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By K. Kanag-Isvaran, President’s Counsel
You could not have failed to notice the “Introduction” to the Seminar in the flyer that was sent out.
It proclaims as the object of the Seminar the “demystification” of the Central Bank’s policy to consolidate financial service entities, the many mergers and amalgamations taking place in line with the policy of the Central Bank’s “consolidation”.
The mystification starts, I believe, with use of the words “consolidate,” “mergers,” “absorb”, “amalgamations”, “takeover” and the like in dealing with the subject of the Seminar, which is to understand the policy of the Central Bank in relation to financial service entities.
To understand the policy imperative of the Central Bank towards the strengthening of the financial sector, I was handed, over the weekend, a Central Bank presentation styled “Master Plan on Consolidation of the Financial Sector” by the Governor of the Central Bank, of January 2014.
In describing the policy objective, the document uses the words “consolidation,” “absorption,” “merger” either singly or in combination. But notably, it no where uses the word “amalgamation”.
Amalgamation is a specific subject in the Companies Act of 2007. The Act says, “Two or more companies may amalgamate and continue as one company, which may be one of the amalgamating companies or may be a new company”.
To a lawyer’s mind, unless words are defined in a statute or in any other statutory instrument, they do not carry any technical meaning. They carry their ordinary grammatical meaning in relation to the context in which it is used. The Act does not define “amalgamation”! The OED says, amalgamate as a verb is to “combine, or unite to from one organisation or structure”. “Amalgamation” is the noun.
It is perhaps, because of the use of so many arcane words that this Seminar appears to have been organised.
The question is, do the various words used to describe the policy objective, mean the same thing or different things, in law? After all what is sought to be done must surely be done within an existing legal framework.
I am reminded of what Alice asked Humpty Dumpty, the anthropomorphic egg, in Lewis Carroll’s Through the Looking Glass (1872).
“When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose to mean – neither more nor less.”
“The question is,” said Alice, “whether you can make words mean many different things.”
“The question is,” said Humpty Dumpty, “which is to be master – that’s all.”
So who is the master?
What I have been asked to do is to examine the legal nature of “amalgamation” –as postulated in the Companies Act of 2007 in relation to what is sought to be done, namely the consolidation of the financial sector in the manner envisaged.
The Companies Act is my master.
The problem, however, is that different words, “consolidate,”, “mergers,” “absorption,” etc., have been used as if they are synonymous. To compound the matter further, the word “amalgamation” has not been defined in the Act either! None of them have a precise legal meaning.
Therefore, to better understand our legal regime on amalgamation, let us first look at the meaning of some of the words used.
After all, if anything meaningful is to be achieved, it has to be within the parameters of the laws now extant. If the legal framework does not provide for what is sought to be done – well then, new laws will have to be looked at.
Legal analysis, as you well know, hinges on the technical meaning of words. They may sometimes be identified by statute, when they are defined, and sometimes by common law, as for instance the “reasonable man” – the man on the Clapham omnibus! Therefore, understanding their senses is critical, because it may conflict with popular understanding of a particular word.
Consolidate, mergers and acquisitions
Let us, then, examine some of the words used.
The word “Consolidate”. Consolidate, in its ordinary signification, is to bring together (separate parts) into a single or unified whole.
In the corporate world, consolidation occurs when two companies combine together to form a new enterprise altogether, and neither of the previous companies survives independently.
In business, consolidation refers to the mergers and acquisitions of many smaller companies.
In technical analysis, it is the movement of an asset’s price within a well-defined pattern or barrier of trading levels.
In accounting, it is combining assets, equity, liabilities and operating accounts of a parent firm and its subsidiaries into one financial statement, for economic benefit.
“Mergers” and “acquisitions” is an aspect of corporate strategy dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or new location.
Today the distinction between a “merger” and an “acquisition” has become increasingly blurred in various respects (particularly in terms of the ultimate economic outcome), although it has not completely disappeared in all situations.
