[By Anurag Shah and Vijay Nekkanti]
The authors are students at Christ (Deemed to be University), School of Law
Introduction
The Ministry of Corporate Affairs (MCA), Government of India, has brought into effect the eagerly anticipated and much-required sub-sections (11) and (12) of Section 230 of the Companies Act, 2013.[i] These provisions pertain to the takeover of a company via squeezing out the minority shareholders under a scheme of compromise/arrangement. While the whole Chapter XV of the Act pertaining to compromise, arrangements, and amalgamations were notified in the year 2016, it took MCA approximately 3 (three) years to notify these two sub-sections. To align these provisions with the company law MCA also had to make consequential revisions to the National Company Law Tribunal Rules, 2016 and the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016. These revisions would streamline the procedure given under the new sub-sections.
Squeeze out implies the compulsory acquisition of equity shares of a company from the minority shareholders of that company through fair cash compensation.[ii] Prior to this notification, it was done under Section 235. The method under Section 235 was enshrined to ensure that shareholders holding 90 percent or more shareholding in a company can acquire shares from minority shareholders during a takeover. The rationale behind such a provision was to ensure smooth takeovers of a company once the majority has consented to it. However, the minority shares should be bought at a fair value and this is what forms the crux of this method and the Courts have enumerated its importance time and again. In the case of Sandvik Asia Limited v. Bharat Kumar & Ors[iii], the Bombay High Court was of the view that if a fair price is being paid to the non-promoter shareholders, and at no point, the same is challenged; the Court should not withhold the sanction to the transaction. This shows the intent behind the method.
Section 230(11) and (12) of the Companies Act, 2013
The provisions notified by MCA would now enable the majority shareholders holding 3/4th of the concerned company’s shares to make a takeover offer and to acquire all or a part of the shares. This can be done through an application before the NCLT. The term shares for the purpose of these provisions would include equity shares and securities that vest the holder with the power of exercising voting rights.
The application for such an offer should be accompanied by a report disclosing the detailed valuation of the shares proposed to be acquired. Adding to this, the acquirer is also required to deposit a sum of not less than 50% of the total consideration for the offer into a separate bank account. The offer should ensure that fair value is being paid to the minority shareholders. The fair should be computed by taking into account the highest price paid by any person or group of persons for the acquisition of these shares during the last 12 months. Other factors such as the return on net worth, book value, and Earning per Share (EPS) should also be considered. Section 230(12) read with the amended NCLT rules provides for the raising of grievances by the minority shareholders in front of the NCLT which shall act as a quasi-judicial body for this whole procedure.
These provisions provide for another formal route for the minority to squeeze out from a company. Earlier known routes were selective reduction under Section 66 of the Act and squeeze out under Section 235 and 236. However, these provisions have been introduced in consonance with the jurisprudence related to the issue of squeeze out of minority shareholders. Now it would be important to see the role NCLT would play in presiding over these transactions, given the view of the Court in the landmark case of Miheer H. Mafatlal v. Mafatlal Industries Ltd[iv], wherein it was stated that the Courts do not have the expertise, time or the means to sit over the wisdom of such a transaction, and the Court should only concern itself with the question as to whether the valuation report is demonstrated to be so unjust, unreasonable and unfair that it would lead to inequity or injustice to the minority shareholders.
Analysis of the provisions from an acquirer’s perspective
Analyzing from the acquirer’s perspective, unlike the erstwhile regime under Section 235 that mandated 90% of control so as make an offer to the dissenting shareholders or initiate squeeze out, under the current provisions a 3/4th majority would suffice to move such a resolution.
On the face apparent, although this particular relaxation might seem to be very liberalistic, one needs to understand in the context of private companies that, under the erstwhile Sections 235 and 236 albeit having acquired 90% of the shareholding, many acquirers were confronted with problems allied with various restrictions imposed on the transfer of shares by the private companies through various instruments such as Pre-Emptive Rights, etc. Thus, although it is easier to reach the threshold of 75% to make an offer, one has to understand that the new provisions amidst the herculean restrictions imposed by private companies have only burdened the acquirers with an additional 15% of shareholders to surpass.
