A Comparative Analysis of Mergers and Acquisitions law (including cross border) in India and the U.K.

Introduction

The scope of Mergers and Acquisitions has been widened with the advent of globalisation and more companies popping up on the radar to expand and capture new markets. While the world is filled with the success stories of international giants coming up and merging with domestic giants or vice versa, the legislation along with permission needed for merging differs from country to country. India, being an honorary discharge of the apt English Common Law Legal system had identified the potential of mergers and acquisitions like its English counterpart. Thus, from beginning of 21st century, it strived for including all the aspects of mergers and acquisitions and give a new push to the business sector in terms of global aspects. However, the divergence in working of the mergers and acquisitions sector can be comprehended from the market intentions and different perspective of the M&A law in both countries. India draws its aspirations from the welfare-based fidelity approach towards market dynamics [1] while its UK counterpart strives for a more market-oriented profitability approach.[2]

Despite being a beacon of common law traditions, the United Kingdom has taken a unique path in the realm of mergers and acquisitions, deviating from the established practices followed by other common law countries.[3] While countries like the United States and the United Kingdom have experienced several waves of mergers and acquisitions, developing nations such as India are currently witnessing their initial foray into this dynamic landscape. This article aims to approach and analyse the divergence of procedural law in Indian Mergers and Acquisitions from its UK counterpart along with a comparative analysis of the cross-border mergers and acquisitions procedure in both countries too.

On a global scale, the statistics of cross border mergers and acquisition show that there has been a substantial increase in the number of mergers and acquisitions quite lately in both UK and India. This increase can be contributed to globalisation.[4] Merger & Acquisition (M&A) activity in India touched an all-time high of $148 billion in the first nine months of 2022. It was 58.2 per cent higher than in 2021. Before this, 2018 saw the highest value of M&A deals at $132 billion.[5] It could be seen that the year 2022 saw the busiest first nine months ever for these types of companies. The UK too had its fair share of M&A deals as inward M&A in Quarter 3 was valued at 2.7 million pounds which was a slight increase of around 0.8 million pounds.[6] This increase can be attributed to the coronavirus pandemic as it helped in boosting the sales of M&A deals globally. [7]?

Black’s Law Dictionary puts forward an interesting proposition of mergers and acquisitions in terms of definition; wherein mergers [8] are defined as the act of one company absorbing the other while retaining the former’s identity. It gains a whole host of liabilities, assets and powers of the latter company. This also points to the inevitable fact that the latter company which is being merged with the former company also ceases to be distinguished as a legal individual entity. It masks itself in the identity of the newly formed merged identity. An acquisition [9] is defined as acquiring something outright so as to be called the owner of such thing; the case being where one company goes out and buys the other company while aiming to either make some changes from the company (like restructuring or to profit off its success. On the other hand, cross border mergers and acquisitions refer to either inbound or outbound mergers happening across the borders of one country on an international scale. To put simply, inbound mergers refer to those mergers wherein a foreign company decides to come in and merge with an Indian company. Thus, a foreign company inbounds itself to our own nation, hence the name ‘inbound merger’ [10] . An appropriate example of the same can be acquisition of Ranbaxy by Daichi or acquisition of 77% stake in Flipkart by Walmart. The other type of cross border merger refers to outbound merger where an Indian company merges with the foreign one and thus bounds outward from the nation. Hence the name ‘outbound merger’ [11].? An example of it can be Acquisition of Jaguar and Landover by Tata Motors in 2011 or Acquisition of Corus by Tata Steels. More companies from other countries are interested in buying companies in India's technology and communication industries. It's cheaper for them to buy existing companies instead of building their own. At the same time, Indian companies are also buying companies in other countries a lot more. The benefit of cross-border merger is that after it's done, the assets and liabilities of the company being bought go automatically to the buyer, and the company being bought is dissolved. This process is useful for combining and moving companies, especially if the assets and liabilities are not clear, or if certain licenses or liabilities need to be transferred without extra steps. It can also be used to get rid of unnecessary companies without going through more liquidation or strike-off process.[12]

Indian Scenario???

