Mergers, Amalgamations and the Acquisition of Minority Shares

The fast track merger: section 233(1)

Notwithstanding the provisions of section 230 and section 232, a 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, subject to the following.

Who may use it: two or more small companies; a holding company and its wholly owned subsidiary; or prescribed classes.

The four conditions:

• (a) a notice of the proposed scheme inviting objections or suggestions within thirty days is issued by the transferor and transferee companies to the Registrar and the Official Liquidator where their registered offices are situated, and to persons affected by the scheme;
• (b) the objections and suggestions are considered by the companies in their respective general meetings, and the scheme is approved by the members or class of members at a general meeting holding at least ninety per cent of the total number of shares;
• (c) each company files a declaration of solvency in the prescribed form with the Registrar of the place where its registered office is situated; and
• (d) the scheme is approved by a majority representing nine-tenths in value of the creditors or class of creditors at a meeting convened on twenty-one days' notice with the scheme, or otherwise approved in writing.

Note the two different measures in clauses (b) and (d). Members are counted by ninety per cent of the total number of shares; creditors by nine-tenths in value. And note that the creditors' approval may be in writing without any meeting.

The fast track procedure: section 233(2) to (7)

Section 233(2). The transferee company files a copy of the approved scheme with the Central Government, the Registrar and the Official Liquidator of the place where its registered office is situated.

Section 233(3). If the Registrar or the Official Liquidator has no objections or suggestions, the Central Government shall register the scheme and issue a confirmation to the companies.

Section 233(4). If either has objections or suggestions, he may communicate them in writing to the Central Government within thirty days. Proviso: if no such communication is made, it shall be presumed that he has no objection.

Section 233(5). If the Central Government, after receiving the objections or for any reason, is of opinion that the scheme is not in the public interest or in the interest of the creditors, it may apply to the Tribunal within sixty days of receipt of the scheme, stating its objections and requesting that the Tribunal consider the scheme under section 232.

Section 233(6). On an application from the Central Government or from any person, the Tribunal, for reasons to be recorded in writing, may direct that the scheme be considered under section 232, or may confirm the scheme by such order as it thinks fit. Proviso: if the Central Government has no objection or files no application, it shall be deemed to have no objection.

Section 233(7). A copy of the confirming order is communicated to the Registrar having jurisdiction over the transferee company and to the persons concerned; the Registrar registers the scheme and issues a confirmation, which is communicated to the Registrars where the transferor companies were situated.

So there are two ways the scheme becomes effective: registration by the Central Government under sub-section (3), or registration following the Tribunal's confirmation under sub-sections (6) and (7).

What registration does: section 233(8) to (14)

Section 233(8): the transferor disappears. Registration under sub-section (3) or sub-section (7) is deemed to have the effect of dissolution of the transferor company without process of winding up.

Section 233(9): four effects.

• (a) the property and liabilities of the transferor become the property and liabilities of the transferee;
• (b) charges on the transferor's property are applicable and enforceable as if they were on the transferee's property;
• (c) legal proceedings by or against the transferor pending before any court are continued by or against the transferee; and
• (d) where the scheme provides for the purchase of shares held by dissenting shareholders or settlement of debt due to dissenting creditors, that amount, so far as unpaid, becomes the liability of the transferee company.

Section 233(10). The transferee company shall not hold any shares in its own name or in the name of any trust, on its own behalf or on behalf of a subsidiary or associate, and all such shares shall be cancelled or extinguished on the merger.

Section 233(11). The transferee files an application with the Registrar with the registered scheme, indicating the revised authorised capital and paying the fees due on it; the fee paid by the transferor on its authorised capital is set off against the fee payable by the transferee on its enhanced capital.

Section 233(12). The section applies mutatis mutandis to those companies in respect of a compromise or arrangement under section 230 or a division or transfer under section 232(1)(b).

Section 233(13). The Central Government may prescribe the manner of merger or amalgamation of companies.

Section 233(14). A company covered by the section may nonetheless use section 232. The fast track is optional, not compulsory.

