In India mergers between two or more companies is covered under chapter XV of the Companies Act, 2013 (the “Companies Act” or “Act”). As the law has it in India, unfortunately the term merger per-se is not defined in the Companies Act. The said Act recognizes a merger as an arrangement or amalgamation between two or more companies – one being the transferor and the other transferee. Such arrangement or as defined in the Act amalgamation can be between a holding and subsidiary company or two separate entities. The process begins with drafting, what is known as a merger scheme that enlists, inter-alia, financial details of the transferor and transferee company, valuation report of both entities, share – swap ratio along with other routine details like, details of assets and liabilities, creditor details etc. What is paramount importance is that shareholders of both companies should not adversely be affected by the said merger. The same applies to the interest of creditors, if any. The said merger scheme then needs the approval of shareholders – at least 3/4th in majority. The shareholders also need to provide a no objection certificate approving the share – swap ratio, which then, along with the scheme needs to be filed before the national company law tribunal (“NCLT”) for approval.
Following is a list of documents that are required to prepare the merger scheme, including share-swap ratio:
- Latest audited statements of both transferor and transferee company.
- Share swap ratio / valuation report from an independent chartered accountant of 10 years in practice. Date of valuation of shares should be proximate to the date of merger application to be filed in company law tribunal.
- List of creditors (both secured and unsecured) specifying their name, address and amount due, duly stamped and signed by the statutory auditors of the respective companies. In case there are no secured or unsecured creditors in any company, a certificate to this effect a required from the statutory auditor of the said company will be required.
- If any scheme of corporate debt restructuring approved by either of the companies.
- A certificate by the company’s auditor has to be filed with the tribunal to the extent that the accounting treatment of the proposed scheme of merger is in conformity with the prescribed accounting standards.
- Details of intercompany loans, if any.
- Declaration of solvency, signed by company’s official auditors to be filed with the registrar.
- Board Resolutions of both the companies approving scheme of merger and share exchange ratio.
- MOA and AOA of both the companies duly signed by the authorized signatories authorized in aforesaid Board Resolutions.
- PAN details of authorized signatories and the details of range/department of income tax where income tax returns of the companies are filed.
- List of shareholders of both the companies specifying their name, address and number of shares The lists are to be duly signed and stamped by the authorized signatories.
- No objection certificate or NOC from all shareholders approving the share – swap ratio and the merger scheme.
- NOC from creditors approving the merger scheme.
- Any employee stock option related documents, if any of the companies have an ESO policy in place.
- Details director loans, if any.
- Documents related to creation of charge, if any.
- Pending litigation, by and against the companies – details of the same.
Once a comprehensive merger scheme is prepared, it is then filed along with an application for approval of merger, at the respective company law tribunal at whose jurisdiction the registered office of the company is located. The said application is filed under relevant provisions of section 230 to 240 of the Companies Act, depending upon the nature of said amalgamation. The intention of application is to satisfy the tribunal that interest of shareholders, employees and creditors is safeguarded. In other words, the said amalgamation will not be prejudicial to the interest of the parties that are directly affected by the merger, namely the shareholders, employees, creditors and that that companies have been law abiding with respect to statutory compliance and payment of tax. Once the tribunal is satisfied that the said merger is in the best interest of companies and stakeholders involved, the tribunal will approve and pass an order to the effect accordingly.
Even though the Companies Act remains a master legislation with respect to amalgamation, there are other applicable ancillary legislations like the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, National Company Law Tribunal Rules, 2016, Income Tax Act and 1961 that need to be complied by.