1. INTRODUCTION
The Companies Act, 2013 ("Act"), by way of Section 230(11) and Section 230(12) had for the first time made provision for takeover of minority shareholders by majority shareholders of a company and extended the concept of takeover often associated only with listed company to unlisted companies. However, the full scope and nature of this newly introduced provision had remained unknown as rules had not been framed under them and their implementation was kept in abeyance.
On February 03, 2020, the Ministry of Corporate Affairs ("MCA") notified1 Sections 230(11) and Section 230(12) of the Act along with the Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 20202 and the National Company Law Tribunal (Amendment) Rules, 20203 ("Amendment") which pertain to arrangements involving takeovers. By way of the Amendment, the MCA has made some key insertions to the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 ("Arrangement Rules") and the National Company Law Tribunal Rules, 2016 ("NCLT Rules"). The Amendment could have some significant implications, specifically on the minority shareholders of a company.
2. KEY CHANGES
2.1. Qualifications
Where a member or a group of members apply to the National Company Law Tribunal ("NCLT") for seeking approval of a 'takeover offer', the applicant(s) must:
- hold at least three-fourths of the Shares in the company; and
- have filed the application for acquiring any part of the balance 25% of the Shares of such company.
"Shares" here refers to instruments with voting rights.
2.2. Exception to the Qualifications
The Amendment states that the relevant sub-rule providing for takeover will not apply in case of:
- any transfer or transmission of Shares through a contract, arrangement or succession; or
- any transfer of Shares made in pursuance of any statutory or regulatory requirement.
2.3. Requirement of a valuation report
In addition to the application, the applicant(s) is/are required to submit a report prepared by a registered valuer disclosing the details of the valuation of the Shares proposed to be acquired under the scheme of arrangement. Such valuation report needs to be prepared after taking into account the following factors:
- 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 as determined by the registered valuer after taking into account valuation parameters such as return on net worth, book value of Shares, earning per Share, price earning multiple vis-à-vis the industry average, and such other parameters as are customary for valuation of shares of such companies.
2.4. Deposit of consideration
Another key provision introduced in the Amendment is the obligation on the member to open a separate bank account and deposit no less than half of the total consideration of the takeover offer in such bank account at the time of making the application. Further, the application must also contain the details of the said bank account into which the amounts will be deposited.
2.5. Grievance Redressal Mechanism
Section 230(12) of the Act provides for a grievance redressal mechanism to any person who is aggrieved by a takeover offer of unlisted companies, by granting an aggrieved person the right to make an application to the NCLT. In connection with the same, by way of the Amendment, Rule 80A has been inserted in the NCLT Rules that stipulates that an application can be filed in Form NCLT-1 and shall be accompanied with such supporting documents as listed in the NCLT Rules.
3. INDUSLAW VIEW
The Amendment has received mixed reactions amongst shareholders and investors, largely due to the ambiguity in the language. We have tried to examine them below.
3.1. Position vis-à-vis listed and unlisted companies
Section 230(11) of the Act specifically provides that listed companies will continue to be governed by the Securities Exchange Board of India ("SEBI") and the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 ("Takeover Code"). One can see that the Takeover Code has been kept in mind while drafting the Amendment as several elements from the Takeover Code find an echo in the Amendment. For instance, valuation report needs to take into account the highest price paid for acquisition of Shares during the last 12 months as a factor similar to the Takeover Code which stipulates that the offer price should be the highest price payable for an acquisition. Further, similar to the Takeover Code, a portion of the consideration needs to be deposited in escrow at the time of making the application.
3.2. Squeeze out or just another arrangement?
While the Amendment, subject to the qualifications (set out above in Para 2.1), appears to offer the applicant(s) the right to acquire the Shares of the minority shareholders in a company, Section 230(4) of the Act continues to provide a shareholder or shareholders that jointly hold 10% or more shareholding in the company, with the right to object to an arrangement under the Act. As a result, the three-fourths majority shareholders' consent requirement appears to be only a criterion to make an application of arrangement (through a takeover) before the NCLT and cannot necessarily be equated to the right of such applicant(s) to squeeze out the minority shareholders holding less than 25% without any protest.
However, from a reading of Section 230 of the Act with the Amendment and the Arrangement Rules, one can infer that a member or members jointly holding 75% or more shareholding in a company may now be able to squeeze out shareholders holding less than 10% of the shares in the company unless such shareholders can get NCLT to dispense with the minimum shareholding criteria for raising objections. This is possible as the Amendment permits an applicant (holding at least 75% Shares) to make an application for acquiring any part of the remaining Shares of a company and does not stipulate the minimum number of Shares that needs to be acquired.
3.3. Protection from takeover
The qualifications inserted to determine a takeover for an unlisted company comes with an exception to the applicability of such qualifications (as set out in Para 2.2). The exception has been provided in the form of an explanation that reads as follows
"Nothing in this sub-rule shall apply to any transfer or transmission of shares through a contract, arrangement or succession, as the case may be or any transfer made in pursuance of any statutory or regulatory requirement".
A literal interpretation of the exception suggests that any transfer / transmission of Shares which are made pursuant to a contract will not be subject to takeover. This could mean that if a share purchase agreement has been executed towards purchase of Shares then such transfer will be kept outside the purview of the takeover rights available to majority shareholders. However, that could be seen as a very strict reading of the exception. The exception could also be read to mean that wherever shareholders have entered into contracts that govern the transfer of their Shares then such Shares cannot be subject to takeover by majority shareholders. However, in the absence of clear indication of the intent behind the Amendment, shareholders have to tread carefully by building in permissible safeguards into their respective shareholders' agreements.
Footnotes
1. Notification available at http://www.mca.gov.in/Ministry/pdf/Notification_04022020.pdf.
2. Available at http://www.mca.gov.in/Ministry/pdf/Rules1_04022020.pdf.
3. Available at http://www.mca.gov.in/Ministry/pdf/Rules3_04022020.pdf.
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