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This blog has been authored by Lohitaksh Shively 

Introduction

Over the past few decades, with the expansion of the Indian economy in a threefold manner, namely, Liberalisation, Globalization and Privatisation; the need for collaborations and strategic alliances have risen immensely. A principal tool used is that of merging two entities. Mergers are when two entities come together to amalgamate their business operations and become one single entity to defeat the competition, achieve economies of scale, and attain positive synergies. Mergers are synonymous with amalgamation, falling under the ‘corporate restructuring’ umbrella. Other such methods of corporate restructuring include – Acquisitions, Takeovers, and Absorptions; wherein acquisitions are when the acquirer entity ends up acquiring controlling power in the target entity. The acquirer can be termed as the ‘big fish’ and the target entity would naturally be the ‘small fish’. The motive for such restructuring is essentially growth; and growth in such abovementioned scenarios is always termed ‘inorganic’, wherein the entities choose external mechanisms to grow their business, customer base, operations etc. This should be juxtaposed with organic growth which is the antithesis of inorganic; it is when the entity reforms its internal working, like, pricing options, among others.

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CBMAs

Mergers and Acquisitions (“M&As”) when spoken about can be classified into various sub-types based on industry, financing options, and territorial limits. In this article, the author will comment upon M&As w.r.t. Territorial limits and the regulations governing such transactions. Such M&As are termed as Cross Border Merger and Acquisitions (“CBMAs”) or ‘transnational’ M&As due to the fact that one entity to such a transaction is always a foreign entity. Any Indian entity in the backdrop of globalization may prefer expanding overseas by acquiring or merging with foreign entities. CBMAs are generally Inbound and Outbound, wherein the former is characterised with a foreign entity merging with or acquiring an entity in India, whereas the latter is when an Indian entity expands overseas. One such example of an inbound acquisition is Walmart’s majority acquisition of Flipkart’s 77% stake for a whopping USD 16 billion. It is evident from the above cross border transaction, that the inflow of USD 16 billion was in fact Foreign Direct Investment (“FDI”) into the Indian economy, and that it opened the doors for Walmart (foreign entities) to enter the Indian market and strengthen their presence. A simple continent wise distribution of inbound M&As shows that North America has accounted for the largest percentage of M&As and Europe running to a close second. This is because for the MNCs (Multi-National Corporations) India has the world’s best resources with cheap but talented labour, largest markets in terms of size, capital markets, technologies, low cost suppliers etc.[1] Similarly on the outbound front, India has mainly targeted the IT, Telecom and pharmaceutical sectors. A continent wise distribution would portray that, maximum of deals entered into are in North America and Europe followed by Asia, as Indian companies have targeted at the developed capital markets for better growth and expansion opportunities.[2] Some landmark examples of outbound CBMAs are Tata-Chorus, Tata-JLR, Tata Tea-Tetley, DIS-Ranbaxy etc.

Motivations for CBMAs

Corporate restructuring transactions mainly aim at enhancing economies of scale and achieving high levels of efficiency. This metamorphosed corporate structure ensures that the newly formed entities focus on their core strengths, efficient allocation of resources, reduction in costs, synergies, corporate performance, R&D (research and development) among others. Apart from the above mentioned rational motives to merger, there are various developed theories to merge, them being the Hubris Hypothesis theory (executives being overconfident and they overestimate their ability to manage the target firm) and the Free Cash-flow theory (utilization of idle cash surplus by the acquirer). A major motive to enter into CBMAs is to overcome restrictions from limited home market growth i.e. the location of acquisition. Thusly, a country must strategically choose from various jurisdictions across the world where it wishes to do ‘business by integration’. Howsoever, while choosing the relevant jurisdiction, business rules, market regulatory mechanism, taxation risks all must be taken into consideration.

