“Amalgamation occurs when two or more companies are joined to form a third entity or one is absorbed into or blended with another.”-explain & illustrate.
Question: Amalgamation occurs when two or more companies are joined to form a third entity or one is absorbed into or blended with another.”-Explain and Illustrate.
1. INTRODUCTION:
The terms Amalgamation, Acquisition, Mergers and takeovers often used interchangeably in common parlance. But there are differences among those words. While Amalgamations means association of two entities into one, acquisition involves one entity buying out another and absorbing the same. In India, in legal sense Amalgamation is known as ‘merger’.
In an amalgamation, two or more companies are fused into one by merger or by one taking over the other. Amalgamation is a blending of two or more existing undertaking into one undertaking, the share holders of each blending company become substantially the shareholder of the company which is to carry on the blended undertaking.
Usually, where only one company is involved in a scheme and the rights of the shareholders and creditors are varied, it amounts to reconstruction or reorganization or scheme of arrangement. Rewalker settlement of 1935 defines Amalgamation as follows-
“The term contemplates not only a state of things in which two companies are joined as to form a new company but also absorption and Blending of one by the other.”
Vastly used text on company Law in the West Gower’s Modern Company Law,observes:
“Under an amalgamation, merger or takeover two companies are merged either dejure by a consolidation of their undertaking or deface by the acquisition of a controlling interest in the share capital of one by the other or of the capital of both by a new company.[1]”
S.S Somyarajlu and the old classic on Halsburg’s Law of English tells us that:
“Amalgamation is a state of things under which either two companies are so joined to form third entity or one is absorbed into or blended with another.[2]”
“Amalgamation has no precise legal meaning. It is 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 business of blended undertakings[3].”
It is in the Seventies that the amalgamation of the Western type become popular on Indian Corporate scene and a number of works on mergers, amalgamations and take over’s started appearing.[4],[5]
2.MAIN REASONS FOR AMALGAMAION :
Acquisition of assets during a distress sale , marketing adavntages, skipping over project stage of business and miscellaneous financial, operating as well as personal reasons are the motives behind amalgamations.
There are various situations under which a company may sell its assets at a discounted rate. When there has been a dividend restrain over a number of years, the company is likely to go for undervalue sale. It may do so even when there is an inefficient capital structure. When there is adequate utilization of its assets and unawareness of the true value of the assets which have a special and higher value to acquiring the company and there is a tax relief which the company sought to be acquired cannot use, the company sells the assets at a discount.
Amalgamation occurs when a company fails to trade adequately on its equity. These companies very often form an attractive object for acquisition so that the acquiring company having acquired the other corporation may make use of credit or borrowed capital by gearing it more efficiently.
Various reasons for amalgamations are discussed under 3 more headings. They are-
a. Financial/Taxation reasons:it has been seen that amalgamation takes place whenever there arises a financial opportunity for exploiting. In order to avoid the risk of internal development programmed also, the amalgamation take place. If a capital is lying idle then the amalgamation helps in the use of capital. Market value of share is also increased and the growths become rapid. Some tax benefits also become available on account of taxation concession offered to particular amalgamation deals. In some countries healthy business acquiring sick units is given taxation reliefs. The acquisition of various types through stock exchange operations have been reported in the literature on economic growth in the West.[6]
b. Market operating reasons: With the help of the mergers of the companies are able to be offset seasonal or cyclical fluctuations in the company’s present line of business. Customers additional demand for services are satisfied with the help of mergers and dependence of company turnover on a single product is reduced. Customer base is broadened and market in the new territory is obtained. In addition to thid the management becomes strong and amy obtain a research and development group. Increase of utilization of present resources any or all types of resources which the company has its disposal, including physical facilities, individual skills surplus funds etc .is sought. Opportunities to use raw materials whose source of supply, the newly acquired or merged company owns are also sought to be exploited.
c. Personal reasons: acquisitions and mergers may take place out of pure personal feeling or even whims and fancies of the controllers of large concern. A common case may be the entrepreneur’s desire to build up an empire. Another reason may be a pure –fancy to acquire a concern. The family of a rich man may set in motion a process of merger or amalgamation so that it becomes the owner of another financial object.
