Process of M&A Transactions: formula sheet

Key formulas

Sequence of stages

Strategy → Target identification → Approach and MOU → Due diligence and valuation → Structuring and negotiation → Definitive documents → Approvals → Closing → Integration

Use this as the skeleton of every answer. Real deals overlap some stages, but this order is the standard exam sequence.

Related party contract (section 188)

Board consent by resolution at a meeting; prior approval of the company by resolution where prescribed limits are crossed; related-party members do not vote

The ordinary-course exemption applies only if the transaction is on an arm's length basis. Exact limits are set by rules, so state them only if you are sure.

Ratification of unapproved related party contract (section 188(3))

Ratify within 3 months of the contract, else voidable at the option of the Board or shareholders

If the contract is with a related party of a director, or authorised by another director, the directors concerned indemnify the company for loss.

Penalty under section 188(5)

Listed company: ₹25,00,000; any other company: ₹5,00,000

Applies to a director or employee who entered into or authorised the contract in violation of the section.

Officer liability after merger (section 240)

Liability of officers in default of the transferor company for pre-merger offences under the Act continues after the merger

A merger does not wipe out past offences.

Purpose of due diligence

Verify facts + identify risks + adjust price and terms

Use this as the one-line frame for any answer.

Four main types

Financial + Legal + Tax + Commercial

Add operational, HR, environmental, IT and IP reviews only if the facts suggest them.

Financial vs legal

Financial = reliability of numbers and value; Legal = ownership, validity and liabilities

This is the usual comparison question.

Outcome of findings

Red flag → price cut, indemnity, warranty, condition precedent or exit

Always link each finding to a deal response.

Section 234(2) consideration

Foreign company may merge into an Indian company (or vice versa) with prior RBI approval; consideration = cash, Depository Receipts, or part cash and part Depository Receipts

Subject to any other law in force. 'Foreign company' means any company or body corporate incorporated outside India, whether or not it has a place of business in India.

Section 236(1): 90% trigger

Acquirer (or persons acting in concert) holds 90% or more of issued equity share capital → must notify the company of intention to buy the remaining equity shares

Applies whether the 90% arises by amalgamation, share exchange, conversion of securities or any other reason.

Section 236(2) and (4): price and deposit

Price = registered valuer's valuation as per prescribed rules; majority deposits the value of shares in a separate bank account operated by the company whose shares are transferred, for at least one year; disbursement within 60 days

Disbursement continues for one year for those not paid or who fail to claim within 60 days.

Section 236(8): sharing of higher price

Minority holders of 75% or more negotiate a higher price for a transfer without disclosing it → majority shares the additional compensation pro rata

Applies where shares were acquired under section 236 and the negotiation happened on or before the date of transfer.

Section 117: filing resolutions

Copy of special resolution (and other listed resolutions or agreements) to be filed with Registrar within 30 days of passing or making

Relevant when the deal needs a special resolution, such as alteration of articles in the deal.

Share exchange ratio

Swap ratio = Value per share of transferor ÷ Value per share of transferee

Gives the number of transferee shares issued for each transferor share. Both values must be computed on the same basis and the same date.

Number of shares to be issued

New shares = Transferor shares held × Swap ratio

Apply to the total shares of the transferor, or to one holder's shares. Fractions are usually settled in cash or as the scheme provides.

Net asset value per share

NAV per share = (Total assets − Outside liabilities) ÷ Number of equity shares

Outside liabilities include preference capital where it ranks ahead of equity. Use fair values if the question gives them.

Capitalised earnings value

Value = Maintainable profit ÷ Capitalisation rate

Use profit after tax available to equity holders. Use the rate given in the question.

Weighted average value per share

Weighted value = Σ (Value by method × Weight) ÷ Σ Weights

Use the same weights for both companies unless the question says otherwise.

Valuer's interest bar (Section 247(2)(d))

No valuation of an asset in which the valuer has a direct or indirect interest, during 3 years before appointment or 3 years after the valuation

Say it in these words when asked about independence.

