Chap.

V
Arbitration, Compromises,
Arrangements and Reconstructions

4/14/17 1
 Interpretation of sections 391-393
A) expression company means any company
liable to wound up under this act.
B)arrangement includes: reorganisation of share
capital of the company by consolidation of
shares of different classes, or by the division of
shares into shares of different classes or, by
both the methods and
C) unsecured creditors who may have filed suits
or obtained decrees shall be deemed to be of
the same as other secured creditors
4/14/17 2
 Meaning of Amalgamation Income Tax
As per S.2(1B) of the Income Tax Act, 1961, unless the context
otherwise requires, the term amalgamation, in relation to
companies, means the merger of one or more companies with
another company or 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 or companies
immediately before the amalgamation becomes the property of the
amalgamated company by virtue of the amalgamation;
(ii) all the liabilities of the amalgamating company or companies
immediately before the amalgamation become the liabilities of the
amalgamated company by virtue of the amalgamation;

4/14/17 3
 (iii) shareholders holding not less than three-fourths in
value of the shares in the amalgamating company or
companies (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.

4/14/17 4
 391- power to compromise or make arrangement
1) where a compromise or arrangement is
proposed-
A)between a company and its creditors or any
class of them; or
B)between a company and its members or any
class of them;
..on application of company or any creditor
or members of the company or which is being
wound up..directions of court

4/14/17 5
 393. Information as to compromises or
arrangements with creditors and members

1. where a meeting of creditors or

any class of creditors or of members
or any class of members, is called
under section 391-
A)it shall contain statement
setting forth the terms of
compromise or arrangement or
..material interest of
directors/MD or manager of the
company
4/14/17 6
 394.Provisions for facilitating reconstruction
and amalgamation of companies

394.1. where an application is made to the

tribunal under section 391 for sanctioning of a
compromise or arrangement proposed
between a company and any such persons as
are mentioned in that section, and it is shown
to the tribunal..
A) that the com pro- arrange has been
proposed for the purpose of, or inconnection
with, a scheme for reconstructin of any
company or companies or the amalgamations
of any two or more companies; and
4/14/17 7
 B)that under the scheme the whole
or any part of the undertaking,
property, or liabilities of any
company concerned in the
scheme( in this section referred to as
a transferor company) is to be
transferred to another
company( transferee company)

4/14/17 8
Courts order of sanctions ( all or any
of the following)
i. the transfer to the transferee company of the whole or any part of the
undertaking, property or liabilities of any transferor company;
Ii. the allotment or appropriation by the transferee company of
any shares, debentures, policies, or other like interests in that
company which, under the compromise or arrangement, are to be
allotted or appropriated by that company to or for any person;
Iii. the continuation by or against transferee company of any legal
proceedings pending by or against any transferor company.
Iv. The dissolution, without winding up, of any transferor company

V. the provisions to be made for any persons who, with such time
and ins such manner s the directs, dissent from compromise or
arrangement; and
Vi. such incidental, consequential and supplemental matters as are
necessary to secure that the reconstruction or amalgamation shall be fully
and effectively carried out.

4/14/17 9
 Section 394:
A) property includes, property, rights and
powers of every description; and liabilities
includes of every description; and
B)transferee company does not include any
company other than a company within the
meaning of this Act; but transferor
company includes any body corporate,
whether a company within in the meaning
of this Act r not
4/14/17 10
 Who can apply?

According to section 391(1), the

company, any creditor or member of
the company, or in the case of a
company winding up, the liquidator,
may make an application to the
court/tribunal

4/14/17 11
 Batliboli ltd v. Mideast Integrated
Steel Ltd(2005)62 SCL 141 Del
During the pendency of the winding up petitions, MISL
drew up a scheme of arrangement to pay the dues in a
phased manner, coupled with a change in management
and control, but the scheme was rejected. Meanwhile,
the banks and institutional creditors moved the DRT.
At the point the ex-management came up with another
scheme, and to show their earstness deposited a sum
of two crore rupees with the Court Registrar on
condition that if the scheme be rejected the amount
should be repaid, but if the scheme be sanctioned it
was to be paid off to the unsecured creditors; and also
produced a foreign investor to invest in the company.
-- held- that an opportunity be given to work out the
scheme

4/14/17 12
Shree nivas girni kamgar kruti samiti vs.Rang
Nath basudev Somani(2005)62 SCL 175

A Scheme need be necessarily for activitating

the same lines of business that was carried on
before if the new business is in accordance
with law, and there is no bar on part-sale of
company assests to pay off creditors and
workers; but third party interveners, who are
neither shareholders nor creditors, offering to
pay more money, have no locus standi---
Held- scheme was sanctioned with
modifications in terms of section 392(2)

4/14/17 13
 Maharashtra Apex Corp ltd.In re.
(2005)57 SCL 305 Kar.
It was held that there is no
specific provision in the
companies Act which prohibits
the Court from according to its
sanction to a scheme under
section 391 even if the scheme is
contrary to a provision contained
in the act or any other law
applicable to the company; in
that case it was argued the
4/14/17 14
 Types of acquisition in India:

Depending upon the business strategy, an entity may acquire

the entire business, done by way of:

Merger/Amalgamation
Share buy-out
Or
A part of business, being a unit or an undertaking, by way of
Acquisition through a De-Merger
Slump sale
The Act seeks to extend tax neutral treatment to transactions of mergers and de-
mergers.
Inbound acquisitions:
Through appropriate structures, local financing can be used byforeign acquirers to
make acquisitions in india. Certain business combination deals are subjected to
competition law and in a recent development the Competition Commission of
India(CCI) is intending to mandatory vet mega merger deals.

