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Takeover of Pvt. co. By Pvt. Co.

Narendra Verma (Senior Executive) (116 Points)

27 April 2010

Pls let me know the procedure involve in takeover of Pvt. Co. by another Pvt. Co.

what are the compliances under Companies Act and Income Tax Act.

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7 Replies

CA Sanjay Jha (ACCOUNTS MANAGER) (914 Points)
Replied 27 April 2010

I think your question related with absorption.

both companies have to board meeting passed a resolution regarding absorption.

All shareholder have to gv permission.

Information given to MCA

PC calculation and Consideratioon.

some Form of ROC regarding liquidatation to be filed

and many more

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CS Jithesh (ACS,) (COMPANY SECRETARY ) (485 Points)
Replied 27 April 2010

The Compliance under Sec 391 to 394 has to be completed . SO Check the following procedure in detailed

takeover of companies without the sanction of high court

SCOPE OF SECTION 395

We have seen that Sections 391 to 394A provide the statutory frame-work by which companies achieve several corporate reorganizations like amalgamations and mergers, restructure of financial and manufacturing activities and demergers with the sanction of the High Courts. In mergers the transferor company(ies) cease to exist and its/their assets and liabilities are transferred to and taken-over by the transferee company.

In a take-over by acquiring the shares of a transferor company under Section 395, the transferor company continues to exist as a separate company. The only change that happens is that the transferor company would become the subsidiary of the transferee company and when all its shares are acquired by the transferee company, the latter will hold its entire shares in place of the several shareholders in the erstwhile transferor company.

Section 395 governs unlisted and Private Companies

The provisions of Section 395 apply mostly to purchase or acquisition of shares of a transferor company by a transferee company both under the purview of the Companies Act, 1956 although it is possible that the transferor company may be a company within the meaning of the said Act or not—See Section 395(5)(b) read with Section 394(4)(b). In other words, this Section regulates the acquisition of shares of unlisted public or private companies. The transferee company will always be an unlisted public or private Indian company.

Jurisdiction of sebi

As against the operation of Section 395, the acquisition of shares of a listed or an unlisted company by a listed public company is governed by the Securities and Exchange Board of India (Substantial Acquisition or Shares and Takeovers) Regulations, 1997.

No sanction by high court and no approval of sebi

Accordingly the acquisition of shares by a transferee company under Section 395 does not need the sanction of High Court except recourse to Court by dissentient shareholders if any and does not come under the purview of SEBI.

Preparation of scheme or contract [Sub-Section (1)]

The Section is activated when a scheme or contract is drawn up and entered into between the transferee company on the one hand and the transferor company or the holders holding substantial shares in the transferor company on the other—See Patrakola Tea Co. Ltd. In re. AIR 1967 Cal. 406.

Transfer of any class of share

In case there are equity and preference shares in the company, the scheme may be for acquisition of equity shares only.

Preliminary Action by the Transferee Company

The Board of Directors of a transferee company may find from their experience that either because of business similarities or due to other reasons it may be profitable if they achieve management control of the activities of another company and to achieve this they may like to acquire all the equity shares in that company held by a number of shareholders. Incidentally, the transferee company is taken to hold about 10% in value of the equity shares in that other.

Friendly transfer

If the Boards of Directors of the two companies are receptive to the idea, the representatives of the two companies hold discussions and jointly work out an agreed scheme including the fair value of the share of the transferor company. They may also decide that the offer to be made by the transferee company to the shareholders of the transferor company will carry a recommendation from the Board of the transferor company.

Making the offer—Starting point

The starting point is the making the offer by the transferee company to the shareholders of the transferor company.

Contents of offer document [Sub-section (4A)]

(i) The offer document that will be sent to the shareholders of the transferor company will comprise of information as prescribed in Form 35A.

(ii) The scheme will contain a statement from the transferee company or on its behalf disclosing steps that it has taken to ensure that necessary cash will be available for acquiring the shares.

(iii) Before sending the offer document or circular to the shareholders, the same along with Form 35 shall be presented to the Registrar of Companies for registration and only after getting the Registration Certificate, the offer document and circular if any from the Board of Directors shall be sent to the shareholders.

Refusal to register

If the Registrar refused to register the offer document and circular, if any, the transferee company may appeal to the Court (or the Tribunal) after it is established against the Registrar’s refusal.

Acceptance of the offer within four months

To enable the transferee company to proceed further:

(i) its offer should be approved (accepted) within four months of the offer,

(ii) by the holders of not less than 90% of the nominal value of the shares whose transfer is involved other than those shares which are already held by the transferee company or on its behalf by its nominees or its subsidiary.

