This article is written by Kanishk Gambhir, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.com. Here he discusses “Can Takeover amount to Oppression of Minority Shareholders”.

Introduction

Minority shareholders can be defined as a shareholder whose proportion of shares is too small to confer any power to exert control or influence over corporate action.

The fundamental principle defining the operation of shareholders democracy is that the rule of the majority shall prevail.

But over the passage of time, authorities have come to the realisation that minority shareholders should be protected as majority shareholders tend to strong-arm minority shareholders during various resolutions and infringe on their rights.

So, over the years’ various rights and protection have been given to minority shareholders to protect them.

One such situation where the rights of minority shareholders might be affected are during takeovers and various rights have been given to them to protect. So the rights of the minority during takeovers are discussed below. 

Minority Shareholders and Takeovers

Corporate takeovers have now become very common both domestically and internationally. When the terms of a potential takeover are being discussed and negotiations are being carried on between the board of the Target company and the acquirer generally such discussion only involves majority shareholders and a lot of times minority shareholders are kept out of the discussions and their involvement is kept to the minimum, unless it is provided by shareholder agreement, Article of Association, the target board, the acquirer as well as majority shareholders have no legal obligation to involve the minority shareholders directly or indirectly in the negotiations or discussions provided all legal obligations along with all rules and regulations are being followed. This is done keeping the practical aspects in mind as a number of shareholders in a listed company are very high.

So, protection of minority shareholders during such takeovers is a part of cooperate governance and to keep the interests of minority shareholders in kind various guidelines and rules have been brought by SEBI so that they have a fair chance. 

One such right is Clause 49 of the SEBI Listing agreement which calls for 50% of the directors to be independent directors is one such clause which is done for the protection of minority shareholders. This clause was introduced in the year 2000 and revised in 2006 to improve the standards of corporate governance and protection of minority shareholders. As the independent directors do not have a direct interest in the company, they would lookout for the best interests of both company and minority shareholders, so their interest is directly represented during the negotiations as well albeit indirectly.  

Another one of such protection is the minimum number of share to be acquired

Regulation 21 of SECURITIES AND EXCHANGE BOARD OF INDIA (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) REGULATIONS, 1997 (hereinafter referred to as “Takeover Code”) clearly states that that the acquirer during a takeover must bid for more than 20 per cent of the voting capital of the company. This provided a chance to minority shareholders who do not have trust in the acquirer’s management skills to exit from the company on reasonable terms and a fair share value which has been calculated using market factors by an independent accountant. 

However, 20 per cent rule does not necessarily allow all the minority shareholders to exit as the acquirer is not any under a legal obligation to accept more than 20 per cent of voting shares, so it becomes unfair to shareholders who try to sell the share after the offer is closed. 

So, the percentage should be increased to at least 30 per cent if the acquirer is trying to take over the company so that at least all the minority shareholders have a fair chance to exit the company at a reasonable offer price.  

Listing agreement with stock exchanges

Clause 40 of the SEBI listing agreement states that the company listing their shares provides that some basic rights are given to the minority shareholders.  Clause 40 states that –  

(i) A public announcement must be made in the prescribed manner in an English language and a regional language newspaper.

(ii) The stock exchange should be informed by both the parties after the negotiation of the deal.

(iii) An offer should be made to the remaining members within two weeks of the date of approval and such offer should be kept open for 6 weeks.

(iv) If as a result of the purchase, there is a change in management, the Central Government should be informed of the same.

It is to be noted that if a company fails to comply, it can lead to delisting. But if the buyer is clear he can easily circumvent such provision.

Minimum Public Shareholding of 25% by Public

SEBI keeping in mind to protect minority shareholders under Securities Contract Regulations Rules, 1957 mandates the public companies to maintain a minimum of 25 per cent public shareholdings of 25 % of each class or kind of equity shareholders or debentures convertible into equity shares.  so that the percentage of minority shareholders is not very less or negligent and they have a good chance to protect themselves.