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Legal Framework

Cross border M&A deals have been the key consideration of the overwhelming FDI inflow in India. In order to tighten the ties between the boundaries it was essential to create an environment for cross border merger transactions between the countries.[3] For this very reason, CBMA in the Indian realm is strictly regulated by a catena of rules under various laws such as Companies Act, 2013, Foreign Exchange Management Regulations, Competition Act, 2002 and various other related statutes. In short, the Indian corporate laws, foreign exchange laws, capital market laws and merger control regulations govern CBMAs. These laws govern entry routes, deal value thresholds, combinations, sectoral caps, mandatory approvals of authorities (like the RBI), investment limits, disclosures etc. A glimpse into a few of the statutory regulations is given below –

1. Companies Act, 2013 (“CA, 2013”)

The CA, 2013 has been brought in order to replace the 1956 act so as to cater to the ‘newer’ needs. Chapter XV of the CA, 2013 lays down guidelines for Compromise, Arrangement and Amalgamations. § 230-240 expressly deal with the such alliances. The Ministry of Corporate Affairs of the Government of India (“MCA”) by way of a notification[4] has notified § 234 of the CA, 2013 enabling cross-border mergers with effect from April 13, 2017. Our focus would thus be on § 234 which governs ‘merger or amalgamation of company with foreign company’[5]. Vide Explanation[6] of § 234 the ambit of the provision is explained by making it such a situation applicable only in cases wherein one entity is a ‘foreign company’. In addition to this internal aid of interpretation, such mergers or amalgamations may only be done pursuant to the prior approval of the RBI and that the terms and conditions of the scheme of merger may provide for payment of consideration to shareholders of merging company in case, DRs (depository receipts) or a combination of both. Vide another notification[7], Rule 25A[8] of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (“CAA Rules”), ‘merger or amalgamation of a foreign company with a Company and vice versa’, states that, the prior approval of RBI along with compliance of §230-232 of the CA, 2013 is a mandate[9]. Such rule read with Annexure B enlists various jurisdictions in which such mergers are possible.[10]

2. Foreign EXCHANGE Management Regulations

The Foreign Exchange Management (Cross Border Merger) Regulations, 2018 have been notified vide notification no. FEMA 389/ 2018-RB dated 20 March, 2018[11] and are effective from the date of notification. As per the Regulations, any merger transactions in compliance with these regulations shall be deemed to have been approved by RBI, and hence, no separate approval should be required[12]. In other cases, merger transactions should require prior RBI approval.[13] The Merger Regulations allow an Indian company to issue or trans­fer any security to a person resi­dent outside India subject to ad­herence to pricing norms, sectoral caps on foreign investment and other applicable conditions pro­vided under the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017.[14] The Merger Regulations allows a resident person in India to hold securities of the foreign company in accordance with the Foreign Ex­change Management (Transfer or Issue of Any Foreign Security) Re­gu­lations, 2004.[15] In the realm of foreign investments into India, there exists two routes, i.e. Automatic Route and the Approval Route; which means that, if an investment is being made into a particular sector, for instance pharmaceuticals,[16] which does not need any approvals, then the same is said to fall under the Automatic route of investment.

3. Competition Act, 2002 (“CA, 2002”)

A replacement to the Monopolistic Restrictive Trade Practices Act, 1969, the CA, 2002 tackled the issue of combinations and various other arrangements in a methodological manner with detailed and economically sane provisions. §5 and 6 of the CA, 2002,  the key provisions to regulate combinations, prevent such mergers if it leads to AAEC (Appreciable Adverse Effect on Competition).  As per the scheme of the CA, 2002, enterprises that propose to enter into combinations have to notify the CCI (competition commission of India) prior to entering into any such arrangements. If the proposed transaction crosses the thresholds given under §5, then it amounts to ‘combination’.[17] The Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (“Combination Regulations”)[18] must be referred to whilst entering into any such transaction as they govern the procedural aspects of combinations.

