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Meaning of Amalgamation

Meaning of Amalgamation

 The term "amalgamation" is not defined by the Companies Act, 1956. But section 2(1B) of the Income-tax Act, 1961, defines the term "amalgamation" for the purposes of the income tax law.

‘Amalgamation is the merger of one or more companies with another company or the merger of two or more companies to form one company.’

In views of the Companies Act, 1956, the terms, "amalgamation" and "merger", has the same meaning.

According to the mandatory Accounting Standard 14 (AS-14) issued by the Institute of Chartered Accountants of India (ICAI), ‘amalgamation’ means an amalgamation pursuant to the provisions of the Companies Act, 1956 or any other statute which may be applicable to companies. Under the said AS-14, two methods of amalgamation have been contemplated, viz., (a) amalgamation in the nature of merger and (b) amalgamation in the nature of purchase.

Amalgamation in the nature of merger is an amalgamation which satisfies all the following conditions.

(i) All the assets and liabilities of the transferor company become, after amalgamation, the assets and liabilities of the transferee company.

(ii) Shareholders holding not less than 90% of the face value of the equity shares of the transferor company (other than the equity shares already held therein, immediately before the amalgamation, by the transferee company or its subsidiaries or their nominees) become equity

shareholders of the transferee company by virtue of the amalgamation.

(iii) The consideration for the amalgamation receivable by those equity shareholders of the transferor company who agree to become equity shareholders of the transferee company is discharged by the transferee company wholly by the issue of equity shares in the transferee company, except that cash may be paid in respect of any fractional shares.

(iv) The business of the transferor company is intended to be carried on, after the amalgamation, by the transferee company.

(v) No adjustment is intended to be made to the book values of the assets and liabilities of the transferor company when they are incorporated in the financial statements of the transferee company except to ensure uniformity of accounting policies.

Amalgamation in the nature of purchase is an amalgamation which does not satisfy any one or more of the conditions specified in above-paragraph


                                                   Meaning of Merger

Black's Law Dictionary defines ‘merger’ as - The fusion or absorption of one thing or right into another, generally spoken of a case where one of the subjects is of less dignity or importance than the other. Here the less important ceases to have an independent existence.

Corporations: An amalgamation of two or more corporations pursuant to statutory provision in which one of the corporation survive and the other disappears. The absorption of one company by another, the former losing its legal entity, and later retaining its own name and identity and acquiring assets, liabilities, franchises and powers of former, and absorbed company ceasing to exist as separate business entity. Morris v. Investment life Ins. Co., 27 Ohio St. 2d 26, 272 N.E.2d 105,108,109,56 O.O.2d 14. It differs from a consolidation wherein all the corporations terminate their existence and become parties to a new one.
The anti-trust laws seek not only to control existing monopolies but also to discourage the acquisition of market power, Historically, mergers have provided an important route to positions of market dominance. Accordingly, Congress has required all mergers, whether vertical, horizontal, or conglomerate, to be scrutinized under the provision of section 7 of the Clayton Act 15 U.S.C.A. 18. See also Kefauver-Celler Act; Hart-Scott-Radino Antitrust Improvement Act.

Cash merger: A merger transaction in which certain shareholders or interests in a corporation are required to accept cash for their shares while other shareholders receive shares in the continuing enterprise. Modern statutes generally authorize cash mergers, though courts test such mergers on the basis of fairness and in some states, business purpose.

