What are the post-acquisition corporate laws to comply with?

Introduction:

Mergers and acquisitions (M&A) represent a complex and intricate process within the corporate landscape. Once the Tribunal issues an order under Sections 230-232 of the Companies Act, 2013, pertaining to M&A, there are specific steps mandated for Transferor Companies, Transferee Company, or both parties involved.

Acquisitions involve the transactional sale of one company to another without the loss of their distinct identities. In this process, the involved companies retain their existence in the market, with the acquiring company assuming predominant decision-making authority over the target company. For instance, if company A acquires company B, both companies continue to operate independently in the market.

Compliance in acquisitions encompasses several aspects, including:

·         Closing compliance related to stamp duty.

·         The Indian Contract Act, 1872 (as amended) (the “Contract Act”), which governs contracts and the rights that parties can agree to contractually under Indian laws;

·         Taxation provisions compliance.

·         Compliance under the Companies Act and its rules.

·         Compliances Under The competition Act

·         SEBI

Post-acquisition compliances -

Stamp Duty: Stamp duty and its assessment fall under the jurisdiction of states in India. States like Maharashtra and Karnataka have introduced specific stamp duty laws, while others like Tamil Nadu, Assam, and North East have made modifications to the Indian Stamp Act, 1899.

Indemnity Clauses: Due to the significant risks involved and the sharing of assets or business between parties in M&A transactions, indemnity clauses become imperative to safeguard the interests of risk bearers. These clauses, whether included in shareholders' agreements or share subscription agreements, are subject to stamp duty provisions.

Conveyance Agreements: Conveyance agreements, constituting sale agreements, facilitate the transfer of asset possession between parties. The conditions for such agreements encompass the transfer of both movable and immovable properties through sale, not provided for under the main act.

Taxation Aspects:

In the realm of mergers and acquisitions (M&A) in India, taxation considerations play a crucial role, influencing the structuring and execution of such transactions. The taxation aspects encompass various facets, including the treatment of assets, goodwill, depreciation, and tax losses, among others.

Purchase of Assets or Shares:

Acquisition transactions typically involve the purchase of either shares or assets of the target company. This purchase can be executed through two primary methods: Lump Sum Sale (Slump Sale) or Itemized Sale (Asset Sale).

Lump Sum Sale (Slump Sale):

In a Lump Sum Sale, the acquiring company purchases all the assets and liabilities of the target company as a single unit, without categorizing them individually. This method is advantageous for streamlining the acquisition process but may involve complexities in determining the tax implications.

Itemized Sale (Asset Sale):

In contrast, an Itemized Sale involves the selective purchase of specific assets of the target company. This method allows the acquiring company to cherry-pick assets tailored to its business needs. However, it requires meticulous evaluation of each asset's tax implications and may result in a more intricate transaction structure.

Taxation of Goodwill:

Goodwill represents the intangible value attributed to a company's reputation, customer base, and other non-tangible assets. In M&A transactions, the treatment of goodwill holds significance, particularly in slump sale transactions.

Tax Treatment of Goodwill:

Previously, under the Indian Income Tax Act, 1961, goodwill was considered an intangible asset eligible for depreciation. However, the Finance Act, 2021, brought a significant change by declaring that goodwill shall no longer be treated as an intangible asset. Consequently, depreciation on goodwill is no longer permissible, impacting the tax treatment of goodwill in M&A transactions.

Depreciation Charges on Tangible Assets:

Tangible assets, such as buildings, machinery, and furniture, are subject to depreciation charges under the Indian Income Tax Act, 1961. The Act specifies depreciation rates for various categories of assets, including an additional depreciation of 20% for machinery used in manufacturing and production activities.

Carry Forward of Tax Losses: Business losses and unabsorbed depreciation can be carried forward to subsequent financial years for offsetting against future profits. The Indian Income Tax Act allows for the carry forward of business losses for up to 8 years and unabsorbed depreciation for an indefinite period. However, the carry forward of tax losses is subject to certain conditions, including the "Continuity Test" prescribed under Section 79 of the Act. This test mandates that the beneficial owners maintain at least 51% voting rights in the company across the relevant financial years.

Companies Act:                    

The Companies Act serves as the cornerstone legislation governing the establishment, management, and operation of companies in India. It delineates procedures for mergers, acquisitions, and combinations, emphasizing shareholder and regulatory approval, share valuation, and protection of minority shareholders' rights.

Approval of Shareholders: Before a merger or acquisition can take place, the proposal must be approved by the shareholders of each company involved. The Companies Act requires that at least 75% of the shareholders present and voting must approve the proposal.

Approval of Regulatory Authorities: The Act also requires approval from various regulatory authorities, including the National Company Law Tribunal (NCLT), the Competition Commission of India (CCI), and the Securities and Exchange Board of India (SEBI). The NCLT and CCI evaluate the impact of the proposed merger or acquisition on competition and ensure that the rights of minority shareholders are protected.

Valuation of Shares: The Companies Act also sets out rules for the valuation of shares, which is necessary for determining the share exchange ratio between the companies involved in the merger or acquisition. The valuation must be done by an independent valuer appointed by the company’s board of directors.

Treatment of Minority Shareholders: The Companies Act also provides protection for minority shareholders. The Companies Act requires that the shares of minority shareholders be treated on par with the shares of the majority shareholders. Minority shareholders have the right to object to the merger or acquisition and can ask for the fair value of their shares to be determined by an independent valuer.

Competition Act, 2002:

The Competition Act regulates competition in the Indian market, prohibiting anti-competitive agreements, abuse of dominance, and scrutinizing mergers and acquisitions for adverse impacts on market competition. It aims to promote fair competition, consumer welfare, and trade freedom.

SEBI Regulations:

As the primary regulatory body for the securities market in India, SEBI regulates M&A transactions to safeguard investor interests and promote market development. SEBI mandates disclosure of transaction details to stock exchanges and shareholders, ensuring transparency and adherence to regulatory norms in M&A activities.

Conclusion:

In conclusion, navigating the post-acquisition corporate laws is essential for businesses engaged in mergers and acquisitions in India. Compliance with the Companies Act, taxation provisions, competition laws, and SEBI regulations is crucial for ensuring legal validity, protecting stakeholder interests, and fostering transparency in M&A transactions. By adhering to these legal frameworks, businesses can navigate the complexities of the corporate landscape with confidence and achieve their strategic objectives effectively.