The laws in India regarding mergers and acquisitions do not pertain to a singular document of code. Rather, it is an amalgamation of a series of legislations that prove to be quite exhaustive in nature if any company decides to quench the thirst of benefits through mergers and acquisitions. Some of these are:

1. The Companies Act 2013.
2. Competition Act 2002.?
3. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011.

From all of these, one of the most important acts that needs to be adhered too while merging is the Companies Act, 2013. It outlines the provisions that are mandated to be fulfilled in order for the company to move to the merging stage. Section 230-234 of the Companies Act 2013[13] are hailed as the merger provisions in Indian conduct as these govern the specifics of mergers and acquisitions in India. The passage of liberalised views in the economy have changed the perception of the courts which have taken cognizance of the fact that Indian markets should come out of the paranoia of globalisation and accept mergers and acquisitions with open and confident arms. This was reiterated in High Court of Andhra Pradesh under the case of Moschip Semiconductor Technology Limited.[14] Domestically, Indian M&A is governed by NCLT (National Company Law Tribunal), which is a specialised court dedicated for company law matters. The legal process for M&A starts with examination of the objective clauses of the merging company to assess whether the clauses allow for a merger or not. It is important to note that selection of target company and all the due diligence matters come before formally proceeding with the objective clauses. After finalisation, an intimation to the stock exchanges is paramount to prevent violent unnecessary shocks to the market and to allow investors make an educated decision about the companies share. [15] After approval of a draft proposal from the respective company boards or the members of highest authority, the company can move forward with an application of merger to NCLT.[16] The NCLT mandates a meeting of shareholders and dispatch of notice to shareholders and creditors (21 days prior) to inform them of the meeting and to provide time to gather objections or concerns if any along with some documents like notice, explanatory statement and other required documents. Upon the approval of minimum threshold of creditors and shareholders (herein 75%), a petition can be made to the NCLT to go ahead with the M&A process. After the due process and formality check of NCLT along with necessary NOCs (Non-Objection Certificates) from departments like CCI (Competition Commission of India), RBI (Reserve Bank of India) etc approving the merger, the NCLT passes the necessary orders. Lastly these certified true copies of NCLT orders are taken to the registrar of companies who will formalise the new entity in the eyes of the government. This would also lead to an easy transfer of assets and liabilities ?and new issue of shares and debentures on the stock exchange would accrue.

With businesses actively pursuing diversification and supply chain risk mitigation, India becomes an alluring destination for setting up manufacturing operations and driving inorganic growth through mergers and acquisitions. As India positions itself as an attractive hub for foreign investment and domestic expansion, these measures are expected to fuel the pace of mergers and acquisitions. Within the banking sector, mergers and acquisitions play a pivotal role in providing institutions with additional capital to bolster their lending capacity and investment opportunities. However, the rapid surge in the volume of such transactions has also resulted in a noteworthy increase in market-level bank concentration, potentially impacting the overall competitiveness of the banking industry.[17] It is because of this reason that RBI and other regulatory operators like CCI has to step in and provide for permissions in the domestic and cross border M&A.

The cross-border mergers and acquisitions under Company Law are governed under section 234[18] of Companies Act, 2013 along with Rule 25A of Companies (Compromises, Arrangements and Amalgamations) Rules, 2016[19]. In India, previously an Indian company was not able to exercise merging with foreign company due to concerns of national corporate importance.[20] However, the scenario changed in March 2018 when RBI authorized Cross- Border mergers and acquisitions by enactment of Foreign Exchange Management (Cross-Border Merger) Regulations, 2018[21] which permitted an Indian enterprise to merge with foreign firms with the RBI's prior approval and clearance[22]. ?In addition to the above rule,? , if any cross-border merger has been followed with adherence to FEMA regulations then it qualifies to be approved without RBI approval(through the automated way) since the statute in nature considers such FEMA adherence as a complete and rigorous solution for regulation; to such an extent that it considers such transaction as if it is being approved by the RBI itself.[23] However, such approval is also deemed to happen duty bound on certain conditions which are also laid down in FEMA cross border regulation itself.

