Amalgamation

What is 'Amalgamation'

Amalgamation is the combination of one or more companies into a new entity. An amalgamation is distinct from a merger because neither of the combining companies survives as a legal entity; a completely new entity is formed to house the combined assets and liabilities of both companies. This sense of the term amalgamation has generally fallen out of popular use, and the terms "merger" or "consolidation" are often used instead.

BREAKING DOWN 'Amalgamation'

Amalgamation is more common in countries such as India than in the United States. Amalgamation typically happens between two or more companies engaged in the same line of business or having some similarity in operations. The companies may combine for diversification of activities or expansion of services. The transferor company, or weaker company, is absorbed into the transferee company, or stronger company, forming an entirely different company.

Types of Amalgamation

An amalgamation in the nature of a merger pools the companies’ assets and liabilities as well as the shareholders’ interests and the business of the companies. All assets of the transferor company become that of the transferee company. The business of the transferor company is carried on after the amalgamation. No adjustments are made to book values. Shareholders of the transferor company holding a minimum of 90% face value of equity shares become shareholders of the transferee company.

An amalgamation in the nature of purchase occurs when conditions for amalgamation in the nature of merger are not met. One company is acquired by another, and shareholders of the transferor company do not continue having proportionate share in the equity of the combined company or the business of the transferor company is not intended to continue. If the purchase consideration exceeds the net asset value (NAV), the excess amount is recorded as goodwill; if not, it is recorded as capital reserves.

Reasons to Amalgamate

Amalgamation is done as a method of acquiring cash resources, eliminating competition, saving on taxes or influencing the economies of large-scale operations. Amalgamation increases shareholders’ value, reduces risk by diversification, improves managerial effectiveness and helps achieve company growth and financial gain.

Amalgamation Procedure

An amalgamation’s terms are finalized by the companies’ board of directors. The scheme is prepared and submitted to the High Court for approval. The High Court and Securities and Exchange Board of India (SEBI) approve the shareholders of the new company. The new company officially becomes an entity and issues shares to shareholders of the transferor company. The transferor company is liquidated, and all assets and liabilities are taken over by the transferee company.

Example of Amalgamation

In November 2015, drug firm Natco Pharma received shareholders’ approval for amalgamation of its subsidiary Natco Organics Ltd. into the company. Consolidated results of postal ballots and e-voting showed the resolution passed with 99.94% of votes in favor, 0.02% opposed and 0.04% invalid.

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