Cross-border mergers: section 234

Section 234(1). The provisions of this Chapter, unless otherwise provided under any other law, apply mutatis mutandis to schemes of mergers and amalgamations between companies registered under this Act and companies incorporated in the jurisdictions of such countries as may be notified from time to time by the Central Government.

The proviso: the Central Government may make rules in consultation with the Reserve Bank of India in connection with such mergers.

Section 234(2). A foreign company may, with the prior approval of the Reserve Bank of India, merge into a company registered under this Act, or vice versa, and the terms of the scheme may provide for payment of consideration to the shareholders of the merging company in cash, or in Depository Receipts, or partly in each.

The Explanation: for sub-section (2), "foreign company" means any company or body corporate incorporated outside India, whether having a place of business in India or not.

Two features are examinable. The merger may run either way, an inbound merger into an Indian company or an outbound merger of an Indian company into a foreign one, which is what "or vice versa" means. And the jurisdiction must be notified by the Central Government; a merger with a company in an unnotified country is outside the section.

Buying out dissentients after an offer: section 235

Section 235(1): the trigger. Where a scheme or contract involving the transfer of shares or any class of shares in the transferor company to the transferee company has, within four months after the making of an offer by the transferee company, been approved by the holders of not less than nine-tenths in value of the shares whose transfer is involved, other than shares already held at the date of the offer by, or by a nominee of, the transferee company or its subsidiaries, the transferee company may, at any time within two months after the expiry of those four months, give notice in the prescribed manner to any dissenting shareholder that it desires to acquire his shares.

Three numbers, and they should be given exactly. Nine-tenths in value; approval within four months of the offer; notice within two months after that period.

And the exclusion matters. Shares already held by the transferee or its nominee or subsidiaries at the date of the offer are left out of the nine-tenths, so an acquirer cannot manufacture the majority out of its own holding.

Section 235(2): the effect of the notice. Where notice is given, the transferee company is, unless the Tribunal on an application by the dissenting shareholder made within one month from the date of the notice thinks fit to order otherwise, entitled and bound to acquire those shares on the terms on which the shares of the approving shareholders are to be transferred.

Note "entitled and bound". It is not merely a power to buy; once the notice is given the transferee must buy. And the dissentient gets the same terms as the majority, which is the section's protection for him.

Section 235(3): the mechanics. Where notice has been given and the Tribunal has made no contrary order, the transferee shall, on the expiry of one month from the notice or, if an application is pending, after it is disposed of, send a copy of the notice to the transferor company with an instrument of transfer, executed on behalf of the shareholder by a person appointed by the transferor company and on its own behalf by the transferee company, and pay or transfer the price to the transferor company; whereupon the transferor company shall (a) register the transferee as the holder of those shares, and (b) within one month of that registration, inform the dissenting shareholders of the registration and of the receipt of the price.

Section 235(4): the trust. Any sum so received by the transferor company shall be paid into a separate bank account, and that sum and any other consideration shall be held by that company in trust for the persons entitled to the shares and disbursed to them within sixty days.

Section 235(5) modifies the section for offers made before the commencement of the Act.

The Explanation defines a dissenting shareholder to include a shareholder who has not assented to the scheme or contract, and any shareholder who has failed or refused to transfer his shares in accordance with it. So silence as well as refusal makes a man a dissentient.

Purchase of minority shareholding: section 236

Section 236(1): the trigger. Where an acquirer, or a person acting in concert with him, becomes the registered holder of ninety per cent or more of the issued equity share capital, or where any person or group of persons becomes a ninety per cent majority or holds ninety per cent of the issued equity share capital, by virtue of an amalgamation, share exchange, conversion of securities or for any other reason, that acquirer, person or group shall notify the company of their intention to buy the remaining equity shares.

Section 236(2): the offer and the price. They shall offer to the minority shareholders to buy their equity shares at a price determined on the basis of valuation by a registered valuer in accordance with the prescribed rules.

Section 236(3): the minority may also start it. Without prejudice to sub-sections (1) and (2), the minority shareholders may offer to the majority shareholders to purchase the minority equity shareholding at the price determined under the same rules.

