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MERGER AND AMALGAMATION OF COMPANIES IN INDIA: AN ANALYSIS OF ITS IMPACT ON VARIOUS STAKEHOLDERS

Section: B

Category: Article

Paper Code: RA-PS-15

Page Number: 320 - 330

Date of Publication: February 10, 2021

Citation: Purbaja Sarmah, Merger and Amalgamation of Companies in India: AN Analysis of Its Impact on Various Stakeholders, 1, AIJACLA, 320, 320-330, (2021).

Details Of Author(s):

Purbaja Sarmah, Advocate, Gauhati High Court


ABSTRACT In this competitive business world, the companies have to strive hard to achieve the Excellency and to establish themselves in this competitive business market. To gain profit, the companies should grow internally as well as externally. Where internal growth can be achieved by introducing new products and improving the quality of sales, external growth can be achieved through processes of merger, amalgamation, acquisition, takeover, etc. A merger is a contract that combines two or more companies into one with a profit motive. Again, Amalgamation is a process where two or more companies join together to form a new company. Merger and Amalgamation, though legally somehow a similar term but in real sense both are different. Though seems easier to be merged and amalgamated with an entity and expand their business there are various issues involved in the merger and amalgamation process. Lack of implementation of framed rules, cultural differences, lack of proper norms etc stands as a challenge before merger and amalgamation. Moreover, as the stakeholders play a key role in the company business, their protection and implementation of proper rules and regulations for the stakeholder's benefit is the most important task here. Apart from all, the researcher here would focus upon the role of the department of human resource management in the entire process of merger and amalgamation in the companies as they acted as swords for the protection of stakeholders. Therefore, the researchers here would like to make a comprehensive study on the merger and amalgamation of companies in India and its impact and benefits upon the various stakeholders of the companies as well as the role of human resource management in resolving these issues. KEYWORDS Amalgamation, Company, Human Resource, Impact, Management, Merger, and Stakeholder


INTRODUCTION A merger is a strategy of combining two or more businesses into one business. It is an agreement that combines two or more companies into one with a profit motive. The goal of combining two or more businesses is to achieve long term profitability by expanding their operations. In the merger, the two companies consented mutually for this operation and form a new entity. However, the concept of amalgamation is different from mergers although they are quite similar in legal prospects. Amalgamation is a process where two or more companies join together to form a new company. It is different from the merger because in amalgamation neither of the company survives as a legal entity and a completely new entity is being formed by combining the assets and liabilities of both the companies. It generally takes place when two competing companies join together and enlarge their business and avoid competition. when one company absorbs another it might also be called amalgamation. In today’s world amalgamation is more popular in India than in other states like U.S, U.K etc. As the stakeholders like employees, shareholders, etc. play an important role in company business, the merger and amalgamations of companies affected them widely. Shareholders are the investors of a company whereas employees are like true assets of a company. They are like a basic component of any company. Therefore they should be protected before and after the merger and amalgamation. It is thereby very much important to study the impact of merger and amalgamation on employees and shareholders. As most adopted of countries have adopted mergers and amalgamation as one tool of corporate growth, it is emerging as a global concept. India as a developing country also adapted this for corporate growth. The concept of merger and amalgamation was not so popular in India till 1988. Because of regulatory and prohibitory provisions of The Monopolistic and Restrictive Trade Practice Act, 1969, the concept of merger and amalgamation has attained much importance. The recent trend of merger and amalgamation in India started after the economic liberalization in 1991. However, other developed countries adapted this process much earlier than India, U.S in 1895, and Europe in 1920. In India, various legislations and rules deal with the concept of merger and acquisition. They are like The Companies Act 2013(earlier companies act 1956), the SEBI Takeover code 1994 and SEBI (substantial acquisition of shares and takeovers) Regulations, 2011, The Competition Act 2002 and The Foreign Exchange Management Act 1999, The Income Tax Act 1961 etc. With the changing needs of the Indian economy, the Companies Act 1956was also amended. Under the new Companies Act of 2013 various new provisions were added for mergers and amalgamation of companies. The provisions like fast track merger of small companies and many more amended sections make this legislation more appropriate than the earlier Act of 1956. The Act of 2013 provides the provision for the protection of minority shareholders during mergers and amalgamation. The point of contention here is of application and effectiveness of these provisions. History witnessed that due to the failure of this legislative provision various mergers and amalgamation failed. Moreover, it depends upon the company management also. Apart from the legislative provisions, some other methods evolved to protect the stakeholders. The Human Resource Department of the companies plays a very important role to protect the employees in any organization. It looks after the overall development of the employees in a company and it also takes care of employee’s protection not only before the merger process but afterward also. To portray the scenario of the impact of mergers and amalgamation of companies upon its various stakeholders this paper is divided into three parts.