Mergers may be horizontal or vertical. Horizontal merger occurs between companies in the same industry. It is a business consolidation that occurs between firms who operate in the same space, often as competitors offering the same good or service. Conversely, a vertical merger takes place when firms from different parts of the supply chain consolidate in order to make the production process more efficient or cost effective.
Therefore, choosing to merge with or acquire another company requires a deep understanding of the financial and the operational impact of blending two sets of systems and philosophies. This important aspect should not be forgotten.
Amalgamation
Then we come to amalgamation. “Amalgamation” signifies the transfers of all or some part of assets and liabilities of one or more than one existing company to two or more companies or to a new company.
According to Halsbury’s Laws of England, an amalgamation is the blending of two or more existing undertakings into one undertaking, the shareholders of each blending company becoming substantially the shareholders in the company which will carry on the blended undertakings.
Amalgamation may come about either by the transfer of one or more undertakings to a new company, or by the transfer of one or more undertakings to an existing company. It does not, therefore, cover the mere acquisition by a company of the share capital of other companies which remain in existence and continue their undertakings. It not always be so because the context might show otherwise.
Then there is also “reconstruction”. Reconstruction occurs where an undertaking which is being carried on by a company is in substance transferred, not to an outsider, but to another company consisting substantially of the same shareholders with a view to its being continued by the transferee company.
We have also seen the use of the word “absorb” in the Master Plan. In “absorption” one or more companies are liquidated. In the process of absorption, no new company is formed and an existing company absorbs (takeover) other liquidated companies.
Then look at the use of the word “take over”. In general terms a “take-over” refers to the transfer of control of a corporation from one group of shareholders to another group of shareholders. It is a change in the controlling interest of a corporation, either through a friendly acquisition or an unfriendly, hostile, bid with the aim of replacing current existing management.
With all this exposition, will you blame a much vexed Alice if she were to ask, Humpty Dumpy, “What are we talking about”?
If Alice should ask me, I will say, “Darling I have absolutely no idea”.
But all that I know is what the Act means when it talks about “Amalgamation”.
So, let us get to that.
Amalgamation under the Companies Act of 2007
The provisions relating to amalgamation in our Act, is based on Canadian legislation with some adaptation from the New Zealand Companies Act.
The word “amalgamation”, serendipitously, has no precise legal meaning.
It contemplates a state of things under which two companies are so joined as to form a third entity, or one company is absorbed into and blended with another company. An important element of the concept of amalgamation is that the amalgamating companies do not die. All the assets, rights and liabilities of the amalgamating companies flow into the amalgamated companies, as opposed to the transfer of the assets, rights and liabilities. They simply become the assets and liabilities of the amalgamated company.
Under the Act, two or more companies, that is, an existing company or a company registered under the Act may amalgamate and continue as one company, which may be one of the amalgamating companies or a new company. Public notice of such amalgamation must be given in accordance with section 239 of the Act.
So, amalgamation is a voluntary process and is done without the sanction of the court. It is a statutory method of company re-organisation where two or more companies combine and continue as one company. Shareholders in the amalgamating companies either take shares in the amalgamated company or receive other consideration in exchange for their shares. The assets and liabilities of the amalgamating companies become the assets and liabilities of the amalgamated company by operation of law.
Amalgamations are generally used where, for commercial reasons, an internal group restructuring or merger of separate companies is deemed desirable. Amalgamations may also be used to “freeze out” minority shareholders, and consequently amalgamation attracts minority buyout rights.
When upon an amalgamation two or more companies “continue as one company,” the merged entity is the equivalent of each of the amalgamating companies. It is generally recognised that the amalgamating companies do not cease to exist but continue, and that the amalgamated company is not a new company.
This metaphysical process has been explained by the analogy of streams coming together to form a river and strands of fibre intertwining to form a rope.
Amalgamation proposal
Every company which proposes to amalgamate shall approve an amalgamation proposal in accordance with the provisions of section 241, setting out the terms of the amalgamation proposal. The proposal should, in particular set out the matters listed in paragraphs (a) to (j) of subsection (1) of section 240.
