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Corporate Restructuring:
General Legal Framework, Challenges and way forward
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ACKNOWLEDGEMENT
At the outset, I would like to thank National Academy of Legal Studies and Research
(NALSAR) for incorporating this Seminar Course under the curriculum of the LL.M
course and giving the opportunity to students to participate in some practical research
work.
I would also like to thank Dr. T. Raghvendra Rao for his guidance and support.
Without his kind support, this submission could not have been possible in time.
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HYPOTHESIS
The researcher is of the opinion that it is impossible to conceive a business that is completely
insolvency free. Laws relating to Insolvency and Restructuring helps to restore the debtor,
and establish a fair and equitable system of claims, distribution of assets and mechanism to
deal with the failure.
Thus the paper will deal with the analysis of proper legal framework which will enable
sustainable economic reform and help corporation in long term.
RESEARCH OBJECTIVE:
The main object is to understand the various legal framework of Restructuring of
Corporations existing.
The issues and complexity relating to such laws in present scenario.
How can we simplify such system to work for the general interest of business?
A way forward.
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CONTENTS:
Table of Contents
Introduction .............................................................................................................................. 6
Meaning..6
Business Strategy...7
History7
Components of Corporate Restructuring..9
Business Portfolio Restructuring9
Financial Restructuring....10
Organizational Restructuring...10
Legal and Regulatory Framework...11
Company Law.11
Amalgamation.12
Demerger.13
Slump Sale...13
SEBI (Substantial Acquisition and Takeovers) Regulations.199714
Public Announcement for Multiple Methods of Acquisition..15
Public Announcement in case of Acquisition by way of a Preferential Issue.16
Acquisitions during Offer Period.16
Disclosures on Acquirers Holding falling below 5%..............................................................16
Buyback of Shares....17
Competition Act, 200218
Indian Scenario...20
Case Study...21
Suggestions..24
Conclusion...26
Bibliography.
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1.0 INTRODUCTION:
There are primarily two ways of growth of business organization, i.e. organic and inorganic
growth. Organic growth is through internal strategies, which may relate to business or
financial restructuring within the organization that results in enhanced customer base, higher
sales, increased revenue, without resulting in change of corporate entity.1
Inorganic growth provides an organization with an avenue for attaining accelerated growth
enabling it to skip few steps on the growth ladder. Restructuring through mergers,
amalgamations etc. constitute one of the most important methods for securing inorganic
growth. The business environment is rapidly changing with respect to technology,
competition, products, people, geographical area, markets, and customers. It is not enough if
companies keep pace with these changes but are expected to beat competition and innovate in
order to continuously maximize shareholder value. Inorganic growth strategies like mergers,
acquisitions, takeovers and spinoffs are regarded as important engines that help companies to
enter new markets, expand customer base, cut competition, consolidate and grow in size
quickly, employ new technology with respect to products, people and processes. Thus the
inorganic growth strategies are regarded as fast track corporate restructuring strategies for
growth.
1.1 Meaning:
Restructuring as per Oxford dictionary means to give a new structure to, rebuild or
rearrange". As per Collins English dictionary, meaning of corporate restructuring is a change
in the business strategy of an organization resulting in diversification, closing parts of the
business, etc., to increase its long-term profitability. Corporate restructuring is defined as the
process involved in changing the organization of a business. Corporate restructuring can
involve making dramatic changes to a business by cutting out or merging departments. It
implies rearranging the business for increased efficiency and profitability. In other words, it
is a comprehensive process, by which a company can consolidate its business operations and
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Prasad G Godbole, Mergers, Acquisitions and Corporate Restructuring,(Vikas Publication House, Mumbai, pg
2009
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The economic and liberalization reforms, have transformed the business scenario all over the
world. The most significant development has been the integration of national economy with
'market-oriented globalized economy'. The multilateral trade agenda and the World Trade
Organization (WTO) have been facilitating easy and free flow of technology, capital and
expertise across the globe. A restructuring wave is sweeping the corporate sector the world
over, taking within its fold both big and small entities, comprising old economy businesses,
conglomerates and new economy companies and even the infrastructure and service sector.
From banking to oil exploration and telecommunication to power generation, petrochemicals
to aviation, companies are coming together as never before. Not only this new industries like
e-commerce and biotechnology have been exploding and old industries are being
transformed. With the increasing competition and the economy, heading towards
globalisation, the corporate restructuring activities are expected to occur at a much larger
scale than at any time in the past. Corporate Restructuring play a major role in enabling
enterprises to achieve economies of scale, global competitiveness, right size, and a host of
other benefits including reduction of cost of operations and administration.
