THE APPLICATION AND IMPLICATION OF THE LAW ON MERGER AND AMALGAMATION

All over the world, the process of economic liberalization and globalization has created its own impetus, due to which, business environment has become highly competitive. In response to competitive market forces, the corporate sector has been restructuring and repositioning itself. The underlying object of corporate restructuring is efficient and competitive business operations by increasing the market share, brand, power and synergies. Accordingly, most of the diversified multi product companies are restructuring their corporate operations into more homogeneous units to achieve synergy in operations. This entails transfer of business units from one company to other.[1]

This article is an attempt to critically examine the manner in which companies have been given the operational freedom to reorganize and restructure themselves into more efficient economic entities, under the supervision of an independent agency i.e., the Tribunal. Emphasis is also given on the stamp duty payable in such circumstances.

MEANING
An application[2] lies with the Tribunal to seek sanction for a compromise or arrangement, either in connection with or for the purpose of a scheme for reconstruction or amalgamation of two or more companies.

However, none of these terms have been defined under the Companies Act, 1956 except the definition of the term 'arrangement' under section 390(b)[3].

According to Palmer, arrangement and reconstruction may be regarded as describing any form of internal reorganization of the company and its affairs as well as schemes for the merger of two or more companies[4].

Compromise means an amicable settlement of differences by mutual concessions by the parties to the dispute or the difference. In Sneath V. Valley Gold Ltd[5], the Court defined 'compromise’ as ‘an agreement terminating a dispute between parties as to the rights of one or more of them, or modifying the undoubted rights of a party, which he has a difficulty in enforcing. The result of this case and all subsequent cases on this point is that there can be no compromise unless there is a dispute.’

‘Amalgamation’ has been defined as an arrangement whereby the assets of two or more companies become vested in, or under the control of, one company, which may or may not be one of the original two or more companies[6]. It is a blending of two or more existing undertakings into one undertaking, the shareholders of each blending company becoming substantially the shareholders in the company, which is to carry on the blended undertakings. There may be amalgamation either by transfer of two or more undertakings to a new company or by the transfer of one or more undertakings to an existing company[7].

The term ‘amalgamation’ contemplates not only a state of things in which two companies are joined to form a new company but also the absorption and blending of one by the other. When two such companies are merged and so joined to form a third company or one is absorbed into other or blended with another, the amalgamating company looses its entity.[8]

Grower in his 'Modern Company Law’[9] says, "under an amalgamation two or more companies are merged: either de jure by a consolidation of their undertaking or by de facto by the acquisition of a controlling interest in the share capital of one by the other, or of the capital of both by a new company."

PROCEDURAL ASPECT

Sections 391-394 of the Companies Act, 1956 provide for a reference to the Tribunal. The procedure envisaged under these provisions operates at two levels.
First, an application is filed before the Tribunal to order a meeting of the affected class of members or creditors;
Second, once the approval from the affected class of members or creditors is obtained, the Tribunal has to sanction the scheme.[10]

The entire process involves a considerable delay. The Companies (Court) Rules, 1959[11] are indicative of how much time it would take for a scheme of amalgamation to come through. The Tribunal, under Section 391, orders a meeting when an application is moved before it by the company or a member or a creditor or by a liquidator during winding up. It is not necessary that it is only the liquidator who can move application to call a meeting during the winding up of the company. Every one entitled to move an application can do so.[12] This application is usually heard exparte, but if the company is not an applicant, then notice has to be served on the company for period of not less than 14 days.[13] The court then fixes the date of meeting for which a notice of 21 clear days has to be given[14]. Once the meeting is held and the requisite majority of three fourths is obtained, the chairman of the meeting has to submit a report and a petition under section 394 praying the scheme of amalgamation. However, any member or creditor of the company can move an application[15] and say that scheme of amalgamation cannot be sanctioned. The Tribunal, then, issues a summons to all the concerned parties, hears them and issues appropriate orders. The abovementioned procedure results in substantial delay. The final sanctioning of the scheme will take at least a minimum of two moths from the date of moving the application to call a meeting under section 391. This time period is calculated without providing for the substantial judicial delays by adjournments.[16]

