FAST TRACK MERGER- A Novel Concepts

FAST TRACK MERGER- A Novel Concepts

Merger is a restructuring tool available to Indian conglomerates aiming to expand and diversify their businesses for various reasons whether it is to gain competitive advantage, reduce costs or unlock values. In commercial parlance, merger essentially means an arrangement whereby one or more existing companies merge their identity into another existing company or form a distinct new entity.

The Companies Act, 2013 introduce the novel concepts fast track merger for Small Companies and Holding and its wholly owned subsidiary Companies. This is the first significant change to merger and amalgamations regime in the last six decades, with the previous Companies Act having been in place since 1956. There are pragmatic reforms for Merger and Acquisitions under Companies Act, 2013, which could make merger, acquisitions and restructuring easier for companies.

There was a long felt need to simplify and fast track the procedure for mergers of holding-subsidiary or companies where interest of third parties is not involved. The act clarifies that this fast track process shall apply not just to mergers but also to all types of compromise & arrangements involving these companies.


Even the Companies have the option to follow the normal route of merger process if the desire


Benefits:
Cross Border merger are expected to increase internal restructuring and Cross Border restructuring. Exit opportunity to the dissenting shareholders is expected to reduce litigation & frivolous complaint and representation of Income Tax Department, Sectoral Regulators would safeguard their interest, though at the cost of prolonged process.

Provisions of section 230 to 232 of the Act for Merger & Amalgamation is very time cumbersome activity, as it includes clearance from many regulatory bodies and all type of companies has to go through such route. Under the fast track process Central government has the power to approve such scheme and there is no need to approach to NCLT.

Sections Involved
Section 233- Merger or Amalgamation of certain companies. This section comes into force w.e.f. 15th December, 2016.

Rule Involved
Rule 25 Companies (Compromises, Arrangements and Amalgamations) Rules, 2016

Notification Involved:
[1]Notification No. S.O. 3677(E), Dated 7th December, 2016 (section become effective)
[2]Notification No. S.O. 4090(E), Dated 19th December, 2016 ([3]Delegation of Power)

Forms involved:
CAA.9- Notice of the scheme inviting objections or suggestions
CAA.10 - Declaration of solvency
CAA.11 Notice of approval of the scheme of merger
CAA.12 Confirmation order of scheme of merger or amalgamation between
INC.28 Notice of Order of the Court or any other competent authority
GNL-1 Filing of Application with ROC

Non Ostensive Clause: Section 233 start with non ostensive clause “[4]Notwithstanding the provisions of section 230 and section 232”.  Meaning of notwithstanding is ‘in spite of what has just been said’. It demonstrate that in spite of whatever said in section 230 and 232 below given class of Companies can avail the option of fast track merger (merger by Central Government (RD) without NCLT.
  
 Between whom the Compromise & [5]Arrangement can propose: Section 233(1)
As in some overseas jurisdictions, the 2013 Act has introduced the new concept of fast- track mergers and demergers. These provide the option of a simplified and fast-track merge process, which can be used for the following and is an option for companies:

§  Merger of Two or More Small Companies or
§  Merger between a holding company and its wholly-owned subsidiary Company or
§  Such other class or classes of companies as may be prescribed;

To whom Scheme for Fast Track Merger will submit: Section 230(2)
Companies shall file application with following below motioned authorities in whose jurisdiction registered office of the Company is situated.
§  Central Government (Powers are delegated to Regional Director)
§  Registrar and
§  The Official Liquidator 
FIRST STEP- Filing of Notice of Proposed Scheme
i.        Issue of Notice of Proposed Scheme: A notice in form CAA-9 of the proposed [6]scheme inviting objections or suggestions, if any, shall be sent to followings:
§  Registrar of Companies, where registered office of the respective companies are situated
§  Official Liquidators, where registered office of the respective companies are situated
§  Persons affected by the scheme
Time period for Objections/ Suggestion:
Above mentioned all persons send their objections/ suggestions to Company within 30 (Thirty) days of the issue of notice to them, by the transferor company or companies and the transferee company.

ii.            Declaration of Solvency: Each of the companies involved in the merger files a declaration of solvency, in form CAA-10 with the Registrar of the place where the registered office of the company is situated.