PART I IMPACT OF MERGER AND AMALGAMATION UPON THE SHAREHOLDERS OF A COMPANY The matter of the rights of the shareholders most important and most debatable matter in the fields of Indian company law. The right of minority shareholder is always controversial among this. Most often they are deprived of their rights because they are minority shareholders in the company. But the legislature and judiciary always try to protect the rights of this minority class as they are deprived of their rights by the majority shareholders of a company. Under the company’s Act 2013 also various provisions are dealing with minority rights during mergers and amalgamation.

COMPANY LEGISLATION IN INDIA AND MERGER AND AMLAGAMTION OF COMPANIES The Companies Act 1956(hereinafter the Act of 1956), was the mother legislation of companies in India, till 2012. It deals with the various issues related to companies including the matters of merger and amalgamation. In the Act of 1956, section 390-395 deals with arrangement, reconstruction, and compromise.[1] These provisions deal with the merger and amalgamations. The term merger and amalgamation is not mentioned in the Act of 1956. Again the companies Act 2013,(hereinafter; the Act of 2013) under section 230-240 deals with compromise, arrangement, amalgamation, and merger of companies.[2] Section 233 exclusively deals with the merger and amalgamation of companies. Again Section 234 deals with the merger of foreign companies. [3]The lawmakers included section 235 and section 236 for the protection of minority shareholders. But the question arises are they protected under this new Act of 2013?

MINORITY SHAREHOLDER’S PROTECTION DURING MERGER AND AMALGAMATION The earlier Act of 1956 though provides the provision for the protection of minority shareholders but it was not so comprehensive. But the new Act of 2013 makes it more perfect and accurate. Section 235 and section 236 of the new Companies Act 2013 deal with “the power to acquire shares of shareholders dissenting from scheme or contract approved by the majority” and “purchase of minority shareholding by the majority shareholding”[4] respectively. Section 236 includes the provision of squeezing out the minority shareholders. Here ‘squeeze out’ means ‘freezeout’ or ‘buy out’. It is the process where the majority shareholders buy the minority shareholders according to the statutory power. This is a way where the majority shareholder can buy the shares from the minority and can hold full control of the company’s shares. Simply speaking it is a process of buying and selling the company’s shares in between the minority and the majority shareholder at the time of change in the company’s control by way of merger, amalgamation, and acquisition. It includes the power of the majority shareholder which is derived from acquiring the shares of minority shareholders. The minority shareholders are openly dominated by eliminating their shareholding by the majority shareholders. Moreover, they are dominated on selecting the price of their shares where they are forced to accept the prize as decided by the majority shareholdings. As this squeezing out process increases the value of the company; therefore the rights and shares of the minority shareholders are sacrificed and eliminated by the majority shareholding with the intention of the company. The provision of squeezing out as mention in the Companies Act 2013 are more improved and developed than the process of squeezing out mentioned in the companies Act, 1956. According to section 236 of the companies Act,2013 which deals with the purchase of minority shareholders by the majority at the time of merger and amalgamation; an acquirer person if holds 90% of issued equity shares capital by way of merger and amalgamation or by anyway; can notify the company about their intention to buy the remaining shares from that minority shareholders. This provision does not include any kind of protected areas for the minority shareholders. The new Act of 2013, provides that the minority shareholder can also offer the majority shareholders to acquire their shares and the price is determined by the contract between them. This is how the majority squeezes the minority shareholder. They are eliminated from their minimum number of equity shares for the benefit of the corporation.

PART II EMPLOYEE’S OBLIGATION /LIABILITIES TOWARDS THE COMPANY Among the different stakeholders of a company, employees are one of the major stakeholders. They are the true assets of a company. Shareholders and employees are like the pillars of a company. Hence their protection in the company during mergers and amalgamation is necessary. Generally, employees are those persons who are engaged in any work for a certain amount of remuneration. They are associated with an organization for consideration. When the employees are engaged in an organization they should have to follow the rules and regulations of a particular organization. The same happened in the case of companies also. The employees have to maintain the rules and regulation of a company when he was employed. The company is a legal person. In case of the liabilities the matters of tortuous and criminal liability, the principle of vicarious liability applicable in a restricted matter to the employees. The directors and the authority is vicariously liable for the act done by the employees. Hence the company is liable for the act done by the employees. But in case of fraud and when this fraud benefited the employee only, then the employee is liable for the fraudulent act he did.[5] Moreover, if an employee is doing any unauthorized work, then the company is not liable for the act done by the employee. The company is liable vicariously in case of tort or crime committed by the employee if they are authorized by the company and if the company directly or indirectly benefited. However, in criminal matters, this liability is more restricted than the tortuous matters. The criminal liability of the employees is dealt with by the mother’s criminal law i.e. IPC.[6]