Conglomerate merger: Merger of Corporation which are neither competitors nor potential or actual customers or suppliers of each other. United States v. General Dynamics Corp., D.C.N.Y.,258 F.Supp. 36,56. One in which there are no economic relationships between the acquiring and the acquired firm. Kennecott Copper Corp. v. F.T.C., C.A.Colo.,467 F.2d 67,75. A conglomerate is one that is neither vertical nor horizontal and can be any of three types. A geographical extension merger occurs when the acquiring firm, by merger, extends it dominance to an adjacent geographic market. See, e.g., United States v. Marine Ban corporation, 418 U.S. 602, 94 S.Ct. 2856, and 41 L.Ed. 2d 978. A product extension merger occurs when the merger joins firm in related product markets. See e.g. , FTC v. Procter & Gamble Co. (clorox), 386 U.S. 568,87 S. Ct. 1224 ,18 L.Ed.2d 303. A "pure" conglomerate merger occurs when the two merging firms operate in unrelated markets having no functional economic relationship. See, e.g., United States v. International Tel. & Tel. Corp.,324 F.Supp. 19. These categories are not mutually exclusives: for example , a merger may have both horizontal and vertical aspects. See,e.g., Brown Shoe Company v. U.S.,370 U.S. 294, 82 S.ct.1502, 8 L.Ed. 2d 510.

De facto merger : A transaction that has the economic effect of a statutory merger but is cast in the form of an acquisition of assets or an acquisition of voting stock and is treated by acourt as if it were a statutory merger. Occurs where one corporation is absorbed byanother, but without compliance with statutory requirements for a merger. Arnold Graphics Industries, Inc. v. Independent agent center, Inc., C.A.N.Y., 775 f. 2d 38,42.

Down Stream Merger : The merger of a parent corporation into its subsidiary.

Horizontal merger: Merger between business competitiors , such as manufacturers on the same type products or distributors selling competing products in the same market area.

Short form merger: A number of states provide special rules for the merger of a subsidiary corporation into it parent where the parent owns substantially all the shares of the subsidiary. This is known as a "short form merger". Short form mergers under any such special statutes may generally be effected by ; a) adoption of a resolution of merger by the parent corporation, b) mailing a copy of the plan of merger to all shareholders of record of the subsidiary; and c) filing the executed articles of merger with the secretary of state and his issuance of a certificate of merger. This type of merger is less expensive and time consuming than the normal type merger. See e.g., Rev. Model Bus Corp. Act 11.04.

Triangular Merger: A method of amalgamation of two corporations by which the diappearing corporation is merged into a subsidiary of the surviving corporation and the shareholders of the disappearing corporation receive shares of the surviving corporation. In a reserve triangular merger the subsidiary is merged into the disappearing corporation so that it become a wholly owned subsidiary of the surviving corporation.

Up stream merger: A merger of a subsidiary corporation into its parents.

Verticle merger: Union with corporate customer or supplier. U.S. v. General Dynamics Corp., D.C.N.Y., 258 F.Supp. 36,56. By directly merging with suppliers, a company can decrease reliance and increase profitability. An example of a vertical merger is a car manufacturer purchasing a tire company.

                                          Procedure of Amalgamation /Merger

The procedures relating to an amalgamation contains critical processes. The law requires involvement of the Courts in the process of an amalgamation. An amalgamation process cannot be completed within few days. It may require few months or more than one year to complete. The Court procedures, relating to an amalgamation, are different in different States. However, the basic-fundamental procedures followed by the Courts in all States are same. In this paper, the fundamental procedures, relating to an amalgamation, is discussed.

                             Amalgamation is not a mere contract that can be executed by the companies themselves. The law requires involvement of the Courts in the cases of amalgamation. (In this paper, "the Court" means the Court dealing with the case of amalgamation. The Companies Act, 1956, empowers the High Courts to deal with the cases relating to the amalgamation). The provisions contained in sections 390 to 396A (both inclusive) of the Companies Act, 1956, (hereinafter "the Act") are dealing with the amalgamations and the mergers. The procedures for carrying out an amalgamation and forms relating thereto are provided under the Companies (Court) Rules, 1959. (Hereinafter, all the sections specified in this submission are of the Companies Act, 1956).