Further, in the case of AIG (Mauritius) LLC v. Tata Tele Ventures[v], the Hon’ble Delhi High Court interpreted Section 395 of the Indian Companies Act of 1956 (corresponding to Section 235 of the 2013 Act) in a way that justice is meted out to the minority shareholders, and had inter alia held that:
“90% majority must comprise of different and distinct persons and only in that event this will fall within the rationale of this section a justify the overriding of the interests of the dissentients……………. the offeror should be substantially different to the majority”
Although this judgment had imported the ideals of Shareholder Democracy within the Indian corporate jurisprudence, when applied in toto to all kinds of companies, it had posed several anomalies for the closely-held private and unlisted companies. Thus, the current provisions by providing a deliberate bifurcation in the application of these provisions only towards the private and unlisted companies have considerably excluded these companies from facing the brunt of the stricter regime envisioned for the listed companies.
The new provisions also tag along the interference of the Tribunal in case any aggrieved or dissenting shareholder opposes the scheme thereunder. If the Tribunal adopts a balanced and proactive approach towards the interests of both the Shareholders and the Acquirer, it can to a great degree mitigate the problem of protracted litigations, as resorted through the erstwhile provisions.
Analysis from a minority shareholder’s perspective
The first strike at the Acquirer in not getting the scheme approved under this section arose when the Shareholders were not in terms with the valuation so rendered by the Acquirer for the purchase of their shares. In fact, as a matter of concern, this issue had been time tested before various Courts and Tribunals in the country, proving perilous to the principles of Shareholder Democracy.
In this regard, the Hon’ble High Court in the Sandvik Judgment had relied on the English case of British and American Trustee and Finance Corporation [vi], in which the House of Lords had held:
“the interest of the creditors was not involved and I think the policy of the Legislature to entrust the prescribed majority of the shareholders with the decision whether there should be a capital reduction…. With these safeguards, the Act leaves the company to determine the same”
If one has to rely on the aforementioned ruling, it is clearly understood that Companies are vested with the autonomy to make changes to the capital to squeeze out the minority shareholders, thereby leaving them with very little scope for negotiating the aspect of valuation in the proposed purchase.[vii]
However, the Judicial trend in this regard had been further strengthened through the landmark judgment of the Bombay High Court in the case of In Re: Cadbury India Limited[viii], where the Court had laid down certain principles regarding valuation in the event of a Capital Reduction scheme, which in common parlance came to be recognized as the Cadbury Principles. According to these principles, for a court to decline the scheme of capital reduction, the objector should show that the proposed valuation is grossly erroneous to reflect the reticent unreasonableness under the guise of the scheme.
Thus, the courts have time and again tried to balance the subsequent interests of the parties in valuation, through the adoption of various principles that formed part of the underlying jurisprudence in this regard. It is therefore evident that the recently notified provisions read with the proposed Rules have been inspired by the evolved jurisprudence as aforementioned and such a change is very pragmatic towards protecting the shareholders’ interests in future.
Endnotes:
[i] Notification by the Ministry of Corporate Affairs, Government of India, available at: http://www.mca.gov.in/Ministry/pdf/Notification_04022020.pdf
[ii] Vikramaditya Khanna, Umakant Varotill, Regulating Squeeze outs in India: A comparative perspective, Working paper, NUS Singapore, 2014, available at: https://law.nus.edu.sg/wps/pdfs/009_2014_Umakanth%20Varottil.pdf
[iii] Sandvik Asia Limited v. Bharat Kumar & Ors 2009 (4) Bom LR.
[iv] H. Mafatlal v. Mafatlal Industries Ltd, (1997) 1 SCC 579.
[v] AIG (Mauritius) LLC v. Tata Tele ventures, 43 SCL 22943 Del 2003.
[vi] British and American Trustee and Finance Corporation, (1894) AC 399.