Chapter XV (Section 230 to 240) of Companies Act, 2013(the Act) contains provisions on ‘Compromises, Arrangements and Amalgamations’, that covers compromise or arrangements, mergers and amalgamations, Corporate Debt Restructuring, demergers, fast track mergers for small companies/holding subsidiary companies, cross border mergers, takeovers, amalgamation of companies in public interest etc.
Corporate Restructuring: Restructuring is an act by which company can reorganizes its legal, ownership, operational, or other major structural aspects to make it more profitable.
In general, companies may pursue corporate restructuring strategies in response to falling profits, general market or economic forces and trends, changes in ownership, changes in corporate strategy, or to increase cash flow.
Restructuring is usually done with an eye toward maximizing companies’ strengths by reducing costs, eliminating inefficiency, and increasing profits.
Types of Corporate Restructuring Strategies
- Merger: A merger is a corporate strategy to combine with another company and operate as a single legal entity. The companies agreeing to mergers are typically equal in terms of size and scale of operations.
- Demerger: Demerger is the business strategy wherein company transfers one or more of its business undertakings to another company. In other words, when a company splits off its existing business activities into several components, with the intent to form a new company that operates on its own or sell or dissolve the unit so separated, is called a demerger.
- Reverse Merger: When a weaker or smaller company acquires a bigger company, it is a reverse merger. In addition, when a parent company merges into its subsidiary or a loss-making company acquires a profit-making company, it is also termed as a reverse merger.
- Disinvestment: Divestment or disinvestment means selling a stake in a company, subsidiary or other investments. Businesses and governments resort to divestment generally as a way to pare losses from a non-performing asset, exit a particular industry, or raise money.
- Takeover/Acquisition: A takeover occurs when one company makes a successful bid to assume control of or acquire another. Takeovers can be done by purchasing a majority stake in the target firm.
- Slump Sale: Slump sale is not defined under the Companies Act, 2013. Though, it is defined under the Income Tax Act, 1961. So as per section 2(42C) of Income -tax Act 1961, ‘slump sale’ means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales.