Tag: Merger and Acquisition

Sec. 2(36) of the Companies Act describes a prospectus as “any document issued as a prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any share in, or debentures of a body corporate.”

In other words, it is a document which invites deposits from the public or invites offers from the public for the subscription of shares in, or debentures of, a company. The words “inviting deposits from the public” were added by the Companies (Amendment) Act, 1974.

Features and Characteristics of Prospectus:

(i) It is a document issued as a prospectus;

(ii) It is an invitation to the member of the public;

(iii) The public is invited to subscribe to the shares or debentures of the company;

(iv) It includes any notice, circular, advertisement inviting deposits from the public;

(v) It is a document by which the company procures its share capital needed to carry on its activities.

Forms and Contents of the Prospectus:

Sec. 56 states that every prospectus must

1. State the matters specified in Part I of Schedule II, and
2. Set out the reports specified in Part II of Schedule II.

The Statement in Lieu of Prospectus is a document filed with the Registrar of the Companies ( ROC ) when the company has not issued prospectus to the public for inviting them to subscribe for shares. The statement must contain the signatures of all the directors or their agents authorized in writing. It is similar to a prospectus but contains brief information. The Statement in Lieu of Prospectus needs to be filed with the registrar if the company does not issues prospectus or the company issued prospectus but because minimum subscription has not been received the company has not proceeded for the allotment of shares.

If a public company does not invite the public to subscribe for its shares but acquires to have money from private sources it may not issue a prospectus. In the circumstances, the promoters are required to prepare a draft prospectus which is known as ‘Statement in lieu of Prospectus’ which must contain the information required to be disclosed by Schedule III of the Act.

Sec. 70(1) states that a company having a share capital which does not issue a prospectus shall not allot any of its shares or debentures unless at least 3 days before the allotment of shares or debentures there has been delivered to the Registrar for registration a statement in lieu of prospectus.

The statement shall be signed by every person who is named therein as a director or proposed director of the company or by his authorised agent in writing. It shall be in the form and contain particulars set out in Schedule III of the Act.

Sec. 70(4) lays down that, in contravention of Sec. 70(1), the company and every director of the company, who wilfully authorizes or permits the contravention shall be punishable with fine which may extent to Rs. 1,000.

Similarly Sec. 70(5) also states that where the statement in lieu of prospectus contains any untrue statement, the persons responsible, for the issue thereof, may be punished by imprisonment which may extend to 2 years or with fine which may extend to Rs. 5,000, or with both.

Red Herring Prospectus:

A Red Herring Prospectus is a document which is submitted by an issuer company who intents to have public offerings of securities (i.e.; stock or bonds). It is associated with an Initial Public Offering (IPO). It must be filed with the Securities and Exchange Commission (SEC). The term Red herring comes from the tradition where young hunting dogs in Great Britain were trained in order to follow a scent by the use of ‘Red’ (i.e. salted and smoked) herring (i.e., kipper).

It is interesting to note that this pungent fish would be dragged across a trail until the puppy learned to follow the scent. But the term is used in prospectus simply due to disclosure statement which is printed in red ink on the cover which clearly states that the issuing company is not attempting to sell its shares.

Contents of Red Herring Prospectus:

(a) Purpose of the issue;

(b) Proposed offering Price Range;

(c) Promotion expenses;

(d) Copy of the underwriting agreement;

(e) Underwriter’s commission and discount;

(f) Disclosure of any option agreement;

(g) Balance Sheet;

(h) Net proceeds to the issuing company;

(i) Earning statement for .last three years;

(j) Legal option on the issue;

(k) Copies of the Articles of Incorporation of the issuer; and

(l) Names and addresses of all offices, underwriters, directors and stockholders owning 10% or more of the existing outstanding stock.

Share Warrant is a negotiable instrument issued by a company that entitles the holder to acquire a specific number of shares at a predetermined price within a certain period. It is often used by companies as a means of raising capital or offering incentives to investors. Share warrants can be traded on the stock market like shares, but they do not carry voting rights or entitle the holder to dividends until the warrant is exercised, i.e., converted into shares.

Key Characteristics of Share Warrants:

• Negotiable Instrument:

Share warrant is a transferable instrument that can be freely traded. The holder of a share warrant can sell it in the market, offering flexibility in investment decisions.

• Right to Subscribe to Shares:

Share warrant grants the holder the right, but not the obligation, to purchase shares at a specified price (called the exercise price) within a set time frame. This option is attractive to investors because they can benefit from price fluctuations of the company’s shares.