                                           Purposes of an Amalgamation:

There may be any purpose for an amalgamation. Among other purposes the following are the main purposes for which an amalgamation may be preferred-

1. To expand the business or operations of the company;

2. To carry on the business of the company more economically or more efficiently;

3. To attain economic, business and other goals of the company in efficient manner;

4. To eliminate competition between the companies;

5. To use economic, financial, technical and other sources efficiently;

6. In the public interest (by the Central Government in exercise of the powers conferred by section 396).

A company having vulnerable financial/economic position may prefer an amalgamation with another company so as to secure itself. And the companies may adopt the concept laid down by the proverb, ‘union is strength’, the result of which may be an amalgamation.

                                        Procedures for an Amalgamation:

The Court procedures, relating to an amalgamation, are different in The Court procedures, relating to an amalgamation, are different in different States. However the basic procedures followed by the Courts in all States are same. The Act requires involvement of the Courts to carry out the amalgamations effectively. The Act empowers the Courts to make orders providing for such incidental, consequential and supplemental matters as are necessary to secure and to carry out the amalgamations properly (Sections 392 and 394(1) (vi)). The basic and important procedure to carry out an amalgamation is discussed below in brief. (To discuss about the procedures for an amalgamation, it is assumed that A Ltd. and BLtd. are getting amalgamated with NLtd.).

1. The Board meeting of individual companies, ALtd. and BLtd. should propose for the amalgamation with NLtd.

2. The proposal for the amalgamation should be forwarded to NLtd. by ALtd. and BLtd.

3. The Board meeting of NLtd. should consider the proposal and to effect for the amalgamation, the Board should approve the proposal of ALtd. and BLtd.

4. Subsequently, NLtd. should inform the fact that it has accepted the proposal to ALtd. and BLtd.

5. After consulting ALtd. and BLtd. NLtd. should appoint the valuers and the solicitors. (Advocates, who can handle the company law related cases, may be appointed as the solicitors).

6. The valuers will determine the fair share exchange ratios of the companies. After their valuation work, the valuers will submit their Valuation Report of shares of ALtd. BLtd. and NLtd.

7. Draft documents of                                                                                                                               i. the application under section 391(1);                                                                                                     ii. the statement, (in this article, for short, "explanatory statement"), under section 393; and                           iii. the scheme for the amalgamation, should be prepared with the assistance of the solicitors.

8. The requirements of sub-section (1) (a) and sub-section (2) of section 393 in respect of statement (i.e. explanatory statement) must be satisfied while preparing that statement.

9. The scheme for the amalgamation, the Valuation Report and the share exchange ratios specified therein should be approved by the Boards of ALtd., BLtd. And NLtd.

10. The solicitors should move an application under section 391(1) in the Court praying an order so as to call, hold and conduct a meeting under that section. A scheme for the amalgamation should be enclosed with the said application.

11. The Court will make an order under section 391(1), on the application made to it.

12. The order of the Court                                                                                                                                 i. will provide for the date, time and venue of the meeting;                                                                                     ii. will provide for the appointment of the chairperson of the meeting;                                                  iii. will provide for the time limit within which the chairperson of the meeting should submit his report to the Court;                                                                                                                                              iv. may provide for the advertisement of the notice of the meeting; and                                                                  v. may give such directions as the Court thinks expedient in relation to the calling, holding and conducting of the meeting.

13. On receipt of the order of the Court, with the assistance of the solicitors, notice of the meeting is to be drawn up.

14. With the notice of the meeting -                                                                                                              i. a copy of the scheme of amalgamation;                                                                                                      ii. an explanatory statement prepared under section 393; and                                                                        iii. where proxies are allowed under the rules made under section 643(section 391(2)), proxy form, must be sent to all the persons who are entitled to present and to vote at the meeting under section 391(2).

15. Advertisement of the notice of the meeting is to be given according to the order of the Court. When giving the advertisement, the requirements of clause (b) of subsection (1) and sub-section (3) of section 393 must be satisfied.

16. The meeting should be presided over by the person who was appointed by the Court as the chairperson of the meeting (or by the person who was appointed as the chairperson in accordance with the provision of the order of the Court).