Globalization gives the consumer many choices technologies are changing, established
brands are being challenged by value for money products, the movement of goods across
countries is on the rise and entry barriers are being reduced. As markets consolidate into
fewer and larger entities, economies become more concentrated. In this international
scenario, there is a heavy accent on the quality, range, cost and reliability of product and
services. 3Companies all over the world have been reshaping and repositioning themselves to
meet the challenges and seize the opportunities thrown open by globalization. The
management strategy in turbulent times is to focus on core competencies selling loss
making companies and acquiring those, which can contribute to profit and growth of the
group. The underlying objective is to achieve and sustain superior performance. In fact, most
companies in the world are merging to achieve an economic size as a means of survival and
growth in the competitive economy. There has been a substantial increase in quantum of
funds flowing across nations in search of restructuring and takeover candidates.
Globalization: Trends, Challenges and Opportunities for countries in Transition (Mojmir Mrak, 2000) para
8.1.1
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profit and growth of the group. There is heavy accent on the quality, range, cost and
reliability of products and services.
2.2 Financial Restructuring
The key to financial restructuring is managing money with growth. What is needed is the
vision to enlarge the size of the cake to increase the share for the equity holder. It requires
evolving appropriate mix of debt and equity to ensure competitive cost structure and
optimizing return on investment. In fact, increase in turnover and profitability should be
reflected in higher value for shareholders in terms of financial reward. The touchstone of
financial restructuring is to enhance the intrinsic worth of equity shares.
2.3 Organizational Restructuring
Organizational restructuring involves continuous examination of the requirement of
competent management and manpower at all levels and matching the same through induction,
training and development. Manpower Planning and restructuring enable companies to sustain
higher level of competitive advantage. At the same time, dead wood is removed by golden
handshake. Business, being dynamic in nature, organizational restructuring is an on-going
exercise in line with change in the nature of business.
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Court would pass its orders confirming the arrangement as approved by the members
or creditors as the case may be.
g) The Court can sanction a compromise or arrangement proposed between a company
and either its shareholders or class of shareholders and/or its creditors or class thereof.
h) The court has supervisory powers in sanction reconstructions of companies and may
give certain directions as part of the order sanctioning the scheme of compromise or
arrangement or by a subsequent order.
3.2 Amalgamation
In amalgamation, two or more existing transferor companies merge together or form a new
company, whereby transferor companies lose their existence and their shareholders become
the shareholders of the new company. In merger, two or more existing companies combine
into one company. The transferor company merges its identity into the transferring company
by transfer of its running business (assets and liabilities). Merger not only creates significant
shareholder value, but also positions the combined company to compete vigorously with
other companies. An essential feature of the scheme of merger is that the transferor company
does not receive the consideration, but the acquiring company pays the consideration directly
to the shareholders of the transferor company. The shareholders of the transferor company
receive shares in the merged company in exchange for the shares held by them in the
transferor company as per the agreed exchange ratio. No distinction is, however, made
between equity, preference and other category of shareholders. As such, cross allotment is
possible for the consideration paid partly or in combination of shares, debentures and cash.
Mergers are of two types horizontal and vertical. In horizontal mergers, two or more
companies, dealing in similar line of activities, merge to achieve economic size. For example,
a steel manufacturing company, to ensure continuous supply of raw material, merges with an
iron ore mining company. In case of vertical merger a company acquires its upstream or
downstream units or a pharmaceutical company acquiring a basic chemicals and
formulations company. The object in both the cases is to achieve cost reduction and efficient
marketing.
Vertical merger is further classified as backward merger and forward merger. In backward
merger, a company with advanced technology merges with a company with backward
technology. For example, a petrochemical company merging with an oil refining company for
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achieving integrated production and distribution of petroleum products. On the other hand, in
forward merger a technologically backward company merges with a technically advanced
company to achieve optimum use of the production facilities.
3.3 Demerger
In demerger, the transferor company sells and transfers one or more of its unprofitable
undertakings to the resultant company (an existing or new company) for an agreed
consideration. The resultant company allots its shares at the agreed exchange ratio to the
shareholders of the transferor company.
3.4 Slump Sale:
In slump sale, a company sells or disposes of its whole or substantially the whole of the
undertaking for a lump sum predetermined price. In slump sale, an acquiring company may
not be interested in buying the whole company, but one of its divisions or a running
undertaking on a going concern basis. When a sale is made for a lump sum price, such a price
cannot be bifurcated towards individual assets. The business to be hived-off is transferred
from the transferor company to an existing or a new company. A business transfer
agreement (Agreement) is drafted containing the terms and conditions of transfer. The
agreement provides for transfer by the seller company to the buyer company, its business as a
going concern with all immovable and movable properties, at the agreed consideration, called
slump price.
