CS Professional · Corporate Restructuring, Valuation and Insolvency

Acquisition of Company or Business: formula sheet

Full chapter guide

Key formulas

Share purchase: core rule: Buyer gets shares; target company continues; liabilities stay in target; The buyer takes the company as it is, including hidden liabilities. This is why due diligence matters.
Asset or business purchase: core rule: Buyer gets chosen assets or undertaking; seller company continues; liabilities move only as agreed; Money goes to the seller company. Transfer of each asset or contract may need separate steps.
Section 186(2) investment limit: Loans + guarantees/security + acquisition of securities ≤ higher of (60% of paid-up share capital, free reserves and securities premium) or (100% of free reserves and securities premium); Beyond this limit, Section 186(3) needs prior authorisation by a special resolution in a general meeting. The proviso exempts loans, guarantees or security to a wholly owned subsidiary or joint venture company, and acquisition by a holding company of securities of its wholly owned subsidiary.
Section 186(1) layers rule: Investment through not more than two layers of investment companies; Unless otherwise prescribed. Provisos protect acquisition of a foreign company with deeper layers under its local law, and subsidiaries required to have investment subsidiaries by law.
Section 186(5) approval: Board resolution at a meeting with consent of all directors present; Prior approval of the public financial institution is also needed where a term loan is subsisting, subject to the proviso.
Section 240: Liability of officers in default of the transferor company for pre-merger, pre-amalgamation or pre-acquisition offences under the Act continues; Applies notwithstanding any other law.
Section 186(2) investment limit: Limit = higher of (60% × [paid-up share capital + free reserves + securities premium]) and (100% × [free reserves + securities premium]); Covers loans, guarantees, security and acquisition of securities of other bodies corporate. Beyond this limit, a special resolution in general meeting is needed under Section 186(3).
Section 186(3) exemption: Special resolution not needed for loan, guarantee or security to a wholly owned subsidiary or joint venture company, or acquisition of securities of its wholly owned subsidiary by a holding company; Details must still be disclosed in the financial statements under Section 186(4).
Section 186(5) board approval: Board resolution passed at a meeting with the consent of all directors present; Prior approval of the public financial institution is also needed where a term loan is subsisting, subject to the proviso.
Section 186(13) penalty: Company: fine ₹25,000 to ₹5,00,000. Officer in default: up to 2 years' imprisonment and fine ₹25,000 to ₹1,00,000; Applies to contravention of Section 186.
Due diligence types: Financial + Legal + Commercial (+ tax, operational, HR, environmental, IT); A memory frame for answers. Link each type to the risk it covers.
Limit under Section 186(2): Limit = higher of (60% × (Paid-up capital + Free reserves + Securities premium)) and (100% × (Free reserves + Securities premium)); Compare both figures and take the larger. Test the aggregate of existing and proposed loans, guarantees, security and investments against it.
Approval test: Existing + Proposed ≤ Limit → Board resolution; Existing + Proposed > Limit → special resolution in general meeting; Board resolution needs consent of all directors present at the meeting. Sub-section (3) requires prior special resolution when the limit is exceeded.
Layers of investment: Investment through not more than two layers of investment companies; Sub-section (1). Not affected for acquiring a foreign company with deeper layers under its laws, or a subsidiary with an investment subsidiary needed to meet a legal requirement.
Interest floor: Rate of interest ≥ prevailing yield of 1, 3, 5 or 10 year Government Security closest to the tenor of the loan; Sub-section (7), applies to loans given.
Penalty: Company: fine ₹25,000 to ₹5,00,000. Officer in default: imprisonment up to 2 years and fine ₹25,000 to ₹1,00,000; Sub-section (13).
Investment limit under Section 186(2): Limit = higher of (60% × [paid-up share capital + free reserves + securities premium]) and (100% × [free reserves + securities premium]); Apply to the aggregate of loans, guarantees, security and investments, including the proposed one.
When a special resolution is needed: Existing aggregate + proposed amount > limit ⇒ special resolution in general meeting (Section 186(3)); Not required for loans, guarantees or security to a wholly owned subsidiary or joint venture company, or for a holding company acquiring securities of its wholly owned subsidiary. Disclosure still applies.
Layers of investment: Not more than two layers of investment companies (Section 186(1)); Unless otherwise prescribed. Exceptions: foreign target with deeper layers under its law; subsidiary's investment subsidiary required by law.
Board approval: Board meeting resolution with consent of all directors present (Section 186(5)); Prior approval of the public financial institution is needed where a term loan subsists, unless within the limit and no default.
Rate of interest on loans: Not lower than the prevailing yield of the 1, 3, 5 or 10 year Government Security closest to the loan tenor (Section 186(7)); Applies to loans, not to share purchases.
Default bar: Company in default on deposits or interest ⇒ no loan, guarantee, security or acquisition till default subsists (Section 186(8)); Check this before any acquisition.
Penalty (Section 186(13)): Company: fine ₹25,000 to ₹5,00,000. Officer in default: up to 2 years' imprisonment and fine ₹25,000 to ₹1,00,000; State both limbs.
Undertaking test (section 180, Explanation): Investment > 20% of net worth (preceding year's audited balance sheet) OR undertaking generates 20% of total income (previous year); If either limb is met, the unit is an undertaking for the approval rule in section 180(1)(a).
Substantially the whole (section 180, Explanation): Value of part sold ÷ value of the undertaking (audited balance sheet, preceding year) ≥ 20%; Test it against the value of the undertaking, not the whole company.
Approval for sale of undertaking (section 180(1)(a)): Board resolution + special resolution of members; A special resolution needs not less than three times as many votes for as against.
Net worth for slump sale tax: Net worth = Value of total assets − Value of liabilities; Depreciable assets at tax written-down value; other assets at book value, ignoring revaluation. Check the exact rule in the slump sale provision of the Income-tax Act, 2025, which applies from the June 2027 session.
Capital gain on slump sale: Gain = Lump sum consideration − Net worth; Under the Income-tax Act, 2025, the gain is long-term only if the undertaking was held for more than 36 months. Confirm the holding period and the net worth rule in the slump sale provision of that Act.
Squeeze-out threshold, section 236: Acquirer or persons acting in concert holding ≥ 90% of issued equity share capital; Applies to share acquisitions only, not to asset deals.
Borrowing limit trigger (section 180(1)(c)): Special resolution needed if: money to be borrowed + money already borrowed > paid-up share capital + free reserves + securities premium; Temporary loans from bankers in the ordinary course of business are left out. Temporary loans are repayable on demand or within six months, and do not include loans for capital expenditure.
Resolution content (section 180(2)): Special resolution must specify the total amount up to which the Board may borrow; A resolution without the amount ceiling is defective.
Excess borrowing (section 180(5)): Debt above the limit is invalid unless the lender proves it lent in good faith and without knowledge of the breach; The burden of proof is on the lender.
Squeeze-out threshold (section 236(1)): Acquirer or persons acting in concert hold ≥ 90% of issued equity share capital → must notify the company of intention to buy the remaining equity shares; Price is based on valuation by a registered valuer. The acquirer must deposit the amount in a separate bank account of the company whose shares are being transferred, for at least one year, and disbursement must be made within sixty days (section 236(4)).
Share swap entitlement: New shares issued = Target shares held × Swap ratio; Swap ratio = Value per target share ÷ Value per acquirer share, both from a fair valuation. Round or settle fractions as the scheme provides.

