Corporate Restructuring And Companies Act 2013

1.Introduction

The Companies Act 2013 provides the mother-law for corporate restructuring in India. The legal provisions contained in the Companies Act 2013 provides the basic parameters how should the corporate restructuring be (legally) done. The provisions contain in the Companies Act 2013 – as applicable to corporate restructuring -support the corporates to undergo restructuring for existence in the wake of competition and for rapid growth in favorable economic situations. The concept of Corporate Restructuring along with the enabling legal provisions in the Companies Act 2013 and their impact on Corporate Restructuring in India are being discussed hereunder.

2.Corporate Restructuring- Meaning

Corporate Restructuring is an expression that connotes a restructuring process undertaken by Corporate business entity viz company. It is the process of redesigning one or more aspects of a company. Hence, Corporate Restructuring is a comprehensive process by which a company can consolidate / diversify its business operations and strengthen its position for achieving its short term and long-term corporate objectives.

Corporate restructuring is concerned with arranging the business activities of the corporate as whole so as to achieve certain predetermined objectives at corporate level. These objectives includes orderly redirection of the firm’s activities, deploying surplus cash from one business to finance profitable growth in another , exploiting inter-dependence among present and prospective business within the corporate portfolio, risk reduction and development of core competencies .Corporate restructuring aims at improving the competitive position of an individual business and maximizing its contribution to corporate objectives. It also aims at exploiting the strategic assets accumulated by a business ie natural monopolies, goodwill, exclusively through licensing etc to enhance the competitive advantages.

Corporate restructuring is basically a business decision. In the words of Justice Dhananjaya Y. Chandrachud ,”Corporate restructuring is one of the means that can be employed to meet the challenges and problems which confront business. The law should be slow to retard or impede the discretion of corporate enterprise to adapt itself to the needs of changing times and to meet the demands of increasing competition. The law as evolved in the area of mergers and amalgamations has recognized the importance of the Court not sitting as an appellate authority over the commercial wisdom of those who seek to restructure business.” [Ion Exchange (India) Ltd., In Re (2001) 105 Comp Cases 115 (Bom).]

Corporate restructuring solves different purposes for different companies at different points of time. It may take up various forms such as merger, amalgamation, demerger, reverse merger, spin- off, LBOs and many more. The purpose of each of these restructuring activity is different but each one of them are targeted to rebuild or rearrange the corporate structure.

3.Need For Corporate Restructuring

Corporate Restructuring aims at different things at different times for different companies and the single common objective in every restructuring exercise is to eliminate the disadvantages and combine the advantages. The various needs for undertaking a Corporate Restructuring exercise are as follows:

to focus on core strengths,operational synergy and efficient allocation of managerial capabilities and infrastructure.
Consolidation and economies of scale by expansion and diversion to exploit extended domestic and global markets.
Revival and rehabilitation of a sick unit by adjusting losses of the sick unit with profits of a healthy company.
acquiring constant supply of raw materials and access to scientific research and technological
Capital restructuring by appropriate mix of loan and equity funds to reduce the cost of servicing and improve return on capital employed.
Improve corporate performance to bring it at par with competitors by adopting the radical changes brought out by information technology.

4.Types of Corporate Restructuring

Various types of corporate restructuring strategies include:
i. Merger
ii. Demerger
iii. Reverse Mergers
iv. Disinvestment
v. Takeovers
vi. Joint venture
vii. Strategic alliance
viii. Slump Sale
ix. Franchising
x. Strategic alliance etc.

i. Merger

Merger is the combination of two or more companies which can be merged together either by way of amalgamation or absorption. The combining of two or more companies, is generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock.

Mergers may be:

(a) Horizontal Merger: It is a merger of two or more companies that compete in the same industry. It is a merger with a direct competitor and hence expands as the firm’s operations in the same industry. Horizontal mergers are designed to achieve economies of scale and result in reduce the number of competitors in the industry.

