Corporate Approvals For Selling A Core Business Division

Introduction : The division sale appears to be one transaction. In reality, it is six or seven transactions that happen at the same time, but each has its own decision-making body, paperwork, and timeline. The transaction that is often forgotten is never the board’s resolution. It is either the lender’s consent, the counterparty’s right to reject the transfer, or the shareholder’s approval, which applies only due to the division reaching the statutory level.

The blog follows the approval process in the chronological order in which a deal team has to obtain such approvals and, finally, the separation concerns, which will determine whether the transaction can ever take place: intellectual property, transition services, data, and liability post-closing. The Companies Act 2013 forms the primary legal backdrop of the blog post. English precedent is merely persuasive authority.

Step one: Is this a sale of the undertaking?

The Companies Act, 2013, Section 180(1)(a) states that the company’s board shall not be allowed to sell, lease, or dispose of the whole or substantially the whole of an undertaking unless there is a special resolution of the shareholders. This applies to public companies only because private companies were excluded through a 2015 notification. The first step of the approval map involves determining the applicability of this provision.

The Act provides for two tests. An “undertaking” will include those activities where the company’s contribution exceeds 20% of its net worth or which were contributing 20% of its income during the previous audited year. “Substantially the whole” implies an interest worth 20% or more of the value of the undertaking on the same balance sheet. These are purely mechanical, but there still exists room for exercise of judgement. A divestiture of business activities conducted on a phased basis or by carving out activities and selling out the revenue while leaving the assets behind or selling the business and transferring the subsidiaries involved can easily satisfy either condition. Where the figures are hovering around 20%, assume it to be covered under Section 180 and call for a vote.

Listed firms have to comply with two additional regulations. Firstly, according to Regulation 30 of the SEBI Listing Regulations, the sale or disposal of a unit or division is regarded as a material event that is required to be disclosed irrespective of the application of the quantitative tests (i.e., 2% of turnover, 2% of net worth, or 5% of the three-year average profit after tax) applicable to other events. Secondly, under Regulation 37A, a voting test must be satisfied for the disposal of the entire or substantially the entire of an undertaking not pursuant to a scheme of arrangement: a special resolution shall only become effective if the number of votes cast by public shareholders in favour exceeds those cast against, and no public shareholder party to the disposal shall vote.

Tax will have an impact on the structuring of the deal. Sale of the division as a going concern for an aggregate price without valuation of individual items of property is referred to as a "slump sale" under section 2(103) of the Income-tax Act, 2025, taxable under section 77. In CIT v Artex Manufacturing Co, decided under the 1961 Act, the Supreme Court looked behind a lump sum because the price of the plant, machinery and dead stock could be identified, and taxed the gain asset by asset.

Board and shareholder approvals

The board moves first. A disposal of an undertaking is a decision made by the board through a resolution at a board meeting as per section 179(3), and all directors owe all the responsibilities as per section 166, which includes a responsibility to act in the best interest of the company, its employees, and its members. The minutes must include how the board considered the value of the transaction, other alternatives, such as a demerger by scheme as per sections 230 to 232, and the impact on the remaining business. If the purchaser is a related party or there is an interest by a director, then sections 184 and 188 will apply.

Following the board, the shareholders follow. For a section 180 disposal, there is a requirement of passing a special resolution, and rule 22 of the Companies (Management and Administration) Rules, 2014, requires that it be put up to a postal ballot where the rule applies. The explanatory statement should provide adequate information to the members and, for a listed company, should include the commercial reasons and use of the proceeds.

The buyer should not accept anything at their face value. According to the law stated under Section 180(3)(a), the title of a good faith buyer is protected under the title protection principle and rule stated in Royal British Bank v Turquand, which enables an outsider to presume that internal formalities of the corporation have been completed successfully. Both principles are irrelevant if there is a buyer who was aware of the approval not being granted.

Lenders and creditors

Before sending out your first term sheet, read all the financing documents. Facility agreements usually have negative covenants and restrictions against disposing of the property and altering the business, and the sale of a key division will violate them even if the loan security itself is not affected. If the division's assets are encumbered, the loan agreement will have to be released, and the company will have to file notice of the release with the Registrar. The lender will want the money from the sale to pay off the debt.

Unsecured creditors lack a veto power, but they do have an available remedy in case the sale makes the company worthless. Section 45 of the Insolvency and Bankruptcy Code of 2016 provides for setting aside the transaction at an undervalue within the look-back period prescribed under section 46 if the company subsequently becomes insolvent. An independent valuation document on record is the best way to counter that danger.

Employees

The employees are not parties to the transaction, and their status still counts. A contract of service under the common law cannot be assigned to a new employer without the consent of the employee, as per the decision of the House of Lords in Nokes v Doncaster Amalgamated Collieries. In India, section 73 of the Industrial Relations Code, 2020 has replaced section 25FF of the Industrial Disputes Act, 1947 since the Code came into force on 21 November 2025. It treats a transfer of an establishment as retrenchment and gives workers with at least a year of service notice and compensation, unless their service is not interrupted, the new terms are no less favourable and the transferee is legally liable to pay compensation on any later retrenchment.

The prudent thing would be to provide continuity of services on an equal footing in written form, have consultations if there is a trade union, and take care of the provident fund and gratuity transfer in the deal papers.