It may be noted that courts have supervisory powers in approving schemes of compromises,
arrangements and reconstructions by companies. The Supreme Court in Hindustan Lever
Limited v. State of Maharashtra7 ruled that while exercising its power in sanctioning a
scheme of arrangement, the court has to examine as to whether the provisions of the statute
have been complied with. Once the court finds that the parameters set out in section 394 of
the Companies Act 1956 have been met then the court would have no further jurisdiction to
sit in appeal over the commercial wisdom of the class of persons who with their eyes open
give their approval, even if, in the view of the court a better scheme could have been framed.
Two broad principles underlying a scheme of amalgamation are that the order passed by the
court amalgamating the company is based on a compromise or arrangement arrived at
between the parties; and that the jurisdiction of the company court while sanctioning the
7
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scheme is supervisory only. Both these principles indicate that there is no adjudication by the
court on merits as such.
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below the optimal level and shareholders prefer to sell their shares to the predator. 10 This is
how takeovers are facilitated in the overall interest of the company and to enhance
shareholders value.
Takeovers are of two types friendly and hostile. In a friendly takeover, the acquirer first
approaches the promoters/ management of the target company for negotiating and acquiring
the shares. Friendly takeover is for the mutual advantage of acquirer and acquired companies.
On the other hand, hostile takeover is against the wishes to the management of the target
company. Acquirer makes a direct offer to the shareholders of the target company, without
the prior consent of the existing promoters and management.
There are three stages in hostile takeover. In the first stage, the management of the acquiring
company starts accumulating shares of a target company up to the prescribed ceiling. In the
second stage, the management of the acquirer company discloses to the statutory authorities
his proposal of acquisition of shares and the move comes into limelight in the stock market.11
In the third stage, the management of the acquirer enters into a bidding war for the shares of
the target company. Ultimately, shareholders by selling or withholding their shares, decide
whether the existing management or the new owner would control their company.
The Securities and Exchange Board of India (SEBI) has issued a notification on 26 March
2013 amending the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations
2011 (Takeover Regulations). This update aims to capture the key highlights of the said
amendments are:
1. PUBLIC ANNOUNCEMENT FOR MULTIPLE METHODS OF ACQUISITION
A new Regulation 13 (2A) has been inserted in the Takeover Regulations. This provides that
in case of a public announcement, referred to in Regulation 3 and Regulation 4 of the
Takeover Regulations, for a proposed acquisition of shares or voting rights in or control over
the target company through a combination of (i) an agreement and any one or more modes of
acquisition referred to in Regulation 13(2); or (ii) otherwise through any one or more modes
of acquisition referred to in Regulation 13(2), would be required to be made on the date of the
first of such acquisitions. This means that the acquirer cannot wait for making a public
10
An Analysis of SEBI Takeover Code by, Pavan Kumar Vijay, Managing Director Corporate Professionals
Group
11
The Evolution of Hostile Takeover Regimes in Developed and Emerging Markets: An Analytical
Framework(John Armour, Jack B.Jacobs, Curtis J.Milhaupt, 2011) para 54.2
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announcement till the open offer trigger is actually crossed in a series of successive
acquisitions. Further, the acquirer is tasked with having to disclose the details of proposal to
make all subsequent acquisitions in such public announcement.12
13
provides for withdrawal of open offer in certain circumstances. Regulation 23(1) (c) has been
amended by adding a proviso which provides that in case the acquisition through preferential
issue is not successful, the open offer would still not be withdrawn.
3. ACQUISITIONS DURING OFFER PERIOD:
A new Regulation 22 (2A) has been inserted providing that where the acquisition is proposed
through preferential issue or through stock market settlement process other than bulk/block
deals, the acquirer can acquire such shares while the open offer is in process. However, such
shares would need to be kept in an escrow account and the acquirer would not be permitted
exercise voting rights on such shares. The shares in the escrow account may, however, be
released after 21 working days of the public announcement if the acquirer deposits 100% of
the open offer amount assuming full acceptance as provided in Regulation 22 (2).
4. DISCLOSURES ON ACQUIRERS HOLDING FALLING BELOW 5%:
Regulation 29(2) of the Takeover Regulations has also been amended by the said notification.