(b) Vertical Merger: It is a merger which takes place upon the combination of two companies which are operating in the same industry but at different stages of production or distribution system. If a company takes over its supplier/producers of raw material, then it may result in backward integration of its activities. On the other hand, Forward integration may result if a company decides to take over the retailer or Customer Company. Vertical merger provides a way for total integration to those firms which are striving for owning of all phases of the production schedule together with the marketing network.

(c) Co generic Merger: It is the type of merger, where two companies are in the same or related industries but do not offer the same products, but related products and may share similar distribution channels, providing synergies for the merger. The potential benefit from these mergers is high because these transactions offer opportunities to diversify around a common case of strategic resources.

(d) Conglomerate Merger: These mergers involve firms engaged in unrelated type of activities i.e. the business of two companies are not related to each other horizontally nor vertically. In a pure conglomerate, there are no important common factors between the companies in production, marketing, research and development and technology. Conglomerate mergers are merger of different kinds of businesses under one flag ship company. The purpose of merger remains utilization of financial resources enlarged debt capacity and also synergy of managerial functions. It does not have direct impact on acquisition of monopoly power and is thus favoured throughout the world as a means of diversification.

ii. Demerger

It is a form of corporate restructuring in which the entity’s business operations are segregated into one or more components. A demerger is often done to help each of the segments operate more smoothly, as they can focus on a more specific task after demerger.

Types of Demergers:

(a) Divestiture – is sale , for cash or for securities, of a segment of a company to a third party which is an outsider ie neither part of organization or management nor the shareholders.

(b) Spin off – It is a kind of demerger when an existing parent company distributes on a pro-rata basis all the shares it owns in controlled subsidiary to its own shareholders by which it gains effect to making two of the one company or corporation. There is no money transaction, subsidiary’s assets are not revalued, transaction is treated as stock dividend and tax free exchange. Both the companies exist and carryon business. It dose not alter ownership proportion in any company.

(c) Equity craved out – Some of the subsidiary’s shares are offered for sale to general public for increasing cash inflow without loss of control.

(d) Split off – Split off occurs when equity shares of a subsidiary company are distributed to some of the parent company’s shareholders in exchange for their holdings in parent company. It alters ownership proportions in both companies. Part of subsidiaries equity shares could also be sold off to public.

(e) Split up – It is a division of a company into two or more parts through transfer of stock and parent company ceases to exist.

iii.Reverse Merger

Reverse merger is the opportunity for the unlisted companies to become public listed company, without opting for Initial Public offer (IPO).In this process the private company acquires the majority shares of public company, with its own name.

iv. Disinvestment

Disinvestment means the action of an organization or government selling or liquidating an asset or subsidiary. It is also known as “divestiture”.

v. Takeover / Acquisition

Takeover means an acquirer takes over the control of the target company. It is also known as acquisition.

Normally this type of acquisition is undertaken to achieve market supremacy. It may be friendly or hostile takeover.

Friendly takeover: In this type, one company takes over the management of the target company with the permission of the board.

Hostile takeover: In this type, one company takes over the management of the target company without its knowledge and against the wish of their management.

vi. Joint Venture (JV)

A joint venture is an entity formed by two or more companies to undertake financial activity together. The parties agree to contribute equity to form a new entity and share the revenues, expenses, and control of the company. It may be Project based joint venture or Functional based joint venture.

Project based Joint venture: The joint venture entered into by the companies in order to achieve a specific task is known as project based JV.

Functional based Joint venture: The joint venture entered into by the companies in order to achieve mutual benefit is known as functional based JV.

vii. Strategic Alliance

Any agreement between two or more parties to collaborate with each other, in order to achieve certain objectives while continuing to remain independent organizations is called strategic alliance.

viii. Franchising

Franchising maybe defined as an arrangement where one party(franchiser) grants another party (franchisee) the right to use trade name as well as certain business systems and process, to produce and market goods or services according to certain specifications.