MANNER OF VOTING

According to rule 77 of the Companies (Court) Rules, 1959, voting in a meeting under section 391 has to take place only by poll. This has significant implication. At any general meeting, voting is done by a show of hands at the first instance[17]. However, voting can be done by poll if specifically demanded by the requisite majority[18]. When voting is done by show of hands, it is implied that there is equality in the value of a vote between the persons voting. But the position under section 391 is different as voting would have been in proportion to the paid up share capital (in case of member)[19], or in proportion to his claims (in case of a creditor). For example, if there are 100 members voting of whom one member holds 901 shares and the reminder hold one each, the 99 share holders holding one share each cannot enforce a scheme against the vote of the holder of 901 shares. This is due to the fact that they do not muster three fourth in value.[20] Hence a situation of this kind leaves ample scope for majority shareholders to override the will of the minority shareholders. The same would be in the case of creditors.[21]

Another point provided under section 391 contemplates a three fourth majority in the members or creditors present and voting and does not use the term "special resolution". One of the implications that flow from this provision is that, the contents of the special resolution cannot be changed when the meeting takes place. Therefore, the wording and effect of the resolution has to be the same as that of the notice. However, in section 391, since the term 'special resolution' is absent, the resolution might be modified at the meeting of the company.[22]

In Union of India V. Ambalal Sarabhai Enterprises[23], a meeting took place under section 391 in which the proposed date of amalgamation was advanced from 1st July 1981 to 1st July 1980. This was challenged before the Gujarat High Court on the ground that the statutory requirements in the notice calling the meeting had not been complied with. A decision of the Chancery Division was cited, in re Moorgate Mercantile Holdings Ltd[24], in support of this contention. In this case, the Chancery Division held that since there was a variation in the special resolution from what had been actually set out in the notice, the special resolution so passed was bad. The Gujarat High Court approved this decision, but distinguished, on the facts, on the ground that Section 391 does not contemplate a special resolution.

APPLICATION FOR SANCTIONS TO BE MADE BY BOTH COMPANIES AND THE CONSEQUENT ISSUES

For an amalgamation, under Section 394, an application is required to be made to the Tribunal under Section 391(1). This section applies to both the amalgamating companies, the transferor company and the transferee company, requiring each of them to apply to the Tribunal as to the meetings of the share holders and creditors, and finally, for sanction under Section 394 by each of these companies. It has been asserted that a common petition in this regard is not acceptable and that the transferee and the transferor company must file two separate petitions, though it is for the same purpose.[25]

The requirement of four applications in all by two different parties and in two different Tribunals definitely leaves a great possibility of uncertainty and also unnecessary delay due to litigation on the aspect, which would indeed defeat the purpose of this ‘Mini-Code’, to expedite proceedings by doing away with numerous applications required under the Act generally.[26]

However, where two different Tribunals are moved for appropriate orders under Section 391 and 394 for sanction and approval, the problem arises when one Tribunal sanctions the scheme and the other does not. Though the Court in Bank of Baroda V. Mahindra Ugine Steel Co. Ltd[27] evolved a formula to resolve such an impasse[28], the provision in this regard are vague in nature and it was emphasised in Miheer H. Mafatlals v. Mafatlals Industries[29] that the law in this regard is to be revisited and made to contain some specification.

ENSURING DISSEMINATION AND DISCLOSURE OF INFORMATION

For the Tribunal to sanction the scheme, all material facts relating to the company such as its latest financial status, the latest auditor’s report on its accounts, pending proceedings pending against the company under Section 235 to 251 of the Companies Act, 1956, have to be presented before the Tribunal, sworn in an affidavit.[30] Under Section 393, after getting sanction, detailed notice, explaining the terms and conditions of arrangement, the material interests of the directors and the effect of those interests on the rights etc of the parties, has to be issued to the concerned creditors or members.

But Section 393(1) (a) requires not only that the terms and conditions of the schemes be explained, but also that the effect be specified. But the meaning of the term ‘effect’ has been subject to wide judicial interpretation.

An explanatory statement has been made for this purpose in Carrron Tea Co. Ltd[31]. But this was held to be insufficient. In this case, the members were not told that the ordinary rule of valuation i.e., the stock exchange evaluation basis was not taken into account in the valuation on the net asset basis; it was also not shown that only the 1959-63 records were taken into account in proceedings to value on the income basis. This was looked upon as failure to ‘explain the effect’ under the provision. If the term ‘effect’ were to mean only the net result, it is impossible to comprehend how the notice would ensure that the persons proposing the scheme are compelled to find their conclusions and projections on the real circumstances. This is perhaps best reflected from from the facts of the Carrron Tea Co case. Then, would it be sufficient to merely state the effect of a scheme and not how that particular projection has been reached?[32]