Penalty on valuer (Section 247(3))

Fine ₹25,000 to ₹1,00,000; if intent to defraud: up to 1 year imprisonment and fine ₹1,00,000 to ₹5,00,000

On conviction, the valuer must also refund remuneration and pay damages (Section 247(4)).

Board consent rule

Related party contract in the seven listed categories → Board resolution at a meeting, before entering the contract

Subject to prescribed conditions. The consent must be by resolution at a meeting, not by circulation, as the section reads.

Shareholder approval rule

Paid-up capital or transaction value ≥ prescribed limit → prior approval of the company by resolution

The prescribed limits come from the Rules. Do not quote figures unless you are sure of them. Related-party members cannot vote.

Voting bar

Member who is a related party → cannot vote on the resolution

Exception: company in which 90% or more members, in number, are relatives of promoters or related parties.

Ordinary course exemption

Ordinary course of business AND arm's length basis → Section 188(1) does not apply

Both limbs are needed. Failing the arm's length test removes the exemption.

Holding-wholly owned subsidiary relief

Holding company and wholly owned subsidiary, accounts consolidated and placed before shareholders → no shareholder resolution needed

This relieves only the shareholder resolution requirement under the first proviso.

Disclosure

Every contract under Section 188(1) → refer in Board's report with justification

Section 188(2).

Ratification

No Board consent or shareholder approval + not ratified within 3 months → voidable

Voidable at the option of the Board or the shareholders, as the case may be. Section 188(3). Directors concerned indemnify the company if the contract is with a related party of any director or authorised by another director.

Penalty

Listed company: ₹25 lakh. Any other company: ₹5 lakh

Applies to a director or any other employee who entered into or authorised the contract in violation. Section 188(5).

Tribunal route for merger

Application under s.230 → Tribunal orders meetings → circulation of s.232(2) documents → Tribunal sanction under s.232(3)

Section 232 applies where the scheme is for merger or amalgamation of two or more companies, or division.

Documents to circulate for the meeting (s.232(2))

Draft scheme + proof of filing with Registrar + directors' report + expert valuation report, if any + supplementary accounting statement if needed

The supplementary statement is needed if the last annual accounts relate to a year ending more than six months before the first meeting.

Auditor's certificate

No sanction without auditor's certificate on accounting treatment under s.133 standards

Proviso to s.232(3). It must be filed with the Tribunal.

Filing of order with Registrar

Certified copy of order → Registrar within 30 days of receipt (s.232(5))

Default attracts a penalty of ₹20,000 on the company and each officer in default, plus ₹1,000 per day of continuing default, capped at ₹3,00,000 (s.232(8)).

Appointed date

Scheme must state an appointed date and is effective from it, not from a later date (s.232(6))

Do not confuse it with the effective date on which the order is filed.

Annual compliance statement

Until the scheme is complete, file a yearly statement certified by a CA, CMA or CS in practice (s.232(7))

It says whether the scheme is being complied with as per the Tribunal's orders.

Foreign company merger (s.234)

Prior RBI approval; consideration in cash, Depository Receipts or partly each

Applies for companies of countries notified by the Central Government.

Synergy value

Synergy = Value of combined firm − (Value of acquirer + Value of target)

A deal creates value only if integration actually delivers this positive amount, net of integration costs.

Effect of registered fast-track scheme (section 233(9))

Property and liabilities, charges, and pending proceedings of the transferor pass to the transferee

The transferor is dissolved without winding-up on registration of the scheme (section 233(8)).

Cancellation of own shares (section 233(10))

Transferee must not hold shares in its own name or through a trust; such shares are cancelled or extinguished

Applies to shares held by the transferee, its subsidiary or associate through such holding, on merger.

Revised authorised capital (section 233(11))

Application to Registrar with registered scheme + fees on revised capital − fees already paid by transferor

A post-closing compliance step for the transferee company.

Officers' liability (section 240)

Liability of officers in default of the transferor for pre-merger offences continues after merger

Applies to offences under the Companies Act, 2013.

