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Merger And Acquisition Under Company Code 2013 And Insolvency And Bankruptcy Act 2016

Understanding Merger and Acquisition:
When one companies takes over the other or acquire other company is called acquisition and on the other hand the merger means two firms precisely of same size that combines together and works as a single entity.

Merger and acquisition falls under section 230-240 of Company Code. Those sections deal with the scheme of compromise, amalgamation or arrangement which also includes about acquisition which is through the mergers, demergers or other similar type of arrangements.

Whereas in cases of Insolvency And Bankruptcy act, there is no particular sections which deals with Merger and acquisition that is why it is read with the companies code 2013.

When the two firms joined to form a new corporation called DaimlerChrysler, the two companies, Daimler-Benz and Chrysler, continued to exist. The shares of both companies were relinquished, and new shares of the new company were issued in their place. In February 2022, the corporation changed its name to Mercedes-Benz Group AG (MBG) in order to update its brand.

Difference Between Mergers And Acquisition:
Merger Acquisition
A merger means where two organization combine to form a new organization. When one company acquires or take over the responsibilities of the other company.
In mergers, new shares are issued In acquisition, no new shares are issued
the merger companies work under a new name The acquisition company mostly work under the parent company or the company who has issued it.
The organizations are of similar statute, operation size and scale of business It is independently stronger in cases of financial capabilities rather than acquired business.
In cases of merger companies, the power is balanced between them In cases of acquired company has no say in terms of power or authority by the acquiring organization
merging of smithKline Beecham and Glaxo welcome to GlaxoSmithKline Tata motors acquisition of jaguar land rover

Types Of M&A Transaction:

There are different types of mergers and acquisition. They are:
acquisition established on the ground between the buyer and the seller:
There are four primary acquisition kinds that are established on the spot between the buyer and the seller. These are;
  • Horizontal acquisition
  • Vertical acquisition
  • Conglomerate acquisition
  • Congeneric acquisition
Generally, a company will take over the other company if the decision makers believes that it will boost the bottom line, whether it does so by boosting revenue or cutting costs. For instance, PQR Inc., a manufacturer of widgets, purchased XYZ Inc., another manufacturer of widgets.

Horizontal Acquisition:
when one company takes over other company which is in the same business.

For example, Tata steel acquired Bhushan steel, that both the companies were in the same line of business and hence it is example of horizontal acquisition

The advantages are that the possibility of increasing a the client base and market share of the company aid in its expansion into new markets.

Vertical acquisition:
This kind of acquisition occurs when one business buys out or takes over another that has a different supply chain position. The business that was acquired can be further up the chain. For example, if a company named XYZ Inc. has acquired a company named PQR that makes an important part used by the acquiring company named XYZ Inc.

It can bring a new income stream as well as lower costs of production and streamlined operations.

Conglomerate Acquisition:
In this type of acquisition, the acquirer and targets are separated industries or earned in separate activities.

For example: if a company who is associated with a real estate business acquires the company who is associated with insurance company.

Diversification is one of the important reasons for this type of acquisition. If one product or assistance given by the company is struggling hopefully there are others well-helping to provide security for the company.

Congeneric Acquisition:
It occurs when the firm making the acquisition and the company being bought sell to the same clients but have different products or levels of customer service. For instance, DEF LLC helps law firms with trade mark searches and filings, and it just acquired LMN LLC, which helps law firms with UCC searches and filings. This kind of acquisition aids a business in growing its product line and market share..

Acquisition Based On Method Of Acquisition:
  1. Statutory Transaction:
    There are various ways to establish an acquisition. This also covers consolidation, share or interest exchanges, and mergers.

    One benefit of adopting a statutory transaction is that, unlike non-statutory transactions, which are the outcome of complex contractual contracts, statutory transactions are resulted by relatively simple documents with specific contents.

    The owners of the current firm who did not authorize the transaction must surrender their ownership interest, which is one of the second advantages statutory transactions have over contractual transactions. In contrast to non-statutory techniques, where mergers, consolidations, and share or interest exchanges have specific, law-directed effects, non-statutory ways leave the acquirer with just disgruntled minority owners.

