In this article we will discuss about merger scheme of a firm and its contents.

Points to be Considered in Merger:

Two important points to be noted in case of merger are:

1. A merger must be approved by a vote of the stockholders of each firm. Typically, votes of the owners of 2/3rd of the shares are required for approval. Also the shareholders of the acquired firm have appraisal rights. This means that they can demand that their shares be purchased at a fair value by the acquiring firm. Often the acquiring firm and the dissenting shareholders of the acquired firm cannot agree on a fair value, which results in expensive legal proceedings.

2. A merger is legally straightforward. It avoids the necessity of transferring title of each individual asset of the acquired firm to the acquiring firm. It does not cost as much as other forms of acquisition.

Steps in Merger Scheme:


Generally, the merger transactions include the following steps:

1. Screening and Investigation of Merger Proposal:

When there is an intention of acquisition or merger of other business unit, the primary step is that of screening of motives and needs to be judged against three strategic criteria i.e., business fit, management and financial strength.

Once the proposal fit into the strategic motive of the acquirer, then the proposed acquirer will collect all relevant information relating to the target company about share price movements, earnings, dividends, market share, management, shareholding pattern, gearing, financial position, benefits from proposed acquisition etc.


This form of investigation will bring out the strengths and weaknesses of both one’s own company and the prospective merger candidate. The acquirer company should not only consider the benefits to be obtained but also be careful about the attendant risks. If the proposal is viable after thorough analysis from all angles, then the matter will be carried further.

2. Negotiation Stage:

The negotiation is an important stage, in which the bargain is made in order to secure the highest price by the seller and the acquirer keen to limit the price of the bid. Before the negotiations start, the seller needs to decide the minimum price acceptable and the buyer needs to decide the maximum he is prepared to pay.

After the consideration is decided then the payment terms and exchange ratio of shares between the companies will be decided. The exchange ratio is an important factor in the process of amalgamation.


This has to be worked out by valuing the shares of both, transferor and transferee company as per norms and methods of valuation of shares. Approved valuer or a firm of Chartered Accountants will evaluate the shares on the basis of audited accounts as on the transfer date.

3. Approval of Proposal by Board of Directors:

Deciding upon the consideration of the deal and terms of payment, then the proposal will be put for the board of director’s approval.

4. Approval of Shareholders:


As per the provisions of the Companies Act, 2013, the shareholders of both seller and acquirer companies hold meeting under the directions of the National Company Law Tribunal (hereinafter called ‘Tribunal’) and consider the scheme of amalgamation. A separate meeting for both preference and equity shareholders is convened for this purpose.

5. Approval of Creditors/Financial Institutions/Banks:

Approvals from the constituents for the scheme of merger and acquisition are required to be sought for as per the respective agreement/arrangement with each of them and their interest is considered in drawing up the scheme of merger.

6. Tribunal’s Approval:


Approval of the Tribunal, confirming the scheme of amalgamation is required. The Tribunal shall issue orders for winding up of the amalgamating company without dissolution on receipt of the reports from the Official Liquidator and the Regional Director that the affairs of the amalgamating company have not been conducted in a manner prejudicial to the interests of its members or to public interest.

7. Approval of Central Government:

It is required to obtain declaration of the Central Government on the recommendation made by the Specified Authority under section 72A of the Income-tax Act, if applicable.

8. Integration Stage:


The structural and cultural aspects of the two organizations, if carefully integrated in the new organization, will lead to successful merger and ensure that expected benefits of the merger are realized.

Contents of Merger Scheme:

Any model scheme of merger will have the contents given below:

1. Transfer Date:

It is usually the first day of the financial year preceding the financial year for which audited accounts are available with the companies. In other words, this is a cut-off date from which all the movable and immovable properties including all rights, powers, privileges of every kind, nature and description of the transferor company shall be transferred or deemed to be transferred without any further act, deed or thing to the transferee company.


2. Effective Date:

It is the date on which the transfer and vesting of the undertaking of the transferor company shall take effect i.e., all the requisite approvals would have been obtained.

3. Arrangement:

The arrangement should be entered into with secured and unsecured creditors, including debenture holders.

4. Arrangement with Shareholders:

It refers to the exchange ratio which will have to be worked-out based on the valuation of shares of the respective companies as per the audited accounts and accepted methods and valuation guidelines.


5. Reduction of Share Capital:

It may necessitate when the shares of the transferor company are held by the transferee company and/or its subsidiary (ies) or vice versa.

6. Pending Receipt of the Requisite Approvals:

Before the receipt of necessary approvals to the amalgamation, the transferor company possesses the property to be transferred and to carry on the business for and on behalf and in trust for the transferee company.

7. Terms of Scheme:

The amalgamation scheme may suitably provide for the following:


(a) Transfer of the whole or part or the undertaking, property or liabilities of transferor company to the transferee company.

(b) Continuation by or against the transferee company of any legal proceedings pending by or against the transferor company.

(c) The transferor company to be dissolved without winding up.

(d) Transfer of employees of the transferor company to the rolls of the transferee company.

(e) Dissenting shareholders, creditors, employees or any other agencies, if any.

(f) Amendments, modifications, alterations, additions, deletions in the scheme as may be suggested, advised or directed by the Tribunal.


8. Exchange Ratio:

The exchange ratio is an important factor in the process of amalgamation. This has to be worked out by valuing the shares of both, transferor and transferee company as per norms and methods of valuation of shares. Approved valuer or a firm of Chartered Accountants will evaluate the shares on the basis of audited accounts as on the transfer date.