This article is written Navya Chopra,BA LL.B Student at Vivekananda Institute of Professional Studies during her internship at LeDroit India
ABSTRACT
Mergers and acquisitions have grown as one of the most effective ways for reorganising organisations to achieve a competitive edge. They have shown to be one of the quickest ways for organisations to get a competitive advantage in a highly competitive global economy. Business restructuring is a complete process, whether it is financial, technological, commercial, or organisational in nature. It can happen in a variety of ways, including asset sale, stock sale, slump sale, amalgamation, and demerger. The method of acquisition that a company seeks can have a variety of effects on both the buyer and the seller, including taxation, stamp duty, successors liability, employee transfer, a slew of other business considerations, and the time and effort put forth by the parties in structuring the transaction and completing it.
Keywords: mergers and acquisitions, M&A, slump sale, asset sale, share sale, stock sale, demerger, amalgamation
INTRODUCTION
A firm can obtain money in two different ways under a corporate capital plan: through loans and through stock. The quickest and simplest approach to finance a company’s operations is to raise cash by issuing shares on the stock market. The second is to obtain a loan from a bank or another institution in order to raise funds for his business. The idea of mergers and acquisitions is developed using this as a starting point and further on the basis of economic viewpoints.
In the framework of corporate strategy, mergers and acquisitions, or (hereinafter: M&A), are the integration of two businesses with a specific method in a certain business field that finally provide a significant capitalization in the market economy. Combining two organisations to improve prospects in the target market is the simplest approach to obtain funds for a firm or rebuild his company.
The legal features of these transactions include matters pertaining to due diligence, outlining the parties’ contractual responsibilities, arranging exit alternatives, and other things of the kind. Every merger or acquisition involves one or more ways of gaining control of a public or private corporation. Every legal system aims to control cross-border mergers and acquisitions because of the potential economic effects, both positive and bad. It’s interesting to note that in regulating cross-border mergers and acquisitions, the government must exercise caution to avoid any overregulation, as this might be deadly to economic growth and discourage both local and foreign investors from acquiring foreign enterprises.
A merger is desired for a number of reasons, including the opportunity it provides to join a new industry or market and the chance to combine the surplus capacity of the acquiring firm with the assets of the target company when both businesses are controlled by the same group.
ASSET SALE
An asset acquisition is the purchase of a company by buying its assets instead of its stock. Which company assets are included in the ownership transfer depends on the kind of transaction. It is significant to note that there are two possible selling scenarios in this case: an entity sale and an asset sale. By taking advantage of the depreciation advantages early and avoiding taking on the former company’s liabilities, an asset sale helps the buyer. In contrast to the higher ordinary income tax rate that applies to asset sales, from the seller’s standpoint, an entity sale is preferred in order to pay taxes at a low long-term capital gain rate.
In these situations, the buyer completes the deal by paying the selling business money in exchange for part or all of its assets. Any company transfer that does not take the form of a share acquisition is referred to as an asset deal. This means that the sale of a firm is often either an asset deal or a share agreement/stock purchase.
With an asset purchase, the buyer may choose which assets to acquire and which ones to reject. Additionally, it offers the purchaser the choice not to take on any responsibilities.
Typically, sellers will keep their commitments relating to their firm. This allows the buyer the opportunity to avoid the liability of unfavourable commitments through the structured asset purchase in an uncertain economic climate.
The planning and negotiation of all the agreement criteria may take longer for an asset deal (including assets allocated, employment termination and rehiring, lease assignment, contract transferability, creditor payouts, etc.). Moving to close and concluding the purchase, however, is really a formality once all of these difficulties have been resolved.
SLUMP SALE
A slump sale, also known as a business transfer, is the entire business undertaking that is transferred on a “going concern” basis. The acquirer wants to buy the entire business undertaking, along with all of the target company’s assets and liabilities, but not the target company that houses the business. Slump sales are typically conducted in order to increase corporate performance, sharpen focus, eliminate inefficient synergies, encourage strategic investment, or take advantage of any associated tax and regulatory benefits. By adding sections 2 (42C) and 50B to the Income Tax Act of 1961, the Finance Act of 1999 officially introduced the idea of slump sales. While the latter supplied the method of computing tax on slump sales, the former defined slump sale.
Before the addition of section 2(42C), courts had determined that a slump sale was the going-concern sale of a firm in which no specific assets or liabilities could be assigned to the lump sum payment. In CIT V. Artex Manufacturing Co., the Apex Court treated the sale of the business as a going concern for a lump sum payment as an itemised sale on the grounds that the valuer had determined the slump price based on itemised assets, whereas in CIT V. Electric Control Gear Mfg. Co., there was no evidence to support the assertion that the slump price is attributable to any assets, the sale of the business as a going concern was regarded as a slump sale.
