Minority Squeeze Outs – reduction of share capital of Cadbury India Limited
In a matter involving the reduction of share capital of Cadbury India Limited (“Cadbury India”), a recent judgment of the Bombay High Court has addressed important issues relating to the squeeze out of minority shareholders.
As part of a Group policy to operate only though branches or wholly-owned subsidiaries, Cadbury India undertook a series of buy-backs and open offers from its shareholders. The current judgment was in relation to Cadbury India seeking sanction of the Court for a reduction of its share capital, previously approved by a majority of its shareholders (including a majority of the non-promoter minority holders). The petition as initially made, was predicated on two valuation reports, which the dissenting minority claimed to be deficient and with significant errors, including in the technique used for valuation. The Court ordered an independent valuation by an independent valuer, which, too, failed to appease the protesting minority.
The submissions of the dissenting minority seemed to suggest that the Court is required to, as a matter of law, take on itself the burden of a microscopic examination of an accounting valuation exercise, testing every assumption, weighing every finding, interfere and abandon assumptions, methodology and valuations, substituting it’s own wisdom (or rather wisdom in line with contentions of the minority) for that of qualified (independent) valuers.
The judgment dismisses these submissions by reiterating the rule in previous precedents, that “
Another valuation is always possible. … Valuations are, by definition, inexact. They do not have an invariable, arithmetical precision. They are approximations, estimations, best-judgment assessments. It is emphatically not for a court to substitute its own view for that of a valuer. It may accept or reject a given valuation, but that must be for cogent reasons and within the well-defined boundaries of what is judicially permissible and what is not.”
Relying on well settled principles in the realm of capital reduction, the Court held that its duty lies in ensuring that: (1) the scheme is not against the public interest; (2) the scheme is fair and just, and not unreasonable; (3) the scheme does not unfairly discriminate against or prejudice a class of shareholders; and (4) a balance is drawn between the commercial wisdom of the shareholders expressed at a properly convened meeting and the whims and fancies of a few protesting shareholders. “Prejudice” in relation to valuation of a scheme would mean something more than just receiving less than what a shareholder desires, being 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.
The Court noted that as it is impossible for a Court to say which of several available valuation models are the “best” or most appropriate, unless it is proven to a Court that a method of valuation is such as has resulted in an artificially depressed or contrived valuation well below what a fair-minded person may consider reasonable, it is not the duty of the Court to venture into the realm of convoluted analysis and take on itself an accounting burden that is no part of its expertise or statutory obligation.
The judgment relies on the previous Division Bench Judgment of the Bombay High Court in Sandvik Asia Limited v. Bharat Kumar Padamsi & Ors. [2009 (3) Bom CR 57], which held,
“… 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 judgment ended a wait of about 5 years for the completion of the capital reduction process initiated by Cadbury India, and in this context, it is hoped that the observations in the judgment with respect to the excessive protests made by a miniscule number of the non-promoter minority shareholders are borne in mind with respect to objections to future schemes. In the ultimate analysis, perhaps the entire class of minority shareholders was only put to greater prejudice on account of the tremendous delay caused by a handful of objecting shareholders, which although resulted in a higher valuation, may not compensate sufficiently for the delay in receipt of the moneys and the uncertainty lent to the process over several years.
Voting at Shareholder Meetings through Postal Ballot / E-voting – Scheme of Amalgamation by Godrej Industries Limited
The concept of voting remotely by postal ballot was first introduced in India by the 2000 Report of the Committee Appointed by the Securities and Exchange Board of India (SEBI) on Corporate Governance under the Chairmanship of Mr. Kumar Mangalam Birla, with a view to strengthen shareholder democracy.
