An Overview of Post Merger Integration

28th January, 2025 - 10:06 am Categories: Intellectual Property Mergers & Acquisition 0 Comments

Mergers constitute a common approach undertaken in the business environment, which is the joining of two or more firms into one with the aim of making it possible to expand, increase productivity, or gain some competitive edge. This activity may take various forms that have a legal and financial basis.

Amongst the various forms of merger, a merge by absorption is one of the common process wherein one company purchases another and the focus company ceases to exist as an independent entity and their products, investments and activities are assimilated into the company acquiring them. The acquiring company does not change and is preserved with its organizational structure and name, only that it assimilates the resources of the ‘absorbed’ company. This form of merger is often sought with the intention to rationalize business activities, reduce competition, or grow into unfamiliar business lines without the need of setting up a new firm and create value based on synergies, market share, and resource use.

Once the legal proceedings of the merger are completed the Post Merger Integration (PMI) takes place which is a complex yet systematic procedure of a seamless transition between corporate entities and the stakeholders performing under the banner of such entities.

I.KEY STEPS IN POST-MERGER INTEGRATION PROCESS

The key viewpoints in PMI are to assess the changed and altered lookout of the newly formed entity and how the new organization will operate on a daily basis keeping in mind the migration and harmonisation of corporate processes and activities of both the previous entities. The main arenas of concerns are as follows:

1. Human Resources: Identification of redundancies, systematic overlap of allotted tasks, managing layoffs and reduction in brain-drain and financial resources.
2. IT and Technology: Merging the operating systems of both the organization with also harmonising the technical differences to achieve a standardised operational system facilitating a reduction in redundancies.
3. Management: Developing key management plans, ensuring a seamless transition between employees and focusing on orientation. Building and establishing internal communication methods best suitable to everyone.
4. Finance: Managing the division of shareholding, distribution of shares between the stakeholders of the organization, issuing new shares in the name of the combined entity. The shares of the new entity can also be acquired through a specified conversion rate where the old entity’s shares are converted. This happens in a stock-for-stock acquisition deal.

II.LEGAL FRAMEWORK REVOLVING MERGERS

The process of merger is regulated by specified statutory provisions accompanied by various caveats, depending upon the type of merger. The foremost and the most basic legal aspects and frameworks ought to be adhered to following a merger are as follows:

1. The Companies Act, 2013: This act performs as the foundation stone for any commercial transaction or activity in India. Sections 230-234 outline the process of mergers, cross border mergers, amalgamations and demergers, while the latter is not specifically mentioned in the bare text. It is whole-heartedly and logically assumed that the legislative intent behind the statute was to include demergers as well. Sections 230-232 lay down the process of handling a merger which involves obtaining approvals from the National Company Law Tribunal, conducting meetings with the shareholders and creditors of the company while keeping in consideration the various compliance requirements within prescribed timelines and appropriate disclosures. It is extremely necessary to obtain all necessary approvals from the Registrar of Companies (RoC), Regional Director, Official Liquidator.
2. The Competition Act, 2002: It is necessary that all combinations involving a merger, acquisition or amalgamation adhere to the provisions prescribed by The Competition Act of 2002 in order to satisfy that such combinations are in strict compliance with the mandates of Section 3 and 4 of the Act. While Section 3 describes Anti-Competitive agreements between parties, persons, entities (including a cartelization agreement), Section 4 lays down the provisions regarding the abuse of dominant position. A merger, amalgamation, acquisition or any related combination has to fit within the specified limits of Sections 5 which highlights the specifications as to the financial resources of the newly formed entity which then requires the prior approval of the Competition Commission of India and Section 6 which lays down the regulation of such combinations with reference to Sections 29 and 31 as well. The objective of the Competition Act, 2002 is to prevent any agreement, activity or transaction which will constitute as AAEC (Appreciable Adverse Effect on Competition)
3. Securities and Exchange Board of India (SEBI) Regulations: There are a number of regulations by SEBI which have to be adhered to, they are the SEBI Takeover Regulations, 2011, LODR 2015, ICDR, 2018.
4. Foreign Exchange Management Act and RBI guidelines: The standards and guidelines laid down in FEMA and RBI guidelines come into play in cases of Cross Border Mergers and transactions involving inbound and outbound mergers. These guidelines impose certain constraints in the process of inbound and outbound mergers

