Mergers,

Acquisitions And
Corporate
Restructuring
SECOND EDITION

Prasad G. Godbole

Copyright © 2013 Prasad Gajanan. Godbole. All rights reserved.

 Chapter 2
Forms of Corporate Restructuring
 CHAPTER 2
Merger

“It involves combination of all the assets, liabilities, loans,

and businesses (on a going concern basis) of two (or more)
companies such that one of them survives.”

 Merger is primarily a strategy of

inorganic growth.

 Example:
India’s largest private sector
corporate entity Reliance
Industries Limited (RIL) is indeed
a result of many mega mergers
of group companies into RIL.
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Merger

A Limited B Limited
 CHAPTER 2
Merger
Example
 CHAPTER 2
Consolidation

B Limited
A Limited

C Limited

 It involves creation of an altogether new company owning assets,

liabilities, loans and businesses (on going concern basis) of two or
more companies, both/all of which cease to exist.
 CHAPTER 2
Consolidation
Example
 CHAPTER 2
Important Concepts
Amalgamation:
This term is used only in India. It is an umbrella term which includes both merger
and consolidation. In India, legal requirements for either merger or consolidation are
the same. They are stipulated in sections 390 to 394A and 396 and 396A of the
Companies Act, 1956.

Amalgamating company or transferor company:

In the process of merger or consolidation, the company whose assets and liabilities
are transferred to another company and which ceases to exist through the process
of dissolution without winding up is called amalgamating or transferor company.
 CHAPTER 2
Important Concepts

Amalgamated company or transferee company

In the process of merger or consolidation, that company which receives the
assets and liabilities of other company or companies and continues to
survive/exist is called an amalgamated company or transferee company.
 CHAPTER 2
Acquisition

Acquisition is an attempt or a process by

which a company or an individual or a group
of individuals acquires control over another
company called ‘target company’.

Acquiring control over a company means

acquiring the right to control its management
and policy decisions.

It also means the right to appoint (and

remove) majority of the directors of a
company.

In acquisition, the target company’s identity

remains intact.
 CHAPTER 2
Acquisition

Ways to acquire a control over a company (a target company):

 By acquiring ,i.e. purchasing a substantial percentage of the voting capital of

the target company.

 By acquiring voting rights of the target company through power of attorney

or through a proxy voting arrangement.

 By acquiring control over an investment or holding company, whether

listed or unlisted, that in turn holds controlling interest in the target company.

 By simply acquiring management control through a formal or informal

understanding or agreement with the existing person (s) in control of the target
company.
 CHAPTER 2
Acquisition

 Acquisition of a target company through acquisition

of its shares

The most common method is to acquire i.e. purchase substantial

voting capital (i.e. equity capital) of the target company.

What percentage would be considered as adequate to qualify as

controlling interest?

 To understand that, one should understand various levels or degrees

of control that are relevant.
 CHAPTER 2
Acquisition

 Absolute control

This would mean an unfettered right to take any decision.

However, in such a case, the company cannot become a listed

company or continue to be listed company if it was listed earlier.

The condition of minimum two members for a private company

or seven members for a public company will have to be complied
with.
 CHAPTER 2
Acquisition

 Practically Absolute Control

• This can be defined as an ability to get any and all resolutions

passed in the general body meeting of the shareholders

• Most of the important decisions, such as further issue of capital

other than a rights issue, buy-back of shares, reduction of
capital, delisting of the company, etc., can be taken, only by
passing a special resolution.

• A special resolution can be passed if at least 75 per cent of the

shareholders by value votes in favour of a special resolution.
 CHAPTER 2
Acquisition
 General control over a company

 Those decisions which do not require passing of a special resolution under the
Companies Act, 1956, but which nevertheless require shareholder’s approval have to
be taken by passing an ordinary resolution.

 An ordinary resolution gets passed by a simple majority of the members present and
voting, either in person or through proxies at the general meeting. The decisions which
require passing of an ordinary resolution are approval of annual accounts, declaration
of dividend, issue of bonus shares, appointment of directors, etc.

 In this case, one does not need to acquire 51% of the voting capital to have a control
over a company.