iii.        Approval from Shareholders in General Meeting: The Companies will hold Meeting of shareholders in following manner:
§  The objections and suggestions received are considered by the companies in their respective general meetings
§  The scheme should be approved by members present in the meeting, holding at least 90% of [7]total number of shares in the General Meeting.
Notice of General Meeting: The notice of the meeting to the members shall be accompanied by –
§  [8]A statement disclosing the details of the compromise or arrangement, as far as applicable.
§  The declaration of solvency made in pursuance of clause (c) of sub-section (1) of section 233 of the Act in Form No. CAA.10
§  A copy of the Scheme.

iv.            Approval from Creditors in their Meeting:  The Companies will hold Meeting of Creditors. The scheme should be approved by creditors or class of creditors present in the meeting, representing at least 9/10 of value of creditors.
Notice of Creditors Meeting: The notice of the meeting shall be convene by giving at least 21 days notice to the members and notice shall be accompanied by –
§  A statement disclosing the details of the compromise or arrangement, as far as applicable.
§  The declaration of solvency made in pursuance of clause (c) of sub-section (1) of section 233 of the Act in Form No. CAA.10;
§  A copy of the Scheme.
Dispensation from the Meeting
If 90% in value of creditors agree by way of affidavit then meeting of creditors can be dispensed.
 SECOND STEP- Filing of Scheme with Central Government (RD)/ ROC/ OL
The transferee company shall within 7 days of after the conclusion of the meeting of members or class of members or creditors or class of creditors shall  Section 233(2) and Rule 25(4)

§  A copy of the Scheme so approved by the members and creditors along with
§  A report of the result of each of the meetings in Form No. CAA.11 to the Central Government (RD).

Filing to whom:
·         Central Government (RD)- through hand delivery or by registered post or speed post
·         Registrar of Companies (ROC) - in Form No. GNL-1 
·         Official Liquidator (OL)- through hand delivery or by registered post or speed post

THIRD STEP- Registration of Scheme
[9]On the receipt of the scheme, If the Registrar or Official Liquidator has any objections or suggestions, he may communicate the same in writing to the Central Government (RD) within a period of 30 days. Section 233(4).

Issue of Order:
§  Where no objection or suggestion is received to the scheme from the Registrar of Companies and Official Liquidator or
§  where the objection or suggestion of Registrar and Official Liquidator is deemed to be not sustainable and
The Central Government is of the opinion that the scheme is in the public interest or in the interest of creditors, the Central Government shall issue a confirmation order of such scheme of merger or amalgamation in Form No. CAA.12.
FOURTH STEP- Filing of Order
Registrar of Companies:
The confirmation order of the scheme issued by the Central Government shall be filed, within 30 days of the receipt of the order of confirmation, in Form INC-28 with the Registrar of Companies having jurisdiction over the transferee and transferor companies respectively. Section 233(7) and Rule 25(7).
Person Concerned:
The confirmation order of the scheme issued by the Central Government shall be filed, within 30 days of the receipt of the order of confirmation, concerned person. Section 233(7

