This article throws light upon the seven main legal aspects of business merger. The aspects are: 1. Analysis of Proposal by the Companies 2. Determining Exchange Ratios 3. Approval of Board of Directors 4. Approval of Shareholders 5. Consideration of Interests of the Creditors 6. Approval of the Court 7. Approval of Reserve Bank of India.

Merger: Legal Aspects # 1. Analysis of Proposal by the Companies:

Whenever a proposal for amalgamation or merger comes up then managements of concerned companies look into the pros and cons of the scheme. The likely benefits such as economies of scale, operational economies, improvements in efficiency, reduction in costs, benefits of diversification, etc. are clearly evaluated.

The likely reactions of shareholders, creditors and others are also assessed. The taxation implications are also studied. After going through the whole analysis work, it is seen whether the scheme will be beneficial or not. It is pursued further only if it will benefit the interested parties otherwise the scheme is shelved.

Merger: Legal Aspects # 2. Determining Exchange Ratios:

The amalgamation or merger schemes involve exchange of shares. The shareholders of amalgamated companies are given shares of the amalgamated company. It is very important that a rational ratio of exchange of shares should be decided. Normally a number of factors like book value per share, market value per share, potential earnings, and value of assets to be taken over are considered for determining exchange ratios.

Merger: Legal Aspects # 3. Approval of Board of Directors:


After discussing the amalgamation scheme thoroughly and negotiating the exchange ratios, it is put before the respective Board of Directors for approval.

Merger: Legal Aspects # 4. Approval of Shareholders:

After the approval of this scheme by the respective Boards of Directors, it must be put before the shareholders. According to section 391 of Indian Companies Act, the amalgamation scheme should be approved at a meeting of the members or class the of members, as the case may be, of the respective companies representing three-fourth in value and majority in number, whether present in person or by proxies.

In case the scheme involves exchange of shares, it is necessary that is approved by not less than 90 per cent of the shareholders (in value) of the transferor company to deal effectively with he dissenting shareholders.

Merger: Legal Aspects # 5. Consideration of Interests of the Creditors:

The views of creditors should also be taken into consideration. According to section 391, amalgamation scheme should be approved by majority of creditors in numbers and three-fourth in value.

Merger: Legal Aspects # 6. Approval of the Court:


After getting the scheme approved, an application is filed in the court for its sanction. The court will consider the viewpoint of all parties appearing, if any, before it, before giving its consent. It will see that the interest of all concerned parties is protected in the amalgamation scheme.

The court may accept, modify or reject an amalgamation scheme and pass orders accordingly. However, it is upto the shareholders whether to accept the modified scheme or not.

It may be noted that no scheme of amalgamation can go through unless the Registrar of Companies sends a report to Court to the effect that the affairs of the company have not been conducted as to be prejudicial to the interests of its members or to the public interest.

Merger: Legal Aspects # 7. Approval of Reserve Bank of India:

In terms of Section 19 (1) (d) of the Foreign Exchange Regulation Act, 1973, permission of the RBI is required for the issue of any security to a person resident outside India Accordingly, in a merger, the transferee company has to obtain permission before issuing shares in exchange of shares held in the transferor company.


Further, Section 29 restricts the acquisition of the whole or any part of any undertaking in India in which non-residents’ interest is more than the specified percentage.