Definition of Amalgamation:
Section 232 of the Companies Act, 2013 provides the provisions for amalgamation. There is no expressed definition of amalgamation in the Act. However, Section 2(1B) of the Income Tax Act, 1961 widely explains the term amalgamation by clearly stating the conditions, under which a merger could qualify as an amalgamation. The term amalgamation means when two or more companies merge with other companies, or one company gets dissolved into another company to form an entirely new entity – the companies comprising amalgamation lose their status of continuing as separate, distinct entities after they are combined.
Section 232 provides three conditions for amalgamation:
- The properties of the amalgamating companies become part of the newly-formed combined company.
- The liabilities of the amalgamating companies aptly form the part of the amalgamated company.
- The shareholders of the amalgamating companies holding not less than 3/4th shares become the shareholders of the newly formed amalgamated company.
Provision of Section 237:
The above section explains the power and obligations of the Central Government in the amalgamation of companies on the grounds of the public interest. The amalgamation of two companies when it is favourable for the public interest and consists of satisfying bases that could primarily benefit the public at large, the Central Government, on such grounds, then issues an order via Official Gazette, to both the constituent companies.
The new company so formed should have definite rights, powers, duties, constitution, authorities, interests, privileges, liabilities and obligations as may be specified in the order by the Central Government.
However, the Section also provides necessary shield and obligations of the Central Government towards the members and the creditors of the amalgamating companies. The Central Government is obliged to provide required and appropriate authority to conduct an assessment of compensation to be paid to the creditors and members of the amalgamating companies whose rights and interests are less than the rights and interests they used to enjoy before the amalgamation. The newly amalgamated company pays compensation to those specified members and creditors.
Any members or creditors of the company, if and when aggrieved by the assessment of the compensation by the prescribed authority could place an appeal to the Tribunal within 30 days from the date of publication of such assessment in the Official Gazette. The Tribunal shall then reassess the compensation.
The Central Government must send a copy of the proposed order in the draft to each of the amalgamating companies by specifying them a definite timeline for filing an objection on the same. The copies of the order must also be placed before both Houses of the Parliament in advance.
The order of amalgamation could also include the order to continue any legal proceedings that are in progress among the amalgamating companies. The Government could not pass any order of amalgamation unless the specified period for the appeal has expired off or unless an existing appeal has been disposed of finally.
An actual merger or amalgamation comes into being when two companies either dissolve or merge their liabilities and properties into a newly formed entity. However, amalgamation under Section 237 firmly focuses on the public interest grounds where the interest of the shareholders in the amalgamating companies should also be upheld, providing equal priority.
Purpose of Amalgamation:
The utilities of amalgamation are many folds. The crucial motive of a business is to maximize the shareholder’s value which could vastly increase the competitive advantage. The other benefits of amalgamation include:
- Amalgamation mainly helps in strengthening the business alliance between the amalgamating companies.
- Helps in preventing unnecessary market competition.
- Effective in expanding the business.
- Helps to increase the research and development facilities.
- Responsible for reducing the operational cost for both the amalgamating companies.
Conditions of Amalgamation Under Section 237 of the Companies Act, 2013:
Anyone of the amalgamating company could back out from the process of amalgamation provided that such back out shall not affect the interest of the members and the shareholders as also the broader public interest. An amalgamation under Section 237 is given a specified interest-based exclusively on the part of the general public. The Black Law’s Dictionary defines public interest as “the general welfare of the public that warrants recognition and protection and the public holds certain interest which is largely associated with the rights and liabilities of the communities.”
The definition is descriptive enough to enumerate an apt explanation of the public interest. The description of the public interest has also been provided under Sections 62(4), 129, 210, 221, 233(5) of the Act. The approval of the members of the Company and stakeholders should be prioritised in the case of Section 237, but that shall not surpass the absolute requirement of satisfying the public interest.
Section 237 of the 2013 Act enumerates similar provisions like that of Section 396 of the Companies Act, 1956. The Section provides the authority to the Central Government to order for forced amalgamation only if it is satisfied that a forced amalgamation is necessary to meet the public interest. However, there is a borderline difference between a forced merger and a forced amalgamation exclusively on the ground of public interest. The Government cannot just order any healthy company to amalgamate with an unhealthy company solely to satisfy the benefit of the underdeveloped one. Such act shall result in a forced merger. The government shall enumerate the grounds of public interest that are strictly associated with the amalgamation procedure.
Amalgamation Procedure Under Section 237 of the Act:
The amalgamation procedure under Section 237 of the Act consists of the following:
1. A resolution of the board meeting is required to pass by a Company intending to amalgamate with the other Company. A must necessary board meeting where a resolution of amalgamation has to be passed, the notice of such meeting has to be given by the Chairperson appointed for the meeting to all the creditors, members and debenture holders of the Company under the prescribed Form No. CAA 2.
2. The notice shall be sent along with the detail of the meeting, which shall descriptively explain the scheme of the amalgamation. Two different statements have to be attached along with the meeting notice. Firstly, information of disclosure shall include the detail of the Company, the potential alterations and effects of the amalgamation upon the members of the Company; the documents required for the procedure, the detail of the investigation proceedings upon the members, creditors and other debenture holders; sanction detail if any as well as the conditions of approval; the order of The National Company Law Tribunal (NCLT) in detail; no-objection certificates from the regulatory and other authorities whose permissions are required subject to the scheme of amalgamation.