FIFTH STEP- Confirmation by ROC

The Registrar shall register the scheme and issue a confirmation thereof to the companies and such confirmation shall be communicated to the Registrars where Transferor Company or companies were situated.
SIXTH STEP- Miscellaneous- Effect of Registration of Scheme
Dissolution of transferor Companies:  The registration of the scheme transferor Companies shall be deemed to have the effect of dissolution without process of winding-up.
Other Effects: Section 233(9)
i.        Transfer of Property or Liabilities: Transfer of property or liabilities of the transferor company to the transferee company so that the property becomes the property of the transferee company and the liabilities become the liabilities of the transferee company.] 
ii.        Charge: the charges, if any, on the property of the transferor company shall be applicable and enforceable as if the charges were on the property of the transferee company. 
iii.        Legal Proceeding: legal proceedings by or against the transferor company pending before any court of law shall be continued by or against the transferee company. 
iv.        Another important Liability: where the scheme provides for purchase of shares held by the dissenting shareholders or settlement of debt due to dissenting creditors, such amount, to the extent it is unpaid, shall become the liability of the transferee company. 
SEVENTH STEP- Transferee Company Compliances
Important Condition for Transferee Companies: Section 233(10) A Transferee company shall not on merger or amalgamation, hold any shares in its own name or in the name of any trust either on its behalf or on behalf of any of its subsidiary or associate company and all such shares shall be cancelled or extinguished on the merger or amalgamation.
Authorized Capital:
The transferee company shall file an [10]application with the Registrar along with the scheme registered, indicating the revised authorized capital and pay the prescribed fees due on revised capital.
Note on Fee:
The fee, if any, paid by the transferor company on its authorized capital prior to its merger or amalgamation with the transferee company shall be set-off against the fees payable by the transferee company on its authorized capital enhanced by the merger or amalgamation.
CONCLUSION:
The thirty days time limit imposed on the regulators will, hopefully, ensure that they respond in a time bound manner. The exact time frame that the entire merger process would involve will be known once it is tested. It would be fair to say that the 2013 Act seeks to streamline and make M&A more smooth and transparent. The new provisions should make it easier for corporations proposing mergers as it spears to have a good system of checks & balances to prevent abuse of these provisions.


OTHER CIRCUMSTANCES IN FAST TRACK MERGER:

We have already understood the process of Fast Track merger as discussed above. Below we would try to give clarity on the provision of fast track merger in the situation Registrar of Companies (ROC) or Official Liquidator (OL) raise any objections or suggestions and send the same to Central Government within a period of 30 days, as per provisions of Sub Section 4 of Section 233 of Companies Act, 2013.
Filing of Scheme with Central Government (RD)/ ROC/ OL
As mentioned in sub section 2 once the scheme is approved by the Shareholders and Creditors The transferee company shall within 7 days of after the conclusion of the meeting of members or class of members or creditors or class of creditors shall  Section 233(2) and Rule 25(4)

§  A copy of the Scheme so approved by the members and creditors along with
§  A report of the result of each of the meetings in Form No. CAA.11 to the Central Government (RD).

Filing to whom:
·         Central Government (RD)- through hand delivery or by registered post or speed post
·         Registrar of Companies (ROC) - in Form No. GNL-1 
·         Official Liquidator (OL)- through hand delivery or by registered post or speed post

Objections/ Suggestions by ROC/ OL
If the Registrar or Official Liquidator has any objections or suggestions, he may communicate the same in writing to the Central Government within a period of 30 (thirty) days. Section 233(4) and Rule 25(5)
Judgment of Central Government (RD)
If the Central Government (RD) after receiving the objections or suggestions or for any reason is of the opinion that such a scheme is not in public interest or in the interest of the creditors, it may file an application before the Tribunal within a period of 60 (sixty) days of the receipt of the scheme under sub-section (2) stating its objections in Form No. CAA. 13 
Decision of Tribunal (NCLT)
On receipt of an application from the Central Government, if the Tribunal, for reasons to be recorded in writing, is of the opinion that the scheme should be considered as per the procedure laid down in section 232, the Tribunal may direct accordingly or it may confirm the scheme by passing such order as it deems fit.
CONCLUSION:
Once its directed by the tribunal to file the application as per procedure given in section 232 then the Companies involved in M&A will file the applications and follow the lengthy process of Merger and Amalgamation.

Calendar of process of Fast Track Merger
S. No.
Particular of Activity
Purpose of Activity
Time Period
A.    
Convey of Board Meeting
To Approve  the Scheme

All Companies
B.    
Filing of Notice of Proposed Scheme along with copy of Scheme
To ROC/ OL/ Concerned Person in form No. CAA-9
All Companies
C.    
Declaration of Solvency
In form CAA.10 after issue of notice
All Companies
D.    
Convey of General Meeting
The scheme should be approved by members present in the meeting, holding at least 90% of [11]total number of shares in the General Meeting
All Companies
E.    
Convey of Creditors Meeting
The scheme should be approved by creditors or class of creditors present in the meeting, representing at least 9/10 of value of creditors
All Companies
F.     
File a copy of Scheme and report of the result of each of the meetings
In Form No. CAA.11 and Form No.CAA.9(i.e. notice) with Within 7 days after the conclusion of the meeting of members or class of members or creditors.
Transferee Company
G.    
Registration of Scheme
Where no objection or suggestion is received to the scheme from the Registrar of Companies and Official Liquidator.

