The terms ‘merger’, ‘amalgamation’, and ‘acquisition’ are often used interchangeably to denote the situation where two or more companies, keeping in view their long term business interest, combine into one economic entity to share risks and financial reward. However, in strict sense, merger is used for the fusion of two companies to achieve expansion and diversification. Amalgamation is an arrangement for bringing the assets of two companies under the control of one company, which may or may not be one of the original two companies. Amalgamation signifies the transfer of all or some part of the assets and liabilities of one or more existing business entities to another existing or new company.

There has been an issue from a long time that whether there is any difference between merger and amalgamation.

As per law, the word “amalgamation” or “merger” is not defined in the companies Act, 2013. Though, the word “merger and amalgamation” is used and section 232 of the Act talks about the merger and amalgamation of companies. However, Section 2(1B) of the Income tax Act, 1961 defines “Amalgamation”

Section 2(1B) “Amalgamation”, in relation to companies, means the merger of one or more companies with another company or the merger of two or more companies to form one company (the company or companies which so merge being referred to as the amalgamating company or companies and the company with which they merge or which is formed as a result of the merger, as the amalgamated company) in such a manner that—

• all the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation ;
• all the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation ;
• Shareholders holding not less than [three-fourths] in value of the shares in the amalgamating company or companies (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,

However, the following two activities shall NOT be considered as amalgamation or merger-

1. The acquisition of the property of one company by another company pursuant to the purchase of such property by the other company, or
2. The distribution of such property to the other company after the winding up of the firstmentioned company.

As per the opening phrase of the definition given above, “amalgamation means merger” and the company/companies which merges are referred to as the amalgamating company/companies and the company with which they merges or which is formed as a result of the merger, is referred to as the amalgamated company.

As per Accounting standard- 14 recognizes two types of Amalgamation:-

• Amalgamation in the nature of merger: -A mode by which one company acquires another company’s asset and liabilities in such a manner that, the equity shareholders of the combining entities continue to have a proportionate share in the equity of the combined entity.
• Amalgamation in the nature of purchase: – A mode by which one company acquires another company and hence, the equity shareholders of the combining entities do not continue to have a proportionate share in the equity of the combined entity or the business of the acquired company is not intended to continued after amalgamation.

In The Commissioner of Income Tax, Delhi v. M/S D.C.M. Limited, ITR Nos. 87-89/1992

The term merger or amalgamation has no precise legal meaning but it involves blending of two or more existing undertaking into one. In case of merger, there is complete blending of the merged undertaking into the other company, but this does result in the transfer of the assets from the merged undertaking. Assets are acquired by the other undertaking. Upon merger, the ‘earlier concern’ or undertaking loses its identity and the ownership in the asset.

Mergers or amalgamation, result in the combination of two or more companies into one, wherein the merging entities lose their identities. No fresh investment is made through this process. However, an exchange of shares takes place between the entities involved in such a process. Generally, the company that survives is the buyer which retains its identity and the seller company is extinguished.

In Saraswati Industrial Syndicate Limited v. Commissioner of Income Tax, (1990) 186 ITR (SC)

When the question was referred to the High Court, the court was of the view that in the amalgamation of the two companies, neither of them ceased to exist, instead both the companies continued their entities in a blended form and the amalgamated company was successor-in-interest of the amalgamating company.

Two companies may join to form a new company, but there may be absorption or blending of one by the other, both amounts to amalgamation. When two companies are merged and are so joined, as to form a third company or one is absorbed into the other or blended with another, the amalgamating company loses its entity.

After the amalgamation of two companies the transferor company ceased to have any entity and  the amalgamated company acquired a new status and it was not possible to treat the two companies as partners or jointly  liable in respect of their liabilities and assets.

In M/s. General Radio and Appliances Co. Ltd. & Ors. v. M.A. Khader, [1986] 2 S.C.C. 656

The Supreme Court held that the High Court was in error in holding that even after amalgamation of two companies, the transferor company did not become non-existent instead it continued its entity in a blended form with the appellant company. The High Court’s view that on amalgamation ‘there is no complete destruction of corporate personality of the transferor company instead there is a blending of the corporate personality of one with another corporate body and it continues as such with the other is not sustainable in law. 

The Supreme Court is of the view that the true effect and character of the amalgamation largely depends on the terms of the scheme of merger. But there can be no doubt that when two companies amalgamate and merge into one, the transferor company loses its entity as it ceases to have its business. However, their respective rights or liabilities are determined under the scheme of amalgamation but the corporate entity of the transferor company ceases to exist with effect from the date the amalgamation is made effective. Two companies may join to form a new company, but there may be absorption or blending of one by the other, both amounts to amalgamation. When two companies are merged and are so joined, as to form a third company or one is absorbed into one or blended with another, the amalgamating company loses its legal entity.

Merger is the whole of which amalgamations is a part. “When companies coalesce or firms unite in some form, the result is variously described as an ‘absorption’, ‘amalgamation’, ‘formation’, ‘fusion’, ‘merger’, or ‘takeover’. Although the word amalgamation is commonly used by businessmen, of recent, the word ‘merger’ has been preferred because it covers a wide range of ways and means by which the union is achieved”.

By MEHR KAUR