Reverse mergers: Exit option in New Cos Bill

Several changes in the mergers & acquisition framework.

The Companies bill, 2011, has provided an exit option for minority shareholders of a listed company in a reverse merger. The law in force at present does not provide for this. A reverse merger is a transaction where a listed company is merged with an unlisted one.

Such mergers, usually done through court approved schemes of arrangement, are exempt from the provisions of takeover law. "If shareholders of the transfer or company decide to opt out of the transferee company, provision shall be made for payment of the value of shares held by them and other benefits, in accordance with a pre-determined price formula or after a valuation is made," says the new Bill.
 

SIMPLIFYING M&AS

Exit opportunity to shareholders in case of merger of listed company into unlisted company 
Companies Act: No specific provisions governing or regulating it. 
New Companies Bill: Specifies how an exit opportunity to the shareholders of the listed company at predetermined 
price formula or after valuations made. 
Cross-border merger 
Companies Act: Only permits merger of a foreign company with an Indian Company. 
New Companies Bill: Permits merger of a foreign company (incorporated in jurisdictions which will be notified by the central Government) with an Indian company and vice versa. 

Merger and amalgamation procedures for certain companies simplified 
Companies Act: In the case of amalgamation of wholly owned subsidiary into holding company, companies currently seek certain dispensations from procedures based on judicial precedents. However, the principle has not unanimously applied and followed. 
New Companies Bill: Simplification of procedures has been prescribed in respect of merger and amalgamation between: 

• Holding company and its wholly owned subsidiary; 
• Two or more small companies

Source: Ernst & Young

According to experts, the National Company Law Tribunal, which approves such schemes, will appoint a registered valuer, who'd decide the exit price for shareholders. "Provided that the amount of payment or valuation under this clause for any share shall not be less than what has been specified by the Securities and Exchange Board under any regulations framed by it," says the new Bill.

In another major move, the Bill proposes to simplify the merger between a holding company and itsfully owned subsidiary, said a note prepared by Ernst & Young. Section 233 provides that such mergers need not seek approval of the Tribunal if they satisfy certain conditions, including approval by 90 per cent of the creditors of the company.

A similar exemption is granted to mergers between two small companies. A small company for this purpose means a company other than a public company, whose paid-up share capital does not exceed Rs 50 lakh or such higher amount as prescribed or a company whose turnover is less than Rs 2 crore or such higher amount prescribed.

No such exemptions are made in the present Companies Act. Another key change in the merger and acquisition framework is the abolition of treasury stock. "A transferee company shall not on merger or amalgamation, hold any shares in its own name or in the name of any trust, either on its behalf or on behalf of any of its subsidiary or associate company, and all such shares shall be cancelled or extinguished on the merger or amalgamation," says Section 233.

At present, there is no specific law which allows or disallows creation of trust shares or treasury stock. Many merger schemes between group companies provide for transfer of cross-holdings of shares to be transferred to a trust created for the benefit of the transferee company.

The advantage of transferring shares to a trust is that these shares can be sold in open market or by private arrangement. Several big companies have used this method in intra-group mergers.