Mergers and Acquisitions
Businesses have been witnessing mergers, acquisitions and takeovers throughout the world for a long time.The fast changing global market and the high competition it has created, has resulted upon conditions where firms are gradually finding it difficult to remain competitive. In this scenario, companies and firms can develop competitive advantages through mergers and acquisitions and ultimately increase their shareholder value.
Why do businesses merge?
- To eliminate competition
- To stimulate growth
- Increase capabilities/Synergy
- Increase market share
- Influence supply chains
- Gain competitive advantages
- Diversify products and services
- Cutting cost
- Economic necessity
- Increase the paid up capital
Merger can be done through:
Here, two or more companies combine into an existing company. In this type of merge, all merging companies except one lose their identity. An example of this can be absorption of Tata Oil Mills Ltd. by Hindustan Lever Limited, whereby the acquiring company survived after the merger and the acquired company ceased to exist.
Here, two or more companies are combined to form a new one. All companies are dissolved to form a new entity.In this type of merger, the acquired company transfers its assets, liabilities and shares to the acquiring company. An example of it can be the merger of Hindustan Computers Ltd., Hindustan Instruments Ltd., and Indian Reprographics Ltd., into a new entity called HCL Ltd.
How will a merger take place in a company?
- By purchasing assets and shares of a company
- By acquiring the assets and liabilities of a company
What is the procedure for merger in Nepal?
Public and private companies can merge into another company according to Section 177 of The Companies Act, 2006. A public company can merge with another company by adopting special resolution in its general meeting, while the process of merger in the private company shall be as provided in its Memorandum of Association (MoA), Articles of Association (AoA) or consensus agreement.
In General, companies should follow the following procedure for merger:
Step 1: General Meeting
A company needs to adopt a special resolution in its general meeting for merger.
Then the company shall make an application within thirty days of adopting such resolution to the Company Registrar’s Office (CRO). The application should include the followings:
- A copy of decision of general meeting in case of a public company, whereas in the case of private company copies of related provisions authorizing merger contained in MoA, AoA or consensus agreement.
- Last balance sheet and auditor’s report of the merging company.
- A written letter of consent of creditors of the merging company and the merged company.
- The valuation of movable and immovable properties of the merging company along with the actual details of its assets and liabilities.
- A copy of the decision made by the merging and merged company, if any, regarding the creditors and employees and workers of the merging company.
- Scheme of arrangement concluded between the companies for merger.
Step 2: Processing at CRO
CRO will then make a study on the matter and give its decision within three months. If the company gains the approval for merger, all the assets and liabilities of the merging company shall transfer to the merged company.
Effects of Merger
A shareholder shall be entitled to get company’s assets valuated prior to unification, merger or alteration in or transfer of sale of assets and get return of the amount in proportion to the shares held by him/her from the merging company, if he/she do not provide his/her consent for such procedure, unless otherwise provided in the MoA, AoA or consensus agreement. In case of a profit non-distributing company merging with another similar company, the necessary amendments, mutatis mutandis, in the procedure stated here can be made.
Note: The public company while merging into a private company or a private company while merging into a public one shall stand as a public company.
ACQUISITIONS occur when one or more company buys the shares of another company to gain control over that company. It can be either friendly or hostile. The acquired company becomes the subsidiary of the purchasing company. In acquisition both the companies exist as separate legal entities, unlike merger.
Friendly takeover, also called as negotiated takeover, involves acquisition through negotiations between the existing promoters and prospective investors of the target company.
Hostile takeover involves an acquiring company’s attempt to take over a target company against the will of a target company’s management. It can be achieved through tender offer and proxy fights.
In context of banks in Nepal, M&A are essential because they are required to meet Nepal Rastra Bank’s (NRB) capital requirement of 8 billion NPR for ‘A’ class commercial banks.
Why acquire another firm?
- To acquire the skills and strengths of another firm to improve the existing business.
- To diversify products or service range in the market, and gain a more dominant position.
- To increase market power.
- To access experts, fresh ideas and perspectives.
Mergers and Acquisitions in Banks and Financial Institutions
Though Competition Promotion and Market Protection Act, 2007 in general governs merger and acquisition of entities and companies to certain extent, Bank and Financial Institution Act, 2017 “BAFIA”, looks into the matters related to merger and acquisition of banks and financial institutions in Nepal. The banks and financial institutions desiring to merge into another banks and financial institutions shall have to submit a joint application to NRB after deciding the matters in their respective BOD, for theoretical approval, pursuant to Section 70 of the Act, stating the following matters along with the necessary approval process under the laws concerning company and securities : necessity of merger and projection of it’s likely impacts on the financial sectors, latest auditor’s reports including audited balance-sheets, profit and loss account, cash flow statement and net worth, provisions for protection of interests of the creditors, actual report of movable and immovable assets of the merging institutions and period of payment of liabilities, details of management of employees and preliminary agreement concluded for merger by the institutions. The NRB may require some other details or documents for the procedure. The above mentioned documents, except the actual report of moveable and immoveable assets and details of management of employees are required even if any bank or financial institution desires to acquire another bank or financial institution, pursuant to Section 70 of BAFIA. The banks and financial institutions after obtaining the theoretical approval of NRB, shall have to adopt special resolutions from their respective General Meetings and shall submit a joint application to the NRB for final approval. NRB can, after completion of its necessary enquiry give final approval by prescribing any terms and conditions or limitations, pursuant to Section 73 of BAFIA. If not, it can notify the concerned financial institution along with reasons for non- approval within forty five days.