The landscape of merger and amalgamation (M&A) in Bangladesh is undergoing a transformation. While the Companies Act of 1994 provides a foundational framework, the intricacies of the process are often complex and require careful navigation. The primary objective of M&A is to consolidate businesses, enhance operational efficiency, and achieve strategic synergies. However, this process is not without its challenges. The court's role is primarily to ensure that the merger complies with the Companies Act and other relevant laws.
MERGER PROCESS: The merger process commences with the approval of both merging companies' Boards of Directors through special resolutions. Subsequently, separate general meetings are convened for shareholders and creditors of each company to obtain consent for the merger scheme. The transferee company, as part of the agreement, issues shares to the shareholders of the transferor company based on a predetermined exchange ratio. Depending on the nature of the merging companies, additional regulatory clearances may be necessary from authorities such as the Bangladesh Bank or the Insurance Commission. A joint petition is then filed with the Hon'ble Company Bench of Supreme Court of Bangladesh (Hereinafter "Court") seeking approval for the merger. Upon receiving the Court approval, the assets and liabilities of the transferor company are transferred to the transferee company, and the transferor company is dissolved without undergoing a formal winding-up process. The merged entity becomes responsible for all merger costs.
COURT INTERVENTION: The Court can impose conditions on M&A transactions to ensure fairness and transparency, especially when public interest is involved. These conditions may include restrictions on foreign ownership, dividend repatriation, and other relevant factors. The Court's intervention ensures that the merger benefits all stakeholders, including shareholders, creditors, employees, and consumers.
PROTECTING SHAREHOLDERS AND THE MARKET: The Court may impose restrictions on directors' ability to sell their shares after the merger, preventing them from profiting from insider information. Additionally, the court may require directors to maintain a minimum ownership stake in the merged entity, ensuring their continued commitment to its success. In a leading case, the Court imposed a restriction that directors of the amalgamated company cannot sell their shares for one year and, after that, cannot sell them above the Net Asset Value ( NAV) per share for two years. The court also directed that directors must hold at least 30 per cent of the amalgamated company's shares.
EMPLOYEE RIGHTS AND WELL-BEING: Employee transfer may be part of the merger scheme but requires Court approval. Existing pension rights should be honoured or equivalent rights provided to transferred employees. The Court may mandate the transfer of existing pension rights or the provision of equivalent benefits to employees who transition to the surviving entity. In one leading case the Court mandated the establishment of a voluntary retirement scheme (VRS) for employees, ensuring their fair treatment during the transition. The Hindustan Lever Employees' Union case reported in AIR 1995 SC 470 was cited to argue that the court has a role in protecting employees' interests during mergers, which lead to creation of a unified pension/gratuity/benevolent fund. The court may even require the creation of voluntary retirement schemes to ensure a smooth and fair transition for affected employees.
PUBLIC INTEREST AND CONSUMER WELFARE: The Court attaches importance to protecting public interest and consumer rights during the merger process. The court prioritises public interest by directing the merged entity to comply with specific conditions set by relevant regulatory bodies. This might include ensuring adherence to consumer protection regulations or mitigating the impact on the workforce. The Court also plays a role in ensuring fair competition by considering the potential anti-competitive effects of a merger. In Robi Axiata Limited and Ors. case reported in 22 BLC(2017) 337, 2016 36 BLD 599, the Court directed the merged entity to comply with specific conditions set by the Bangladesh Telecommunication Regulatory Commission (BTRC) and the Ministry of Posts, Telecommunications and Information Technology (MOPT). It establishes a framework for evaluating such mergers, considering factors such as consumer welfare and the impact on the workforce.
ACCOUNTABILITY AND COMPLIANCE: The Court's directives extend beyond the initial merger process. It may hold relevant authorities accountable for ensuring compliance with its orders. Additionally, the court may order investigations into the valuation process or tax compliance of the merging companies' directors. In a leading case the Court directed the Bangladesh Securities and Exchange Commission, Central Depository of Bangladesh, Dhaka Stock Exchange, and Chittagong Stock Exchange to ensure compliance with the Court's order.
VALUATION AND TRANSPARENCY: The Court's role in M&A is complex, requiring a careful balancing act between the interests of various stakeholders. A fair valuation of the assets and liabilities of both institutions is crucial. The valuation method should be transparent and acceptable to ensure a fairer valuation process to protect public shareholders from potential market manipulation by dominant shareholders. In one leading case, the Court acknowledged that relying solely on market price is not ideal, especially in volatile markets like Bangladesh. It emphasised the importance of considering factors like past share prices, dividend cover, and growth prospects, as outlined in the Hindustan Lever Employees' Union case. The Court directed that the Financial Reporting Council (FRC) will investigate the valuation process, and the National Board of Revenue (NBR) will investigate the tax compliance of the transferor company's directors. The Court may even appoint an independent auditor to determine a revised share exchange ratio that reflects the true value of the merging companies.
NAVIGATING TAX ISSUES: The merger process can have significant tax implications. Capital Gains Tax may be levied on the transfer of assets and shares. Additionally, Stamp Duty is payable on the transfer of shares and property. Corporate Tax can also be affected, particularly in terms of carrying forward losses and tax deductions. The Court may hold that the provisions of the Companies Act permit the transfer of tax benefits associated with specific power generation undertakings of the transferor companies. However, these benefits will be limited to the transferred undertakings and will not extend to the entire amalgamated entity.
FOREX REGULATIONS: Foreign exchange regulations can significantly impact M&A transactions, especially those involving foreign investors. These regulations govern the inflow and outflow of foreign currency, and non-compliance can lead to legal and financial consequences. For instance, foreign investors may need to obtain specific approvals from the Bangladesh Bank for certain types of foreign exchange transactions related to the M&A deal. These approvals may include permission to repatriate funds, to acquire shares in Bangladeshi companies, or to make foreign currency payments.
ANTI-TRUST & COMPETITION: The Competition Act 2012 plays a crucial role in safeguarding competition in the Bangladeshi market by regulating mergers and acquisitions. This Act empowers the Competition Commission to review and approve or reject mergers that may harm competition. To ensure fair market practices, the Commission assesses factors such as market definition, market power, barriers to entry, and potential impact on consumer welfare. By complying with the provisions of the Competition Act, businesses can navigate the M&A landscape more effectively and avoid potential legal and financial consequences.
Section 21 of the Act prohibits "combinations" that may have an adverse effect on competition. Mergers can be considered a type of combination. Therefore, while there is no explicit requirement for prior approval, it is advisable for companies contemplating a merger to consult with the BCC to assess potential antitrust concerns and avoid potential legal issues.
SECTOR SPECIFIC MERGER PROCESS: There are additional prior approvals required for a few sectors. For example, the merging banks must seek prior approval from the Bangladesh Bank. The central bank will assess the proposed merger based on various factors, including financial health, regulatory compliance, potential impact on the banking system, and the interests of depositors and other stakeholders based on Bank Company Act 1991, Bank Akotrikoron Nitimala 2024 and Guidelines for Merger/Amalgamation of Banks/Financial Institutions 2004. A certificate from the Bangladesh Bank verifying its approval of the merger is required. Both banks' shareholders and creditors must approve the merger scheme. The acquiring bank may have to absorb the losses of the weaker bank.
The merging banks must develop a comprehensive integration plan to ensure a smooth transition. The interests of customers, including depositors, borrowers, and other stakeholders, should be protected during the merger process. The Bangladesh Bank may provide financial support to the merged entity to facilitate the integration process. The central bank may force weak banks to merge with stronger ones if they fail to improve their financial performance.
CONCLUSION: While M&A activity is growing in Bangladesh, the legal framework remains underdeveloped. Reforms are needed to address gaps and facilitate efficient public M&A transactions. The merged entity should have a clear strategy for achieving synergies and improving operational efficiency. In the banking sector, the forced nature of the mergers has raised concerns about the rights of shareholders and the autonomy of banks. There are concerns about the long-term viability of the merged entities, especially given the forced nature of the mergers. Experts fear that merging weak banks with stronger ones could drag down the performance of the healthier institutions. The process has been criticised for not adhering to international best practices for bank mergers and acquisitions. The process has also been criticised for its lack of transparency. Decisions were made in closed-door meetings, and some bank executives were unaware of the merger plans until they were publicly announced.
The Competition Commission (CC) is not yet fully operational, creating a regulatory landscape with some gaps. Notably, there's the absence of a specific legal framework to shield friendly deals from hostile takeovers. Furthermore, the process lacks clear notification thresholds for antitrust review, potentially leading to uncertainty for businesses. While no explicit foreign ownership restrictions have been identified, a robust and transparent regulatory environment, including clear guidelines for mergers and acquisitions, is crucial for fostering a competitive and investor-friendly market.
Mohammed Forrukh Rahman, Head of Chambers, Rahman's Chambers; Barrister-at-Law, Advocate, Appellate Division, Supreme Court of Bangladesh. www.rahmansc.com
© 2025 - All Rights with The Financial Express
