Thursday, December 27, 2007

Contractual Mergers a Possibility

Presently, accomplishing a merger of two or more companies involved a fairly detailed process that lasts about four to six months, if not more. Under Sections 391 to 394 of the Companies Act, 1956, apart from the approval of the shareholders (and sometimes creditors) the merger also requires the sanction of the appropriate High Court (and often multiple High Courts).

However, there is likely to be simplification in the procedure. The Economic Times reports that the Government is proposing to introduce a system of ‘contractual mergers’ which does away with the requirement of obtaining the sanction of the High Court. Approval of the shareholders would continue to be a pre-requisite for mergers. There seem to be checks and balances introduced to avoid abuse of this process – the simplified procedure is available only to specific types of merger transactions where public interest is not expected to be affected. The news report states:

The new norms for M&As between group companies will cover mergers between a parent and a subsidiary as well as mergers between two unrelated private companies where public interest is minimal. The logic is that if outsiders are not involved, it is unfair to subject the internal matter of a group or of two private companies to the rigours of an elaborate process designed for public limited companies where the public and other stakeholders are involved.

This proposal is consistent with developments across the globe. For instance, in the Delaware (which has the maximum concentration of incorporations in the United States), all mergers are contractual and do not require sanction of the court. Affected parties are however free to challenge merger transactions ex post if there is a breach of law. Other nations, including several Commonwealth countries such as Singapore and New Zealand are gradually moving in the same direction.

A significant advantage that the court sanction under Sections 391 to 394 of the Companies Act provides is that the order of the court operates in rem and therefore enables parties to give effect to a smooth transfer of all assets, liabilities, contracts, licences, employees, litigation and so on by virtue of the court order. Often, parties resort to a court scheme rather than elaborate bilateral negotiations and transfers in order to avail of this advantage. It remains to be seen whether the proposed ‘contractual’ merger option takes into account the aspect of the merger operating in rem, failing which parties may still continue to resort to the court procedure (regardless of the cost and delay) in cases where transfer of assets and liabilities become complex without a court order.

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