In the dynamic business environment of Nepal, mergers and acquisitions are becoming increasingly common as companies seek growth, market share, operational efficiencies, and strategic advantages.
The process of merging or acquiring another company offers significant benefits, such as expanding business operations, enhancing capabilities, and improving financial performance.
However, it also involves a complex legal process governed by the Companies Act, 2063, and other related regulations and bylaws.
Statutory Legislation Governing M&A in Nepal
Here are some of the important legislations which govern the procedures of the merger and acquisition of companies in Nepal:
- Companies Act, 2063 - The main law governing M&A, outlining procedures such as shareholder approval, asset and liability transfer, and registration with the Office of the Company Registrar (OCR).
- Merger Bylaws, 2068 - Provide detailed guidelines for the merger process, especially for the banking and financial sectors, covering documentation, valuation, and post-merger integration.
- Acquisition Bylaws, 2068 - Regulate acquisitions, defining procedures for share or asset purchase, valuation, disclosure, and regulatory approvals.
- Merger and Acquisition Bylaws, 2073 – Consolidate previous bylaws into one framework, setting unified procedures for both mergers and acquisitions, emphasising transparency, valuation standards, and regulatory compliance.
What Are Mergers and Acquisitions?
Before diving into the specifics of mergers and acquisitions, it is important to know what these terms mean:
Merger
A merger refers to the combination of two or more companies into a single entity.
The merging companies agree to combine their assets, liabilities, and operations into a new, unified company.
In a merger, both companies typically surrender their original identity and operate under a new name or structure. Here are the types of mergers of companies:
- Horizontal Merger - This type of merger takes place between companies operating in the same industry and market segment. The goal is often to increase market share, reduce competition, and achieve economies of scale.
- Vertical Merger - A vertical merger occurs when companies at different stages of the production or supply chain combine.
- Conglomerate Merger - A conglomerate involves companies from unrelated industries. The purpose is to diversify, thereby reducing business risk by expanding into new markets or sectors.
Acquisition
In an acquisition, one company purchases the shares or assets of another company.
The acquired company may continue to operate under its original name or be absorbed into the acquiring company.
In most cases, the acquiring company assumes control of the acquired company’s operations, assets, and liabilities.
Here are the two types of acquisitions of companies in Nepal:
- Asset Acquisition - In this type of acquisition, the acquiring company purchases specific assets and liabilities of the target company. This allows the buyer to choose which parts of the business to purchase while avoiding unwanted obligations or debts.
- Stock Acquisition - Here, the acquiring company purchases shares or stock of the target company, gaining ownership and control of the entire business. This method transfers all assets, liabilities, and operations of the target company to the acquirer.
Requirement for Mergers and Acquisitions in Nepal
Mergers and acquisitions in Nepal must meet several legal and procedural requirements to ensure fairness, transparency, and regulatory compliance.
The key requirements include:
- Compliance with the Companies Act, 2063 – All M&A activities must follow the procedures and provisions outlined in the Act.
- Shareholder Approval – As per Section 177, a special resolution must be passed by the shareholders of both companies involved in the merger or acquisition.
- Regulatory Approvals – Relevant authorities must approve the transaction, such as the Nepal Rastra Bank (NRB) for banks or the Insurance Board for insurance companies.
- Due Diligence – A thorough review of the company’s financial, legal, and operational status is required to identify potential risks or liabilities.
- Valuation – An independent valuation must be conducted to determine the fair value of assets, liabilities, and share exchange ratios.
- Merger Agreement – A formal agreement outlining the terms, structure, and responsibilities of both parties must be approved by their respective boards.
- Public Notice – According to Section 178 of the Act, a public notice must be published in a national daily newspaper announcing the proposed merger or acquisition.
These requirements ensure that the M&A process in Nepal is transparent, legally compliant, and protects the interests of shareholders and stakeholders.
The Process of Merger and Acquisition of a Company
The process of merging or acquiring a company in Nepal involves several steps that must be carried out in compliance with the Companies Act, 2063.
Below is a breakdown of the typical steps involved in a merger and acquisition (M&A):
Initial Discussions and Negotiation
The M&A process begins with discussions and negotiations between the companies involved. This is where the terms and conditions of the merger or acquisition are outlined.
