Strategic Alliances

Company Law or Corporate Law is the law of the most dominant kind of business enterprise in the modern world. It is the study of how Shareholders, Directors, Employees, Creditors, and other Stakeholders such as consumers, the community and the environment interact with one another under the internal rules of the firm. Other types of business associations can include partnerships, companies limited by guarantee & moreover companies formed due to strategic alliances. A strategic alliance can be said to be a union of two distinct corporate entities with a resultant formation of a new entity. Strategic alliance may be in the form of a Merger, Acquisition, Amalgamation or a Joint Venture.

 

A corporate entity may opt for an alliance with another, under certain circumstances which are either forced or voluntary. Under the circumstances of business expansion and diversification of business activities an alliance may be opted for, unlikely in the circumstances for a fully eroded company an alliance will be helpful in order to save the company from being wound up. The former is a situation of where the companies opt for the alliance voluntarily and later would be forced. A strategic alliance in the form of a merger may be classified into Horizontal, Vertical and Conglomerate. A horizontal merger is said to have taken place when two companies of the same business lines merge, merger between to such companies who are the suppliers of the raw materials and manufacturers of the final product is said to be a vertical merger and the merger between such companies with different areas of business would be known as a conglomerate merger.  Acquisition is type of an alliance where the companies opt to take over the other, in the form the acquiring assets or acquiring a major share in the board of directors. An acquisition in the form acquiring the assets of the transferee company may be termed as strategic investment on a secured mortgage, an acquisition in the form holding a major share in the board of directors can be attained through purchasing the 3/4^th shares of the company form the either stock market or the company itself. In the both the circumstances of the acquisition the transferee company has an in flow of funds. Amalgamation and Merger are usually interchangeably used as they mean one and same, amalgamation means to compound consolidate or combine business interests of a firm, where as merger is the combination the two or more commercial organization into one. A Joint Venture is a scheme of alliance wherein the transferor companies transfer funds and resources to from a new company (Transferee Company), which in deed is formed with a motive to execute its business jointly by the representatives of both the transferor companies. In simple terminology it is the cooperative execution of the work at hand.

 

Under the Indian Statutory, the concept of strategic alliances is provided under the Companies Act, 1956 (Sections: 108A to 108F & 391 to 397) and Sick Industrial Companies (Special Provisions) Act, 1985. Under these statutes the scheme of the alliance must be approved by the judiciary. The Board for Industrial and Financial Reconstruction (BIFR), National company law tribunal (NCLT) and High Court are empowered to grant the various schemes of alliance between the companies. Additionally every scheme of such an alliance between the companies would be governed by the various provisions of the Companies Court Rules, 1959, Income Tax Act, 1961, Central Sales Tax, 1956, Indian Stamp Act, 1899, Competition Act, 2000, Securities and Exchange Board of Indian (SEBI) Regulations, and Foreign Exchange Management Act, 1999.

 

In the recent times, Indian and other nations to have witnessed certain strategic alliances which have proven to be successful, the success or the failure of the alliance depend upon various factors. Alliances between Tata & NatSteel, Tata & Tetley, Kingfisher Airlines & Air Deccan, Ranbaxy & Terapia, United Airlines & US Airways, Mittal & Arcelor, are some of the most successful alliances that have been witnessed recently. The causes of success of such alliances are due to various factors such as accurate selection of potential merging partners in the market, suitable results of due diligence reports, fewer competition in the market and fruitful results in business functioning. The major causes for failure of an alliance can be traced out as failure to identify potential merging partners due to soaring competition, unfavorable results of due diligence, non approval by the judiciary, in capacity of Transferee Company to repay the debt in case of secured mortgage (Acquisitions) and voluntary backward integration (De-Merger).

 

Even though, these alliances are exposed to risks of failure they are gaining huge importance and companies opt for them with view to expand and diversify their business activities and it is here that emerges the concept of Mergers and Acquisitions which together constitute the alliances in the form of a business strategy. With the high acceptance and growth of these strategies, evolution of new laws to govern the same has taken place. Therefore due to these alliances, a new kind of corporate laws is found to be emerging fast.