The Significance of “Appointed Date” and “Effective Date” in Mergers and Demergers

In the case of mergers and demergers, two dates play a critical role: the “Appointed Date” and the “Effective Date.” These dates are carefully planned by corporate managers to ensure the smooth execution of the restructuring process. The Appointed Date is chosen to safeguard the interests of the companies involved, while the Effective Date is determined by the High Court upon filing the final order with the Registrar of Companies. Understanding the importance of these dates is essential for successful mergers and demergers.

The Significance of the “Appointed Date” and “Effective Date”:

  1. Asset and Liability Identification: The Appointed Date is crucial for determining the assets and liabilities to be transferred from the transferor company to the transferee company. It provides clarity to both companies’ members regarding what will be transferred and ensures a smooth transition.
  2. Company Name and Status Changes: Changes in the name, address, or status of a company after the Appointed Date generally do not affect the court’s sanction of the scheme, unless they impact the rights, interests, or obligations of the company, its members, or creditors.
  3. Accounting Treatment: Upon the Scheme’s effectiveness on the Effective Date, the transferee company records the assets and liabilities received from the transferor company at their fair values at the close of business on the day preceding the Appointed Date.
  4. Share Capital Increase and Appointed Date: Share allotment occurs only after the court sanctions the scheme. The increase in authorized share capital is typically implemented upon scheme approval. Therefore, objections claiming that the Transferee Company’s share capital was insufficient on the Appointed Date to execute the scheme are not valid.
  5. Nature of Business: From the Appointed Date until the Effective Date, the transferor company acts as a trustee of the transferee company. It carries on its business activities, holding and managing the assets for the benefit of the transferee company. Major policy decisions or changes to the capital structure require the transferee company’s written consent.
  6. Employee Transfer: In most mergers or demergers, employees of the transferor company become employees of the transferee company on the Effective Date, ensuring a seamless transition without any interruption in service. The transferor company should maintain the cadre and number of employees willing to transfer.
  7. Dividend Declaration and Record Date: Dividends declared by the transferee company after the Appointed Date are payable to both transferee and transferor company shareholders. Shareholders of the transferor company become shareholders of the transferee company from the Appointed Date, entitling them to dividends declared after that date. The record date is established by the transferee company’s board upon the scheme’s effectiveness.
  8. Dividend, Profit, and Bonus/Rights Shares: After the Appointed Date, the transferor company should not declare dividends or issue bonus or rights shares from its authorized or unissued share capital without the transferee company’s written consent. The profits of the transferor company from the Appointed Date belong to the transferee company.
  9. Tax Liability: For direct or indirect tax liability, the cut-off dates are based on whether it pertains to day-to-day activities or annual assessments. Day-to-day activities are subject to tax liability from the Effective Date, while activities such as annual assessments are assessed based on the Appointed Date.

The selection of the “Appointed Date” is a critical decision in merger and demerger transactions. It influences various aspects, such as asset and liability identification, employee transfers, dividend declarations, and tax implications. Choosing the appropriate Appointed Date ensures a smooth transition and minimizes potential issues, contributing to the overall success of the restructuring process. Similarly, the Effective Date marks the legal effectiveness of the scheme and serves as a reference point for accounting treatments and other significant actions.