CORPORATE RESTRUCTURING. LEGAL FRAME WORK (Concept to Completion)

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1 CORPORATE RESTRUCTURING LEGAL FRAME WORK (Concept to Completion) NIRC / ICSI By - CS Harish K Vaid 1

2 Major Issues Legal Technical Financial Stamp Duty on Assets/issue of Shares Taxation Valuation & Calculations Fairness Opinion in cases of Unlisted Cos. Exchange Ratio 2

3 A. Statutory Provisions Chapter-V A complete code in the nature of Single window clearance. CS HKV/

4 Chapter V, Sections 390 to 396A of the Companies Act, 1956 Chapter V relates to Arbitration, compromises, arrangements, reconstructions. (includes mergers/demergers/hive-offs/spin-offs of Public/Pvt/Listed/Unlisted/Indian/Foreign Cos.) However, Section 389 relating to power of Companies to refer the matter to arbitration stands omitted since The Companies Act does not use the word merger. Similarly it does not define amalgamation, only some reference at CS HKV/ places. 4

5 Rules 67 to 87 of the Companies (Court) Rules, 1959 Prescribe the detailed procedure to be followed for approval of such Schemes. All formats are also prescribed. 5

Section 2(1B) of the Income Tax Act. This Section defines amalgamation and stipulates three conditions: All properties of amalgamating company should vest with amalgamated company.

6 Section 2(1B) of the Income Tax Act. This Section defines amalgamation and stipulates three conditions: All properties of amalgamating company should vest with amalgamated company. All liabilities of amalgamating company should vest with amalgamated company. Shareholders holding not less than 75% shares in the amalgamating company should become shareholders of the amalgamated company. AS 14 Amalgamation (i) in the nature of Merger, (ii) in the nature of Purchase. 6

7 B. Right to amalgamate 7

8 Though for the purpose of Section 391, company means any company liable to be wound up, yet it does not debar amalgamation of financially sound companies. (Section 390) 8

9 Section 394 (4) Transferee Company does not include any company other than a company within the meaning of this Act. (Has to be a company registered under the Companies Act) Transferor Company includes any body corporate whether a company within the meaning of this Act or not. (Can be a Foreign Co.) 9

10 C. Objects, Reasons and Advantages of Amalgamations Disclosed / Undisclosed 10

11 Synergy of operations Economics of Scale Reduction in production, administrative, selling, legal and professional expenses. Benefits of integration Optimum use of capacities and factors of production Tax advantages Financial constraints for expansion Strengthening financial strength CS HKV/ Diversification 11

12 Advantage of brand equity Loss of objectives with which several companies were set up Survival Competitive advantage Eliminating / weakening competition Revival of a weak / sick company Sustained growth More efficient use of larger resources and funds 12

13 Seldom undisclosed Reorganization of Business Increasing the Promoters Holding Listing of Unlisted entity Induction of Partner Tax Benefits Leases (Including mining leases) 13

14 D. Reverse Merger Healthy Company amalgamating with a financially weak company. Holding Company merging with its subsidiary. 14

15 E. Procedure for seeking approval of Members / Creditors Board s approval Contents of Scheme Appointed Date Effective Date Capital Structure of both companies Exchange ratio Cross holdings - Cancellation / Trust Transfer of undertaking and liabilities (charges created) Continuation of legal proceedings Carrying on of business during intervening period Services of employees Allotment of shares in exchange ratio, treatment of fractions and rights of shareholders to Dividend etc. Dissolution of transferor company (without winding up on the effective date) Conditions subject to which the Scheme is to take effect. Cooling period of 1 months to Stock Exchanges Clause 24(f) 15 CS HKV/

16 Drafting of Scheme vis-à-vis Objective Specific / Standard Schemes Clubbing of Authorised Capital Borrowing Powers Change of Name Change of Objects Reduction of Capital Flushing of small shareholders Redemption of Preference Capital Cancelation of Cross holding Vs Trust 16

