[Opinion] The Tail of Restructuring

CS Omkar Dindorkar – [2023] 156 taxmann.com 711 (Article)

Introduction

Mergers, Demergers, Slump Sale, Capital Reductions (hereinafter “Restructuring”) involves various stages viz. Preparatory Stage, Validation Stage, Process Execution Stage, Post Transaction activities. Each stage is a project in itself and need to be addressed with specialisation and requires through knowledge and planning. The Success and timelines of any restructuring depends on how diligently each stage is followed and it has been executed with due cautious of backups and forecasting of challenges.

In Preparatory Stage the transactions is designed in multiple ways to achieve the desired objective in most cost-efficient manner considering the taxation and Stamp duty impact.

In Validation stage the designed transaction is cross checked with compliances of various applicable laws and backed up with Judgements of various courts.

In Process execution Stage it involves documentations, filings with Hon’ble Courts, clearances from Regulators, multiple hearings in NCLT and finally Statutory Clearances.

In Post transaction it involves various activities that are to be carried out to successfully give a closure to a transaction, generally the assumption is that Court Clerance is the ultimate success of any transaction however it is to be understood that the implementation of the court order and doing all the necessary formalities to actually achieve the desired objective is the real success of the transaction and therefore Post transaction activities should be taken into account with due cautious else the overall transaction may come to halt.

Let us understand what all can be the Post transaction activities that needs to be adhered to give successful closure to the transaction.

1. Effectiveness of the transaction

The date of effectiveness plays a crucial role and is to be decided very carefully from accounting point of view /from invoicing point of view. In merger the transferor Company comes to end from this date and therefore any activity to be ensured in the transferor company shall be considered before the effective date.

Ideally schemes defines effective dates, as the date on which the Order of NCLT is lodged with the Registrar and on meeting up all the conditions mentioned in the conditionality clause. One should ensure that the conditions mentioned in the clause are achievable and specific and not open ended.

The date of Effectiveness of the scheme is important form the context of vendors of the company who shall be raising the invoices on the transferor Company name, further transferee company should get its vendor registration done for clients of transferor company.

2. Consideration Clause – Allotment of Securities

Ensuring the compliance of consideration clause in spirit is the essence of the closure of the transaction, many a times it happens that the swap ratio mentioned in the scheme and actual allotment differs in fractional shares and therefore having right clause of dealing with fractional entitlements in the scheme shall be ensured. Further, allotment of securities shall not be delayed, and it shall happen immediately on effectiveness of the scheme.

In case of Capital Reduction there is no timelines particularly specified for actual payouts against cancellation of capital, however it should clearly be set out in the explanatory statement of the resolution passed for reduction as some shareholder may raise a concern over this and the transaction may come to halt.

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