III.DUE-DILIGENCE

The jurisdictions involved or the tax status of the companies involved must be known in order to begin preparing the integration program. It is also necessary to confirm whether infrastructure is in place, whether works councils are appointed, whether collective bargaining agreements are applicable, or whether contracts with change-of-control clauses are in place. Ideally, throughout the acquisition due diligence process, the data needed to begin the integration strategy for the acquired company will already have been gathered. Otherwise, the first step in the integration planning process usually calls for a small amount of due diligence. In order to find any potential legal and other difficulties that might impact the integration process, due diligence on the buyer’s current entities involved in the post-acquisition integration may also be required. It is crucial that the parties abide by any potential antitrust laws when exchanging information before signing or between signing and closing, especially when acquiring a rival.

IV.CONSIDERATION OF MERGER

Cash, securities, or other assets may be used as consideration for the merger. The fair worth of the consideration’s components is evaluated in order to calculate its value. Several methods are used to determine fair value. For instance, the value determined by the statutory authorities may be regarded as the fair value when the consideration consists of securities. For other assets, the market estimation of the assets relinquished may be used to calculate the fair value. Assets may be assessed at their corresponding net book values if the market worth of the surrendered assets cannot be accurately determined.

Section 239 of The Companies Act, 2013 provides that the books and every necessary and essential document of the previous entity which has been amalgamated into the new corporate entity shall be preserved even if such entity has ceased to exist. Disposal of the books can only be carried out subject to prior approval granted by the Central Government. The Central Government is authorised to appoint a person to examine such books and records. Section 240 provides for liability of officers post-merger in cases an offence has been committed by them before such amalgamation scheme has taken force and enacted.

Such transfer of assets will also bring about a significant change in the shareholding pattern of the corporate entity, such changes are required to be disclosed by the company post-merger under a mandate imposed by the Securities and Exchanges Board of India in the form of Listing Obligations and Disclosure Regulations, 2015.

Regulation 31(1) requires that “that every listed entity shall submit a shareholding pattern to the stock exchanges on a quarterly basis, detailing the number of shares held by promoters, public shareholders, and other categories.”

Regulation 31(2) requires that “any change in the shareholding pattern to be disclosed within a specified timeframe, ensuring that all stakeholders are informed about significant changes following a merger.”

V.TAX IMPLICATIONS ON MERGERS

Since Section 47 of the IT Act exempts mergers and demergers from the definition of “transfer,” these transactions are typically regarded as tax neutral. Therefore, capital gains tax does not apply to such transactions. Additionally, Schemes may carry forward and pay off accrued tax business losses as specified in Section 72A of the IT Act.

VI.TRANSFER/MIGRATION AGREEMENTS IN M&A TRANSACTIONS

There are a number of agreements which have to be drafted after conducting due diligence and preparing a thorough and in-detail Due Diligence Report which includes each and every caveat, every information that is needed regarding user data, use cause, information of shareholders, background, performance details, etc.