17 F. Court s directions for convening meeting of Members / Creditors (Rule 69) (Court may dispense any meeting) 17

18 Application in F-34 Judges summon supported by Affidavit in Form 33 Directions of the Court for Date, time and place of meeting Appointment of Chairman Quorum Notice and manner of giving advertisement Time for filing of Chairman s Report Dispensing meeting of members and creditors in certain cases 18

19 G. Meaning of Class of Members and Creditors Based on rights attached (Equity/Preference holders) Secured / Unsecured Creditors (FCCB/GDRs/FDs/Employees) 19

20 H. Notice of Meeting UPC 21 clear days in Form 36 Proposed Scheme to be attached Statement under Section 393 Vs. Sec. 173 Proxy Form in Form 37 Publication in News Papers in Form 38 (Rule 74) Affidavit of Chairman for service / advertisement of notice 20

21 I. Proceedings at Meeting Voting to be by poll only Chairman to appoint two scrutineers to count and report Scheme to be approved by Special Majority (Principle of Fair Representation) Majority in number representing 3/4th in value Majority of members / creditors present and voting (JP 46 Obj. 5 Pb 2 = 53 Exclude Promoters) 21

22 J. Report of result of meeting Chairman to file report in Form 39 within seven days of meeting (Rule 78) 22

23 K. Requirements of Listing 23

24 Intimation to SEs within 15 minutes of Board s decision In principle approval u/cl. 24(f) 1 month time Valuation Report/Fairness Opinion-Cl.24(h) in case of Unlisted Cos./WOS-if consideration Intimation to SEs after approval of members / creditors Copies of notices, circulars etc. to be sent to SEs Report of Chairman to be filed with SEs 24

25 L. Explanatory Statement u/s 393 Requirements regarding explanatory statement Terms of arrangement Effect of Scheme Material interest of Directors Pre/Post shareholding pattern. Fairness report etc. Principles governing Explanatory Statement u/s 393 Different from Section 173 material facts Valuation/Fairness Reports need not be circulated Providing exchange ratio and not calculations is enough Directors interest has to be special 25

26 M. Procedure for Seeking approval of High Court High Court sanction to the Scheme In case Scheme involves reduction in capital procedure to be followed However, if reduction is part of scheme, no separate petition under section 100 is required. Petition to High Court in Form 40 after approval of Members / Creditors Notice to Central Government under Section 394A. To Regional Director and none else Report of OL 2 nd Proviso 394(1) Report of ROC To RD - To Court 1 st Proviso 394(1) 26

27 Hearing on Petition Notice of hearing to be advertised (Rule 80) High Court Order on petition after hearing (Rule 81)»Order under Section 391 in Form 41»Order under Section 394 in Form 42 27

28 N. Filing of Order with ROC Within 30 days in Form 21 Shall have no effect unless certified copy filed with ROC Inform Stock Exchanges Secure Listing of new shares. 28

29 O. Order to be annexed to MOA Copy of Order needs to be annexed to each copy of MOA Section 391 (4) CS HKV/

30 P. Power of High Court to enforce comprise / arrangement Vast powers under Section 392(1) 30

31 Q. Stamp Duty on High Court Order Transfer / vesting is by virtue of Court Order without further documents / deeds Court Order Vs Conveyance In case duty is payable in the State, same shall be paid on the Order Litaka Pharmaceutical Limited Vs State of Maharashtra HLL Vs State of Maharashtra (2003) 117 Cocases SC 758 CS HKV/

32 R. Principles evolved for sanctions of Scheme by Courts Resolutions are passed by Statutory majority in value and in number u/s 391(2) at a meeting duly convened and held. Unless Scheme is so approved, the Courts will have no jurisdiction to confirm the same. Those who took part in the meeting to be fair representatives of the class. Scheme as a whole should be reasonable one. If so, Courts not to interfere in collective wisdom of shareholders. Objectors will have to convince the Court that Scheme is unfair and needs to be rejected. Court not to launch an investigation into the commercial merits / demerits of the Scheme. There should be no coersion of the minority at the statutory meeting and no lack of good faith on the part of majority. 32 CS HKV/