The Competition Act also signifies an important role in mergers and acquisitions due to the welfare approach of India towards the market by prevention of making of monopoly cartels through M&A. An amendment in 2007 added a significant clause to the Competition Act 2002 regarding cross-border mergers, stating that no merger can be completed within 210 days of notice to the CCI or until the CCI has approved, rejected, or modified the proposed merger's terms under Section 31[24]. Section 32[25] grants the CCI the authority to make decisions on transactions outside India that affect competition in India, but the Act does not clarify the process for enforcing such orders or how they align with the legislation of the company's home country.

Comparison

On looking closely at the merger process of UK with that of India, we can see a lot of similarities between them. Like India, UK company directors have to produce documents like draft terms of the merger, effect of merger on companies and other things along with due diligence reports on the other companies with an explanation as to why the merger is needed. In similarity, they also have to obtain 75% of the majority approval like in India before passing it to their high courts. In India the High courts are replaced by special courts like NCLT (National Company Law Tribunal). On further observation, it can be found that UK has similar conditions of publishing material relating to mergers and acquisitions in newspapers and gazettes. In India, it is important to follow the process of publishing merging companies’ information in two or more newspapers while in UK, before the meeting with shareholders and/or creditors, information about the meeting, a copy of the plan for the merger, a court order for the meeting must be given to the companies’ registrar at least two months in advance. The registrar will then announce the meeting in the Law Society Gazette.

In India, the approval list of checks and balances are further proceeded by SEBI who also takes a check on such cross-border mergers and acquisitions. It also monitors the process of exchanging shares of merging companies in a close sighted manner. The merger can only proceed forward if SEBI gives it approval. The inspection includes whether the merger is having a strategic money laundering effect or global terrorism funding and other security measures to investigate the genuineness of a merger.[26]

The process that is followed in the Indian scenario for mergers and Acquisitions include approval from the RBI too while the United Kingdom warrants only for a high court order. In the Indian scenario, the additional step of RBI helps in keeping a check on M&A activities. A foreign company incorporated outside India may merge with an Indian company after obtaining prior approval of Reserve Bank of India and after complying with the provisions of sections 230[27] to 232[28] of the Act and these rules. In the process of evaluation, India follows the method of conducting such evaluations by people who are members of a recognized professional body in the jurisdiction of the transferee company. This evaluation also has to comply with international standards of accounting principles and valuation. In UK, the report of such evaluation reports is left to the discretion of shareholders of merging companies. In the UK, CMA or Competition and Markets Authority is conferred with the responsibility of reviewing the mergers and acquisitions domestically. However, its operations differ from CCI in India as it follows an independent approach wherein the UK government does not play any formal role or otherwise exercise any influence over, CMA merger control investigation.[29] Along with this, the company law in India provides for a full disclosure of announcement of any M&A scheme by companies to the stock exchange while UK has the leak system, formally known as PUSU-Put up or shut up system. The "Put up or Shut up" rule, often referred to as PUSU, is a provision in the Takeover Code that comes into effect when there is a leak announcement related to a potential takeover.[30] This rule sets forth specific obligations for the bidding party. Upon the occurrence of a leak announcement, the bidder has a period of 28 days to either make a formal announcement of a fully financed binding offer or publicly declare that it will not proceed with an offer. If the bidder chooses not to make an offer, it is then subjected to a standstill period of 6 months during which it is prohibited from launching another takeover attempt. An interesting thing about CMA is that its discretion in mergers and acquisitions is completely voluntary since filling to CMA in UK is also not mandatory for the merging parties.[31] This is complete opposite since mandatory filing and permission seeking of CCI and RBI in the mergers and acquisitions process in UK. The intervention discretion of the CMA also only lasts for 4 months after announcement.[32]

