This article on ‘Corporate Governance and its Impact on Merger & Acquisition’ was written by Chelsi Antil, an intern at Legal Upanishad.
Every company is set up under the Companies Act, 2013. As we know, even a home has its own rules and regulations to run it smoothly and properly. Our society is also running under the vigilance of laws, rules, regulations, orders, etc. In today’s time, everything has its own rules to perform its work and role in our society, and corporate governance is also one of them. Good corporate governance helps the company grow, and bad corporate governance can lead the company into a loss or scandal. So, in this article, we will learn what corporate governance is and its impact on the merger and acquisition of companies.
Corporate governance refers to the management of a firm using a set of rules, regulations, procedures, and processes. The rules and processes, how a company will work and behave, who has what powers, what will be done by whom, meeting procedures, and so on are all outlined in the AOA (Article of Association) of the specific firm. According to the Company Acts, each company must have its own AOA, and the corporation must follow the standards outlined in the AOA. Corporate governance oversees the company’s interests and encompasses shareholder rights and responsibilities, the management system, suppliers, customers, investors, the government, and society. Corporate governance has two impacts, good and bad:
Good corporate Governance
Good governance of the company helps the company grow smoothly and properly. For good corporate governance, there are four fundamental terms that need to be followed by the board of directors to attract shareholders, investors, and the market, and these terms are:
- Liability: Poor performance may lead to bad consequences. So, the person should take responsibility for his actions and risks.
- Fairness: For good corporate governance, all shareholders should be treated equally.
- Accountability: For good corporate governance, one should explain every action taken by him that concerns the company.
- Transparency: For good governance, the company should give clear data and information to all shareholders and stakeholders.
These four terms need the correct data and level to ensure an effective result.
Bad Corporate Governance
Bad governance by the company leads to scandals. The abovementioned 4 principles are important for good governance; if one fails to follow these 4 principles of good governance, it will have bad consequences, such as the financial crisis and the Enron scandal, which both show the failure of good corporate governance.
NEXUS BETWEEN CORPORATE GOVERNANCE AND TAX
As we know, tax liability is the primary concern of the corporate sector. In the corporate sector, tax liability is the primary issue at the board directors’ meetings, which attracts the tax authorities, and on the other hand, corporate governance is developed to attract investment. Both are interlinked.
It is the responsibility of corporate governance to ensure law compliance, including tax law as well. The main concern of corporate governance is the integrity of the financial report which leads the company to attract shareholders and the market. On the other hand, an authentic financial report is also the basis for tax compliance.
The board of directors is expected to develop corporate strategies in such a way that they ensure high tax compliance. In Japan, the National Tax Agency organised programmes to ensure tax corporate governance. Many tax authorities are members of the Organisation of Economic Cooperation and Development, which has new cooperative compliance objectives, and their objective is tax compliance.
Expectations of Tax Authorities from Corporate Governance
The expectations of the tax authorities towards corporate governance to ensure tax compliance effectively are as follows:
- Involvement and direction of top management.
- Carrying out the functions of the accounting division.
- Tax procedure with checks and balances.
- Measures to curb illegal actions.
CORPORATE GOVERNANCE REFORM AND ITS IMPACT OF M&A
Corporate governance reform means the intervention of the state government and our judiciary in the management of the company. The reforms that have been done by the government and the court are as follows:
The Companies Act, 1956
All the companies were acted upon according to this act in the past. However, 24 amendments have been made to this act since 1956, and due to these amendments, the Companies Act of 1999, the Companies Act of 2000, and the Companies Act of 2001 came into play.
The Securities Act, of 1956 and the SEBI Act, of 1992
These acts were enforced to control the market regulations, which include share value, debenture, stock price, bonds, and other market securities, in favour of the company.
The Companies Act, 2013
Finally, this act came into force, which strengthened the power of corporate governance. This act strengthened the minor shareholders. This act added the company tribunal and appellate tribunal, women empowerment, and expanded the maximum limit of shareholders in private companies from 50 to 200.
Mergers and acquisitions are important parts of the growth of the company. Successful mergers and acquisitions need proper attention and good governance which analyses the risk of the merger and acquisition. Corporate governance focuses on shareholder value, regulatory compliance, and operational effectiveness to ensure successful outcomes and maintain continuity between the two merging companies. So, the reforms in corporate governance have a direct link to mergers and acquisitions. The Companies Act, 2013 introduced new terms such as fast-track mergers and cross-border merger positions.
This article concludes that for the smooth and proper working of the company, the company needs good governance. So, I suggest that the rules and regulations of the company not be ambiguous and be cogent, which would help the company grow and attract investors, shareholders, and the market.
- Satoru Araki, ‘Tax and Corporate Governance, CIAT’, available at: https://www.ciat.org/tax-and corporate-governance-what-tax-authorities-expect-of-companies/?lang=en
- James Chen, ‘Corporate Governance: Definition, Principles, Models, and Examples’, Investopedia, available at: https://www.investopedia.com/terms/c/corporategovernance.asp
- ‘Corporate Governance: Definition, Principles, Importance, History and Reforms, Challenges’, Testbook, available at: https://testbook.com/ias-preparation/corporate-governancereforms#:~:text=Corporate%20governance%20Reforms%20(CGR’s)%20were,decades%20sin ce%20it%20was%20introduced