Mergers and Acquisitions in Nepal
Mergers and Acquisitions in Nepal
Mergers and Acquisitions (M&A) have increasingly become a strategic tool for businesses in Nepal to expand market presence, achieve operational efficiency, and unlock shareholder value. The legal framework for M&A transactions in Nepal is primarily governed by the Companies Act, 2006, supplemented by sector-specific regulations such as the Bank and Financial Institutions Act (BAFIA), 2073, the Competition Act, 2007, and relevant directives issued by regulatory bodies including the Securities Board of Nepal (SEBON) and the Nepal Rastra Bank (NRB).
Whether it involves the consolidation of two entities or the takeover of one company by another, M&A transactions require careful legal planning, regulatory compliance, and due diligence to ensure a seamless transition and value realization.
Legal Framework for M&A in Nepal
The Companies Act, 2006 lays out the procedures and requirements for:
• Mergers – where two or more companies combine to form a new entity or one survives while others dissolve;
• Acquisitions– where one company acquires a controlling interest in another, typically through share purchase or asset acquisition.
The Act also provides for Amalgamations, a broader term encompassing both mergers and acquisitions.
M&A transactions in regulated sectors such as banking, insurance, telecommunications, and energy are subject to additional approvals and compliance under their respective laws.
Types of Mergers and Acquisitions
M&A transactions in Nepal typically take one of the following forms:
• Statutory Merger: Two or more companies merge into a single entity, often involving the dissolution of one or more merging parties.
• Share Acquisition: A company acquires controlling shares (often more than 51%) of another company, without dissolving the target entity.
• Asset Acquisition: A business acquires specific assets or liabilities of another company without acquiring its legal identity.
• Joint Venture and Strategic Alliances: While not traditional M&A, these involve shared ownership and strategic control and may lead to eventual mergers.
Merger Process under the Companies Act
The standard legal process for a merger under Nepalese law involves the following steps:
a. Board Approval
Each company’s Board of Directors must approve the proposed merger or acquisition in principle.
b. Due Diligence
A comprehensive legal, financial, and tax due diligence is typically carried out to assess liabilities, risks, and legal compliance of the target company.
c. Drafting of Scheme of Merger
As required by Section 177 of the Companies Act, the merging companies must prepare a Merger Scheme, which includes:
• Rationale and terms of the merger;
• Impact on shareholders and creditors;
• Proposed share exchange ratio (if any);
• Assets and liabilities to be transferred;
• Future governance structure.
d. Shareholder and Creditor Approval
The Merger Scheme must be approved by at least 75% of shareholders of each merging company. Prior notice to creditors and an opportunity to object is also required.
e. Application to OCR
Upon obtaining shareholder approval, the merger application along with the scheme, financials, and board resolutions must be submitted to the Office of the Company Registrar (OCR) for final approval.
f. Registration and Effectiveness
Once approved by the OCR, the merger is officially registered. One of the merging companies (or a new entity, if created) survives, and others are dissolved. All rights, obligations, and liabilities transfer to the surviving company by operation of law.
Acquisition Process
Acquisitions do not necessarily follow the same procedure as mergers. Key steps include:
• Negotiation and signing of Share Purchase Agreement (SPA) or Asset Purchase Agreement;
• Obtaining board and shareholder approvals (if required under the Articles or Companies Act);
• Filing change of shareholding and directorship with the OCR;
• Regulatory approvals, especially in case of foreign investment or change of control in regulated sectors.
Acquisitions involving foreign parties require prior approval from the Department of Industry or Investment Board Nepal under the Foreign Investment and Technology Transfer Act, 2019.
Regulatory Considerations
M&A transactions may trigger compliance obligations under:
• Competition Act, 2007 – to prevent market dominance and anti-competitive practices;
• Bank and Financial Institutions Act (BAFIA), 2073 – mandatory NRB approval is required for mergers between banks or financial institutions;
• Securities Related Laws – SEBON approval is required if listed companies are involved;
• Labor Laws – employee rights and service continuity must be preserved;
• Tax Laws – mergers and share transfers may attract capital gains tax, VAT, or stamp duty.
Foreign Investment in M&A
Foreign investors may participate in M&A transactions by:
• Acquiring existing shares in a Nepalese company (secondary investment); or
• Investing fresh capital to acquire a controlling stake (primary investment).
All foreign acquisitions require approval from the Department of Industry or Investment Board Nepal and must meet the minimum foreign investment threshold (currently NPR 20 million).