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Analysis and Conclusion

The detailed provisions must be complied with in strict accordance as well as various sectoral approvals must be acquired. The companies would also need to carefully evaluate the regulations of the jurisdiction of the foreign company with which a merger is intended and may have to comply with additional requirements that may be specified by the foreign jurisdictions.[19] Since there exists an obvious jurisdictional difference, the question(s) that comes to our mind is the likely contradictions betwixt the different nation’s regulators. For instance, the CCI has extra-territorial jurisdiction as per §32[20] which provides for the CCI to have power to inquire into such arrangements o/s India effecting India. This provision gives life to the ‘effects doctrine’[21]. The CA, 2002 also encapsulates within its ambit the Principle of Attributability, wherein if assets are transferred to an enterprise (Special Purpose Acquisition Companies, Special Purpose Entities, Special Purpose Vehicles) for entering into arrangements, the value of assets/ turnover of transferor entity shall be attributed to the value of assets/ turnover of the transferee entity for calculation of thresholds.[22] This ensures that there is no contravention of law by investor entities who want to escape cognizance by the regulators by way of incorporating shell companies. Coming to approvals by quasi-judicial bodies, the NCLT (National Company Law Tribunal) and NCLAT (National Company Law Appellate Tribunal) cannot be forgotten. However, due to the number of pending cases, the same has led to a continuous delay in merger approvals. Thusly, the benefit of fast-track mergers (green channel)[23] could be made available in the cases of a merger of a wholly-owned foreign subsidiary or small company with its Indian parent company or vice versa.[24] Nevertheless, the existing regulations on CBMAs is an open door for FDI (Foreign Direct Investment) in the form of FPIs (Foreign Portfolio Investment) and FIIs (Foreign Institutional Investment). It may also provide for an impetus to ‘bailout takeovers’ under the Insolvency code. In short, CBMAs would provide for growth and recognition to  Indian Companies. One mustn’t forget that India is still in the stage of developing its economy, thusly any harsh or stringent statement made at the current stage would not do justice to the legal and policy developments that might occur in the future in the realm of transnational transactions.

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[1] Dr. Rabi Narayan Kar and Dr. Minakshi, Mergers Acquisitions & Corporate Restructuring Strategies & Practices, pg. 328, Taxmann’s, 3^rd Edition, 2017.

[2] Ibid.

[3] https://www.roedl.com/insights/india-ma-cross-border-mergers-evolution

[4] https://www.mca.gov.in/Ministry/pdf/section234Notification_14042017.pdf

[5]https://www.indiacode.nic.in/show-data?actid=AC_CEN_22_29_00008_201318_1517807327856&orderno=238

[6]“Explanation.— For the purposes of sub-section (2), the expression foreign company means any company or body corporate incorporated outside India whether having a place of business in India or not.”

[7]https://www.mca.gov.in/Ministry/pdf/CompaniesCompromises_14042017.pdf

[8] http://www.bareactslive.com/ACA/act2987.htm

[9] Rule 25A(1) of CAA Rules.

[10] Rule 25A(2) of CAA Rules.

[11] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11235&Mode=0

[12] Rule 9 of Foreign Exchange Management (Cross Border Merger) Regulations, 2018.

[13]https://www.pwc.in/assets/pdfs/news-alert-tax/2018/pwc_news_alert_26_march_2018_fema_cross_border_merger.pdf

[14] https://www.roedl.com/insights/india-ma-cross-border-mergers-evolution

[15] Ibid.

[16] https://pib.gov.in/newsite/PrintRelease.aspx?relid=76548

[17] Adv. Gautam Shahi and Dr. Sudhanshu Kumar, Indian Competition law A Comprehensive Section-wise Commentary on Competition Act 2002, pg. 206-207, Taxmann’s, July 2021.

[18] https://www.cci.gov.in/images/combinationlegalframeworkregulation/en/cci-procedure-in-regard-to-the-transaction-of-business-relating-to-combinations-regulations-2011.pdf

[19]https://kpmg.com/in/en/home/insights/2017/04/firstnotes-section-234-of-the-companies-act-2013-notified.html

[20]https://www.indiacode.nic.in/show-data?actid=AC_CEN_22_29_00005_200312_1517807324781&orderno=33

[21] Empowers competition regulators to extend jurisdiction beyond the ‘principle of territoriality’; See case Ms. Vijayachitra Kamlesh v. RCI India (P.) Ltd. 2021, CCI Case No. 29 of 2019.