The Central Government (RD) is of the opinion that the scheme is in the public interest or in the interest of creditors, the Central Government shall issue a confirmation order of such scheme of merger or amalgamation in Form No. CAA.12
Issue of Order by RD
H.    
Filing of Order with ROC
The confirmation order of the scheme issued by the Central Government shall be filed, within 30 days of the receipt of the order of confirmation, in Form INC-28 with the Registrar of Companies having jurisdiction over the transferee and transferor companies respectively
All Companies
I.       
Confirmation by ROC
The Registrar shall register the scheme and issue a confirmation thereof to the companies and such confirmation shall be communicated to the Registrars where Transferor Company or companies were situated
By ROC

(Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com)
Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information. IN NO EVENT SHALL I SHALL BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL OR INCIDENTAL DAMAGE RESULTING FROM, ARISING OUT OF OR IN CONNECTION WITH THE USE OF THE INFORMATION.
This is only a knowledge sharing initiative and author does not intend to solicit any business or profession.





[3] Power of Central Government u/s 233(2-6) transferred to Regional Director
[4]  Englisth meaning  in spite of what has just been said
[5] Explanation.For the purposes of this sub-section, arrangement includes a re-organization of the company’s share capital by the consolidation of shares of different classes or by the division of shares into shares of different classes, or by both of those methods
[6] Scheme approved by Board of Directors
[7] For calculating the 90% members present in the meeting will consider.
[8] Referred to in sub-section (3) of section 230 of the Act read with sub-rule (3) of rule 6 hereof
[9] if no such communication is made, it shall be presumed that he has no objection to the scheme.
[10] In form SH-7 for increase in authorized capital.
[11] For calculating the 90% members present in the meeting will consider.

Comments

  1. demeger can be covered under this sections

    ReplyDelete
  2. This comment has been removed by the author.

    ReplyDelete
  3. As per section 233:-

    fast track scheme of merger or amalgamation may be entered into between two or more small companies or between a holding company and its wholly-owned subsidiary company or such other class or classes of companies as may be prescribed.

    Kindly inform what type of companies fall under "such other class or classes of companies as may be prescribed.

    ReplyDelete
  4. there are some shareholders who are deaceased and legal representatives are not forthcoming for transmission. They constitute less than 1 % of shareholding. rest all held by holding co. whether anyway out for fast track merger?

    ReplyDelete
  5. As per Section 233(12), this section mutatis mutandis apply to companies in respect of scheme of compromise or arrangement.

    Whether Demerger can be done under this Section, Kindly explain?

    ReplyDelete
  6. Declaration of solvency in Form CAA 10 includes Audited statements of assets and liabilities and audit report on the same. Whether the audit report can be prepared in accordance with the SA 800?

    Otherwise, under what SA and kindly suggest the format for statement of assets and liabilities to be given.

    Thanks in advance

    ReplyDelete
  7. This comment has been removed by the author.

    ReplyDelete
  8. Company A Ltd. is holding 99.98% in B Ltd. Is both company can go for merger process through Fast Track Route?

    Kindly Suggest.

    Thanks
    CS Monisha Meghna

    ReplyDelete
  9. No, company should be wholly owned subsidiary i.e. 100% shares held by the holding co. In your case, 99.98 % is holding which is not 100%. Therefore, normal merger will apply

    ReplyDelete
  10. For creditors' approval it is written as "indicated in a meeting convened", does it mean to consider the value of creditors who have attended the meeting? For Instance, in our case we have 4 creditors, out of which 3 creditors (holding 1.55% of total value) are in favour of scheme, however 1 creditor (holding 98.45 % of total value) will not give his consent neither will attend the meeting. Can we pass Scheme of amalgamation with 3/4 creditors having 1.55%/98.45% of total value?? Please reply.

    ReplyDelete
  11. It is not possible to pass the Scheme of Amalgamation as it requires 90% or more of total outstanding amount as on appointed date.

    ReplyDelete

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