Law on The Merger Of Companies

LAW ON THE MERGER OF COMPANIES LAW ON THE MERGER OF COMPANIES By Dr. Shaukat Husain, Advocate Supreme Court of Pakistan An amalgamation is the process by which two or more companies or legal persons merge into a single entity or one is absorbed into or blended with another1. The power to amalgamate should have been provided in the Company's Memorandum. If it is not there it should be acquired by altering the memorandum2. The company adopting the scheme of amalgamation should not necessarily be in financial hardships or that it should not be a well-off Company. When two or more companies are joined to form a third entity, it is said that amalgamation has taken place. However, there is a distinction between 'reconstruction' and 'amalgamation'. There is reconstruction of a company when that company's undertaking and business are transferred to another company doing the same business and the same persons are interested in it as in the case of the Old Company3. For several purposes the reconstruction may become essential. New objects can be adopted only by the process of reconstruction4. A reconstruction may also become necessary to cause material a erations of the rights of a class of shareholders or creditors5. Amalgamation occurs when two or more companies have merged with another to form a third entity. The effect is to wipe o it the merging companies and to fuse them all into a new one created. The new company comes into existence having all the property, rights and powers and subject to all duties and obligations of all the constituent companies. 1. Somayajula v. Hope Prudhomme & Co. Ltd. [1963] 2 Comp.LJ 61. 2. Hari Krishna Lohia v. Hoolungooree Tea Co. [1970] 40 Comp.Cas. 458, 463 (Cal.) and PMP Auto Industries Ltd. Re. [1994] 80 Comp.Cas 289 (Born.). 3. J.A. Hornby, An Introduction to Company Law at 174 (1957). 4. North of England Protecting and Indemnity Assn. Re (1929) 45 TLR 296. 5. Bank of India Ltd. v. Ahmadabad Mfgr & nCalico Printing Co. (1972) 42 Corn. Cas 211 (Born.); Industrial Credit and Investment, Corpn. of India v. Financial and Management Services Ltd. AIR (1998) Bom. 305. The Companies Ordinance, 1984 lays down a procedure for amalgamation of companies. Section 284 provides:-- (1) Any proposed compromise or arrangement between a company and its creditors or members, the Court may, on the application, in a summary way, of a company, creditor or member, order a meeting to be called, held or conducted in such a manner as the Court, directs. (2) In case 3/4 in value of the creditors and members agree through a resolution to any compromise or arrangement, shall, if sanctioned by the Court, be binding on all the creditors, members and in the case of company in the course of being wound-up, on the liquidation and contributories of the company: Provided the Court shall not make any order sanctioning any compromise or arrangement, unless satisfied that the company or any person, by whom an application has been moved, places on record all material facts relating to the company i.e. latest financial position or the latest auditor's report, on the accounts of the company. This is to say that the provisions of section 2846 will become operative in case any person who is entitled to do so has moved an application before the Court. The Court has the discretion to sanction the scheme and make necessary orders. Even the objector will be examined with regard to his bona fides as to whether he has raised a valid objection.7 The Companies Ordinance, 1984 makes further provision for facilitating reconstruction and amalgamation of companies. Section 2878 of the Ordinance reads:-- (1) Where an application is made to the Court under section 284 for the sanctioning of a compromise or arrangement proposed between a company and any such person as are mentioned in that section and it is shown to the Court. (a) that the compromise or arrangement has been proposed 6. Analogous provisions in Indian Companies Act, 1956 section 391, English Companies Act 1985, section 425. 7. Piceadally Radio PLC. Re [19891 BCLC 683 Ch. D; New Laser Centres (Raj koti) (P) Ltd.-Re [2002]111 Comp. Case 756 (Guj.). 8. Analogous provisions in Indian Companies Act, 1956-section 394; English Companies Act, 1985-section 427. for the purpose of, or in connection with, a scheme for the reconstruction of any company or companies, or the amalgamation of any two or more companies; and (b) that under the scheme the whole or any part of the undertaking, property or liabilities of any company concerned ("the transferor company") is to be transferred to another company ("the transferee company"). The Court, may, either by the order sanctioning the compromise or arrangement or by a subsequent, order, make provisions for all or any of the following matters:-- (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 persons; (iii) the continuation by or against the 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 provision to be made for any