Effect of merger on nominee shareholder

Introduction

Merger is a form of corporate restructuring and it is an amalgamation of two or more entities into a single entity or one or more entities being amalgamated into one of the existing entities or can be in the form where one new entity can be formed by merging two or more than two existing entities. A merger is a process of corporate reconstruction in which the assets and liabilities of a company are merged to form either a new entity or an already existing company. As a result, the existing legal structure is dissolved. The method of corporate restructuring is adopted by any company for various reasons inter alia to achieve economic growth, to gain competitive edge or to manage the competition already present in the market, to achieve economies of scale, to get access to newer markets and technologies, etc.

Nominee shareholder

Every holder of securities of a company may, at any time, nominate, any person to whom his securities shall vest in the event of his death. Nominee shareholder means a person whose name is entered in the registered of member, who hold share in behalf of actual owner of share; he has to make declaration and can be a natural person or a legal person.

Stock-swap merger

When a company merges, there are three scenarios of how the share price of the companies involved is managed during mergers and acquisitions, stock for stock, cash for stock and cash and stock. A merger is generally stock swap merger, wherein one entity in exchange of shares of the company, merges with the other entity. In Stock swaps the holders of the target company’s stock receive shares of the acquiring company’s stock. A merger arbitrage specialist will sell the acquiring company’s stock short, and will purchase a long position in the target company, using the same ratio as that of the proposed transaction. The Shareholders of the company whose identity have been merged are then issued shares in the capital of the new merged company in accordance with Share Exchange Ratio.

Three Conditions for Merger to qualify as an amalgamation

• All the property of the amalgamating company (old) immediately before the amalgamation becomes the property of the amalgamated company (new) by virtue of amalgamation.
• All the liabilities of the amalgamating company immediately before the amalgamation become the property of the amalgamated company by virtue of amalgamation.
• Shareholders holding not less than three- fourth in value of the shares in the amalgamating company (other than shares already held therein immediately before the amalgamation by or by a nominee for the amalgamated company or its subsidiary) become shareholders of the amalgamated company by virtue of the amalgamation.

Impact of merger on shareholder

Nominee shareholders are not treated any differently than the other shareholders during a merger. A merger affects all the three bodies of the company i.e.- employees, board of directors and shareholders. During the process of amalgamation, 90% of the shareholders of the equity shares of the transferor company become equity shareholders of the transferee company by virtue of the amalgamation. Public companies often merge with the declared goal of increasing shareholder value, by gaining market share or from entering new business segments. Shareholder’s value might increase post-merger because in the scheme of arrangement the company could agree on allotting more shares to the existing shareholders, eg 3 shares in the resulting company as opposed to the 1 share held in the merged company. This could encourage and motivate the existing shareholders to stay in the company and not make an exit in case of a merger.

Documents required-

• Documents are required for transmission of securities held in physical mode- For securities held in single name with a nominee:
• Duly signed transmission request form by the nominee;
• Original death certificate of deceased shareholder or a copy, duly attested by a Notary Public or by a Gazetted Officer;
• Self-attested copy of PAN card of the nominee. (Copy of PAN card may be substituted with ID proof in case of residents of Sikkim after collecting address proof) ;
• Self-attested copy of Address proof i.e. AADHAAR Card / Passport / Driving License / Voter ID;
• Bank Mandate Form
• Original Share Certificate(s)

Conclusion

A merger affects the shareholders in a way that 75% of the shareholders of the amalgamating company becomes the shareholders of the amalgamated company. This makes the merger a stock swap merger allowing the transaction to be tax neutral under the Income tax Act, 1961. The shareholders are given an exit opportunity before the merger deal, if the shareholders find the deal as lucrative, they then continue in the amalgamated company, if not then they give up their shares of the amalgamating company.