Mergers, Demergers, and Acquisitions
The concept of mergers, demergers, and acquisitions refers to the selling, buying, and combining of various companies. This is done for the purpose of rapidly increasing the growth of a rising company without creating another entity.
What is a merger?
A merger can be defined as a mechanism for combining companies for the purpose of expanding the business and its operations for a long-lasting profit.
What laws govern the concepts of mergers, demergers, and acquisitions in Pakistan?
These laws govern the abovementioned concepts in Pakistan:
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The Competition Act, 2010
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The Companies Ordinance, 1984
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The Competition (Merger Control) Regulations, 2007
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Listed Companies (Substantial Acquisition of Voting Shares and Takeovers) Ordinance also known as Takeover Ordinance, 2002
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Listed Companies (Substantial Acquisition of Voting Shares and Takeovers) Regulations also known as Takeover Regulations, 2008
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Banking Companies Ordinance, 19662
What institutions of government partake in the process of mergers, demergers, and acquisitions in Pakistan?
The following institutions of the government are involved in the abovementioned procedures in Pakistan:
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State Bank of Pakistan (SBP)
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The Competition Commission of Pakistan (CCP)
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The Securities and Exchange Commission of Pakistan (SECP)
What are hostile bids?
A hostile bid or takeover is when the majority shares of a company are purchased in an open market without the consent of that company’s board.
Are hostile bids/ takeovers permitted in Pakistan?
Yes, however, they are very rare.
What is a demerger?
It is a tool that allows a large corporation to split off its brands and business units.
Why should I demerge?
You should demerge if:
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You want your business to be more focused and successful
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You want to keep an individual check on the finances
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Increase the market value of your business, brand, or product
What are the cons of a demerger?
There are chances that the parent could lose control over the spin-off; however, it lessens their liability.
What are the modes of a demerger?
The following are the modes of how a demerger can be legally carried out:
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It may be complete or partial
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It may be carried out by an agreement
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Through a voluntary winding up
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Or through a scheme of arrangement
Will a company pay its original debt after a demerger?
Yes, the company will still pay all its debts.
Can a merger take place from a contract?
A merger can take place from a contract if the parties to that contract mutually intend to do so.
Can a company keep its identity after a merger?
A company that absorbs another company in a merger can keep its identity, power, franchises, assets, and liabilities while the other ceases to exist. For instance, in the case where Jazz absorbed Warid, Jazz retained its identity, franchises, powers, etc. but, Warid ceased to exist as an entity.
What is consolidation?
Consolidation is when both companies in the merger lose their existence and become a new business entity.
What is a vertical merger?
It is a merger between a supplier and a customer.
What is a horizontal merger?
It is a merger between two rival corporations. For instance, the merger of Jazz and Warid is a horizontal merger.
What is a short form merger?
A short-form merger is a merger between a parent company and its subsidiary. This form of a merger is cheap and fast as compared to other mergers.
What is a merger clause?
It is a provision in a contract which states the terms and conditions of a merger. Oral agreements shall not change these terms.
What is a conglomerate merger?
In this merger, the corporations are not customers, or suppliers, or rivals of each other. In short, they had no economic relationships with one another.
Why should I merge?
You should seek a merger if:
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You want to improve the economic condition of your business;
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You want to manage your business smoothly and efficiently;
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You want to cut off unnecessary expenses;
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You want to avoid duplication of processes.
How many sanctions are required for a merger?
A three fourth majority of sanctions by the creditors is required for a sanction to take place.
When will a court sanction a merger?
A court will only sanction a merger if it is satisfied by the material facts of the company regarding the following aspects:
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The current financial position of the corporation
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Current accounts of the corporation via the latest audit report
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Any pending proceedings or investigations against the company
How is a merger enforced?
A merger is enforced when the order passed by the court regarding it is filed with the registrar not later than 30 days after it was passed.
What is an acquisition?
The acquisition is defined as an act through which a property is secured, procured, or acquired by becoming its official owner.
What is the purpose of an acquisition?
The purpose of the acquisition is to acquire proprietary rights via ownership.
How does acquisition differ from requisition?
In requisition, only the possession of the property is acquired for an unlimited or limited period.
Who can acquire?
Any individual, company, or group of persons can acquire.
What is an original acquisition?
The original acquisition is when a property is secured in a shape different from when it is acquired. This can be done through accession, occupancy, securing patented inventions, or copyrighted artwork, etc.
What is a derivative acquisition?
These acquisitions are procured from other parties. For instance, owners may exchange chattels and/ or goods in a legal manner in cases of marriage, insolvency, forfeiture, succession, a judgment of the court, intestacy, sale, or via gift deed.
Which institution deals with the acquisition of a Non-Banking Finance Company (NBFC)?
As per section 282 (L) (4) of the Companies Ordinance, the approval of the acquisition of an NBFC is sought from The Securities and Exchange Commission of Pakistan (SECP).
Caution:
Information contained in the above FAQs is for general understanding purposes only and may have altered or have become incorrect owing to variation in factual aspects and evolving laws, therefore, should not be treated as an alternate to professional legal advice.