Section 230(11) – Squeezing out the Minority Shareholder in Unlisted Company
(11) Any compromise or arrangement may include takeover offer made in such manner as may be prescribed:
Provided that in case of listed companies, takeover offer shall be as per the regulations framed by the Securities and Exchange Board.
Section 230(11): A new Exit route for Squeeze Out
Squeeze outs is a method whereby controller or majority shareholders undertakes a transaction to forcibly acquire remaining or minority shares of a company.
Section 230 of the Companies Act provides for arrangements between a company and its creditors or members or any class of them, after getting the majority approval and getting it sanctioned by NCLT. Earlier, the provision was limited till 230(10) however, recently in February 2020 through the amendment sub-clause 11 and 12 were brought in, whereby power has been given to the majority shareholders holding at least 3/4th (75%) of the share capital of the target company to enter into arrangement for acquisition of any part of the remaining shares in an unlisted target company.
The enabling new takeover provision provides for ‘takeover offer’ by the shareholders holding at least 3/4th of the shares of a company to the remaining shareholders, which means shareholders holding 75% or more of the issued share capital of the a company can now enter into an arrangement with the target company to acquire remaining shares by offering them the price determined by the registered valuers. Shares have been defined to mean equity shares or securities such as depository receipts, which entitle the holder to voting rights. The application with the takeover offer is required to contain the report of a registered valuer disclosing the details of the valuation of the shares proposed to be acquired as well as details of a bank account, to be opened separately by the offeror, wherein a sum of not less than 50% of the total consideration of the takeover offer is deposited. The valuation report needs to take into account the highest price paid by any person or group of persons for acquisition of shares during the last 12 months and the fair price of shares of the company. The provision is brought into effect keeping in mind the SEBI (Substantial Acquisition of Shares and Takeovers) (takeover code). The requirements of taking into consideration the highest bid for the shares in past 12 months and opening of an escrow account can be found in the takeover code also.
There were already various provisions available to squeeze out the minority like reduction of share capital under section 66, through section 236 requiring the shareholders holding minimum of 90% to make an offer to minority shareholders, etc. Practically, section 235 fails to achieve its objective of releasing the minority shareholders as the section does not clarify whether upon receiving such an offer the minority shareholders are obligated to sell the shares, and also no specific timelines have been prescribed for acceptance of such an offer. Section 236 has a pre-requisite of holding at least 90% shares, which is considered as a high threshold and difficult to implement. Moreover, it lacks clarity on whether the minority shareholders are obligated to accept the exit offer or they have the power to dissent.
In Re: Cadbury India Ltd.
The Bombay HC has set out the principles in the case which court should take into account while determining if selective reduction of share capital is fair, and observes that the new framework appears to have taken the principles into account fairly. The Cadbury principles emphasise the importance of ensuring fair valuation set out in the provisions. Although, the provisions set out the parameters to be taken into consideration, NCLT’s are troubled with the question as to what constitutes ‘fair valuation of company’s shares’. The Cadbury judgement has emphasised that a valuation report can be dismissed if found that minority shareholders have been discriminated against or prejudiced against. The judgement states “‘Prejudice’” here must mean something more than just receiving less than what a particular shareholder may desire. It means a concerted attempt to force a class of shareholders to divest themselves of their holdings at a rate far below what is reasonable, fair and just. Prejudice in this context must connote a form of discrimination, a stratagem by which an entire class is forced to accept something that is inherently unjust.
As such, according to the principles laid out in this case, for a court to decline sanction to a scheme on account of a valuation, an objector to the scheme must first show that the valuation is ex facie unreasonable, i.e., so unreasonable that it cannot on the face of it be accepted.
Crucial Point of Information
Sub-section (12) was also notified along with Section 230(11) which provided grievance redressal for the minority shareholders with respect to the ‘takeover’ offer. It allows the dissenting minority shareholder to contend the takeover offer on grounds on valuation reports. Based on Section 230(12), application was filed by the minority shareholders in Cadbury Case which led to the court making the observation. If resorted to Sub-section 12, the minority shareholder could mention any aspect of unreasonableness and try to get a favourable order from the court stalling the takeover offer. While the legislature has given excessive power to squeeze out minority with multiple exit options, the judiciary has tried to balance right of minority shareholders.
-Samyak Jain (LC Content Writer)
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