Unfortunately in Jitendra R. Sukhadia V. Alembic Chemicals[33], the Gujarat high Court has ruled that the statement of effect of scheme is enough to discharge the burden under Section 393(1) (a) and nothing more is required. It was said that the requirement was to state and explain the effect and not the details or particulars of the consequence.[34]

BINDING NATUREOF MERGER AND RIGHT TO DISSENT

If in pursuance of a meeting held under Section 391(2), three fourths majority passes a resolution, the scheme becomes binding on that class. Therefore, if there were creditors or members who voted against the merger, then by virtue of this provision, it would still be binding on them. However, under Section 394, the Tribunal in its discretion may make a provision for persons who dissent from the merger. Therefore, subject to this, the dissenting persons would be bound by the scheme.[35] In addition to this, under Section 395(1), the transferee company can acquire the shares of the dissenting share holder.[36] This would again lead to much hardship to the dissenting persons as they have to accept the scheme against their will.

ABSENCE OF POWER TO AMALGAMATE IN THE MEMORANDUM OF ASSOCIATION
In the case of Re Oceanic Steam Navigation Co. Ltd[37], it was held that a compromise or arrangement should be within the powers of the company and nor ultra vires. If it was beyond the object or powers of the company, such amalgamation or restructuring would be beyond the jurisdiction of the court to sanction.

This view has been disregarded in Re EITA India Ltd[38], where a scheme of amalgamation was opposed by the central government among other grounds for the reason that the amalgamation clause in the memorandum did not permit the present amalgamation. The Court stated that the power to amalgamate is a statutory power and this power may be exercised notwithstanding the fact that the memorandum of association of a particular company may not contain express power to amalgamate.

POSITION OF EMPLOYEES

A conjunct reading of sections 391 to 394 makes it clear that the workmen of the transferor company have no legal or statutory right of holding a meeting and express their opinion on the question of amalgamation.[39] They also do not have locus standi to challenge the amalgamation on the basis of their apprehended transfer or retrenchment or payment of lower bonus on account of likely reduction of profits.[40] But this seems to be not a correct view. But it was later held by the court that the employees of amalgamating company have a locus standi to object to the proposed scheme. The court has to consider their representations because the court is duty bound to protect their interests.[41]

Further, it was held that the employees have a right to say ‘no’ to being transferred to the transferee company but they do not have the right to raise any objection to the proposed amalgamation so long as they are given the same status or position in all respects in the transferee company which they enjoyed in the transferor company.[42]

SANCTION OF THE SCHEME AND STAMP DUTY

An instrument liable to be stamped under the Stamp Act, 1899[43] includes every document by which any right or liability is, or purports to be created, transferred, limited, extended, extinguished or recorded. Section 394(2) of the Companies Act, 1956 provides that the properties and liabilities of the transferor company, in a scheme of amalgamation, stand transferred to the transferee company by virtue of the order of the Tribunal under Section 394(1). The Tribunal’s order under Section 394(2) provides for the passing of the consideration from the transferee company to the share holders of the transferor company. The well settled law is that the property belongs to the company and the company belongs to the share holders. That means the owners of the company receive the consideration. Therefore, a transaction under Section 394 of the Companies Act has all the trappings of a sale. The consideration for such a sale is shares of the transferee company.

“Conveyance” under the Stamp Act includes every instrument by which property whether movable or immovable is transferred inter vivos. A company is a living person under the Transfer of Property Act, 1882.[44] A document creating or transferring a right is an instrument. An order effectuating a transfer is a document. Under an amalgamation transfer is effectuated by an order of the Tribunal and such an order is an instrument. Consequently, it is a conveyance and hence liable to be stamped under the Stamp Act, 1899.[45]

CONCLUSION

Section 391 of the Companies Act thus operates at two levels. The role of the Tribunal in ordering the meeting of the members or creditors is lengthy and involves substantial delay. Also, at this stage the Tribunal will not look into the merits of the scheme. It is submitted that section 391 should be amended so that the company is under the duty to call the meeting of respective classes of members or creditors. The role of the court should just be confined to sanctioning of the scheme. This would help in reducing the delays.[46]

Another suggestion is that rule 77of the Companies (Court) Rules, 1959 and Section 391(2) should be modified. Voting, in the first instance, should be by hand as is envisaged for a general meeting. Sections 391-394 should also be amended to include a right to dissent. Any member or creditor who is unhappy with the scheme should be given an option to opt out of the scheme. Under the prevailing circumstances, the Tribunal has discretion to provide an alternative arrangement for dissenting members or creditors under Section 394.[47]

