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Merger and Acquisition of company in Pakistan and related laws.

An appraisal concept

5/21/2023
Submitted To: Mr. Saif Hashmi

Submitted By: Huzaifa Basheer

Roll Number: 031

College of Law

University of Sargodha

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Contents:
Abstract ________________________________________________________3

Introduction ____________________________________________________3

 History
 Overview of merger and acquisition
 Importance of merger and acquisition in Pakistan

Legal Framework of M&A in Pakistan______________________________6

 SECP
 Companies Act 2017 related to M&A

Process of M&A in Pakistan ______________________________________9

 Legal process
 Documentation
 Closing and post-merger integration

Benefits and Drawbacks of Companies Act 2017 related M&A__________11

Case Study in Pakistan __________________________________________12

Conclusion ____________________________________________________12

Bibliography __________________________________________________13

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Abstract:
This work provides a detailed appraisal of the concept of (M&A) merger and acquisition of the
companies. The assignment focused on the process followed by the Pakistan along with the
relevant laws and statutes, particularly the Companies Act 2017. This assignment focused on the
legal framework of merger and acquisition, also discussed about the process, requirements and
legal restriction involved. This work also highlights the governing impact of statute (Companies
Act 2017) on merger and acquisition transactions, some potential challenges, and its benefits.
The complete analysis is in easy language to understand and clear points is maintained due to
better understanding.

Introduction:
Mergers and acquisitions (M&A) are business transactions in which the ownership
of companies, business organizations, or their operating units are transferred to
or consolidated with another company or business organization. As an aspect of strategic
management, M&A can allow enterprises to grow or downsize, and change the nature of their
business or competitive position.

The Great Merger Movement: 1895–1905

The Great Merger Movement was a predominantly U.S. business phenomenon that happened
from 1895 to 1905. During this time, small firms with little market share consolidated with
similar firms to form large, powerful institutions that dominated their markets, such as
the Standard Oil Company, which at its height controlled nearly 90% of the global oil
refinery industry. It is estimated that more than 1,800 of these firms disappeared into
consolidations, many of which acquired substantial shares of the markets in which they operated.
The vehicle used was so-called trusts. In 1900 the value of firms acquired in mergers was 20%
of GDP. In 1990 the value was only 3% and from 1998 to 2000 it was around 10–11% of GDP.
Companies such as DuPont, U.S. Steel, and General Electric that merged during the Great
Merger Movement were able to keep their dominance in their respective sectors through 1929,
and in some cases today, due to growing technological advances of their products, patents,
and brand recognition by their customers. There were also other companies that held the greatest
market share in 1905 but at the same time did not have the competitive advantages of the
companies like DuPont and General Electric. These companies such as International
Paper and American Chicle saw their market share decrease significantly by 1929 as smaller
competitors joined forces with each other and provided much more competition. The companies
that merged were mass producers of homogeneous goods that could exploit the efficiencies of
large volume production. In addition, many of these mergers were capital-intensive. Due to high
fixed costs, when demand fell, these newly merged companies had an incentive to maintain
output and reduce prices. However more often than not mergers were "quick mergers". These

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"quick mergers" involved mergers of companies with unrelated technology and different
management. As a result, the efficiency gains associated with mergers were not present. The new
and bigger company would actually face higher costs than competitors because of these
technological and managerial differences. Thus, the mergers were not done to see large
efficiency gains; they were in fact done because that was the trend at the time. Companies which
had specific fine products, like fine writing paper, earned their profits on high margin rather than
volume and took no part in the Great Merger Movement.

1. Overview of Merger:
The merger is occurs when two or more different companies form an agreement to
combine especially their operations and called a single entity. The main goal is to increase
market position, improve the scale of economies and shareholders. Further there are two
types of merger,
 Vertical Merger:
Vertical merger is when two companies have a same supply chain but operating at
different stages. Like a manufacturer of car merge with the producer of tire to
control entire process.
 Horizontal Merger:
When two or more companies having same production and distribution in the
market. These kinds of companies emerge for increase their marker share.
2. Overview of Acquisition:
Acquisition means when one company buys another including operational control, assets
and liabilities. The acquiring company becomes the new owner of the company.