4/14/17 15
 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.

Merger:

In Merger two or more existing companies combine into one

company. The transferor company merges its identity into the
transferring company by transfer 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.

4/14/17 16
HORIZONTAL MERGER

TWO OR MORE COMPANIES DEALING IN SIMILAR LINE OF ACTIVITIES COMBINE

TOGETHER TO ACHIEVE ECONOMIC SIZE.

VERTICAL MERGER:

A COMPANY ACQUIRES IT UPSTREAM OR DOWNSTREAM UNITS. UPSTREAM

ARE THE SUPPLIERS OF RAW MATERIAL WHEREAS DOWN STREAM ARE
MARKETING OR RETAIL OUTLETS. THE OBJECT IS COST REDUCTION AND
EFFICIENT MARKETING.

MERGER NOT ONLY CREATES SIGNIFICANT SHAREHOLDER VALUE, BUT ALSO

POSITIONS THE COMBINED COMPANY TO COMPETE VIGOROUSLY WITH OTHER
COMPANIES.

4/14/17 17
 DEMERGER
In 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.

4/14/17 18
 Merger/Amalgamation

The term Merger /Amalgamation does not defined in

companies act. Section 2(1B) of the Income Tax Act,
defines the amalgamation to mean merger of two or
more companies(amalgamating companies)with another
company(amalgamated company), in such a manner that-
All the properties and liabilities of the amalgamationg
company immediately before the amalgamation, become
the properties and liabilities of amalgamated company;
Shareholders holding not less than 75% of value of shares
in the amalgamating company become the shareholders
of the amalgamated company

4/14/17 19
 Amalgamation as defined above, does not cover transfer of
assets etc., as a result of acquisitions of property of one
company by another company and considers only a-
Total merger of one company into another(absorption);or
Merger of two companies into a third one;or
Formation of new company by amalgamating two companies

If the conditions in (a) & (b) above, are not satisfied then the
reorganisation shall not be treated as amalgamation for
purpose of the Act, though it may qualify to be an
amalgamation under the Indian companies Act.

4/14/17 20
 Sections 391-394

Examination of objects clause- MOA of both companies- transferor
company and the transfree company should contain enabling provision-
Approval of scheme by the board of directors
Intimation to Stock Exchange- Cl.36 listing agreement-Merger Scheme
Application to the court for directions- Sec.391 (1) HC. Rule 67
Companies court rules, 1959.
High court directions for convening shareholders Meeting
Dispatch of Notice to shareholders and Creditors
Advertisement of the Notice Meeting- Rule 74.
Holding of the shareholders and creditors meeting--------
Submission of Chairmans Report on the conduct of the meeting to the
court.
Filing of registration with the Registrar of Companies- with in 30days.

4/14/17 21
 Submission of petition to the court for sanction of the scheme---7 days
after submission of chairman report.
Issue of notice to Regional Director, Company Law Board, Registrar of
companies and to the Official Liquidator-
Conduct of Hearings and Issue of Order confirming the Scheme-court
proceedings-
Transfer or Assets and Liabilities to the Transferee Company----
Filing of Court Order with the Registrar of Companies by both the
companies- u/s394(3)r/w rule 81 of company court rules
Issues of shares to the shareholders of the transferor company-
Sec.75/150/151 Companies Act,
Listing the New shares
Annexation of Court Order to the Memorandum of Association- Sec.391(4)
Preservation of Books and Papers of the Transferor Company- Sec.396(A)

4/14/17 22
 Reasons for Acquisitions:
to deal with overcapacity through
consolidation in mature industries;
to roll-up competitors in geographically
fragment
to extent into new products or markets.
As a substitute for R&D; and
To exploit eroding industry boundaries by
inventing an industry.

4/14/17 23
 Period Company Acquirier Deal worth US$

Feb2007 Novelies Hindalco 6.0 billion

Jan 2007 Corus Group Tata Steel 12.1 billion

Jan 2007 Ritz-Cariton Indian Hotels 170

Sept 2006 Jeco Holding AG M&m 180 Million

July 2006 Arcelor Mittal Steel 30.0 Billion

June 2006 Sabah forest BILT 261 million

March 2006 Hansen Sulzen Energy 565 Million

March 2006 Terapia Ranbaxy 324 million

Feb 2006 Betapharm Dr.Reddys 570 million

July 2005 Teleglobe VSNL 239 million

4/14/17 24