 In India, in terms of the regulations promulgated by the Securities and Exchange

Board of India (SEBI), no person can acquire 15 percent or more of share capital
(having voting rights) of a company without making an open offer to public
shareholders to acquire minimum 20 percent of the shares of the company from them.
 CHAPTER 2
Acquisition
Substantial acquisition of shares can lead to three
situations
(a) The existing promoters being dislodged as promoters and the
acquirer stepping into their shoes and becoming the promoter.
This would be called a successful acquisition.
Example
(b) The acquirer managing to acquire more or less the same

CHAPTER 2
percentage or a little less percentage of shareholding than the
existing promoters, thereby getting fair representation on the
board and some say in the management of the target company
but not being able to dislodge the existing promoters. This
would be a partially unsuccessful acquisition.
Example
In the above example (Slide no. 17), if we assume that Mr P, after
acquiring 6 per cent equity shares in the market enters into an agreement
only with Mr A to acquire his 10 per cent holding and consequently makes
an open offer to acquire 20 per cent from the public. The offer gets partial
response and Mr P is able to acquire only 15 per cent in the open offer.
Thus, his total shareholding is now 31 per cent as against combined 30
per cent of M/s B, C and D. In this case, Mr A would certainly cease to be
a promoter, but just because Mr P has 1 per cent more than existing
remaining promoters, he would not be automatically able to dislodge M/s
B, C and D as ‘promoters’. In all likelihood, he will become a promoter
along with M/s B, C and D and would share the board representation and
say in the management of the company along with them. This, thus, would
be a partially unsuccessful acquisition.
 CHAPTER 2
(c) The acquirer not managing to get any substantial
percentage of share capital. This would be an
unsuccessful acquisition.

Example

Three brothers, M/s A, B, C are holding 10 per cent each of XYZ Limited
and are the existing promoters of the company. Balance 70 per cent is
widely held by the public. None of the brothers are ready to sell any
shares to Mr P. So Mr P acquires 14 per cent from the market and makes
an open offer for 30 per cent the shares. The offer fails miserably and Mr
P is able to acquire only 3 per cent in the offer, taking his shareholding to
17 per cent. In this case Mr P may be able to get a small representation
on the board, but M/s A, B and C would be able not to include his name in
the list of promoters declared to stock exchange(s), nor would they cede
much control to Mr P. Therefore, this will be a case of an unsuccessful
acquisition.
 CHAPTER 2
Acquisition

 Acquisition of a target company through power of

attorney, etc.

This is not a commonly used way of effecting acquisition of a

company.

It could be used only as a short-term tactic, probably as a

precursor to the substantial acquisition of shares from existing
promoters or a faction of the existing promoters, who, pending
the conclusion of Memorandum of Understanding (MOU) to sell
their shares to the acquirer, may allow him to vote on their behalf
on certain key resolutions.
 CHAPTER 2
Acquisition

 Acquisition of a target company through acquisition of an

investment or holding company which is controlling the target
company.
Example

ABC Limited is an unlisted company wherein 100 per cent of the equity
shares are held by Shah family. ABC Limited has invested 40 per cent in the
equity capital of XYZ Limited and Shah family has directly invested 10 per
cent in it. The management of XYZ Limited is controlled by ABC Limited and
therefore by Shah family. Shah family sells its entire shareholding in ABC
Limited to Agrawal family, but retains its direct shareholding in XYZ
Limited. This is a case of indirect acquisition of XYZ Limited by Agrawal
family from Shah family. If XYZ Limited is a listed company, Agrawal family
would have to make an open offer to the public shareholders of XYZ Limited
even if ABC Limited is an unlisted company.
 CHAPTER 2
Acquisition

 Acquisition of a target company through formal or informal

agreement

Example

ABC Limited is a listed software company that is doing well, but not as well as it
should be doing. Its promoter Mr X, who is also its managing director, wants the
company to grow much faster. Therefore, he approaches the renowned software
guru Mr Z to help him run the company. He also offers Mr Z equity stake in the
company. Mr Z on his part, accepts the offer to run the company, but declines to
acquire any equity shares. He also refuses to take any remuneration or any seat on
the board. However, he puts a condition that all policy decisions would henceforth
be taken by Mr Z and Mr X would vote on all the special and ordinary resolutions
as per requirements of Mr Z. Mr X and Mr Z enter into an agreement to that
effect. This would be a case of acquisition of ABC Limited by Mr Z. As per the
SEBI regulations, Mr Z will have to make an open offer to the public shareholders
of ABC Limited, though he neither acquired any shares nor is the beneficiary of
any kind.
 CHAPTER 2
Acquisition

 Some of the significant acquisitions in Indian

context in recent past :

Acquisition of Corus by Tata Steel

Acquisition of Novelis by Hindalco
Acquisition of Spice Communication by Idea Cellular
Acquisition of Ranbaxy by Daiichi Sankyo
Acquisition of Hutchison Essar by Vodafone
Acquisition of Sahara Airlines by Jet Airways
Acquisition of Deccan Airways by Kingfisher Airlines
 CHAPTER 2
Divestiture

Divestiture means an out and out sale of all or substantially all assets of
the company or any of its business undertaking/divisions, usually for
cash (or for a combination of cash and debt) and not against equity
shares.

Divestiture means sale of assets, but not in a piecemeal manner.