Contract consents

List all contracts that accompany the business division and classify them in accordance with the terms of the contract. Assignment of the advantage under a contract is possible in most cases. However, it is not possible to shift the disadvantage to another person without consent from the counterparty in India under section 62 of the Contract Act. Prohibition clauses will apply: in Linden Gardens Trust v Lenesta Sludge Disposals, the House of Lords ruled that an anti-assignment clause was effective.

Three categories will require separate treatment. The first category consists of those contracts requiring consent for assignment. The second category includes those contracts having change-of-control clauses, which will be relevant if the transaction is a share sale of a subsidiary holding the division. The third category includes those contracts shared by the division and the retained business, which need to be divided or duplicated. Suppliers and customers with bargaining power, especially those with sole-source relationships, will treat consent as a bargaining point. Thus, contact them in a specific sequence and maintain its confidentiality until the signature.

IP separation

Intellectual property is where carve-outs fail quietly. Sort every asset into three groups: what the division owns, what it only uses under license, and what the seller keeps.

In respect to owned property, there will be formalities for each law. For example, for copyright assignment there is a need for a written document signed by the assignor and also details about what work is being transferred, the rights being assigned, the period, and the territorial limits; otherwise, the default position under the Act will be for five years in India. Patent assignment needs to be a written document and transfer registered. A trademark registered or not can be assigned.

Joint IP requires a decision, not an assumption. In the case that two parties both share a brand name or a software solution, there should be a decision either to allocate it to the acquirer with a license to the seller or leave it on the side of the seller and license the buyer. Regardless of the option picked, the scope, field, and territory of the license should be included in the sales contract rather than in a side letter. Finally, review the chain of title.

Transition services and data migration

A transition services agreement allows the buyer to operate the business from day one as separations occur between systems and individuals. Write it with the rigidity of an SLA: defined services, service levels, a definite term with limited extension options, a basis for costs, exit assistance, and a clause for ownership of modifications made during the term. This is a time-bound obligation, not a long-term service agreement, for the seller. It’s a map for the buyer and therefore must be tied down to each individual system or person.

The data requires legal access. The personal data of customers and employees is not going to migrate just because the company is. The Digital Personal Data Protection Act, 2023, and the rules made under it were notified in phases from 13 November 2025, but the notice, consent, and security provisions only commence on 13 May 2027. Till then, the Sensitive Personal Data Rules under section 43A of the Information Technology Act shall continue to be applicable to the sensitive data, and section 43A is omitted when section 44(2) of the DPDP Act commences.  Migration should take place in phases, including data mapping, proper segregation of shared databases, test migration, cut-over date, and deletion of data by the seller at the end of any retention period.

Post-closing liabilities

Closure does not mark the end of the seller’s risk. The agreement needs to provide for what liabilities are to be transferred, what liabilities are to remain with the transferor, and who bears the risk of liabilities that cannot be quantified. Statutory provisions can prevail over contractual agreements. Under Section 85 of the CGST Act, 2017, the transferee of the business shall be liable for tax dues of the transferor in respect of the business transferred. Similarly, under section 499 of the Income-tax Act, 2025, a charge or transfer of specified assets made while tax proceedings are pending, or after they end but before recovery notice is served, is void against the revenue’s claim. It survives only if it was made for adequate consideration and without notice, or with the Assessing Officer’s permission.

Indemnities and Warranties Require their Own Drafting. The Contract Act defines indemnity very narrowly, but the Bombay High Court in Gajanan Moreshwar Parelkar v Moreshwar Madan Mantri held that indemnities could be created outside of this definition, while damages for breach will continue to fall under section 73. Set out caps, baskets, limitations, escrow/retention, and third-party claim processes.

The seller shall also provide a non-compete clause. Section 27 of the Act declares void any agreement in restraint of trade, except in case where a seller of goodwill agrees not to carry on a similar business within certain local limits. In the case of Percept D'Mark (India) v Zaheer Khan, the Supreme Court declared the post-term restraint void under this section. Make sure the covenant fits into the exception by linking it to the goodwill sold, and making the local limits reasonable.

Sale-readiness checklist

• Conduct the analysis against the 180 section and, where applicable, the Regulation 30 and 37A provisions.

• Determine the appropriate method (slump sale, itemized sale or demerger arrangement) of the transaction with tax advice prior to the term sheet.

• Write board papers containing the valuation, alternatives and conflicts of interest disclosures.

• Schedule the special resolution, the postal ballot and the explanatory statement.

• Examine each loan, charge and covenant and secure the necessary consents from the lenders.

• Classify all commercial contracts: assignable, novation required, change-of-control or shared.

• Lay out a plan to seek consent from counterparties based on their leverage, with deadlines.

• Develop an employee transfer plan dealing with notice, terms, compensation and consultations.

• Conduct an IP audit: owned, licensed in, shared, and chain-of-title issues.

• Ascertain additional regulatory approvals required, including competition notification if applicable.

• Draw up the transition services schedule, including owners, service levels and termination dates.

• Carry out a data map, migration plan and lawful basis for all transfers.

• Establish allocation of liabilities and excluded liabilities with indemnities, escrows and non-compete clauses.

• Assign one coordinator with a checklist, named owners and long-stop dates.

Conclusion

Division sale is a coordination issue that comes with legal gates. Apply the test to the statutory thresholds first, get approval from each consent holder in an orderly manner, and sort out the IP, transition, and liability issues before signing, not afterwards. Think of the checklist as a working document for the deal team, and let in-house counsel lead the order of things.

Author: Sakshi Soni in case of any queries please contact/write back to us via email to content@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney