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FAST TRACK MERGERS BETWEEN STARTUPS & SMALL COMPANIES

March 26, 2021

By Lucy Rana and Rupin Chopra

The Ministry Of Corporate Affairs (MCA) has notified an amendment to the Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2016. The amended rules will be known as the Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2021 and will be enforced on the date of its publication in the official Gazette.

Fast track merger is a shorter option for merger between Holding Company and its wholly owned subsidiary company and between two or more small companies only. Fast track merger does not require approval from the National Company Law Tribunal (NCLT) as compared to regular mergers, and requires procedure to be followed by the respective transferor & transferee Company which is as follows:

  1. Initial Procedure
  • A notice of proposed scheme to be served to the Registrar of Companies and Official Liquidator or to the Persons affected by the scheme inviting suggestions or objections.
  • Holding a General meeting of shareholders to approve the proposed scheme taking into account objections & suggestions by the Registrar of Companies & Official Liquidator.
  • A declaration of solvency must be filed by both the companies in Form CAA-10, with the respective Registrar of Companies.
  • Holding a meeting of creditors to approve the proposed scheme.
  1. Filing of Scheme and approvals
  • File a copy of Scheme and report of the result of each of the meetings with the Regional Director, Registrar of Companies & Official Liquidator.
  • On the receipt of the scheme, if the Registrar of Companies or the Official Liquidator has no objections or suggestions to the scheme then Regional Director shall register the same and issue a confirmation order.
  • If the Registrar of Companies or Official Liquidator has any objections or suggestions he shall communicate the same in writing to Regional Director. If no such communication is made, it shall be presumed that he has no objection to the scheme.
  • If the Regional Director after receiving the objections or suggestions or for any reason is of the opinion that such a scheme is not in public interest or in the interest of the creditors, Regional Director may apply to the National Company Law Tribunal stating the reasons for objections. The objections and suggestions given should be clearly mentioned for the National Company Law Tribunal to consider the scheme.
  1. Post Confirmation of Scheme:

If the scheme is approved by Regional Director or National Company Law Tribunal it shall be registered by the Registrar of Companies and after registration following steps:

  • Transfer of all the property or the liabilities of the transferor company to the transferee company;
  • Charges on the property of the transferor company shall be enforceable as charges on the property of the transferee company;
  • Any or all the legal proceedings initiated by the transferor company shall be carried on by the transferee company and
  • All the other additional liability for purchase of shares by dissenting shareholders or settlement of dues to dissenting creditors of the transferor company shall become the liability of the transferee company.

Fast Track Merger- Amended Rules

The key amendments made are as follows:

Basis Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2016 Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2021
Fast track merger between start-ups & small company. Earlier Fast track merger could be entered into between

1.       Two or more small companies or;

2.       Between a holding company and its wholly-owned subsidiary company.

The new amendment inserted section 1(a) to the existing rule 25 wherein:

Fast track merger can now be entered into between any of the following class of companies:

1.       Two or more start-up companies or;

2.       One or more start-up company with one or more small company.

Explanation of Small Company & Startup

  1. Small company – means a company, other than a public company, which fulfils the following criteria:
  • The paid-up share capital of does not exceed 50 lakh or:
  • Turnover of which as per its last profit and loss account does not exceed two crore rupees
  • A small company cannot be a holding company or a subsidiary company of another company; a company registered under section 8 or; a company or body corporate governed by any special Act.
  1. Startup shall mean companies as recognized by the Department for Promotion of Industry and Internal Trade which fulfills the following criteria
  • A company incorporated or registered in India with up to 10 years from its date of incorporation.
  • With Annual turnover not exceeding 100 crores in any of the preceding financial years.
  • Is engaged in innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.

This move is expected to benefit the startups by making the merger process simplified, shorter. The amendment which provides fast track merger option for startups will create more room for mergers and acquisitions between startups or small companies.

References:

https://www.thehindubusinessline.com/economy/policy/fast-track-mergers-mca-keen-to-extend-facility-to-more-classes-of-companies/article31669393.ece

https://www.startupindia.gov.in/content/dam/invest-india/Templates/public/198117.pdf

https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf

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