The franchisee usually pays a one-time franchisee fee plus a percent age of sales revenue as royalty and gains.

ix. Slump sale

Slump sale means the transfer of one or more undertaking as a result of the sale of lump sum consideration without values being assigned to the individual assets and liabilities in such sales. If a company sells or disposes of the whole or substantially the whole of its undertaking for a predetermined lump sum consideration, then it results in a slump sale.

5.Corporate Restructuring – General Regulatory Framework

Corporate Restructuring is governed or regulated in India by an array of laws. The Companies Act 2013 obviously is the mother law of Corporate Restructuring in India. The other specific laws are Income Tax Act 1961, Competition Act 2002, Indian Stamp Act 1899 , State Stamp Acts etc. Besides, Industry specific laws and regulations influence Corporate Restructuring in India. In the case of restructuring of listed companies SEBI (ICDR) Regulations 2018, Securities Contracts ( Regulation) Rules 1975, SEBI(LODR) Regulations 2015and other relevant SEBI laws are also applicable .

6. Corporate Restructuring–Applicability Of Companies Act,2013

As stated earlier, the Companies Act 2013 is the mother law of Corporate Restructuring in India. The Companies Act, 2013 contain many enabling provisions with regard to mergers, compromise or arrangements, especially with respect to cross border mergers, time bound and single window clearances, enhanced disclosures, disclosures to various Regulators, simplified procedure for smaller companies etc. The provisions of the Companies Act v2013 facilitating corporate restructuring are given in Chapter XV of the Act. The provisions are:

230 :Power to Compromise or Make Arrangements with Creditors and Members
231 :Power of Tribunal to Enforce Compromise or Arrangement 232:Merger and Amalgamation of Companies
233:Merger or Amalgamation of Certain Companies
234:Merger or Amalgamation of Company with Foreign Company
235: Power to Acquire Shares of Shareholders Dissenting from Scheme or Contract Approved by Majority
236 : Purchase of Minority Shareholding
237 :Power of Central Government to Provide for Amalgamation of Companies in Public Interest 238:Registration of Offer of Schemes Involving Transfer of Shares
239:Preservationof Books and Papers of Amalgamated Companies
240:Liability of Officers in Respect of Offences Committed Priorto Merger, Amalgamation,etc.

The procedural aspects in relation to Corporate Restructuring are detailed in‘ The Companies (Compromises, Arrangements and Amalgamations) Rules, 2016’.

7.Domestic Mergers & Companies Act, 2013

In India, merger and amalgamation deals are on the rebound in the year 2022 after the slowdown of economic activities caused by Covid-19 pandemic. Section 232 of the Companies Act 2013 provides legal framework how domestic merges to done. Section 232 of the Companies Act 2013 discusses clearly the procedure when two or more than two companies merge or amalgamate.

It states that where an application is made to the Tribunal for the sanctioning of a compromise or an arrangement and it is shown to the Tribunal—

that the compromise or arrangement has been proposed for the purposes of reconstruction of the company or companies involving merger or the amalgamation; and
that under the scheme, the whole or any part of the undertaking, property or liabilities of the transferor company is required to be transferred to the transferee company

On receiving such application, the Tribunal may order a meeting of the creditors or members or their classes separately, as the case may be, to be called, held and conducted in such manner as the Tribunal may direct.

The Tribunal, after being satisfied that all the statutory requirements have been complied with, may, by order, sanction the compromise or arrangement or by a subsequent order, make provision for the following matters, namely:—

the transfer to the transferee company of the whole or any part of the undertaking, property or liabilities of the transferor company from a date to be determined by the parties unless the Tribunal, for reasons to be recorded by it in writing, decides otherwise;
the allotment or appropriation by the transferee company of any shares, debentures, policies or other like instruments in the company which, under the compromise or arrangement, are to be allotted or appropriated by that company to or for any person. As a result of compromise or arrangement, a transferee company shall not hold any shares in its own name or in the name of any trust whether on its behalf or on behalf of any of its subsidiary or associate companies and any such shares shall be cancelled or extinguished;
he continuation by or against the transferee company of any legal proceedings pending by or against any transferor company on the date of transfer;