17. At the meeting, the scrutineers should be appointed. And, after taking a poll for the resolution approving the scheme for the amalgamation, the results will be announced by the chairperson of the meeting.

18. The chairperson of the meeting will submit his report, on the decision taken at the meeting on the scheme of amalgamation, to the Court.

19. An application should be made to the Court praying an order under section 391(2) sanctioning the scheme of amalgamation.

20. To consider the application, the Court will order to send notice of hearing to the persons/companies who/which are concerned with the scheme of amalgamation.

21. According to section 394A the Court will give notice to the Central Government of which representations, if any, will be taken into consideration before passing any order under

section 391(or 394).

22. The Court may make an order to publish the notice of hearing in the newspapers and to send its copy to the Registrar of Companies.

23. After                                                                                                                                                              i. hearing all the persons/companies concerned with and interested in the scheme of amalgamation; ii. Considering the representations, if any, made by the Central Government;                                     iii. Satisfying the requirements of the proviso to section 391(2); and                                                              iv. Considering such other matters relating to the scheme of amalgamation, the Court will make an order under section 391(2) sanctioning the scheme of amalgamation.

24. When the scheme of amalgamation is sanctioned by the Court it will be binding on all the parties specified in section 391(2).

25. The order made under section 391(2) must be filed with the Registrar. If the order is not filed so, it will have no effect (Section 391(3)).

26. A copy of every such order must be annexed to every copy of the memorandum, or the instrument constituting or defining the constitution of the company, issued after the certified copy of the order has been filed as aforesaid (Section 391(4)).

27. Where an application is made to the Court under section 391 for the sanctioning of the scheme of amalgamation and after considering the matters specified in section 394(1) (a) and (b), the Court may either by the order sanctioning the scheme of amalgamation or by a subsequent order, make provision for all or any of the matters specified in clauses (i) to (vi) of section 394(1) to facilitate for the amalgamation (Section 394(1)).

28. Before making an order under section 394(1) (iv) for the dissolution of ALtd. and BLtd., the transferor companies, without winding up, the Court will appoint the Official Liquidator who, on scrutiny of the books and papers of ALtd. and BLtd., the transferor companies, will make a report to the Court that the affairs of the companies have not been conducted in a manner prejudicial to the interests of their members or to the public interest (Second proviso to section 394(1)).

29. After considering the report made by the Official Liquidator and such other matters, the Court will make an order under section 394(1) (iv) for the dissolution of ALtd. and BLtd. the transferor companies, without winding up.

30. Every order made under section 394 must be filed with the Registrar within thirty days after making that order (Section 394(3)).

Other Relevant Points:

Some other points relating to the amalgamation process and relevant to the companies involved therein is discussed below:-

A. Official Liquidator:-

Before making a report to the Court, the Official Liquidator may appoint such persons like Chartered Accountants to examine the books and papers of the transferor companies, ALtd. and BLtd. The persons so appointed will make their report to the Official Liquidator who will, subsequently, submit his report to the Court.

B. Forms:-

The Companies (Court) Rules, 1959, prescribes forms to use in the amalgamation process. The forms used in the amalgamation process should be in accordance with the said Rules and forms prescribed there under.

C. Intimations /Notices to the Stock Exchanges:-

At the several stages of the amalgamation process, the companies involved therein are required to send intimations/notices to the stock exchanges concerned. For instance                                                i. when the Board meeting decides for the amalgamation, the fact thereof;                                        ii. after a meeting is called, held and conducted under section 391(1), the minutes thereof;                  iii. when the Court by an order sanctioned the scheme of amalgamation, the fact thereof;                     iv. When the Court made an order for dissolution of ALtd. and BLtd. (the transferor companies) without winding up, the fact thereof, should be intimated/sent to the stock exchanges concerned by the respective companies involved in the amalgamation.

