CORPORATE RESTRUCTURING - MERGER AND AMALGAMATION

Corporate Restructuring

It is an expression that connotes a restructuring process undertaken by business enterprises for the purpose of bringing about a change for the better and to make the business competitive.

Need and scope of Corporate Restructuring:

 Need:

• Orderly redirection of the firm’s activities
• Deploying surplus cash from one business to finance profitable growth in another
• Exploiting inter- dependence among present or prospective businesses within the corporate portfolio.
• Risk reduction
• Development of core competence.

 Scope:

Enhancing economy (cost reduction) and improving efficiency (profitably). When a company wants to grow or survive in a competitive environment, it needs to restructure itself and focus on its competitive advantage.

 

Merger -  A Merger can be defined as the fusion or absorption of one company by another. It may be understood as an arrangement whereby the assets of two or more companies get transferred to, or come under the control of one company (which may or may not be one of the original two companies). The Shareholders of the company whose identity have been merged are then issued shares in the capital of the new merged company in accordance with Share Exchange Ratio.

Amalgamation - Amalgamation is an ‘arrangement’ or ‘reconstruction’. Amalgamation is a legal process by which two or more companies are joined together to form a new entity or one or more companies are to be absorbed or blended with another and as a consequence the amalgamating company loses its existence and its shareholders become the shareholders of new company or the amalgamated company.

 

Three Conditions for Merger to qualify as an amalgamation

• All the property of the amalgamating company (old) immediately before the amalgamation becomes the property of the amalgamated company (new) by virtue of amalgamation.
• All the liabilities of the amalgamating company immediately before the amalgamation become the property of the amalgamated company by virtue of amalgamation.
• Shareholders holding not less than three- fourth in value of the shares in the amalgamating company (other than shares already held therein immediately before the amalgamation by or by a nominee for the amalgamated company or its subsidiary) become shareholders of the amalgamated company by virtue of the amalgamation.

Benefits achieved from Merger and Amalgamation

• Coming together to produce a new or enhanced effect.
• Reduction in the average cost of production and hence in the unit costs when output is increased, to enable to offer products at more competitive prices and thus to capture a larger market share.
• Reduction in production, administrative, selling, legal and professional expenses.
• Mutual benefit by reducing competition, saving costs by reducing overheads, capturing larger market, pooling technical or financial resources.
• Optimum Use of capacities and factors of production
• Tax advantage – Carry forward and setoff of losses of a loss – making amalgamating company against profits of a profit – making amalgamated company
•  Financial constraints for expansion can be removed
• Diversification
• Advantage of Brand – Equity
• Survival
• Revival of Sick Company
• Substantial Growth.

 

Categories of Mergers

1.Cogeneric Merger – Within same industries and at the same level of economic activity

(a) Horizontal Merger – Merger between business competitors who are manufactures or distributors of the same type of products or who render similar or same type of services for profit. Horizontal Mergers result in the reduction in number of competing companies in an industry; increase the scope for economies of scale and elimination of duplicate facilities.

(b) Vertical Merger – It occurs which are complementary to each other. In this merger the two companies merge and control the production and marketing of the same product.

2. Conglomerate Merger – This type of merger involves coming together of two or more companies engaged in different industries and/or services. Their businesses lack commonalty either in their end product, or in the rendering of any specific type of services to the society.

 

Methods of Merger/Amalgamation

• Merger under a scheme of compromise or arrangement
• Merger by purchase of shares of one company by another
• Merger in public interest under the orders of Central Government.
• Merger through holding company
• Merger for revival and rehabilitation.

 

Legal aspect of Merger/Amalgamation

Companies Act, 1956 has provided for a set of provisions specially dealing with amalgamation of companies, to facilitate the transactions. The statutory provisions relating to Merger and Amalgamation are contained in Sections 390 to 396A.

Section 390 interprets the expressions “company”, "arrangement" and unsecured creditors.