In addition to the requisite disclosure of change in shareholding or voting rights exceeding
2% in the target company by persons acting in concert already holding 5% or more
shareholding or voting rights, the amendment requires disclosure to be made even in case of a
12
Public Mergers and Acquisitions in India:Take over Code Dissected (Nishith Desai Advocate, 2013)
13
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change in the shareholding or voting rights of the acquirer falling below 5% in the target
company. This amendment just clarifies the position on disclosure by the acquirer in case of
sale of shareholding in the target company.
5. BUYBACK OF SHARES:
Regulation 10(3) of the Takeover Regulations has been amended now providing that where
there is an increase in voting rights of a shareholder in a target company triggering an open
offer in case of buyback of shares, such shareholder shall be exempt from the obligation to
make an open offer provided such shareholder reduces his shareholding such that its voting
rights fall below the threshold referred to in Regulation 3(1) within ninety days from the date
of closure of said buyback offer by the target company. Prior to this amendment, the
reference date of reducing the shareholding was ninety days from on which the voting rights
would increase.
The changes relating to disclosures and reference date in buyback of shares by the target
company are only clarificatory in nature. However, the changes brought by SEBI in terms of
timing of making a public announcement in case of successive and connected acquisitions of
shares or voting rights in the target company as well as those concerning timing of public
announcement as well as withdrawal of open offer in case of acquisition by way of
preferential issue are quite significant.
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approves merger of foreign companies with Indian companies and its foreign shareholders
owning shares in the merged company which is registered under Indian laws.
The Indian Industry feel that a period of 210 days is far too long a period in the life cycle of a
transaction, particularly after companies reach a definitive agreement to go ahead with an
M&A plan. In most developed countries merger control regimes give their first-stage
decision within 30 days, clearing the way for most transactions to go ahead with closure. The
European and the US competition authorities normally pronounce their final decision even
for complex transactions within 90 days. Secondly, Industry wants provision of a deemed
approval where there is no communication from the CCI within 30 days. Thirdly, industry
wants pre-merger consultations, a global best practice, with the CCI.
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RIL. In the new structure, Mukesh had been given complete control in the oil exploration,
refining, petrochemicals, and textile businesses through a standalone entity in RIL along with
IPCL. He got also shares in biotech firm Reliance Life Sciences and Trevira, a company in
Europe which manufactures polyester fibers. Whereas Anil got control over financial
businesses power, communication, and through four other companies (Reliance Capital
Ventures Ltd., Reliance Energy Ventures Ltd, Reliance Communication Ventures Ltd. And
Reliance Natural Resources Ltd.) which came under Anil Dhirubhai Ambani Enterprise
(ADAE) as part of the Reliance group. This restructuring causes a jump of 26 per cent
increase in share price for every shareholder.
Corporate restructuring is designed for enterprise property rights relations and other debt,
assets, management, structure of the expanded enterprise restructuring, consolidation and
integration process, as a whole and strategic business management to improve the situation,
and strengthen competition in the market capacity, promote business innovation. Major
corporate restructuring, including restructuring of property rights, debt restructuring, capital
restructuring, asset restructuring, organizational restructuring, and, by the corporate
restructuring will inevitably lead to the corresponding economic structure and industrial
structure of the reorganization.
The benefits of corporate restructuring are the following aspects:
1. The stock of assets through restructuring of existing enterprises can optimize the
structural elements of various resources to accelerate business innovation, to enable
enterprises to government agencies out of control and intervention, full the potential
of enterprises and workers to play, and improving the productivity and
competitiveness.
2. Maintain the sustainable development of enterprises. For enterprises to get greater
efficiency and broader opportunities for further development.
3. The likelihood of corporate restructuring in itself means that a huge and direct
economic benefit, property rights can change the existing unitary enterprise, the
drawbacks of abstraction. Through the diversification of property rights and to
implement specific business property rights, this could make many investors to
participate in and view Note the survival of enterprises so that enterprises can better
under new leadership change and development of market economy.
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4. The restructuring of the Chinese enterprises have a more special meaning: for China's
enterprises, in the past has been to separate government from enterprises for many
years, but the government and enterprises has always been inseparable, the reason one
does not seize the property that long-term key the second is not to find ways to solve
the problem of enterprise property rights.
5. Corporate restructuring can provide an effective means to this end. Donors and
businesses to achieve the separation of corporate ownership, thus contributing to
separation of enterprise operational mechanism, to enable enterprises to get rid of
dependence on the line of authority, a city of independent competitors.
