A Project on

Merger and Amalgamation vis a vis

Members and Creditors Participation
in the deal: Detailed Investigation

SUBMITTED TO:
XYZ
(Faculty of )

SUBMITTED BY:

(Roll No.- 39, Sem. IX, Batch: VIII)
B.A, LL.B(Hons)


SUBMITTED ON:
October


HIDAYATULLAH NATIONAL LAW UNIVERSITY,
RAIPUR (C.G.)


2
ACKNOWLEDGEMENT
First and foremost, I take this opportunity to thank Dr. , Faculty, H.N.L.U., for allotting me this
challenging topic to work on. She has been very kind in providing inputs for this work, by way
of suggestions.
I would also like to thank my dear colleagues and friends in the University, who have helped me
with ideas about this work. Last, but not the least I thank the University Administration for
equipping the University with such good library and I.T. facilities, without which this work
would not have taken this shape in correct time.










3
RESEARCH METHODOLOGY
This research conducted by me for this project is doctrinal in nature. I have relied heavily on
secondary sources of information such as books and various websites in order to gather data on
the given topic.













4
INTRODUCTION

The terms merger and/or amalgamation have not been defined under the Companies Act and
are generally used interchangeably. In common parlance, merger is understood as the coming
together of two entities resulting in the comingling of the assets, liabilities, rights and interests of
such entities.
Although not defined in the Companies Act, a likely successor to the Companies Act, the
Companies Bill, 2009, currently placed before the Parliament of India (the Companies Bill),
defines merger as defined under the English Companies Act, 2006: distinguishing between a
merger by absorption, where one or more existing companies merge into an existing company
and a merger by formation of a new company which involves merging of two or more companies
to form a new company.
The term amalgamation has been defined in the Income Tax Act. The definition of
amalgamation in the Income Tax Act does not differentiate between a merger and an
amalgamation and defines amalgamation as merger of one or more companies into another
company or the merger of two or more companies to form one company such that, pursuant to
the amalgamation, the assets and liabilities of the amalgamating company become the assets and
liabilities of the amalgamated company and shareholders holding not less than three fourths in
value of the amalgamating company become shareholders of the amalgamated company. The
benefits of carried forward losses and unabsorbed depreciation of an amalgamating company are
available only for certain types of companies falling within the scope of shipping, hotel, banking
and industrial undertakings and further subject to continuity of the business for three years before
the amalgamation and five years after the amalgamation. Further, stringent conditions are also
applicable for closely held companies.



5
LAWS ON AMALGAMATION
HISTORICAL PERSPECTIVE
Mergers and amalgamations are very important features of the modern capitalist. The history of
big modern corporations is a clear testimony of the importance of mergers and amalgamations in
the corporate world and has unquestionably played an important part in the growth of most of the
leading corporations of the world.
Statistics have shown that almost 2/3rd of large public corporations in the USA have had a
merger and amalgamation in their history and the top 200 corporations in the USA are known to
own about half of the total corporate wealth of the USA
1
. That is why, from time to time,
companies have preferred the external means of growth by way of merger and amalgamations.
Indeed mergers and amalgamations have tended to follow a historic pattern of waves with
periods of frenetic takeover activity punctuating periods of relative sedateness.
2

Historical Pattern of United Kingdom Takeover Activity
In 1968, 1972 and 1989 the UK witnessed peaks of takeover activity in terms of value and
average size of takeover. Britain experienced the transition from a sense of war to a sense of
peace during the war years. The interruption to the world trade affecting some of the major
market, the decline of many of its important 19th century industries and the effect of the great
depression was bound to have effect on many companies and upon old and new amalgamations.
Thus even where larger companies have combined, many of them declined absolutely or
relatively and then were replaced by new firms in new industries.
According to the Stock Exchange Year Book 1947, on the whole, the successful mergers were of
firms in the same trade where the one process activity was carried out on a large scale, unlike
many of the post war mergers covering a multitude of different activities during the war years.

1
Sen S.C, Merger, Amalgamation and Takeover, 1969, Pg.10.
2
Sudarsanam, P.S., Essence of Merger and Acquisitions, 1997, Pg.1
6
The successful merger movement that occurred in pre-war years in Britain was Associated
Biscuit Manufacturers (1921), British Match Corporation (1927), British Plaster Board (1932),
Great Universal Stores (1931) and Rugby Portland Cement (1935) and so on.
British history is the living evidence of the mergers of three of the largest firms in to one group
namely:
1. General Electric Company, Associated Electric Company and English Electric Company
merged famously in a merger called the electric merger.
2. Motor merger which is the merger of Austin and Morris in 1957 to for British Motor
Corporation
3. Textile merger of ICI with Courtaulds.
Mergers in the United States of America
Several merger movements have occurred in the USA and each one was more or less dominated
by a particular type of merger. All the merger movements occurred when the economy
experienced sustained a high rate of growth and coincided with particular developments in the
business environment.
One reason of merger activity in the periods of high business activity may be that the firms are
not motivated to make large investment outlays when the business prospects are not favourable.
Only when future benefits accruing to a business endeavour exceeds its costs in the action
warranted and when such favourable business prospects are joined with changes in competitive
conditions directly motivating a new business strategy does merger and amalgamation activity
get simulated.
3

An insight into the history of American Business strategy shows that merger activity in the USA
is associated over the last century and runs in cycles.
4
The peaks of these cycles typically
accompany peaks in either economic activity or the stock prices.
5


3
J. Fred Weston and Kwang S.Chung, Merger Restructuring and Corporate Control, 1997 Pg.8.
4
Shiva Ramu S., Corporate Growth through Merger and Acquisition 1998, Pg.16.
5
Makan S. and Wolf A Weinhold, Diversification through Acquisition, 1979, Pg.10.
7
Merger activities have been classified by various authors into so called waves by clustering
activities during various periods. Weston (1953) has identified three major periods of merger
movements while studying the US business behaviour.
1. First merger wave between 1895-1904
2. Second merger wave between 1922-1929
3. Third merger wave between 1940-1960














8
COMPANIES ACT, 1956: MERGERS AND
ACQUISITION
Section 391
6

Section 391 of the Companies Act, 1956 provides that the company or any creditor or
member of a company can make an application to the NCLT (National Company Law
Tribunal). If a company is already under liquidation, an application will be made by the
liquidator.
Section 391 (1) of the Act, lays down that on such application, the NCLT may order for a
meeting of creditors or members or a class of them to be called and held as per directions of
NCLT. The NCLT may waive conditions for meeting of creditors. Section 391 (2) of
Companies Act, 1956 provides that if the NCLT sanctions the scheme, it will be binding on
all creditors or members of that class and also on the company, its liquidation and
contributors.
Section 393: Notice and conduct of Meeting
7

Notice of meeting sent to every creditor / member will contain a statement setting forth the
terms of compromise or arrangement explaining its effect material interest of direction,
managers of the company in the scheme of amalgamation and the effect of scheme of
amalgamation on their interest should be fully disclosed.
Section 396: Powers of central Government to provide for Amalgamation of companies
in National Interest
8
.
Every member or creditor (including a debenture holder) of each of the companies before the
amalgamation shall have, as nearly as may be, the same interest in or rights against the
company resulting from the amalgamation as he had in the company of which he was
originally a member or creditor & his rights or interest in or against the company resulting

6
Section 391 of Companies Act, 1956
7
Section 393 of Companies Act, 1956
8
Section 396 of Companies Act, 1956
9
from the amalgamation are less than his interest in or rights against the original company, he
shall be entitled to the compensation which shall be assessed by such authority (as may be
prescribed)
9
and every such assessment not shall be published in official gazette. The
compensation so assessed shall be paid to the member or creditor concerned by the company
resulting from the amalgamation.













9
Joint Director (A/c.), Department of Company Affairs is the prescribed authority vide Rule 12A, Companies
(Central Government ) Rule, 1956.
10
MEMBERS AND CREDITORS IN AMALGAMATION
A JUDICIAL INTERPRETATION

Mergers and Acquisitions are governed by both state and federal laws. State law sets the
procedures for approval of mergers and establishes judicial oversight for the terms of mergers to
ensure shareholders of the target company, receive fair value, Generally, State law tends to be
deferential to defenses as long as Target Company is not acting primarily to preserve its own
positions. Courts tend to be skeptical of defenses if management of a target company has already
decided to sell the company or to bring about a change of control. Because of the fear that
mergers will negatively affect employees or other company stakeholders, most states allow
directors at target companies to defend against acquisitions. Because of the number of state
defenses now available, the vast majority of merger and acquisition are friendly negotiated
transactions.
The doctrine of merger and acquisition of companies is neither a doctrine of constitutional law
nor a doctrine as such statutorily recognized. It is a common law doctrine founded on the
principle of property in the hierarchy of Justice delivery system. It should be noted that law is not
what is being legislated within the four wall of the parliament but also what the Judiciary decides
as according to realist school of Jurisprudence.
Section 391 and 394 requires holding of meetings of the members and creditors of
Transferor:
In Awsys Software Private Ltd. and In. re
10
Karnataka High Court held that section 391 and 394
required holding of meeting of the members and creditors for the purpose of discussing and
approving a proposed scheme, it has a definite purpose and object that couldnt be done away
which is in conflict with very provisions of law.

10
(2004) 122 Comp. Case 526 (Kar)
11
In Ne plus Technologies Pvt. Ltd
11
.: Madras High Court held that the object of holding a meeting
of the shareholders is to ascertain their collective view in favor or against the scheme of
amalgamation and any individual decision prior to filling of petition for the sanction is not a
ground to contend that shareholders have already given their consent for the scheme.
Voting majority is determined on the basis of shareholding and not on head Court of one
person one vote. Proxy could be given to a non-member as contemplated under section
391(2).
In Dinesh Vrajlal Lakhani Parke Davis (India Ltd)
12
, it was held that:
That under the companies Amendment Act, 1956, a proxy could be given even to a non-
member. Thus the two other Joint members / holders could give proxy in favour of one of
them and because that member voted twice, it could not be said that it was against law.
If 99.94% of shareholders had voted in favour of resolution and when the majority of the
shareholders found the exchange ratio just and fair it could not be interfered with.
That under Article 105 of Article of Association when there were joint registered holders
of shares, any one of them could vote at the meeting or appoint another person whether
member or not as his proxy.
That if more than one joint holder was present at the meeting. Then the person whose
name stood higher on the register was alone entitled to speak and vote at the meeting.
The name of an individual may appear in different order of names.
Court Judgment related to interveners of third party interference in the scheme and
petitions filed for sanctioning of scheme no other person except creditor or member is
entitled to move application u/s 391.
In Kashinat Dikshit vs. Surgicals and Pharmaceuticals in Liquidation
13
, Karnataka High Court
held that any other person except any creditor or any company member or if company is wound
up by liquidator of the company under section 391 (1) would not be entitled to move application
for the scheme of amalgamation.

11
(2002) 112 Comp. Case (Mad), Alston Power Boiler Ltd., vs SBI and Others, (2002) 117 Comp. Case (338)
12
[2005] 124 Comp Case (Bom H.C) ; Parke Davis (India Ltd; Inre, [2005] 124 Comp Case 531 (Bom H.C) ; Hindustan
Ciba Geigy Ltd ; Inre [1997] 14 SCL 115 (Bom)
13
(2002) 40 SCL 921 (Kar) ; S.K.Gupta K.P.Jain (1979) 49 Comp Case 342 (S.C).
12
In re Hindalco Industries Ltd.
14
, Whether a person who is neither a shareholder nor a creditor has
no locus standi to raise objection in relation to a scheme propounded by such company under
sec. 391.
Interveners have no locus standi in proceedings.
In Sriniwas Giri Kamgar Kruti Samiti and others vs. Rangnath Basudev Somani and others,
15

Bombay High Court held that once the court is satisfied that all the statutory proceedings has
been followed and that majority decision was Just and fair, it is not permissible for Court to
permit third party to Intervene. The interveners could not be allowed to intervene in the public
Interest as they were neither shareholders nor creditors of company. Thus they will have no locus
standi in the proceedings under sections 391 and 393.
Modify scheme to be approved if sanctioned by majority of creditors.
In Counter Mann Peipers (India) Ltd., vs. Union of India and others
16
, Bombay High Court
held that if the modified scheme of amalgamation had been approved by majority of creditors
and directors, the modified scheme was to be sanctioned in terms of sections 391 and 394.
In Vishnu Barium Chemicals Pvt. Ltd., In re
17
,, Andhra Pradesh High Court also held that where
the majority of parties agree for the variation in the contract terms the court is authorized to
impose such variation even on the remaining dissenting members, but where set of class of
creditors does not agree for proposal, it is the duty of Court to examine whether consent is
unreasonable withheld or alternatively whether sanction of scheme would prejudicially effect
that set of creditors who have withheld the consent.
In Renuka Datla vs. Duphar Interfran Ltd.
18
Bombay High Court held that Company Court (Now
NCLT) under section 391 is not bound to sanction a Scheme as propounded. Court has the
Jurisdiction to sanction the scheme subject to certain modifications. Section 392 gives ample

14
(2009) 94 SCL, 1 Bom.
15
(2005) 127 Comp Case 752 (Bom) ; Hindustan Lever vs. State of Maharashtra (2003) 117 Comp Case 758 ; J.K
(Bombay Pvt. (TD). New Kaiser, AIR 1970 SC 1041 company.
16
(2005) 127 Comp Case 32 (Bom)
17
(2002)110 Comp. Case 67 (AP)
18
(2004) 121 Comp Case 631 (Bom)
13
power to the High Court to make addition or omission to the scheme. Once their claim is cleared,
creditors have no locus standi to interrupt in the scheme.
In C.G. Electronics System India Ltd. In.re,
19
Delhi High Court held that a creditor of a company
having been paid his claim has no right to appear and object to the proposed scheme of
amalgamation of that company with other company. The object of holding meeting o creditors is
to ascertain that whether the payment of sum due to them by transfer or Transferee Company
may be jeopardized in any manner by the Court giving its sanction to the proposed scheme of
amalgamation. Joint petition can be filed to get sanction.
In Torun Overseas Pvt. Ltd, In.re,
20
Delhi High Court held that neither Companies Act, 1956, nor
companies Court Rules, 1959, Prohibits the filling of Joint petition under section 391 and 394 of
the Act for sanction of scheme when subject matter is same and common question of law and
fact would arise for decision. Scheme once sanctioned cant be set aside on entirely new ground.
In Konark Investments Limited vs. Union of India the Supreme Court held that after the scheme
was acted upon and the third party were already created, the scheme cant be upset particularly
when these exist no material to show that the scheme is solely with a view to evade taxes.
Neutral creditors wont be counted in ascertaining the majority in number and value.
In Hindustan General Electric Corporation In.re
21
, Calcutta High Court held that creditors and
members who are present at the meeting but remain neutral or abstain from voting wont be
counted in ascertaining the majority in number and value.
Courts proceedings shouldnt be against the decision of the majority creditors
In Blue Star Ltd. In.re,
22
Bombay High Court held that transfer of shares by one company to
another company is primarily to be determined by shareholders and if over whelming majority
considers it fair and reasonable then Court should not interfere with it.


19
(2003) 116 Comp Case 48 (Delhi H.C)
20
(1999) 95 Comp Case 53 (Delhi M.C)
21
(1959) 29, Comp. Case 46 (Cal)
22
(2001), 104 Comp. Case 371 (Bom) Larsen and Tourbo Limited, Inre (2004) 121 Comp. Case. 523.
14
CRITICISM AND SUGGESTIONS
Merger and acquisition activities must adhere to the existing legal regime, providing legal
framework under which the merger and acquisition activities can be undertaken. The first major
regulation dealing with the mergers and acquisitions is The Companies Act, 1956. As the Policy
initiatives since 1991 has change the corporate environment, it has also resulted in various
amendments in The Companies Act, 1956. This Act deals with mergers and acquisition in
Sections 391 to 394. The provisions of the Section 395, 396 and 396A are supplementary.
23

Recently in the year 2002 the Second Amendment of the Companies (Amendment) Act, 2002
provided that the powers of the High Court (Company Court) to adjudicate in the matters relating
to mergers and acquisitions has been transferred to the National Company Law Tribunal.
24

Section 394 of The Companies Act, 1956 is the main provision dealing with the merger and
acquisition, this section facilities reconstruction and acquisition. It provides that the National
Company Law Tribunal may make provisions for the transfer of whole or any part of
undertaking, property, and liability of any transferor company to the transferee company. This
section requires an application to be made by the companies to the National Company Law
Tribunal under section 391. Section 391 of the Act authorizes a company to compromise or make
an arrangement with its creditors or members. This section further empowers the National
Company Law Tribunal to sanction or reject a compromise or an arrangement as proposed by the
Companies. Section 392 empowers The National Company Law Tribunal to give such directions
in regard to any matter as it may consider necessary for the proper working of the scheme. This
section also empowers the National Company Law Tribunal to enforce compromise or
arrangement order under section 391. Section 393 provides supportive provisions for compliance
such as providing a statement stating terms to compromise along with the notice calling the
meeting.
The Board has requisite powers to modify the draft scheme, on receipt of suggestions from the
above concerns or from any creditors, or employees of the concerned industrial enterprises.