D. The Central Government’s Power:-

The Central Government has power to provide for the amalgamation of the companies in the public interest, notwithstanding anything contained in sections 394 and 395 but subject to the provisions of section 396 (Section 396(1)).

E. Preservation of Books and Papers:-

The books and papers of ALtd. and BLtd. the transferor companies, must not be disposed of without the prior permission of the Central Government (Section 396A).

F. Issue of Shares:

The transferee company (NLtd.) may issue shares to the transferor companies (ALtd. and BLtd.). In such cases the requirements of law and rules, regulations, guidelines, etc., made there under, regarding the issue of shares, must be complied with.


                                                   Meaning of De-merger          
A De-merger results in the transfer by a company of one or more of its undertakings to another company. The company whose undertaking is transferred is called the De-merged company and the company (or the companies) to which the undertaking is transferred is referred to as the resulting company.          
Companies often have to downsize or ‘contract’ their operations in certain circumstances such as when a division of the company is performing poorly or simply because it no longer fits into the company’s plans or give effect to rationalization or specialization in the manufacturing process. This may also be necessary to undo a previous merger or acquisition which proved unsuccessful. This type of restructuring can take various forms such as demergers or spin offs, split offs, etc.
Large entities sometimes hinder entrepreneurial initiative, sideline core activities, reduce accountability and promote investment in non-core activities. There is an increasing realization among companies that demerger may allow them to strengthen their core competence and realize the true value of their business.     

‘Demerger’ is often used to describe division or separation of different undertakings of a business, functioning hitherto under a common corporate umbrella. "A scheme of demerger, is in effect a corporate partition of a company into two undertakings, thereby retaining one undertaking with it and by transferring the other undertaking to the resulting company. It is a scheme of business reorganization" Justice N.V. Balasubramaniam J in Lucas TVS Ltd. in Re. CP No. 588 and 589 of 2000 (Mad-Unreported).     

Such a split or division may take place for various reasons e.g. a conglomerate company carrying out various activities might transfer one or more of its existing activities to a new company for carrying out rationalization or embarking specialization n the manufacturing process. Also, such a transfer might be of a less successful part of the undertaking to a newly formed company. The new company and transferee, need not be the subsidiaries of the parent company which has affected/undergone such split or division.         

The term "Demerger" has not been defined in the Companies Act, 1956. However, it has been defined in Sub-section (19AA) of Section 2 of the Income-tax Act, 1961. According to the said Sub-section, "demerger" in relation to companies, means transfer, pursuant to a scheme of arrangement under Sections 391 to 394 of the Companies Act, 1956, by a demerged company of its one or more undertakings to any resulting company in such a manner that –

i. all the property of the undertaking being transferred by the demergedcompany, immediately before the demerger, becomes the property of the resulting company in such a manner that

ii. all the liabilities relatable to the undertaking, being transferred by the demerged company, immediately before the demerger, become the liabilities of resulting company of virtue of the demerger.

iii. the property and the liabilities of the undertaking, being transferred by the demerged company are transferred at values appearing in its books of account immediately before the demerger;

iv. the resulting company issues, in consideration of the demerger, its shares to the shareholders of the demerged company on a proportionate basis;          

v. the shareholders holding not less than three fourths in value of the share in the demerged company (other than shares already held therein immediately before the demerger or by a nominee for, the resulting company or, its subsidiary) become shareholders of the resulting company or companies by virtue of the demerger, 

vi. the transfer of the undertaking is on a going concern basis;   

vii. the demerger is in accordance with the conditions, if any, notified under Sub section (5) of Section 72A of the Income Tax Act 1961 by the Central Government in this behalf.

Explanation 1-For the purposes of this clause, "undertaking" shall include any
part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity.      
Explanation 2 – For the purposes of this clause, the liabilities referred to in subclause (ii), shall include:

(a) the liabilities which arise out of the activities or operations of the undertaking;

(b) the specific loans or borrowings (including debentures) raised, incurred and utilized solely for the activities or operations of the undertaking; and  

(c) in cases, other than those referred to in clause (a) or clause (b), so much of the amounts of general or multipurpose borrowings, if any, of the demerged company as stand in the same proportion which the value of the assets transferred in a demerger bears to the total value of the assets of such demerged company immediately before the demerger.    

