Amalgamation of companies: Public interest should be the deciding factor

Md Nazrul Islam Khan | Published: June 01, 2019 21:20:45 | Updated: June 10, 2019 21:31:53

In recent times with the expansion of business as well as commercial activities of large companies we have experienced a number of amalgamations or mergers and it is anticipated that in forthcoming years more schemes of amalgamation will be submitted to company court for approval. The object of amalgamation is to increase financial strength and capacity of the amalgamated company to implement its business initiatives in more efficient and economic manner. No amalgamation scheme should be framed in such a way which may hinder public interest or limit the scope of competition in market.

The words 'amalgamation' and 'merger' possess identical significance in company law although there is no precise definition of their meanings.  Amalgamation or merger is the fusion of two or more companies in accordance with a scheme. The company which transfers its assets and liabilities is called 'transferor' and the receiver company is known as 'transferee'.

In amalgamation, the transferor company transfers its assets as well as liabilities to the transferee company without execution of any further deed or instrument and the shareholders of transferor company participate in the shares of the transferee company on certain approved ratio. Finally, on completion of legal formalities the transferor company loses its legal existence without following the procedures of winding up. By means of amalgamation two or more companies may also, by one transaction, become merged in a new incorporated body created by operation of law.

"Every merger has and has to have a specific date called 'appointed date' or 'transfer date'. Likewise, every merger also has 'effective date'. Whereas the former denotes the date on which the amalgamation takes place or, in other words, the property, assets and liabilities of the merging company (the transferor company) vest in and are transferred to the merged company (the transferee company), the latter denotes the date on which the merger is completed in all respects after having gone through the formalities involved and merging company is dissolved by the Registrar…" (Compendium of Key Issues under Corporate Law by Dr. K. R. Chandratre, Vol. 2, Chapter 42.1).

Absence of any provision for amalgamation in objects clause of the company's Memorandum of Association cannot bar the court to approve its amalgamation scheme. Mere fact that the Memorandum of Association of the transferor company does not have enabling provisions for arrangement cannot be the ground to refuse sanction [(2011) 104 CLA 190 (Mad)].

When the company court sanctions a scheme of amalgamation, there is no need for amendment to the Memorandum of Association of the transferee company in accordance with the procedure under the Act, because business activity which was earlier being undertaken by the transferor company, would upon merger will be undertaken by the transferee company [(2011) 104 CLA 189 (Del)]. In amalgamation proceeding, the court may pass order to alter company's objects to facilitate amalgamation without following the procedures of alteration. The amalgamation scheme shall not affect or nullify the pending legal proceeding against the transferor company and the litigations will continue in the name of amalgamated company.

Amalgamation or merger may be classified into four categories: horizontal, vertical, extension and conglomerate. Horizontal merger is the blending of two competitive companies of similar level of capacity. A merger between two beverage manufacturing companies is an instance of horizontal merger which causes threat to competitive environment in market. Vertical merger is the fusion of two companies of different level of competition but deal with similar products. Extension merger occurs when two companies of similar level of capacity, but functioning in different geographical markets merge. Extension merger ordinarily does not create threat to competitive atmosphere of market. Conglomerate merger is the fusion of two companies that deal with totally different products.

The Board of Directors of companies after considering the scheme may decide to submit an application under sections 228 and 229 of the Companies Act, 1994 and authorise any person to file the petition. The petition may be filed jointly by the participating companies in the proposed amalgamation. The court, after admission of the petition, may order to call for a General Meeting of members to consider the said scheme. A meeting of creditors may also be convened if the court thinks fit. The notices of the meetings shall be published in the newspapers as decided by the court.

The proposed scheme should be approved by at least three-fourths majority of the meetings. The notice of the General Meeting, its minutes approving the scheme and chairman's report need to be submitted to the court. Similarly, the notice of the creditors' meeting, its minutes and chairman's report shall be submitted to the court by a petition of compliance. The court may allow any creditor or member-- who desires-- present speech before the court.

Where all the assets and liabilities of one company are transferred to the other and the creditors of one company are given the same rights against the transferee company which they would have had against the transferor company,  the objection to the scheme of merger has very little substance (Bengal Tea Industries -versus- Union of India, 1988-89, 93 CWN 542). If the scheme contains nothing prejudicial to the interest of the creditors, the court may not order to convene the meeting of creditors.

The shareholders of the transferor company participate in the shares of the amalgamated or merged company and to ascertain the appropriate share exchange ratio, proper valuation is a must. In determining valuation of shares, its capital cover, yield, earning capacity and marketability should be taken into consideration (Principles of Company Law by Pennington). Weinberg and Blank's treatise on Take-over and Amalgamations (page 519) prescribes the following factors for ascertaining share exchange ratio: (a) the stock exchange prices of the shares of the two companies before the commencement of negotiations or the announcement of the bid, (b) the dividend presently paid on the shares of the two companies, (c) the relative growth prospects of the two companies, (d) the cover for the present dividends of the two companies, (e) the relative gearing of the shares of the two companies, (f) the values of the net assets of the two companies, (g) the voting strength in the merged enterprise of the shareholders of the two companies, and (h) the past history of the prices of the shares of the two companies.

The material on the basis of which share valuation has been worked out should be placed on record of the court and also brought to the notice of the shareholders [(1976) 46 Com Cases 227 (Guj)]. The court is not to disturb a scheme unless the person who challenges the valuation satisfies the court that the valuation arrived at was grossly unfair [(1994) 3 Comp LJ 46 (Bom)]. But the share value and exchange ratio should be computed by well-reputed chartered accountants. Usually, the company court does not interfere in share exchange ratio unless there is something patently wrong.

In approving amalgamation schemes of companies, courts on a number of occasions express their vigilance regarding the job security of existing employees of transferor-company. In the illustrious amalgamation matter in the jurisdiction between Airtel and Robi [reported in 22 BLC (2017) 337, para-22 ] the Hon'ble Court observed:

"As is usual for this Court's sanction of any blueprints for amalgamation, employment security and employee interests are given priority of consideration to gauge the acceptability of any merger plan. This case proved no exception in that regard. The University of Dhaka Expert Report emphasises the retention of service of employees of both entities in the Amalgamated Company, in particular, as well as devising a Voluntary Retirement Scheme (VRS) for them. With regard to the latter, the Expert Report recommends that employees desiring to leave their jobs shall be offered a VRS  following policy clearance by BTRC and all relevant government bodies making not only the decision on allowing VRS but also developing the detailed framework for its implementation based on a review of the practice of national and international organisations having similar options." There is, therefore, a clear implication in such report of the need for detailed elaboration of a retirement scheme as a necessary corollary to the scheme's implementation.

Amalgamation schemes of bank companies or financial institutions should be approved by the Bangladesh Bank prior to filing petition in the court. Being satisfied with the prescribed due diligence report, Bangladesh Bank may approve the scheme.

At the time of approving amalgamation scheme, the court may direct the transferee company to pay an amount of charity to some charitable institutions as fixed by the court. The amalgamation will take into effect after communication of the order to the Registrar of Joint Stock Companies and Firms.

No amalgamation scheme should be sanctioned which is envisioned to create monopoly and disturb competitive environment in the market. Public interest should prevail in all such circumstances.

Md Nazrul Islam Khan in an advocate of the Supreme Court of Bangladesh.


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