Approval of amalgamation proposal
An amalgamation proposal should be put to the shareholders for their approval. But before it is put, the board of each amalgamating company must resolve that “in its opinion” the amalgamation is in the best interest of the company and that the amalgamated company will satisfy the solvency test immediately after the amalgamation becomes effective. The directors voting in favour of the resolution must sign a certificate setting out the reasons for their opinion. The amalgamated company should satisfy the solvency test immediately following the amalgamation. The directors must also sign a solvency certificate.
The board of each amalgamating company must send to the shareholders of the company, not less than twenty working days before the amalgamation proposal is to take effect, the documents set out in paragraphs (a) to (e) of subsection (3) of section 241.
The board of each amalgamating company is also required, not less than twenty working days before the date on which amalgamation is intended to become effective, to send a copy of the amalgamation proposal to every secured creditor of the company, and to give public notice of the proposed amalgamation.
An amalgamation will be effected if the amalgamation proposal is approved:
(a) by a special resolution of each amalgamating company, in accordance with the provisions of section 92; and
(b) where required, by a special resolution of an interest group.
Section 241 subsection (5) requires shareholder approval by way of special resolution before the amalgamation may proceed. Therefore, a shareholder who votes all his shares against the special resolution approving an amalgamation is entitled to have his shares purchased by the company.
Therefore, a company should be cautious when implementing an amalgamation proposal in view of minority buy-out rights having an impact on the company’s finances.
Powers of court in respect of amalgamation
If a creditor of an amalgamating company or a person to whom an amalgamating company is under an obligation considers that giving effect to an amalgamating proposal will unfairly prejudice their interests, they may apply to
Court for relief, at any time before the date on which the amalgamation becomes effective. If the court is satisfied that giving effect to the amalgamation will unfairly prejudice the creditor or the person to whom the amalgamating company is under an obligation, it may make any order it thinks fit in relation to the proposal.
Short form amalgamation
Vertical Short From
In a short form of amalgamation, a company and two or more companies that are directly or indirectly wholly owned by the first company may, without complying with the provisions of section 240 (amalgamation proposal) or of section 241 (approval of the proposal by shareholders), amalgamate and continue as one company, i.e. the first company. This is permissible where the amalgamation is approved by the resolution of the board of each amalgamating company, and each such resolution provides that:
(i) the shares of each amalgamating company, other than the amalgamated company, will be cancelled without payment or other consideration;
(ii) articles of association of the amalgamated company will be the same as the first company;
(iii) the board is satisfied that the amalgamated company will immediately after the amalgamation becomes effective, satisfy the solvency test;
and
(iv) the person or persons named in the resolution will be the director or directors of the new company. This type of amalgamation is called the „vertical short form amalgamation‟ of wholly owned subsidiaries.
Horizontal short form amalgamation
Another variety of the short form amalgamation is called the “horizontal short form amalgamation”. This takes place where two or more companies which are directly or indirectly owned by a parent company amalgamate and continue as one company.
For a horizontal short form amalgamation to be effected, the amalgamation should be approved by the board of each amalgamating company, and each resolution should provide that:
(i) the shares of all but one of the amalgamating companies will be cancelled without payment or other considerations;
(ii) the articles of the amalgamated company will be the same as the articles of the company whose shares are not cancelled;
(iii) the board is satisfied that the amalgamated company will immediately after the amalgamation becomes effective, satisfy the solvency test; and
(iv) the person or persons named in the resolution will be the director or directors of the new company.
The board of each amalgamating company shall, not less than twenty working days before the date on which the amalgamation is intended to become effective, give written notice of the proposed amalgamation to every secured creditor of the company, and give public notice of the proposed amalgamation.
The directors who vote in favour of a resolution should sign a certificate stating that in their opinion, the conditions set out in the respective subsections are satisfied, and giving reasons for reaching that opinion.
Registration of amalgamation proposal
For the purpose of effecting an amalgamation the Registrar should be provided with the following documents for registration:
(i) the approved amalgamation proposal;
(ii) any certificates required under subsection (2) of section 241 or subsection (5) of section 242;
(iii) a certificate signed by the board of each amalgamating company stating that the amalgamation has been approved in accordance with the provisions of the Act and the articles of the company;
(iv) a consent from each of the persons named in the proposal as a director of the amalgamated company, to act as a director of that company, as required by section 203; and
(v) a consent from each of the persons named in the amalgamation proposal as secretary of the amalgamated company, to act as secretary of that company, as required by subsection (2) of section 221.
Certificate of amalgamation
Upon the receipt of the documents required to be sent for registration under section 243, the Registrar shall, forthwith, issue a certificate of amalgamation in the prescribed form, if the amalgamated company is the same as one of the amalgamating companies.
If the amalgamated company is a new company, the Registrar shall enter the particulars of the new company on the Register and issue a certificate of amalgamation in the prescribed form together with a certificate of incorporation
Effect of certificate of amalgamation
The amalgamation becomes effective on the date shown in the certificate of amalgamation. If the name is the same name as one of the amalgamating companies, the amalgamated company shall have the name specified in the amalgamation proposal, in which event the Registrar will remove from the Register all particulars relating to the amalgamating companies, other than the amalgamated company.
The amalgamated company succeeds to all the property, rights, powers and privileges of each of the amalgamating companies, and also to all the liabilities and obligations of each of the amalgamating companies. This takes place by operation of law, and no stamp duty is payable.
The underlying policy of the amalgamation provisions in the Act and its overriding concept of „continuance‟ is demonstrated in the case of Carter Holt Harvey Ltd v McKernan (1998) 3 NZLR 403, where the court held that the guarantees granted to Carter Holt’s subsidiary continued to apply to liabilities incurred after its amalgamation with Carter Holt, and that Carter Holt was entitled to enforce those guarantees for debts arising after the amalgamation.
Carter Holt Harvey Ltd v McKernan is also authority for the proposition that an employment contract of an employee will also remain enforceable by and against an amalgamated company. However the position will be different altogether if the contract of employment itself provided for termination on amalgamation.
Pending legal proceedings
In so far as pending proceedings by or against an amalgamating company is concerned, it may be continued by or against the amalgamated company. A conviction, ruling, order, or judgment in favour of or against an amalgamating company may be enforced by or against the amalgamated company.
Power to acquire shares of shareholders dissenting from scheme or contract approved by the majority
Where any person acquires, pursuant to an offer made to the holders of voting rights of a company, not less than ninety per centum of the voting rights of such company, such person may, within three months of such acquisition, give notice in the prescribed manner, to all the shareholders holding the outstanding shares carrying voting rights, of the desire to acquire the outstanding shares, and such person shall be entitled to acquire such shares on terms not less favourable than the terms made under the aforementioned offer, unless the court, upon an application made by any shareholder within fourteen days of the receipt of such notice for the acquisition of his shares, thinks fit to order otherwise.
This is a compulsory acquisition of shares, as opposed to and to be distinguished from the repurchase of shares under section 63, and minority buy-out rights under section 93.
Where an amalgamation cannot be effected under Part VIII of the Act, dealing with Amalgamation, the court is empowered to order that an amalgamation shall be binding on the company and on such other persons or classes of persons as the court may specify, under Part X, namely, “Approval of Arrangements, Amalgamations and Compromises by Court”.
However, the court mandated not to approve an amalgamation under this Part of the Act unless it is satisfied that it is not reasonably practicable to do so under Part VIII.
I trust that this account captures, reasonably, the main features of the legal regime relating to amalgamations under the Companies Act of 2007.
Whether the provisions of the Companies Act meet with the aspirations, requirements and compulsions of the Central Bank’s ‘Master Plan on Consolidation of the Financial Sector’ and or will provide a comfort zone to the travails of the target financial institutions is not a matter on which I have been asked to speculate. So I say nothing.
