In this blog post, Harshit Singh Jadoun, a Third Year student of B.A. LLB(HONS) from Institute of Law, Nirma University, Ahmedabad and a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, analyses the effect of the Companies Act on a minority squeeze out.
India no doubt acts as a crucial player in world economy by attracting enormous amounts of investment in various sectors and as well as endowing investments to different countries in order to make healthy relations with other countries so that it can further strengthen its position in the world market and can be known as a key financial player in the global economy. The various public and private limited companies play a major role in intensifying the position of India through a continuous process of negotiations along with investments in foreign businesses that contributes significantly to the growth of the Indian economy.
There has been consistent development in the laws regulating the functions of all types of companies and the area governing them is no more a gray matter including the rights of the shareholders of the company. Albeit, all the shareholders, do not participate actively in the day-to-day running of the company’s business, but they are no doubt an indispensable part of the company and they play a significant role in the corporate governance. As soon as the person becomes a part of a company he is bestowed with certain rights and privileges that are drafted under the Articles of Association or Memorandum to which they consent depending upon the specific shares. However, there has always been a bifurcation relating to rights and privileges of the majority, and minority shareholders where the former since the inception of the Company Act has always been in a dominant position and decision taken in the name of the democratic institution has always overshadowed the interest of the minority shareholders. Inter alia rights and duties of the shareholders, there is a very pertinent issue named as minority squeeze out in which the majority shareholders try to eliminate the minority shareholders by buying their stocks and compensating them accordingly.
The present article attempts to take the lid off the rights of minority shareholders that existed earlier and aimed at disclosing amendments and changes brought in the company’s act further strengthening their locus in the daily functioning of the company.
Minority Squeeze Out: Definition
The definition of minority squeeze out can be derived easily and is very evident and apparent from the name itself that when majority shareholders try to eliminate the minority shareholders by buying their shares and then accordingly paying compensation to them is the very essence of the concept. However, the issue is regarding the consent of the minority shareholders and the percentage of share that a shareholder should acquire to buy the funds of minority shareholders. Squeezing out minority has always been a debatable issue involving several technicalities and at the time it even becomes a tedious job when court proceedings come into the picture. The company act of 1956 had provision like Section 395 where the transfer of share can take place but with due consent of the minority shareholders which made the task practically arduous which lead the company to take resort of Section 100 that allows the company to go for selective reduction of share capital by squeezing out the minority shareholder.
However, with the introduction of Company’s Act of 2013 considerable changes and amendments have been brought and are subsequently discussed in this manuscript.
Impact of the Companies Act, 2013
Section 236 of the Companies Act of 2013 deals with regard to the minority squeeze out where several changes have been brought trying to remove all the previous rigour that took place while eliminating minority shareholders by buying their funds, but the opinion of various scholars and jurists pertaining to it still suggests that there still prevails ambiguity and uncertainty as to various aspects related to reducing the share capital of the company by putting the minority shareholders at a fragile end. The status quo is that there are certainly many lacunas and loopholes in the act and taking care of the interest of the minority shareholders continuous to be a myth in the corporate governance.
After giving a peripheral reading to the Section 236, of the act, it can be deduced that the shareholders who acquire 90% of the equity share capital of the company can buy out the shares of minority shareholders after the determination of exit price by a registered valuer. In contrast to the earlier companies act many major changes have been introduced in this such as the “acquiring entity” includes the “acquirer” or the “person acting in concert” who are defined under India takeover code which is contrary to earlier provisions which contained only “companies”. Moreover, the provision clearly indicates that transfer of share is not the only way through which reduction of capital could take place, but it can also take place from an amalgamation, share exchange conversion of securities or for any other reason. An appreciable change that has been brought by the new companies act is regarding the determining the value of the exit price by a registered valuer; this modification has helped in removing the ambiguity that existed related to squeeze out in Section 100 of the company’s act of 1956. Prior to the companies act of 2013 the modus operandi involved while buying out the minority share was very strenuous and involved court proceedings which proved to be painstaking, however the contemporary act has reduced the rigorous process of court proceedings and has made the course much flexible where the squeeze out can be carried out without court intervention which nevertheless keeps the minority shareholders on an unstable platform. Inter alia alteration, one that has given a reasonable sort of relief to the minority shareholder is that they would be entitled to the share of additional compensation that the shareholder would receive consequent to the minority-by-out if the sale is at a higher price than minority buyout.
The legislation does not seem to be drafted considering the interest of the minority shareholders rather it suffers from certain ambiguity and has left several issues ignored with a scope for wide interpretation against the concern of minority shareholders. Along with the facts as mentioned earlier, the legislation has severe loopholes which are discussed as follows:
- The legislation does not articulate clearly on the issue that whether the minority shareholder is bound to sell their shares once the offer notice is sent to the majority shareholders. Section 236 mentions about the notification that is to be sent to the minority shareholders before acquiring their share and then without any provision regarding obtaining the consent of the shareholders the section states the majority shareholders to publish their sales record after they have bought the shares. Moreover if in any case, the majority shareholders are not able to buy all the shares the let out minority shareholders will be governed by the company’s act 2013. In all, there is a major uncertainty as to whether the minority shareholders are obligated to sell their share.
- Another very pertinent query that arises is that is the criteria to calculate the exit price is authenticated and qualifies all the requirement to ascertain the accurate exit price. The contention regarding ascertaining the proper exit price has been raised in the court several times and where the shareholder is a foreigner investor the exit price has to be calculated as per Indian foreign exchange laws and other necessary regulations. In the present act the value of shares of the company can be computed in following ways:
- If it is a public listed company, then the offer price has to be calculated according to the guidelines laid down by Security Exchange Board of India.
- On another hand, if it is a private company or an unlisted public company then the offer price would be determined by considering the highest price paid by the acquirer for acquisition in the last twelve months and fair prices of share as determined by registered value.
In a nutshell, it can be said that Section 236 is not a complete reasoned legislation and does not carve a proper way with regard to minority squeeze out and leaves the certain area where the company will face predicament resolving certain issues. The legal framework associated with regulation of companies and it’s agent it no doubts very intricate and more and more legislation and judicial precedents over the time has made it more complex instead of making it simple and lucid. There is a serious need for the legislature to come up with some simplified text which is well structured and is equally concerned about shareholders irrespective of their capital. The legislature should look for a balanced approach to preserving the interest of both promoters as well as non-promoters of the company while working in consonance with all the guidelines of Security Exchange Board of India and several other regulators in India.
Tarunya Krishnan, Khaitan &Co, New provision on minority buy-out | Is the buy-out a squeeze-out?, Lexology, http://www.lexology.com/library/detail.aspx?g=76064aa9-4fd5-4a9c-9430-be50e6fbd796, Last saw on 28/06/2016.
 Akash Choubey, Partner and Sukanya Hazarika, Associate Khaitan &Co, Minority Squeeze Out Impact of Companies Act,2013, (2014) PL (CL) January 60, SCC Online