Company can take action to get the shares transferred of those who approved the offer

As soon as holders of 90% of the shares in value (other than those already held by the transferee company) approve the offer, the company can take action to make payment of the value of the shares and to get the transfer instruments signed by them and produce the deeds to the transferor company for registration of the transfers.

Notice by transferee company after four months

If the offer is approved by holders of not less than 90% in value of the shares within four months, the transferee company shall, within two months after the expiry of four months, give notice in the prescribed manner to any dissenting holder to the effect that it desires to acquire his share.

If the dissenting shareholder does not respond

If the dissenting shareholder does not respond within one month from the date on which notice was given by the company, the transferee company shall be entitled to acquire those shares also on the same terms on which the shares of the approving shareholders are to be transferred to the transferee company.

Under the proviso to sub-section (1) it is provided that where shares of the transferor company of more than 10% are held by the transferee company, then the transferee company shall offer the same terms to all the remaining holders and further the offer should be approved not only by the holders of 90% in value of the shares (other than those held by the transferee company) but also not less than 75% of the holders of the said shares.

Right of dissenting shareholders to move the Court

If any shareholder is not satisfied with the price offered by the transferee company, he is at liberty to move the Court. It is doubtful that where the price offered has been accepted by 90% of the shareholders, whether the Court will allow the application of the dissenting shareholders.

Valuation of shares

The success of an offer made by a transferee company entirely revolves around the fact whether the price offered was fair—Commissioner of Wealth Tax v. Mahadeo Jalan (1972) 86 ITR 621 (SC). See also Krishnamoorthy (A.R.) v. C.I.T. AIR 1989 SC 1055.

Where 90% of the shares are already held by the transferee company—Action to send notice to the balance shareholders [Sub-section (2)]

Where shares already held by the transferee company, its nominee and/or subsidiary comprise 90% in value of the shares of the transferor company, then the transferee company shall:

(i) give notice of that fact in the prescribed Form 35 to the holders of the remaining shares.

(ii) state in the notice that the dissenting shareholder may within three months from the date of notice require the transferee company to acquire the shares in question.

Transferee company to acquire the balance shares where it already holds 90% in value of the shares

Where 90% in value of the shares of the transferor company are held by or on behalf of the transferee company, the latter shall be entitled to acquire the balance shares on terms as per the scheme approved by the other shareholders. If in response to the petition, if any, filed by the dissenting shareholders, the Court has ordered payment of a higher sum, the transferee company shall acquire those shares on the basis approved by the Court.

Notice given to dissenting 10% shareholders [Sub-section (3)]

Where notice has been sent to the dissenting shareholders under sub-section (1) within two months after expiry of four months and the Court (the Tribunal in course of time) has not made any order varying the terms of the scheme, the transferee company shall, after expiry of one month from the date on which the notice was given under sub-section (1), or after the disposal of the application, if any pending, of the dissenting shareholders:

(a) transmit copy of the notice to the transferor company together with,

(b) instrument of transfer executed by a person appointed by the transferee company on behalf of the dissenting shareholder and also signed by the transferee company, and

(c) make payment to the transferor company representing the value of the shares of the transferor company held by the dissenting shareholder (In case there are two or more dissenting shareholders, there will be as many number of transfer instruments).

Registration of transfer by the transferor company

On receipt of the duly executed transfer instruments, the transferor company shall:

(a) register the transferee company as the holder of the shares of the dissenting shareholder(s),

(b) within one month of date of registration, inform the dissenting shareholder(s) that their shares have been registered in the name of the transferee company,

(d) keep the said money in a separate bank account in trust till the money is paid to the shareholders on the basis of the shares held by them.

(Guest)

Above all replies are wrong.

Moreover Section 395 is not applicable to Private Company. It only applies to the Public Company.

The Procedure for the Takeover is very Simple.

(1) Execute the Share Transfer Form and Lodge it with the Tranferor Company, Once the Transferor Company will approve 100% of the Shares of the Transferor Company will be held by Transferee Company.

(2) After that Take Resignation letter from all the Directors of the Transferor Company and Appoint Some Directors of the Transferee Company into the Transferor Company.

File Form 32 with ROC for the same.

(3) There are no other formalities with MCA, ROC & Income Tax.

-------------------------------------------

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CS Jithesh (ACS,) (COMPANY SECRETARY ) (485 Points)
Replied 28 April 2010

IF my answer is wrong , kindly ignore and apologise for the wrong answer. I thought that take over provisions is applicable to all companies.

So Kindly Ignore :(

Narendra Verma (Senior Executive) (116 Points)
Replied 30 April 2010

Dear jitesh i appricaite your effort, your answer is not wrong, you just look at the querry in different way. And section 391 to 396 applicable to all the cos.