Fast Track Merger Scheme for Startups

The Ministry of Corporate Affairs (MCA) on February 01, 2021, has issued the Companies (compromises, arrangements and amalgamations) Amendment Rules 2021. Through this amendment, the Fast Track Merger Scheme under the Companies Act, 2013 has now been extended to Starts ups and other small companies. The current article briefs the Fast Track Merger Scheme.

Synopsis of Companies (compromises, arrangements and amalgamations) Amendment Rules 2021

Companies (compromises, arrangements and amalgamations) Amendment Rules 2021 specifies that a scheme of merger or amalgamation under section 233 of the Companies act will be entered into between any of the following class of companies:

Two or more start-up companies
One or more start-up company with one or more small company

The official notification pertaining to the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 is as follows: [pdf-embedder url="https://www.indiafilings.com/learn/wp-content/uploads/2021/02/AmalgamationsAmndtRules_02022021.pdf"]

Scheme of Merger or Amalgamation under Section 233 of the Companies Act

Section 233 of the Companies Act, 2013 read with Rule 25 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 provides the concept of simplified merger. Under Companies Act, 1956 all the mergers and restructurings had to go through with lengthy proceedings, the intervention of the High Court was mandated thus making the process very time-consuming. The Fast Track merger covered under section 233 of Companies Act, 2013 requires the approval from Shareholders, creditors, Registrar of Companies, Official Liquidator and Regional Director.

Eligible Entity for Fast Track Merger Scheme

According to the Companies (compromises, arrangements and amalgamations) Amendment Rules 2021, a scheme of merger or amalgamation will be entered between the following types of Companies:

Holding Company and its wholly-owned subsidiary company
The merger between two or more small companies
Two or more start-up companies
One or more start-up company with one or more small company

Start-up Company

Companies (compromises, arrangements and amalgamations) Amendment Rules 2021 prescribes that "Start-up Company means a private company incorporated under the Companies Act, 2013 of Companies Act, 1956 and recognized as such following notification number G.S.R. 127 (E), dated February 19, 2019, issued by the Department for Promotion of Industry and Internal Trade''.

Small Company

Small Company means a company, other than a public company
The Paid-up share capital of the company does not exceed 50 lakh or such higher amount as may be prescribed which shall not be more than 10 Crore
Turnover of the company, as per profit and loss account for the immediately preceding financial year, does not exceed 2 Crore or such higher amount as may be prescribed which shall not be more than 100 Crore:

The Procedure of Fast Track Merger

According to the Companies (compromises, arrangements and amalgamations) Amendment Rules 2021, both the Transferor and Transferee Company need to authorize by their Articles of Association (AOA) for the merger. If not, they need to alter their Articles of Association and Merger shall be permissible as per the Object Clause of Memorandum of Association (MOA) of both the Companies.

Conducting Board Meeting for approval of Scheme

Under this fast rack merger process, both the transferor and transferee company shall hold the Board Meeting for approving the draft scheme of merger and to fix the following:

To fix the date, time and place for the convening of shareholders meeting;
To fix the date, time and place for the convening of creditors meeting;

Submission of Notice of proposed scheme

After the approval of Board of Directors of each Company, the notice of the proposed scheme inviting objections or suggestions needs to be sent by each transferor and transferee company in form CAA-9 to the Registrar of Companies (“ROC”) and Official Liquidators where the registered office of the respective companies are situated along with a copy of the Scheme.

Filing Declaration of Solvency with ROC

Each of the transferor and transferee companies involved in merger must file a declaration of solvency with the ROC where the registered office of the companies are situated, before convening the meeting of members and creditors for approval of the scheme

Notice of EGM

The notice of the meeting along with the following documents needs to be sent to the members before 21 days:

Copy of proposed scheme
A statement disclosing the details of the merger
Declaration of solvency made in Form No. CAA.10
Copy of latest audited financial statements of each company
Copy of valuation report
Any other relevant and material information

Note: Alternatively, approval in writing from the majority representing 90% of the total number of shares may be taken without conducting the general meeting.

Members Approval

The objections and suggestions received by the ROC, Official Liquidator and persons affected by the scheme are considered by the companies in their respective general meetings and the scheme must be approved by the respective members or class of members at a general meeting holding at 90% of the total number of shares.

Creditors Approval

Both Transferor and Transferee Company need to take approval from creditors either by way of written approval or at a meeting of creditors.
The notice of the meeting required to be sent to the creditors before 21 days and it shall be accompanied with documents mentioned above.

Filing of the Scheme

The draft scheme involving merger must be filled within a week of the conclusion of the meeting of members and creditors to the following:

A copy of Scheme and report of the result of each of the meetings with the Regional Director (R.D) having jurisdiction of Transferee Company.
A copy of the scheme along with Form CAA 11
ROC in Form GNL 1
Official Liquidator through hand delivery or by registered post or speed post

Approval of Scheme by Regional Director

On the receipt of the scheme of merger or amalgamation, if the ROC or the Official Liquidator has no objections or suggestions to the scheme, the Regional Director shall register the same and issue a confirmation to the companies.

If the ROC or Official Liquidator has any objections or suggestions, he may communicate the same in writing to the Regional Director within a period of 30 days. If no such communication is made, it shall be presumed that he has no objection to the scheme.

Filing of confirmation order with the ROC

A copy of the order confirming the scheme of merger or amalgamation by the Regional Director will be filled with the ROC, within 30 days, in form INC-28, having jurisdiction over the Transferor and Transferee Company and the ROC shall register the scheme and issue a confirmation to the companies and such confirmation shall be communicated to the ROC where transferor company or companies were situated.