When the operations, resources, and liabilities of many business entities are merged into one, it is commonly recognized to be a merger of those entities. Since this is a statutory transaction, the merger cannot be lawfully completed unless the conditions of the business organization laws of the buyer's and seller's state development are met. Consequently, certain entities persist in existence while others vanish.

In general, a merger requires the creation of a merger plan that outlines the terms and conditions. The owners of the failing company must accept the strategy and the boards of directors or managers must also approve it. In a select few circumstances, the owner of the survivor must also allow it. Following approval, the articles of merger were filed with the secretary of state or a comparable authority in the formation of the acquirer of the target.

Triangular Merger:
When a merger is employed to complete an acquisition, a triangular merger is frequently used. Three commercial entities are involved in a triangle merger:

Parental and/or subsidiary:
  • The target of the acquisition
    The subsidiary will typically be freshly founded with the sole objective of aiding the parent in acquiring the target. The acquirer is not a merger's constituent. The transaction's outcome is that the target turns into an entirely owned subsidiary of the acquirer.
Despite the fact that the target and the subsidiary merged, the acquirer does not assume the target's obligations. To enable the acquiring business to acquire the target without assuming the liabilities, this is the primary justification for entering into the triangle merger.

The merger of two or more organizations to create a new business organization is a legal transaction. As a result, every business organization that existed before to the amalgamation is eliminated. Not all of the state's corporate organization statutes permit them. Therefore, confirming legislative authorization is the first stage in carrying out a consolidation.

Share Interest And Exchange Interest:
Another statutory mode of acquisition provided for (in some but not all) by state business entity legislation is an exchange.

In a share exchange, one company acquires all of the outstanding shares of one or more classes of the other company. All of the acquirer's shareholders must abide by the terms of the exchange.

The exchange of title interests in an unincorporated firm is the same type of transaction as an interest exchange.

A plan of exchange should be drafted and approved and articles of exchange filed to result the transaction.

An exchange achieves the same end as (and can be used in place of the reverse triangular an exchange -same as a triangular merger -the acquired firm does not go out of existence. It becomes a subsidiary of the acquirer. The advantage of the statutory exchange over the triangular merger is that there is no need to establish a subsidiary to accomplish the transaction.

Advantages And Disadvantages Of Mergers And Acquisition:

  • Improved Economic Scale:
    A new, substantial company that has purchased another firm typically has greater material and supply needs, and while a company has greater wants, it also has greater purchasing power. A company's ability to negotiate bulk purchases is facilitated by its strong purchasing power, which also contributes to cost effectiveness. In other words, a corporation can increase its scale by purchasing supplies and resources in larger quantities.
  • Enhanced Distribution Capacities:
    A merger or acquisition may cause a company to geographically expand, improving its capacity to furnish facilities or distribute goods to the broader population.
  • Increased Market Share:
    The newer, larger company gains a larger market share when two businesses in the same industry merge or when one company purchases another.
  • More Financial Resources:
    When two businesses combine or one entity buys the other, the business may have access to a larger marketing budget, which allows it to reach an increasing number of clients. This is due to the fact that when two businesses join forces or one company purchases another, they pool their financial resources.
Disadvantages Of Merger &Acquisition:
  • Job Losses:
    Duplication and excess capacity inside the organization may result from two businesses combining and becoming one entity, which could lead to layoffs.
  • Diseconomies Of Scale:
    Diseconomies of scale are a potential consequence of mergers and acquisitions. It may occur, for instance, when the new, larger company's owner lacks the managerial skills necessary to oversee a larger enterprise.
  • Higher Prices:
    Even though it has no bearing on the company, it is nevertheless important to mention. A large market share might be advantageous to a company, but it can also pose a risk to its clients. when a company has a greater market share and less competition, and when customers are willing to pay more for a product or service.
  • Lost Opportunities:
    Last but not least, it takes time, effort, and money to combine two businesses or buy a business. The investment of time, money, and effort in a merger or acquisition process may result in the company losing out on other possible chances.

Overview Of The Insolvency And Bankruptcy Code (Ibc):
Introduction To The Ibc:
The insolvency and bankruptcy code, 2016 was enacted in India to lay out a comprehensive framework for resolving the insolvency and bankruptcy of companies, individuals and partnerships. the IBC was designed to maintain India's outdated insolvency and bankruptcy was and to provide a more systematic and well-planned system for resolving insolvency and bankruptcy.