IMPACT OF MERGER AND AMALGAMATION UPON EMPLOYEES Merger and Amalgamation is one of the major aspects of corporate growth and very common in today’s world. As employees are one of the major pillars of the company therefore it is very necessary to study the impact of mergers and amalgamation upon the employees. Some of the effect of merger and amalgamation upon the employees is mentioned below.

High workload During the period of merger and amalgamation, the employee has to work hard because their business strategies might change due to merger and amalgamation. It changes the entire company structure. Instead of capturing one market they, after the merger expected to grab two or three markets. Therefore, they are also pressured by the higher authority of the companies for more profit. Therefore, they have to work hard to fulfill their company’s target.

Uncertainty and job insecurity During mergers and amalgamation, one company acquire the other company. The acquirer company is in a high position and therefore their employees are might safe in case of merger and amalgamation also. Generally, the employees of the acquired company face high job insecurity in case of a merger. Moreover, in many times it has been seen that after merger both the companies decided about the employee stuff which more efficient than the present employees. It creates a high rate of job insecurity for the employees. Moreover, there is no any security provision mention in the Companies Act, 2013 regarding the protection of employees during merger and amalgamation.

Disagreement between the employees When the merger takes place, it not only involves the merger of assets, shares, etc. but involves a combination of employees also. Sometimes this combination creates disagreement between the employees of two companies. Therefore, the employee should maintain a friendly relation in this regard.

Proper training to the employees During the period of Merger and amalgamation, companies adopted new policies and procedures. Therefore, the employees must be trained properly[7]. As employees are the true assets of a company, hence most essential tasks of a company is done by the employees. Therefore, it is the responsibility of the company to give them proper training, so that they can exercise their works properly.

Cultural differences The companies adopted different cultures according to their functions. During the merger and amalgamation, two companies from different cultures combine. Therefore there may arise cultural differences and most importantly cultural shifts. It most often happens that, due to the merger, any of the companies to whom the merger is effected changed the culture.[8] The HR department plays a very important role in this regard.

Loss of loyalty At the time of the merger generally, the employees feel themselves to be losers. Their designation and status in a company may change due to mergers. At that time if they are appointed for the next merged company then their loyalty for that new entity might lesser than the earlier one.[9]Most of the senior employees take voluntary retirement due to the merger process. Therefore the talented and the most senior employees are retaining due to this merger process.[10] Hence these are the main effects of mergers and amalgamation upon employees. More often they are negatively affected by the merger process.

LEGISLATIVE BACKDROWPS CONCERNING EMPLOYEES PROTECTION As most developed countries have adopted merger and amalgamation as one of the tools of corporate growth, it is emerging as a global concept. India as a developing country also adapted this for corporate growth. The concept of merger and amalgamation was not so popular in India till 1988. Because of regulatory and prohibitory provisions of The Monopolistic and Restrictive Trade Practice Act, 1969[11], the concept of merger and amalgamation has attained much importance. The recent trend of merger and amalgamation in India started after the economic liberalization in 1991. However other developed countries adapted this process much earlier than India, U.S in 1895, and Europe in 1920. In India, various legislations and rules deal with the concept of merger and acquisition. They are like The Companies Act 2013(earlier companies act 1956), the SEBI Takeover code 1994 and SEBI (substantial acquisition of shares and takeovers) Regulations, 2011, The Competition Act 2002 and The Foreign Exchange Management Act 1999, The Income Tax Act 1961 etc.[12] With the changing needs of the Indian economy, the Companies Act, 1956 was also amended. Under the new Companies Act of 2013 various new provisions were added for mergers and amalgamation of companies. The companies Act 1956(hereinafter “the Act of 1956”) provides some of the provisions relating to merger and amalgamation under sector 390-396A.[13]There is no such provision about the protection of employees during mergers and amalgamations mentioned in the Act of 1956. Section 390 of the companies Act 1956 states about the disclosure concerning merger and amalgamation to the members of the company[14]. But this provision doesn’t involve the disclosure of facts to the employees. Moreover, there is nothing mentioned in the Act of 1956 relating to the protection of employees concerning mergers and amalgamation. For various defects of the Act of 1956, the Companies Act, 2013 has been passed. Though this Act stands as s most effective legislation concerning company law but there is a defect concerning merger and amalgamation. Section 230 to 240 of the said Act includes the provision of merger and amalgamation[15]. But as with the earlier Act of 1956, this Act also mentions nothing about the protection of employees concerning mergers and amalgamation. Various provisions are newly added by the Act of 2013 concerning merger and amalgamation. But the protection of employees in this regard is complete an ignorant matter.

