A merger is a strategic move by two or more entities to combine their operations, typically to increase competitive strength, expand product lines, or enter new markets. While the term 'merger' is not explicitly defined in the Companies Act, 1956, or the Income Tax Act, 1961, the Companies Act, 2013, elucidates the concept without strictly defining it. It is generally understood as the process where two or more companies consolidate into a single entity, with one of the companies surviving and the others dissolving without going into liquidation. It can be defined as the amalgamation of two or more companies into one new or existing company.

The Companies Act, 2013, Chapter XV (Sections 230 to 240), governs the legal procedures for mergers and amalgamations. These sections outline a comprehensive framework for facilitating mergers, ensuring fairness to all stakeholders involved, and maintaining regulatory compliance.

The Rules associated with these sections, such as the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016, provide the procedural specifics, including the necessary forms, attachments, and timelines required to execute a merger. Together, these sections and rules regulate the merger process, ensuring that it is conducted in an orderly and transparent manner, safeguarding the interests of shareholders, creditors, and other parties involved.

Scheme Approval Process

1. Application:

   • Section 230
   • Transferor & Transferee companies shall file an application to National Company Law Tribunal in Form NCLT 1 along with:
   1. Copy of scheme with disclosures u/s 230(2).
   2. A notice of admission in Form NCLT 2.
   3. Affidavit in Form NCLT 6.
   4. NOCs from both creditors and shareholders (seeking dispensing of meetings of shareholders and creditors, by way of affidavit).
   5. A certificate from the Auditor of the Company to the effect that the accounting treatment in the scheme of compromise or arrangement is in conformity with the accounting standards prescribed under Section 133.
       

2. Tribunal's Authority and Procedures for Scheme Approval:

   • Section 232 (1)(a) & (b):
   • The Tribunal, upon reviewing the application, has the authority to direct that a meeting be convened. This meeting will involve the company's creditors or a class of creditors, members or a class of members, and debenture holders to deliberate and vote on the proposed scheme of merger or amalgamation.
   • If the scheme is approved by the required majority and subsequently sanctioned by the Tribunal, it becomes binding on all parties involved.
      

3. Notice and Annexure Requirements for Scheme Meetings:

   • Section 230(3) - (6) read with Rule 6:
   • The transferor & the transferee companies will send notices to the members/ creditors in compliance of the order of National Company Law Tribunal in Form CAA 2, 30 days prior to the date fixed for meeting.
   • Annexure to the notice calling meetings:
   • Draft scheme
   • Explanatory statement
   • Confirmation that a copy of draft scheme has been filed with Registrars of Companies.
   • Expert reports on valuation, if any
   • Report by Directors explaining its impact on each class of shareholders, Key Managerial Personals, promoter and non-promoter.
   • Supplementary accounting statement when annual accounts are older than six months before the first meeting of Board for approving the scheme.
      

4. Publication and Notification Requirements for Scheme Approval:

   Section 230(3) read with Rule 7
   Publication of notice in one English and one vernacular newspaper having wide circulation or such newspapers as may be directed by the Tribunal. This advertisement must be in Form CAA.2 and placed at least thirty days before the meeting date. Additionally, for listed companies, the notice must be placed on the company's website, the SEBI website, and the recognized stock exchange's website where the company's securities are listed.
   
   The notice must be sent to all creditors, members, and debenture-holders, detailing the proposed compromise or arrangement, along with a valuation report and an explanation of its effects on various parties. The notice and accompanying documents must be sent to the Central Government, income-tax authorities, Registrars of Companies, and other applicable authorities in Form CAA.3
    

5. Affidavit of Service and Compliance with Notice Requirements:

   Section 232 read with Rule 12
   The transferor and transferee companies are required to submit an affidavit to the Tribunal at least 7 days prior to the scheduled members/creditors meetings. This affidavit must include a statement affirming that the directions regarding the issuance of notices and advertisements have been appropriately followed.
   
   Rule 12 further specifies that the chairperson appointed for the meeting, or the person tasked with issuing the advertisement and notices, must file this affidavit. If there is a failure to comply with these instructions, the application, along with a copy of the last order issued, must be presented before the Tribunal, which will then decide the appropriate course of action.
    

6. Convening Meetings and Notification to Authorities:

   Section 232(1) read with Section 230(3) -(6)
   The meeting of members & creditors as the case may be, must be convened at the earliest after filing affidavit of service. The notice and relevant documents must be sent to various authorities, including the Central Government, income-tax authorities, Reserve Bank of India, Security Exchange Board of India ,stock exchanges. It must include details of the proposed compromise or arrangement, along with a valuation report. The notice should also be placed on the company's website, sent to regulatory bodies, and published in newspapers.
    

