By Sugandha Kapur
Mergers and amalgamations are an important tool for corporate strategy and structuring. On this subject, the division bench of the Delhi High Court ruled (13 July 2012) inter alia, in the case of Idea Cellular Limited v. Union of India (Company Appeal Nos. 42 & 67 of 2011) that amalgamation of companies and licenses held by the merging companies are entirely independent and the former need not necessarily lead to the latter.
Facts
On 5th February 2010, the Judge of the Delhi High Court sanctioned the scheme of amalgamation for Spice Communications Limited (“Spice”), a public listed company providing telecom services in Punjab and Karnataka to merge with Idea Cellular Limited (“Idea”). Idea contended that the Unified Access Service Licenses (“UASL”) issued by the Department of Telecom (“DoT”) under Section 4 of the Indian Telegraph Act, 1885 to Spice for the service areas of Punjab and Karnataka also stood transferred to it, accordingly, casting an obligation on DoT to merge existing licenses of Spice and Idea. DoT disagreed and stated that its prior approval was required, which was not obtained and hence sought an unwinding of the scheme of amalgamation order.
On 4th July 2011, the Hon’ble Judge modified the earlier order of sanction on grounds of non-disclosure and suppression of material facts by Idea at the time of filing of application for sanction of amalgamation scheme and held that the same amounted to playing a fraud upon the Court. It was held as held that sanction was in contravention of License Condition and Inter Service Area Merger Guidelines, 2008 (“Merger Guidelines”) but the recall of the entire order not being feasible, modified the earlier order to state that the licenses and spectrum owned by Spice for Punjab and Karnataka shall not stand transferred to Idea until prior permission of DoT is obtained. Both DoT and Idea, being aggrieved with different parts of the order filed appeals before the division bench of the Delhi High Court and the order passed therein sets out certain important principles governing the rights and limits of the authority of the court and the government in certain cases, as summarized in the following paragraphs.
Key Issues
Merger of a company distinct from merger of licenses
Sections 391-394 of the Companies Act, 1956 (the Act) set out the procedure and requirements for amalgamation of companies through the courts, whereas terms and conditions of UASL issued to companies are governed by the License Agreement and Merger Guidelines, accordingly, prior approval of DoT is necessary for the same. The court will sanction a scheme that is just, fair, reasonable and beneficial for the class affected by such commercial decisions. If approvals are required under separate statutes for completing the merger, the same needs to be obtained independently and cannot be assumed as automatic pursuant to a sanctioned scheme of amalgamation by a court. Any dispute between the DoT (Government) and a business entity regarding a license would be decided on the basis of the license agreement and the government policy and not by the order of the court sanctioning the merger. Consequently, sanction of a scheme of amalgamation is only for merging the company and not the licenses for which separate approval has to be obtained from the DoT.
Jurisdiction of TDSAT regarding transfer of licenses
The appropriate forum for deciding disputes as to whether overlapping licenses of Spice shall vest with Idea pursuant to amalgamation or stand transferred to the licensor, is an issue for the Telecom Disputes Settlement and Appellate Tribunal (“TDSAT”) to decide.
Effect of suppression of material facts
As per the License Agreement and Merger Guidelines, prior permission of DoT is a requirement for transfer/merger of licenses. Idea did not seek the approval of DoT for acquiring 41.09% in Spice and did not disclose this material information to the court, as required under the proviso to Section 391(2) of the Act, which mandates that the company or any other person, by whom an application for sanctioning is made, must disclose to the court “all material facts relating to the company”. The expression “such as” used before the examples given in the proviso show that the information is not exhaustive and other material facts are also to be supplied with an application seeking sanction of amalgamation scheme. This is further supported by the fact that the specific information is also suffixed by the words “and the like”. Thus, all material facts relating to the affairs of the company are to be disclosed.
The aforesaid suppression of material facts would have a bearing on the sanctioning of the scheme subject to certain conditions if the same had been disclosed, but it cannot be said that suppression amounts to playing a fraud requiring a revocation of the entire order sanctioning the scheme. The order of the company judge on fraud for suppression of facts was not upheld by the Division Bench of the Delhi High Court.
Conclusion
A merger of business entities does not necessarily imply an automatic/ consequent merger of all legal approvals/licenses held by the merging individual entities. Separate approvals would have to be obtained under the appropriate statute for successful completion of the merger as envisaged by the entities.
