Circumstances under which a surety may be discharged from the liability by the conduct of the creditor.

1. Introduction

Amalgamation is a combination of two companies into one larger company.[1] It may be in the form of one or more companies being merged into an existing company or a new company may be formed to merge two or more existing companies. Such actions are commonly voluntary and involve stock swap or cash payment to the target. Stock swap is often used as it allows the shareholders of the two companies to share the risk involved in the deal. A merger can resemble a takeover but result in a new company name (often combining the names of the original companies) and in new branding; in some cases, terming the combination a “merger”[2] rather than an acquisition is done purely for political or marketing reasons.

According to companies act, 1956[3], the term amalgamation includes ‘absorption’.[4] The learned judge refers to amalgamation as “a state of things under which either two companies are joined so as to form a third entity or one is absorbed into or blend with another”.

  • Merger or amalgamation through absorption.
  • Merger or amalgamation through consolidation.

1.1 Absorption:

A combination of two or more companies into an existing company is known as ‘absorption’. In absorption all companies expect one go into liquidation and lose their separate identities.  E.g. Absorption of Reliance Polyproplene Ltd. (RPPL) by Reliance Industries Ltd. As a result of the absorption, the RPPL was liquidated and its shareholders were offered 20 shares of RIL for every 100 shares of RPPL held by them.

1.2 Consolidation:

That is a combination of two or more companies into a new company. In this form of merge, all the existing companies, which combine, go into a new company. In this form of merger, all the existing companies, which combine, go into liquidation and form a new company with a different entity. The entity of the existing company is lost and their assets and liabilities are taking over by the new corporation or company.

2. Types of Mergers/ amalgamation

From the perspective of business structures, there is a whole host of different mergers. Here are a few types, distinguished by the relationship between the two companies that are merging:

  • Horizontal merger – Two companies that are in direct competition and share similar product lines and markets, join together it is known as a horizontal merger. The idea behind this type of merger is to avoid competition between the units.[5]
  • Vertical merger – A customer and company or a supplier and company.[6]
  • Market-extension merger – Two companies that sell the same products in different markets (e.g.: an ice cream maker in the United States merges with an ice cream maker in Canada)
  • Product-extension merger – Two companies selling different but related products in the same market (e.g a cone supplier merging with an ice cream maker).
  • Conglomeration – Two companies that have no common business areas where two merging firms are in the same general industry, but they have no mutual buyer/customer or supplier relationship, such as a merger between a bank and a leasing company. Example: Prudential’s acquisition of Bache & Company.

Acquisitions or Take-Over

An acquisition, also known as a takeover[7] or a buyout, is the buying of one company by another. It is an act of acquiring control over management of other companies. An acquisition may be friendly or hostile.

3. Distinction between Mergers and Acquisitions

Although they are often uttered in the same breath and used as though they were synonymous, the terms merger and acquisition mean slightly different things. When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer “swallows” the business and the buyer’s stock continues to be traded. In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a “merger of equals.” Both companies’ stocks are surrendered and new company stock is issued in its place.

4. Amalgamation / Mergers & their sections

Section 391 – 394 of the Companies Act, 1956 deals with Compromises, Arrangements and Reconstructions and other related issues through schemes of arrangement approved by the High Courts. A resolution to approve the scheme of arrangement has to be passed by the shareholders in the general meetings. The shareholders have to vote on the resolutions on the schemes of arrangement on the basis of the disclosures in the notice/explanatory statement. Section 393 of the Companies Act, 1956 specifies the broad parameters of the disclosures which should be given to the shareholders / creditors, for approving a scheme of arrangement.

4.1 Section 391

Amendment in the Companies Act, 1956 in year 2002 gave powers to National Company Law Tribunal to review and to allow any compromise or arrangement, which is proposed between a company and its creditors or any class of them or between a company and its members or any class of them. However, because of non formation of National Company Law Tribunal, these powers still lie with High Courts and the parties concerned can make applications to  high courts.

The order made by Tribunal will come in to effect only after the filing of  certified copy with the Registrar of Companies. Court’s power under the section is very wide and has discretion to allow any sort of arrangement between the company and members. Scope and ambit of the Jurisdiction of the Court:

Ø      The sanctioning court has to see to it that all the requisite statutory procedure for supporting any scheme has been complied with along with requisite meetings.

Ø      That the scheme put up for sanction of the court is backed up by the requisite majority vote.

Ø      That the concerned meetings of the creditors or members or any class of them had the relevant material to enable the voters to arrive at an informed decision for approving the scheme.

Ø      That the proposed scheme is not found to be violative of any provision of law and is not contrary to public policy.

4.2 Section 392

Under this section, the court has power to supervise the carrying out of the compromise or an arrangement; and may, at the time of making such order or at any time thereafter, give such directions in regard to any matter or make such modifications in the compromise or arrangement as it may consider necessary for the proper working of the arrangement.

4.3 Section 393

This section prescribes the procedure required for convening the meeting of the members or creditors called under section 391.The notice for the meeting should be sent along with a statement setting forth the terms of the compromise and or arrangement and explaining its effect and in particular, the statement must state all material interest of the directors, managing directors of the company, whether in their capacity as such or as members or creditors of the company.