• No Ownership Rights:

Share warrant holders do not own the shares until they exercise the warrant. They are not considered shareholders and do not have voting rights or dividend entitlements.

• Specified Time Period:

Warrants have an expiration date by which they must be exercised. After this period, the warrant becomes void, and the holder loses the opportunity to purchase shares at the pre-agreed price.

• Issued by the Company:

Share warrants are issued by the company directly and are different from other market instruments like options, which are often issued by financial institutions or traded in the derivatives market.

• Discounted Pricing:

Companies sometimes offer warrants at a price lower than the market price to make them attractive to investors. This can be particularly beneficial if the company’s share price increases before the warrant’s expiration, as the holder can buy the shares at a lower price.

Advantages of Share Warrants:

• Capital Raising:

Companies can raise capital without immediately diluting shareholder equity. If warrants are exercised, the company will receive the exercise price as additional capital.

• Incentive for Investors:

Share warrants can serve as a sweetener for investors, providing an additional benefit that increases the attractiveness of the investment.

• Leverage Opportunity:

Investors can potentially gain leverage through warrants by buying shares at a lower price, benefiting from future appreciation in the company’s stock price.

Disadvantages of Share Warrants:

• No Immediate Shareholder Rights:

Until exercised, the warrant holder has no claim to dividends or voting rights, limiting their influence in the company.

• Expiration Risk:

If the company’s stock price does not rise above the exercise price before the warrant’s expiration, the warrant can become worthless.

Legal Provisions in India:

Under the Companies Act, 2013, the concept of share warrants is not commonly used by private companies, as the Act mandates all securities to be fully paid up before being issued. However, listed companies often use share warrants as part of capital raising or financial restructuring strategies.

Share Certificate

Share Certificate is an official document issued by a company that certifies ownership of a specific number of shares in that company. It serves as evidence of the title of a shareholder and acts as a legal proof of the ownership of shares. Share certificates are issued to shareholders after the shares have been allotted and fully paid up.

Key Characteristics of Share Certificates:

• Proof of Ownership:

Share certificate is the primary document that certifies ownership of shares in a company. It acts as proof that the shareholder owns the shares mentioned in the certificate.

• Physical or Dematerialized Form:

In the past, share certificates were issued in physical form, but with the rise of dematerialization, most companies now issue shares in electronic form. However, in cases where shares are still held in physical form, a physical certificate is provided.

• Essential Information:

A share certificate contains key information such as:

1. The name and address of the shareholder.
2. The number of shares held by the shareholder.
3. The unique share certificate number.
4. The distinctive numbers of the shares.
5. The face value of each share.
6. The date of issue of the certificate.

• Legal Document:

Share certificates are legal documents that can be presented in court as evidence of ownership. They must be signed by authorized company officers (usually the company secretary and one director) and bear the company’s seal.

• Transferability:

Shares represented by share certificates are transferable, and the certificate plays a role in the transfer process. When shares are transferred, the old certificate is typically surrendered to the company, and a new certificate is issued to the new owner.

• Issuance Timeline:

Under Indian law, the company is required to issue the share certificate within two months from the date of allotment of shares or within one month from the date of transfer of shares.

Advantages of Share Certificates:

• Legal Recognition:

Share certificate legally proves that a shareholder owns a part of the company. This is crucial in situations like litigation or disputes over ownership.

• Ease of Transfer:

In the case of physical shares, the certificate facilitates the transfer process, as it must be surrendered and reissued when ownership changes.

• Historical Importance:

Before dematerialization, physical share certificates were important records of ownership and were often kept for long periods.

Disadvantages of Share Certificates:

• Risk of Loss:

Physical share certificates can be lost, stolen, or damaged, leading to complications in proving ownership and requiring reissuance by the company.

• Cumbersome Transfer Process:

In the case of physical share certificates, the transfer process can be time-consuming, as it requires physical handling and verification by the company.

Legal Provisions in India:

Under the Companies Act, 2013, companies are required to issue share certificates within the prescribed time frame (as mentioned above). Share certificates must be signed by authorized officers and stamped with the company’s seal. If a shareholder loses a certificate, the company must follow due legal procedures for reissuing a duplicate certificate.

Statutory Meeting

Statutory Meeting is the first meeting of the shareholders of a public company. It must be held within a period of not less than one month nor more than 6 months from the date at which the company is entitled to commence business. It is held only once in the lifetime of a company. A private company and a company limited by guarantee and not having a share capital need not hold such a meeting.