[22] Regulation 5(9) of Combination Regulations; Etihad Airways/ Jet Airways Deal.

[23] https://ibclaw.in/section-233-of-the-companies-act-2013-merger-or-amalgamation-of-certain-companies/

[24] https://www.roedl.com/insights/india-ma-cross-border-mergers-evolution

This article has been written by Mr. Abhishek Sinha

INTRODUCTION- Role of Director

A company’s management and affairs are overseen by the Board of Directors, which has supreme executive authority. In a company, majority shareholders at their wish can appoint a director during the incorporation of the company. Notice to the Board members can be used to call an Annual General Meeting if the shareholders wish to change the director expressing their opinion. Under the Companies Act, 2013, the MoA and AoA of the company, Directors are allowed to enforce their powers.

There is no exhaustive definition given in the Companies Act, 2013. As per Section 2 (34) of the Companies Act, 2013 – a “Director” is one who has been appointed to the Board of Directors. He is the individual who is assigned to carry out the responsibilities and functions of a company’s director in accordance with the Companies Act of 2013.

Lord Reid in the case of Tesco Supermarkets Ltd. v. Nattraso[1] held that “A living person has a mind which can have knowledge or intention and he has hands to carry out his intention. A corporation has none of these it must act through living persons.” As per the Supreme Court, it is important to appoint an individual as a director in the company as the director’s office is the office of trust and if someone fails to carry out this trust then someone should be held responsible.[2] Section 149 of the Companies Act, 2013 states that the Board of Directors shall consist of individuals as directors. Lord Bowen held that the Board of Directors are the brain of the company and the company does act only through them. [3]

To learn more about the Companies Act and the roles of a Director, explore the Certificate course in Understanding Companies Act, 2013. 

WHAT ARE THE ROLES OF DIRECTOR? 

As a member of the Board of Directors, he is in charge of the company’s management, supervision, and direction. Directors are said to be the agents of the company, officers of the company and also trustees of the company. Professional men are hired by the company to direct the affairs of the organisation still they are not called the servant of the company.[4] But through a separate service agreement, a director can offer his professional services to the company as a sole employee and sole director.[5] Regarding the position or role of directors in the company, there is mere silence in the Companies Act, 2013. As per Bowen LJ, “Directors are called as agents, MD or trustees. But these expressions are used as indicating useful points of view through which they may for that particular period and the particular purpose is considered instead of using it as exhaustive of their powers and responsibilities.”[6]

I. As Employee

If the Board of Directors appoints and the company’s shareholders approve any full-time director who manages the company’s day-to-day operations as an employee.

In the outline of the employment letter issued by the BoD, all the directors make go an organization.

II. As Officer

• High Court of Calcutta held that “Certain officials of the company should be treated as organs of the company so that for actions of that particular official company can be held liable just as a natural person is for the action of his limbs.”[7] The absence of the director can paralyze the company.

As per section 2 (59) of the Companies Act, 2013, the director is treated as an officer of the company on whose directions other directors or Board of Directors are accustomed to act. As per section 2 (60) of the Companies Act, 2013, the director is considered an “officer in default” and he is even punished as an officer in default for non-compliance with provisions.

III. As Agents of the Company

• As per the Observation of Lord Cairns who believed that Public Company Directors are the agents of the Company. The Company and Directors have a relation of Principal and Agent.^[8]”

In an Agency a person is bound to form, Perpetuate a relationship of Principal with third parties, the role and powers they get from Memorandum and Articles of the Company, if their activities are outside the criteria given under MOA and AOA, it is beyond legal Power.

IV. As Trustee of the Company

• Based on an analogy Lindley LJ observed that Director is always considered and treated as trustees of the company as they have control of the company and they have been held liable to make good amounts of money since the invention of joint-stock companies.

They are considered the custodian of the assets of the company and are responsible to use the assets in the best interest of the company, as a trustee of the company. They would be held liable if they misuse or divert the assets in their vested interests.

To learn more about the Companies Act, explore the Certificate course in Understanding Companies Act, 2013. 