Section 192A of the Companies Act, 1956 (1956 Act) was inserted in the 1956 Act with effect from June 15, 2001 to provide for the passing of resolutions by postal ballot in public listed companies. The 1956 Act read with rules issued thereunder prescribed certain (important) items, such as alteration of articles of associations to insert provisions defining private company, issuance of shares with differential voting rights, giving loans, extending guarantees or providing security in excess of the limits prescribed by Section 372A(1), to be mandatorily decided only by way of postal ballot and left it open to a (public listed) company to pass such others optionally as it deems fit.
The 2003 Report of the SEBI Committee on Corporate Governance dated February 8, 2003 chaired by Mr. N. R Narayana Murthy noted that the absence of an option to members to enable them to vote by postal ballot for key decisions makes the concept of corporate democracy illusory.
Recognizing the salutary nature of postal ballot, the 2005 Report submitted by the Expert Committee on Company Law headed by Dr. Jamshed J. Irani to the Ministry for Company Affairs on May 31, 2005 (“JJ Irani Report”) recommended permitting every company to transact any item of business as it deems fit through postal ballot (apart from prescribed mandatory items). The JJ Irani Report also promoted extensive use of postal ballot including electronic media to enable shareholders to participate in meetings. However, at the same time, realizing that decisions on certain items benefit from discussions, and enable members to make an informed decision, the JJ Irani Report recommended the prescription of a negative list of items to be transacted only at a physical meeting and not through postal ballot, including consideration of annual accounts and reports of directors and auditors, declaration of dividends, appointment of directors, appointment of and fixing the remuneration of the auditors, and items of business in respect of which directors/ auditors have a right to be heard at the meeting (e.g. when there is a notice for their removal), collectively, “Negative List”.
In 2013, SEBI revised the requirements for stock exchanges and listed companies involved in a scheme of arrangement under the 1956 Act by way of two circulars – Circular No. CIR/CFD/DIL/5/2013 dated February 4, 2013 and SEBI Circular No. CIR/CFD/DIL/8/2013 dated May 21, 2013 (SEBI Circulars). The SEBI Circulars mandatorily require certain specified types of schemes involving listed companies to have a suitable provision for obtaining shareholders’ approval through a special resolution passed through a postal ballot, after disclosure of all material facts in the explanatory statement sent to the shareholders in relation to such resolution.
The suggestions in the JJ Irani Report, the 21st Standing Committee Report and the 57th Standing Committee Report were agreed and accepted and the Negative List has found its place in Section 110 of the Companies Act, 2013 (“Act”). Section 110 of the Act requires certain items to be mandatorily decided (and certain other items, other than the Negative List items, to be optionally decided) by way of postal ballot, including by electronic means (“Postal Ballot”), instead of transacting such business at a general meeting. The Section further has a deeming provision and deems all resolutions assented to by the requisite majority of the shareholders by means of Postal Ballot to be duly passed at a general meeting duly convened and held in this regard.
Additionally, by way of Circular No. CIR/CFD/POLICY CELL/2/2014 dated April 17, 2014, Clauses 35B and 49 of the Equity Listing Agreement have been amended and e-voting facility has been made mandatory in respect of all shareholders’ resolutions to be passed at general meetings or by postal ballot.
A judgment of the Bombay High Court in the scheme of amalgamation of Wadala Commodities Limited with Godrej Industries Limited (Godrej) has raised pertinent issues with regard to the provisions of the Act dealing with Postal Ballot.
A Company Summons for Directions (CSD) was filed by Godrej requesting directions for holding meetings (including a request for dispensation of the holding of a meeting of its members). In the course of the CSD, a question arose as to whether a scheme could be approved by a majority of equity shareholders of the company voting by Postal Ballot in complete substitution of a physical meeting. In this context, certain fundamental issues relating to shareholder meetings were discussed.
Fundamentals of Court Convened Meetings:
The 1956 Act (sections 391 to 393) as well as the Act (Sections 230 to 232, although not yet notified) treat Court convened shareholders’ meeting under section 391 on a different footing as compared to the other shareholders’ meetings held by a company (i.e. annual general meetings and extra-ordinary general meetings). To this end, Court convened meetings are actually convened by the Court at its discretion, and conducted pursuant to a special set of rules being the Company (Court) Rules, 1959. A parallel to these rules under the Act has not yet been notified, since the constitution and notification of the National Company Law Tribunal under the Act is pending.