The purpose of the statutory meeting with its statutory report is to put the shareholders of the company in the possession of all the important facts relating to the new company, what shares have been taken up, what the moneys received etc. This also provides an opportunity to the shareholders of meeting to discuss the whole situation, the management and prospects of the company.

The Board of Directors must, atleast 21 days before the day on which the meeting is to be held, A forward a report, called the ‘statutory report’ to every member of the company. This report contains all the necessary information relating to formational aspects of the company for the information of the shareholders.

Contents of Statutory Report

1. The total number of shares allotted, distinguishing those allotted as fully or partly paid up otherwise than in cash, the extent to which they are partly paid up, the consideration for which they have been allotted and total amount received in cash;
2. An abstract of the receipts and payments under distinctive heads upto a date within seven days of the date of report;
3. An account of estimate of the preliminary expenses of the company.
4. The names, addresses and occupations of the managing director, director, and also its secretary and auditors of the company;
5. The particulars of any contract which, and the modification or proposed modification of which, are to be submitted to the meeting for approval;
6. The extent to which underwriting contracts, if any, have not been carried out and the reason therefor;
7. The arrears, if any, due on calls from directors, managing director or manager; and
8. The particulars of any commission or brokerage paid, or to be paid, in connection with the issue or sale of shares to any director, managing director or manager.

Annual General meeting

Annual General Meeting (AGM) is a yearly meeting of stockholders or shareholders, members of company, firm and organizations. Annual General Meeting is held every financial year and it is mandatory for everyone. In AGM functions like reviewing company account, approving audited accounts, elections, fiscal records of the past year are discussed.

As per Companies Act, an annual general meeting must be held by every company once a year without fail. There cannot be a gap of more than 15 months between two AGMs.

However, the first AGM of a company can be held at any date, within a period of 18 months, since the date of incorporation of the company. Annual general meetings help members understand the company’s rate of growth and potential for improvement.

An AGM gives insights into what steps made the company more successful and which steps caused loss. it helps the members and the board to decide the future course of action. An AGM must be held on a working day.

If the Government declares a public holiday on the day of the meeting, it will be considered a working day by the members attending the meeting. The annual general meeting can be held at the registered office of the company.

Legal Requirements for holding an Annual General Meeting

Legally, a notice period of 21 days must be given to all the members before the meeting. However, there is an exception to this rule. If all the voting members consent, the meeting may be held at an earlier date. Further, the following documents are also to be sent with the notice. Articles of Association, company bylaws, and jurisdiction specifies the rules that govern annual general meeting.

• Copy of annual accounts of the company
• Director’s report on the company’s position for the given year
• Report by the Auditor of the annual accounts.

Members are allowed to use proxies in their absence. The proxy does not need to be a member of the company. However, the proxy forms have to be submitted to the company at least 48 hours before the meeting.

Quorum for Annual General Meeting

Unless the articles of the company state otherwise, the quorum for an Annual General Meeting is as follows

• Public companies: At least 5 members must be present.
• Other companies:At least 2 members must be present within half an hour of the commencement of the meeting.

Issues Undertaken at Annual General Meeting

The functions of business undertaken at a typical annual general meeting are listed as follows:

• The declaration of dividend among shareholders
• Consideration of annual accounts
• Discussion of the director’s report and the auditor’s report
• Appointment and fixing of the remuneration of the statutory auditors
• Appointing replacement directors in place of existing directors retiring

Extraordinary meeting

An Extraordinary General Meeting (an EGM) can be defined as a meeting of shareholders which is not an Annual General Meeting (an AGM). It is held when some urgent issue becomes about the company arises or any situation of crisis and it requires the input of all senior executives and the Board.

As we know, an EGM is held in case of emergency situations and requires the attention of senors execs and the Board. Members, shareholders, and execs must be instructed on the purpose of the meeting so they have time to prepare their valuable input and then, collectively decide further course of action.

Who can Call for an EGM

The members/shareholders of a company can call for an extraordinary general meeting. However, only certain members with a significant stake in the company are allowed to call for an EGM. They are listed in the Companies Act,2013 as follows.

