Factors to be Considered

Business restructuring may be achieved by a variety of methods, such as, Merger, Demerger/Spin Off, Slump Sale, Acquisition of Shares, etc. Each method has its own pros and cons and must be selected keeping in mind the objectives to be achieved. While adopting a particular method, the following legal factors, wherever applicable, need to be considered, in addition to the commercial and financial justification:

1. Income-tax impact on the Companies and their shareholders, e.g., capital gains on the transfer, set-off of losses and depreciation, transfer of deduction u/ss. 80-IA/IB/IAB, 10A/10B, cost of assets to the transferee, etc.
2. Stamp duty, e.g., levy, concessions, etc.
3. Companies Act provisions
4. Competition Law provisions
5. SEBI Takeover Regulations and SEBI DIP Guidelines
6. Listing Agreement provisions and procedural requirements
7. FEMA and FIPB Policies
8. Sales tax / VAT – transfer of Exemption Schemes and tax on the transfer of business
9. Transfer of CENVAT Credit and Excise Registration
10. Transfer of Licences under EPCG (Export Promotion Council Guarantee) Scheme, Project Import Regulations, etc.
11. Transfer of tenancies under Rent Control Laws
12. Labour law implications, e.g., Govt. permission for closure of a unit with more than 100 workers
13. Permissions required under contractual agreements, e.g., lenders, Govt. ministries in case of infrastructure / telecom projects, etc.
14. Transfer of environmental licences
15. Accounting implications of a particular method

Broad Checklist for Mergers

1. Examine whether a Forward Merger or a Reverse Merger is more beneficial : the factors to be considered are tax benefits, listing, etc.
2. In case of a merger of a Listed Company into an Unlisted Company, the conditions and procedure specified in the SEBI Guidelines must be followed to enable listing of the shares of the Unlisted Transferee Company
3. Ensure that the Main Objects or the incidental objects of the Memorandum of Association contain the power to amalgamate
4. Prepare the Draft Scheme of Amalgamation.
5. Listed Companies to place the valuation report obtained from the independent chartered accountant to the Audit Committee. The Audit Committee shall furnish a report recommending the draft scheme, taking into consideration, the aforesaid valuation report.
6. Listed Companies to ensure that the scheme submitted with the High Court for sanction, provides for obtaining shareholders approval through special resolution passed through postal ballot and e-voting, after disclosure of all material facts in the explanatory statement sent to the shareholder in relation to such resolution. The scheme shall also provide that the special resolution shall be acted upon only if votes cast by public shareholders in favour of the proposal amount to at least two times the number of votes cast by public shareholders against it.
7. File the draft scheme proposed to be filed before the Court or Tribunal with the Stock Exchanges, for their approval, at least a month before it is presented to the Court or Tribunal. Listed companies must also submit to the stock exchange, an Auditors’ Certificate to the effect that the accounting treatment contained in such schemes is in compliance with all the applicable Accounting Standards.
8. Listed Company to disclose the draft scheme filed with the stock exchange on the Company’s website.
9. Ensure that the Scheme does not violate, override or circumscribe the provisions of securities laws or the stock exchange requirements
10. Stock Exchanges to forward the draft scheme and the documents to SEBI. Also, Stock Exchanges are required to forward the Objection/No-objection letter within 30 days from the date of filing of the draft scheme.
11. Stock exchanges to issue an Observation letter to listed company after incorporating the comments received from SEBI on the draft scheme. The observation letter is required to be disclosed on the Company’s website within 24 hours of receipt.
12. Consider whether the merger would be covered under the Competition Act and hence, one which requires the permission of the Competition Commission
13. Convene a Board Meeting to approving the Scheme of Amalgamation
14. Obtain the consent/approvals, if any, required prior to the merger
15. The Explanatory Statement forwarded must disclose the pre and post-merger capital structure and shareholding pattern
16. Apply to the High Court/National Company Law Tribunal in Form Nos. 33 and 34
17. Send a copy of the Application to the ROC within 30 days
18. Send the Notice (in Form No. 36) convening the General Meeting to every member and creditor as directed by the Court along with the Explanatory Statement and Form of Proxy (in Form No. 37). Ensure that the Notice reaches the member at least 21 days before the date of the GM.
19. If the Court directs give an advertisement of the notice meeting (Form 38)
20. Hold the Meeting and pass Resolutions approving the Scheme
21. File the Report of the Meeting’s Chairman (in Form No. 39) with the Court
22. Prepare a Petition in Form No. 40 for obtaining the Court’s sanction to the Scheme
23. At least 10 days before the date fixed by the Court for the hearing of the Petition, advertise the date of hearing
24. Obtain the Official Liquidator’s Report
25. Receive the Court’s Order sanctioning the Scheme
26. File a copy of the Order of the Court with the ROC within 30 days from the date of receipt of the Order
27. Allot the securities to the shareholders of the Transferor Company
28. Attach a copy of the Court Order with every copy of the Memorandum and Articles of Association

Merger Scheme

The Merger Scheme/Scheme of Amalgamation must cover the following:

• Definitions of important terms such as Appointed Date, Effective Date, Record Date for issue of shares, etc.
• Background, capital, history, etc., of the Transferor and Transferee Company
• Rationale of the Scheme
• Amalgamation of Transferor with Transferee Company and vesting of its undertaking, assets and liabilities in the Transferee Company. Reduction of capital, if any, of the Transferee
• Issue of securities, etc., by Transferee to shareholders of Transferor, Share Exchange Ratio, Valuation Report, etc.
• Increase in Authorised Capital of Transferee, if required
• The Date from when the Scheme comes into operation
• Accounting Treatment of the amalgamation by the Transferee
• All contracts, deeds, bonds, instruments, executed by the Transferor to be binding on and enforceable against the Transferee
• All legal proceedings, by or against the Transferor to be binding on and enforceable against the Transferee
• Transferee to carry on Transferor’s business until the effective date
• Applications to relevant High Courts for their approval
• All employees of Transferor to become the employees of Transferee
• No dividends, bonus, rights, further shares to be issued by either company without prior approval of the other company
• The approvals/sanctions upon which the Scheme is conditional and effect of non-receipt of such approvals
• Sharing of merger costs and expenses
• Change of Board of Directors of Transferee, if any
• Dissolution without Winding-Up of Transferor
• Change of name and registered office of the Transferee, if applicable

Additional Checklist for Demergers

1. Ensure that what is being Demerged is an Undertaking as per the Income-tax Act or else the tax benefits may be jeopardised
2. Decide whether the Resulting Company would be a New Company or an Existing Company.
3. Reduction in capital of the Demerged Company
4. Accounting Adjustments, if any
5. Resulting Company to take over the assets and liabilities of the Demerged Company
6. Allot the securities to the shareholders of the Transferor Company

Checklist for Slump Sale