Merger & Acquisition

Merger & Acquisition

Before Merger and Acquisition we must know basic concept of Corporate Restricting and Reorganization, Corporate Restructuring and Corporate Reorganization is two different processes and apply different circumstances of company.

The purpose of corporate restructuring is to maximize profit, improve quality and quality of work done, increase the rate of investment and bring new technology and that will be possible once ownership and operational structure of company will be changed. This process is to be done through legal and financial consultant.

However corporate Reorganization is a different process in which a bankrupt on an insolvent company is taken over by a financially stable and big company by restating its asset and liabilities. This is the legal process and done under supervision of court.

Why corporate is restructured?

For better cash flow, to bring better business strategy, to expand market share, reduce competition

What are types of Corporate Restructuring?
  1. Merger ( Amalgamation & Absorption)
  2. Acquisition & Takeover
  3. Demerger
  4. Reverse Merger
  5. Strategic Alliance
  6. Joint Ventures.
  7. Disinvestment/Contraction

Merger  & Amalgamation - It is a process of corporate restructuring and the purpose of this process is improve financial and operation strength of the company. In this process two companies are combined to form a single company or one company will absorb other company.

Generally, merger refers to the consolidation of two or more business entity to form one single joint entity with the new management structure and new business ownership where both the entities join hands and decide to merge together as a one unit with a new name to gain the competitive advantage and synergies in operations.

For example In the Auto industry A and B are two distinct organizations now, a second company known as "C" enters the picture and begins to blanket the key market region, luring people in his direction. This heightened the sensation of rivalry in the market, allowing them to remove rivals and maintain their market position. A and B decide to do business together by pooling their earnings and sharing their losses by forming a separate corporation called "AB." Merger is the term for an agreement between A and B to pool their assets and liabilities for future commercial dealings.

Whereas amalgamation is different process similar to merger. in this company carrying similar business and they form a new business and the existing company will lose their identity and the shareholder of the two or more entity that is involved become substantially the shareholder of new entity. Amalgamation is defined under section 2(1B)  


All amalgamations are merger but all mergers are not amalgamation. 

Earlier the term Merger has not been defined specifically under any specific law in India, but now it regulates under Companies Act, 2013 , Income Tax Act, and SEBI(Substantial Acquisition of share and take over)Amendment Act 2018.


TYPES of MERGER

  1. Horizontal Merger
  2. Vertical Merger
  3. Demerger
  4. Conglomerate Merger
Horizontal Merger- When two same industries companies are merged, or in simple say two different company selling similar product or service are merged is known as Horizontal Merger.

Purpose of this process to eliminate competitor and establish strong presence in the market and expand their market share. It conceptualizes as 1+1= 3 . Meaning of this concept is two company merged together and performing like three company altogether. 

Example - Merger of Tata Oil Mills Corporation Ltd with Hindustan Liver Limited
Merger of Lipton India and Broke Bond
Merger of Bank of Mathura with ICICI

Vertical Merger- When two companies are operating same industries but working on different stage of production. For example car company merges with a tyre making company

By merging this process ,the acquirer will have strong hold in market as its production and distribution chain will be more integrated than other existing competitors.

Demerger- When a splits off(i.e  separated from each another)  from one to another such process is known as demerger.  

For example demerger of Hero and Honda. Now hero is separate entity and Honda is operating separately.

Conglomerate Merger -  When two companies are operating different segment come together to form single entity. the process of such merger is Conglomerate Merger.

For example a biscuits manufacturing company merges with Cosmetic Company. 
 
Merger of L & T and Voltas Ltd as a real example conglomerate merger.    

Legal Provision of Merger

The Company Act 1956 enlisted Merger Provision under Section 390 to 394 which was enforce till 2016. In the new company act of 2013 provision of Merger and Acquisition was introduced under section 230 to 234 but these came into force in 2016 along with the companies (Compromises, Arrangement and Amalgamation) rule 2016 which governs area of Merger and Acquisition.

National Company Law Tribunal (NCLT) is relevant quasi judicial authority(Means hold similar power of court) regulates Merger, amalgamation and reconstruction of organization.

Procedure and requirement of Merger
  1. First of all the company is required file a scheme for merger or amalgamation at NCLT to get an approval of Merger or amalgamation of company
  2. There is rule given in provision, meeting must be conducted between company and concerned person when merger and amalgamation is about to take place so that requisite documents must be shared and circulated. requisite documents are as Report of expert on valuation, if the last annual financial statement of any of the merging company related financial year ending more than six month before the first meeting of the company summoned for approving the scheme
  3. In case where a listed company merges into unlisted company then it would not be automatically listing of unlisted transferee company.
  4.  The shareholders and creditors have been allowed to raise objection         
Step 1: Convening Meetings: -

An application under section 391 of the Companies Act will be filled by any company, creditors of the company, class of them, members or the class of members can file an application seeking sanction of any scheme of compromise or arrangement. Such applicant should disclose all material particulars in accordance with the provisions of the Act.

Step 2: Holding Meetings: - Upon satisfying that the scheme is prima facie workable and fair, the Tribunal order for the meeting of the members, class of members, creditors or the class of creditors. Rather, passing an order calling for meeting, if the requirements of holding meetings with class of shareholders or the members, are specifically dealt with in the order calling meeting, then, there won’t be any subsequent litigation. The scope of conduct of meeting with such class of members or the shareholders is wider in case of amalgamation than where a scheme of compromise or arrangement is sought for under Section 391

Step 3: Proposing Scheme: - The scheme must get approved by the majority of the stake holder’s viz., the members, class of members, creditors or such class of creditors. The scope of conduct of meeting with the members, class of members, creditors or such class of creditors will be restrictive somewhat in an application seeking compromise or arrangement

Step 4: Notice: -

A notice disclosing all material particulars and annexing the copy of the scheme as the case may be while calling the meeting. In a case where amalgamation of two companies is sought for, before approving the scheme of amalgamation, a report is to be received form the registrar of companies that the approval of scheme will not prejudice the interests of the shareholders.

Step 5: Seeking Central government Approval: -

An application under Section 394 will be filled seeking the Central Government approval of proposed compromise, arrangement or the amalgamation between the companies.

Step 6: Certified Copy: - After complying with all the requirements, if the scheme is approved, then, the certified copy of the order is to be filed with the concerned authorities.

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Source:-  Ledroit and Finology

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