person who, within such time and in such manner as the Court directs, dissent from the 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: Provided that no compromise or arrangement, proposed for the purpose of, or in connection with, a scheme for the amalgamation of the company, which is being wound up, with any company or companies, shall be sanctioned by the Court, unless the Court has received a report from the registrar that the affairs of the company have been conducted in a manner prejudicial to the interests of its members or to public interest: Provided further that no order for the dissolution of any transferor company under clause (iv) shall be made by the Court, unless the Official liquidator has, on scrutiny of the books and papers of the company, made a report to the Court, that the affairs of the company have not been conducted in a manner prejudicial to the interests of its members or to public interest. (2) Where an order under this section provides for the transfer of any property or liabilities, then, by virtue of the order, that property shall be transferred to and vest in, and those liabilities shall be transferred to and become liabilities of the transferee company; and in the case of any property, if the order so directs, freed from any charge which is, by virtue of the compromise or arrangement, to cease to have effect. (3) Within thirty days after the making of an order under this section, every company in relation to which the order is made shall cause a certified copy thereof to be filed with the Registrar for registration. Statutory Obligations of the Court The provisions of section 284 read with section 287 of the Companies Ordinance, 1984 provide a ground to facilitate merger or reconstruction of a company with another company or companies subject to certain conditions. The Court will sanction a workable scheme if the minority shareholders have not been coerced and exchange ratio of shares has been approved by them9. Similarly the Court will not sanction amalgamation of a company which is in the process of being wound up unless the Court receives a report from the Registrar/or SECP. The word "public interest" has wide connotations which enables the Court to examine every aspect as to why the transferor company was formed and why it was being dissolved by merging it with another company10. The Court will not order dissolution of the transferor company unless the Official Liquidator has furnished report regarding its affairs that the company has not conducted its business prejudicial to the interest of minority shareholders and to public interest11. The scheme of merger could be disapproved only if the same appeared to be unfair, unreasonable and oppressive on the face of it to a certain class of shareholders which did not 9. Kamala Sugar Mills Ltd. In Re (1984) 55 Comp.Cas. 308 (Mad.). 110. Wood Polymer Ltd. In Re. (1977) 47 Comp. Case. 597 (Guj.) 11. Regional Director v. Mysore Galvanising Co. P. Ltd. (1976) 46 Comp. Cas. 639 (Ker.). appear to be the case in the facts and circumstance of merger12. The Court sanctioned the merger scheme where the members of both the companies have overwhelmingly supported the resolution for merger without any coercion13. In certain cases the Court may provide in its order for continuation of legal proceedings pending by or against any transferor company, the dissolution without winding up of any transferor company, the provision to be made for any person who dissents from the scheme and such other matters as are necessary to secure that the scheme is carried out. Similarly the Court has to be vigilant that the Directors' scheme for merger will not be sanctioned if they have acted arbitrarily. The Directors may have discretion in selecting one of the suitable courses of action but they have no discretion to act, in the manner injurous to the interest of shareholders14. This is to say that the power of the Court is discretionary. In a scheme for merger the rights of various classes of shareholders are taken care of and receive statutory protection in such schemes as same are subject to approval and judicial scrutiny15. An order under this section will be sufficient to vest properties and liabilities in the transferee company without execution of any other document. If the Court so directs, the properties may vest free of charge. But, an order transferring the property, rights and liabilities of a company to the transferee company does not automatically transfer contracts of personal service16. Where the whole undertaking is taken over, all the rights pass whether mentioned in a schedule or not17. The company now born out of amalgamation becomes the new tenant because the property rights which pass to the transferee company include tenancy rights also18. 12. International Multi-leasing Company v. Capital Assets Leasing Co. Ltd. 2004 CLD 1 (Lah.) 13. Brooke Bond Pakistan Ltd. v. Aslam Bin Ibrahim 1997 CLC 1873. 14. Kohinoor Raiwind Mills Ltd. v. Kohinoor Gujar Khan Mills 2002 CLD 1314. 