23
For details see, Sections 391-394, 395, 396, 396A of The Companies Act, 1956.
24
Companies Act was amended twice in year 2002. This instant amendment was the second amendment of The
Companies Act in 2002.
15
Once the scheme is finalized by the Board it has to be approved by the shareholders of the
transferee within or without modifications by special resolution. On compliance of requirement
of sub-section 3(1) and 3(b) of section 18 of the Act the scheme once sanctioned by the Board
becomes legal document to be relied upon by the courts in evidence in all legal proceedings in
appeal or otherwise.
The Central Government has set up a Board, known as Securities and Exchange Board of India
(SEBI) with the objective inter-alia to protect the interest of investors in securities. It if from this
objective that section 11(h)
25
of the above Act empowers the Board as one of its functions of
regulating substantial acquisition of shares and takeovers of companies.
In discharge of its aforesaid functions, the securities and Exchange Board of India has notified
Substantial Acquisition of Shares and Takeovers (SEBI) Regulations, 1997. These regulations
are based n the recommendations of Justice P.N. Bhagwati Committee report. The regulations
are not exhaustive and final and are to be reviewed from time to time.
The Madhya Pradesh High Court in the case of Gountermann-peipers (India) Ltd. vs. Union of
India,
26
held that the transfer o shares by one company to another is primarily to be determined
by the shareholders and if the modified scheme of amalgamation have been approved by the
majority of creditors and directors, then the modified scheme has to be sanctioned in terms of
sections 391 to 394 of the Companies Act, 1956.
In Sharp Industries Ltd. In.Re.
27
it has been held that the proceedings under Section 391(6) does
not include in its ambit the criminal proceedings, thus the directors and guarantor of the company
are not entitled to the benefits of section 391(6).
Upon the matter of jurisdiction of the court following Judgment was given by the Supreme Court
in the leading case of Vikrant Tyres Ltd., In.re.,
28


25
The Securities and Exchange Board of India Act, 1995.
26
(2005) 127 Comp. Case 32 (MP); Vishnu Barium Chemical Pvt. Ltd; In.re. (2002) 110 Comp. Case 67 (AP) ; Blue
Star Ltd. In.re, (2001) 104 Comp. Case 37 (MP); Larson and Turbo Ltd; In.re.(2004) 121 Comp. Case. 523.
27
(2005) 123 Comp. Case. 60 (Bom)
28
(2003) 26 Comp. Case. 503 (SC) Himachal Telematics Ltd. and Himachal Futuristic communications Ltd;
In.re.(1996) 86 Comp.Case.325 (Del).
16
Court has limited Jurisdiction that lies in checking whether the exchange ratio was so
wrong or the error was so gross as would make the scheme oppressive to the minority of
members or any class of them.
Courts must see that the creditors interest was not affected as the transferee company
was commercially superior to the transferor company.
That the exchange ratio of shares agreed was just and fair.
That the scheme was in the interest of shareholders, creditors and public at large.
In Covelong Beach Hotels (India) Ltd., In.re.
29
it has been held that the court exercises
supervisory role under section 394 and cannot embark upon an evaluation of correctness of the
share exchange ratio arrived at in the interest of general body of shareholders and creditors.
Similar decision was given in CAL Fuel Systems Ltd. and Another, In.re.
30