4.4 Section 394

Where the court is of the view that the proposed arrangement/scheme is of such nature that the scheme is for the reconstruction of any company or for amalgamation of any two or more companies; and that under the scheme the whole or any part of the undertaking property or liabilities of any concerned company is to be transferred to another company; the court may make provision for all or any of the following matters.

Ø      The allotment or appropriation by the transferee company of any shares, debentures or other like interest in that company which, under the arrangement, are to be allotted or appropriated by that company to.

Ø      The continuation of any legal proceeding against the transferee company by the transferor company.

Ø      The dissolution, without winding up, of any transferor company.

Ø      The provisions for any dissenting persons. Who are opposing such scheme or any other matter, which the court deems fit.

5. Guidelines for Merger/Amalgamation of Banks/Financial Institutions

(i)     Banking Companies and Financial Institutions are primarily companies registered under the Companies Act and as such are subject to the provision of the Companies Act, 1994[8] (“CA-94”) for all matters including merger or amalgamation except those covered in the Banking Companies Act, 1991 (“BCA-91”) or the Financial Institutions Act, 1993 (“FIA-93”).

(ii)   However, an important factor that distinguishes Banking Companies and Financial Institutions from other companies is that the Banks and Financial Institutions carry on their business largely with the money accepted as deposits from members of public and for this reason the Bangladesh Bank has been vested with power to ensure that Banks and Financial Institutions do not undertake any activity or enter into any transaction which the Bangladesh Bank considers as detrimental to the interest of the depositors and/or financial discipline of the country.

(iii) Banking Companies Act: – Section 49 (1) (c) of the BCA-91 requires Bangladesh Bank to assist as intermediary or otherwise in relation to a proposal for amalgamation of banking companies.

(iv) Financial Institutions Act- Reference is also made to Section 28 of the FIA-93 which lays down that amalgamation of a Financial Institution with any other Financial Institution shall not take place without prior approval of the Bangladesh Bank. Sub-section (2) further lay down that with a view to considering the proposal of amalgamation, the Bangladesh Bank may call for such information from the applicant, as it may deem necessary. Thus, the Financial Institutions are also required to approach Bangladesh Bank before they approach the High Court division under Section 228/229 of the CA-94.

(v)   The net effect of the above provisions is that no merger / amalgamation of a Banking Company with another Banking Company or of a Financial Institution with another Financial Institution or of a Financial Institution with a Banking Company, is possible without the Bangladesh Bank being satisfied that such amalgamation is not detrimental to the interest of the depositors or the company or the financial system of the country.

(vi) In view of what is stated above, it is desirable to lay down a guideline to be followed by Banking Companies and Financial Institutions for their merger/amalgamation, including compromise, arrangement, reconstruction etc.

5.1 Proposal of Merger/Amalgamation including reconstruction etc.: – Banking Companies carrying on business within the meaning of BCA-91 or Financial Institutions carrying on financing business within the meaning of FIA-93 and proposing to reconstruct themselves through a compromise/arrangement or carry out merger/amalgamation shall get suitable resolutions passed by their respective Board of Directors agreeing in principle, to proceed in accordance with such resolution.

5.2 Commencement of the Due-Diligence: – In order to enable Bangladesh Bank to consider the amalgamation of banking companies/financial institutions, the transferee company should seek prior approval in relation to commencement of the financial and legal due-diligence of itself and also of that part of the business of the transferor banking company or financial institution which is sought to be taken-over or of the whole transferor company, if merger is intended.

5.3 Parties to Maintain Confidentiality:

(i)     After obtaining approval from Bangladesh Bank for carrying out due-diligence of itself and of the transferor company, the transferee company shall submit an undertaking as per Annexure A to Bangladesh Bank confirming that all information, particularly all non-public domain information and documents etc. shall be kept strictly confidential and shall not, unless advised by Bangladesh Bank or legally required or required to comply with the regulatory requirements to do so, be divulged to any person, organization, not included in the due-diligence team. Provided that, where specific permission of Bangladesh Bank, under this clause, has not been obtained, the Bank shall be duly informed of such disclosure. In case of any breach of the undertaking, the approval given by the Bangladesh Bank shall be withdrawn.

(ii)   The members of the due-diligence team, referred to the above, shall also be bound under the aforesaid undertaking to keep the information, document etc. confidential and shall not divulge any information that they come across during the course of due-diligence. The team conducting the due-diligence shall not demand from the transferee/transferor companies, any information/observations made by Bangladesh Bank in relation to the affairs and the business of concerned companies or the Bangladesh Bank inspection report, either in part or full.

5.4 Submission of Due-Diligence Report:

The team conducting the due-diligence on completion of its task shall submit a copy of the report to Bangladesh Bank giving details of-

(i) The secured and unsecured debts and in the case of secured debts particulars of the securities, their value.

(ii) The value of the property and the assets of the transferor and the transferee company calculated on the basis of Annexure B.

(iii) The liabilities of the transferor and the transferee companies.

(iv)  In view of clauses (i) to (iii) above, the financial impact of the compromise/merger proposal on the two companies and their creditors, shareholders and depositors.