Explanation 3 – For determining the value of the property referred to in subclause (iii), any change in the value of assets consequent to their revaluation shall be ignored.
Explanation 4 – For the purposes of this clause, the splitting up or the reconstruction of any authority or a body constituted or established under a Central, State or Provincial Act, or a local authority or a public sector company, into separate authorities or bodies or local authorities or companies, as the case may be, shall be deemed to be a demerger if such split up or reconstruction fulfills such conditions as may be notified in the Official Gazette, by the Central Government.

From the above, the following points emerge about demergers:  

1. Demerger is essentially a scheme of arrangement under Section 391 to 394 of the Companies Act, 1956 requiring approval by:      

(i) majority of shareholders holding shares representing three-fourths value in meeting convened for the purpose; and      
(ii) sanction of High Court.        

2. Demerger involves ‘transfer’ of one or more ‘undertakings’.    

3. The transfer of ‘undertakings’ is by the demerged company, which is otherwise known as transferor company. The company to which the undertaking is transferred is known as resulting company which is otherwise known as ‘transferee company’.        

Demerged company    
According to Sub-section (19AAA) of Section 2 of the Income-tax Act, 1961, "demerged company" means the company whose undertaking is transferred, pursuant to a demerger, to a resulting company.         
Resulting company      y
According to Sub-section (41A) of Section 2 of the Income-tax Act, 1961 "resulting company" means one or more companies (including a wholly owned subsidiary thereof) to which the undertaking of the demerged company is transferred in a demerger and, the resulting company in consideration of such transfer of undertaking, issues shares to the shareholders of the demerged company and includes any authority or body or local authority or public sector company or a company established, constituted or formed as a result of demerger.
The definition of ‘resulting company’ has clearly brought out three important requirements while establishing its relationship with demerging company. They are –     

1. Consideration for transfer of undertaking would be by issue of shares only by resulting company.       
2. Such consideration would be paid only to the shareholders of demerged company.
3. Resulting company can also be a subsidiary company of a dmerged company.

                                           Steps to be taken for Demerger    

1. Preparation of scheme of demerger  
(i) Prepare a scheme of demerger in consultation with all interested parties and have the same approved in principle by the Board of Directors of the company at a meeting.
(ii) Appoint an expert for valuing the shares to determine the share exchange ratio.
(iii) Engage an advocate for the preparation of scheme and for appearing subsequently before the High Court.    
(iv) In case of listed companies, the stock exchanges where the shares are Listed should be intimated.

2. Application to court for direction to hold meetings of members/creditors        
3. Obtaining court’s order for holding meetings of members/creditors     
4. Notice of the meetings of members/creditors  
5. Holding meeting(s) of members/creditors                  

 Anil Kumar Joshi July 4, 2010
Please clarify whether there is any bar in the companies Act that a government company can not merge with private company
 hastin January 30, 2011
 raju July 29, 2011
 a.naveen kumar July 29, 2011
explain the followings
top management commitment towwrds mergers&acquisitions. the procedure for search merger partner. negotiating with merger partner.
 vikash kumar mishra August 5, 2011
i satisfide this chapter
 devaraj August 15, 2011
thank for hinds
Vinesh October 18, 2011
In this site more points good wording
 GHUFFAR QURESHI December 1, 2011
 Raju Mashilkar March 27, 2012
i am also taking lecture in diff institute on accountancy really presentation for amalgumation is really good.
 lalit May 26, 2012
sahi hai
Olaleye reuben adewale September 29, 2012
Is there any benefit from merger than forming a partnership?
Mohit Shah January 10, 2013
Where can I get the accounting procedures for d same?
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