Both parties must agree on the type of transaction, specifically whether it is a merger, acquisition, or consolidation.
- Confidentiality Agreement – At this stage, the companies often sign a confidentiality agreement to ensure that sensitive information remains private.
- Preliminary Due Diligence – The companies may also conduct a preliminary due diligence process to assess the financial health, assets, liabilities, and legal standing of the other party.
Due Diligence
After the initial agreement is reached, a comprehensive due diligence process takes place.
During due diligence, the acquiring company (or merged companies) reviews all financial, legal, and operational aspects of the other company.
- Financial Review – This includes auditing the financial statements, checking for debts, liabilities, and other financial obligations.
- Legal Review – This involves reviewing contracts, intellectual property rights, litigation history, and regulatory compliance.
- Operational Review – These checks for synergies in operations, workforce integration, and the compatibility of business models.
Due diligence helps ensure that the transaction is fair and transparent and identifies potential risks that may arise after the merger or acquisition.
Drafting the Merger/Acquisition
Once due diligence is complete, the companies draft a merger or acquisition agreement.
This agreement outlines the terms and conditions of the transaction, including:
- The transaction method (cash, shares, or a combination).
- The valuation of assets and liabilities.
- The governance structure post-merger or acquisition.
- Any conditions or warranties regarding the transaction.
The agreement must also include a clear outline of the transaction timeline, including deadlines for approvals, asset transfers, and share exchanges.
Shareholder Approval
Both the acquiring and target companies need to obtain approval from their respective shareholders.
A special resolution must be made in the general meeting of each company.
This approval is required for both the merger agreement and the final acquisition terms.
- Shareholders will vote on whether to approve the terms of the merger or acquisition.
- The Companies Act, 2063 mandates that at least 75% of shareholders present at the meeting must approve the resolution.
Application to the Office of the Company Registrar (OCR)
Once the shareholder resolution is passed, the companies must submit the following documents to the Office of the Company Registrar (OCR) for final approval:
- The merger agreement or acquisition agreement.
- The amended memorandum of association and articles of association.
- A valuation report on the company’s assets and liabilities.
- A due diligence report and other necessary documentation.
The OCR will review the documents and, if satisfied with the legality and fairness of the transaction, will issue a Certificate of Merger or Acquisition.
Regulatory Approvals (If Applicable)
Suppose the companies involved are listed on the Nepal Stock Exchange (NEPSE) or engage in regulated industries.
In that case, they must also seek approval from regulatory bodies such as SEBON (Securities Board of Nepal) and NEPSE.
- SEBON will evaluate the financial health, governance structures, and regulatory compliance before approving the merger or acquisition.
- If the company plans to list its shares post-merger, NEPSE will need to review and approve the listing requirements.
Transfer of Assets and Liabilities
Upon receiving regulatory approval, the companies can proceed with transferring assets and liabilities.
This includes the following:
- Transferring the shares of the acquired company to the acquiring company or the new company formed after the merger.
- Setting outstanding liabilities and obligations.
- Amending company records to reflect the new structure.
Post-Transaction Integration
Once the merger or acquisition is complete, the companies must work on integrating their operations, systems, and workforce.
This process includes harmonising corporate cultures, aligning business strategies, and managing redundancies.
Challenges of Mergers and Acquisitions in Nepal
While Mergers and Acquisitions (M&A) transactions offer numerous benefits, they also come with significant challenges:
- Regulatory Compliance - M&A transactions in Nepal require navigating complex regulatory frameworks, including compliance with the Companies Act, SEBON, and NEPSE regulations.
- Cultural Integration - Integrating into different corporate cultures can be challenging, especially if the companies involved have differing management styles or employee expectations.
- Due Diligence Risks - Incomplete or inaccurate due diligence can lead to unforeseen liabilities or operational issues post-merger or acquisition.
- Costs - The costs of M&A transactions, including legal, financial, and advisory fees, can be significant, particularly for smaller businesses.
Conclusion
Mergers and acquisitions in Nepal offer businesses a strategic way to grow, expand, and improve financial performance.
However, the process is complex and requires careful planning, due diligence, and compliance with the Companies Act, 2063.
With the right legal and financial guidance, companies can successfully navigate the M&A process and achieve growth and market share while overcoming integration and regulatory compliance challenges.