That is the important symmetry. The section is not only a squeeze-out; it is also a sell-out right for the minority.

Section 236(4): the money goes in first. The majority shall deposit an amount equal to the value of the shares to be acquired in a separate bank account to be operated by the company whose shares are being transferred for at least one year, for payment to the minority, disbursed to the entitled shareholders within sixty days. Proviso: disbursement continues for one year for those who were not paid within the sixty days or who failed to receive or claim payment.

Section 236(5). The company whose shares are being transferred shall act as transfer agent for receiving and paying the price and for taking delivery of the shares and delivering them to the majority.

Section 236(6): no physical delivery. Where shares are not physically delivered within the time specified by the company, the share certificates are deemed to be cancelled, and the company is authorised to issue shares in lieu of the cancelled shares, complete the transfer, and make payment of the price out of the deposit.

Section 236(7): untraced or deceased holders. Where the majority requires a full purchase and deposits the price for shareholders who have died or ceased to exist, or whose heirs, successors, administrators or assignees have not been brought on record by transmission, the right of those shareholders to offer their shares for sale continues for three years from the date of the majority acquisition.

Section 236(8): sharing a better price. Where minority shares have been acquired under the section and, on or before the date of transfer, shareholders holding seventy-five per cent or more of the minority equity shareholding negotiate or reach an understanding on a higher price for a transfer of their own shares without disclosing that fact or likelihood, the majority shall share the additional compensation with those minority shareholders on a pro rata basis.

Section 236(9). Where the majority fails to acquire full purchase, the section continues to apply to the residual minority shareholding.

The Explanation takes "acquirer" and "person acting in concert" from the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

Amalgamation in the public interest: section 237

Section 237(1). Where the Central Government is satisfied that it is essential in the public interest that two or more companies should amalgamate, it may, by order notified in the Official Gazette, provide for their amalgamation into a single company with such constitution, property, powers, rights, interests, authorities and privileges, and such liabilities, duties and obligations, as may be specified in the order.

Section 237(2). The order may also provide for the continuation of pending legal proceedings by or against the transferee company and such consequential, incidental and supplemental provisions as the Central Government thinks necessary.

Section 237(3): the guarantee of no loss. Every member or creditor, including a debenture holder, of each transferor company shall have, as nearly as may be, the same interest in or rights against the transferee company as he had in his original company; and where his interest or rights are less, he is entitled to compensation to that extent, assessed by the prescribed authority, published in the Official Gazette, and paid by the transferee company.

Section 237(4): appeal. A person aggrieved by the assessment may, within thirty days of its publication in the Official Gazette, appeal to the Tribunal, which shall then make the assessment.

Section 237(5): three preconditions to the order. No order shall be made unless (a) a draft has been sent to each company concerned; (b) the time for appeal under sub-section (4) has expired or the appeal has been finally disposed of; and (c) the Central Government has considered, and made such modifications as it thinks fit in the light of, suggestions and objections received from any such company, any class of shareholders, or any creditors or class of creditors, within a period fixed by it not being less than two months from the receipt of the draft.

Section 237(6). Copies of every order shall be laid before each House of Parliament.

The remaining three sections

Section 238: registration of the offer circular under section 235. In relation to every offer under section 235:

• (a) every circular containing the offer and the directors' recommendation to the members of the transferor company to accept it shall be accompanied by the prescribed information in the prescribed manner;
• (b) every offer shall contain a statement by or on behalf of the transferee company disclosing the steps it has taken to ensure that the necessary cash will be available; and
• (c) every circular shall be presented to the Registrar for registration, and no circular shall be issued until it is registered.

The proviso: the Registrar may refuse registration, for reasons recorded in writing, where the circular does not contain the required information or sets it out in a manner likely to give a false impression, communicating the refusal to the parties within thirty days.

Section 238(2): an appeal lies to the Tribunal against the Registrar's refusal. Section 238(3): a director who issues an unregistered circular is liable to a penalty of one lakh rupees.

