Abstract- This write-up examines the concept of minority squeeze-out in India and the way forward by taking into consideration the provisions of the Companies Act, 2013 and the Rules connected therewith.
Minority shareholders, as the term suggests, refer to a person or organization that owns fewer shares in a company than the controlling shareholder1, making it difficult for such shareholders to participate in the process of decision making, thereby giving birth to the Rule of Majority. The Rule of Majority was first laid down in the case of Foss v. Harbottle2 and is based on the fundamental principle of corporate democracy, which entails that it is upon the majority's will to decide what is in the company's best interest.3
While on the face of it, there seems to be no problem with this whole idea of upholding the rights of the majority, it does raise concerns about the rights of those shareholders who do not form part of such majority.
2. MINORITY SHAREHOLDERS AND SQUEEZE-OUT:
i) Minority Shareholders:
Minority shareholders could be defined to mean shareholders holding not more than 10% shares of a company. This is in view of Section 235 of the Companies Act, 2013 which has put the said limit of 10% of shares of a company for 'dissenting shareholders' in case of acquisition of shares of such shareholders.4
Although the definition does not pay much importance to the rights of minority shareholders in a company's decision-making process, the Companies Act, 2013 attempts to protect the interest of such shareholders by putting a restriction on the unbridled power of the majority.
ii) The Concept of Minority Squeeze-Out:
The term "squeeze-out" usually refers to the mandatory acquisition of the equity shares held by the minority in exchange for a "fair" price determined in accordance with the provisions of the Companies Act, 2013 read with the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016.
The question pertaining to whether such an act in exchange for a price can be referred to as unfair and inequitable arose in the case of Sandvik Asia Limited v. Bharat Kumar Padamsi, wherein it was observed that "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-promoters shareholders having voted in favour of the resolution shows that the Court will not be justified in withholding its sanction to the resolution."5
iii) Why is there a need to regulate?
The Rule of Majority, as laid down in the case of Foss v. Harbottle is based on the principle of decision making by the majority shareholders and, in such cases where the majority shareholders take the decisions, there could be no interference by the Court.6 . While this rule has been supported by the Utilitarian approach, which purports that decision-making power always vests with the majority, thereby automatically conferring a greater decision-making power, the legislature had a contrary view.
To amend the existing provisions of the Companies Act, 1956, an Expert Committee was set up by MCA in 2004 that presented its report in 2005, which had, among others, focused on protecting the interests of minority shareholders. The Committee was headed by J.J. Irani and had pointed out the need to maintain a balance between the majority rule and the rights of the minority shareholders.7
3. PRESENT LEGAL POSITION:
i) The power to acquire shares of shareholders dissenting from a scheme or contract approved by the majority:
Based on similar lines as Section 395 of the Act of 1956, Section 235 of the Companies Act, 2013 provides for the acquisition of shares by a company from the dissenting shareholders by way of a scheme or contract which has been approved by the majority of shareholders.
The Section provides that: "Where a scheme or contract involving the transfer of shares or any class of shares in a company (the transferor company) to another company (the transferee company) has, within four months after making of an offer in that behalf by the transferee company, been approved by the holders of not less than nine-tenths in value of the shares whose transfer is involved, other than shares already held at the date of the offer by, or by a nominee of the transferee company or its subsidiary companies, the transferee company may, at any time within two months after the expiry of the said four months, give notice in the prescribed manner to any dissenting shareholder that it desires to acquire his shares."8
Sub-section (2) of Section 235 of the Companies Act, 2013 further provides that where a notice has been given, the transferee company shall be entitled to and bound to acquire such shares, within a period of one month from the date of such notice, unless the National Company Law Tribunal, on an application being made by such dissenting shareholders, ordered otherwise.9
In this regard, the Court in AIG (Mauritius) LLC v. Tata Tele Ventures, had observed that "90 per cent majority should comprise of different and distinct persons since this would then fall in line with the rationale of the Section and justify the overriding of the interests of the dissentients.... the offeror must be substantially different to the majority."10
ii) Purchase of Minority Shareholding:
Section 395A was introduced in the Companies (Amendment) Bill, 2003 to regulate the acquisition of remaining shares, which, although not implemented, was recommended by the J.J. Irani Committee to be taken into consideration for developing a framework for the acquisition of minority shareholders.11
With the enactment of the Companies Act, 2013, Section 236 was introduced, which provides that in the case where the acquirer becomes a registered holder of 90% or more share capital or when the majority acquires 90% or more share capital in the company by way of an amalgamation, share exchange, conversion of securities or for any other reason, such acquirer is obligated to notify the company of their intention to purchase the remaining equity shares.12 In case of such acquisition, the acquirer shall make an offer to such minority shareholders at a price determined by a registered valuer13 in accordance with the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016.