Secondly, a detailed statement of the members of the Company who has got voting rights and shall vote as well as attend the meeting. Detail of the person attending the meeting or voting in proxy has to be included in the statement.
3. Application in electronic format has to be made to the stock exchange to receive the approval letter from the same.
4. The meeting advertisement has to be published in an English newspaper and another newspaper of regional language, whose copy has to be uploaded on the website of the Company, as per required under Form No. CAA 2. However, the amalgamating companies could jointly provide an advertisement of the meeting notice.
5. An affidavit within seven days before the already fixed date of the meeting has to be filed before NCLT stating that the requirements and procedures concerning the issue of notice for meeting and advertisement of the same have been complied with in accordance to the procedure aforementioned under Form No. CAA 2.
6. An application under Form-1, Form –2 with the notice of admission and an affidavit in Form – 6 and a copy of the scheme of the amalgamation along with the prescribed fees has to be made to the National Company Law Tribunal (NCLT) of a definite jurisdiction of the Company. The Company must provide every detail of every class of creditors and members of the Company whose interests are associated with the expected amalgamation and are required for the scheme approval.
7. A notice under Form No. CAA 3 accompanied by the scheme of amalgamation has to be sent to the Central Government, RBI (Reserve Bank of India), Registrar of Companies (ROC), Competition Commission of India, IT authorities, Official Liquidator and other authorities that are directly or indirectly responsible for the amalgamation procedure.
8. In order to sanction the scheme at the Company level, an essential meeting of the creditors or class of creditors, members or class of members has to be convened. The scheme shall be deemed to be sanctioned if three fourth of persons among the creditors and members vote for it. The Chairperson convening the meeting must file the meeting report under Form No. CAA 4 with the NCLT within three days after the meeting.
9. After filing the report of the meeting, within seven days, the Company shall file Form No. CAA 5 before the NCLT. The advertisement for Form No. 5 has to be made in a similar newspaper as per prescribed under Form No. CAA 2. The NCLT shall then fix a final hearing date. The approval of the statutory authorities linked up directly or indirectly with the amalgamation procedure has to be taken before passing any last order by the NCLT under Form no. CAA 7 concerning the amalgamation procedure.
10. After the final order on amalgamation under Section 237 has been passed by the NCLT, the copy of the certified order shall be filed under Form INC-28 before the ROC within thirty days from the date of receipt of the order. An acknowledgment mentioning the fees paid to the Regional Director and the Official Liquidator has to be attached with the Form.
11. An application has to be made to the stock exchanges for the listing of the new shares as allotted to the shareholders following the newly passed amalgamation scheme. The shareholders shall be informed in detail concerning the effectiveness of the new scheme and the date of implementation of the provisions of the scheme in detail.
Judicial Interpretation Under Section 237 of the Act:
Moons Technologies Ltd. v. UOI & Ors.
Popularly known as the 63 Moons case, is a landmark judgment under Section 396 of the 1956 Act. The National Spot Exchange Limited (NSEL), which was the subsidiary company of 63 Moons Technologies Limited (previously known as the Financial Technologies India Limited or FTIL) was ordered to be shut down and was barred from entering into any contracts by SEBI on the ground of payment default. The parent and the subsidiary companies were then ordered by the Government to merge under Section 396 of the 1956 Act. The Bombay High Court dismissed the order challenged by the company. The company then appealed to the Supreme Court. The Supreme Court set aside the order of the Government after getting convinced of the fact that the grounds of merger does not satisfy the “public interest” grounds, and therefore there shall be no amalgamation.
An amalgamation based on the grounds of “public interest” must favour a positive change in terms of employment and commerce which in turn shall be beneficial for the development and welfare of the community and shall not bar the same. In 63 Moons case, the merger failed to provide any compensation to the creditors and stakeholders of the FTIL, and even the compensation assessment was unable to consider the interest of the creditors and shareholders. Therefore, the Supreme Court’s order of setting aside the amalgamation was apt and was significant enough to save an amalgamation on arbitrary grounds.
Conclusion:
The compulsory amalgamation by the Central Government under section 237 of the 2013 Act, primarily focuses on the aspect of the “public interest” which has an extensive meaning when critically analysed and the same could give rise to several legal consequences.
The 63 Moons case does depict the need of providing an adequate safeguard to the members of the amalgamating companies. It is necessary to protect the shareholder’s interest in a more committed manner. Instilling a convincing yet compelling standard of protection is required which could extend to protect their economic value of shares.
In 63 Moons case, an absolute inability resulted in differentiating between mergers for public interest and mergers by absorption. It was necessary to raise the difference to refer to the term “interest” mentioned under Section 396(3). The merger by absorption gives rise to no new entities, and hence the term interest remains constant.
The objection lies in providing such a vast ambit of power to the Central Government through Section 237. It bars the free flow of trade to some extent, being majorly intervened with corporate affairs. Section 237 seems to cease the sheer power of regulation and makes the Government an entity that interferes mainly in the structuring of the corporate entities and holds limitless authority to do the same. The judiciary must examine and verify the grounds of amalgamation under Section 237 of the 2013 Act before passing any order under the same, and the provisions of the Section must be definite and descriptive to prevent any arbitrary order of amalgamation and exercise of limitless powers to implement the same.
This article has been written by Amrapali Mukherjee, LL.M student in Commercial and Corporate Law Queen Mary University of London, UK.
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