CASE STUDY

By: Sanjay Buch, Partner Crawford Bayley & Co. Advocates & Solicitors

One listed and an unlisted company are considering coming together by (1) Merger, (2) Takeover of shares/control (3) sale of Business/ Assets.
(1) MERGER Implications: Stamp Duty 1. stamp duty on instruments, and not on transactions. 2. Li Taka Pharmaceuticals Ltd. vs State of Maharashtra And Other AIR (1997) Bom 7.

Listed Co.

Unlisted Co.
3. Hindustan Lever & Anr vs State of Maharashtra & Anr AIR (2004) SC 326 ,

4. Delhi Towers Limited vs GNCT of Delhi 2009,

1937 Notification, Article 23 and 62 of Indian Stamp Act, Maharashtra, Gujarat, Karnataka, Rajasthan, MP, WB state amendments;

One listed and an unlisted company are considering coming together by Merger Conti..
MERGER Implications: Companies Act, 2013
Section 230: Disclose Reduction of share capital of the Company if included in the compromise of arrangement; Details of any scheme of corporate debt restructuring (CDR) consented to by not less than seventy-five percent of the secured creditors in value including funds required post-implementation of the CDR; Attach valuation report on shares and all of the assets of the Company, disclose in the Notice explaining its effect on creditors, Key Managerial Personnel, Promoter and Non-Promoter and debenture holders and the effect of the compromise or arrangement on any material interests of the Directors; Notice of any meeting send to Central Government, Income-tax authorities, RBI, SEBI, Stock exchange, Registrar, Official Liquidator, CCI (if necessary) and any other regulator likely to be affected; Representations by them within 30 days otherwise deemed approval. Optional Postal ballot Voting allowed.

One listed and an unlisted company are considering coming together by Merger Conti..
Objection in relation to a Scheme can be raised only by persons holding not less than 10% of the shareholding; or having outstanding debt amounting to not less than 5% of the total outstanding debt as per the last audited financial statement. Treasury Shares has been done away with under the proviso to sub-section (3)(b) wherein holding of shares by the company in its own name or in trust as a result of the Scheme. Fast track merger between- holding company and its wholly owned subsidiary and two or more small companies. No approval of the Tribunal is required. (Small company= Paid-up Cap not more than 50 lakhs or Turnover not more than 2 Crore); Section 236: Exit option to Minority shareholders allowed : Majority shareholders (holding at least 90% of equity share capital) can buy at a price by Registered valuer Listed and unlisted companies all covered. Section 232 merger of listed transferor company and unlisted transferee company, the transferee company shall continue to be an unlisted company. Exit option to be given to the shareholders of the transferor company if they decide to opt out of the transferee company, wherein the exit price to be not less than the price under any SEBI regulation.

One listed and an unlisted company are considering coming together by Merger Conti..
Implications: Takeover Code/ Listing Agreement
SEBI Circular No. CIR/CFD/DIL/8/2013 dated 21st May, 2013 to clarify and relax certain issues in reference to its Circular CIR/CFD/DIL/5/2013 dated February 4, 2013 dealing with its observations on M&A Schemes; Applies where no exemption from Rule 19(2)(b) of Securities Contracts (Regulation) Rules, 1957 for listing is sought; Compliance with 24(f) and (g) of the BSE Listing Agreement; Valuation Report from an Independent Chartered Accountant' is not required in cases where there is no change in the shareholding pattern of the listed company / resultant company; (example: WOS into Parent) Otherwise Valuation Report required in all cases. SEBI to provide its comments on the Draft Scheme to the stock exchanges within 30 days from Date of receipt of copy of in-principle approval for listing of equity shares of the company seeking exemption from Rule 19(2)(b) of Securities Contracts (Regulation) Rules, 1957 on designated stock exchange, in case the company is listed solely on regional stock exchange. Provide facility of post ballot and e-voting for seeking approval of the shareholders to the scheme .. The votes cast by public shareholders in favour of scheme must at least be two times in the vote cast against for the special resolution to be acted up on.