The United Kingdoms is also governed by a multitude of laws in their working of the merger system. Some of these laws include the Enterprise Act 2002[33] which gives the Competition and Markets Authority the power to oversee mergers (it was amended in 2013). The Companies (Cross-Border Mergers) Regulations 2007[34] applied before BREXIT. It was revoked as of the end of the transition period as per the Companies Limited Liability Partnerships and Partnerships (Amendments etc.) (EU Exit) Regulations 2019[35].To do a cross-border merger in the UK, companies need approval from the High Court, and also have to follow the process in other involved countries to get a certificate. Unlike some other European countries, the UK doesn't have a domestic merger process, so companies have to either transfer shares or assets, and dissolve or liquidate the company being bought if it's not needed anymore. The exception was the cross-border merger process, which is based on EU laws and is regulated by the Companies (Cross-Border Mergers) Regulations 2007. Under these rules (CBMR), a UK company can visualise on the idea of merging with one or more foreign companies, provided the merger is with at least one of the companies from the EEA state. (European Economic Area). This process was followed before BREXIT. The takeover code was also followed in the UK following the takeover of companies in the United Kingdom’s region. Before Brexit, the UK takeover code had some control over deals with companies from the EU, but it worked together with EU laws. After Brexit, this is no longer the case unless the company being bought has its main management in the UK.

Brexit has also resulted in some delays in merger transaction process taking longer. However, not everything is bad after Brexit since the depreciation of currency after Brexit has notably increased the number of foreign M&A buyers leading to better foreign capital inflow.[36] Some prominent examples are US-based Advent’s GBP 4.1 billion acquisition of Cobham plc (2020), and Hong Kong’s CK Asset Holdings purchase of Greene King for GBP 2.7 billion (2019).

Conclusion and Suggestions

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The legislation on mergers and acquisitions has had its fair share of problems in the modern contemporary world. While the domestic companies are judiciously allowing themselves to either merge or get merged with other foreign ones, the legislation is little backtracked when it comes to dealing with problems associated with it. One of the main setbacks is that acts, particularly Companies Act 2013 dealing with mergers and acquisition have not defined demergers anywhere. On the other hand, the provisions in UK have defined the same. Demergers are important since they help in the ability to focus on the big picture enhanced by such isolation and bring tax benefits that are associated with spin-offs.[37] The advantages offered by demergers are tremendous in nature which is why it becomes imperative to incorporate them. The present laws of competition also showcase some arbitrariness when it comes to making decisions on transactions outside of India that influence competition in India.? The Competition act does not make clear the procedure for executing such orders or how they connect with the rules of the company's home country which makes it difficult to move forward with mergers and acquisitions. This makes it highly ambiguous since the principal legislation on the matter is silent on such procedures in India. Lastly, tax considerations and stamp duty remain a concern for cross border mergers and acquisitions since they remain largely unexplored and ambiguous in nature. [38]

One of the other suggestive matters which pertain to UK legislation is to allow for specialised company courts (like NCLTs in India) in UK too since there are many benefits which can be accrued by having dedicated court recourses based on company law matters like mergers and acquisitions. It would also lead to less burden on UK high courts and build an efficient system of corporate judicial governance.

The United Kingdoms is one such place from where we have derived most of our laws. The Indian courts have never hesitated to look forward towards UK’s courts for direction in some cases due to awestruck similarity of regulation between both the countries. However, when it comes to mergers and acquisitions, the position is a very complex one indeed. In some processes, they follow the same procedure as Indian courts while in others like the Put up and Shut up rule and non-mandatory filing to CMA, they differ in market operation. UK legislation should follow up and make a baseline authority for CMA for proper regulation in M&A.

