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Acquisitions through mergers |
Acquisition through Mergers
Absorption through mergers involves the allotment of shares of the transferee company to the shareholders of the transferor companies. Such merger can also be accompanied by simultaneous separation or hiving off of unrelated product or business divisions.
Under Section 391 of the Companies Act for such acquisition through mergers also an application has to be made to the jurisdictional High Court for ordering separate meetings of members and affected creditors of the concerned companies, to consider the proposal and for sanctioning the scheme.
This mechanism avoids the gestation period in setting up a green field project. Further, acquisition of a company in similar business eliminates competitor and reduces competition for the acquirer.
Price for takeover through mergers are paid in new shares of the buying company as long as the promoter group has no fear of loosing controlling interest or majority therein through relative reduction of their holding. Otherwise they are vulnerable to a takeover bid from the predators.
In order to checkmate takeover bids, in absorption through mergers the controlling group always seeks to retain at least 51% voting powers or shareholding along with its allies.
To avoid dilution of stake, sometimes consideration is also paid in cash instead of shares.
If a public company wants to issue further shares, these have to be offered to all its existing shareholders in proportion to their shareholdings. These shares are called ‘rights shares’. For any waiver or curtailment of such rights of shareholders, either their special resolution passed by three-fourths majority or their ordinary resolution coupled with Central Government approval, is required. Before making preferential allotment of shares without offering the shares to all or any part of the existing shareholders, this procedure must be followed.
In takeover through mergers often provision for preferential allotment of shares in favour of the promoter group of the acquirer company, to the exclusion of its other shareholders, is made a fundamental condition of the scheme. It is provided that in the event preferential allotment of shares, as aforesaid, is not approved, the scheme of amalgamation shall stand dropped altogether. This is to ensure that the promoter group of the absorbing company continues to retain their controlling stake even in its new set up, despite issue of shares in favour of the shareholders of the absorbed company.
Preference shareholders have a preferential to a fixed rate of dividend. Preference shareholders get dividend first out of the profits of the company before equity shareholders. In case of inadequacy of profits, no dividend can be paid to the equity shareholders without making full payment of dividend to the preference shareholders. However, preference shareholders have no voting rights except on matters, which affect their interests like reduction of capital, winding up of the company etc. Moreover a company can issue preference shares, which are repayable at the option of the company. Those are called redeemable preference shares, which gain voting right only when dividend on these falls into arrears for 2 consecutive years.
In order to retain controlling stake, sometimes consideration for shares in acquisition is also paid in preference shares as in usual conditions, as indicated above, these have no voting rights.
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