When two or more existing companies merge and become one company it is called a merger.
The companies which are being merged lose their respective identities and the existing shareholders receive shares of the new (merged) company in exchange for the shares held by them.become shareholders of the new company. Broadly speaking, there are five types of merger:
Also known as Horizontal Integration, this takes place between entities engaged in competing businesses which are at the same stage of the industrial process. In this kind of merger, a competitor is eliminated and hence the combined entity moves one step towards monopoly. Competition Commission of India scrutinizes these kinds of mergers.
A vertical merger happens when two entities which are at different stages of industrial/production process and they decide to merge to form a new entity. The benefits of these kinds of mergers are lower transactional costs, synchronization of demand and supply and greater independence.
These mergers happen when entities which are in the same industry and somewhat interrelated but having no common customer-supplier relationship. The benefit of this kind of merger is using the same sales and distribution channels to reach the customers of both entities.
When two entities in unrelated industries merge, it is called a conglomerate merger. The benefit of such kind of merger is access to financial resources, enlargement of debt capacity, an increase in the value of outstanding shares because of increased leverage and EPS.
Also known as a cash-out merger, this merger provides the shareholders of one entity cash in lieu of their existing shares. The shareholders on receiving cash, cease to be shareholders.
An amalgamation or takeover takes place when a bigger and financially stronger entity takes over a smaller one. The motive of the acquirer is to gain control over the management of the target company. There are two types of takeovers:
The intention behind a friendly takeover is for the mutual advantage of the acquirer company and the acquired one. The acquirer company approaches the promoters/management of the target company for negotiation.
When a company makes a direct offer to the shareholders of the company it wants to acquire without the prior consent of latter’s promoters/management, it’s called a hostile takeover. It’s generally perceived as against the wishes of the target company’s management.
A Brief Overview of Legal Processes during a Takeover
- An application under section 391 can be filed seeking sanction of any scheme of compromise or arrangement. While doing this, the applicant should disclose all material particulars.
- The Tribunal after satisfying itself that the scheme looks good and is fair, orders for a meeting of the stakeholders.
- The scheme must be approved by the majority of the stakeholders.
- A due notice should be there disclosing all material particulars and annexing the copy of the scheme.
- A report should be received from the registrar of companies that the approval of this scheme will not prejudice the shareholders’ interests.
- The central government should also file its report in an application seeking approval of compromise, arrangement or the amalgamation as the case may be under section 394A.
- Once the scheme gets approved, the certified copy of the order should be filed with the concerned authorities.
SEBI SAST (Substantial Acquisition of Shares and Takeover) Regulations 2011
There has been a significant rise in Merger & Acquisition activities in listed as well as unlisted companies. Amidst all these activities, protecting the interests of public & minority shareholders is an important corporate governance principle. SEBI, to protect these interests has come up with SAST Regulations, 2011 which applies to direct and indirect acquisition of shares or voting rights in, or control over the target company. Under these regulations, acquisitions are divided into two types:
Acquisition of such number of shares that the shareholding of Acquirer along with Persons Acting in Concert (PAC) exceeds the stipulated thresholds and crosses the limit of 25% of shares or voting control of the target company is called Direct Acquisition. This will trigger the obligation to make an open offer.
Acquisition of shares or voting rights in, or control over, any company or other entity that would enable the acquirer or PAC with him to exercise or direct the exercise of such percentage of voting rights in, or control over, a target company, the acquisition of which would attract the obligation to make an open offer is called Indirect Acquisition.
Exemption BY SEBI
Regulation 11(1) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (SAST Regulations), gives power to the Board to grant exemption from the obligation to make an open offer for acquiring shares. Further, as per Regulation 11(3) of SAST Regulations, the acquirer shall file an application with the Board, supported by a duly sworn affidavit, giving details of the proposed acquisition and the grounds on which the exemption has been sought.
Grounds for exemption
- The target company is a company in respect of which the Central Government or State Government or any other regulatory authority has superseded the board of directors of the target company and has appointed new directors under any law for the time being in force, if:
- Such board of directors has formulated a plan which provides for transparent, open, and competitive process for acquisition of shares or voting rights in, or control over the target company to secure the smooth and continued operation of the target company in the interests of all stakeholders of the target company and such plan does not further the interests of any particular acquirer.
- The conditions and requirements of the competitive process are reasonable and fair;
- the process adopted by the board of directors of the target company provides for details including the time when the open offer for acquiring shares would be made, completed and the manner in which the change in control would be effective.
- Exemption from strict compliance with one or more of such provisions is in public interest, the interests of investors in securities and the securities market.
We covered an Overview of Mergers Amalgamations and Takeovers. Let us know in the comments section if you want any specific topic to be covered. Wishing you all the best for your SEBI Grade A preparation!
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