3. Importance of M&A in Pakistan:

It plays a crucial role in the economic development and business landscape of Pakistan.
 Consolidation of Market:
Merger and acquisition transactions improve market consolidation by bringing
together the companies. In a state like Pakistan, where a number of companies and
enterprises are small sized, in these cases merger and acquisition help to
consolidate these businesses, maintain the scale of economies and enhanced
competitiveness.

 Foreign Direct Investment:

M&A activities often involve foreign investors acquiring or merging with local
companies. This inflow of FDI contributes to the economic growth of Pakistan,

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 brings in new technologies, expertise, and best practices, and creates opportunities
for job creation and skill development.
 Market Access and Expansion:
This process provides companies opportunities in Pakistan to expand the market
and provide access to a new geographical regions or customer segments. By
acquiring or merging with companies that have an established presence in different
markets, Pakistani firms can diversify their operations, reduce risks, and gain a competitive
edge.
 Development of Capital Market:
M&A activities can contribute to the development of the capital markets in
Pakistan. Successful mergers and acquisitions can attract investor confidence,
stimulate trading activity, and foster a more robust and dynamic market
environment.
 Contribution in GDP and Economic Growth:
Overall, M&A activities can have a significant impact on Pakistan's economic
growth and gross domestic product (GDP). By facilitating business expansion,
technology transfer, and operational efficiencies, M&A can contribute to higher
productivity, increased revenues, and improved economic performance.

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Legal Framework of M&A in Pakistan:
In Pakistan the legal framework of merger and acquisition consist of two statute and rules and
regulations. The statute enforced in Pakistan is Companies Act 2017 and rules and regulations
issued by the Securities and Exchange Commission of Pakistan (SECP). Some important key
points are mentioned below;

 Regulatory Bodies: The SECP is the primary regulatory authority overseeing

M&A activities in Pakistan. It regulates public and listed companies, while the
Registrar of Companies handles private company matters.
 Types of M&A Transactions: M&A transactions in Pakistan can take various
forms, including mergers, acquisitions, amalgamations, and takeovers. These
transactions can be structured as share purchases, asset purchases, or a combination
of both.
 Mandatory Approvals: M&A transactions in Pakistan may require approval from
various regulatory bodies, depending on the type and size of the transaction. The
SECP, Competition Commission of Pakistan (CCP), and other sector-specific
regulators may be involved in the approval process.
 Due Diligence: Conducting thorough due diligence is crucial in M&A transactions.
It involves a comprehensive review of the target company's financial, legal,
operational, and regulatory aspects. The buyer should assess any potential risks or
liabilities associated with the target company.
 Disclosure Requirements: Listed companies must comply with disclosure
requirements, including providing timely and accurate information to shareholders,
the SECP, and the stock exchange(s) where the company is listed. This ensures
transparency and protects the interests of stakeholders.
 Competition Law: The CCP is responsible for reviewing M&A transactions to
ensure compliance with competition laws. The Competition Act, 2010, prohibits
anti-competitive practices and regulates mergers that may have a substantial
adverse impact on competition in the relevant market.
 Shareholder Protection: The Companies Act, 2017, provides certain safeguards
for shareholders' rights in M&A transactions. These include the right to object to a
proposed scheme of arrangement or merger, the right to dissent and seek fair value
for their shares, and the right to receive all relevant information before making a
decision.
 Valuation and Pricing: Valuation of the target company and determining the
purchase price are essential aspects of M&A transactions. Valuation methods may
vary depending on the industry and the nature of the transaction. Pricing should be
fair and based on an objective assessment of the target company's value.

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  Documentation and Approval Process: M&A transactions require the preparation
of various legal documents, including a share purchase agreement, a merger
scheme, or an amalgamation plan. These documents must be approved by the
shareholders, regulatory authorities, and the court, if applicable.
 Post-Merger Integration: After completing the transaction, the acquiring
company must effectively integrate the target company into its operations, ensuring
a smooth transition and maximizing the value of the merger.

