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What is in store for mergers and acquisitions?
February, 01st 2018

With the recent enactment of the Companies Amendment Act, 2017, the legislature’s attempt to clean up the provisions of the existing company law and to facilitate easy business for companies will get mixed reactions.

With the recent enactment of the Companies Amendment Act, 2017, the legislature’s attempt to clean up the provisions of the existing company law and to facilitate easy business for companies will get mixed reactions. Admirers may claim this as a great piece of legislation to ease the company law, but the fine print doesn’t show this at all. In particular, for mergers and acquisitions (M&As), many provisions are amended now, which are rather confusing than earlier. This column analyses some aspects that will affect M&As. The meaning of ‘significant influence’ used for the purpose of defining an ‘associate company’ has been amended. Significant influence means the control of at least 20% of the total voting power or control of or participation in business decisions under an agreement. The concept regarding the control of or participation in business decisions under an agreement is vague. This will raise questions on veto right matters, which are very important in any M&A deal. The question is whether having veto rights will mean having control of or participation in business decisions? If that be the case, then every investor having veto rights will have significant influence. In several cases, it has been held that veto rights do not lead to control. But there is no case where it is held that having veto rights means having the right to participate in business decisions. Thus, this amendment can create some confusion.

Another change is the new definition of a joint venture (JV). This is the first time that JV has been defined in the Companies Act, 2013. As per the new definition, JV means a joint arrangement whereby parties that have joint control of the arrangement have rights to the net assets of the arrangement. This concept is vague too. It doesn’t clearly give the meaning of “have rights to the net assets of the arrangement.” There is no concept of net assets of the arrangement in the Companies Act. Simply put, it appears that this provision makes a JV company as associate company of the JV partners.

The definition of ‘interested director’ has been deleted. But this would not mean that interested directors will be allowed to participate and vote on matters where they are interested. The only change is that the definition of interested director is removed, but interested directors will continue to be governed by Section 184 and Section 185 of the Companies Act, as the case may be.

The definition of key managerial personnel (KMP) is broadened to include officers of the company who are in full time employment of the company, working at a level just below the Board, provided the Board designates them as KMP. In effect, this means there will be more people to be fixed as KMP under law, should there be any violation for which KMP is liable.

Some shortcomings in the definition of related party have also been fixed. A ‘foreign’ holding company (which was excluded until now) of an Indian company will also be a related party now. Similarly, the existing definition of related party only covers an associate company of a company, but it does not cover that company to which the concerned company is an associate. These two amendments will get these companies within the ambit of related parties, which were unintentionally getting excluded.

A major amendment is the change in definition of subsidiary company. Now, a subsidiary means a company where more than one-half of the ‘total voting power’ (instead of ‘total share capital’) is held by another company. Therefore, the test to determine a subsidiary has changed from shareholding to voting power. For example, if a company ‘A’ holding 100% shares of another company ‘B’ gives its voting rights on 51% shares to another company ‘C’ (say, by a power of attorney), ‘C’ will become the holding company of ‘B’.

Detailed concept of ‘beneficial interest’ in a share has been introduced. Beneficial interest will include directly or indirectly, through any contract, arrangement or otherwise the right or entitlement of a person alone or together with any other person to exercise rights attached to shares, or receive or participate in dividend or other distribution with respect to shares. The new concept will have a wide coverage. It will cover any kind of voting arrangement between shareholders—such as through power of attorney or pooling arrangements which are common in M&A deals. Therefore, the person holding the rights over such shares through these arrangements will said to be having beneficial interest in those shares. Lastly, the sections relating to forward dealing and insider trading have been deleted. This is a good step as these concepts fall under SEBI’s domain, there was no point of having them covered in the Companies Act and apply them to unlisted companies.

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