INTRODUCTION 

The terms merger and amalgamation have not been defined in the Companies Act,The terms merger and amalgamation are synonyms and the term �amalgamation�, as per Concise Oxford Dictionary, tenth edition, means, �to combine or unite to form one organization or structure�. 

The provisions relating to merger and amalgamation are contained in Sections 207 to 210A of the Act. Any proposal of amalgamation or merger begins with the process of due diligence, as the proposal for merger without due diligence is like entering a tunnel with darkness growing with each step. 

The Act and the relevant rules pertaining to amalgamation are to be followed scrupulously. The provisions of the Act also deal with compromise or arrangement within or without amalgamation or merger. Presently, the court enjoys powers of sanctioning amalgamation matters. 

We have attempted to present the provisions of the Companies Act in relationto mergers and amalgamations. Several terms are used to describe the methods by which two or more companies join to one. None of these terms have precise legal meanings. The terms are: 

i)       Merger

This occurs when two companies join together under the name of one of them or as a new company formed for the purpose. A merger may also be called an amalgamation. Mergers generally only take place when there is agreement between the directors of companies. 

ii)     Takeover

This term describes the acquisition by one company of sufficient shares in a company (sometimes referred to as the 'target' company) to enable the purchaser to control the target company. Sometimes takeover bids are contested by the board of the company, and on some occasions rival bids are made for the control of the same company takeover differs from a merger in that both companies will remain in existence (at least the time being). 

Sometimes a company will wish to reorganise in some way without involving other companies. It may wish for example: 

i.            To transfer its assets to a new company, the persons carrying on the business remaining substantially the same. This is usually referred to as a reconstruction. 

ii.          To make an arrangement with members and/or creditors because difficulties, but where winding�up is not appropriate. 

MERGERS AND RECONSTRUCTIONS 

Basic procedurewill usually provide either: 

i)            That the transferee company takes over the debts of the transferor; or 

ii)          That the transferor company retains sufficient funds to pay its debts. 

If the creditors feel that their position is jeopardized in that the new assets received by the transferor company will not be sufficient to pay their debts they can petition for the compulsory winding�up of the transferor company on the ground that it is unable to pay its debts. 

RECONSTRUCTION

When a company has been making losses for a number of years, the financial position does not present a true and fair view of the state of the affairs of the company. In such a company the assets are overvalued, the assets side of the balance sheet consists of fictitious assets, useless intangible assets and debit balance in the profit and loss account. Such a situation does not depict a true picture of financial statements and shows a higher net worth than what the real net worth ought to be. In short the company is over capitalized. Such a situation brings the need for reconstruction. 

Reconstruction is a process by which affairs of a company are reorganizedby revaluation of assets, reassessment of liabilities and by writing off the losses already suffered by reducing the paid up value of shares and/or varying the rights attached to different classes of shares. 

The object of reconstruction is usually to reorganize capital or to compound with creditors or to effect economies. Such a process is called internal reconstructionwhich is carried out without liquidating the company and forming a new one. 

However, there may be external reconstruction. Wherever an undertaking is being carried on by a company and is in substance transferred, not to an outsider, but to another company consisting substantially of the same shareholderswith a view to its being continued by the transferee company, there is external reconstruction. 

Types of merger 

There are two types of merger: 

1.   Company A goes into voluntary liquidation, selling its assets to company B (an established and successful company). In return the shareholders of company A receive shares in company B. company A is then dissolved and the business of both companies is carried on by company B. This is, in effect, a takeover by agreement. 

2.   Companies A and B both go into voluntary liquidation. The assets of both companies are then transferred to company C, a new company formed for the purpose, the members of A and B receiving shares in company C. Companies A and B are then dissolved. In order to retain their goodwill company C may change its name to A B Ltd. 

SCHEMES OF ARRANGEMENT 

It can be used to effect any type of compromise or arrangement with creditors or members, for example changing their rights in or against the company, or transferring their rights to another company which then issues shares or takes over liabilities in return for cancellation of existing rights against the first company, i.e. it can be used for both reconstructions and mergers.  There must however be a 'compromise' or an 'arrangement': 

A compromise can only be made when there has previously been a dispute

An arrangement has a much wider meaning and does not depend on the presence ofa dispute. 

Procedure of Reconstruction

1)    The first step is for the company, or any creditor, or any member or, if the company is being wound up, the liquidator asks the court to convene a meeting of creditors and meetings of each class of members. 

2)    The company must send out with the notice of any meeting called a statement explaining the effect of the scheme and in particular details of material interests of directors and its effect on them (Sec. 208(1))

3)    The compromise or arrangement must be agreed at each meeting by a simple majority in number representing 75% in value of those voting in person or by proxy. (Sec. 207(2))

4)    When the necessary meetings have been held and the required majorities obtained the court must give its approval. 