In this context it may also be noted that the provisions of Sections 391 to 394 of the 1956 Act are a complete code by themselves, as has been held by several High Courts including the Bombay High Court. To that extent, it is debatable whether Section 110 of the Act (and Section 192A of the 1956 Act) would be relevant for the purposes of schemes of arrangement, whether under 1956 Act or under the Act.
However, since arguments canvassed on behalf of the petitioner laid heavy emphasis on Section 110 of the Act to seek dispensation for convening a shareholders’ meeting, the result, in the opinion of the authors, is a judgment which, in order to prevent the implementation of such arguments, appears to set down conditions on certain aspects that may end up being more stringent than necessary on certain issues pertaining to Court convened and other shareholders’ meetings.
Principles analyzed in the Judgment:
(1) Benefit of Collective Wisdom Inherent in the Right of Members to Vote: The Judgment has recognized the rights of members, not merely to cast a vote in favour of or against a scheme, but also to have the benefit of collective wisdom.
(2) Amendments: The shareholders of a company have complete power to approve, reject or modify a proposed scheme and once a scheme of amalgamation is duly passed by the requisite majority of the members, the Court cannot intervene unless it is unjust or prejudicial to the interest of shareholders. Inherent in the right to approve a scheme proposed by the board/ management of a company comes the right to approve it with amendments, including amendments in relation to the share exchange ratio.
(3) Court Convened Meetings: The Judgment also states that Section 110(1) of the Act (which permits any matters as a company may choose, other than the Negative List items, to be decided by Postal Ballot) begins with a non-obstante clause, i.e. “Notwithstanding anything contained in ‘this Act’”, and therefore applies only to the provisions of the Act (i.e. the Companies Act, 2013) and does not extend to Sections 391 to 394 of the 1956 Act. Additionally, Section 110 of the Act is with regard to meetings called “by the company”, while meetings in a scheme of amalgamation are Court convened.
(4) The Judgment has come to a conclusion that at a Court convened meeting, a physical meeting of members of the company is essential and cannot be done away with. However, in addition to the physical meeting provisions for Postal Ballot should be provided to the member. This essentially means that a Court convened meeting is now to be held (a) physically, and in respect of such meetings, provisions should be made for (b) postal ballot, and (c) (remote) electronic voting, in addition to (d) electronic voting at the venue of the meeting (with (a), (b), (c) and (d) collectively referred to as “Voting Options”). A shareholder who has cast a vote by postal ballot or by electronic voting from a remote location (other than the venue of the meeting) is additionally entitled to attend the meeting and participate in the proceedings at such meeting, albeit he cannot vote at such meeting.
Analysis of the Judgment:
The Judgment does focus on important issues in relation to the rights of shareholders of a company and pierces the surface of the right to vote of a shareholder, which inherently in its essence includes the right to discuss, debate, get the benefit of collective wisdom and amend a resolution before/ as an alternative to merely approving or rejecting a resolution as proposed by the board/ management of a company. However, at the same time, it leaves the following issues open for discussion:
(1) Physical Meeting vis-à-vis Dispensation: Under the provisions of Sections 391 to 394 of the 1956 Act, a well established practice was to seek appropriate directions from the Court in respect of convening or dispensation of meetings. Section 391 of 1956 Act granted full discretion to Courts to convene or dispense with meetings since it provided that the Court may on an application by the Company order a meeting of the members or any class thereof to be called, held and conducted in such manner the Court directs. It is submitted that the same principle ought to apply with respect to Act and it is entirely for the Court in its discretion and based on the facts and circumstances of every case to convene or to dispense with a meeting. To that extent the Judgment appears to set out a rule that Postal Ballot may never be a replacement of an actual general meeting, this issue needs greater consideration and deliberation.
