Purchase of Minority Shareholding under Section 236 Companies Act – What the NCLAT held

The National Company Law Appellate Tribunal has held that purchase of minority shareholding under Section 236 of the Companies Act 2013 can be done only in the event of an amalgamation, share exchange and conversion of securities and other similar circumstances..The phrase “for any other reasons” used in the Section after “amalgamation, share exchange, conversion of securities”, therefore, ought to be read ejusdem generis with the preceding words..The Appellate Tribunal has also held that in the absence of valuation by a registered valuer in terms of Section 236(2), shares of a minority shareholder could not be canceled under Section 236(6)..The Judgement was passed by a two-member Bench of Member (Judicial) Justice AIS Cheema and Member (Technical) Balvinder Singh in an appeal against an order passed by the Madras Bench of National Company Law Tribunal..The appellants, S Gopakumar Nair and Asha Devi, had filed a company petition before the NCLT under Sections 241 to 244 read with 246, 337 to 341 of the Companies Act, 2013 against OBO Bettermann India Private Limited (OBO India) and OBO Bettermann Holding – GMBH (OBO Germany) which is a shareholder in OBO India..OBO India was incorporated in December 2006. It was earlier in the name of Cape Electric India Pvt. Ltd (CEIPL). The Appellants were 100% shareholders in CEIPL. Pursuant to an MOU dated September 14, 2007, OBO Germany explored the possibility of becoming a shareholder in CEIPL..Subsequently, various documents, agreements, and arrangements were executed between the appellants and OBO Germany and the share capital of CEIPL was increased..In July 2008, CEIPL’s name was changed to OBO Bettermann India Private Limited and a fresh Certificate of Incorporation was issued by MCA..Over the course of time, OBO Germany became the holder of 99.64% shareholding in OBO India while the appellant’s holding reduced to 0.36%..OBO Germany then sought to buy out the equity shares of the appellants pursuant to a Put and Call Option Agreement. When the attempt did not materialize, OBO Germany issued notices under the provisions of Section 236 to the appellants and went ahead to buy their shares in spite of their resistance..The appellants thus approached the NCLT to address their grievances but the company petition was dismissed by NCLT on the ground of maintainability..NCLT held that since OBO Germany had acquired the shareholding of the minority shareholders, i.e. the appellants, the appellants did not hold any shares in OBO India and were thus not eligible to maintain Application under Section 241 of the Act..After hearing the parties and perusing the documents involved in the case, the Appellate Tribunal opined that it was “unable to agree with the findings recorded by the NCLT”..The Appellate Tribunal recorded that the fact that OBO India had only three shareholders i.e. OBO Germany and the appellants was undisputed. It was only after 2015-16 that the OBO Germany resorted to Section 236 and forcibly purchased the minority Shareholding that the shareholding of the appellants dropped to zero..These acts have already been questioned by the appellant on the ground that they were wrongly and oppressively deprived of their shares, and were subjected to other oppressive acts, the appellate Tribunal further noted..Retreating that Section 244(1)(a) of the Act gave the Right to Apply under Section 241 to such the Members of the company which are not less than one-tenth of the total number of its members, the Appellate Tribunal stated that the appellants had the requisite number of Members..It thus opined that NCLT ought to have decided the dispute with respect the shareholding under Section 241 and ascertained whether Section 236 was duly complied with..The Appellant Tribunal further took the opportunity to discuss the scope of Section 236 and observed that Section 236 has to be strictly construed and applied..It noted that Section 236 could be invoked in the context of an “acquirer” and a “persons acting in concert” as defined in provisions of SEBI Act as well as for companies other than listed companies, in the event of “an amalgamation, share exchange, conversion of securities or for any other reason.”.The Appellant Tribunal clarified that words “for any other reasons” should be circumscribed by the preceding words of amalgamation, share exchange, conversion of securities..“If the intention of the legislature was to give a free hand to person or persons who anyhow become 90% shareholders, it was notnecessary to use the sentence “by virtue of amalgamation, share exchange, conversion of securities or for any other reasons”. The words “for any other reasons” have to be read ejusdem generis with the preceding word and must take the same or similar colour….Words “for any other reasons” are ambiguous. If what Respondents are submitting is accepted to say that “any other reasons” is uncontrolled by the context, becoming 90% by even resorting to criminal acts will also have to be accepted.”.It thus held that words “for any other reasons” required section 236 to be read as a whole require along with other sections of the Chapter XV of the Act on “Compromises, Arrangements, and Amalgamation”..After explaining the scheme of the Chapter, the Court stated,.“.. there can be compromise or arrangement or mergers or amalgamation with certain percentage of persons-members dissenting, or, all could be assenting. The dissenting are dealt with under Section 235. Section 236 deals with the residuary in the event of all assenting shareholders and amalgamation or share exchange or conversion of securities taking place need may arise to those who have become 90% majority or are holding 90% to acquire the remaining minority shareholding.”.In view of the discussion, the Appellate Tribunal concluded that the present set of facts did not fall in any contingency listed in Section 236(1), specifically under “for any other reason”..“The documents show gradual change of shareholding under agreements with liabilities of the parties including Respondent No.1 company. Thus in our view Section 236 was not available to the Respondents.. Sub-Section (1) of Section 236 for its applicability would require occurring of “the event” of any person or group of persons becoming 90% of majority or holding 90% of the issued share capital of a company. That event too must be, by virtue of amalgamation, share exchange, conversion of securities or for any other reasons. No such “event” has taken place in the set of facts which we have.”.The Appellate Tribunal also went on to hold that in the absence of valuation by a registered valuer in terms of Section 236(2), shares of a minority shareholder could not be deemed to be canceled under Section 236(6)..“the provision of Section 236 has drastic nature of forcibly transferring the shares. When this is so the Section 236 has to be strictly construed and applied.. If Section 236 of the Act has to survive, it has to be insisted upon that the valuation must necessarily be by registered valuer and that too in accordance with the rules prescribed.”.In the present case, the valuation of the minority shareholding was not done by a registered valuer but a Chartered Accountant appointed by the OBO India and OBO Germany..For the above reasons, the order of NCLT, as well as the notice under Section 236, was set aside by the Appellate Tribunal..While restoring the shareholding of the appellants, the Appellate Tribunal remitted the issues under Section 241 to the NCLT for adjudication..The appellants were represented by senior advocate Sanjeev Puri, who was briefed by J. Sagar Associates team including Partners – Dhirendra Negi, Mayank Mishra and Sidharth Sethi and Senior Associate – Kumar Kislay..The respondents were represented by advocates Krishnendu Datta, Sahil Narang, Niharica Khanna, and Riddhi Jad..Read the Judgement: