Difference between Merger and Demerger
Subhendu Sanyal
Jogesh Chandra Choudhary Law College, Kolkata
This Blog is written by Subhendu Sanyal, a Law Graduate of Jogesh Chandra Choudhary Law College, Kolkata
Under the Companies Act, 2013 Mergers and Demergers are very important corporate reconstruction. While both make changes in the corporate structure, they serve different purposes involving different legal applications.
1. Merger
A Merger occurs when two separate entities combine forces to create a new joint organization. The merger requires no cash to complete but dilutes each company’s individual power. It is regulated under Section 230 to 232 of the Companies Act, 2013, which deals with Compromise, Arrangements, and Amalgamations.
Advantages of Merger:
1) Reduce operational costs.
2) Expand in a new market.
3) Boost revenue and profit.
Disadvantages of Merger:
1) Usually takes 10 to 12 months to complete - time-consuming.
2) Substantial regulatory cost levied by the Regulatory Authority.
3) May impact the outplayed shareholders who are against Merger.
4) Firm with monopoly power may become inefficient
Key features of a Merger:
1) Two or more companies are combined into a single entity
2) All assets and liabilities of the merging companies get transferred to the new or surviving entity
3) In most cases one company survives and the others cease to exist
4) Section 232 of the Companies Act, 2013 lays down the provisions of merger under Chapter XV (Compromise, Arrangements, and Amalgamations)
5) Requires approval from shareholders, creditors and NCLT
6) Shareholders of merged companies get shares in the new/surviving entity in proportion to their holdings.
Types of Mergers:
Conglomerate: This is a merger between two or more companies engaged in unrelated business activities. A pure Conglomerate involves two firms having nothing in common. A mixed conglomerate takes place between organizations that, while operating in unrelated business activities, are trying to gain product or market extensions through the merger. Walt Disney merged with ABC in 1995.
Congeneric: Also known as a product extension merger. Combines two or more companies operating in the same market or sector with overlapping factors, such as technology, marketing, R&D, etc. Citigroup merged with Travelers Insurance with complementary products.
Horizontal: Occurs between companies operating in the same industry. 1998 merger of Daimler-Benz with Chrysler.
Vertical: When two companies operating at different levels within the same industry’s supply chain combine their operation. America Online merged with Time Warner.
Reverse Merger: It occurs when a private company purchases a publicly traded company. New York Stock Exchange merged with Archipelago Holdings in 2006.
Real-world Example:
Exxon Corp and Mobil Corp completed their merger in November 1999 following approval from the Federal State Commission (FTC). They were the top two oil-producing corporations, before their merger.
Merger of America Online and Time Warner in 2000.
2. Demerger
A merger is a form of corporate restructuring where a business is broken into components. The resultant units either operate on their own or are sold or liquidated. Spin-off is the most common type where the parent company retains an equity stake in the new company. Like mergers, demergers are governed by Sections 230-232 of the Companies Act, 2013
Key features of a Demerger:
1) Section 230 guides the Demerger arrangement
2) Section 232 guides the transfer of assets and liabilities to the new/surviving entity
3) Like a Merger, the approval of majority shareholders, creditors, and NCLT are required in a Demerger also.
4) Section 2(19AA) of the Income Tax Act, 1961 guides the demerger as certain conditions are required to be fulfilled for the demerger to be declared “tax neutral”
5) The shareholders of the original company must receive shares in the new entity on a pro-rata basis.
A Demerger can allow a company to:
a) Refocus on its most profiting units;
b) Streamlines operations;
c) Reduce risks;
d) Create greeted shareholder value;
e) Raise Capital;
f) Prevent a hostile takeover by a capable Investor.
Types of Demergers: The following three are most common beside other forms,
i) Spin-Off: When a parent company receives an equity stake in the new company equal to its loss of equity in the original company. Shares are then bought and sold independently. In the case where the selling firm retains some part of the spun-off identity, it is called partial de-merger ;
ii) Split Off: It is a Spin Off with more components. It occurs when multiple businesses are split from the parent company into different entities.
iii) Liquidation: It involves liquidation of the business entity in question. Assets are divided into new companies. It generally happens when there is conflict among the management, shareholders, and board members.
Advantages of Demerger:
1) May boost shareholder value.
2) Business decisions can be made independently.
3) Makes management more responsible and accountable.
Disadvantages of Demerger:
1) Possibilities of tax liabilities.
2) Requires shareholder approval.
3) Lose economies of Scale.
4) Interest clash among top level
Real-world Example of Demerger:
1) Walmart sold European retailer Asda to the Issa Brothers and TDR Capital in 2021. The corporate giant does retain an investment interest in Asda.
2) Australian Airline Qantas splits its international and domestic operations vis demerger in 2014. Each unit runs separately.
3) In 2008, Cadbury Schweppes Spun off its US beverages unit to create a new entity called Dr Pepper Snapple Group.
Conclusion:
In summary, while both mergers and demergers involve corporate restructuring under the Companies Act, of 2013, a Merger brings companies together to form a larger entity, while a Demerger splits a company into distinct units, typically to focus on separate lines of business or increases operational efficiency. Also, Tax treatment is governed by the Income Tax Act for both processes, and in both cases, it can be tax-neutral if certain conditions are satisfied. So, both forms of restructuring are being carried out not only to get profit for the corporation but also the Shareholders.
Both processes require legal approval and compliance with statutory procedures.
References:
1) Company Act, 2013
4) onlinelibrary,wiley.com
5) kochhar.com