(2) Voting at Court Convened Meetings: Rule 77 of the Company (Court) Rules, 1956, mandates decisions at Court convened meetings to be ascertained only by taking a poll. However, the Judgment seems to mandate all the four Voting Options to be provided to shareholders at every Court convened meeting. For companies convening such meetings, there is now some amount of uncertainty with respect to the process to be followed for voting at court convened meetings.
Another suggestion made in the Judgment is that electronic voting should be permitted at the meeting itself. Whilst there is fundamentally no reason for electronic voting not to be permitted at the Court convened meeting, what needs to be considered is that distinct tests of requisite majority needs to be fulfilled with respect to the SEBI Circulars on the one hand (special resolution by Postal Ballot) and Section 391 to 394 on the other hand (majority in number representing three-fourths in value). Allowing a shareholder to attend the meeting, be treated as part of quorum for the meeting, and thereafter also be allowed to vote by electronic voting facility and thereby not be taken into consideration for the purposes of the test of majority in number representing three-fourths in value under Section 391 to 394 will result in needless complications for the company convening the meeting and the scrutineers.
(3) Collective Wisdom: Although the Judgment does appreciate the right of members to get the benefit of collective wisdom and to make amendments to a scheme, the Judgment, in mandating both Postal Ballot and a physical meeting simultaneously has the effect of ignoring some of the rationale for introduction of voting by Postal Ballot (as discussed earlier). In the event the option of Postal Ballot is provided to members and some members taking the benefit thereof vote through Postal Ballot, they do not get the benefit of discussion or collective wisdom of other members of the company. In such an event, different members may take a view and vote based on different considerations.
(4) Amendments: The Judgment lays emphasis on the discussion on the share exchange ratio at the meeting. It is submitted that as a matter of practice such ratio can generally only be either approved or disapproved at a meeting. It is unlikely for a share exchange ratio to be negotiated at a meeting particularly where fresh valuation reports, independent fairness opinions, etc. may be required in order for any swap ratio (including a modified swap ratio) to be put up for discussion. Therefore, for all practical purposes the share exchange ratio, and a scheme in its entirety, is either approved entirely or not approved at all in a situation where the requisite majority of members are not convinced of the share exchange ratio. Further, the moment the option for Postal Ballot has been provided, irrespective of whether even a single member has chosen to vote by that manner, amendments to resolutions or a scheme may not represent a fair outcome (or may render the process unworkable), since those who would have voted by Postal Ballot would not have considered such amendment.
(5) Postal Ballot, a Truer Test?: The alternative to a physical meeting, whether by way of dispensation of the meeting on receipt of written consent from a certain percentage of members (or creditors) or by passing of requisite resolutions by Postal Ballot, is also likely to be a truer test. The practical reality of companies needing to solicit shareholder attendance for physical meetings, and the objectives underlying the introduction of Postal Ballot, i.e. of greater shareholder participation in meetings, need to be given due weightage.
A well publicized recent case of arrangement of a multinational involving its listed subsidiaries in India demonstrated that the scheme was actually put to test on account of the Postal Ballot, and not because of the shareholders meeting. Based on reports available in public domain, the company in question received approximately 68% approval in the Postal Ballot process (which was sufficient for the purposes of SEBI’s postal ballot requirements) – as compared to the approval of over 98% in number representing over 90% in value received at the shareholders’ meeting.
(6) Quorum Requirements: Shareholders, now being entitled to vote by Postal Ballot, may choose that option and prefer not to attend a meeting physically. In such an event, if the minimum quorum is not achieved at the physical meeting despite votes having come in through Postal Ballot, will it mean that the resolution fails completely and the scheme is not sanctioned? Such an eventuality and the procedure to deal with the same need to be taken into consideration.
