In this blogpost, Priyanka Kansara, Student, National Law University, Jodhpur, writes about the section 236 of the Companies Act 2013, loopholes in the provision, judicial interpretation and judicial intervention

General introduction

Section 236 (corresponding section 395, Companies Act 1956) talks about the purchase of minority shareholding by the majority shareholding; it says that if an acquirer has ninety percent or more of the issued equity share capital of the company, he can make an offer to the company by a notification to purchase the remaining shares[1]. Thoroughly reading of this provision gives an impression that there is nowhere mentioned any right of the minority shareholders as to whether they can be informed properly about the same; whether the interest of the dissenting shareholders shall be looked into etc.

Loopholes in the provisions

There are certain other loopholes in this provision, such as-

• Whether the minority shareholders are ‘bound to accept the offer’ e. it is mandatory or optional is not clear;
• Certain companies are facing problem in share valuation in the absence of prescribed valuation guidelines;
• It does not contemplate and address several other scenarios including drawing distinction between acquisition of shares in the same or different classes;
• The vagueness in the content of the Offer notice and lack of the provision for serving the notice to the minority shareholders;
• There are also no prescribed timelines within which the minority shareholders must tender their offers to the majority shareholders, unlike the UK Act. Simply put, it is doubtful whether the 2013 Act actually provides for compulsory minority squeeze-out mechanism[2];
• It is also unclear as to whether Indian judiciary would be able to protect the rights of minority shareholders, as in other countries such as the USA[3];
• The statutory provisions is needed to ensure a separate meeting of minority shareholders where the majority shareholder cannot participate;
• Even more strangely, this majority who approve the scheme need not be those whose shares are being boughtback; the law needs to be amended to specifically prohibit such buybacks without the consent of the shareholders.

Judicial interpretation and Judicial intervention

The Madhya Pradesh High Court in the case of In Re Indian National Press[4] has put forth the general principle i.e. the company has the right to determine the extent, the mode and incidence of the reduction of its capital. But the court, before it proceeds to confirm the reduction of capital, must see that the interests of the minority and that of the creditors are adequately protected and there is no unfairness to it, even though it is a domestic matter of the company. The power of confirming or refusing to confirm the special resolution of a company to reduce its capital is conferred on the court in order to enable it to protect the interest of person who dissented or even of persons who did not appear[5]. In another language, the Bombay High Court in the case of In Re Pmp Auto Industries[6] has held that the Court has the power to approve the scheme, which is in benefit of the Company. A single judge bench in Bombay High Court in the case of Sadvik Asia Ltd.[7], while relying on the judgement of British And American Trustee And Finance Corporation v. Couper[8], which held that ‘there may be no inequality in the treatment of a class of shareholders, although they are not all paid in the same coin, or in coin of the same denomination’; the same Court also relied on another English judgment of Westburn Sugar Refineries Ltd.[9], wherein the Court has emphasised that the Court has to safeguard the interest of the shareholders who may be in a minority[10]. On the other hand, the division bench in the case of Sadvik Asia Ltd. vs. Bharat Kumar Padamsi & Ors.[11] has reversed the verdict and stated that once it is established that non-promoter shareholders are being paid fair value of their shares, at no point in time it is even suggested by them that the amount that is being paid is anyway less and that even overwhelming majority of the non-promoters shareholders having voted in favour of the resolution shows that the court will not be justified in withholding its sanction to the resolution[12].

Furthermore, Hon’ble Bombay High Court in the case of Organon (India) Ltd.[13] has stated about the fair valuation that the court’s obligation is to be satisfied that the valuation was in accordance with the law, and it was carried out by an independent body. The present Act provides for the ‘independent body’, which is prescribed under Section 247 of the Act and known as registered valuer. In another judgment of Cadbury India Limited v. Samant Group & Ors.[14] the Bombay High Court has itself appointed a valuer for providing a fair value to the shareholder for its shares and approved a squeeze out through capital reduction at a price that was determined by an independent valuer appointed by the court itself[15].

