Shareholding company's role in the merger of the company in which it holds shares

Facts- Companies A and B are going to merge. Sec 230 (6) along with Sec 232 of the Companies Act 2013 (‘Act’) requires the consent of a minimum of 75% of its shareholders in case of a merger. So, Company A needs the consent of both its shareholders which are companies X and Y as they hold 50% of the shares each. Again, Company Y is a joint venture held by L and P. In Company L’s Board of Directors (BoD) Company B has majority nomination. Issue- Whether Company Y can give its consent through its Board of Directors or does it also need the consent of its shareholders which are companies L and P?

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  • The issue revolves around whether Company Y, being a joint venture held by L and P, can provide consent to the merger of Company A and Company B through its Board of Directors, or whether it requires the consent of its shareholders (L and P).
    Analysis:
    Section 230(6) and 232 of the Companies Act, 2013:
    These sections mandate a minimum of 75% consent of shareholders for any arrangement, including mergers.
    Company A must seek consent from its shareholders, i.e., X and Y, since they each hold 50% shares in A.
    Company Y’s Role:
    Since Company Y holds shares in Company A, it needs to give consent for the merger.
    The question arises about how Company Y should provide its consent—whether through its Board of Directors or by obtaining approval from its own shareholders (L and P).
    Authority of Board of Directors in a Joint Venture:
    Generally, the Board of Directors is empowered to make decisions unless the Articles of Association (AoA) or Shareholders’ Agreement (SHA) require shareholder approval for specific matters.
    In the absence of any restrictive clause in the AoA or SHA, the Board of Directors of Company Y would typically be authorized to make decisions, including consenting to the merger.
    Influence of Company L’s Board:
    Since Company L’s Board of Directors includes majority nominations from Company B, there could be a conflict of interest.
    However, unless there is a stipulation in the joint venture agreement or other legal documents that requires shareholder consent (L and P), the consent could technically be given by Company Y’s Board of Directors.
    Shareholder Approval of Company Y:
    If the AoA or SHA of Company Y stipulates that major decisions (such as mergers involving significant investments) need approval from the shareholders (L and P), then Company Y would also need to seek approval from its shareholders.
    If no such provision exists, the Board of Directors of Company Y can act independently to give consent.
    Conclusion:
    If the Articles of Association or Shareholders’ Agreement of Company Y require shareholder consent for significant decisions, Company Y will need approval from both L and P to provide consent for the merger of A and B.
    If no such restriction exists, the Board of Directors of Company Y can provide consent on its own.
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