Certain Terms
a. Compromise: Compromise means settlement/
adjustment of claims in dispute by mutual
concession by parties to the dispute. So there can
be no compromise unless there is a ‘dispute’.
b. Arrangement: Arrangement means re-
arrangement of rights or liabilities with or without
existence of any dispute. Arrangement includes a
reorganization of the share capital of the company
by consolidation of the shares of different classes;
or by division of shares into shares of different
classes or by both these methods.
c. Amalgamation : In amalgamation, two or more
existing transferor companies merge together or
form a new company, whereby transferor
companies lose their existence and their
shareholders become the shareholders of the new
company.
01/30/25 Corporate Legal Practice
M&A
Merger: In merger two or more existing companies
combine into one company. The transferor
company merges its identity into the transferring
company by transfer of its business (assets and
liabilities). The shareholders of the transferor
company receive shares in the merged company in
exchange for the shares held by them in the
transferor company as per the agreed exchange
ratio.
Horizontal merger- two or more companies
dealing in similar line of activities combine together
to achieve economic size. [Competition tends to be
higher among companies operating in the same
space. Purpose- potential gains in market share
and synergies gain. E.g. HP – Compaq merger].
01/30/25 Corporate Legal Practice
M&A (cont).
Vertical merger- a company acquires its ‘upstream’
or ‘downstream’ units. Upstream are the suppliers of
raw material whereas down streams are marketing or
retail outlets. The object is cost reduction and efficient
marketing. A vertical merger occurs when two or
more firms, operating at different levels within an
industry's supply chain, merge operations. E.g. a
ladder manufacturer could decide to make its own
aluminum rather than purchasing it from suppliers.
Conglomerate Merger- A merger between firms
that are involved in totally unrelated business
activities. There are two types of conglomerate
mergers: pure and mixed. Pure conglomerate mergers
involve firms with nothing in common, while mixed
conglomerate mergers involve firms that are looking
for product extensions or market extensions. Reasons
to merge- increasing market share, synergy and cross
selling. Firms also merge to diversify and reduce their
risk exposure.
01/30/25 Corporate Legal Practice
Reverse Merger: Reverse Merger implies a weak
company taking over a strong company.
Restructuring: Restructuring means to bring a unit
back to its health so as to enable the unit to operate
efficiently and sub-serve the interests of all the
stakeholders.
Insolvency: insolvency is the situation where an
entity cannot raise enough cash to meet its
obligations, or to pay debts as they become due for
payment.
There are two tests for Corporate insolvency-
(a) Cash-Flow test: If the company is unable to pay
its debts as and when they fall due for payment;
(b) Balance Sheet test: If the value of the
company's assets is less than the amount of its
liabilities.
01/30/25 Corporate Legal Practice
Objectives of Corporate Restructuring:
To unload loss making Businesses
To Eliminate Debt
To Respond to Changing Trends
To Meet Regulatory Change
To order redirection of the firm's activities
To Organize surplus cash from one business to financed profitable
growth in another
To reduce risk
To develop core competencies
To Improve Debt-Equity ratio
To obtain tax benefit by merging a loss making company with a
profit making company
To have a better market share
To eliminate competition between the companies.
01/30/25 Corporate Legal Practice
Demerger : Transferor company sells and transfers
one or more of its unprofitable undertakings to the
resultant company for an agreed consideration. The
resultant company allots its shares at the agreed
exchange ratio to the shareholders of the transferor
company.
Slump Sale: “slump sale” means transfer of one or
more undertakings by way of sale for a lump sum
consideration, without values being assigned to the
individual assets and liabilities.
Takeover : Takeover is a business strategy of
acquiring control over the management of the target
company – either directly or indirectly. The motive of
acquirer is to gain control over the board of directors of
the target company for synergy in decision-making. The
eagle eyes are on the look out for cash rich and high
growth rate companies with low equity stake of
promoters.
01/30/25 Corporate Legal Practice
Types of Take Over/ Take over Strategies
Two types – ‘Friendly’ and ‘Hostile’.
In ‘Friendly Takeover’, the acquirer first approaches
the promoters/ management of the target company for
negotiating and acquiring the shares. It is for the
mutual advantage of acquirer and acquired companies.
‘Hostile Takeover’ is against the wishes to the target
company’s management. Acquirer makes a direct offer
to the shareholders of the target company, without the
prior consent of the existing promoter/management.
Three stages in hostile takeover- (a) acquirer company
starts accumulating shares of a target company; (b)
acquirer company has to disclose to the statutory
authorities his acquisition of shares; (c) the acquirer enters
into a bidding war and the shareholders decide whether the
existing management stays or the new owner would control
the company.
01/30/25 Corporate Legal Practice
M&A- Income Tax Act
S 2 (1B) “amalgamation” means – (i) the merger of one or
more companies with another company; or (ii) the merger
of two or more companies to form one company (the
company or companies which so merge being referred to as
the amalgamating company or companies and the
company with which they merge or which is formed as a
result of the merger, as the amalgamated company) in such
a manner that—
(i) all the property of the amalgamating company(ies)
immediately before the amalgamation becomes the
property of the amalgamated company by virtue of the
amalgamation;
(ii) all the liabilities of the amalgamating company(ies)
immediately before the amalgamation become the
liabilities of the amalgamated company by virtue of the
amalgamation;
01/30/25 Corporate Legal Practice
Cont..