Challenges for Restructuring
Though there are many drivers of restructuring and one can expect increase in the
restructuring, there are certainly some challenges the corporations have to deal with:
Many external shocks such as political instability, higher oil prices and interest rates
have potential to affect the dynamics of restructuring. For example the growth rates
and access to capital can be affected which are catalysts for mergers and acquisitions.
The protectionism and nationalist attitude at times hurt the cross-border activity. Such
environment needs to be anticipated and managed carefully in case of foreign entity
entering a new market.
Lack of transparency or weak disclosure standards in certain Asian markets could lead
to surprises that were not anticipated during due diligence.
The pace of regulatory change and, in some industries and markets, reversal of
regulation is a risk that needs to be assessed and taken into account, as far as possible.
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8.0 SUGGESTIONS
Following suggestions if implemented would enable Indian companies to meet the challenges
in the emerging scenario:
Voluntary remedies to Insolvency:Once a firm begins to encounter these difficulties the firms owners and management have to
consider the alternatives available to failing business. Such a firm has two remedies, Attempt
to resolve its difficulties with its creditors on voluntary or informal process. Petition the
courts for assistance and formally declare bankruptcy. The company creditors also may
petition to courts and get the company involuntarily declared bankrupt.
To reorganize or liquidate:Regardless of whether a business chooses informal or formal methods to deal with its
difficulties eventually the decision has to be made whether to reorganize or liquidate the
business. Before this decision can be made both the business liquidation value and its going
concern value has to determine.
Informal alternatives for failing business:Regardless of exact reasons why a business begins to experience difficulties Regardless of
the exact reasons why a business begins to experience difficulties the result is often same
Cash flow problems. The first step taken by troubled company involves stretching its
payable. In some occasions this can keep the company busy for several weeks of needed time
before creditors take action. If the difficulties are more than just minor and temporary the
company may turn to its bankers with request for additional working capital loans.
Another possible action is the company bankers and creditors take up to restructure the
companys debt.
Organizational restructuring exercise:Many firms have begun organizational exercises for restructuring in recent years to cope with
heightened competition. The common elements in most organizational restructuring and
performance enhancement programmes are described below,
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Regrouping of business: firms are regrouping the existing businesses into a few compact
strategic business units which are often referred to as profit centers. For example L&T ahs
been advised by Mckinsey Consultants to regroup its twelve businesses into five compact
divisions.
Decentralization: to promote a quicker organizational response to dynamic environmental
developments, companies are resorting to decentralization, de-layering,
and delegation
aimed at empowering people down the line. For example, Hindustan lever Ltd., has embarked
on an initiative to reduce.
Portfolio restructurings:Mergers, asset purchases, and takeovers lead to expansion in some way or the other. They are
based on the principle of synergy which says 2 +2=5
Portfolio restructuring, on the other hand, involves some kind of contraction through a
Divestiture or a De-merger is based on the principle of synergy which says 5 -3 = 3
Corporate strategy :Towards reorganizing themselves companies need to develop a strategy.
The conditions companies must satisfy if they are to conserve their essential characteristics
over time may be summed up as
Deregulation,
Companies also need to change the way they compete and also the basic assumptions
underlying the planning criteria that they adopt for their more general strategic
design/architecture and those that govern the ways in which they interact with the
external environment.
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9.0 CONCLUSION:
Organizations are restructuring themselves to meet changing environment. For three decades
after world war two most economies around the world witnessed historically unparalleled
progress. However after the early 1970s growth in most of industrialized economies began to
slow down, affecting much of the developing world particularly adversely during the 1980s
and 1990s. There were a variety of causes of this change in the trajectory of growth some of
a macroeconomic nature and others rooted in the structure of corporate organization and in
inter-firm linkages.
The response to these pressures has been a significant change in macroeconomic policies
amongst countries. Throughout the world there has been a surge toward deregulation and a
feeling of barriers to the global flow of many resources. For some countries this has resulted
in significant enhancement to economic growth but for others globalization has done little to
enhance living standards and security. Thus the gains from globalization is not automatic they
depend on response of producers to the changing competitive environment.
One critical area of change is to be found in organization of production. To cope with new
competitive pressures firms have to deliver not just low-priced goods and services but also
products of greater quality and diversity. This requires in the first instance that they reorient
their internal organization, changing production layout, introducing new methods of quality
assurance and instituting processes to ensure continuous improvement.
The corporate restructuring being a matter of business convenience, the role of legislation is
to facilitate restructuring on healthy lines. The legislative intention is that monopoly is not
necessarily bad provided market dominance is not abused.
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