' UMAR ATA BANDIAL, J.---Through this application under sections 284 to 288 of the Companies Ordinance, 1984 a prayer has been made for merger of petitioner No,2, Messrs Nishat Apparel Limited ("NAL") into petitioner No,1, Nishat Mills Limited ("NML") along with its assets and liabilities.
2. Petitioner No,1 NML, established in 1969, is a public limited company with a paid up capital of Rs,1,597,857,170 divided into 159,785,717 ordinary shares of Rs,10 each listed on all stock exchanges of the country. The petition& No,2 NAL, an unlisted public limited company was established in 2005 and has paid up capital of Rs,717,288,000 divided into 71,728,800 ordinary shares of Rs,10 each.
3. The merger of petitioner No,2 NAL into petitioner No,1 NML in terms of the scheme attached with the petition as Annexure "C" is sought on the ground that the creation of a single entity after merger will save administrative expense/over heads, will enhance the profitability of the entity, improve the operation, manufacturing and production of the unit and will simplify and streamline the credit arrangements. Also the reorganization of capital through amalgamation will be to the advantage of shareholders jointly and severally.
4. On the presentation of the application, general meetings of the aforesaid companies were convened under the supervision of Chairmen appointed by the Court. The scheme of proposed merger and various arrangements for its execution were placed before the members in general meetings. All those shareholders present or represented in the meetings unanimously approved the amalgamation scheme. Thereafter notice of hearing was issued through newspapers in terms of Rule 61 of the Companies (Court) Rules, 1997. However, no one has come forward to object the proposed scheme and amalgamation.
5. Parawise comments filed by the SECP in relation to the terms of the scheme of the merger contained three observations, upon which the Court conducted hearing after inviting the reply of the petitioners. These points have been answered through rejoinder in the main petition. The points raised are to the following effect:--
(i) The swa p ratio between the petitioners, NML and NAL has been calculated on the basis of breakup value of shares taken on historical basis. It is recommended that the swap ratio should be based, upon revaluation of assets for arriving at a realistic figure.
' Although paid up capital of the two merging entities is being added in consequence of the amalgamation, however the same treatment cannot be given to their authorized capital. The authorized capital of the surviving entity should be increased to cover the aggregated paid up capital.
(iii) The merging company petitioner No,2 NAL is a loss making entity and therefore, the public shareholders of the petitioner No,1 NML would suffer a disadvantage on account of the merger which is not in their interest.
6. Learned counsel for the petitioners companies has answered the foregoing observation as follows:-- ' He submits that the law does not lay down any specific method or basis for the purposes calculating the swa p ratio of shares of amalgamating companies. Any incremental value obtained as a result of revaluation of assets of a company is to be credited to a Surplus on Revaluation of Fixed Assets ("Account"). According to section 235(2) of the Companies Ordinance, 1984 the Account cannot have revenue application. The Account is excluded from the Free Reserves of a company and does not form part of its shareholders equity. The Account cannot, therefore, be an input in the calculation for determining the breakup value of shares. He has reinforced the point by reference to the definition of "Free Reserves" provided in Companies (Issue of Capital) Rules, 1996.
7. A similar objection taken in a letter by a shareholder, State Life Insurance Corporation (SLIC) claiming a higher swa p ratio for the present merger was abandoned at the extraordinary general meeting of petitioner No,1 company as SLIC could not provide a basis for its claim. In so far as the observation by the SECP is concerned its intent is appreciated. However, the higher value that is expected on the revaluation of the assets of petitioner No,1 is inconsequential because of the statutory prohibition on utilization of the Account for calculating shareholders equity which is the principal ingredient for determining breakup value of a share and hence its swap ratio.
Accordingly, recourse to revaluation of assets of the petitioner No,1 company was not necessary in the circumstances of the case as it would not have fetched any advantage or benefit to its shareholders. In the light of the aforesaid, the observation made by the SECP stands explained.
8. The second observation by the SECP to the effect that the authorized capital of the surviving company should be increased in order to accommodate the increased paid up capital resulting from its merger with the second company was answered by the learned counsel for the petitioner.
The notion of paid up capital cannot exist in law without the umbrella of authorized capital.
Accordingly, where the paid up capital of two merging companies is aggregated under an amalgamation, likewise, the corresponding authorized capital of both companies must also be added. As a result, by the merger the authorized capital of the surviving company is increased correspondingly by the amount of the authorized capital of, the merging company. The resulting figure of authorized capital of the surviving company shall be sufficient to cover the combined paid up capital of the two companies.
9. The observation is seemingly meant to recover additional fees for the SECP. However, in terms of law such an objection has been rejected in other cases, including, Mahmood Power Generation Limited and Mahmood Textile Mills Limited v. Joint Registrar of Companies and others 2006 CLC 1364. That view proceeds on the footing that paid up capital and authorized capital are connected items relating to capital issue of a company. When paid capital of merging companies is aggregated, it is necessary that their authorized capitals should also receive the same treatment.
In the present case, there are no legal or accounting bars to the proposed aggregation. In the light of the aforesaid judgment, the SECP objection stands explained.
10. The third objection is that the petitioner No,2 is a loss making entity and its merger with the surviving company would cause loss to the shareholders of the latter company. A perusal of the report by the Chairman of the extraordinary general meetings of the petitioner companies shows that no objection was raised by any member of either company against the proposed merger being carried into effect. Learned counsel for the petitioners has clarified that the break up value of the shares of the merging company, petitioner No,2 has been calculated after deducting its total accumulated loss from its total paid up capital. This has diminished the break up value of its share resulting in a lower swa p ratio for its share, thereby transferring the loss to its shareholders. The merger is bringing in new assets to the surviving company worth Rs,1.0 billion whereas additional liabilities of Rs,650.0 million are being added to the balance sheet of the surviving company. There is a net value addition made to the assets of the surviving company. The secured creditors of the petitioner companies has also given their NOCs to the proposed merger. In view of the fact that accumulated loss was deducted from shareholders equity of the merging company whilst arriving at the swa p ratio constitutes an adequate step for safeguarding the shareholders of the surviving company.
11. In the result, the observations made by the SECP, although pertinent, are not sufficient to counter the case for merger approved unanimously by the members of both petitioner companies Nos.1 and 2 in their general meetings held on 29-11-2008 and 21-2-2009 respectively.
12. The NOCs from all creditors banks of both petitioner companies have been placed on record.
This shows unanimous approval of the creditors for the relief of merger now under consideration of the Court.
13. In view of what has been stated above, the merger prayed for is allowed with effect from 1-7- 2008.