“Equity and efficiency are complimentary, not contradictory, and we must move forward on both these while maintaining a high degree of fiscal and financial discipline and a robust external economic profile”.
The agenda of escalation of Indian market can be empathized from the above quoted opinion. The unleashing of the Indian economy has led the business communities to enter into broader prospect of trade and business through Merger and Acquisition. Mergers and amalgamation are a major part of the corporate finance world. Not surprisingly a merger and acquisition deal grab news as these transactions are worth hundreds of millions or over billions of dollars. It’s an investment decision and an activity for the purpose of business expansion.
Amongst the various amalgamation schemes, share swapping is one of the most commonly pursued strategies for restructuring.
A company is an organic whole. Restructuring of a company by swapping of shares extends the scope of both the companies. Traditionally, corporate restructuring is mainly discussed with reference to acquisitions, mergers and amalgamation. However, realistically speaking, corporate restructuring either can take place internally i.e. modifications will be within the corporate entity or modifications which affect the corporate entity externally. The former type of modification could be called “organic restructuring” whereas the later one is called “non-organic restructuring”. The concept of swapping of shares comes under the purview of organic restructuring.
Restructuring is a method of changing organizational structure in order to achieve the strategic goals of the organization or to sharpen the focus on achieving them. There is ‘reconstruction’ of a company when that company’s business and undertaking are transferred to another company formed for that purpose, so that as regards the new company substantially the same business is carried on and the same persons are interested in it as in the case of the old company. Structures depend on the mission and strategy of the organization. Restructuring can be a tool of one of the following methods aimed at a major change in organization:
i) As a defense from takeovers.
ii) Split of a division/forming subsidiary/independent company/ reverse merger.
iii) As per advice from parent company/consultant/stakeholders.
v) Business process Re-engineering
Sometime restructuring is undertaken in order to prevent takeover of company by another company. Forms of restructuring involve:
- By sale of shares.
- By sale of undertakings.
- By sale and dissolution.
- By scheme of arrangement.
Sale of shares is the simplest process of reconstruction. Shares are sold and registered in the name of the purchasing company. The selling shareholders receive either compensation or shares in the acquiring company. If nine-tenths of the holders of a class have approved the terms, shares of the rest can be acquired under Section 395.
The second method involves a sale of the whole of the undertaking of the transferor company as a going concern..
Section 394 applies to every scheme which involves transfer of the whole or any part of the undertaking or liability of a company to another company.
Restructuring generates a number of issues in the sphere of economics, law, and Public policy and Managerial policy. Some of them are:
i). Economic Issues– The first thing to be considered in a corporate restructuring scheme is whether there is an economic gain from it. Any restructuring is undertaken for joint profit maximization, and the same is considered along with their options, only when the takeover is expected to produce synergistic gains. These synergistic gains are possible from a number of sources.
ii). Legal issues – Mergers and acquisitions by and method are generally seen in public policy as activities which, if left uncontrolled, can lead to negotiation of public interests. As a result, these activities are controlled through various statutes and code of conduct. M & A were governed by Section 111 and 390 to 396A of the Companies act, 1956. It’s a process to combine business financially. A merger results when two companies, mostly of similar size, agrees to co-exist as a new company. This is known as the “merge of equals.” Such merges are financed by stock swaps. Generally merging via stock swap mode is between equal companies. A stock swap is a merger in which the purchased-or target-firm’s shareholders trade their shares for shares in the acquiring firm. The trade is usually not one-for-one. The acquiring firm makes an offer to the target firm (based on the relative value of that firm) and bases the stock swap offer on that value. A merger by swapping of stock leaves the company in an advantageous position. This can be best explained with an example: A, a company has a very sound financial resource but lags in manpower and managerial skill. B, a company has a very strong managerial strategy and manpower but doesn’t have ample financial resource to exploit and implement it. Thus, if company A swaps its shares with company B, in that case a merger between both the companies will give rise to a financially strong and strategically adequate corporate entity. The purpose may be to expand the operations with an eye on long term profitability. The interests of shareholders of the company are usually well-protected. Generally, the deal is beneficial to both the parties.