To keep it simple, some of the important migration agreements are as follows:

Data Migration: The process of data migration is essential to ensure that there is no loss of data while transition into a new entity or a company being absorbed by another entity. An integration and amalgamation of IT interfaces is necessary to facilitate seamless transition and smooth functioning of data operations. The legal framework which regulates and governs data migration is as follows:

• The Digital Personal Data Protection Act, 2023 (DPDP Act): The newly enacted DPDP Act is essential to protect the personal data of users and also allows the use of personal data subject to certain conditions. Organizations which are involved in M&A deals come into the position of data fiduciaries and shall ensure the processing of the data of principals is for a lawful and legitimate purpose. It is also mandatory to obtain the data after being granted consent by the data principal. Section 17 (1) (e) reads as follows: (1) The provisions of Chapter II, except sub-sections (1) and (5) of section 8, and those of Chapter III and section 16 shall not apply where (e) the processing is necessary for a scheme of compromise or arrangement or merger or amalgamation of two or more companies or a reconstruction by way of demerger or otherwise of a company, or transfer of undertaking of one or more company to another company, or involving division of one or more companies, approved by a court or tribunal or other authority competent to do so by any law for the time being in force.

Section 16 of the Act provides that The Central Government is bestowed with the power to restrict the transfer of personal data by a data fiduciary for processing of such data outside India by rolling out a formal notification.

Furthermore, the Data Protection Act will be superseded by any laws that establish a greater standard of protection or limitations on the transfer of personal data outside of India. For instance, the transfer clauses in the Data Protection Act would be superseded by the Reserve Bank of India’s requirements to store payment data only in India, as provided under Section 16(2).

The Ministry of Corporate Affairs is empowered to use personal data to evaluate or conduct a merger, divestiture, corporate restructuring, re-organization or transfer of assets or even liquidation process.

The Digital Personal Data Protection Act, 2023’s Section 2(1) defines a Data Protection Officer as “a person designated by the Significant Data Fiduciary under clause (a) of sub-section (2) of section 10.” Section 10 of this Act mandates that companies that satisfy certain criteria—such as the volume and sensitivity of personal data processed, the risk to the data principal’s rights, the potential influence on our nation’s sovereignty, etc.—appoint a Data Protection Officer. The duties of the DPO include communicating with regulatory bodies, serving as a point of contact for data subjects, and making sure the Act is followed. In order to keep an eye on data protection tactics and make sure that data processing operations comply with legal standards, the DPO is essential.

Human Resources and related Labour Laws: There are a number of considerations that have to be taken care of in case of Mergers and Acquisitions. Various compliances have to be taken care of pre- merger and post-merger. Some of these compliances are as follows:

Industrial Disputes Act, 1947: Section 25 FF of the ID Act reads as follows: “Where the ownership or management of an undertaking is transferred, whether by agreement or by operation of law, from the employer in relation to that undertaking to a new employer, every workman who has been in continuous service for not less than one year in that undertaking immediately before such transfer shall be entitled to notice and compensation in accordance with the provisions of section 25F, as if the workman had been retrenched.”

This provision is well applicable in cases of Mergers and Acquisitions and strict compliance shall be adhered to and any change in the form of services shall be formally served to the workmen as per Section 9 of the Act.

Employees’ Provident Fund and Miscellaneous Provisions Act, 1952: According to this act, provident fund contributions must still be made by the transferor and transferee corporations. In McLeod Russell India Limited v. Regional Provident Fund Commissioner, the Supreme Court stressed that the transferee entity is responsible for the transferor’s failure to fulfil provident fund commitments, underscoring the necessity of doing extensive due diligence before to an acquisition.

The Supreme court in the case of Sunil Kr. Ghosh v. K. Ram Chandran held that it is the legal responsibility of the employer to take consent of the employee before being transferred to a new employer altogether irrespective of the fact that whether the terms of employment and service have changed or not.

Many states have their own shops and establishments acts dealing with the issue of granting leaves to employee in cases where there is a merger or acquisition. It is provided under states’ statutes that leave shall be granted to employees which come with the benefit and provision of leave encashment, depending upon the terms and conditions of service.

More importantly, in order to ensure that there is no disruption in employment for the purposes of social security benefits, the transfer of employees must be accompanied by an agreement between the transferor (seller) and the transferee (buyer), whereby the buyer may be required to assume the seniority or period of service. Additionally, this will entail moving employee provident fund accounts to the new organization and gratuity monies to the buyer firm.

