Merger Under Section 232 of the Companies Act

A merger under section 232 of the Companies Act, 2013 is not a separate application. It starts life as a scheme under section 230 and becomes a section 232 matter once the applicant shows the Tribunal that the compromise or arrangement is for a reconstruction involving a merger, an amalgamation or a division. From that point the section adds its own disclosure list, its own menu of things the order may do, and its own filing and penalty rules. This page reads section 232 as printed.

What makes a scheme a merger under section 232?

Two showings, set out as clauses (a) and (b) of sub-section (1). The applicant must show the Tribunal that the compromise or arrangement has been proposed for the purposes of, or in connection with, a scheme for the reconstruction of the company or companies involving merger or the 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 company (hereinafter referred to as the transferor company) is required to be transferred to another company (hereinafter referred to as the transferee company), or is proposed to be divided among and transferred to two or more companies.

The transferor and transferee labels are defined inside that clause, not in the definitions section. Once the showing is made, the Tribunal may order a meeting of the creditors or members, and the provisions of sub-sections (3) to (6) of section 230 shall apply mutatis mutandis, which is how the notice, the objection threshold, the regulator copies and the three-fourths voting test described in what is a scheme of arrangement carry across.

What has to be circulated before the vote?

Five documents, and sub-section (2) names them in order.

Clause (c) carries the sentence that matters most to a shareholder reading the papers. The report must lay out the share exchange ratio specifying any special valuation difficulties. Clause (d) is conditional: the expert's report is required if any, so the Act does not itself compel a valuation in every case.

What can the Tribunal's order provide for?

Ten heads, lettered (a) to (j), and the list is worth reading as a whole because several of them change who owns what without any separate conveyance. The order may provide for the transfer of the undertaking, property or liabilities from a date to be determined by the parties unless the Tribunal, for reasons to be recorded by it in writing, decides otherwise; for the allotment of shares, debentures, policies or other like instruments; for the continuation by or against the transferee company of any legal proceedings pending by or against any transferor company on the date of transfer; and for dissolution, without winding-up, of any transferor company.

Two of the three guards below are provisos, one to clause (b) and one closing the sub-section. The third is clause (h) itself, whose own proviso sets the exit price floor:

• A transferee company shall not, as a result of the compromise or arrangement, hold any shares in its own name or in the name of any trust on its own or a subsidiary's behalf, and any such shares shall be cancelled or extinguished.
• Where a listed transferor merges into an unlisted transferee, the transferee shall remain an unlisted company until it becomes a listed company, and exiting shareholders must be paid an amount that shall not be less than what has been specified by the Securities and Exchange Board under any regulations framed by it.
• No scheme is sanctioned unless a certificate by the company's auditor has been filed with the Tribunal confirming that the accounting treatment conforms to the accounting standards prescribed under section 133.

Sub-section (4) then makes the order self-executing on property: the property shall be transferred to the transferee company and the liabilities become the transferee's, and property may, if the order so directs, be freed from any charge.

Which filings does a section 232 merger leave behind?

Three, each on its own timing, and only one of them is penalised.

Sub-section (5) requires every company in relation to which the order is made to file a certified copy with the Registrar for registration within thirty days of the receipt of certified copy of the order. Sub-section (6) requires the scheme to clearly indicate an appointed date from which it shall be effective, and provides that the scheme is deemed effective from that date and not at a date subsequent to the appointed date. Sub-section (7) requires an annual statement to the Registrar until the scheme is complete, duly certified by a chartered accountant or a cost accountant or a company secretary in practice, saying whether the scheme is being complied with.

The penalty in sub-section (8), substituted by Act 29 of 2020, section 42, with effect from 21 December 2020, reads: If a company fails to comply with sub-section (5), the company and every officer of the company who is in default shall be liable to a penalty of twenty thousand rupees, and where the failure is a continuing one, with a further penalty of one thousand rupees for each day after the first during which such failure continues, subject to a maximum of three lakh rupees. It names sub-section (5) only. The annual compliance statement under sub-section (7) has no penalty attached to it in this section.

How is a merger different from a division under this section?

The Explanation at the end of section 232 draws three distinctions that the body of the section leaves implicit, and each names its own count. A merger by absorption is where the undertaking, property and liabilities of one or more companies are transferred to another existing company. A merger by formation of a new company is where the undertaking, property and liabilities of two or more companies are transferred to a new company, whether or not a public company. A scheme involves a division where the undertaking, property and liabilities of the company in respect of which the compromise or arrangement is proposed are divided among and transferred to two or more companies each of which is either an existing company or a new company.

The counts are not interchangeable. Absorption reaches one or more transferors; formation of a new company requires two or more; and a division starts from one company and ends in two or more. Both merger limbs also carry the words including the company in respect of which the compromise or arrangement is proposed, which keeps the applicant inside its own scheme. The division limb in clause (iii) does not repeat them, because it already names that company as its only subject.

The Explanation also defines the property and liabilities being moved in the widest terms: property includes assets, rights and interests of every description and liabilities include debts and obligations of every description.

Smaller combinations do not have to come through this section at all. Section 233 supplies an administrative route for small companies and wholly owned subsidiaries, described in a fast track merger, and a scheme with a foreign counterparty is governed by a cross border merger. Officers of a transferor do not shed liability by merging, as officer liability after a merger sets out.

Flock reports the filings themselves, each stamped with its date and linked back to the exchange or regulator that published it. What any of it means for you is your call to make.