Accordingly, all assets, i.e., fixed assets, capital works progress, current
assets and many a times even investments are sold as one lump and
the consideration is also determined as one lump sum amount and not
for each asset separately. Due to this reason, it is also called ‘slump
sale’ under the Income Tax Act, 1961.
 CHAPTER 2
Divestiture

The consideration is normally payable in cash for two

reasons:

 to pay off the liabilities and secured/unsecured loans.

 to bring cash into the company for pumping into remaining
business or to start a new business.

No part of consideration is payable in the form of equity

shares.
 CHAPTER 2
Divestiture
Example
 CHAPTER 2
Demerger

Forms of Demerger:

➨ Spin-off

➨ Split-up

➨ Split-off
 CHAPTER 2
Demerger

➨Spin-off

• Spin-off involves transfer of all or substantially all the

assets, liabilities, loans and business (on a going
concern basis) of one of the business divisions or
undertakings to another company whose shares are
allotted to the shareholders of the transferor company on
a proportionate basis.

• In spin-off, the transferor company continues to carry on

at least one of the businesses.
 CHAPTER 2
Demerger

➨ Split-up

• Split-up involves transfer of all or substantially all assets, liabilities,

loans and businesses (on a going concern basis) of the company to
two or more companies in which, again like spin-off, the shares in
each of the new companies are allotted to the original shareholders
of the company on a proportionate basis but unlike spin-off, the
transferor company ceases to exist.
 CHAPTER 2
Demerger

Spin-off and Split-up: Common Points

 In spin-off and split-up, there is no sale of assets to another

company.
 In spin-off and split-up, shareholders of the transferor company
receive consideration for transfer of assets by the transferor
company.
 In both the cases, consideration is always in the form of equity
shares of the transferee company(ies) .
 Companies wanting to carry out demerger in the form of spin-off or
split-up have to ensure that consideration is paid only in the form
of shares.

 The word used in section 2(19AA) is ‘shares’ and not ‘equity shares’.
 CHAPTER 2
Demerger

 In case of both, i.e., spin-off and split-up, the shares of the resulting
company, i.e., transferee company have to be issued to the shareholders
of the transferor company in proportion to their shareholding in the
transferor company. In case this is not done, not only the tax benefit
under the Income Tax Act, 1961 will be lost, but the structure itself would
not be called a spin-off or split-up. It will then be the case of a split-off.

 Spin-off and split-ups are normally resorted to achieve focus in the

respective businesses, especially if the businesses are unrelated (non-
synergistic).

 They are used to improve the price earning ratio and consequently, the
market capitalization by demerging not so profitable businesses into a
separate company or companies.
 CHAPTER 2
Demerger

➨ Split-off

• Split-off is a spin-off with the difference that in split-off, all the

shareholders of the transferor company do not get the shares of the
transferee company in the same proportion in which they held the
share in the transferor company.

• Most of the time, in split-off, some of the shareholders get shares in

the transferee company in exchange of shares in the transferor company.

• Normally split-offs are used to realign the inter se holding of

promoters while businesses are being split-off and brought under
control of respective factions.
 Important Concepts

CHAPTER 2
Demerged company

Demerged company means the company whose assets, liabilities, loans

and business(es) are being transferred in the process of demerger to
another company in case of either spin-off or split-up. It is also called
transferor company.
 Important Concepts

CHAPTER 2
Resulting company

• Resulting company(ies) means the company or companies to

which assets, liabilities, loans and business(es) are being
transferred in the process of demerger.
• It is not necessary that one has to float a new company to act
as resulting company.
 CHAPTER 2
Carve-Out

» It is a hybrid of divestiture and spin-off.

» In carve-out, a company transfers all the assets, liabilities,
loans and business of one of its divisions/undertakings to
its 100 per cent subsidiary .
» At the time of transfer, the shares are issued to the
transferor company itself and not to its shareholders.
» Later on, the company sells the shares in parts to
outsiders - whether institutional investors by private
placement or to retail investors by offer for sale.
» In case of carve-out, the consideration for transfer of
business to a new company eventually comes in the
coffers of the transferor company.
 CHAPTER 2
Carve-Out

» Carve-outs are normally used to

mobilize funds for core business
or businesses of a company by
realizing the value of non-core
businesses.

» They are also used to carve out

capital hungry businesses from
the businesses requiring normal
levels of capital so that further fund
raising by equity dilution can be
restricted to capital intensive
businesses sparing the other
businesses from equity dilution.
 CHAPTER 2
Joint Venture

It is an arrangement in which two or more companies (called joint venture

partners) contribute to the equity capital of a new company (called joint
venture) in pre-decided proportions.

Normally, joint venture partners are limited companies, one or all of them
may not be limited companies. The biggest joint venture in India, viz., Maruti
Suzuki had the Government of India as one of the joint venture partners.
 CHAPTER 2
Joint Venture

Normally, joint ventures are formed to pool the resources of the partners and
carry out a business or a specific project beneficial to both the partners but
which none of the partners wants to carry out under its own corporate entity
for any one of the given reasons:

• The venture may be highly risky.