Also, if the workers are being transferred to some other corporate entity with the catch of less favourable terms being offered, the workers who have completed 5 years of service shall be paid gratuity as well.

Transfer of assets: It is pertinent to note that a smooth process shall be adopted while transferring the assets of the transferor company to the transferee company.

A Share Purchase Transaction is a relatively simpler transactions with comparatively lesser approvals required. The most essential document required in such a transaction is a Share Purchase Agreement which put lights on the terms and conditions of the contract while there are other documents requiring signatory approvals for transfer of securities. In such a transaction, approval from the NCLT is not required ordinarily.

In an Assets Purchase Transaction, specific details are required for transfer of tangible and intangible assets with approvals and consent from creditors and shareholders, including employees.

A unified set of accounting rules is adopted after the amalgamation if the transferor and transferee companies had different accounting policies at the time of the merger. Accounting Standard (AS) 5 is followed for reporting the impact of any changes to accounting policies on the financial statements. Changes in Accounting Policies, Previous Period Items, and Net Profit or Loss for the Period

The transferee business accounts for the integration under the purchase method either by assigning the consideration to specific identifiable assets and liabilities of the transferor company based on their fair values on the date of amalgamation, or by incorporating the assets and liabilities at their current carrying amounts. Assets and liabilities not listed in the transferor company’s statement of affairs may be included in the identified assets and liabilities.

VII.TRANSFER OF LICENSES

There are a number of agreements which are also drawn up when licenses are transferred into the merged/ amalgamated company. The legal aspects involving such transfer of licenses are as follows:

1. Software Licence: The governing provisions of a software licence agreements entered by and between the transferor and the other parties will cover the legal aspect of the transfer of the software licence to the transferee Company and therefore the right to use the software will be transferred from the transferor to the transferee Company.
2. Reserve Bank of India: Any transfer of a banking licenses has to pass the scrutiny of the RBI.
3. IP rights are registered and recorded by the Indian Patent Office, Trademark Registry, and Copyright Office. To guarantee legal recognition, all transfers of intellectual property rights, including licenses, must be formally documented with these offices.
4. Competition Commission of India: Although defences are available to corporate entities as to the transfer and licensing of Intellectual Property following a combination scheme approved by the two merging corporate bodies. The CCI still has powers to assess such combinations and see whether such license transfer does not have an AAEC and does not fall within an Anti-Competitive Agreement under Section 3 and abuse of dominant position under Section 4.

CONCLUSION

The process of mergers and acquisitions (M&A) in India is complex and subject to a strong legal framework that guarantees adherence to numerous legislative requirements. The cornerstone of this system is the Companies Act, 2013, which outlines the merger operations, including obtaining the required permissions from the National Company Law Tribunal (NCLT) and adhering to the regulations set forth by the Regional Director, Official Liquidator, and Registrar of Companies.
Post-Merger Integration (PMI) encompasses important domains like financial restructuring, technological integration, human resources management, and efficient communication tactics and is essential for attaining operational synergy. Effective PMI necessitates meticulous preparation to handle redundancies and guarantee an uninterrupted transition for employees and stakeholders alike.

In order to enable data migration, guarantee labour law compliance, and efficiently manage asset transfers, a variety of transfer agreements must be drafted after due diligence.

Important considerations about data handling during M&A transactions are introduced by the DPDPA, 2023. Businesses must guarantee that personal data is processed legally while abiding with the rules governing data fiduciaries.

Conclusively, managing the intricacies of mergers and acquisitions in India necessitates a thorough comprehension of the relevant legal frameworks and careful consideration of post-merger integration tactics. By following legal requirements and concentrating on efficient integration procedures, businesses can reduce the risks involved in M&A deals and set themselves up for long-term success in their new organizational structures. This study emphasizes the significance of careful planning and adherence to regulations in attaining successful results in M&A operations.

Author:  Pratham Kaushik, Co-Author: Dewang Saraswat, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at Khurana & Khurana, Advocates and IP Attorney.

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