2. TYPES OF AMALGAMATION:
2.1There are for three types of amalgamation[7]:
a) vertical short-form amalgamation- when a holding cooperative amalgamates with one or more of its wholly owned subsidiary cooperatives. It means merger of two companies which are in different field altogether, the coming together of two concerns may give rise to a situation similar to monopoly.
b)horizontal short-form amalgamation-when two or more wholly owned subsidiary cooperatives amalgamate and continue as one cooperative. The two companies which have merged are in the same industry, normally the market share of the new consolidated company would be larger and it is possible that it may move closer to being a monopoly or near monopoly.
c)long-form amalgamation- when members and, if any, investment shareholders of each amalgamating cooperative approve an amalgamation agreement before filing articles of amalgamation.
d)Reverse Amalgamation: Where, in order to avail benefit of carry forward of losses which are available according to tax law only to the company which had incurred them, the profit making company is merged with companies having accumulated losses.
e)Congeneric Amalgamation: In these mergers the acquire and the target companies are related through basic technologies, production processes or markets. The acquired company represents an extension of product line. These amalgamations represent an outward movement by the acquirer from its current business scenario to other related business activities.
2.2The Business Corporations Act provides for two types of amalgamation. Such as-Ordinary and simplified amalgamation..
a)Ordinary amalgamation :
An ordinary amalgamation is a merger of at least two business corporations into a single entity.
To carry out an ordinary amalgamation[8], the business corporations must sign an amalgamation agreement, which establishes the terms and conditions of the amalgamation.
The directors of each of the business corporations must adopt a by-law approving the amalgamation agreement, which must be ratified by two-thirds of the shareholders present at the special general meeting held for that purpose.
b)Simplified amalgamation :
A simplified amalgamation can be either the merger of a parent company with at least one of its subsidiaries, all of whose shares it owns, or the merger of two or more subsidiaries of the parent company.
To carry out a simplified amalgamation[9], it is not necessary to sign an amalgamation agreement or to adopt an amalgamation by-law and have the shareholders of the corporations that are merging ratify it.
3. AFFECTS OF AMALGAMATION:
Mergers must form part of the business and corporate strategies aimed at cretin sustainable competitive advantage for the firm. Amalgamations are strategic decisions leading to the maximization of a company’s growth. There are numerous research articles on the theme which appeared in the American journals like Harvard Business Review and Quarterly Journal of Economics.[10]In this context, we amy refer to the studies of LSHA win Arthur S.Dewing, G.I. Weston[11] and J.Kitching[12]. All these articles weigh the criteria of success of acquisitions and mergers and measures performance of merged companies. Gains of mergers to the shareholders are discussed in Mendelkar’s[13] study. Farank’[14]s study
Amalgamations are usually intended to achieve any or some or all of the following purposes. Various reasons and advantages of amalgamation are:
Synergistic operational advantages – come together to produce a new or enhanced effect compared to separate effects.
Economies of scale – 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[15].
Benefits of integration – Combining two or more companies under the same control for their mutual benefit by reducing competition, saving costs by reducing overheads, capturing a larger market share, pooling technical or financial resources. Cooperating on research and development, etc . Integration may be horizontal or vertical and the latter may be backward integration or forward integration.
Tax advantages – carry forward and set off of losses of a loss-making amalgamating company against profits of a profit-making amalgamated company[16].
Financial constraints for expansion – A company which has the capacity to expand but cannot do so due to financial constraints may opt for merging into another company which can provide funds for expansion.
Diversification– It is an Advantage of brand equity. It losses of objectives with which several companies were set up as independent entities
Survival- It Accelerate Company’s market power and reduce its severity or competition.
Competitive advantage – The factors that give a company an advantage over its rivals. Eliminating or weakening competition.