However, in some cases, it can be clearly seen that following the onset of Brexit, the regulation and legislation for cross border mergers and acquisitions in the UK have followed a dwindling spiralling down step. It is thoroughly observed that either the rules have become outdated following the Brexit or it has led to a lot of confusion for the companies to either shift their bases to other European countries or decide to stay with United Kingdom. There had also been a rising number of cross-border mergers sanctioned by the English courts beforehand.? But with BREXIT, the companies are not left with the choice of a streamlined process of cross border merger and regulation. ?The UK's withdrawal from the European Union has resulted in the revocation of the expedited procedure for mergers and acquisitions that was previously accessible to corporations with operations situated within the European continent. Thus, the efficiency of a streamlined process that was previously available with UK has been disintegrated and it has placed a great burden on the UK companies who are not able to get any benefits of cross border mergers and acquisitions easily. However, this might change since UK government published the Digital Markets, Competition and Consumers Bill in 2023[39], which will prepare for a game-changing transformation as the United Kingdom gears up to unleash a series of sweeping alterations to its competition and consumer laws. A wave of amendments may magnify the authority of the Competition and Markets Authority, revolutionize the procedures for assessing mergers and investigating antitrust cases, and ultimately reshape the entire landscape of UK commerce.

Hence, mergers and acquisitions form an integral part of company law in both India and UK. While both have their niche differences, they are similar in terms of working in more ways than one despite different perspectives; with India being welfare-oriented market and UK being Profit oriented.

[1]Neeraj Tiwari, Merger Under The Regime Of Competition Law: A Comparative Study Of Indian Legal Framework With EC And UK, (2011) 23.1 BOND LAW REVIEW.

[2] Id.

[3] Delnaz Dinyar Dastoor, A Study on Analysing Indian Mergers & Acquisitions and its Impact on Financial Performance of Selected Corporates in India, Gujarat Technological University, (2019), https://s3-ap-southeast-1.amazonaws.com/gtusitecirculars/uploads/Thesis_Delnaz%20Dastoor_847885.pdf .

[4] Report of the expert Committee on Company Laws, Mergers and Acquisitions, MINISTRY OF CORPORATE AFFAIRS, (21st January 2023, 1:03 pm), https://www.mca.gov.in/MinistryV2/mergers+and+acquisitions.html

[5] BS Web Team, M&A activity touches all-time high in 2022, 58.2% higher than 2021: Report, BUSINESS STANDARD, (21st January 2023, 11:02 am), https://www.business-standard.com/article/companies/m-a-activity-touches-all-time-high-in-2022-58-2-higher-than-2021-report-122101200500_1.html .

[6] Dave Sweet Team, Mergers and acquisitions involving UK companies: July to September 2022, OFFICE FOR NATIONAL STATISTICS, (21st January 2023, 12:02 pm), https://www.ons.gov.uk/businessindustryandtrade/changestobusiness/mergersandacquisitions/bulletins/mergersandacquisitionsinvolvingukcompanies/julytoseptember2022

[7] Gauri Pandey & Ojashwi Sidharth, The Impact of Covid-19 on Merger and Acquisition, Vol. 4, INTERNATIONAL JOURNAL OF LAW MANAGEMENT & HUMANITIES, 213, 213-230, (2021).

[8] HENRY A. CAMPBELL, BLACK’S LAW DICTIONARY, 4th edition, Pg 1140, (West Publishing Co,1968).

[9] HENRY A. CAMPBELL, BLACK’S LAW DICTIONARY, 4th edition, Pg 41, (West Publishing Co,1968).

[10] Singhania and Partners LLP, Inbound and Outbound Mergers, SINGHANIA AND PARTNERS LLP BLOG, (21st January 2023, 120:04pm), https://singhania.in/blog/inbound-and-outbound-mergers

[11] Id.

[12] Minority Business Development Agency, Benefits of a Merger or Acquisition, US DEPARTMENT OF COMMERCE, (21st January 2023, 2:30 pm), https://archive.mbda.gov/news/blog/2012/04/benefits-merger-or-acquisition.html

[13] The Companies Act 2013, §230-§234, No.18, Acts of Parliament, 2013, (India).

[14] Re: Moschip Semiconductor v. Unknown, 2003 (5) ALD 827.

[15] Jay Bhavesh Parekh, Understanding Legalities - Mergers, Acquisitions and Combinations, ICSI, (05th July 2023, 03:31 pm).