The Companies Act 2017: An overview related to M&A:

The Companies Act, 2017 in Pakistan governs various aspects of corporate law, including
mergers and acquisitions. Here's an overview of some key provisions related to M&A
transactions under the Companies Act, 2017:

 Modes of M&A: The Act allows for various modes of M&A, including mergers,
amalgamations, and acquisitions. It provides a legal framework for both domestic and
cross-border transactions.
 Scheme of Arrangement: The Act allows companies to enter into a scheme of
arrangement, whereby they can restructure their share capital, amalgamate, or merge with
other companies. The scheme of arrangement must be approved by the shareholders and
the court.
 Approval Process: M&A transactions require the approval of the shareholders and the
regulatory authorities. The Act specifies the procedures for convening meetings,
obtaining shareholder approval, and notifying the authorities of the proposed transaction.
 Protection of Minority Shareholders: The Act incorporates provisions to protect the
interests of minority shareholders in M&A transactions. Minority shareholders have the
right to object to a proposed scheme of arrangement or merger and can seek relief from
the court if their interests are prejudiced.
 Appraisal Rights: The Act provides for appraisal rights for dissenting shareholders in
certain cases of M&A. Shareholders who dissent from a proposed scheme of arrangement
or merger have the right to have their shares appraised and to be paid the fair value of
their shares.
 Merger Report: Companies involved in a merger or amalgamation must prepare a
merger report, which includes details such as the terms of the merger, the reasons for the
merger, and the impact on shareholders, employees, and creditors. The merger report is
submitted to the court for approval.
 Investigation of M&A: The Act empowers the Securities and Exchange Commission of
Pakistan (SECP) to investigate M&A transactions to ensure compliance with the law. The

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 SECP can inquire into the affairs of the merging companies, their financial statements,
and any other relevant matters.
 Cross-Border M&A: The Companies Act, 2017 allows for cross-border mergers and
acquisitions. It sets out specific provisions for the transfer of assets and liabilities
between companies incorporated in Pakistan and companies incorporated in foreign
jurisdictions.
 Post-Merger Matters: The Act addresses post-merger matters, such as the transfer of
assets and liabilities, employee rights and benefits, and the continuity of contracts and
agreements. It provides guidelines for the seamless integration of the merging companies.

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Merger and Acquisition process in Pakistan:
The merger and acquisition (M&A) process in Pakistan generally involves several key steps.
While the specific process may vary depending on the nature and complexity of the transaction,
here is a general overview of the M&A process in Pakistan:

Planning and Strategy:

 Identify the strategic objectives and rationale behind the proposed merger or acquisition.
 Conduct market research and due diligence to identify potential target companies.
 Determine the preferred structure of the transaction (merger, acquisition, etc.).

Preliminary Negotiations:

 Initiate discussions with the target company to gauge interest and willingness to engage
in M&A.
 Negotiate preliminary terms and conditions, including the purchase price, mode of
consideration, and other key terms.
 Execute a non-disclosure agreement (NDA) to protect confidential information during the
due diligence process.

Due Diligence:

 Conduct thorough due diligence on the target company, including legal, financial,
operational, and regulatory aspects.
 Review the target company's financial statements, contracts, intellectual property,
compliance records, and other relevant documents.
 Assess any potential risks, liabilities, or synergies associated with the target company.

Definitive Agreement:

 Prepare and negotiate the definitive agreement, which outlines the terms and conditions
of the merger or acquisition.
 The definitive agreement may include provisions related to purchase price adjustments,
representations and warranties, closing conditions, and post-closing arrangements.

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Regulatory Approvals:

 Obtain necessary regulatory approvals from the Securities and Exchange Commission of
Pakistan (SECP), Competition Commission of Pakistan (CCP), and other relevant
regulatory authorities.
 Submit the required documents and information, including the merger report, to the
authorities for their review and approval.

Shareholder Approval:

 Obtain approval from the shareholders of both the acquiring and target companies.
 Convene shareholders' meetings and provide them with the necessary information and
documentation regarding the transaction.
 The approval thresholds may vary depending on the type and size of the companies
involved.

Court Approval (if applicable):

 If the transaction involves a scheme of arrangement or merger, seek court approval by

filing a petition before the relevant court.
 The court will review the petition, consider objections (if any), and determine whether
the scheme is fair and reasonable to the shareholders and other stakeholders.

Closing and Integration:

 Fulfill all closing conditions and complete the transaction as per the terms of the
definitive agreement.
 Transfer the ownership of shares or assets, make the required payments, and execute any
necessary legal documents.
 Begin the integration process to merge the operations, systems, and resources of the
acquiring and target companies.

