the approval of the High court a notice will be sent to all the shareholders and creditors in two languages namely vernacular language of the state and in English. The notice must be provided 21 days before such meetings.
Filing High court order to Registrar of Company: A genuine copy of the orders passed by the high court must be filed to the registrar of company within the time limit prescribed by high Court.
Merging assets and liabilities of both companies: The assets and liabilities of the both companies must be merged and hence it will be passed to the newly merged company.
The reason behind the merger and acquisition is that the company becomes more valuable and more profitable after the merger but that is not always the case. With the advent of globalization there is a rise in the merger and acquisitions process all around the world. The concept of FDI liberalized in India after 1991, which gave rise to the formation of company system and the merger and acquisition in India.
1. Company Act, 2013.