15. Admajee Insurance Co. Ltd. v. Muslim Commercial Bank Ltd. 2003 CLD 463. 16. Nokes v. Doncaster Amalgamated Collieries Ltd. (1940) 3 All ER 549, (1940) AC 1014. 17. L. Mullick & Co. v. Benani Properties (P.) Ltd. (1983) 53 Comp. Cas 693 (Cal.) 18. Telesound (India) Ltd. Re. (1983) 53 Comp. Cas 926 (Del.) Filing of Order of the Court It is statutory requirement that a certified copy of the Court's order sanctioning the scheme should be filed with the Registrar within 30 days from the date of its order. This order takes effect after a certified copy of the same is filed with the Registrar. Until this is done the scheme remains in abeyance valid but not effective. Non-filing of certified copy of the order is punishable under the provisions of the law. Once the scheme is sanctioned and a certified copy of the scheme is filed with the Registrar, it has a statutory force and cannot be varied by act of the parties19. Shareholder Acquires Right after Sanction In the proposed scheme of merger, a date has been mentioned from which the scheme will become effective even though an application is pending with the Court for sanctioning of scheme. Each existing member of the transferor company will get his share after the Court has sanctioned the scheme and from the date specified for the operation. A member of the transferor company does not get any right of membership in the transferee company and as such he has no locus standi to make application or institute a suit to interfere in the affairs of the transferee company20. This is to say that the legal authority of a member of the amalgamated company remains suspended until the scheme is sanctioned and the amalgamating company confers right to a share upon him. Reduction of Capital in Amalgamation Where the scheme of merger is to amalgamate two companies into a new company and the merging companies are dissolved without winding up, the preference shareholders of the merging companies are to be paid back under the scheme does not amount to reduction of capital.21 This principle was laid down in view of the fact that both companies had been dissolved thus having no existence whereas the Companies Act clearly envisages reduction in capital in the context of an existing and continuing company. The object for seeking 19. Smt. Premila Devi v. Peoples' Bank of Northern India Ltd. 43 CWN 205; AIR 1938 PC 284: (1939) 9 Comp. Cas. 1(PC) 20. Brooke Bond India Ltd. v. Dinkar Landge (1984) 56 Comp. Cas. 1 (Bom) 21. T. Durairajan v. Waterfall Estates Ltd. (1972) 42 Comp. Cas 563 (Mad.); Novapan India Ltd. Re (1997) 88 Corn. Cas 596 AP; (1997) 25 Corpt. LA 224 AP. sanction of the Court, for reduction of capital is nothing else than to safeguard the interest of the creditors of the company. In the aforesaid case the new company had undertaken to pay all the debts of the merging companies and, therefore, the Court's interference in such .cases is not warranted. There is, otherwise, no legal restriction on reduction of share capital when the scheme of amalgamation has so provided subject to complying with the procedure laid down in the Companies Ordinance; 1984. The scheme had been approved by requisite majority of shareholders and creditors. The auditors report was that the affairs of the company had not been conducted in a manner prejudicial to members' or public interest22. Increase of Authorized Share Capital Where the scheme of amalgamation involves an increase in the authorized share capital of the transferee company, the Court held that the procedure prescribed for such increase would have to be followed without any waiver. It is the obligation of the transferee company to carry out the scheme in its letter and spirit23. Finally the merger is a fusion of two or more companies. It happens when two or more enterprises by or under the control of a body corporate cease to be distinct enterprises. The purpose behind the merger may be for large scale production or it may be to secure the supply of raw-materials or channels for marketing the products. Another end may be to eliminate competitors from the market. It may also be for diversification of activities and for expansion of the business. Sometimes it may be to create cartel in a particular trade. Sometimes it may help in getting the assets of another company at a low price with all its technical skill and administrative machinery. This "modus operandi" may enable the transferee company to save time, money and energy in establishing a new company similar to that of a merged one. But merger or amalgamation of companies is subject to the order of the Court by which the scheme of merger has been sanctioned. The Court may refuse to sanction any scheme of merger which is found to be against the interest of shareholders or creditors or contrary to public interest. 22. Comat Infoscribe (P.) Ltd. Re. (2004) 53 SCL 41 Kant; 2004 CLC 851; (2005) 128 cc 152. 23. Anmol Trading Co. Ltd. v. Shaily Engg. Plastics Ltd. (2003) 113 Comp. Cas 107 (Bom.).