Section 391 lays down in detail Power to compromise or make arrangements with creditors and members.

Section 392 explains Power of Tribunal to enforce compromise and arrangement.

Section 393 lays down Information as to compromises or arrangement that is to be sent with every notice calling a meeting of creditors and members.

Section 394 explains Provisions for facilitating reconstruction and amalgamation of companies.

Section 394A lays down Notice to be given to Central Government for applications under sections 391 and 394.

Section 395 depicts Power and duty to acquire shares of shareholders dissenting from scheme or contract approved by majority.

Section 396 lays down Power of Central Government to provide for amalgamation of companies in national interest.

Section 396A lays down Preservation of books and papers of amalgamated company.

 

Approvals in respect of amalgamation

1. Approval of Board of Directors
2. Approval of Shareholders – Section 391(1)
3. Approval of Stock Exchange
4. Approval of Financial Institutions
5. Approval from Land Holders – If the land on which the factory is situated is the lease hold land and the terms of lease deed so specifies, the approval from the lessor will be needed.
6. Approval of High Court
7. Approval of Reserve Bank of India – where the scheme of amalgamation envisages issue of shares to NRI.

 

Methods of accounting for amalgamation

1. The pooling of Interest Method - the assets, liabilities and reserves of the transferor company are recorded by the transferee companyat their existing carrying amounts. If, at the time of the amalgamation, the transferor and the transferee companies have conflicting accounting policies, a uniform set of accounting policies is adopted following the amalgamation. The effects on the financial statements of any changes in accounting policies are reported in accordance with Accounting Standard (AS) 5, Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies.

2. The Purchase Method - the transferee company accounts for the amalgamation either by incorporating the assets and liabilities at their existing carrying amounts or by allocating the consideration to individual identifiable assets and liabilities of the transferor company on the basis of their fair values at the date of amalgamation. The identifiable assets and liabilities may include assets and liabilities not recorded in the financial statements of the transferor company. Where assets and liabilities are restated on the basis of their fairvalues, the determination of fair values may be influenced by the intentions of the transferee company.

 

Treatment of Balance of Profit and Loss Account on Amalgamation

In the case of an ‘amalgamation in the nature of merger’, the balance of the Profit and Loss Account appearing in the financial statements of the transferor company is aggregated with the corresponding balance appearing in the financial statements of the transferee company. Alternatively, it is transferred to the General Reserve, if any.

In the case of an ‘amalgamation in the nature of purchase’, the balance

of the Profit and Loss Account appearing in the financial statements of the transferor company, whether debit or credit, loses its identity

 

Disclosure Requirements on Amalgamation

The following disclosures are considered appropriate in the first financial statements following the amalgamation:

(a) names and general nature of business of the amalgamating companies

(b) effective date of amalgamation for accounting purposes

(c) the method of accounting used to reflect the amalgamation

(d) particulars of the scheme sanctioned under a statute.

 

For amalgamations accounted for under the pooling of interests method the following additional disclosures:

(a) description and number of shares issued, together with the percentage of each company’s equity shares exchanged to effect the amalgamation

(b) the amount of any difference between the consideration and the value of net identifiable assets acquired, and the treatment thereof.

 

For amalgamations accounted for under the purchase method the following additional disclosures:

(a) consideration for the amalgamation and a description of the consideration paid or contingently payable

(b) the amount of any difference between the consideration and the value of net identifiable assets acquired, and the treatment thereof including the period of amortisation of any goodwill arising on amalgamation.

 

Treatment of Goodwill Arising on Amalgamation

Goodwill arising on amalgamation represents a payment made in anticipation of future income and it is appropriate to treat it as an asset to be amortized to income on a systematic basis over its useful life. Due to the nature of goodwill, it is frequently difficult to estimate its useful life with reasonable certainty. Such estimation is, therefore, made on a prudent basis. Accordingly, it is considered appropriate to amortize goodwill over a period not exceeding five years unless a somewhat longer period can be justified.