(7) Listing Agreement Requirements: The provisions of the SEBI Circulars with regard to passing of resolutions by Postal Ballot in relation to a scheme of arrangement are applicable to all listed companies. This is independent of and over and above or in addition to the requirements of a physical Court convened meeting. One does not over-ride the other or render the other redundant. Irrespective of whether a Court convened meeting is mandated to be held or a dispensation granted, the passing of the resolution approving the scheme of arrangement by postal ballot is an independent and an additional process which has to be followed by listed companies.
While observing “Prima-facie it appears that the provisions of Section 110 of the 2013 Act cannot and do not extend to any scheme matters. This is true of all companies, whether listed or not.”, the Judgment has stated,
“Consequently, any SEBI circulars or guidelines or notifications that make electronic voting or postal ballot the exclusive method of voting on such schemes are clearly unlawful and contrary to the intent of Sections 230/232 of the 2013 Act and of Sections 391/394 of the 1956 Act.”
It is submitted that this observation may result in confusion for listed companies currently involved in a scheme of arrangement, particularly since the SEBI circulars do not appear to have mandated that electronic voting or postal ballot should be the exclusive method of voting on such schemes, but rather that the Postal Ballot process is intended to supplement the Court convened meetings.
(8) Previous Judicial Pronouncements: Certain courts have permitted resolutions approving a scheme of arrangement to be passed solely by way of Postal Ballot and have dispensed with the holding of a physical meeting.
(9) Provisions in relation to Schemes under the Act and the 1956 Act: Additionally, it is pertinent to note that Section 391 of the 1956 Act (which is currently in force) expressly provides that a majority in numbers representing 3/4ths in value of the members present and voting either in person or, where proxies are allowed, by proxy, is required to approve a scheme of arrangement. Section 230 of the Act has expanded the scope to allow persons to vote at meetings either themselves or through proxies or by postal ballot for the adoption of a scheme of arrangement. However, Section 230 of the Act is not yet notified and Section 391 of the 1956 Act does not currently permit voting by Postal Ballot.
Therefore, while the Judgment does raise valid concerns, it is submitted that some of the issues decided in the Judgment require a more detailed analysis and consideration.
Recognizing inconsistencies in the act, the MCA, by way of General Circular No. 20 of 2014 dated June 17, 2014 issued a clarification in relation to voting through electronic means, stating inter alia:
(1) A person who has voted through electronic means is not be debarred from attending the meeting physically, but he is not permitted to vote again at the meeting and his earlier vote would be treated as final.
(2) In relation to companies covered under Section 108 of the Act read with Rule 20 of the Rules, provisions in relation to a demand for poll would not be relevant, but voting is required to be on the principle of ‘one share – one vote’ unlike ‘one person – one vote’ principle under show of hands, and therefore, the chairperson of the meeting is cast with the responsibility to regulate the meeting accordingly.
(3) Shareholders, who cannot participate in a general meeting personally or exercise voting through electronic means, do not have the option of voting through postal ballot.
(4) In case a company not mandated under Rule 20(1) of the Rules, opts or decided to give its shareholders e-voting facility, the entire procedure specified in Rule 20 would be applicable to such company.
In line with the last clarification above, MCA has, vide notification dated June 23, 2014, amended Rule 20(3) of the Companies (Management and Administration) Amendment Rules, 2014 necessitating companies not mandatorily covered by the provisions of the Act in relation to e-voting to follow the procedure specified in Rule 20 in the event such company were to provide e-voting facility to its members. However, recognizing the hardship in implementing provisions of the Act in relation to e-voting, the MCA has deferred the mandatory applicability of these provisions to January 2, 2015.
It is hoped that further consideration of the above issues by courts and the MCA would result in clarity and simplification of the process for shareholder meetings, and in particular, Court convened meetings for schemes of arrangement.
Nandish Vyas is a Partner and Shyamalene Siqueira is an Associate at AZB & Partners
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