DUTIES OF DIRECTORS AS PER LEGAL PROVISIONS UNDER THE COMPANY ACT, 2013

The Companies Act of 2013 categorises the duties and responsibilities of directors into two categories: —

[i] The responsibilities and liabilities that uplift and advance the investment of directors’ work bring good corporate governance, good management, and making fully-fledged and shrewd decisions to avoid unnecessary risks to the company.

[ii] Fiduciary duties guarantee and ensure that the directors of companies always protect and secure the interests of the company and its stakeholders, above their self-interests.

The duties of a director were not expressed in the 1956 Act, however, they are specifically stated in Section 166 of the Companies Act, 2013[9].

SECTION 166 of the companies Act, 2013 lay down the following Duties of the Directors of a Company

Directors of Company are bound to do the following Duties given Under Section 166 of the Companies Act, 2013

• Activities of the Director shall always be in accordance with the AoA[10].
• Director shall perform in good faith in order to uplift the objects of the organisation, for the profit of shareholders and for the well-being of the organization[11].
• He shall follow his duties with proper care and exercises independent judgment[12].
• He shall not perform any act which give rise to conflicts.
• Director shall be held liable to pay an equal amount to the gain if he found to be gaining any undue advantage[13].

ROLE OF DIRECTORS DURING THE PANDEMIC

Pandemic has affected most of the big companies and due to this, they have also suspended their work for the time being. As cases are reducing these days but still due to mass gathering companies are not able to work at full capacity. So here the role of directors during the pandemic is that he needs to take certain steps for the survival of the organization in this pandemic. Primary considerations of the directors are:

I. Procuring the shareholder’s interest

• As shareholders always look to have transparency and honesty from the companies’ end. The company shall inform the respective shareholders about the crisis plan which they are going to use to tackle the challenges caused due to covid-19. And directors should pay dividends to the shareholders if the company has a good amount of cash reserves. Director shall inform the current situation of the organisation.

II. Health and safety of employees

• Directors shall emphasize the safety and health of their workers, employees and suppliers. It’s their basic responsibility to build a safe environment during the lockdown. Work from Home should be allowed during the pandemic and in extreme cases, they shall be called to offices and factories. Director shall comply with the government circulars and advisories. To prevent data breaches or losses there shall be proper data security measures.

III. Avoid conflicts of interest

• The director shall avoid any personal interest while taking the decision for the company and he shall also not engage himself in an act which can give rise to a conflict of interest. All relevant information shall be disclosed by the director to the board as failing to do this can be a reason for dispute with shareholders and which can result in damage to long terms prospects.

IV. Independent decisions shall be made

• Director shall act in good faith to promote the long interest of the company. He should avoid making decisions which can affect the company in long run.

CONCLUSION

The Directors of the Company play a crucial role in the Company, They play an essential part in managing and directing the course of the Company.

The company’s main motive is to run in a successful manner, to hand over the management of the Company in the hand of a responsible person. In this regard Company has a Board of Directors who runs the Company with the greatest responsibility, if the Director’s action causes mismanagement in the Company then the Director is liable to the company for reimbursement of the loss.

To learn more about the Companies Act, explore the Certificate course in Understanding Companies Act, 2013. 

[1] [1977] AC 153 at 170.

[2] Oriental Metal Pressing Works P. Ltd. v B. K. Thakoor, [1961] 31 Comp Cas 143.

[3] Bath v Standard Land Co.

[4] Moriarty v Regent’s Garage and Engg. Co., [1921] 1 KB 423.

[5] Lee v. Lee’s Air Farming Ltd., [1961] AC 12.

[6] Imperial Hydropathic Co. v. Hampson, [1882] 23 Ch. D. 1.

[7] Gopal Khaitan v State, AIR 1969 Cal 132.

[8] Ferguson v Wilson, [1886] LR 2 Ch 77.

[9] Section 166, Companies Act, 2013.

[10] Section 166(1), Companies Act, 2013.

[11] Section 166(2), Companies Act, 2013.

[12] Section 166(3), Companies Act, 2013.

[13] Section 166(4), Companies Act, 2013.