Tuesday, July 5, 2016

Scheme of Amalgamation: Leeway on Appointed Date and Effective Date

[The following guest post is contributed by Bhavika Gohil, who is working with a multinational consulting firm in Mumbai]

The Madras High Court by way of its order dated 6 June 2016 (accessible through Judis) permitted petitions filed by Equitas Micro Finance Limited (“Transferor Co. 1”), Equitas Housing Finance Ltd. (“Transferor Co. 2”) and Equitas Finance Ltd. (“Transferee Company”) (“the Companies”) with leeway to the companies to fix the appointed date and the effective date. Further, there was no express mention of the share-exchange ratio in the scheme and the scheme inter alia specified the ratio being arrived at based on the book value of the shares of the Transferor Co. 1 and Transferor Co. 2 as on the effective date.

Background

Petitions seeking sanction of the Scheme of Amalgamation (“Scheme”) of Transferor Co. 1 and Transferor Co. 2 with the Transferee Company were filed with the Hon’ble High Court of Judicature at Madras.

The Companies are subsidiaries of a company by the name of Equitas Holdings Limited. The holding company had applied to the Reserve Bank of India (“the RBI”) for grant of in-principle approval to establish a Small Finance Bank (“SFB”). The RBI granted an in-principle approval subject to certain conditions which, inter alia, required the amalgamation of the Transferor Co. 1 and Transferor Co. 2 with the Transferee Company to be effected prior to the commencement of business of the SFB.

It is in this context that the Companies took steps for bringing about the amalgamation of the Transferor Co. 1 and Transferor Co. 2 with the Transferee Company. Towards this, Companies proceeded to secure consent of its shareholders and creditors.

Upon notice being filed with the Regional Director (“RD”) in the aforesaid matter, the RD raised the following concerns:

(a)           The first concern was that, the Scheme did not fix the “appointed date”, and that, its definition was tied in with the definition of the “effective date”. Further, the effective date was defined to be the working day immediately preceding the date of commencement of business of bank by the proposed SFB. A concern was also raised that there was no clear date fixed in the Scheme, which would work as the effective date;

(b)           The second concern expressed was with respect to the share-exchange ratio being arrived at based on the book value of the shares of the Transferor Co. 1 and Transferor Co. 2 as on the effective date; and

(c)           The last concern pertained to the provision in the Scheme which envisaged dissolution of the Transferor Co. 1 and Transferor Co. 2 on the 30th day of the effective date.

Observation of the Court

It was argued by the Counsel representing the Companies that the Scheme was so crafted keeping in mind the in-principle approval granted by RBI for establishing the SFB.

The Court observed that the in-principle approval for commencing SFB business was based on an assurance that the merger of Transferor Co. 1 and Transferor Co. 2 with the Transferee Company would take place prior to the matter being taken up for grant of a banking licence. It was further observed that there was no assurance that a banking licence would follow if, for any reason, the RBI came to the conclusion that all formalities and conditions stipulated by it do not stand fulfilled. It was in these circumstances that the Scheme could not provide a clear appointed date or fix a share exchange ratio. The amalgamation of the Transferor Co. 1 and Transferor Co. 2 with Transferee Company was dependent on the issuance of a banking license by the RBI and, in turn, the issuance of license was dependent on the Court sanctioning the Scheme.

The Court further observed that Section 394 of the Companies Act, 1956 provided leeway to the Companies to draft the Scheme in such manner and sanctioning of a compromise or arrangement did not necessarily fetter the Court from delaying the date of actual amalgamation/merger of entities.

Epilogue

The above judgment would encourage companies to consider formulating schemes having appointed as well as effective dates conditional upon happening / non-happening of certain events. This leeway however, can be exercised only until sections 391-394 of the Companies Act, 1956 are in place as the merger provisions under the Companies Act, 2013 (specificatlly section 232(6)) require companies to make an explicit mention of appointed date in the scheme.


- Bhavika Gohil

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