• Joint venture partners may otherwise be competitors but may be wanting to
collaborate only for a specific project or business.
• Neither of the partners may be willing to dilute control on their business by
accepting funding, especially equity funding, in their own balance sheet.
• To ensure that management control of the common business or project is
shared in the agreed proportion through charter of the joint venture
company.
• To ensure that rewards of the common business or the project are shared in
the predetermined ratio without the possibility of manipulation in favour of
either side.
 CHAPTER 2
Reduction of Capital

 This is a legal process u/s 100 to 104 of the Companies

Act, 1956, by which a company is allowed to extinguish
or reduce liability on any of its shares in respect of share
capital not paid up or is allowed to cancel any paid-up
share capital which is lost or is allowed to pay off any
paid-up capital which is in excess of its requirements.
 CHAPTER 2
Reduction of Capital

Why would a company reduce its

capital?
 CHAPTER 2
Reduction of Capital

Way no. 1

 By extinguishing or reducing the liability in respect of share

capital not paid-up

 Situational Logic:

 A company may have come out with an issue of capital, wherein

shareholders would be required to pay the issue price in stages, as and
when called. Before all the calls are made, the project may be over and
further funds may not be immediately required.
 CHAPTER 2
Reduction of Capital

 Way no. 2

 By writing off or cancelling the capital which is lost

 Situational Logic:
 If a company has been incurring losses for a long period of time and
the accumulated loss has gone beyond the reserves (if any) which it
had built in past, it would have actually lost a part of its paid-up
capital, i.e., a part of the paid-up capital is no more represented by any
real assets.
Hence, the company would have been showing the accumulated loss
as a fictitious asset on the asset side of the balance sheet and
simultaneously would have been showing its paid-up capital at the
historical figure.
 CHAPTER 2
Reduction of Capital
 Way no. 3

 By paying off or returning excess capital that is not required by the

company

 Situational Logic:
 A company may have been extremely profitable and thereby, it may
be having excess/ surplus cash. In such a case, the company may
want to return the excess cash to its shareholders since idle cash
will reduce its ROCE and ROE.
• By returning the excess cash and in process, reducing either the face value
of its shares or the number of outstanding shares, it can not only
maintain/improve its ROCE and ROE, but also boost its earnings per share,
thereby, pushing the market price up.
• It may also want to effect early redemption of its preference share capital if
any.
 CHAPTER 2
Buy-back of Securities

This is yet another important tool of capital restructuring.

Buy-back of securities has been allowed only after

October 31, 1998 by incorporating sections 77A, 77AA
and 77B.

Companies find it prudent to reduce the capital base by

either resorting to reduction of capital under sections 100
to 104 of the Companies Act, 1956, or to buy-back its
equity (sometimes even preference) shares.
 CHAPTER 2
Buy-back of Securities

Advantages:

Buy-back of equity shares indirectly increases the promoter’s stake in the

voting (equity) capital of the company without being required to make an
open offer and reduces or eliminates the possibility of takeover bid by an
outsider.

Promoters (anyone holding above 15 percent of the company’s voting

capital) can acquire only 5 percent of the company’s voting capital in a
financial year without being required to make an open offer. This is called
creeping acquisition. By a combination of creeping acquisition and buy-
back, they can acquire much more than 5 percent in a financial year and
build up their stake faster.

In buy-back the company would be shelling out money and not the
promoters.
 CHAPTER 2
Buy-back of Securities

However……….
 CHAPTER 2
Buy-back of Securities
• Reasons why a company may still resort to reduction of
capital under section 100 to 104 and not buy-back under
section 77A:

Under section 77A, a company can buy-back only 25 percent of its

paid-up equity capital in a financial year. If a company wants to
effect a larger buy-back, it will have to follow the reduction of capital
route.
In buy-back under section 77A, shareholders may or may not
participate even after passing a special resolution in general
meeting.
Other conditions of section 77A, such as, post buy-back debt equity
of 2:1, buy-back amount not to exceed 25 percent of share capital
plus free reserves, are not applicable to reduction of capital under
sections 100 to 104.
 CHAPTER 2
Delisting

 Delisting of a security is delisting of any of the securities

(and not necessarily all) from any of the stock exchanges
(and not necessarily all).

 Delisting of a company as a form of corporate

restructuring refers to delisting of its equity shares from
all stock exchanges.
 CHAPTER 2
Delisting

Why do companies delist?

 CHAPTER 2
Delisting

➨ To reduce costs of maintaining large number of reports

and having an expensive work force.

➨ To avoid sharing a lot of information in public domain.

➨ Promoters delist to make use of the level of freedom

that unlisted companies enjoy.

➨ MNCs especially delist so that they do not get listed at

very low prices due to FERA requirements.