Apart from providing the acquirer with the option to purchase such minority shareholding, the Section also empowers the minority by providing them with an opportunity to make an offer to the majority shareholders to purchase the remaining shareholding at a price determined in accordance with the rules, only in a case where the preconditions provided for under Sub-sections (1) and (2) are complied with.14
iii) Minority Takeover:
The Government, vide notification dated 3 February 2020, had introduced a new method for acquisition of shares of the minority by unlisted companies. Section 230(11)15 read with Rule 3(5) and (6) of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 permit the majority of shareholders, holding at least 3/4th of the shares, to make an offer to acquire the remaining shares by making an application before the National Company Law Tribunal.16
Rule 80A of the said Rules provide for the manner in which such application is to be made and provides that the report of a registered valuer shall be submitted along with the application, thereby ensuring that the rights of the minority are protected at all costs.17 Further, sub-section (12) of Section 230 attempts to balance this power of the majority by providing the party, aggrieved by the takeover offer, a remedy to make an application to the Tribunal.18
One of the most important factors to be considered while acquiring such minority shareholding is whether such shares are being purchased at a fair and equitable price and if not, can it be held to be in contravention with the rights of the minority?
This question was answered in the case of Cadbury, wherein it was observed that "In considering the application for sanction, the Court must ensure that (1) the scheme is not against the public interest; (2) the scheme is fair and just, and not unreasonable; and (3) the scheme does not unfairly discriminate against or prejudice a class of shareholders.
"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."19
4. PROTECTION TO MINORTIY SHAREHOLDERS IN OTHER JURISDICTIONS
i) European Union:
The process of minority squeeze-out in the European Union is governed by the Third Directive, i.e., the Third Counsel Directive Concerning Mergers of Public Limited Liability Companies which is applicable in case of mergers and provides for a fair 'exchange ratio' which determines the shareholding of both the companies, and the Thirteenth Directive on Takeovers which provide for a two-step choice to members of the EU. The first choice talks about a bid, which is to be made mandatorily for the acquisition of remaining shares, while the second seeks the consent of the minority shareholders.
The Corporations Act, 200120 provides explicitly for protection of the rights of minority shareholders and empowers such shareholders to challenge the approval obtained by the majority in a general meeting. The law is based upon Eggleston Principles which are aimed at promoting fairness and protection to minority shareholders.21
iii) United Kingdom:
The law in United Kingdom resonates to the Indian law and provides the acquirer who holds at least 90% shares to acquire the remaining shares. Similarly, it also provides the minority shareholders to 'sell-out' their shares to such acquirer who holds a minimum of 90% shares.22
On an analysis of the provisions pertaining to minority squeeze-out, it is clear that the necessity of protecting the interest of the minority shareholders has been recognized. However, as it presently stands, the legislation provides for an inefficient and costly recourse to minority shareholders in case of a 'squeeze-out' and hence, does not afford adequate protection to such minority shareholders, especially when compared to other jurisdictions.
The Lawmakers may consider:
- providing the minority shareholders with an option to challenge the approval in a general meeting; or
- requiring a 'majority of the minority' vote to give effect to such acquisition.
Such measures would be essential to ensure that whichever method of squeezing out of the minority is adopted, the goal of protection of the minority should remain intact.
The Law On Minority Squeeze-Out In India
1. "Minority shareholder." https://dictionary.cambridge.org/ Dictionary, Cambridge, available at http://dictionary.cambridge.org/dictionary/english/minority-shareholder. (last accessed on 28 May 2022).
2. 67 ER 189.
3. Boyle and Birds' (eds.), Company Law 673 (John Birds et al., 3rd ed., 1997).
4. The Companies Act, 2013 (Act 18 of 2013) s. 235(1).
5. (2009) 91 CLA 247 at page 63.
6.  67 ER 189.
7. Ministry of Corporate Affairs, "Report of the Expert Committee on Company Law" (May, 2005).
8. The Companies Act, 2013 (Act 18 of 2013) s. 235(1).
9. The Companies Act, 2013 (Act 18 of 2013) s. 235(2).
10. 43 SCL 22943 Del 2003.
11. Ministry of Corporate Affairs, "Report of the Expert Committee on Company Law" (May, 2005).
12. The Companies Act, 2013 (Act 18 of 2013) s. 236(1).
13. The Companies Act, 2013 (Act 18 of 2013) s. 236(2).
14. The Companies Act, 2013 (Act 18 of 2013) s. 236(3).
15. The Companies Act, 2013 (Act 18 of 2013) s. 230(11).
16. The Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 Rule 3(5), 3(6).
17. The Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 Rule 80A.
18. The Companies Act, 2013 (Act 18 of 2013) s. 230(12).
19. Cadbury India Limited, In re, 2014 SCC OnLine Bom 4934.
20. The Corporations Act, 2001.
21. Emma Armson, "Evolution of Australian Takeover Legislation" 39 Monash University Law Review 654, 694 (2013).
22. The Companies Act, 2006 Chapter 3 of Part 28.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.