The IBC came into force on May 28,2016 and has from then it has undergone several amendments to improve its effectiveness and to state practical challenges.

Objectives Of IBC:
The aim objective of IBC is to give a time bound and ea. well planned process for resolving insolvency and bankruptcy in a transparent manner. The IBC aims to:
  • Rise in the value of the assets of the debtor
  • Promote and encourage entrepreneurship
  • Ensure a timely and successful resolution of insolvency and bankruptcy cases
  • Stabilize the interests of all stakeholders including the creditors, debtors, and creditors
  • Enable the promotion of a competitive market and economy
  • Provide a framework to deal with cross-border insolvency cases
The IBS aims to achieve these objectives through an effective process that includes different stages including beginning of insolvency, appointment of an insolvency professional, submission of claims by creditors, resolution plan, and liquidation.

Key Provisions Related To M&A under The IBC:

The insolvency and bankruptcy code (IBC) in India gives a framework for the resolution and liquidation of insolvent firms including provisions related to mergers and acquisition (M&A) with regards to the insolvency process.

Key Provisions Related To M&A under The IBC:

Corporate Insolvency Resolution Process (Cirp):

  • When a firm undergoes insolvency proceedings under the IBC, a resolution professionals appointed to manage the affairs of the firms during the corporate insolvency resolution process (CIRP).
  • The resolution professional explores different options for the resolution of the company, which may incorporate the possibility of merger or acquisition.

Section 29a: Ineligibility Of Resolution Applicants:

  • Section 29A of the IBC sets the criteria for determining the eligibility of an individual or entity to submit a resolution plan for the insolvent firm.
  • This section provides some disqualification like willful defaulters, individual associated with non-performing assets, and those who are convicted of a particular offence from participating in the resolution process.

Section 31: Approval And Implementation Of The Resolution Plan:

  • Section 30 of the IBC indicates the requirement and procedure for the submission and acceptance of a resolution plan.
  • A resolution plan can be given in by eligible resolution applicants, including potential acquirers, and it must provide for the resolution of the firm in a manner that will increase the value of assets.
  • The plan shall also provide for the payments of debt to creditors and be approved by the committee of creditor (CoC) and the national company law tribunal (NCLT).

Section 230: Scheme Of Comprise Or Agreement:

  • It deals with the approval and implementation of the resolution plan
  • Once the resolution plan is approved by the committee of creditor (CoC) and the National company law tribunal (NCLT) it is binding on the company, to its employees, members. Creditors and other stake holders.
  • The plan may involve the acquisition or merger of the insolvent company by other firms as per the conditions and provisions stated in the resolution plan.

Section 230: Scheme Of Comprise Or Agreement:

  • This section is mostly read jointly with the IBC that provides for a scheme of compromise or arrangement between a company and its creditors or members.
  • This section allows the M&A transaction to be accepted as a part of a resolution plan subjected to the approval of the NCLT and ither regulatory bodies.
Those provision of IBC gives a legal framework for M&A transactions within the insolvency resolution process. The main objective is to give service to resolution and revival of insolvent companies while safeguarding the interest of creditors and stakeholders. It is important to consult the particular provisions of the IBC and take legal advice for a comprehensive understanding of the requirements and procedures related to M&A transaction under the IBC.

Role Of The National Company Law Tribunal (Nclt) In M&A Cases:

The NCLT is crucial in helping to settle disputes involving corporate law since it aspires to offer a productive and effective platform for doing so, which is crucial for the expansion and development of India's business sector.

It has the authority to hear and rule on cases involving a range of issues, including those pertaining to corporate law, mergers and acquisitions, suppression and mismanagement, winding up of firms, and other similar issues. The NCLT offers a single forum for the settlement of disputes connected to corporation law, which is one of its major benefits.

It helps to cut down on delays and also ensure consistency in how laws pertaining to company disputes are applied. In situations involving the Insolvency and Bankruptcy Act, it has the authority to appoint an insolvency office employee who aids in efficiently settling the cases.

The NCLT also plays a significant role in settling lawsuits involving mergers and acquisitions. The NCLT ensures that during the merger and acquisition process, the interests of all stakeholders, including employees and creditors, are protected. Additionally, it ensures that the process is fair and transparent and that the enterprises participating have a higher market value.

