In this article, Aditya Sethi & V.S Pravallika discusses Minority Squeeze Out, Judicial Interpretations and Methods under Companies Act, 2013.
The term squeeze out implies compulsory acquisition of equity shares of a company from minority shareholders through cash compensation. This method helps shareholders holding 90% or more shareholding in a company to acquire the shares in the company from minority shareholders. Squeeze Out refers to a transaction where the acquiring party is the controller of the firm to be acquired. The Companies Act, 2013 under Section 236 (Section 395 of Companies Act, 1956) provides for the concept of squeezing out which categorically mentions situations whereby minority shareholders can be bought out by the majority shareholders. Section 236 provides that a majority shareholder of a company holding at least 90% of equity shareholding has a right to notify its intention to buy out minority shareholders who may sell their shares to the majority shareholders at a price to be determined in accordance with the rules under Companies Act, 2013.
Various Methods of Squeeze Out under Companies Act, 2013
Reduction of Capital
Section 66 of the Companies Act, 2013 provides that the paid up capital of a company can be reduced by paying off the minority shareholders. The reduction in such capital is subject to a special resolution which has to be further confirmed by the National Company Law Tribunal (NCLT) of the concerned jurisdiction. Judicial precedents suggest scenarios where selective reductions have been approved, allowing certain members to retain their shares unreduced while shares of others are extinguished.
The Court in Sandvik Asia Limited v. Bharat Kumar & Ors. held th
at ‘once it is established that non-promoter shareholders are being paid fair value of their shares, at no point of time it is even suggested by them that the amount that is being paid is any way less and that even overwhelming majority of the non-promoter shareholders having voted in favour of the resolution shows that the Court will not be justified in withholding its sanction to the resolution.’
The Court took a contrarian view in Chetan Cholera v. Rockwell and categorically observed that companies in India often adopt this method to selectively oust the non-promoter minority. The Court was critical of this observation and reiterated that it is important for Courts while protecting the rights of workman/employees/shareholders/promoters to not only adhere to the procedural and substantive aspects of scheme of arrangement. The Courts should also take into consideration Articles 38 and 39 of the Constitution which assures and secures the citizens a socialist state. The Court emphasized upon the duty of regulators like SEBI to safeguard the interests of the investors.
The Court in Cadbury India Limited approved a squeeze out through reduction of capital at a price determined by the valuer appointed by the Court. The Court denied the objections raised by the dissenting minority shareholders. The Court held that before it could object to a scheme of sanction, the objector must show that the valuation is ex-facie unreasonable. The Court relied on the judgment of Mafatlal v Mafatlal and observed that ‘Courts do not have the expertise, the time or the means to do this. What the Court’s approach must be to examine whether or not a valuation report is demonstrated to be so unjust, so unreasonable and so unfair that it could not result and result only in a manifest and demonstrable, inequity or injustice.
Acquisition of Shares
This method under Section 235 of the Companies Act, 2013 requires that a transferee company may under a scheme or contract; make an offer to the shareholders of the transferor company to acquire their shares. If such offer is approved by the shareholders holding 90% of the shareholding within two months after the expiry of four months, the transferor company may give notice to the dissenting shareholders, notifying them of its intention to acquire their shares. If a dissenting shareholder does not make an application to the National Company Tribunal within one month from the receipt of such notice, the transferee shall be entitled to acquire the shares of the dissenting shareholders on the same terms of the contract.
The Court in AIG (Mauritius) LLC v. Tata Televentures (Holdings) Ltd. addressed the question that if offers were received for shares constituting 90 per cent or more of capital of a company, then the remaining shares would be acquired at the same price. The Court categorically observed that the same group that was in the majority could not use to remove the small majority under this provision. The court held that ‘it was this very reason the section is deemed to be constitutional and if this was deviated from, it would amount to violation of fundamental rights and thus be struck down.’
Scheme of Arrangement
Section 230 of the Companies Act, 2013 allows a company to enter into compromises and arrangements with its shareholders and creditors. A company may begin by proposing a scheme that permits the controller to purchase the shares held by the minority shareholders. Under Section 230(1) of the Companies Act, 2013, the High Court can order a company to convene the meeting of the various shareholder classes. Each of the scheme must be approved by 3/4th majority in value of each class. Once the approval is obtained, the company may apply to the High Court for the sanctioning of the scheme. The High Court will then hold a meeting in which the interested parties may represent themselves and if satisfied, the High Court shall issue an order sanctioning the scheme under Section 230(5) &(6).
Purchase of Minority Shareholders under Section 236 of Companies Act, 2013
Section 236 of the Companies Act, 2013 provides that an acquirer on account of becoming a registered holder of 90% or more of issued share capital of a company by virtue of amalgamation, share exchange or by any other reason shall notify the company of their intention to buy the shares at a pre-determined price on the basis of a valuation by a registered valuer. The majority shareholders are also mandatorily required to deposit an amount equivalent to the value of shares acquired, in a separate account for at least a period of one year for payment to the minority shareholders which shall be disbursed to them within 60 days. Section 236 has to be read with Rule 27 of the Companies (Compromise, Arrangement and Amalgamation) Rules, 2016 to determine the price for purchase of minority shareholding. This provision also provides an option to the minority shareholders of a company to offer their shares to the majority, thereby assisting them in exercising their exit rights.
Consolidation of share capital under Section 61 of Companies Act, 2013
This option provides the company to consolidate and divide its share capital into shares having face value larger than the existing shares. This option is possible only if an authorization is provided by the Articles of Association of the company. After the consolidation, minority shareholders shall receive fractional shares which stand transferred to the Board or a person appointed by the board, who them in trust for such members.
Regulatory Framework for Minority Squeeze Out in Different Jurisdictions
The bidder after a takeover offer has the right to acquire minority shareholdings if it has been contracted by not less than 90% in value of shares which are the subject matter of the offer carrying voting rights. The company can further indulge in selective capital reduction.
The United States
An acquirer on completion of a tender offer holds 90% of the target shares, the acquirer can implement a short-form merger without the approval of any other shareholder from the target company. However, on the contrary the acquirer and the target company would proceed towards a long-form merger with the approval of other shareholders of the target company.
An acquirer intending to acquire the issued share capital of a public or private company by the method of squeezing out may make a general offer followed by compulsory acquisition or through a scheme of arrangement by way of mutual arrangement.
Articles 3 & 4 of Third Council Directive Concerning Mergers of Public Limited Company
These provisions are applicable to merger by acquisition and in a merger by the form of a new company. The shareholders of both the corporations must receive shares according to an exchange ratio approved by both sets of boards and shareholders.
Article 5& 15 of the Thirteenth Directive on Takeovers
Article 5 provides that anyone intending to acquire control shares of a listed firm must initiate a tender offer known as the mandatory bid. Article 15 provides that a shareholder acquiring 90%or more of the voting shares through tender offers may succeed in squeezing out minority shareholders at a fair price by using cash.
The new provisions incorporated in the Companies Act, 2013 with respect to squeeze-out balance out the rights of the acquirer in achieving the desired shareholding position in the target company and the minority shareholders to be adequately compensated. However, it is important for the minority shareholders to be aware of the implications of the squeeze out provisions in the 2013 Act and be aware of the rights that they have as owners of the company i.e. the right to vote, fair valuation, and oversight of the Court.
R. Luthra, et al, Minority Squeeze Out, available at: http://www.luthra.com/admin/article_images/minority-squeeze.pdf.
Sandvik Asia Limited v. Bharat Kumar & Ors., (2009) 3 Bom CR 57.
Chetan Cholera v. Rockwell,  102 SCL 93 (AP).
In Re Cadbury India Ltd, Company Petition No 1072 of 2009, Decided on 25th February. 2014.
Miheer H. Mafatlal v. Mafatlal Industries Ltd, JT 1996 (8) 205.
AIG (Mauritius) LLC v. Tata Televentures (Holdings) Ltd., (2003) 43 SCL 22 (Del.).