A Critical Appraisal of the Fast Track Mergers under the Companies Act, 2013
Written by Mayur Kulkarni
Research Associate at Law & Order (Aug-Oct 2020)
Third Year, B.Com LLB. Gujarat National Law University
Disclaimer: Please note that the views expressed below represent the opinions of the article's author. The following does not necessarily represent the views of Law & Order.
Introduction
Corporate houses have always favoured mergers and acquisitions as the means to infuse more resources and scale up their operations. Having said that the cumbersome process of mergers and acquisitions envisaged under the Companies Act, 2013 [the Act] was proving detrimental to interests of all the stakeholders involved. Hence, with an intention to ease out this cumbersome process the Parliament rolled out the Fast Track Merger System [FTMS] under Section 233 of the Act read with Rule 25 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 [the CAA Rules]. This article seeks to discuss the procedure, advantages and defects of the Fast Track Merger system.
What companies are eligible to opt for Fast Tracker Merger System
It is pertinent to note that only three types of companies are eligible to opt for FTMS.[1]
They are:
Holding Company merging with this Wholly-Owned Subsidiary – These companies can be both public and private companies. Also, if the Holding Company intends to merge with more than one of its subsidiaries, separate applications for each company needs to be presented. Further, the companies must also provide proof of being a Holding company and a wholly-owned subsidiary.
Two or more small companies – ‘Small company’ is defined under Section 2(85) of the Act as follows:
i. the company must not be a public company
ii. the paid-up capital of which does not exceed 50 lakhs or such higher amount as may be prescribed which in any case shall not exceed 5 crores; or
iii. turnover of which as per the last profit and loss account does not exceed 2 crores or such higher amount as may be prescribed which in any case shall not exceed 20 crores.[2]
3. Such other class or classes of companies as prescribed.
What is the procedure for FTMS
Requisite permission under Articles of Association [AoA] and Memorandum of Association [MoA] - The first step involved in FTMS is that both the transferor and the transferee companies must ensure that their respective AoA permit a merger. If not, then the AoA can be amended in this regard. Further, the object clause of the MoA of the companies must also permit a merger.
Board meeting for approval of the Merger - Next, both the transferor and the transferee companies must hold the Board Meeting and approve the draft scheme of merger. Also, necessary resolutions must be passed to convene shareholders’ and creditors’ meetings and authorise all the acts required to conduct the merger.
Filing the draft scheme of merger for objections – On the approval of the draft scheme of merger by the Board members, it shall be filed with the respective Registrar of Companies [RoC], Official Liquidator and Other Persons affected by the merger. Subsequently, the RoC, Official Liquidator and other persons affected by the merger can file their objections to the scheme within 30 days of notice.[3]
Declaration of Solvency – As per Section 233(1)(c) of the Act read with Rule 25(2) of the CAA Rules, the companies involved in the merger must file their respective declaration of solvency statement with the RoC.[4]
General Meeting of Shareholders - The next step in the process is to convene the shareholders’ meeting of both the companies. As per Section 233(1)(b) of the Act and Rule 25(3) of CAA Rules, the companies must obtain approval of 90% of total number of shares for the proposed scheme of merger.[5]
General Meeting of Creditors – As per Section 233(1)(d) of the Act read with Rule 25(3) of CAA Rules, both the companies must obtain the approval of majority of creditors representing 9/10th value of creditors in writing.[6] It must be noted here that notice of the Shareholders’ or Creditors’ meetings must be given 21 days prior to the commencement of the meetings which must be accompanied by a copy of proposed scheme of merger, an explanatory statement as per Rule 6(3) of CAA Rules, a copy of the Declaration of Solvency.[7]
Conveying the results of the meetings to the Regional Director [RD] – After the completion of these meetings, the copy of the approved scheme of merger and the report of the result of both the Shareholders’ and the Creditors’ meetings must be filed with the RD.[8]
