Mergers and Acquisitions

Mergers and acquisitions are two distinct processes, though they can both give a company a competitive advantage and increase shareholder value. A merger is a union of two companies where both dissolve and create a new third entity. On the other hand, an acquisition, also known as a takeover or buyout, is when one company buys another company and takes possession of its assets and liabilities. It can either be a share purchase or an asset purchase. In a share purchase, the buyer acquires the shares of the target company from the shareholders. 

In an asset purchase, the buyer buys the target company’s assets from the target company. A joint venture is when two or more businesses join forces under a contractual agreement to run a specific business venture. Both parties share profits and losses, and it is limited to one project rather than a continuous relationship, as in a strategic alliance. A strategic alliance is a partnership between two businesses that join forces to leverage better prices, seek out business opportunities, or provide part of a product. 

Lastly, a partnership is when two or more people own and operate a business together and share profits and losses. It is important to note that many mergers are in fact acquisitions, where one company takes over another and incorporates it into its own business. This misuse of the term merger often needs to be clarified, leading to the combination of mergers and acquisitions (MandA) when reporting merger statistics. This gives a more accurate view of the merger market.

Mergers are a vital business strategy that can have positive and negative implications. Economists generally classify these mergers into three categories: horizontal, vertical and conglomerate. Horizontal mergers involve two companies in direct competition and share the same product lines and markets. These mergers lead to the consolidation of firms that are natural rivals. 

Vertical mergers are mergers between a customer and a company or a supplier and a company. This merger type results in firms with actual or potential buyer-seller relationships. 

Conglomerate mergers are broadly classified into product extension, market extension and pure conglomerate mergers. 

• Product-extension mergers involve companies selling different but related products in the same market or selling non-competing products using the same marketing channels or production processes. 
• Market-extension mergers involve companies selling the same products in different or geographic markets. 
• Pure conglomerate mergers are between two companies with no apparent relationship. 

The fundamental law related to mergers is codified in the Indian Companies Act 1956, which works with various regulatory policies. Sections 391 to 396 of this Act collectively deal with the compromise and arrangement with creditors and company members needed for a merger, amalgamation and reconstruction. 

• Section 391 grants the Tribunal the power to sanction a compromise or arrangement between a company and its creditors/ members, subject to certain conditions.
• Section 392 provides for the enforcement and/ or supervision of such compromises or arrangements with creditors and members. 
• Section 393 requires the availability of the information needed by the creditors and members of the concerned company when acceding to an arrangement. 
• Section 394 makes provisions for facilitating the reconstruction and amalgamation of companies by making an appropriate application to the Tribunal. 
• Section 395 gives power and duty to acquire the shares of shareholders dissenting from the scheme or contract approved by the majority. 
• Section 396 deals with the ability of the central government to provide for an amalgamation of companies in the national interest.

In any scheme of amalgamation, both the amalgamating company or companies and the amalgamated company must comply with the requirements specified in sections 391 to 394 and submit details of all the formalities for consideration of the Tribunal. It is not enough if one of the companies alone fulfils the necessary formalities. When an application is filed, the Tribunal will pass orders about the fixation of the hearing dates and the provision of a copy of the application to the Registrar of Companies and the Regional Director of the Company Law Board by section 394A and to the Official Liquidator for the report. Before sanctioning the scheme of amalgamation, the Tribunal must give notice of every application made to it under sections 391 to 394 to the central government and consider any representations made to it by the government.

The Company Law Board exercises the powers and functions of the central government in this regard through its Regional Directors. When hearing the companies’ petitions in connection with the scheme of amalgamation, the Tribunal grants the petitioner company an opportunity to meet all the objections which may be raised by shareholders, creditors, the government and others. The assets and liabilities of the amalgamating company automatically become vested in the combined company by order of the Tribunal granting a scheme of amalgamation. 

The Tribunal may also make provisions for the means of payment to the shareholders of the transferor companies, continuation by or against the transferee company of any legal proceedings pending by or against any transferor company, the dissolution (without winding up) of any transferor company, the provision to be made for any person who dissents from the compromise or arrangement, and any other incidental consequential and supplementary matters to secure the amalgamation process if it is necessary. The order of the Tribunal granting sanction to the scheme of amalgamation must be submitted by every company to which the charge applies (i.e., the amalgamating company and the amalgamated company) to the Registrar of Companies for registration within thirty days.

Motives behind Mergers and Acquisitions (M&A) are often discussed regarding increasing shareholder value. These motives include achieving economies of scale, increasing revenue/market share, cross-selling, corporate synergy, tax benefits, geographical or other diversification, resource transfer, and improved market reach and industry visibility.

Mergers and acquisitions (M&A) offer several strategic advantages to companies, such as accessing new markets, maintaining growth momentum, acquiring visibility and international brands, buying cutting-edge technology, taking on global competition, improving operating margins and efficiencies, and developing new product mixes. The potential of M&A to add shareholder value makes it an attractive option for businesses looking to expand and diversify in the competitive market.

India’s merger control law is regulated by the Competition Act 2002. Sections 3 and 4 of the Act address anticompetitive agreements and abuse of dominant position. Other sections, including Sections 5, 6, 20, 29, 30, and 31, govern various types of mergers and acquisitions (M&A).

The Competition Commission of India (CCI) also enforces the “Procedure regarding the Transaction of Business relating to Combinations” Regulations, 2011 (Combination Regulations), to regulate M&A deals that may have a negative impact on competition. The CCI recently amended Form-II, which is required for M&A deals, necessitating detailed examination to assess the likely effect of the combination on competition in India. Form-I will be filed for less significant deals and requires less generic information. Starting May 1, 2022, companies must disclose the extent of “complimentary linkages” between them and their impact on the market. Furthermore, companies must provide market-facing data from the past five years, including market size, market share of the parties, and the market share of competitors, customers, and suppliers. Currently, only data from one year is required.

The process of mergers and acquisitions in India is Court driven, long drawn and problematic. The method may be initiated through common agreements between the two parties, but more is needed to provide legal cover. The sanction of the High Court is required to bring it into effect. The Companies Act 1956 consolidates provisions relating to mergers and acquisitions and other related issues of compromises, arrangements and reconstructions; however, other provisions of the Companies Act get attracted at different times, and in each merger and acquisition case, the procedure still needs to be simplified. The Central Government has a role to play in this process, and it acts through an Official Liquidator (OL) or the Regional Director of the Ministry of Company Affairs. The entire process has to be to the satisfaction of the Court. This sometimes results in delays.

Mergers and acquisitions (M&A) can be complex transactions that require legal expertise to navigate successfully. Our team of experienced lawyers can guide every aspect of the transaction, from due diligence to negotiations and closing the deal. We’ll work closely with you to understand your business goals and help you develop a strategy that meets your needs.

Whether you’re looking to acquire another company, merge with a competitor, or sell your business, we have the knowledge and expertise to help you achieve a successful outcome. We understand the complexities of M&A transactions and will work tirelessly to protect your interests and ensure the transaction is completed smoothly. We have a proven track record of helping businesses of all sizes successfully navigate M&A transactions. 

Our lawyers have extensive experience in M&A law and can provide comprehensive legal advice to help you make informed decisions. Don’t hesitate to contact us.