[1] Naresh Kumar, “Amalgamation, Merger and Demerger Problematic Areas”, Jan 3 2005, Vol-57, SEBI and Corporate Laws, pp. 72-83
[2] Under Section 394 of the Companies Act, 1956.
[3] Arrangement includes reorganization of the share capital of the company by consolidation of the shares of different classes, or their division.
[4] Palmer's Company Law, Volume II, Part 8 (W. Green, London: Sweet and Maxwell, 1994) at 12009.
[5] (1893) 1 Ch 447
[6] Cf. Takeovers and Amalgamation by M.A. Weinberg.
[7] HALSBURY'S LAWS OF England, 4th Edn. Vol. VII, Para 1539 (page 855). See also Baytrust Holding Ltd V. I.R.C., (1971) 1 WLR 1333; Brooklands Selangor Holdings Ltd. V. inland Revenue Commissioners, (1970) 2 All ER 76 (Ch D).
[8] Saraswati Industrial Syndicate Ltd. V. CIT, Haryana, (1991) 70 Com Cases 184, 188
[9] (2nd Edn., page 550)
[10] Ananth Lakshman, “Merger Routes Under the Companies Act, 1956”, Sep. 2004, Vol- 03, Issue – 03, Company Law Journal, pp. 105-112.
[11] Rules 67-87 of the Companies (Court) Rules, 1959 deal with compromises or arrangements under Sections 391 to 394.
[12] Alagiri Raja and Co. V. N. Guruswami (1987) 1 Comp LJ 265 (Mad)
[13] Rule 68
[14] Rule 73. 21 clear days means that the date of service of notice and the date of meeting will be excluded for the purpose of calculation of 21 days.
[15] Under Rule 82.
[16] Supra note 8
[17] Section 177 of the Companies Act, 1956.
[18] Under Section 179 of the Companies Act, 1956.
[19] Section 87 of the Companies Act, 1956 provides that, in case of a company limited by shares, voting rights shall be in proportion to the paid up share capital of the company. There can be no derogation from this statutory provision except if the company is one that is not limited by shares.
[20] S. Ramanujam, “Mergers et al”, 4th Reprint, 2000, Tata McGraw- Hill Publishing Company Limited, New Delhi, p. 16-17.
[21] Supra note 8
[22] Supra note 8
[23] ((1985) 1 Comp LJ 405 (Guj)
[24] (1980) 2 All ER 40
[25] Kanika Agarwal, “Role of Courts in Mergers and Amalgamation”, 2005, Vol-57, SEBI and Corporate Laws, pp. 72-83.
[26] Supra note 21.
[27] (1976) 46 Comp Case 227
[28] In this case, the Central Government raised an objection that since the scheme would affect rights of members of the transferee company as between themselves, unless it took steps to receive similar sanction, it could not be granted to the transferor company. The Court decided that it would accord sanction to the scheme, but reserved right of giving any orders under Section 394(1) until after the proceedings initiated by the transferee company has been completed successfully under Section 391(1) and 394(1).
[29] (1996) 4 Comp. LJ 124 (SC)
[30] The proviso to Section 391(2). This proviso came o be inserted on the recommendation of the Daphtary Shastri Committee, by the Companies (Amendment) Act, 1965.
[31] (1966) 2 Comp LJ 278 (Cal)
[32] Supra note 26.
[33] (1987) Comp LJ 141 (Guj)
[34] Supra note 26.
[35] Supra note 11.
[36] Section 395(5) (a) says ‘dissenting share holder includes a share holder who has not assented to the scheme or contract and any share holder who has failed or refused to transfer his shares to the transferee company in accordance with the scheme or contract.
[37] (1939) 9 Comp. Cas 229 (Ch.D)
[38] AIR 1977 Cal 208
[39] Gujarat Nylons Ltd V. Gujarat State Fertilizers Co. Ltd., (1992) 8 Corpt LA 166 (Guj)
[40] Jitendra R. Sukhadia V. Alembic Chemicals Works Co. Ltd., (1988) 64 Com Cases 206, 223 (Guj).
[41] KEC International Ltd. V. Kamani Employees Union (2000) 1 Comp LJ 351.
[42] Bengal Tea Industries V. Union of India, (1988-89) 93 CWN 542 (Cal).
[43] Under Section 2(14)
[44] Under Section 5.
[45] Jehangir M. J. Sethna, “Indian Company Law”, 2005, 11th Edn, Vol-3, Modern Law Publications
[46] Supra note 11
[47] ibid