dissolution,without winding-up, of any transferor company;

the provision to be made for any persons who,within such time and in such manner as the Tribunal directs, dissent from the compromise or arrangement;
where share capital is held by any non-resident shareholder under the foreign direct investment norms or guidelines specified by the Central Government or in accordance with any law for the time being in force, the allotment of shares of the transferee company to such shareholder shall be in the manner specified in the order;
the transfer of the employees of the transferor company to the transferee company;

where the transferor company is a listed company and the transferee company is an unlisted company,the transferee company shall remain a nunlisted company until it becomes a listed company;
where the transferor company is dissolved, the fee, if any, paid by the transferor company on its authorized capital shall be set-off against any fees payable by the transferee company on its authorized capital subsequent to the amalgamation; and
such incidental, consequential and supplemental matters as are deemed necessary to secure that the merger or amalgamation is fully and effectively carried out.

Under the Companies Act 2013, a merger needs to be approved by majority representing 3/4th in value of the creditors and members or class thereof present and voting in person or by proxy or by postal ballot. Allowing postal ballot helps to have wider participation of the shareholders of the company in voting and will protect shareholders interest.

A scheme of merger shall be objected by persons holding not less than ten per cent. of the shareholding or having outstanding debt amounting to not less than five per cent. of the total outstanding debt as per the latest audited financial statement. This threshold limit for raising objections in regard to scheme of merger will protect the scheme from small shareholders’ and creditors’ frivolous litigation and objection.

The Companies Act 2013 mandatorily requires the scheme to contain the valuation certificate. The valuation report also needs to be annexed to the notice for meetings for approval of the scheme. In case of purchase of minority shareholder, the draft Rules provides that the mode for determining the price to be paid by the acquirer or person etc. shall be as per the method specified in the said Rules separately for listed and unlisted companies. This will enable the shareholders to understand the business rationale of the transaction and take an informed decision. The valuation report obtained by the company should be robust as the same will now have to stand scrutiny of various stakeholders. Since the methodology has been specified under the Rules for buying out the minority shareholding, this gives a sense of protection to the minority shareholders who were prejudiced by the price they get in the absence of any such guidelines.

The Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 provides various formats such as the creditor’s responsibility statement in Form No. CAA.1 which make the documentation associated with implementing the scheme of mergers easy.

8.Cross Border Mergers & Companies Act, 2013

India , post liberalization has become a global power. Gone are the times when Indian Companies were bait for foreign companies. Today, foreign companies are more eager to get a share in the ever increasing appetite of Indian Consumers and

are going in for joint ventures. On the other hand, Indian companies have all their eyes on takeovers and acquisitions in the International markets. With the economy growing rapidly Indian companies are all the time on lookout for acquiring companies in America , Europe and other countries. Growth in telecommunications has shrunk the world.

Section 234 of the Companies Act 2013 provides the base law for Cross Border mergers. It allows both an Indian company as well as a foreign company to merge with each other subject to the approval of the Reserve Bank of India. This unique provision of the companies Act 2013 allows two way cross border merger unlike the erstwhile Companies Act of 1956, which allowed only a foreign company to merger with an Indian company and not vice versa.

It provides under section 234 that the Central Government may make rules, in consultation with the Reserve Bank of India, in connection with mergers and amalgamations provided under this section. It also states that Subject to the provisions of any other law for the time being in force, a foreign company, may with the prior approval of the Reserve Bank of India, merge into acompany registered under this Act or vice versa and the terms and conditions of the scheme of merger may provide, among other things, for the payment of consideration to the shareholders of the merging company in cash, or in Depository Receipts, or partly in cash and partly in Depository Receipts, as the case may be, as per the scheme to be drawn up for the purpose. A foreign company for the purpose of this section means any company or body corporate in corporate outside India whether having a place of business in India or not.

Rule25A of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 prescribes the procedures to followed for Merger or amalgamation of a foreign company with a Company and vice versa.