Section 239: preservation of books and papers. The books and papers of a company amalgamated with, or whose shares have been acquired by, another company under this Chapter shall not be disposed of without the prior permission of the Central Government; and before granting permission that Government may appoint a person to examine them to ascertain whether they contain evidence of the commission of an offence in connection with the promotion or formation, or the management of the affairs, of the transferor company, or its amalgamation or the acquisition of its shares.

Section 240: liability survives the merger. Notwithstanding anything in any other law, the liability in respect of offences committed under this Act by the officers in default of the transferor company prior to its merger, amalgamation or acquisition shall continue after it.

Sections 239 and 240 exist for the same reason. A merger must not be a way of destroying the evidence or escaping the consequences of what was done before it.

A worked example

Karjat Springs Private Limited and Neral Fasteners Private Limited are both small companies and propose to merge, Neral Fasteners being absorbed.

The fast track. Being small companies they may use section 233. They issue notice of the scheme inviting objections or suggestions within thirty days to the Registrar and Official Liquidator of each registered office and to persons affected; consider the objections in their respective general meetings; obtain approval of members holding at least ninety per cent of the total number of shares; file a declaration of solvency with each Registrar; and obtain approval of a majority representing nine-tenths in value of the creditors, either at a meeting called on twenty-one days' notice with the scheme or in writing.

Then the filing. The transferee, Karjat Springs, files the approved scheme with the Central Government, the Registrar and the Official Liquidator. The Official Liquidator raises no objection and says nothing for thirty days, so he is presumed to have none. The Central Government registers the scheme and issues a confirmation.

What that does. Neral Fasteners is dissolved without winding up; its property and liabilities pass to Karjat Springs; charges on its property are enforceable as if on Karjat's property; pending suits continue by or against Karjat; and any unpaid amount for dissenting shareholders or creditors becomes Karjat's liability: section 233(8) and (9). Karjat cancels any shares it would otherwise hold in itself, files for its revised authorised capital, and sets off the fee Neral had paid on its own authorised capital.

If the Central Government objected. It could have applied to the Tribunal within sixty days on the ground that the scheme is not in the public interest or in the interest of creditors, and the Tribunal could have directed that it go through section 232 or confirmed it. And the companies could in any case have chosen section 232 from the start: section 233(14).

A takeover instead. Suppose Panvel Holdings Limited offers to buy all the shares of Neral Fasteners. Within four months of the offer, holders of ninety-two per cent in value of the shares whose transfer is involved accept, excluding a two per cent block Panvel already held through a nominee at the date of the offer.

Section 235 applies, the acceptance being of not less than nine-tenths in value of the relevant shares. Panvel may, within two months after the four months expire, give notice to any dissenting shareholder that it desires to acquire his shares. A dissenting shareholder may apply to the Tribunal within one month of the notice; failing an order otherwise, Panvel is entitled and bound to acquire the shares on the same terms as the accepting shareholders.

The mechanics. On the expiry of that month, or after the application is disposed of, Panvel sends the notice and an instrument of transfer to Neral Fasteners, executed on the shareholder's behalf by a person Neral appoints and on its own behalf by Panvel, and pays the price to Neral. Neral registers Panvel as the holder, informs the dissentients within one month of the registration and the receipt of the price, holds the money in a separate bank account in trust, and disburses it within sixty days.

The circular. The offer circular carrying the directors' recommendation had to be accompanied by the prescribed information, to contain a statement of the steps taken to ensure the cash will be available, and to be registered by the Registrar before issue. Had a director issued it unregistered he would be liable to a penalty of one lakh rupees, and the Registrar's refusal to register could have been appealed to the Tribunal.

A ninety per cent holding. Suppose instead Panvel comes to hold ninety-one per cent of the issued equity share capital of Neral by a share exchange. Under section 236(1) it must notify the company of its intention to buy the remaining equity shares, and under sub-section (2) offer to buy them at a price determined on a registered valuer's valuation. The minority may equally offer to sell at that price under sub-section (3).

The money. Panvel deposits the value in a separate bank account operated by Neral for at least one year; the amount is disbursed within sixty days, and continues to be available for a year for those not paid or who did not claim. Neral acts as transfer agent. A shareholder who does not deliver his certificates within the time specified has them deemed cancelled, Neral issuing shares in lieu and paying him out of the deposit.