Gains from slump sale transactions do not qualify as business income or capital gains, according to the Supreme Court in the illustrious case of PNB Finance Ltd. v. Commissioner of Income Tax, which examined the application of S. 41(2), 45, and 50B. Depreciable assets and consideration that can be divided among different assets are required for the subject matter to fall under section 41(2). Since it is unable to assign the slump price to depreciable assets in a slump sale, the undertaking that is transferred (together with depreciable and non-depreciable assets) cannot be taxed as such. In contrast, the Court ruled that in order to generate capital gain, the charging part and the computing portion are integrated pieces of code, and if one fails, the other also fails, meaning that if the computation section fails, so does the charging section.
STOCK/ SHARE SALE
A buyer directly purchases the shares of a target firm from the selling shareholders in a stock acquisition. With a stock sale, the buyer acquires ownership of the company’s assets as well as its liabilities, including any possible liabilities resulting from the company’s prior conduct. The buyer is simply filling in for the outgoing owner, and business as usual is maintained.
Assets and liabilities on the balance sheet are included in a stock acquisition. This can be a good choice if the buyer requires a tax write-off. Since a stock sale entails purchasing the entire company, the buyer is exposed to enormous prior financial and legal obligations. Therefore, financial debt and legal danger may contribute to a decrease in the sale’s purchasing price.
A buyer may be considering a stock acquisition if they believe that the company’s stock has room to rise in value at the moment and/or that the company’s existing and future obligations are manageable or modest. If the transfer of individual assets could be difficult or expensive, the buyer might choose a stock sale since they receive all of the company’s assets as a whole without having to transfer ownership of each one individually. Corporate finance positions have responsibilities that include making these strategic choices.
AMALGAMATION
Amalgamation is a type of external reconstruction in which two or more businesses are combined, either through a merger or a takeover.
The assets and liabilities of the merging firms as well as the shareholder interest and business excess of the two companies are really pooled. Following the merger, the transferee firm’s assets and liabilities consist entirely of the reserves and surplus of the transferor business. The combined entity’s equity owners continue to own a proportionate part of it. After the merger, the transferee firm is meant to continue the transferor company’s operations.
DEMERGER
A demerger is a business arrangement in which a portion or undertaking of one company is transferred to another that runs independently from the original firm. Typically, previous firm shareholders are awarded an equivalent ownership position in the new business.
A conglomerate company’s division or area of business may occasionally wind up becoming a distinct legal entity. Spinoffs are these kind of demergers. For instance, firm A formerly engaged in both logistics and hospitality. A spinoff would occur if firm A decided to split all of its logistical operations into a new corporation. It should be noted that the two businesses would exist independently under the law. As a result, A would continue to exist together with the creation of new firm B. This separation of concerns would not result in the dissolution of the parent firm.
A conglomerate can decide to divide its businesses into several firms in various situations. A split is what this is. Such an arrangement would be referred to as a split, for example, if firm A decided to split into two new companies, B and C, to separate its hospitality and logistics businesses, respectively. Company A would not survive in this scenario, it should be noted.
In other situations, firm A could desire to offload its logistics division to a third party. Therefore, it may opt to sell a portion of its stock ownership to a third party or a strategic investor. An equity carve out is the term used to describe this kind of deal. Two points concerning this deal deserve attention. First off, spin-offs and splits don’t count as sales to other parties. In contrast to spinoffs and splits, an equity carve-out generates capital injection. Second, A continues to be the same legal entity in this situation. The carved-out unit B no longer functions as an autonomous division under the control of the parent firm; instead, it joins another business.
Demergers are carried out primarily for two reasons. The first is a corporate restructuring exercise, while the second, in the case of family-owned businesses, is a family division exercise. Each of the segments is demerged so that they may now concentrate on a narrower duty, which will aid in their smoother operation.
The definition of a demerger is provided under Section 2(19AA) of the Income-tax Act of 1961: Demerger refers to the transfer of one or more undertakings to any resultant company in accordance with a plan of arrangement under Sections 391 to 394 of the Companies Act, 1956, in such a way that:
- All of the undertaking’s assets and liabilities are transferred to the resulting company.
- Every asset and liability is transferred at book value (excluding increase in value due to revaluation).
- Unless the succeeding business is a shareholder of the demerged company, the resulting company distributes shares to the demerged company’s shareholders proportionately.
- Shareholders of the resultant firm must own at least 75% of the value of the shares (other than shares already held therein immediately before the demerger by, or by a nominee for, the resulting company or its subsidiary).
- An endeavour is transferred as a going concern.
- The demerger complies with the requirements specified in Section 72A(5) of the IT Act of 1961.
CONCLUSION
Acquisitions and mergers are reliable signs of a healthy and expanding economy. Such business reorganization requires a legal framework that is simple, accommodating, and free of bureaucratic and regulatory red tape. Asset sales, stock sales, slump sales, amalgamations, and demergers are a few of the options available to carry them out. There is no set process for each transaction; it is entirely dependent on the particular facts and conditions. The method of acquisition that a company seeks can have a variety of effects on both the buyer and the seller. As a result, if the transaction structure is not designed carefully and appropriately, it might easily sabotage and ruin the sale, particularly in a nation like India.
