Corporate Governance and M&A

Corporate Governance in Context of M&A

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For the last few decades, the evolution of Corporate Governance has taken place at a surprising speed. After the Satyam Scam, the changes introduced in the Companies Act shaped the Corporate law framework. The effects of better corporate governance have really gained much momentum within the companies to apply the good governance policies in their functioning. One of the aspects of the company where there was not enough talk or discussion was the application of Corporate Governance in the context of Mergers & Acquisition (M&A).

This project would be dealing with the intersection of two significant chapters, that of Corporate Governance and Mergers & Acquisitions, of the Companies Law framework. Both the chapters are an indispensable part of the Indian Corporate law framework where the chapter of Corporate Governance looks upon building the environment of trust, transparency and accountability of the company to ensure the financial stability and business integrity resulting into the growth of the company whereas the chapter of Mergers & Acquisition acts as the catalyst for the expansion of the company.

In the Indian law context, both these chapters require greater attention on a stand-alone basis, at least for the last few decades. However, there has been little focus on the intersection of these two. This article would focus solely on the intersection of these two and discuss it in a detailed manner. 

Corporate Governance and M&A have an interdependent relationship. Professor Henry Manne in the year 1965 coined the phrase “ the market for corporate control “, wherein he mentions that the companies which have potential to flourish in the market but could not do so, due to the poor governance, automatically become targets for acquisition. The existence of such a possibility leads to companies boosting their structure of the governance and practices and in order to avoid the takeover. 

Concept of Corporate Governance 

Corporate Governance in a general sense could be defined as a concept which ensures the application of best Management Practices with compliance of applied laws and regulations. It is an extensive concept which consists of transparency, accountability and fairness of all the stakeholders in the organization to achieve economic efficiency.1 

According to the US Supreme Court, Corporate Governance refers to the internal rules and policies of the organisation, the relationship between the shareholders, the roles and responsibilities of the directors and the top management and the decision-making structure. In all, it covers all the aspects of the organisation which helps in conducting the business both with respect to internal as well as external stakeholders. 

Corporate Governance is pivotal for the investors of the company as it shows the company’s direction and business integrity. Good Corporate Governance aids in building trust with investors and the other stakeholders. This results in Corporate Governance aiding in promoting financial soundness by creating a long-term investment opportunity for market participants. 

The board of directors has a dominant role in corporate governance. Its relationship to the other primary participants, typically shareholders and management, is critical. Other members include employees, customers, suppliers, and creditors. The corporate governance framework also depends on the legal, regulatory, institutional and ethical environment of the community. Usually, corporate governance is described as the host of legal and non-legal principles and practices affecting control of publicly held business firms. Broadly speaking, corporate governance affects not only who controls publicly traded corporations but also the allocation of risks and returns from the firm’s activities among the various contributors in the firm, including stockholders and managers as well as creditors, employees, customers, and even societies.

Corporate Governance in Indian Companies Act, 2013

Corporate Governance was not so prominent in India till the start of the 21st Century. It took a very long journey to establish itself in the Indian corporate sector. It was in the 1990s, this term was first used and in the year 1998, first-ever guidelines for Corporate Governance came. Afterwards, there were many committees set up to give recommendations for the Corporate Governance viz., Kumar Mangalam Birla report (2000), Narayana Murthy Committee (2002) and Naresh Chandra Committee (2002). 

But the major change in the concept of Corporate Governance came with the issuance of voluntary guidelines by the Ministry of Corporate Affairs, which has to be complied by the listed companies in the year 2009, in light of the Satyam Scam. With the introduction of Companies Act, 2013, Corporate Governance came up with a new and solid build-up having significant provisions being introduced in the Act.

Corporate Governance and Role of M&A

As already stated that Prof. Henry Manne had talked about the intersection of Corporate Governance and the M&A way back in the 1960s. Hence it is not a new phenomenon for many countries but for India, it is still in the latent stage as there has not been much attention being paid to it. 

An M&A transaction is an important part of the company as it shows the success or the failure of the company. However, there are certain situations where due to the failure of management, companies go for bad investment in the form of M&A.   The failure of management could be in the form of display of overconfidence in acquiring the target or paying the unreasonable price. Apart from that, there are various other reasons for the failure of management which leads to the failure of the M&A deals. 

However, a better and efficient corporate governance structure within the company ensures minimization of the risk of failed M&As. In the Indian Corporate Law framework, there are a number of well-established governance mechanisms operating in the context of M&A operating both at domestic as well as cross border level.  

Board of Directors

Board of Directors are the important personnel of the company. They undertake a lot of activities and the company is monitored under the supervision of the board. Reviewing the merits and demerits of the M&A transaction, which is an essential part of board decision making, comes under the ambit of the Board of Directors. 

India has witnessed many lessons from the past in the form of a global financial crisis and various scandals of Corporate Governance. However, with the advent of the Corporate Governance environment, it ensures strict scrutiny of the decisions of the board and the board now needs not only a mere act but also has to take a pragmatic approach. 

