Crucial Factors to be kept in mind post Mergers/Amalgamations under the Companies Act, 2013

When restructuring activities like Merger /Amalgamations transactions are underway, the same needs significant planning that includes compliances and actions on every aspect. There are certain pre-requisites under the Companies Act, 2013 that require comprehensive understanding of the provisions for executing the entire restructuring process of Merger /Amalgamations.

There are varied cases wherein it has been established that scheme of merger is a code in itself. One amongst such case includes Maneckchowk and Ahmedabad manufacturing Co. Ltd (1970) 40 Com CAS 819 (GUJ) it was clearly stated that section 391 of Companies Act, 1956 is a code in itself. However, other provisions under the Act are to be complied separately or the same shall be expressly covered in scheme wherever possible. In this article, we shall walk through some amongst the crucial aspects. Some amongst them include: -

A.?????Related Party Transactions of Transferor Company:

The related party transactions between the transferor and transferee companies need to be dealt very cautiously and with vigilance as the same is a significance importance.

1???????At the initial stage of Merger /Amalgamation transaction, one should verify whether any entity or person with whom Transferor/Transferee Company has transactions is becoming a related party of transferee companies post-merger.

2???????Transferee Company shall take the Omnibus approval limits from Audit Committee for Related Party Transactions considering the engagement of transactions of Transferor Company for the year in which the transaction will get effective.

3???????If the transactions are becoming material related party transactions, then Transferee Company shall take the shareholder's approval before the effective date of the scheme.

MCA vide General Circular no. 30/2014 dated 17 July, 2014 has explicated that transactions arising out of Compromises, Arrangements and Amalgamations dealt with under specific provisions of the Companies Act, 1956/Companies Act, 2013 will not attract the requirement of complying section 188 of the Companies Act, 2013.

The aforementioned clarification states that any transaction arising out of Compromises, Arrangements and Amalgamations transaction (Capital reductions, allotments pursuant to merger or transfer of assets pursuant to merger etc.) will not be considered as related party transaction and will not attract the requirements of Section 188 of the Act, but the transaction of transferor and transferee company which are continuing in nature be considered separately and shall require compliance approvals separately.

B.?????Limits under Section 180/186 of the Act (Powers of Board):

Section 180 and Section 186 of the Act lays down the limits of Borrowings and Loans, Investments, Guarantees & Securities (LIGS) respectively for a company. Any borrowings and LIGS beyond the limits shall require the approval of the members of the company in the manner laid therein.

Pursuant to merger /amalgamation all the Borrowings and LIGS of transferor company will be merged into transferee company and the limits approved by members of transferee company or in existence thereof may exceed and therefore members approval for the limits of section 180 and 186 of the Act post merger/Amalgamations shall be planned and executed accordingly or the approval of limits under section 180 and 186 shall be taken as a part of scheme itself.

C.?????Section 185 of the Act:

Section 185 of the Act gives two kinds of prohibitions for giving loans, guarantees and securities,

·????????One is strict prohibition and

·????????Other is conditional prohibitions (which is allowed on passing special resolution)

Further there are also some conditional exemptions given for both kind of prohibitions.

There could be one of a scenario where the transferor company has given loan, guarantee or security to any entity in which director of transferee company is interested as explained in the section and accordingly a transferee company shall take note of such points and execute the compliances accordingly.

D.????Corporate Social Responsibility:

One of a situation that is likely possible where the compliances of spending on corporate social responsibility is not applicable on independent basis to either transferor company or transferee company but on merging of both the companies the net profit / Net worth /turnover figures are exceeding the thresholds and the question could arise in case, where the appointed date has already passed, therefore appropriate plan of action for compliances on the same should be ensured.

E.?????Managerial Remuneration:

One significant and time-based compliance under the Act for Public Limited Companies is Managerial Remuneration and the same may have an impact if a loss-making company is merged with profit making company and therefore one should preceding to the transaction or at an initial stage shall calculate the limits of remuneration and take shareholder approval in this regard to ensure the compliance.

Conclusion:

Whenever a Merger /amalgamation restructuring activity is executed one should take note of all compliances in a 360 Degree view. The above mentioned points shows some amongst the crucial scenarios which may be over looked and that could turn out non-compliant. Hence to plan a restructuring activity with a fore thought needs comprehensive understanding, which shall give a transparent picture of all the areas of compliances that leaves a remarkable impact.