29
(2002) 112 Comp. Case. 17 (Mad)
30
(1992) 72 Comp. Case. 63.
17
CONCULSION
Mergers and acquisitions have gained importance in recent times. Business consolidation by
large industrial houses, consolidation of business by multinationals operating in India, increasing
competition amongst domestic companies and competition against imports have all combined to
spur mergers and acquisitions activities in India.
Indian industries experienced such shocks after the initiation of liberalisation of economy in
1991. Therefore Indian companies have started responding to shocks such as liberalisation and
de-regulation. A few attempts in the merger and amalgamation activities during the initial period
were more in the nature of testing environment.
The actual wave in Indian context has started after 1994 when the necessity of formulating a new
takeover code was felt by the regulatory agencies. Although merger and amalgamations have
taken place even before 1994 but those were few and far between. Mergers between larger
business firms have been negotiated and concluded right through the post-independence period
in India, a full list of mergers and amalgamations settled during each year has been published
only since 1972-73. However the constrained choice of the years 1972-73 as the cut off period is
not wholly inappropriate because a number of significant changes in government policies
became operative immediately before or in that year. These changes were heralded through the
abolition of the managing agency system, the passage of the MRTP Act 1969, the nationalisation
of the banking system and the announcement of the new provision granting tax relief in finance
bill for 1967.
31
All these initiatives were aimed at curtailing the power of the big business houses
and dealing with the adverse consequences of the absence of price competition among the
established business groups. They, therefore, affected the process of growth through mergers as
well.
In 1994 companies like Morgan Group and RPG sought to build industrial empires through
acquisitions. This followed the prevailing industrial structure of building a conglomerate of
diverse into one group.

31
The Income Tax Act 1961, contains special provisions for some type of amalgamation and provides for some tax
reliefs subject to certain conditions. The tax relief relates to development rebate and development allowance. The
Finance Act 1967 extended the sphere of relief in tax matters in relation to amalgamation.
18
The recent trend is more of restructuring firms through consolidation to face the likely
competition from the foreign companies.
In the years 1997-2000 takeover wars heated up in the Indian sub-continent. Between April 1997
and September 2000 there had been 894 cases of takeovers, mergers and acquisitions. Out of
these 894 cases 221 companies made an open offer involving a sum of Rs. 5468.06 millions.
Investors response to these 189 offers bid was valued at Rs. 1714.77 millions.
32
Apart from the
open offer route there have been 637 cases of acquisitions under the automatic exemption route
and 71 additional cases that have been referred to the takeover panel. Out of these 36 companies
25 have been granted exemption from open offers. Interestingly 7 hostile takeover cases are
under SEBIs Takeover Regulations 1997.
33
In 1997-98 many companies either changed hands
or divested parts of their business. In all these cases the promoters took the initiative. They did so
because the slowdown had plunged so many companies into liquidity crunch, a complete or
partial sell off was keen as a way out of an ineluctable crisis. Year 2000 has been the year of
takeover for the Indian insurance. As many as 72 companies fell prey to takeovers. The list
includes small firms like Selfridges Auto to giants such as Coates of Indian Aluminium
Corporation.
According to the data provided by SEBI 72 companies launched public offers to acquire equities
from ordinary shareholders. The offers followed acquisition of over 15% stakes from erstwhile
promoters, a mandatory rule under the SEBI norms.
In India the takeover activity has also been active due to prevailing capital market conditions
wherein love for the technology shares coupled with an economic slowdown in which the prices
of old economy stocks started quoting at ridiculous valuations. The real estate holding and liquid
investments of many of these old economy companies attracted corporate raiders. Thus capital
market scenario provided fertile ground for the raiders.
2006 will be remembered in Indias corporate history as a year when Indian companies covered a
lot of new ground. They went shopping across the globe and acquired a number of strategically

32
Bhatia N.L., Takeover Games & SEBI Takeover Regulations, October 2002, Pg.154
33
SEBI (Acquisition of Shares & Takeover) Regulations, 1997.
19
significant companies. This comprised 60 per cent of the total mergers and acquisitions (M&A)
activity in India in 2006. And almost 99 per cent of acquisitions were made with cash payments.



















20
BIBLIOGRAPHY
Books
Bangia R. K., Companies Law, 13th Edition (2002).
Dhingra L.C., Principles of Company Law, Ist Edition 1994.
Kumar Naresh, Takeover and Merger : Need for Mode Code Chartered Secretary, Sep.
1994
Routedge and Kegan Paul, The Logic of British and American Industry 1972
Verma, J.C., Corporate Merger and Acquisition Takeover, 2002
Dictionary
Oxford Dictionary, 2003.
Encyclopedia Britannica, 1999-2002.
Websters Dictionary.
Concise Law Dictionary