(iii) shareholders holding not less than 3/4th in
value of the shares in the amalgamating
company(ies) (other than shares already held
therein immediately before the amalgamation by,
or by a nominee for, the amalgamated company
or its subsidiary) become shareholders of the
amalgamated company by virtue of the
amalgamation,
otherwise than as a result of the acquisition of the
property of one company by another company
pursuant to the purchase of such property by the
other company or as a result of the distribution of
such property to the other company after the
winding up of the first-mentioned company;
01/30/25 Corporate Legal Practice
Cont…
Section 2 (19AA) “demerger”, in relation to
companies, means the transfer, pursuant to a
scheme of arrangement under sections 391 to
39487 of the Companies Act, 1956 (1 of 1956), by a
demerged company of its one or more undertakings
to any resulting company in such a manner that—
(i) all the property of the undertaking, being
transferred by the demerged company, immediately
before the demerger, becomes the property of the
resulting company by virtue of the demerger;
(ii) all the liabilities relatable to the undertaking,
being transferred by the demerged company,
immediately before the demerger, become the
liabilities of the resulting company by virtue of the
demerger;
01/30/25 Corporate Legal Practice
Cont..
(iii) the property and the liabilities of the undertaking or
(iii) the property and the liabilities of the undertaking or
undertakings being transferred by the demerged company
are transferred at values appearing in its books of account
immediately before the demerger;
(iv) the resulting company issues, in consideration of the
demerger, its shares to the shareholders of the demerged
company on a proportionate basis 88[except where the
resulting company itself is a shareholder of the demerged
company];
(v) the shareholders holding not less than three-fourths in
value of the shares in the demerged company (other than
shares already held therein immediately before the
demerger, or by a nominee for, the resulting company or,
its subsidiary) become share-holders of the resulting
company or companies by virtue of the demerger,
otherwise than as a result of the acquisition of the property
or assets of the demerged company or any undertaking
01/30/25 Corporate Legal Practice
thereof by the resulting company;
Cont..
(vi) the transfer of the undertaking is on a going concern
basis;
(vii) the demerger is in accordance with the conditions, if
any, notified under sub-section (5) of section 72A by the
Central Government in this behalf.
Section 2(19AAA) “demerged company” means the
company whose undertaking is transferred, pursuant to a
demerger, to a resulting company;
Section 2 (41A) “resulting company” means one or more
companies (including a wholly owned subsidiary thereof) to
which the undertaking of the demerged company is
transferred in a demerger and, the resulting company in
consideration of such transfer of undertaking, issues shares
to the shareholders of the demerged company and includes
any authority or body or local authority or public sector
company or a company established, constituted or formed as
a result of demerger;
01/30/25 Corporate Legal Practice
Capital Gains
Section – 45: Any profits or gains arising from the
transfer of a capital asset effected in the previous year
shall, save as otherwise provided in S 54,
54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H, be
chargeable to income-tax under the head “Capital gains”,
and shall be deemed to be the income of the previous
year in which the transfer took place.
Section – 47: Transactions not regarded as
transfer.
Nothing contained in section 45 shall apply to the following
transfers :—
…..
(vi) any transfer, in a scheme of amalgamation, of a
capital asset by the amalgamating company to the
amalgamated company if the amalgamated company is
an Indian company;
01/30/25 Corporate Legal Practice
Capital Gains
(via) any transfer, in a scheme of amalgamation, of a capital
asset being a share or shares held in an Indian company, by
the amalgamating foreign company to the amalgamated
foreign company, if—
(a) at least twenty-five per cent of the shareholders of the
amalgamating foreign company continue to remain
shareholders of the amalgamated foreign company, and
(b) such transfer does not attract tax on capital gains in the
country, in which the amalgamating company is incorporated;
(viaa) any transfer, in a scheme of amalgamation of a
banking company with a banking institution sanctioned and
brought into force by the Central Government under sub-
section (7) of section 45 of the Banking Regulation Act, 1949,
of a capital asset by the banking company to the banking
institution.
01/30/25 Corporate Legal Practice
Capital Gains
(vib) any transfer, in a demerger, of a capital asset
by the demerged company to the resulting
company, if the resulting company is an Indian
company;
(vic) any transfer in a demerger, of a capital asset,
being a share or shares held in an Indian company,
by the demerged foreign company to the resulting
foreign company, if—
(a) the shareholders holding not less than three-
fourths in value of the shares of the demerged
foreign company continue to remain shareholders
of the resulting foreign company; and
(b) such transfer does not attract tax on capital
gains in the country, in which the demerged foreign
company is incorporated :
01/30/25 Corporate Legal Practice
Cont..
Provided that the provisions of the Companies Act shall
not apply in case of demergers referred to in this clause;
(vid) any transfer or issue of shares by the resulting
company, in a scheme of demerger to the shareholders
of the demerged company if the transfer or issue is made
in consideration of demerger of the undertaking;
(vii) any transfer by a shareholder, in a scheme of
amalgamation, of a capital asset being a share or shares
held by him in the amalgamating company, if—
(a) the transfer is made in consideration of the allotment
to him of any share or shares in the amalgamated
company except where the shareholder itself is the
amalgamated company, and
(b) the amalgamated company is an Indian company;
01/30/25 Corporate Legal Practice
BY:
HARSHUL SHAH
ADVOCATE & SOLICITOR
&
INSOLVENCY PROFESSIONAL
Email:
[email protected] Facebook: https://www.facebook.com/harshul1979
Corporate Legal
01/30/25 Practice