5.5 Consent of the shareholders/creditors in terms of the Companies Act:

Based on the findings of the due diligence, the transferor and transferee companies shall prepare a scheme of amalgamation as the case may be. The Board of Directors of the respective companies, while passing a resolution in this regard, shall consider the scheme so drawn and then, in terms of the provisions of CA-94, hold meetings of their respective members or class of members to consider and approved.

5.6 Submission of Scheme to Bangladesh Bank: – With the requisite consent in terms of paragraph 5 above, the transferee company shall submit an application to Bangladesh Bank with a copy of the Scheme of reconstruction/merger/amalgamation.

5.7 Examination of Draft Scheme: – On receipt of the draft Scheme, Bangladesh Bank shall satisfy itself that the Scheme as proposed by the transferee company can be successfully implemented.

5.8 Valuation of Assets and Liabilities:

It is for the transferor and the transferee companies to mutually agree to valuation of the assets. Bangladesh Bank shall generally not interfere in this regard except where there are reasons to believe that the valuation is not fair and reasonable. In a case where mutual agreement has not been possible in relation to certain items for example (a) valuation of a particular asset (b) classification of any advance (c) determination of any liability or any like issue, the bank / financial institution, shall highlight those areas and seek advice of Bangladesh Bank.

5.9 The transaction price:-

The transaction cost/price shall be mutually agreed between the transferor and the transferee on the basis of fair valuation of assets and liabilities proposed to be transferred. It would be open to the parties to fix the price at a premium or discount to valuation. Bangladesh Bank shall, however, have a right to be satisfied that the price as mutually agreed is fair and reasonable and for this purpose may ask for pricing rationale to examine the same and accept or suggest modification.

5.10 Approval by Bangladesh Bank:

On being satisfied that the Scheme as proposed can be implemented (i) to the benefit of the company or companies and/or the financial system of the country and (ii) that the scheme is not detrimental to the interest of the depositors, Bangladesh Bank may give its approval to the said Scheme with or without such modifications as deemed necessary.

5.11 Petition to High Court:

(i) Once the scheme of merger/amalgamation has been approved by Bangladesh Bank, the transferor and the transferee shall proceed to comply with other formalities as required under the CA-94 and shall file an application in terms of Section 228/229 of the said Act before the High Court and submit the scheme for the reconstruction, merger/amalgamation, as the case may be. The transferee bank/financial institution shall mark a copy of the application was filed before the Court together with annexure, if any, to Bangladesh Bank and shall keep the Bank informed of the developments in the matter, from time to time or at such intervals as directed. If for any reason, the company, after obtaining approval of the Scheme from the Bangladesh Bank, does not take any further steps as required under the CA-94, to implement the same, in the next three months from the date of the approval granted by Bangladesh Bank, the approval so granted shall, unless otherwise extended on justifiable consideration, lapse.

(ii) The High Court may either by the order sanctioning the Scheme or by any subsequent order make provisions for all or any of the following matters: –

a) The transfer to the transferee bank/financial institution of the whole or any part of the undertaking and of the properties and liabilities.

b) Appropriation by the transferee company of any shares, debentures policies or other like interest in the bank/financial institution.

c) The reconstruction or amalgamation of the share capital by consolidation of shares of different classes or by division of shares into shares of different classes or both.

d) The continuation by or against the transferee bank/financial institution, of any legal proceedings pending by or against the transferor bank/financial institution.

e) The dissolution of the transferor bank/financial institution.

f) Provision made by the transferor/transferee bank/financial institution, for the dissenting stakeholder.

g) Such other matters as may become necessary in view of the proposal made in the scheme.

6. In conclusion

Ordinarily amalgamation and merger are same. Halsbury’s Laws of England describe amalgamation as a blending of two or more existing undertaking into one undertaking, the shareholders of each blending company becoming substantially the shareholders in the company which is to carry on the blended undertaking. For a dead type of company amalgamation is useful process. In that sense that is so good & sometimes essential too.

7. Bibliography:

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[1] AMALGAMATION “blending together of two or more undertakings into one undertaking, the shareholders of each blending company, becoming, substantially, the shareholders of the blended undertakings. There may be amalgamations, either by transfer of two or more undertakings to a new company, or to the transfer of one or more companies to an existing company”.

[2] Merger is a financial tool that is used for enhancing long-term profitability by expanding their operations. Mergers occur when the merging companies have their mutual consent. The income tax Act, 1961 of India uses the term ‘amalgamation’ for merger.

[3] That’s actually the company act of India. Bangladeshi company act also depend on that too.

[4] In SS Somayajula v. Hop Prudhommee and co. ltd.

[5] e.g.: two manufacturers’ of same type of cloth, two transport companies operating on the same route-the merger in all these cases will be horizontal merger.

[6] e.g.: an ice cream maker merges with the dairy farm that they previously purchased milk from; now, the milk is ‘free’

[7] Reverse take-over: When a smaller firm will acquire management control of a larger or longer established company and keep its name for the combined entity. This is known as a reverse takeover.

[8] Company act of Bangladesh, which is based on Indian company act-1956.