• In the case of a company having a share capital, members holding not less than one-tenth of such paid-up capital of the company that carry voting rights in regard to that matter as on the date of depositing the requisition;
• In the case of a company not having a share capital, members holding not less than one-tenth of the total voting power in regard to that matter as at the date of deposit of the requisition.
• EGM called by Board.  Upon the receival of a valid requisition, the Board has a period of 21 days to call for an EGM. The EGM must be then held with 45 days from the day of the EGM being called.
• EGM called by the requisitionists: In case the Board fails to call for an EGM, it can be called for by the requisitionists themselves during a period of 3 months from the day the requisition was deposited. If the EGM is held within this specified period of 3 months, it can be adjourned to any day in the future after the 3 months.

Essentials of a Valid Requisition

1. Specify the issue for which the meeting is called
2. Signed by requisitionists
3. Must be deposited at the company’s registered office.

Requirements for holding an EGM

A notice period of 21 days must be given to the members. However, there is an exception to this rule. Where if 95% of the voting members consent, the EGM can be held at a shorter notice.

Quorum Required for EGM

Unless the company’s Articles state otherwise, the following number of members are required for a quorum.

• In the case of a public company: Five(5) members personally present
• In the case of any other company: Two (2) members personally present

Quorum means the minimum number of persons who being entitled to attend a meeting must be present at the meeting so that the business of the meeting can be transacted validly. Such a number is desirable so that a meeting gets a representative character and no decisions are taken with a very small number of persons being present.

At the same time the quorum shall not be too big so that a meeting falls through on account of small attendance.

Features of Quorum:

(1) What shall be the quorum for different types of meetings of an organisation are usually mentioned in its bye-laws or in the Articles of Association in case of a company. Some statutes also make such provisions. For example Sec. 174 of the Companies Act makes such provisions. The bye-laws or the Articles cannot provide smaller quorum than what are provided in the statutes, if any.

(2) A meeting cannot be started if quorum is not present. The quorum might be continuously present. If any member or members leaves or leave earlier and by that the quorum falls, then any decision taken afterwards will not be binding, if the by-laws or Articles so provide.

(3) It is the duty of the chairman to see that the quorum is present. The secretary helps him in counting the quorum. If at the middle of the meeting quorum falls, any member present may draw the attention of the chairman to this fact by raising a ‘point of order’.

(4) If quorum is not present at the scheduled hour of a meeting already notified, then the members present will wait for half an hour.

After half an hour the following alternative effects can take place:

(A) In Case of an Informal Meeting:

(i) The chairman may allow informal discussions but no binding decisions can be taken. The meeting is adjourned and can be held afterwards after giving fresh notice.

(ii) If the quorum is missing by a small margin, the chairman may allow discussions and decisions may be taken which, however, have to be formally ratified at a next meeting where quorum must be present.

(B) In Case of Any Meeting of a Company:

The Act provides that the meeting shall be adjourned:

(i) In case of a general meeting to the same day in the next week, at the same time and place or to such other day and at such other time and place as the Board may determine.

(ii) In case of a Board meeting, unless the Articles otherwise provide, to the same day in the next week, at the same time and place or if that day is a holiday till the next succeeding day which is not a public holiday, at the same time and place.

(iii) In case of an extraordinary general meeting requisitioned by members the meeting is not adjourned and the meeting just fails.

(5) In case of a members’ meeting of a company where proxy is allowed only members present in person are counted for quorum and not the proxies but representatives are counted

(6) When fraction comes out while calculating quorum (like one-third, one-fourth) the next round number is taken into account.

(7) Conflicting views exist with regard to counting when there are joint holders of shares. Generally it is accepted that joint holders of shares shall be treated as a single member. Some people think that each joint holder is a separate member if his name appears in the Register of Members.

Where Quorum is Strictly not Necessary:

Normally the quorum is necessary for a valid meeting.

But in the following circumstances a less number of persons may make the quorum:

(1) Whenever a meeting is adjourned for want of quorum, any number of members present at the adjourned meeting shall make the quorum.

(2) At a Board meeting when a matter comes up in which one or more than one director is or are interested then, director or directors concerned cannot take part in the discussion. The remaining directors shall make the quorum. If only on- director is left out then of course there cannot be a quorum and the matter shall be referred to a general meeting of members for decision.

(3) In case of class meetings if one person alone holds all the shares of that particular class of shares then he alone shall make the quorum.

(4) In case of an annual general meeting of a company (ailed by the order of the Central Government on the complaint by only one member of the company, or a general meeting called by the Company Law Board on the application of one member of the company then the member alone present in person or by proxy, shall make the quorum when the meeting is held.

