M&a -corporate matters

This query is : Resolved

Rakesh (Querist)
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07 December 2016 Dear Friends & Prof Colleagues ,
Please consider the given below issue and post your comments.

In case of merger , allotment of shares as consideration for acquisition, to more than 200 allotee's, be treated as public issue?
Whether shares issued by a company to individual share holders to acquire business(Holding Subsidiary relationship) of another company be treated as public offer?

Thanks in ADVANCE

CS Nagesh Rudrakanthwar

CS Nagesh Rudrakanthwar (Expert)
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08 December 2016 If the shares issued pursuant to scheme of merger/ amalgamation then it wont amount to public offer. It can be offered to more than 200 members

Rakesh

Rakesh (Querist)
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10 December 2016 Thanks . Please provide legal backing for why it would not amount to public offer. Please consider the provisions of sec 42 and section 23 of companies act 2013.

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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03 August 2024 In the context of mergers and acquisitions (M&A), especially when shares are allotted as consideration to more than 200 allottees, it's important to determine whether such an issuance is considered a public offer or not. Here's a detailed analysis based on the provisions of the Companies Act, 2013:

### **1. **Provisions Under Companies Act, 2013**

**A. **Section 23: Public Offer and Private Placement**

- **Section 23(1)**: This section defines a **public offer** as an offer to the public for subscription of shares or debentures by a company. This includes a situation where shares or debentures are offered to the public or to a section of the public.

- **Section 23(2)**: It provides that a company can only make a public offer if it complies with the requirements laid out for public issues under the Act. This includes filing a prospectus with the Registrar and adhering to disclosure and other compliance requirements.

**B. **Section 42: Private Placement**

- **Section 42**: This section governs **private placement** of shares and debentures. It allows a company to make an offer to a select group of persons (not exceeding 200) and requires a company to adhere to specific procedures, including filing a private placement offer letter and complying with disclosures.

### **2. **Applicability in Case of Merger**

When it comes to mergers where shares are issued as consideration:

**A. **Allotment to More than 200 Allottees**

- If shares are allotted to more than 200 allottees as part of a merger transaction, this does not necessarily constitute a **public offer** under Section 23. Here’s why:

**1. **Not a Public Subscription**: In a merger, shares are allotted to the shareholders of the merging company as part of the consideration. This is not a public subscription or an offer to the general public. It’s a transaction between companies and their shareholders.

**2. **Section 42 Compliance**: If the allotment is done in connection with a merger or acquisition, and if the allotment is a part of a scheme of arrangement sanctioned by the National Company Law Tribunal (NCLT), it is generally considered as a part of a private arrangement, not a public issue.

**B. **Shares Issued to Acquire Business**

- In the case where shares are issued to acquire the business of another company (holding-subsidiary relationship), the issuance of shares is generally governed by the scheme of merger and acquisition. This is treated as a private transaction and not a public offer for the following reasons:

**1. **Scheme of Arrangement**: If the merger or acquisition is sanctioned by the NCLT, it is treated as a scheme of arrangement under Section 230 to 232 of the Companies Act, 2013. This process involves a court-approved scheme where the allotment of shares is part of the consideration for the merger and does not fall under the public offer provisions.

**2. **Regulatory Approval**: Such transactions are subject to different regulatory approvals (like from the NCLT) rather than the public issue regulations. The shares issued are part of a restructuring or consolidation rather than a public issuance of shares.

### **3. **Legal Backing**

**A. **Section 23(1) and 23(2)**

- **Section 23(1)** defines what constitutes a public offer and includes offers to the public for subscription of shares or debentures. The issuance of shares in a merger does not fit this definition as it is not aimed at the general public but at existing shareholders of the merging entity.

- **Section 23(2)** outlines requirements for public offers, such as prospectus and disclosures, which are not applicable in the context of a merger where shares are allotted as consideration.

**B. **Section 42**

- **Section 42** deals with private placements and specifically excludes public offers. Since the shares allotted in a merger are done through a scheme of arrangement and not through a private placement offer letter, this section does not apply.

### **Summary**

- **Not a Public Offer**: The allotment of shares to more than 200 allottees in the context of a merger is not considered a public offer under Section 23 of the Companies Act, 2013. This is because it does not involve a public subscription but rather an internal transaction as part of a scheme of arrangement.

- **Private Placement Exemption**: The shares issued in connection with a merger are not considered a private placement under Section 42, as they are part of a sanctioned scheme of arrangement rather than an offer to a select group.

**Legal Framework**: Sections 23 and 42 of the Companies Act, 2013 provide the basis for distinguishing between public offers, private placements, and transactions under schemes of arrangement. The issuance of shares as consideration in a merger typically falls under the latter, exempting it from being treated as a public offer or a private placement.