7. Filing of Representation and Deadline for Response:

   Section 230(5)
   Filing a representation by the Central Government, IT authorities, Regional Director as the case maybe, to the Tribunal within 30 days from the date of receipt of notice by the authorities. If they do not respond within this timeframe, it is assumed that they have no objections or comments on the proposal.
    

8. Requirements for the Agreement to be binding:

   Section 230 (6) read with Rule 14
   After a meeting convened under Section 230(1), if a majority representing three-fourths in value of the creditors or members agree to a compromise or arrangement, and the Tribunal sanctions it, the agreement becomes binding on all relevant parties.
   
   Rule 14 specifies that the chairperson must submit a report in the Form CAA.4 within three days of the meeting's conclusion, unless the Tribunal has set a different deadline.
    

9. Filing of Petition:

   Section 232 read with Rule 15
   After the chairperson submits the report of the meeting's results, both the transferor and transferee companies must file a petition to the Tribunal within seven days. This petition, filed in Form CAA.5, seeks the Tribunal's sanction for the proposed scheme of compromise or arrangement.
   
   If the compromise or arrangement involves a scheme for the reconstruction of companies or amalgamation, the petition should request the Tribunal for appropriate orders and directions .
   
   If the company fails to present the petition as required, creditors or members may, with the Tribunal's permission, file the petition themselves. In such cases, the company would be responsible for the costs incurred.
    

10. Notice of Hearing and Advertisement

    Section 232 read with Rule 16(1)
    The Tribunal will schedule a date for the petition hearing, and the notice of the hearing will be published in the same newspaper where the meeting notice was advertised, or in another newspaper as directed by the Tribunal. This advertisement must occur not less than ten days before the date fixed for the hearing.
     

11. Notification and Hearing Process for Compromises or Arrangements:

    Section 230(4) and Section 232 read with Rule 16 (2).
    States the procedure for notifying relevant parties about hearings related to compromises or arrangements between a company and its creditors or members.
    
    It requires that notices sent under subsection (3) enable recipients to vote on the proposed compromise or arrangement within one month of receiving the notice, either in person, through proxies, or by postal ballot. It also stipulates that only those holding at least ten percent of the shareholding or at least five percent of the total outstanding debt, as per the latest audited financial statement, are entitled to object to the compromise or arrangement.
    
    The Tribunal must serve notice of the hearing to the objectors or their representatives, the Central Government, IT authorities, Registrar of Companies, and any other authorities who have made representations under Rule 8 and wish to be heard.
     

12. Final Hearing:

    Section 232 read with Rule 19 & 20
    It establishes the legal procedure for the final hearing and orders issuance for amalgamation. Rule 19 grants the Tribunal the authority to issue directions during the hearing of an application, allowing for inquiries into creditors and the securing of debts, ensuring fairness. It also specifies Form CAA 7 as the prescribed format for the order sanctioning the amalgamation scheme, signifying the approval of the Tribunal and authorizing the companies to proceed according to the scheme's terms.
     

13. Order by Tribunal and Filing Requirements:

    Section 232 read with Rule 17
    When the Tribunal sanctions the compromise or arrangement, the order must include directions or modifications that the Tribunal deems fit for the proper working of the compromise or arrangement. The order must also direct that a certified copy of the order be filed by the transferee company with the Registrar of Companies within thirty days from the date of receipt of the order, or within such other time as may be fixed by the Tribunal. The order should be in Form CAA. 6, with necessary variations.
     

14. Compliance Filing Requirements until Scheme Implementation:

    Section 232 (7) read with Rule 21
    Both the Companies will file statement of compliance until the scheme is fully implemented to Registrar of Companies in Form CAA 8 duly certified by Chartered Accountant /Cost Management Accountant /Company Secretary in practice within 210 days of the end of each financial year. This filing should also include the requisite fee as specified in the Companies (Registration Offices and Fees) Rules, 2014.
     

Conclusion:
The process of a merger is a complex and meticulously regulated procedure that requires adherence to a series of legal steps as outlined in the Companies Act, 2013, and its associated rules in Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016. From the initial application to the National Company Law Tribunal (NCLT) to the final compliance filings post-merger, each step is designed to ensure transparency, fairness, and due diligence. This includes obtaining necessary approvals, holding meetings with stakeholders, publishing notices, and submitting various forms and affidavits to the National Company Law Tribunal.

Bibliography:

1. https://www.icsi.edu/Portals/70/Drafting_&_Approval_of_application_for_compromises_arrangements_&_amalgamation.pptx
2. The Companies Act 2013

Written By: Priyamvada Suresh - Final year Law student Ramaiah College of Law