Impact Of Ibc On Existing M&A Framework:

As has already been mentioned, the government promptly removed the barriers following the effective implementation of IBC. Since 2016, IBC has already made three major amendments to the act, including adding home buyers as financial creditors, prohibiting promoters of Indian defaulting organizations from bidding on distressed assets, and outlining how to request approval from the Indian Competition Commission. In addition to the IBC, other laws were also changed to advance it. Among the significant changes were:

Takeover Code:

To achieve the minimum public shareholding requirement of 25%, listed businesses maintain a 75% threshold limit for private parties. Even with the distressed asset, it's crucial to mix money or change equity. As a result, the aforementioned prohibition was lifted for IBC-compliant enterprises.

Exemptions From Delisting:

If the following requirements are met, the delisting plan under the SEBI (Delisting of Equity Shares) regulations 2009 will no longer apply to any delisting of equity shares in compliance with a resolution procedure under this code:
  • A specific delisting plan is outlined in the plan.
  • Current public shareholders are given the option to quit at a price equal to or greater than the liquidation value.
  • In addition, if the promoters are departing at a higher cost, the leaving dividend for shareholders cannot be less than the amount they were able to obtain.
Case Laws:
MEL Windmills Pvt. Ltd vs Mineral Enterprise Ltd. Anr:
The main facts of the case are that it includes a demergers scheme in an organization that had an investigation ongoing in its mining operations. There was not at al any demerger in a mining industry. The legal position of the case is that the supreme court while interpreting the provision of section 29A of IBC supreme court considered that for an eligible resolution applicant by using the means like declassification as a promoter without paying off the outstanding non-performing assets.

It is said that an individual who has been in the charge of the corporate debtor because of whom the resolution plan has been made do not come back in some other form to recover the control of the company without first paying off their outstanding debts, here section 29A of Insolvency Bankruptcy act 2016 speaks about the individuals' who are not eligible from submitting the resolution plans or becoming the resolution applicants.

Tata Steel Acquired Bhushan Steel:

The basic facts of the case are that the Bhushan steel was declared to be insolvent in the year 2017 and in the year 2018 tata steel's resolution plan was accepted by the committee of members (CoC). But before the plan was accepted by the National company law tribunal, a forensic audit report disclosed the fact that collection of suspect transactions. So, this prompted the resolution officer to file an avoidance application in front of the tribunals.

Before the hearing could take place on the avoidance application the tribunal has already approved the resolution plan but the NCLT issued a notice for the hearing of the avoidance application, regardless of the resolution plan was approved

Hence, the Delhi high court held that the avoidance resolution and the corporate insolvency resolution are two different sets of proceedings. The court further held that the avoidance of transaction needs the findings of a suspicious or dubious transactions, which is complicate in nature and is also time consuming. Thus, it can continue after the resolution process has been completed.

Challenges and risks in M&A:
M&A transactions are complex and involve numerous risks and challenges. Some of the challenges are as follows:
  • Integration: Merging two companies can be challenging, particularly if they have different cultures, processes, and systems.
  • Legal and regulatory compliance: M&A transactions involve numerous legal and regulatory requirements, and failure to comply with them can result in significant delays and even the failure of the transaction.
  • Financing: Financing the transaction can be challenging, particularly in uncertain economic conditions or if the parties have limited access to capital.
  • Valuation: Determining the value of the target company can be challenging, particularly if there are significant differences in the parties' opinions.
  • Due diligence: Conducting due diligence can be time-consuming and expensive, particularly if the target company is large or has complex operations.
It is essential to identify and address these risks and challenges as early as possible in the transaction process. Conclusion
Mergers and acquisitions (M&A) are a complex and highly regulated process that requires careful planning and execution. Companies engaging in M&A transactions must comply with the provisions of the Company Code and the Insolvency and Bankruptcy Code (IBC), conduct thorough due diligence, comply with legal and regulatory requirements, and carefully manage the integration process.

While M&A transactions can be highly beneficial, they can also be risky and challenging, and companies must carefully manage these risks to achieve a successful outcome.

Written By: Ipsa Nayak, 5th year - SOA National Institute of Law
Email: [email protected], Ph no: 6371737233
Adreess: BDA Housing Complex Phase-2, Paikrapur, Bhubaneswar, Odisha

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