A dead shareholder. For a holder who has died and whose heirs have not been brought on record by transmission, the right to offer the shares for sale continues for three years from the date of the majority acquisition: section 236(7).

A better price later. If, on or before the date of transfer, holders of seventy-five per cent or more of the minority shareholding had negotiated a higher price for their own shares without disclosing it, Panvel must share the additional compensation pro rata with those minority shareholders: section 236(8).

A foreign merger. Had Neral instead merged into a company incorporated in a country notified by the Central Government, section 234 would apply, with the prior approval of the Reserve Bank of India, and the consideration to Neral's shareholders could be paid in cash, in Depository Receipts, or partly in each.

And a public interest order. If the Central Government were satisfied that it is essential in the public interest that the two companies amalgamate, it could order it by notification in the Official Gazette under section 237, after sending a draft to each company, allowing not less than two months for objections from the companies, any class of shareholders and any creditors, and after any appeal against the assessment of compensation had been disposed of. Every member or creditor left with less than he had would be compensated, the assessment being published in the Official Gazette and appealable to the Tribunal within thirty days. Copies of the order would be laid before each House of Parliament.

Afterwards. Neral's books and papers may not be disposed of without the Central Government's prior permission, which may first appoint a person to examine them for evidence of an offence: section 239. And the liability of Neral's officers in default for offences committed before the merger continues after it: section 240.

Distinctions that carry marks

What this does NOT mean

It does not mean the fast track is compulsory for small companies. Section 233(14) says such a company may use section 232.

It does not mean the Registrar's or Official Liquidator's silence blocks the scheme. Silence for thirty days is presumed to be no objection.

It does not mean the transferee's own shares count towards the nine-tenths in section 235. Shares already held at the date of the offer by the transferee, its nominee or its subsidiaries are excluded.

It does not mean a dissentient under section 235 gets a different price. He is bought out on the terms on which the approving shareholders' shares are to be transferred.

It does not mean section 236 is only a squeeze-out. Sub-section (3) lets the minority offer to sell at the same valuation.

It does not mean an amalgamation ends the officers' liability. Section 240 continues the liability of the transferor's officers in default for offences committed before it, and section 239 protects the books and papers.