One listed and an unlisted company are considering coming together by Merger Conti..
Exemption in Regulation 10 (1) (d) of the Takeover Code acquisition pursuant to a scheme under any law or regulation, Indian or foreign including amalgamation, merger or demerger, pursuant to an order of a court subject to condition that: -component of cash and cash equivalents in the consideration paid being less than twenty-five per cent of the consideration paid under the scheme; and -persons directly or indirectly holding at least thirty-three per cent of the voting rights in the combined entity are the same as the persons who held the entire voting rights before the implementation of the scheme.

One listed and an unlisted company are considering coming together by Merger Conti..
Implication: Rent Act and Assignment of Tenancies
Though court order judgment in rem, High court while sanctioning such a transfer of undertaking, has no powers to override the provisions of the state laws relating to tenancy . tenancy rights cannot be transferred without the permission of the landlord. If such a transfer is made, the landlord may be legally entitled to evict the tenant. General Radio and Appliances Co Ltd vs MA Khader (1986) 60 Com Cases 1013 (SC). Brooke Bond Lipton India Ltd, Re, (1998) 15 SCL 81 (Cal) that if a scheme of amalgamation comes before the court which contains transfer of a tenancy, it will not hold back sanction merely because the prior permission of the landlord was not obtained. It held that so long there was no other problem, it will sanction it and thereafter, it would be a matter between the landlord and the transferor/transferee companies.

One listed and an unlisted company are considering coming together by Takeover..
Implications: Stamp Duty The Share Purchase Agreement (SPA) is an Instrument transferring title to the Acquirer form the Promoters required to be stamped. Share Transfer Form covered by Article 62 of the ISA.Demat by Article 8 A ISA. Tax wise but not twice is well settled. Article 5(h)(A) Schedule I to the BSA. Article 5(h)(A) (I) to (V). This Article generally seeks to bring in all instruments/ contracts where specific performance is sought for in case of value of such contract exceeds Rs.1 Lakh as also a contract which creates any obligation, right or interest having monetary value and assignment of copyrights, is liable to be stamped in accordance with the New Article 5(h) (A). Article 5 (h) (B) retained and deals with all other miscellaneous categories of instruments/ contracts which are not otherwise provided. In that sense, Article 5 (h) (B) overrides all the other sub-articles of Article 5(A) including Article 5(h)(A) of Schedule attached to the BSA and seeks to levy stamp duty on such miscellaneous categories of contracts with a fix rate rather than ad-veloram. A SPA is not defined under the BSA or any other statute and is not otherwise covered by any entry of the Schedule to the BSA therefore, an argument can be made that it thus falls in a residuary Article 5 (h) (B) of the BSA and is thus chargeable with a Stamp Duty of only Rs.100/-. Enforceability: Section34 Inadmissibility in evidence after regularizing and payment of penalty @ 2% PM.

One listed and an unlisted company are considering coming together by Takeover Conti..
Implications: Take Over Code/Listing Agreement
Negative Control and Enforceability of Put Call options Shubhkam Ventures : Dispute in this case was whether these rights i.e. the right to nominate a director on the board of the company, the right to be present to constitute quorum and the affirmative voting rights all of which is essentially negative control rights constituted control for the purposes of the takeover code regulations. SEBI and Subhkam Ventures have reached an out of court settlement in the matter and hence in November 2011 the Supreme Court passed an order disposing off the appeal. The order of the Supreme Court also specifically stated that the order of the SAT would not be treated as a precedent in the matter of law. under the New Takeover Regulations definition of control remains unchanged, the ambiguity regarding negative control continues. Enforceability of Put call options in shareholders Agreement SEBI Circular of 3rd October,2013. Compliance with Listing Agreement and Clause 40-A. Minimum Public Shareholding frozen at 25%.