Quick revision

Two routes: acquire shares (control of the company) or acquire a business or undertaking (assets and liabilities).
Due diligence tests the target before price and structure are fixed.
Section 186(2) limit: 60% of paid-up share capital, free reserves and securities premium, or 100% of free reserves and securities premium, whichever is more.
Section 186(3): if the total goes past the limit, a special resolution in general meeting is needed beforehand.
The special resolution is not needed for a loan, guarantee or security to a wholly owned subsidiary or joint venture, or for a holding company buying securities of its wholly owned subsidiary, but the details must be disclosed.
Section 186(5): the Board resolution needs the consent of all directors present, and prior approval of the public financial institution where a term loan is subsisting, subject to the proviso.
Section 186(7): no loan below the prevailing government security yield of the closest tenor.
Section 186(8): no loan, guarantee, security or acquisition while the company is in default on deposits or interest.
Section 186(9) and (10): keep a register at the registered office, open to inspection by members.
Section 186(13): the company faces a fine of ₹25,000 to ₹5,00,000. Officers in default face up to two years' imprisonment and a fine of ₹25,000 to ₹1,00,000.
Section 62(1)(c): a preferential issue to any persons needs a special resolution and a registered valuer's report on price.
Section 186(1): investment through not more than two layers of investment companies, unless otherwise prescribed.

Common mistakes

Treating acquisition and merger as the same thing. Fix: Say that in a merger the transferor usually dissolves under a scheme, while in an acquisition the target usually survives as a separate company.
Saying that in a share purchase the target's assets are transferred. Fix: Write that only shares change hands. The company still owns its assets and owes its liabilities.
Writing due diligence as only a financial audit of the target. Fix: Always cover legal and commercial reviews as well. Add at least one extra review that fits the facts, such as tax, labour or environmental.
Listing types of due diligence without linking them to risks. Fix: For every type, write what is checked and what loss it prevents, for example title checks prevent buying assets the seller does not own.
Using only 60% of capital and reserves, or only 100% of free reserves. Fix: Always compute both limbs and take the higher figure.
Testing only the new investment against the limit. Fix: Add loans, investments, guarantees and security already made. The limit applies to the aggregate.
Using only the 60% limit. Fix: Always compute both limits and take the higher.
Counting only the new investment against the limit. Fix: Add all earlier loans, investments, guarantees and security as well.
Calling a deal a slump sale although separate values are assigned to assets. Fix: Look for a lump sum with no item-wise values. Item-wise values mean itemised sale.
Applying the 20% tests to the whole company instead of the undertaking. Fix: First test whether the unit is an undertaking (net worth or income test). Then test the part sold against the undertaking's value.

Exam tips

Start with a one-line definition and the two modes. Examiners reward a clear base before the analysis.
Use a short comparison for acquisition versus merger: survival of the target, scheme, dissolution, consideration payee.
In case facts, always name the mode first, then apply Section 186 to the acquirer. Show the limit calculation if numbers are given.
Quote Section 186 numbers carefully: limit in (2), special resolution in (3), Board consent in (5), register in (9).
End with practical advice, such as due diligence, indemnities and the transfer steps, since the paper values drafting and compliance points.
Structure every case answer as provision, analysis, conclusion. Name the type of due diligence and tie it to a fact in the question.
If the buyer is a company, always test Section 186. Show the two-limb calculation and pick the higher figure.
Mention the practical drafting outputs: NDA, MOU or letter of intent, due diligence report, share purchase or business transfer agreement with warranties and indemnities.