This article is written by Saswata Tewari who is pursuing a Diploma in M&A, Institutional Finance and Investment Laws (including PE and VC transactions) from LawSikho.

Introduction

Many times what happens in an unlisted company is that the minority shareholders come in a position to block the majority shareholders from giving out resolutions or taking any decision that the majority shareholders may consider suitable for the business of the company. Consequently in such situations, it becomes important for the majority shareholders of the company to consolidate the shareholding in the company to attain superior control over the business operations of the company, without getting any undue intervention from the minority shareholders.

As per the Companies Act, 2013 various provisions have been awarded to the majority shareholders of a company to buy out or squeeze out the minority shareholders of the company in a reasonable procedure.

This write up is an attempt to analyse the various options of squeezing out minority shareholders of a company.

What is the minority squeeze out?

Minority squeeze-out implies the option of forceful acquisition of the equity shares of the company by the majority shareholders. The shares are acquired from the minority shareholders through cash remuneration.

Section 236 of the Companies Act states the concept of squeezing out minority shareholders and explains the situations where the minority shareholders can be bought by the majority shareholders. 

This section further states that the majority shareholder of a company acquiring a minimum of 90 % equity shareholding of the company, has the right to notify his or her desire to buy out the minority shareholders, who can sell their shares to the majority shareholder at a price to be ascertained in compliance with the rules prescribed by the Companies Act.

What is a squeeze-out transaction? 

The term ‘squeeze out transaction’ under company law, simply shows a situation where the shareholders who have acquired a major portion in the shareholdings of the company, undertake a transaction to compulsorily acquire the remaining shares of the company. The acquiring party will be the controller of the firm to be acquired.

Several methods have been defined in the Companies Act using which the minority shareholders can be squeezed out by the majority shareholders, viz. Reduction of share capital, acquisition of shares, scheme arrangement, purchase of minority shareholders, consolidation of shareholders, etc.

Methods of squeeze out under Companies Act, 2013

Reduction of capital 

Section 66 of the Companies Act states the squeezing out option of reduction of share capital. Reducing share capital can be required in several situations such as trading losses, heavy capital expenses, and assets of reduced or doubtful value. This section provides particular methods of reduction of share capital such as reducing or extinguishing liability, canceling any paid-up share capital, and paying off any paid up share capital that is in surplus of the demands of the company. 

Nonetheless, these procedures are simply for examples and it was the strategy of the Legislature to give responsibility for the prescribed majority of the shareholders with the choice whether there should be a reduction of share capital and if so how it should be undertaken.

If the concept of reduction of capital is to be stretched, the buyback of shares would also be considered as one of the modes as it results in the reduction of share capital. However, the court does not check the intent behind the reduction of share capital, all it inspects is whether the price determined is fair and rightful. Therefore it can be seen from the judicial and legislative approach, that the reduction of share capital is an internal matter of the company, and no such procedure for such a reduction of share capital is prescribed. But the consent of the court or the tribunal is a must for the reduction of capital. The court is in a supervisory position to protect the interests of the creditors and the minority shareholders of a company.

The tribunal must send notice of the applications put for the reduction of share capital to the Central Government, Registrar, and also SEBI in the case of a listed company. The representations given by these authorities are taken into consideration by the court for giving its consent to the reduction of the share capital of the company.

It should be noted that procedural requirements given in the Companies Act 1956 for the reduction of the share capital were different than the procedure prescribed by the current Companies Act 2013. Previously, the court was permitted to dispense with the procedural requirements concerning particular circumstances.

Acquisition of shares

Section 235 of the Companies Act provides for the option of acquisition of shares. This section was introduced to safeguard the interests of the minority shareholders and to give out a fair exit for the minority shareholders.

As per this section, an acquiring company can make an offer to the shareholders of a company which is in the form of a scheme or a contract to obtain the shares of the company. If the shareholders of the company, holding at least 90 % gives their assent to such a contract within 4 months of the offer, the acquiring company has the right to give notice to the minority shareholders to obtain their shares at any time within two months after the expiry of the 4 months.

As per this section, it is not obligatory to get the sanction of the court or the tribunal. The jurisdiction of the court only comes into play when an application is filed by the minority shareholders objecting to the transfer of shares. In a situation, where a scheme or contract is accepted by 90 % of the shareholders of the company, the offer would be considered as a fair and reasonable one and the responsibility will lie upon the minority shareholders to prove the contrary. In such cases, the court has intervened only in cases where the scheme or contract is unreasonable. It has been provided that given the contractual nature of the agreement, the court would usually exercise restraint in interfering until and unless there is some fraud or disadvantage to the public interest.

Scheme agreement 

Section 230 of the Companies Act provides for the option of the scheme or the arrangement, which was previously covered by Section 391 of the Companies Act 1956. 

This section states the powers of the tribunal to make an order on the application of the company or any creditor or any other member to organize a meeting for the suggested compromise or arrangement between the company, its members, and the creditors. A notice of the meeting called in the execution of the order of the tribunal shall be sent to all the members and creditors of the company.

According to clause 6 of Section 230, a scheme or arrangement will be binding on the members and the company if it attains the consent of more than 3/4th of the members present and voting and is authorized by the court. The court has to check if the scheme is just and reasonable and is not contradictory to the provisions of law and does not infringe any public policy.

Purchase of minority shareholders

Section 236 of the Companies Act states that the registered shareholders of a company having at least 90% of the equity shareholdings of the company, either directly or along with an individual acting in concert because of an amalgamation, share exchange, conversion of securities, or for any other reason to first give a hint regarding their desire to buy the rest of the shares or part thereof, and then secondly to give an offer to the minority shareholders at a price ascertained by the registered valuer and ultimately getting the ownership of those shares by depositing the money equal in amount to the value of shares to be acquired in a different bank account. At the same time, the minority shareholders can also offer their shares to be acquired to the acquirer at a price ascertained by the registered valuer in compliance with the prescribed rules.

Nonetheless, in a realistic situation, Section 236 does not attain its purpose of releasing the minority shareholders because the section does not make it clear whether on the receiving of such an offer, the minority shareholders or the acquiring party is obliged to sell or buy the shares and no such particular timelines have been prescribed for acceptance of such an offer for the shares. Moreover, the situations where the shares are to be held in demat form have also not been discussed.

Consolidation of share capital 

Section 61 of the Companies Act provides for the option of consolidation of shares. Consolidation of shares implies consolidating the nominal value of shares that results in a decrease in the number of shares with an increase in the value of each share. For example, 100 shares having the face value of Rs. 10 each can be consolidated into 1 share having the face value of Rs. 1000 each.

Consolidation of shares is also known as the reverse stock split, which is considered an effective tool using which a company restructures its capital and can remove the minority shareholdings with the acceptance of the tribunal following the terms given in Section 61 and Rule 71 of the National Company Law Tribunal Rules, 2016.

References

http://vinodkothari.com/2020/02/minority-squeeze-out/

https://thelawblog.in/2020/06/25/minority-squeeze-out-in-re-cadbury-india-ltd/comment-page-1/

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