The General Patterns of Quorum:

Every company in its Articles of Association or an association in its bye laws or a Com­mittee or Sub-Committee in its own rules and regulations usually provides what shall be the quorum for the different kinds of meetings to be held under it. The quorum for a general meeting is usually one-fourth or one-third of the total number of members or a fixed number like ten, fifteen etc. taking into consideration the total strength of the members.

The Companies Act is very liberal and provides that if nothing is mentioned in the Articles then any two members in case of a private company and any five members in case of a public company, present in person at a general meeting, shall make the quorum.

The quorum for the meeting of an important committee, like the Executive Committee or Managing Committee, is generally fixed at one-third. The Companies Act provides that the quorum for Board meeting, if nothing is provided in the Articles, shall be one-third or two whichever is bigger.

The directors themselves at the first Board meeting may fix the quorum for Board meetings. In some special cases, the quorum is fixed at a big percentage of the total number of members. For example, the quorum for a class meeting in a company is very often fixed by the Articles to be two- thirds or three-fourths or all the shareholders belonging to that class.

Sometimes all the members make the quorum. For example, in a private company having only two directors, both the directors shall make the quorum at a Board meeting. Again, in a private company having only two shareholders, both the members shall make the quorum at a general meeting.

Company debenture is one of the important sources of finance for large companies, in addition to equity stocks, bank loans, and bonds. Companies need to follow certain procedures for issue of debentures to raise money. There are several ways of issuing a debenture viz. at a par, premium or discount and even for consideration other than cash.

Issue of Debentures

The procedure of issuing debentures by a company is similar to the one followed while issuing equity stocks. The company starts by releasing a prospectus declaring the debenture issuance. The interested investors, then, apply for the same. The company may need the entire amount while applying for the debentures or may ask for installments to be paid while submitting the application, on allotment of debentures or on various calls by the company. The company can issue debentures at a par, at a premium or at a discount as explained below.

Different ways for issuing of Debenture

Once the company invites the applications and the investors apply for the debentures, the company can issue debentures in one of the following ways:

Issue of Debenture at par

When the issue price of the debenture is equal to its face value, the debenture is said to be issued at par. When a debenture is issued at par, the long-term borrowings in the liabilities section of the balance sheet equals the cash in the assets side of the balance sheet. Thus, no further adjustment is required to balance the assets and the liabilities of the company. The company can collect the whole amount in one installment i.e on an application or in two installments i.e. on an application and subsequent allotment. However, there might be a scenario in which money is collected in more than two installments i.e. on an application, on an allotment and at various calls by the company.

Issue of debenture at discount

The debenture is said to be issued at a discount when the issue price is below its nominal value. Let us take an example – a Rs. 100 debenture is issued at Rs. 90, then Rs.10 is the discount amount. In such a scenario, the liabilities and the assets sides of the balance sheet do not match. Thus, the discount on debentures’ issuance is noted as a capital loss and is charged to ‘Securities Premium Account’ and is reflected as an asset. The discount can be written off later.

Issue of Debenture At Premium

When the price of the debenture is more than its nominal value, it is said to be issued at a premium. For example, a Rs. 100 debenture is issued for Rs.105 and Rs.5 is the premium amount. Again, assets and liabilities do not match in such situation. Therefore, the premium amount is credited to Securities Premium Account and is reflected under ‘Reserves and Surpluses’ on the liabilities side of the balance sheet.

The Issue of Debenture as Collateral

The debentures can be issued as a collateral security to the lenders. This happens when the lenders insist on additional assets as security in addition to the primary security. The additional assets may be used if the complete amount of loan cannot be realized from the sale of the primary security. Therefore, the companies tend to issue debentures to the lenders in addition to some other physical assets already pledged. The lenders may redeem or sell the debentures on the open market if the primary assets do not pay for the complete loan.

Issue of Debenture for Consideration Other Than Cash

Debentures can also be issued for consideration other than cash. Generally, companies follow this route with their vendors. So, instead of paying the cash for the assets purchased from the vendor, the companies issue debentures for consideration other than cash. In this case, also, the debentures can be issued at a par, premium or discount and are accounted for in the similar fashion.

Over Subscription

The company invites the investors to subscribe to its debenture issue. However, it may happen that the applications received for the debentures may be more than the original number of debentures offered. This scenario is referred to as oversubscription. In the case of over-subscription, a company cannot allocate more debentures than it had originally planned to issue. So, the company refunds the money to the applicants to whom debentures are not allotted. However, the excess money received from applicants who are allocated debentures is not refunded. The same money is used towards allotment adjustment and the subsequent calls to be made.