There are several disadvantages behind Amalgamation-
However, the key one being the dissenting rights provisions of the Companies Act 1981. Shareholders who oppose the amalgamation and who do not think fair value has been offered for their shares, may apply to the Court for an appraisal. This value becomes binding on the Acquirer. There are also inherent objectives of Amalgamation, is, exploitation of the monopolies, and possibility of jeopardizing the interest of investors and creditors by unscrupulous promoters.[17]
CONCLUSION:
The viability and the process of a merger and amalgamation is of course, not a decision which can be taken without considering the corporate legal environment of the country in which firms operate. The process of evaluating the probable advantages of amalgamation and the legal process involved in the amalgamation is country specific. The object of Amalgamation usually would be to secure economical working and to eliminate competition and control the market in a particular trade.
Bibliograpgy
1. Blank, W. a. (1979). Takeovers & Mergers. London.
2. Merger Mania. (1992). Business World , 62-69.
3. Navani. (1986). Takeovers and Mergers. Economic Times.
4. Nelson, R. (1959). Merger Movement In America Industry1895-1956. Princeton, Princeton University Press,.
5. Nelson, R. Mergers Movement in America .
6. Mergers & Acquisitions. (n.d.). Retrieved 03 29, 2011, from Leagalarticlesdirectory: http://legal-articles.deysot.com/business-law/mergers-and-acquisitions.html
7. Misra, N. (2008, May 23). Retrieved 04 03, 2011, from http://www.trai.gov.in/RelatedDocuments/MergerAcquisition.pdf
8. The Companies Act, Cap308. (n.d.). Retrieved 03 30, 2011, from Corporate Affairs and Intellectual Property Office: http://www.caipo.gov.bb/corp/inner/companies.html#compamal
9. Upon amalgamation rights of amalgamating company devolve upon amalgamated company. (2011, Jan 26). Retrieved 04 01, 2011, from taxguru: http://taxguru.in/company-
10. Reid, S. ,. (1968). Mergers,Managers and the Economy. New York: McGraw-Hill Book Co.
11. Robert, S. (1972). Mergers and Acquisitions,A comprehensive Bibliography. Washington,D.C.: Mergers and Acquisitions.
12. Santhanam, R. (1978). A guide to Amalgamations of Companies With Special References to Tax Planning. New delhi: Sultan Chand & Sons.
13. Steiner, P. O. (1975). Merger:Motive,Effects,Policies,An Arbor. university of Michigan.
14. Stopford, J. M. (1972). Managing the Multinational Enterprise. New York: Basic Books Inc.
15. Swarup, J. (1964). The Companies Act,1956. Lucknow.
16. ARGUMENTS FOR AND AGAINST MERGERS AND ACQUISITIONS. (n.d.). Retrieved 04 02, 2011, from Globusz® Publishing : http://www.globusz.com/ebooks/Mergers/00000013.htm
17. Chavan, S. (2010, November 11). Merger’s & Amalgamation’s From Legal Point of View. Retrieved 03 31, 2011, from Managementparadise: http://www.managementparadise.com/article.php?article_id=703
18. U.S, N. (1986,May2). Takeovers and Mergers .
19. Yorkston, R. a. (1962). Company Law. Australia.
20. Verena Kusstatscher, C. L. (2005). Managing emotions in mergers and acquisitions. Glos: Edward Elgar Publishing Ltd.
21. Choudhury, S. R. (2011, January 05). Mergers In India. Retrieved 04 02, 2011, from awyersclubindia: http://www.lawyersclubindia.com/articles/Mergers-In-India-3397.asp
22. External expansion or Business combination and it’s types. (n.d.). Retrieved 04 02, 2011, from Mbaknowledgebase: http://www.mbaknol.com/management-concepts/external-expansion-or-business-combination-and-its-types/
23. Arun Kumar Sen, J. K. (2000). Commercial Law and Industrial Law. New Delhi.
24. Günter K. Stahl, M. E. (2005). Mergers and acquisitions: managing culture and human resources. Stanford university Press.