The role of the court in reconstruction

The court plays a key role in reconstruction as discussed below

1)    The court will ensure that the scheme is not ultra vires or an improper use of the procedure laid down in reconstruction

2)    The court will check that the meetings were properly convened and that the required majority approval was obtained. 

3)    Since the requirement is only for a majority of members voting rather than of all the members, the court will examine whether the class was fairly represented at the meeting 

4)    Probably the court will have already directed that a substantial percentage of the class constitute a quorum when the initial application was made to the court to hold the meeting.

5)    The court will be very careful if the majority of one class of shares also hold the shares of another class since they may vote in favour of a scheme which harms the first class of shares but benefits the second class. 

6)    The court will look at situations where creditors are also shareholders since a similar conflict of interest could arise. 

7)    In general, the court will require disclosure of all relevant information, listen to any minority objections and finally only sanction the scheme if it is one that an honest and intelligent businessman would approve. Once the court has approved the scheme it binds all parties and cannot be altered. 

TAKEOVERS 

The term takeover is usually used to describe a contested bid for the shares in one company (the 'target' company) by another company. Takeovers have become very common in recent years. They have also been the subject of increasing concern, because in some cases the interests of investors in general have suffered as directors and controlling shareholders have sought to further their own personal interests. Takeovers are not however undesirable as such. It may well be that larger size brings economies of scale and better management. 

Reasons for Takeovers

Takeovers often take place for one of two reasons: 

i)          The target company may have been badly managed so the market price of the controlling shares has fallen to less than the potential value of the company's assets. Thus even if the offeror pays slightly more than market value for the shares, it will still obtain control of the assets for less than their true value. 

ii)        A well�managed and successful company may be sufficiently attractive to a larger company that the larger company is prepared to pay the true value for its shares to secure control of its assets. 

The Basic Procedure for Takeovers

The following is the basic procedure to be followed during a takeover

a)      The bidding company will offer to purchase all the shares in the target company either for cash or in return for its own shares. Usually the offer will be conditional on acceptance in respect of a certain percentage ofthe shares. 

b)      In some cases the dissenting minority will not wish to sell their shares even at market value. This could be inconvenient for the offeror which may wish to acquire a wholly owned subsidiary. In such a situation the Act provides for the offeror to 'buyout' the dissenting minority of the target company, provided it acquires 90% of the shares to which the offer relates and complies with certain conditions. Such a purchase will not however be allowed if it is being used as a means of expropriating the minority interest when there is no genuine takeover: 

In Re Bugle Press (1961) case, persons holding 90% of the shares in a company formed a new company. The new company then made an offer for the shares of the old company. Clearly the 90% accepted the offer and the new company then served a notice on the 10% shareholder in the old company stating that they wished to purchase his shares. He opposed the scheme on the ground that it amounted to an expropriation of his interest in that the shareholders of the new company were the persons who held 90% of the shares in the old company. His claim succeeded. 

This is a good example of the court lifting the veil of incorporation of the companies and basing its decision on the actual identity of the members concerned.

c)      The dissenting minority also have a right to change their minds and accept the offer when it becomes clear that the offeror has a substantial majority. It applies when the shares transferred under the scheme plus those already held by the offeror amount to 90% in value of the shares or class of shares in the target company. The offeror must then give notice of this fact to the remaining shareholders and any such shareholder can then require the offeror to buy his shares. 

Distinction between a scheme of arrangement and a reconstruction

The following are some of the difference between schemes of arrangement and a reconstruction:

AMALGAMATION

Amalgamation is the combination of two or more firms, into either an entirely new firm or a subsidiary controlled by one of the constituent firms.

a blending together of two or more undertakings into one undertaking, the shareholders of each blending company, becoming, substantially, the shareholders of the blended undertakings. There may be amalgamations, either by transfer of two or more undertakings to a new company, or to the transfer of one or more companies to an existing company". Thus, the two concepts are, substantially, the same. However, the term amalgamation is more common when the organizations being merged are private schools or regiments.

There are three forms of business combinations:

�        Statutory Merger: a business combination that results in the liquidation of the acquired company�s assets and the survival of the purchasing company.

�        Statutory Consolidation: a business combination that creates a new company in which none of the previous companies survive.

�        Stock Acquisition: a business combination in which the purchasing company acquires the majority, more than 50%, of the Common stock of the acquired company and both companies survive.

Amalgamation: Means an existing Company (Vendor Company) which is taken over by another existing company. In such course of amalgamation, the consideration may be paid in "cash" or in "kind", and the purchasing company survives in this process....