Quick revision

• 233(1): fast track for two or more small companies, a holding company and its wholly owned subsidiary, or prescribed classes, on (a) notice inviting objections within thirty days to the Registrar, Official Liquidator and persons affected; (b) approval of members holding ninety per cent of the total number of shares after considering the objections in general meeting; (c) a declaration of solvency filed with each Registrar; and (d) approval of a majority representing nine-tenths in value of the creditors at a meeting on twenty-one days' notice, or in writing.
• 233(2) to (7): the transferee files with the Central Government, Registrar and Official Liquidator; no objection means registration and confirmation; objections go to the Central Government within thirty days, silence being presumed to be none; the Central Government may apply to the Tribunal within sixty days if the scheme is not in the public interest or the creditors' interest; the Tribunal may direct section 232 or confirm; the Registrar then registers and confirms.
• 233(8) to (14): registration dissolves the transferor without winding up; property and liabilities pass, charges remain enforceable, proceedings continue, and amounts due to dissentients become the transferee's liability; the transferee holds no shares in itself; revised authorised capital filed with set-off of the transferor's fee; the section applies to section 230 schemes and section 232(1)(b) divisions; and section 232 remains available.
• 234: the Chapter applies mutatis mutandis to mergers with companies in countries notified by the Central Government, rules being made in consultation with the Reserve Bank of India; a foreign company may merge into an Indian company or vice versa with the Reserve Bank's prior approval, consideration payable in cash, in Depository Receipts or partly in each; a foreign company here means any company or body corporate incorporated outside India, whether having a place of business in India or not.
• 235: where an offer is approved within four months by holders of not less than nine-tenths in value of the shares whose transfer is involved, excluding shares already held by the transferee, its nominee or subsidiaries, the transferee may within two months after give notice to a dissenting shareholder; unless the Tribunal on an application within one month orders otherwise it is entitled and bound to acquire on the same terms; thereafter it sends the notice and instrument of transfer and pays the price to the transferor company, which registers the transfer, informs the dissentients within one month, holds the money in a separate account in trust and disburses it within sixty days. A dissenting shareholder includes one who has not assented and one who has failed or refused to transfer.
• 236: on becoming holder of ninety per cent or more of the issued equity share capital, by amalgamation, share exchange, conversion or otherwise, the acquirer or group shall notify the company of the intention to buy the rest and offer at a registered valuer's price; the minority may offer to sell at that price; the money is deposited in a separate account operated by the company whose shares are transferred for at least one year, disbursed within sixty days and available for one year; the company acts as transfer agent; undelivered certificates are deemed cancelled and shares issued in lieu; the right of deceased or untraced holders continues for three years; where seventy-five per cent or more of the minority secretly negotiate a higher price, the majority share the additional compensation pro rata; and the section continues to apply to the residual minority.
• 237: the Central Government may, by order in the Official Gazette, amalgamate companies in the public interest, providing for the constitution, property, rights and liabilities and for pending proceedings; every member or creditor keeps as nearly as may be the same interest, with compensation for any shortfall, assessed by the prescribed authority, published in the Gazette and appealable to the Tribunal within thirty days; no order without a draft to each company, the appeal time expired or disposed of, and consideration of objections given at least two months; copies laid before each House of Parliament.
• 238: the offer circular under section 235 must carry the prescribed information, a statement of the steps taken to ensure the cash is available, and must be registered by the Registrar before issue, who may refuse for reasons in writing within thirty days, subject to appeal to the Tribunal; issuing an unregistered circular costs a director a penalty of one lakh rupees.
• 239 and 240: the books and papers of the amalgamated or acquired company may not be disposed of without the Central Government's prior permission, which may appoint a person to examine them for evidence of an offence; and the liability of the transferor's officers in default for offences committed before the merger continues after it.

Test yourself

1. Which companies may use the fast track merger, and what approvals do they need? Two or more small companies, a holding company and its wholly owned subsidiary, or prescribed classes: section 233(1). They need notice inviting objections within thirty days to the Registrar, the Official Liquidator and persons affected; approval of members holding at least ninety per cent of the total number of shares; a declaration of solvency; and approval of a majority representing nine-tenths in value of the creditors, at a meeting on twenty-one days' notice or in writing.

2. What is the effect of registration of a fast track scheme? It is deemed to dissolve the transferor company without winding up; its property and liabilities become the transferee's; charges remain applicable and enforceable as if on the transferee's property; pending legal proceedings continue by or against the transferee; and amounts payable to dissenting shareholders or creditors become the transferee's liability: section 233(8) and (9).

3. When may a transferee company compulsorily acquire a dissenting shareholder's shares? Where a scheme or contract involving the transfer of shares has, within four months of the offer, been approved by holders of not less than nine-tenths in value of the shares whose transfer is involved, excluding shares already held by the transferee, its nominee or its subsidiaries at the date of the offer; the transferee may then, within two months after the expiry of those four months, give notice to a dissenting shareholder: section 235(1).

4. Can a dissenting shareholder resist? He may apply to the Tribunal within one month from the date of the notice, and unless the Tribunal thinks fit to order otherwise the transferee is entitled and bound to acquire the shares on the same terms as the approving shareholders: section 235(2).

5. What triggers section 236, and at what price? An acquirer, or a person acting in concert, becoming the registered holder of ninety per cent or more of the issued equity share capital, or any person or group becoming a ninety per cent majority by amalgamation, share exchange, conversion of securities or any other reason. The price is determined on the basis of valuation by a registered valuer in accordance with the prescribed rules: section 236(1) and (2).

6. Does an amalgamation wipe out earlier offences? No. Section 240 provides that the liability in respect of offences committed under the Act by the officers in default of the transferor company before the merger, amalgamation or acquisition continues after it; and section 239 forbids disposal of the transferor's books and papers without the Central Government's prior permission.