The Board of Director has to provide the key strategic inputs in the form of the company’s overall strategy. The M&A transaction requires the findings of due diligence conducted on the target which addresses various issues before the board viz., the fairness to the stakeholders, legal documentation, etc. Also, it is a component of a better Corporate Governance that there must be an expert advisor(s) advising the board in deciding the M&A transactions.   

Risk Management

Risk Management is one of the important factors that the board has to keep in mind while undertaking any business decision ( including M&A transactions ). In the cross border acquisitions, this factor becomes very pivotal as the acquirer company is generally new to the target country. Acquirer companies face unique issues and risks such as the legislation in the country, culture and traditions of the country. 

Acquirer companies do show a keen interest in the companies which have better corporate governance in a way that it is away from the corruption perspective. For example, under Companies Act, 2013, statutory recognition was given to Serious Fraud Investigation (SFIO) to look into the fraudulent activities of the companies. The acquirer company will not be interested if there is a charge on the company under the SFIO. Therefore, the implementation of better policies for Corporate Governance is pivotal for the success of the corporate bodies and it also ensures the expansion of the companies not only in the form of market area but in the form of capital too.     


Accountability of management to shareholders and stakeholders is an important part of Corporate Governance. The loyalty towards the investor is the sign of a good corporate governance. Although the management of the company lies to the board of directors, the impact of the decisions of the management falls onto the shareholders as well as stakeholders. 

Therefore, to protect the interest of the shareholders and to control the arbitrariness of the directors of the company, Companies Act, 2013 provides for the mandatory requirement of at least one-third of the directors to be independent directors of the company. It is expected and believed that independent directors would work in the interest of the company and not for private gain as they don’t have any connection as to promoters or directors of the company. 

In M&A transactions, where the decisions of the Board of Directors is significant, independent directors play a crucial role in mitigating the arbitrariness or the biasness of the other directors. Independent Directors seek advice from various experts and advisors in the related field to assist the board before making decisions on the M&A transactions.  

Shareholders and Activism

Transparency, fairness and accountability are the most important components of Corporate Governance. One of the key criticisms of the corporate governance framework is the lack of outside shareholder participation in decision-making, particularly with reference to M&A transactions. Therefore, Transparency seeks that the important information of the company as to the financial statement, its policies for expansion and its performance should be accurately and precisely be provided to the shareholders. 

The M&A transactions have a deeper impact on the shareholders. The concerns and interests of the shareholders therefore have to be kept in mind which can be done by giving proper participation to the shareholders. Although, the majority of shareholders have their say in the decisions of the board as they control the large part of the company. It is the minority shareholders who suffer from the failure of Management. Failure of M&A transactions is a huge burden on the company as it involves huge capital of the company and its success and failure depend upon that. 

Therefore to protect the interest of the minority shareholders, Class Action suits are provided under Section 245 of the Companies Act, 2013 which protects the right of the minority shareholders. The minority shareholders can file a suit before the NCLT against the unfair practice of the board. 

After expressing some of these more universal sentiments, this article will briefly comment on the state of the law in India on M&A and the extent to which it does, or does not, take into account corporate governance issues, primarily with a view to addressing the concerns of minority shareholders in listed companies. Transactions involving Indian companies can be divided into three broad categories, viz. (i) mergers, demergers and corporate restructuring; (ii) takeovers; and (iii) going-private transactions culminating in squeeze out of minority shareholders. All of these generate different types of governance issues, and this essay will touch upon each of them.2 

Mergers, Demergers & Corporate Restructuring 

Mergers and Amalgamation and other such forms of corporate restructuring usually take place through a scheme of arrangement that requires the list of compliances such as approvals from different stakeholders of the company, sanction from the Tribunal, etc. 

The provisions of the Companies Act, 2013, specifically under Sections 230 to 240, provides for an elaborate framework to lay down the scheme of arrangement. There are various mandatory requirements for the approval of M&A schemes keeping in view the interest of all the members of the company and to ensure better corporate governance. 

There are certain RBI rules and regulations along with other statutory rules which have to be complied by the companies. Those rules are formulated to secure the position of the company from any fraudulent practices or scams. Some of the rules which are essential part of M&A transactions are Rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (Companies Merger Rules), Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (FEMA Regulations) and SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011


Even though there is no specific statute or law governing corporate governance as a whole in case of M&A of unlisted companies, there are various provisions under the Companies Act, 2013, SEBI guidelines, etc. which indirectly strives to have a good corporate governance system like provisions for the appointment of independent directors and their roles and duties, the appointment of audit committees, role of directors, etc.3

Further, corporate governance makes sure that the interest of the companies’ shareholders as well as other stakeholders are taken into consideration. Hence, better corporate governance provides for check and balance on the practices of the companies which are adopted while undertaking the M&A. To achieve the goals and objectives of the merged organisation and for a smooth transition, well-structured corporate governance is vital.


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Archit Jain

Student, NLIU, Bhopal

Archit Jain is a 4th-year law student at National Law Institute University, Bhopal. He has developed his interest in corporate and commercial laws and is very enthusiastic and keen at making a career out of it. Apart from the corporate, he has an interest in Antitrust/Competition Law as well. For any Clarifications, feedback, and suggestion, you can reach him at

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