Approval of the Scheme of Merger by the Regional Director – This is the most important step in the procedure of FTMS. Along with the above documents, the comments and objections filed by the RoC and the Official Liquidator must be given to RD. on acknowledgement of all these documents and if there are no objections raised, and the Rd believes that the proposed scheme of merger is in public interest and in the interest of shareholders and creditors, the RD shall approve the scheme of merger. This approval shall be considered as the Order sanctioning the proposed scheme of merger. It is to be noted here that the RD is acting as the representative of the Central Government in this step.[9] On the other hand, if any objections are sent to the RD in writing, he/she shall take them into account and review the scheme. If the RD believes that the scheme is against the public interest or the interest of creditors, he/she may file the scheme before the National Company Law Tribunal [NCLT] for consideration within 60 days stating the objections.[10] Further, the RD may also request the NCLT to consider the scheme of merger under the regular procedure of mergers as per Section 232 of the Act. On receipt of the request from the RD, the NCLT may direct the parties to conduct the merger under Section 232 or reject the objections raised by the RD and approve the scheme of merger through an Order.[11]
Registration of the Scheme of Merger – On the approval of the scheme of merger either by the RD or the NCLT, the Order of confirmation is to be filed with the RoC within 30 days by the Transferee Company. The RoC shall register the scheme and issue a confirmation of the same to both the companies. The FTMS procedure culminated with this step.[12]
Advantages and Disadvantages of Fast Track Merger System
The notable advantages of the FTMS are that it is less time consuming and involves a less cumbersome procedure as compared to mergers under Section 232 of the Act.
FTMS does not require mandatory approval from the NCLT at all steps during the merger. It also does not require issuing public advertisements. It involves less administrative burden and is cost-effective also.
On the other hand, there are some disadvantages to FTMS which need consideration. As FTMS requires little or no involvement of NCLT, it gives significant power to the RoC and in turn the Central Government. As seen above, if the RD believes the scheme to be in contravention of public interest or the interests of the creditors, she may file an application before NCLT which can consequently order the companies to conduct the merger under Section 232. These defeats the whole purpose of FTMS as the time taken to complete the merger would be long.
Conclusion
On considering the advantages and the disadvantages of FTSM, it seems to be a system friendly to the companies. However, there is a need to address its disadvantages especially given the fact that the government is looking to purview of FTMS to include other companies and joint ventures.[13] Therefore, the key to the success of FTMS lies in the proactiveness of the Central Government in addressing the loopholes of FTMS and model it into an easy, corporate friendly system.
[1] Section 233(1) of the Companies Act, 2013. [2] Section 2(85) of the Companies Act, 2013. [3] Section 233(a) of the Companies Act, 2013; Rule 25(1) of the CAA Rules. [4] Section 233(1)(c) of the Companies Act, 2013; Rule 25(2) of the CAA Rules. [5] Section 233(1)(b) of the Companies Act, 2013. [6] Section 233(1)(d) of the Companies Act, 2013. [7] Rule 25(3) of the CAA Rules. [8] Section 233(2) of the Companies Act, 2013. [9] Section 233(3) of the Companies Act, 2013; Rule 25(5) of the CAA Rules. [10] Section 233(5) of the Companies Act, 2013; Rule 25(6) of the CAA Rules. [11] Section 233(6) of the Companies Act, 2013. [12] Section 233(7) of the Companies Act, 2013; Rule 25(7) of the CAA Rules. [13] Fast Track Mergers : MCA keen to extend facility to more classes of companies, Business Line, May 25 2020, https://www.thehindubusinessline.com/economy/policy/fast-track-mergers-mca-keen-to-extend-facility-to-more-classes-of-companies/article31669393.ece. (Last visited 02nd October, 2020).
Bibliography
Articles:
● Fast Track Mergers: MCA keen to extend facility to more classes of companies, Business Line, May 25 2020, https://www.thehindubusinessline.com/economy/policy/fast-track-mergers-mca-keen-to-extend-facility-to-more-classes-of-companies/article31669393.ece.
Statutes:
● Companies Act, 2013, No. 18, Acts of Parliament, 2013 (India).