Part III ROLE OF HUMAN RESOURCE DEPARTMENT DURING MERGER AND AMALGAMATION This part deals will role of human resource development in the merger and amalgamation process. As in the earlier chapters, we discuss the challenges that the employees face during mergers and amalgamation. The human resource development dept. helps them during that difficult time and manages their work during the merger process also.

HUMAN RESOURCE DEPARTMENT The Human Resource Department ( hereinafter HR dept.) is nothing but an advisory and most trusted dept of any organization or corporation (especially in a company) that serves the corporation in managing its most valuable assets, i.e. the employees during the company’s most crucial time.[16] No matter whether the corporation is big or small, the HR dept. will be there for the well being of the organization. They are appointed by the companies as a support system of the organization that manages the organization by safeguarding its employees. It acts as a trusted advisor during mergers and amalgamation also helps the employees from being fired from the corporation during mergers and amalgamation. Moreover in a country like India where there is no legislative safeguard for the employees during merger and amalgamation, in that situation this dept. act as the best guide for the employees during that crucial period.[17]They guide the employees in even post-merger and pre-merger situation. When the merger took place, it means two entities were combined and becomes one entity. The HR dept works for both the entities’ employees. They did not even ignore the employees of any of the particular organization. Professional Employer Organization (PEO), Business Process Outsourcing (BPO), Application Service Provider (ASP) is some categories of HR.[18] For creating a safety zone for the employees, the HR dept. handle their taxes, deal with their compensation policies, safety inspection, inspecting the medical and health care facilities, protecting them after and before merger situation, handling hiring and firing situations etc. This is how they protect the entire employee community during any kind of crucial situation.

ROLE OF HUMAN RESOURCE DEPARTMENT IN PRE-MERGER AND AMALGAMATION SITUATIONS The HR dept. not only works after merger situation. We can even separate their efforts in the post-merger and pre-merger era. Before the merger, they prepared the employees regarding its consequences about what might happen during the merger and amalgamation[19]. Various training courses are arranged for the employees. They are guiding them on how they have to deal when merger and amalgamation took place, what kind of strategies they have to take when merger and amalgamation took place etc. if they are trained properly before the merger process then only they could easily deal with the entire merger and amalgamation deal[20]. The employees are informed about the most common impact which might happen during this merger process. They also guide the managing board on how to protect their most valuable assets i.e. employees during this merger process. Because most of the time the most effective employees got fired during merger and amalgamation which create a very big hurdle for the company, and they realize after 3 or 4 months of that merger process. So to protect both employees and management both the HR dept. plays such kind of initiative.

ROLE OF HUMAN RESOURCE DEPARTMENT IN POST MERGER AND AMALGAMATION PERIOD The main function of the HR dept comes during and post-merger period. The dept has worked more actively during this period. Following are functions of the HR dept in the post-merger period.

Solving the cultural problems While two of the companies got merged or amalgamated their cultures were also merged. The culture here refers to the values norms that a company follows. It differs from company to company. Most of the time due to these clashes because of these cultural differences most of the mergers failed.[21] The work of the HR dept comes here only. They try to arrange meetings along with merging entities and try to solve the problems they are facing due to this cultural merger process. Moreover, they try to make a common language in between them so that they could understand each other’s language in a proper way.[22] Moreover the personal efforts of the employees are also necessary here to manage the problems.

Solving the employee benefit issues During this merger and amalgamation process, one of the most important issues comes is that of benefit issues. Acquired company clashes if one of the acquiring company gets more benefit and vis-à-vis. So it is the duty of the management of both the companies to manage the priorities of both of these companies equally.[23] If again, any such kind of inequality taken place then the HR dept. works for the benefit of employees. It is the work of management generally. If the management fails to meet the necessities of the employees then the HR dept will work in favor of the employees.