[The author is an Associate, Corporate Practice, Lakshmikumaran & Sridharan, New Delhi]
Mergers and amalgamations are an important tool for corporate strategy and structuring. On this subject, the division bench of the Delhi High Court ruled (13 July 2012) inter alia, in the case of Idea Cellular Limited v. Union of India (Company Appeal Nos. 42 & 67 of 2011) that amalgamation of companies and licenses held by the merging companies are entirely independent and the former need not necessarily lead to the latter.
Facts
On 5th February 2010, the Judge of the Delhi High Court sanctioned the scheme of amalgamation for Spice Communications Limited (“Spice”), a public listed company providing telecom services in Punjab and Karnataka to merge with Idea Cellular Limited (“Idea”). Idea contended that the Unified Access Service Licenses (“UASL”) issued by the Department of Telecom (“DoT”) under Section 4 of the Indian Telegraph Act, 1885 to Spice for the service areas of Punjab and Karnataka also stood transferred to it, accordingly, casting an obligation on DoT to merge existing licenses of Spice and Idea. DoT disagreed and stated that its prior approval was required, which was not obtained and hence sought an unwinding of the scheme of amalgamation order.
On 4th July 2011, the Hon’ble Judge modified the earlier order of sanction on grounds of non-disclosure and suppression of material facts by Idea at the time of filing of application for sanction of amalgamation scheme and held that the same amounted to playing a fraud upon the Court. It was held as held that sanction was in contravention of License Condition and Inter Service Area Merger Guidelines, 2008 (“Merger Guidelines”) but the recall of the entire order not being feasible, modified the earlier order to state that the licenses and spectrum owned by Spice for Punjab and Karnataka shall not stand transferred to Idea until prior permission of DoT is obtained. Both DoT and Idea, being aggrieved with different parts of the order filed appeals before the division bench of the Delhi High Court and the order passed therein sets out certain important principles governing the rights and limits of the authority of the court and the government in certain cases, as summarized in the following paragraphs.
Key Issues
Merger of a company distinct from merger of licenses
Sections 391-394 of the Companies Act, 1956 (the Act) set out the procedure and requirements for amalgamation of companies through the courts, whereas terms and conditions of UASL issued to companies are governed by the License Agreement and Merger Guidelines, accordingly, prior approval of DoT is necessary for the same. The court will sanction a scheme that is just, fair, reasonable and beneficial for the class affected by such commercial decisions. If approvals are required under separate statutes for completing the merger, the same needs to be obtained independently and cannot be assumed as automatic pursuant to a sanctioned scheme of amalgamation by a court. Any dispute between the DoT (Government) and a business entity regarding a license would be decided on the basis of the license agreement and the government policy and not by the order of the court sanctioning the merger. Consequently, sanction of a scheme of amalgamation is only for merging the company and not the licenses for which separate approval has to be obtained from the DoT.
Jurisdiction of TDSAT regarding transfer of licenses
The appropriate forum for deciding disputes as to whether overlapping licenses of Spice shall vest with Idea pursuant to amalgamation or stand transferred to the licensor, is an issue for the Telecom Disputes Settlement and Appellate Tribunal (“TDSAT”) to decide.
Effect of suppression of material facts
As per the License Agreement and Merger Guidelines, prior permission of DoT is a requirement for transfer/merger of licenses. Idea did not seek the approval of DoT for acquiring 41.09% in Spice and did not disclose this material information to the court, as required under the proviso to Section 391(2) of the Act, which mandates that the company or any other person, by whom an application for sanctioning is made, must disclose to the court “all material facts relating to the company”. The expression “such as” used before the examples given in the proviso show that the information is not exhaustive and other material facts are also to be supplied with an application seeking sanction of amalgamation scheme. This is further supported by the fact that the specific information is also suffixed by the words “and the like”. Thus, all material facts relating to the affairs of the company are to be disclosed.
The aforesaid suppression of material facts would have a bearing on the sanctioning of the scheme subject to certain conditions if the same had been disclosed, but it cannot be said that suppression amounts to playing a fraud requiring a revocation of the entire order sanctioning the scheme. The order of the company judge on fraud for suppression of facts was not upheld by the Division Bench of the Delhi High Court.
Conclusion
A merger of business entities does not necessarily imply an automatic/ consequent merger of all legal approvals/licenses held by the merging individual entities. Separate approvals would have to be obtained under the appropriate statute for successful completion of the merger as envisaged by the entities.
[The author is an Associate, Corporate Practice, Lakshmikumaran & Sridharan, New Delhi]