Quick revision

• Deal sequence: planning and target search, due diligence, structuring and documentation, valuation and pricing, approvals, closing, integration.
• Due diligence findings can change the price, the structure or the decision to proceed.
• Section 188 covers contracts with related parties for sale, purchase or supply of goods, property dealings, leasing, services, agents, office or place of profit, and underwriting.
• Under Section 188(1), Board consent by a resolution at a meeting is needed, and larger transactions as prescribed need prior approval of the company by a resolution.
• A member who is a related party cannot vote on that resolution. This does not apply to a company where 90% or more members, in number, are relatives of promoters or related parties.
• Section 188 does not apply to ordinary-course transactions, but only if they are on an arm's length basis.
• The holding company and wholly owned subsidiary exception applies where accounts are consolidated and placed before shareholders at the general meeting for approval.
• If a director or other employee enters into a contract without Board consent or approval by a resolution, and the Board or shareholders do not ratify it within three months, it is voidable at the option of the Board or shareholders. The directors concerned must indemnify the company against loss only where the contract is with a related party to any director or is authorised by any other director.
• Penalty under Section 188(5): the director or employee who entered into or authorised the contract is liable to a penalty of ₹25,00,000 if the company is listed, or ₹5,00,000 if it is any other company.
• Section 177(4)(iv): the Audit Committee approves related party transactions and may give omnibus approval, subject to prescribed conditions.
• Section 247: valuation under the Act is by a registered valuer appointed by the Audit Committee, or by the Board if there is none. The valuer must be impartial and cannot value assets in which they have an interest within three years before appointment or after the valuation.
• A valuer who contravenes Section 247 faces a fine of ₹25,000 to ₹1,00,000. With intent to defraud, imprisonment up to one year and a fine of ₹1,00,000 to ₹5,00,000.

Common mistakes

• Treating M&A as only the legal approval stage (Tribunal and filings). Fix: Always start from strategy and target selection and end with integration. Show the legal steps as part of the full chain.
• Putting due diligence after signing the final agreement. Fix: Due diligence and valuation come before the definitive documents, and their findings shape price and warranties.
• Treating due diligence as only a financial audit. Fix: Always cover legal, tax and commercial reviews as well, and say which risks each one finds.
• Mixing up financial and legal due diligence. Fix: Financial checks amounts and quality of earnings. Legal checks title, validity of contracts, litigation and compliance.
• Saying a term sheet or LOI is wholly binding, or wholly non-binding. Fix: Write that commercial terms are generally non-binding, while confidentiality, exclusivity and cost clauses are usually expressly made binding.
• Treating share purchase and asset purchase as the same in effect. Fix: State that a share purchase brings the target's liabilities along, while an asset or business purchase lets the buyer choose assets and leave liabilities.
• Putting the ratio upside down (transferee ÷ transferor). Fix: Shares are issued by the transferee to the transferor's holders. So the transferor's value is the numerator.
• Using total value, not value per share. Fix: Always convert each method to value per share before weighting.
• Saying shareholder approval needs a special resolution. Fix: Write "resolution". The 2015 amendment substituted it in the section.
• Treating every ordinary-course deal as exempt. Fix: Always write both limbs: ordinary course of business and arm's length basis.

Exam tips

• Write the stages as a numbered list with headings. Examiners can then award marks per stage quickly.
• Tie each stage to a document or approval. Naming the MOU, valuation report, scheme and agreement shows practical knowledge.
• If facts mention related parties, cite section 188 and its consequences exactly: voidable, three months, indemnity, penalty.
• Mention section 240 whenever the question involves a merger and past offences of the transferor company.
• Finish with integration. Many students stop at closing and lose easy marks.
• For a difference question, compare focus, documents checked and outcome. A short point-wise comparison scores better than long paragraphs.
• In case-based questions, name each red flag, say which type of due diligence finds it, and state the deal response.
• Do not invent a statutory section for due diligence. Cite a section only where you are checking a specific compliance and are certain of it.