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One listed and an unlisted company are considering coming together by Business/ Asset Sale.. Implications: Stamp Duty
Business Transfer Agreement(BTA) not defined in the BSA and is not otherwise covered by any entry of the Schedule to the BSA therefore, an argument can be made that it thus falls in a residuary Article 5 (h) (B) of the BSA and is thus chargeable with a Stamp Duty of only Rs.100/-. If sale of undertaking on a going concern basis under a BTA includes and covers sale and transfer of immovable properties with or without movable properties, then it may be contended by Revenue that it operate as a Conveyance under Section 2(g) of the BSA read with Article 25 of the Schedule I. The issue whether fixed assets comprising of plant and machinery would be treated as immovable property or not has also been dealt with by the Supreme Court in the case of Dunccans Industries Ltd. vs. State of UP and others AIR 2000 SC at 355, held that when there is an intention to transfer the entire business undertaking on an as-is-where-is basis including plant, machinery and other assets, the machinery which formed the fertilizer plant were permanently embedded to the earth with an intention of running, that the machinery is to be treated as immovable property and liable to stamp duty as conveyance.

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One listed and an unlisted company are considering coming together by Business/ Asset Sale Conti..
sale and transfer of tangible movable property: under the provisions of TP Act read with Section 17 and 18 of the Registration Act, the transfer can be effected by handing over/physical delivery of such movable property by obtaining a suitable receipt to that effect recording and/or acknowledging the passage of title in movables from one party to the other. Such a transfer of movables physical deliver does not require registration or stamping.

sale and transfer of intangible movable property: Trade Marks, Goodwill, Book Debts is proposed to be affected, then in such a case, it would be advisable to execute separate instrument in the nature of Deed of Assignment of Trade marks and/or Deed of Assignment of Book Debts for the purposes of payment of Stamp Duty.

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One listed and an unlisted company are considering coming together by Business/ Asset Sale.. Conti..
Implications: Takeover Code
Obligations of the Acquirer. Regulation 25

In the event the acquirer has not declared an intention in the detailed public statement and the letter of offer to alienate any material assets of the target company or of any of its subsidiaries whether by way of sale, lease, encumbrance or otherwise outside the ordinary course of business, the acquirer, where he has acquired control over the target company, shall be debarred from causing such alienation for a period of two years after the offer period: Provided that in the event the target company or any of its subsidiaries is required to so alienate assets despite the intention to alienate not having been expressed by the acquirer, such alienation shall require a special resolution passed by shareholders of the target company, by way of a postal ballot and the notice for such postal ballot shall inter alia contain reasons as to why such alienation is necessary. Obligations of the target company. Regulation 26 (2) During the offer period, unless the approval of shareholders of the target company by way of a special resolution by postal ballot is obtained, the board of directors of either the target company or any of its subsidiaries shall not, (a) alienate any material assets whether by way of sale, lease, encumbrance or otherwise or enter into any agreement therefor outside the ordinary course of business; (b) effect any material borrowings outside the ordinary course of business; (c) issue or allot any authorised but unissued securities entitling the holder to voting rights.

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One listed and an unlisted company are considering coming together by Business/ Asset Sale.. Conti.. Implications: Companies Act,2013
section 180/293 applicability Scope widened and the new section applicable to all the companies public or private. Sale of undertaking subject to consent of the company in general meeting are now to be approved by passing of special resolution. Undertaking now defined in section 180.

Implications: Rent Act Transfer of Tenancies Assignment is not automatic but a deed of assignment of leasehold rights will have to be executed as purchaser entity will be different. Another argument that can be advanced is that of Successors and assigns clause. Clever drafting of the Lease Deed will never allow Successors and assigns of the tenant to hold and continue with the tenancy.

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Sanjay Buch Crawford Bayley & Co. State Bank Buildings, 4th Floor, NGN Vaidya Marg, Fort, Mumbai - 400 023 Tel: (+91 22) 2266 8000 Ext.111 Fax: (+91 22) 2266 0986 / 0355 Mob: +91 9820058507 sanjay_buch@crawfordbayley.com