33 Court must not act as a rubber stamp. It has a duty to scrutinize but scrutiny is not with the eye of an expert of exactness of an accountant. Court to ensure that requisite statutory procedure has been complied with. Scheme to be backed by requisite majority under Section 391(2) The meetings had relevant material to enable taking informed decisions. All requisite material required by proviso Section 391(2) is placed before the Court and Court is satisfied. (Latest Financial Position/Pendency of Inv. proceedings u/s 235 to 251 and the like. Judgement in AIR 2006 SC 2287 The Chairman SEBI Vs Shriram Mutual Fund & Anth has included Sec 209 A also. Scheme as a whole is found to be just fair and reasonable from the point of view of prudent men of business taking a commercial decision. Once the above parameters are met, the Courts will have no further jurisdiction to sit an appeal over the 33 commercial wisdom of the majority. CS HKV/

34 S. Handling of Objections SOURCES OF OBJECTIONS A - Shareholders CS HKV/ Unfair Exchange Ratio Absence of Fair Representation Clubbing of Authorised Capital Revenue Loss Violation of Take Over Code Change of Name through Scheme Reduction of Capital not permitted Collusion of Regulators with Companies Non disclosure of Latest Financial Position/Investn Regular mergers/demergers Report of ROC not received Provide Transport 34

35 B. Creditors Security may get diluted Merged company won t honour commitments FCCB holders Website/Advt in Foreign Papers C. Central Govt. (RD) Clubbing of Authorised Capital Loss of Revenue Borrowing Powers clubbing not permissible Change of Name separate procedure Reduction of Capital separate procedure Exchange Ratio calculations not provided (Shardul Shroff Committee Report, Calculations to be confdl., Double Lock with one key to ROC). Business not covered by Objects Clause 35

36 D. Official Liquidator Inspection/Audit of Records of Transferors E. SEBI Investigation in Progress under TO Code Don t sanction till action is completed F. Stock Exchanges Exchange Ratio Public shareholding falling below minimum G. Employees 36

37 Merger of JIL with JRC (2004)2CLJ105(ALLD.) 1. Merger of JAPL with JRCL = JIL 2. Hive-off Cement Plant by JIL to BCL (u/s 293(1)(a) 3. Hive-off Cement Business of JIL to BCL (name changed to JCL) u/s 391/ Merger of JIL with JCL (JAL) u/s 391/394 37

38 Merger of Jaiprakash Industries Ltd. & Jaypee Rewa Cement Ltd. Law laid down for the First Time as reported in (2004)2CLJ105(Alld). 1. Meaning of Fair Representation in meetings while considering the Scheme. 2. Right of shareholders not constituting the requisite strength u/s 399 to file suit instead of approaching CLB in case of Oppression & Mismanagement 3. Impact of pending litigation on Scheme. 38

39 Post Merger Activities Necessary Press notices for all concerned Notices to SEs/Depositories Fixing Record Date Allotment of shares in Exchange Ratio Credit/Listing of newly allotted shares Effecting Change of Name/A.Capital,if any Revised Resolution to Banks/Clients 39

40 Change of ownerships of Moveable Properties Mutation of Immovable properties Mining & other leases/agreements etc. IPRs necessary changes to be effected Names to be changed in all Licences/Permits etc. Changes, if any, in Occupiers/Managers 40

41 FOR SUCH SCHEMES WE NEED TO PLAN If we fail to plan, we are planning to fail Better to prevent and prepare rather than to repent and repair Irretrievable corporate actions You can make omlette from an egg, but not egg from the omlette 41

MERGERS AND DEMERGERS. Presented by Y. Suryanarayana, Advocate,

MERGERS AND DEMERGERS. Presented by Y. Suryanarayana, Advocate, MERGERS AND DEMERGERS Presented by Y. Suryanarayana, Advocate, MERGER & DEMERGER Application & Documentation Disclosures in the Application Directions by Tribunal Dispensation of Meetings Convening of