Change in External Aspects on Reorganization: Engagement with Statutory Authorities, Revised ISO Certification and Similar Other Certifications, Revisiting past Government approvals, decisions and other contracts

Engagement with Statutory Authorities

This is one of the important areas that deals with legal requirements and is close to the company secretary. It is essential to identify government authorities that need to be intimated formally about the merger/ amalgamation/takeover e.g. SEBI, Stock Exchange etc.

Restructuring is also likely to require reflection of the changes to various government permissions, licenses, approvals granted in the past e.g. under labour and industrial laws, sales tax and service tax registrations, permissions under SEZ/STPI requirements where a unit of a merging entity now becomes part of the merged entity. Appropriate steps need to be carried out for updating registration of vehicles owned by merging entity prior to merger.

Revised ISO Certification and Similar Other Certifications

Restructuring could lead to changes in existing certifications such as ISO or similar other certifications. With the addition to locations or changes in organization structure, suitable changes need to be reflected to the certifications obtained e.g. post-acquisition, the acquiring company may decide to close down a branch of acquired company located in Bangalore, since acquiring company may have a large set up in Bangalore; which would require intimation to concerned bodies and completing necessary formalities to ensure all locations/ Functions in new set up are certified.

Revisiting past Government approvals

Restructuring is not always about future decisions or actions. One would need to take a look at past decisions or approvals which were conditional and insist for re-visiting earlier decisions e.g. assuming that the Board of Directors of a company had passed a resolution for not paying any remuneration to nonexecutive directors. However, acquiring entity pays certain percentage of its profits to non-executive directors. Post acquisition and to fit into group policy, company would need to pass another resolution for payment of remuneration to non-executive directors. Take another example, where a company had obtained permission from Reserve Bank of India stating a condition that the permission is subject to condition that foreign shareholding in the company does not exceed X%. If post acquisition, the percentage of foreign shareholding passes stipulated percentage, the company would need to refer the matter to RBI and seek appropriate sanction. There would be a few issues which are disputable where the order of Court would operate and no formal process needs to be followed. However, it is recommended that a company should take appropriate steps to avoid multiple interpretation or possible non-compliance in such cases.

Additionally, a company may be subjected to compliance with Operational Challenges Post Corporate Restructuring certain laws of requirements as a result of restructure e.g. a non-listed company acquires a listed company to make the listed company as its subsidiary. Certain provisions of listing agreement/ SEBI regulations would apply which apply to a holding company of a listed company, which was so far not applicable to such a nonlisted company. Or where a merging entity had a unit in SEZ; now the merged entity would need to ensure compliances under regulations applicable to SEZ unit. Assume a company has obtained 100 software licenses required as a part of internal system used for a particular project. Post-merger, if the size of such team increases to 150 members, company would need to procure additional licenses.

Decisions and other contracts

It is a onerous exercise to check provisions in the existing contracts having connection to any form of restructuring. While order of the Hon’ble Court would prevail and shall ensure that the contracts entered by the merging entity shall continue to be transferred in the name of merged entity as if merged entity was the signing party from the relevant date, provisions contained in a contract with third party may require company to inform about such merger or may give rise to the other party to terminate the contract.

A lease agreement having committed period clause (providing for minimum period of lease during which the lease contract is not terminable by the landlord) may release the landlord from such restriction in the event of a restructure of the lessee entity. Likewise, the company may lose the benefits/ concessions under existing contract, unless company is able to re-negotiate those terms to its favor. Or a contract may provide for lifting the restrictions around fixed fees say for a period of three years, consequent to restructure. It is now imperative for the merged entity to check all such provisions triggering from a restructure rather than criticizing how badly the contract was negotiated by merging entity.

Further, the merged entity would need to check various rights and obligations spelt out in the contracts with third parties and should allocate teams to identify and ensure compliance of those requirements. A loan agreement may insist on the borrower company to obtain prior permission from the Bank. Restructuring is likely to trigger termination rights for other party to the contract, which could turn out to be dangerous from business continuity perspective.