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Benefits and Drawbacks of the Companies Act 2017 related to M&A:
Benefits of the Companies Act, 2017 related to M&A:

 Clarity and Modernization: The Companies Act, 2017 provides a clear legal framework
for mergers and acquisitions in Pakistan. It incorporates modern concepts and practices in
corporate law, aligning with international standards.
 Shareholder Protection: The Act includes provisions to protect the rights and interests of
minority shareholders in M&A transactions. It ensures that their voices are heard,
allowing them to object to schemes of arrangement or mergers and seek fair value for
their shares.
 Appraisal Rights: The Act provides dissenting shareholders with the right to have their
shares appraised and to be paid fair value for their shares if they disagree with a proposed
scheme of arrangement or merger. This protects their investment and provides an avenue
for fair compensation.
 Regulatory Oversight: The Act empowers regulatory bodies such as the Securities and
Exchange Commission of Pakistan (SECP) and the Competition Commission of Pakistan
(CCP) to oversee M&A transactions. This helps maintain transparency, prevent anti-
competitive practices, and protect the interests of stakeholders.

Drawbacks of the Companies Act, 2017 related to M&A:

 Complex Procedures: The Act's provisions and procedures related to M&A transactions
can be complex and involve multiple approvals from regulatory authorities, shareholders,
and sometimes even the court. This can create administrative burdens and lengthen the
overall process.
 Potential Delays: Due to the involvement of various regulatory bodies and the court (if
applicable), the M&A process under the Companies Act, 2017 can experience delays.
Obtaining necessary approvals and meeting regulatory requirements may take time,
affecting the overall timeline of the transaction.
 Compliance Burdens: The Act imposes compliance obligations on companies involved in
M&A transactions, including the preparation of merger reports, disclosure requirements,
and adherence to competition laws. These obligations can be resource-intensive and may
require expert assistance to ensure compliance.
 Limited Flexibility: While the Act provides a framework for M&A transactions, its
provisions may limit certain flexibility in structuring transactions. Companies may need
to adhere to specific requirements and procedures, which may not always align perfectly
with their strategic objectives or commercial considerations.

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Case Studies in Pakistan:
Acquisition of K-Electric by Shanghai Electric Power Company:

In 2016, Shanghai Electric Power Company, a Chinese state-owned utility, acquired a 66.4%
stake in K-Electric, the largest integrated power company in Karachi, Pakistan. The transaction
was valued at approximately USD 1.77 billion. This acquisition aimed to improve the power
infrastructure in Karachi and enhance the efficiency of electricity supply.

Merger of Warid Telecom and Mobilink:

In 2016, VimpelCom Ltd., the parent company of Mobilink, Pakistan's leading

telecommunications provider, announced a merger with Warid Telecom, the country's fourth-
largest mobile operator. The merger created Pakistan's largest telecom operator with over 50
million subscribers. This transaction aimed to strengthen the competitive position of the merged
entity in the telecom industry.

Conclusion:
In conclusion, the legal framework for mergers and acquisitions (M&A) in Pakistan is primarily
governed by the Companies Act, 2017, along with regulations issued by the Securities and
Exchange Commission of Pakistan (SECP). This framework provides clarity and modernization
in corporate law, ensuring transparency, shareholder protection, and regulatory oversight in
M&A transactions. The Companies Act, 2017 offers benefits such as clear guidelines, protection
of minority shareholders, appraisal rights for dissenting shareholders, and regulatory oversight to
maintain transparency and prevent anti-competitive practices. However, there are certain
drawbacks, including complex procedures, potential delays, compliance burdens, and limited
flexibility in structuring transactions.

Overall, understanding the legal framework, conducting thorough due diligence, and seeking
professional advice are essential for successful M&A transactions in Pakistan.

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Bibliography
 https://www.hascol.com/
 https://www.mobileworldlive.com/
 https://www.ncbi.nlm.nih.gov/
 https://en.wikipedia.org/wiki/Mergers_and_acquisitions#
 https://www.cc.gov.pk/index.php?
option=com_content&view=article&id=501&Itemid=125&lang=en
 https://zallp.com/practice/mergers_law/
 https://zallp.com/practice/mergers_law/#:~:text=Three%20fourths%20of%20the
%20creditors,manner%20as%20the%20Court%20directs.
 https://dealroom.net/blog/successful-acquisition-examples

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