9.Fast Track Merger & Companies Act,2013

The provisions of Section 233 of the Companies Act, 2013 (Act) provides a simplified procedure for Merger and Amalgamation of certain companies wherein these companies need not follow the lengthy and complicated procedure as provided under Sections 230 to 232 of the Act. This simplified procedure is called “Fast Track Merger” and Section 233 was notified by the Ministry of Corporate Affairs (MCA) on December 7, 2016.

A scheme of merger or amalgamation under section 233 of the Act may be entered into between any of the following class of companies, namely :—

Two or more start-up companies; or
One or more start-up company with one or more Small Company;
Merger between two or more Small Companies;
Merger between a Holding Company and its Wholly-owned Subsidiary

Explanation: For the purpose of this sub-rule “Start-up Company” means a private company incorporated under the Companies Act, 2013 or Companies Act, 1956 and recognised as such in accordance with Notification number G.S.R. 127 (E), dated 19th February, 2019 issued by the Department for Promotion of Industry and Internal Trade.

“Small Company”means a company other than a public company—

(i) paid up share capital of which does not exceed two core rupees and (ii) turnover of which as per profit and loss account for the immediately preceding financial year does not exceed twenty crore rupees.

Fast Track Merger (“FTM”) is a concept that has been introduced in India to facilitate the ease of doing business. Through this,the time and cost required for the merger process have been significantly reduced by the elimination of any court intervention. Fast Track Mergers have been introduced under section 233 of the Companies Act, 2013 in order to simplify the merger process. It is applicable to a merger involving small companies, a merger of a holding company with its subsidiary company, and such other classes of companies as specified in the rules from time to time.

The Fast Track Merger regime is definitely a welcome move. By doing away with the requirement of approaching the Tribunal for a certain group of companies, the legislature has sought to remove administrative barriers faced in Tribunal proceedings, thereby resulting in faster disposal of Schemes, reduction in the burden on Tribunals and reduction in costs and resources of the companies involved.

The process of Fast Track Merger excludes the intervention of the National Companies Law Tribunal. The scheme of such a merger is approved by the Regional Director. It should be ensured that a provision for the merger is provided in the AoA and preliminary due diligence should be conducted in order to ensure a risk-free transaction.

10.Slump Sale As Corporate Restructuring Method & Companies Act, 2013

Slump Sale means the transfer of one or more undertakings against a lump sum consideration without values being allocated to the individual assets and liabilities. The consideration for a slump sale should be settled in lump sum only which can be in cash, Exchange of shares, debentures, bonds etc
Slump sale is a method of corporate restructuring. Slump sale is generally undertaken to hive off a part of the business division, to weedout a loss making division andto focus on the core business activities and improve its performance.

Slump sale is intended to accomplish the following purposes:
⦁ To strengthen the performance of the business with efficient management strategies
⦁ To target and remove negative synergy and distinction between core and non-core operations
⦁ Toattain tax and regulatory benefits

Slump sales as a method of corporate restructuring is generally resorted in compliance with the provisions of section 180 of the Companies Act ,2013. The Board of Directors of a company shall resort to Slump sale only with the consent of the company by a special resolution. The consent of shareholders by way of special resolution restricts the board’s power to dispose of the assets /undertaking of the company, to ensure that the slump sale as a method of corporate restructuring is beneficial to the company.

11. Conclusion

The Companies Act 2013 provides clear and specific provisions enabling corporate restructuring in its all forms. These help in reducing corporate litigation and make business restructuring process more smooth and efficient. Moreover, introduction of fast-track schemes, being cost and time effective will encourage corporate restructurings for small and group companies; merger of an Indian company into a foreign company should give impetus to cross-border M&A activity; introducing the threshold for raising objections to a scheme would deter frivolous objections and postal ballot approval would ensure a wider participation of the stakeholders. The provisions of the Companies Act 2013 vis-à-vis corporate restructuring promote ease of doing business in India.