25. Dash, A. P. (2009). Mergers And Acquisitions. New Delhi: Tata_Mcgraw Hill.
26. Younth, G. &. (1962). The Law of Income Tax,Sur Tax and Profit Tax. London.
27. Younth, G. (1962). Mergers and Acquisitions,Planning and Action. London.
28. Siddharthan, N. (1969). Conglomerates and Multinationals in India-Astudy of Investment and Profits. New Delhi.
29. Sings, A. (1971). Takeovers. Cambridge University Press.
30. Amalgamations. (n.d.). Retrieved 04 01, 2011, from Taxireland: http://www.taxireland.ie/taxfind/ContentHTML/ParsedHTML/SD_HTMLFILES/c13.t4.html
31. Anthony F. Buono, J. L. (1989). The Human Side of Mergers and Acquisitions: Managing Collisions Between. Washington D.C: Jossey-Bass Inc.
32. law/upon-amalgamation-rights-of-amalgamating-company-devolve-upon-amalgamated-company.html
33. Bhole, L. M. (2009). Financial Institutions & Markets. New Delhi: Tata-mcgraw Hill.
34. Periasamy, P. (2009). Financial Management. New Delhi: The McGraw Hill Comapnies.
35. Ray, K. G. (2010). Mergers and Acquisitions. New delhi: PHi Learning Private Ltd.
36. Millar, R. (2007). Doing Business with India. London: GMB Publishing Ltd.
37. Chetty, P. (2009, June 16). Mergers and Acquisition. Retrieved 04 01, 2011, from Projectguru: http://www.projectguru.in/publications/?p=346
38. Miller, G. P. (1998). Bank mergers & acquisitions. MA: Kluwer Academic Publisher.
[1] See Gower’s Modern Company Law, 4th ed..p.682
[2] See S.S. Somarajlu ,V.Hope Prudomme & Co.Ltd.1983
[3] See Halsburg’s,Law of England, 4th ed., Vol.7.
[4] See R.N.Bansal,”Amalgamation, Mergers and Schemes of arrangement Under the Companies Act,Company News and notes, special Number,Nov.19-24,1970,pp.80-97
[5] See H.K. Saharay, ”Mergers, Amalgamation and Takeovers” Eastern Law House Private Limited,Calcutta,1981,p.9
Here , we can see that amalgamation becomes a matter of everyday occurrence in the Corporate world of India. So, the procedure and the valuation of shares in amalgamations bids.
[6] See Simon Richardson Reid ,Mergers Managers and the Economy, New York, McGraw-HIII Booth Company,1968,pp.121-130.
[7] See Corporations Canada, 2009-01-09
[8] See The agreement must contain certain provisions required by law.
[9] The corporation resulting from a simplified amalgamation must, if it has not already done so, file the current updating declaration required by the Act respecting the legal publicity of enterprises.
[10] See Author S.Dewing ,”A statistical Test of the Successful Consolidation” ,”Quarterly Journal of Economics,Vol.50,Nos.4.pp.36-85
[11] See Westron,I,Conglomerate Firms and Economis Efficiency, Research paper in Competition and Business Policy,Reprint,Nos.,2 and 4.California,1970
[12] See Kitching,J.”Why do mergers Micassy?” Harvard Business Review, Vol.45,Nos.6,Nov-Dec.,1976
[13] See Mendleker,G.,”Risk and Return-The Case of Margin Firm”, Journal of Finance Economics,Vol.50,No.40.
[14] See Franks,JR Broyles JE and Hecht MJ.,”An industry Study of Profitabily of Mergers in U.K”.,Journals of Finance,vol.32.No.,5.
[15] See The impact of amalgamation on the economy can be made on the basis of the orders passed by the Central Government under Section 23 of the MRTP,1969.
[16] .See Ahuja,P.K., Rehabilitation of sich units-Amalgamation And Mergers, New Delhi, Development Banking Centre,1982.
[17] R.N.Bansal,op. cit.,p.97.
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