The Share exchange ratio is the number of shares which the transferee company would issue, for each share of the transferor company, to the shareholders of the transferor company. The transferee company, in consideration of amalgamation/merger of the transferor company with the transferee company, issues and allots to the shareholders of the transferor company, equity shares of the transferee company. The scheme sets out the share exchange ratio at which the shareholders of the transferor company are to be allotted shares of the transferee company.
The duty of the court while sanctioning the scheme is to ensure that the scheme is fair and not prejudicial to the interests of the shareholders. The share exchange ratio, if agreed to by majority of the shareholders of the company, is not to be questioned by the court merely because the same is opposed by small number of shareholders holding negligible number of shares. If the share exchange ratio has been fixed by an experienced and a reputed firm of charted accountants, then, in the absence of any charge of fraud against them, the court would accept such valuation and ratio of exchange. Once the scheme of valuation has been approved by the shareholders of the company the court will not disturb the scheme of amalgamation unless the person challenging the valuation satisfies the court that the valuation arrived at is grossly unfair.
A company can enter into schemes even where no power has been specifically given by the memorandum of association because Chapter V of the Companies Act gives power to companies to apply for sanction of arrangement, Compromise or amalgamation. The expression ‘Arrangement’ in Sec.390 includes a reorganization of the share capital of the company by the consolidation of shares of different classes, or by the division of shares into shares of different classes, or by both those methods. Then an application is to be made in the under the jurisdiction of the principal seat of the High Court. An application can be made only by a member or creditor of the class which is affected by the compromise or arrangement proposed by the company. If the application is properly made, the court may order a meeting of the class of creditors or members to be called, which shall be held and conducted in the manner directed by the court. Thereafter a notice calling the meeting is to be circulated amongst the creditors. Thus, if the scheme is approved by a majority representing three-fourths in value of the creditors or members, as the case may be, it may then be sanctioned by the court. Thus, the final stage is the stamping and filling with Registrar of Companies.
Share swapping is a beneficial deal to enter into. In a share swap the companies acts as subsidiaries or joint ventures of each other. As like all mergers, stock swap mergers involve event risk associated with fluctuations in the stock prices of the two companies. Any number of factors can cause a deal to fail to be completed.
 Manmohan Singh, Indian Prime Minister first address to the nation, 22 May 2009.
 N.L Bhatia & Jagruti Sampat “Takeover games & SEBI Regulations” Edn:2, 2002.
 J.A. Hornby, An Introduction to Company Law, p. 174 (1957)
 Allotment of shares on preferential basis to the holding company of the transferee company so as to maintain the majority stake was held to be a fair basis allotment in the transferee company to the members of the transferor company. Hindustan Lever Ltd, Re; Tata Oil Mills Co Ltd, Re, (1994) 81 Comp Cas 754 Bom
 This is considered in connection with voluntary winding up.
 This has already been considered
 S. 394(1)(a) and (b). Amalgamation of a company dealing in shares with a transport company, there is no power to prevent it. Eita India Ltd, Re, (1997) 24 Corpt LA 37 Cal
 Van Horne J.C.: Fundamentals of Financial Management, Fifth edn
 N.L Bhatia & Jagruti Sampat “Takeover games & SEBI Regulations” Edn: 2002.
 Re Brooke Bond Lipton India Ltd (1999) 98 Comp Cas 496
 Amico Pesticides Ltd. In re, (2001) 103 Comp Cas 463 Bom, the scheme required alteration of the Company’s memorandum, the special provisions applicable to alteration need not be followed, sufficient powers in the court for this purpose.
Student, 4th Year, ILS Law College, Pune
[Submitted as an entry for the MightyLaws.in Blog Post Writing Competition, 2011]