This helps in breaking the domination of promoters and majority shareholders and provides a voice to minority shareholders so that they are not left unheard. 

Squeeze out

This term implies the compulsory acquisition of equity shareholders. Under Section 236 of Companies Act, 2013 providers opportunity to the acquirer after they have acquired more than 90% or more of issued shares in the company, to issue a notification of their intention to buy the remaining share of the issued share capital for a price which is determined by an independent accountant. Further, the majority shareholders for using the squeeze out option have to submit all the payment payable to such shareholders in a separate account for at least for a minimum period of 1 year.

Section 236 is read with section 27 of the Companies (Compromise, Arrangement and Amalgamation) Rules, 2016 which is used to determine the price. This provides a fair opportunity for minority shareholders to exit the company at a fair price.

Further, Section 230 also provides an opportunity for the company to come into a compromise with its shareholders.

The company can arrange a scheme of arrangement between the majority shareholders and minority shareholders to reach a fair scheme. This allows the minority shareholders to quit the company if they have doubts about the management of majority shareholders. Such a scheme though has to be approved by the High Court once the scheme is approved by 3/4th majority in value of each class. 

Then the high courts will hold a meeting where representation can be done by all interested parties and if the high court is satisfied it may issue an order sanctioning the same. 

The above-stated rules and procedures are just a few safeguards for minority shareholders to protect themselves against the majority during a takeover. 

Generally, Minority shareholders to showcase a takeover is oppressive towards them would have to show to the authorities that the terms of the takeover were highly unfair to them or process of law along with the laid down guidelines rules and regulations were not followed. If then can satisfy the court, tribunal or SEBI about the same, such a takeover can be blocked until the minority shareholders are given a proper a fair chance. 

Conclusion and Inference

Minority shareholders even though form a small part of shareholders, but SEBI over the years has given them protection and have emphasized greatly on the importance of protection of rights of minority shareholders starting from clause 49 of SEBI Listing agreement to (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 which provides minority shareholders a free and fair opportunity to sell their shares at a fair market price which has been determined by an independent accountant. So, from providing them with an opportunity to exit the company in case they do not like the new acquirer and giving them other protections showcases that minority shareholders are no longer being dominated by the majority shareholder nor they are being oppressed or are left unheard. 

Hence after going through the multiple protective rights which have been given to the minority shareholders, the author is of opinion that NO, TAKEOVER DOES NOT AMOUNT TO OPPRESSIONS OF MINORITY SHAREHOLDERS. Even though for obvious reasons the majority of shareholders are given more preference and their opinion is of more value as they have more voting rights. This is highly realistic and practical keeping in mind large shareholders in a listed company and individual participation of each shareholder who are spread geographically throughout the country and sometimes multiple countries is next to impossible and highly inefficient. And as long as the Board and the Majority shareholders follow the laws and act in consistency with all the rules, regulations and guidelines, it would not amount to the oppression of minority shareholders.

Even though minority shareholders are of course at a disadvantaged position against the majority but that necessarily does not mean they are being oppressed. Further, SEBI and Companies Act provided enough protection to minority shareholders while keeping in mind that the companies are not overburdened with dealing with multiple guideline and rules which would make such takeover very complex and difficult. 

Hence, it would be wrong to say that minority shareholders are being oppressed during a takeover but for of course for obvious reasons they are no doubt at a disadvantage compared to majority shareholders.

References

1. merriam-webster.com/legal/minority%20shareholder (Last accessed on 30/01/2020)
2. Minority Interests, http://www.mca.gov.in/MinistryV2/minority+interests.html (Last accessed on 09/01/2020)
3. G. Ramasubramanian, Takeovers And Minority Shareholders Regulations in India. (Last accessed on 30/01/2020)
4. R. Luthra, et al, Minority Squeeze Out, available at: http://www.luthra.com/admin/article_images/minority-squeeze.pdf. (Last accessed on 30/01/2020)

5.  https://blog.ipleaders.in/minority-squeeze-out/#_ftn1 (Last accessed on 30/01/2020)

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