Clashes among the employees The HR dept helps the employees if any kind of clash is taken place in between them. Whether they fight for the benefit or any other cases the HR dept will solve the problems in between them amicably. They believe that it is the communication gap between the employees of both companies for which such clashes have taken place. Hence, they try to solve such kind of problems amicably by not harming the interest of any of the parties.

CONCLUSION Merger and Amalgamation is a growing concept in the recent corporate world. This wave of merger and amalgamation touches almost all sectors of the business world. Whether it is companies, banks, the e-commerce sector, Insurance, almost every sector of the corporate world witnessed this recent trend of corporate growth i.e. merger and amalgamation. Though both of the concepts are different in many points most of the time they are used for similar meanings. Especially in legal meaning, both are used equivalently. As described in earlier sections being a developing country India adopted this policy of merger and amalgamation as one of the important tools of corporate growth. Even the Indian legislations also supported mergers and amalgamation in this regard. But the point here is that if these laws are adequate or not. Where the shareholders are the main investors of the company, whether they are protected Under the Companies Act 2013 or not. Again when we are dealing with various stakeholders in a company, we cannot skip the role of the employees here. As the employees are the main assets of a company, therefore their protection, security during merger and amalgamation is important. So here if we look at the provisions of the Companies Act 2013 there is no such provision relating to the protection of employees during mergers and amalgamation. Thereby a question arises how merger and amalgamation impact the employees? We may here assume that there might be some other protection available to the employees for their security during mergers and amalgamation depending upon the rules and the regulations of the companies. They might bind themselves via self-regulated contractual relations between the employees and the employer which guide them during this merger and amalgamation period.


[1] Companies Act, 1956, ministry of corporate affairs, Govt. of India, (Nov. 2020, 30, 08:00 PM), http://www.mca.gov.in/Ministry/pdf/Companies_Act_1956_13jun2011.pdf. [2] S.c Tripathi, New Company Law, 327-399 (central law publication). [3] Ibid. [4] Ibid. [5] Shivashis Kumar Tripathi, Corporate Criminal Liability in India, (Dec. 2020, 4, 09:45 PM), https://blog.ipleaders.in/corporate-criminal-liability-in-india/. [6] Ibid. [7] Merger and acquisition: How they impact employees, America Job Exchange, Circa formerly Local Job Network, (Nov. 2020, 30 08:45 PM), https://www.americasjobexchange.com/employer/employer-articles/business-mergers-and-employees. [8] S Ramanujam, Mergers et.al., 1132 (3rd edn.). [9] Singh, Rakesh Kumar, Amalgamation and merger of companies in India under WTO regime a socio legal study, shodhganga, (Nov 2020, 30 09:30 PM), http://shodhganga.inflibnet.ac.in/bitstream/10603/172512/12/12_chapter%207.pdf. [10] Ibid. [11] Attorney Navpreet Panjarath, Merger and Acquisitions in India –A general Analysis, legal service India, (Dec. 2020, 04 08:45 PM), http://www.legalserviceindia.com/articles/amer.htm. [12] Ibid. [13] Karan Gandhi & Mukesh Arora, India: Key Comparison Between Companies Act, 1956 & Companies Act, 2013 - Merger & Amalgamation Perspective, mondaq, (Dec. 2020, 04 10:30 PM), http://www.mondaq.com/india/x/411816/Shareholders/Key+Comparison+Between+Companies+Act+1956+Companies+Act+2013+Merger+Amalgamation+Perspective. [14] Ibid. [15] Ibid. [16] Anupam Jauhari, The dynamic role of merger and acquisition in merger and acquisition, People Matter, (Dec. 2020, 05 10:40 PM), https://www.peoplematters.in/article/hr-ready/dynamic-role-hr-merger-acquisitions13197?media_type=article&subcat=mergers-acquisitions&title=dynamic-role-hr-merger-acquisitions&id=13197. [17] Ibid. [18] Ibid. [19] Mita Mehta, Arti Chandani Sooraj , et.al., Challenges Faced By Employees and the Role of HR in Mergers and Acquisitions (M&A); Fifteenth AIMS International Conference on Management (Dec. 2020, 15, 04:00 PM), http://www.aims-international.org/aims15/15ACD/PDF/A217-Final.pdf. [20] Ibid. [21] Post merger and acquisition integration- human resource(HR), HUconsultancy, (Dec. 2020, 27, 11:30 AM), http://huconsultancy.com/post-merger-integration-human-resource/. [22] Ibid. [23] Ibid.

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