[16] ICSI, https://www.icsi.edu/media/filer_public/f7/46/f7468f35-19e2-4a5d-a021-cc61864c15ef/ cs_gaurav_ nashikkar_ppt_m__a__30092020.pdf, (05th July 2023).

[17] Chadha and Co, Regulatory Interventions in M&A - including CCI, RBI and SEBI.

LEXOLOGY,(05th July 2023, 08:08 pm),https://www.lexology.com/library/detail.aspx?g=f3f85237-78a9-42fc-8850-c4dc92c49b04 ,

[18] The Companies Act 2013, §234, No.18, Acts of Parliament, 2013, (India).

[19] Rule 25A of Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, Ministry of Corporate Affairs, 2016, (India).

[20] Singhania and Partners LLP, Inbound and outbound mergers, SINGHANIA AND PARTNERS LLP, (05th July 2023, 05:25 pm), https://singhania.in/blog/inbound-and-outbound-mergers#:~:text=Implication%20of%20Foreign%20Exchange%20Management,corporate%20law%20at%20that%20time .

[21] Foreign Exchange Management (Cross-Border Merger) Regulations, 2018, FEMA.389/2018-RB, Acts of RBI, 2018,(India).

[22] Reserve Bank of India, Foreign Exchange Management (Cross Border Merger) Regulations, 2018, RBI NOTIFICATION, (21st January 2023, 3:01 pm), https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=11235&Mode=0

[23] Rajat Sethi, S & R Associates, Cross-Border Merger Framework in India: Limited Efficacy?, (05th July 2023, 05:38 pm), https://www.snrlaw.in/cross-border-merger-framework-in-india-limited-efficacy/

[24]? The Competition Act 2002, § 31, No. 12, Acts of Parliament, 2003, (India).

[25] The Competition Act 2002, § 32, No. 12, Acts of Parliament, 2003, (India).

[26] Shorewala, Krishna and Vasumitra, Vasundhara, Comparing Takeover Laws in the UK, India and Singapore (05th July, 06:30 pm), https://dx.doi.org/10.2139/ssrn.1753341

[27] The Companies Act 2013, §230, No.18, Acts of Parliament, 2013, (India).

[28] The Companies Act 2013, §232, No.18, Acts of Parliament, 2013, (India).

[29]CMA , Mergers: Guidance on the CMA’s jurisdiction and procedure, (05th July 2023, 07:05 pm), https://assets.Publishing.service.gov.uk /government/uploads/system/uploads/attachment_data/file/1044636/CMA2_guidance.pdf

[30] OGILVY WATSON,https://ogilvywatson.com/2021/04/what-is-a-pusu-under-the-takeover-code/,(05th July 2023)

[31] ICLG,https://iclg.com/practice-areas/merger-control-laws-and-regulations/united-kingdom , (05th July 2023)

[32] Supra note 28.

[33] The Enterprise Act 2002, No.20, Acts of Parliament, 2002, (UK).

[34] The Companies (Cross Border Mergers) Regulations 2007, SI 2007/2974, Acts of Parliament, 2007, (UK)

[35] The Companies Limited Liability Partnerships and Partnerships (Amendments etc.) (EU Exit) Regulations 2019, No.348, Acts of Parliament, 2019, (UK).

[36] Dial Partners LLP, The Impact Of Brexit On Uk And European M&A Activity

DLP,https://www.dialpartnersllp.com/the-impact-of-brexit-on-uk-and-european-m-a-activity , (05th July 2023, 09:30 pm)

[37] Ranjit Singh, Impact of Demerger on Shareholders’ Wealth. Vol. 1, ENTERPRISE RISK MANAGEMENT, 44-59 ,(2009)

[38] King Stubb and Kasiva,KSK Attorneys, Legal issues in cross border mergers and acquisitions: Indian Perspective, (05th July 2023,06:12 pm), Legal issues in cross border Mergers and Acquisitions: Indian Perspective ( ksandk.com )

[39]Digital Markets, Competition and Consumers Bill, https://bills.parliament.uk/bills/3453 , (United Kingdoms).

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