For the question of forceful acquisition and fair & justifiable manner, Hon’ble Supreme Court in the case of Ramesh B. Desai v. Bipin Vadilal Mehta[16] held that a proper and fair scheme would have been one where all other shareholders, other than the promoters, who wanted to retain their shares, were excluded from the scheme so that their shares would not be subject to the forcible reduction of capital by compulsory acquisition[17].

In several cases, the Court has come with the idea that the interest of the minority shareholders will be looked into as a class[18]; whereas in another judgment, it is said that the Court can, in case of minority squeezing out, each shareholder’s interest shall be looked into and the scheme can be rejected if it is unfair for the interest of even one shareholder[19].

Author’s Remark

Therefore, through several case-laws of several jurisdictions, it is clear that the Company can pass any resolution if it is just and fair and in the interest of minority shareholders. Hon’ble Bombay High Court stated the same in the case of Elpro Interational Ltd., In re[20], held that the court has to look two matters namely: (i) that the transaction is not unfair, (ii) all creditors subject to reduction have either consented or been paid or secured[21].

In the said provision, as above-mentioned, there is nowhere mentioned that there should be a prescribed format of notice, or the serving of notice to each and every minority shareholders personally, whose shares are to be reduced/purchased; though it is mentioned under section 236 (2) as the majority shareholder shall offer to the minority shareholders…., or whether it is mandatory for them to accept the ‘offer’ by the majority shareholders i.e. promoter shareholders, or in case of grievances, the minority shareholder can go to the tribunal as it is prescribed in  section 235 (2) of the Act. Moreover, it is also not mentioned in this provision that before the ‘acceptance’ of the offer the transferor company shall conduct a meeting, wherein the minority shareholders can take part, and the future of the offer shall be decided by voting; even if the voting is being done, and 75% majority approved the scheme that does not mean the remaining minority shareholders has approved the same.

The legislature, while making a law, should look for a balancing approach between the rights of the promoter shareholders’ group and non-promoter shareholders’ group i.e. majority shareholders and minority shareholders respectively. As per SEBI’s Listing Agreement, Cl. 24 (f) says that the company shall file any scheme/petition proposed to be filed before any Court or Tribunal for any scheme of arrangement/ amalgamation/ merger/ reconstruction/ reduction of capital, etc. with the stock exchange, for approval, at least a month before it is presented to the Court or Tribunal[22]; here the role of SEBI arises as to put an eye on the companies because what companies do before the squeezing out of the rights of the minority shareholders is that they make unlisted (and privatized) themselves for escaping the legal procedure for the same for the listed companies.

[1] Section 236 (1), Indian Company Act 2013.

[2]Aakash Choubey and Sukanya Hazarika, Minority Squeeze-Out | Impact of the Companies Act 2013, Khaitan & Co., December 2013, https://kcomail-web.sharepoint.com/Documents/ERGO-Perspective-P4-Dec-2013.pdf,  (last accessed on April 13, 2016).

[3] Guth v. Loft (1939); Sinclair Oil Corporation v. Levien (1971); In Re Wheelabrator Technologies, Inc. Shareholders Litigation (1995

[4] MANU/MP/0068/1986.

[5] id.

[6] 1991(4)BomCR387.

[7] (2004) 121CompCas58(Bom.).

[8] (1891-4) All England Law Reports Reprint 667.

[9] (1951) 1 All England Law Reports 881

[10] Supra Note 4.

[11] 2009(3)BomCR57.

[12] id.

[13] (2010) 101 SCL 270 (Bom).

[14] Company Petition No 1072 of 2009, Decided on 25th February. 2014 (Bombay High Court).

[15] id.

[16](2006) 5 SCC 638.

[17] id.

[18] Miheer H. Mafatlal v. Mafatlal Industries Ltd., JT 1996 (8) 205.

[19] In Re Panruti Industrial Co. (P) Ltd., AIR 1960 Mad 537.

[20] (2009) 149 Comp Cas 646 (Bom).

[21] id.

[22] SEBI Circular 17/2003, dtd. May 8, 2003, http://www.sebi.gov.in/circulars/2003/smdcir17.html, (last accessed on April 13, 2016).