Author Name:   thass

The law relating to reduction of share capital can be found in Section 100 to 105 of the Companies Act, 1956. The recent judgements in Elpro and Sanvik Asia...

Squeeze out of minority shareholders

The law relating to reduction of share capital can be found in Section 100 to 105 of the Companies Act, 1956. The recent judgments in Elpro and Sanvik Asia have laid down that minority shareholders can be squeezed out without their consent, thereby creating an arena of jurisprudence in the favor of majority acquiring full rights to do whatever they will with the company. According to Punjab Distilleries India Ltd. v CIT, the following requirements have to be followed under section 100 of the Companies act:

(i) A resolution has to be passed by the general body of the company
(ii) Application has to filed with the court for confirmation
(iii) After confirmation register with the Registrar of Joint Stock Companies.
(iv) Issue notices to invite applications for refund of share capital
(v) Distribute the proportionate share capital among each of the shareholders.

British and American Trustee and Finance Corporation v. Couper is a leading authority on reduction of share capital which laid down that courts cannot go into the motive of reduction by the company.

The judicial trend in this regard seems to show that Section 100 primarily is being used for more of objectionable objectives, for example in the leading case of Sandvik Asia the reason behind the Company’s reduction of share capital was to continue to remain a public company even after delisting of its shares, other reasons like reduction of administration costs , conversion to a private limited company in order to avoid greater regulations, are being widely used. Initially companies used Section 100 read with Section 391, however this practice was done away with in order to avoid the condition of a separate class meeting.

Prior to the court’s decision in Sandvik Asia, the Court in Sterlite Industries Ltd., approved a scheme of reduction of share capital under Section 100 read with Section 395, and also the clause that stated that silence of the shareholders would amount to consent. Post this decision the SEBI amended its Listing Agreement to include the provision that public limited companies need the prior sanction from the Stock exchange.

Section 395 is another provision that provides for the acquiring company to buy the target company’s shares if nine tenth of the share holders of the target company agree to such offer, the rest of the shareholders can be squeezed out.

Under Section 395, if the transferee company holds more than 10% of the same class of shares as is being acquired by it from the transferor company , certain conditions have to be fulfilled by the acquirer before squeeze out can be performed:

i) The shareholders of this class should be offered the same terms.

ii) the 90% of shareholders who had earlier approved the scheme , should constitute atleast 3/4 th of the holders of that share.

Though section 395 also provides for majority shareholders to sell their shares and exit the company, it is not used widely since it is coupled with a lot of conditions which are difficult to follow and is highly uncertain.

Current Scenario
A large number of companies are now resorting to the route provided by section 100 of the companies act which include Philips India, Wartsila NSD, Carrier Aircon and Reckitt Benckiser. Section 100 was framed at a time when other modes of capital reduction were not introduced, so such a provision was framed keeping in mind those companies genuinely intended on capital restructuring.

One of the reasons why promoter prefer squeeze out of minority shareholders is to gain a better control of the company and to gain more administrative flexibility.This provision is being misused widely by a large number of companies who have delisted themselves and now plan to remove the few public shareholders in their company..

Madura Coats
In August 2003, Madura Coats Ltd. after getting delisted, in an extraordinary general meeting passed a resolution to squeeze out 6.48% of the shareholders, who constituted the minority public shareholders. They were to be paid Rs 40 per share, the 75% mark required under section 100 was easily acquired as promoters constituted 93.52% of total shareholders.

JP Coats Ltd., UK and Coats Plc., UK are the two foreign promoters in Madura Coats that hold 93.52% of the total equity of the company. They claim that the 3.81 crore held by the public shareholders( 6.48 %) are in excess of what they need, and they removal of these small shareholders will reduce their administrative costs.

Sandvik Asia
The majority shareholders of Sandvik Asia limited, passed a resolution for the reduction of share capital at Rs 850 per share by a special resolution( 99.95%) to exit the minorities, the scheme was filed with the Bombay High Court for approval.

Minority shareholders arguments:
The minority claimed that instead of using section 100, section 77A should be used for reduction since this section provides shareholders with a option to stay or exit the company.The minority shareholders contended that squeeze out is violative of the right to retain or hold shares under Section 111 A(2), it is the duty of the court to ascertain that the company has not created a separate sub class of shareholders for the purposes of reduction of share capital. An overwhelming majority are promoters, they for the purposes of reduction of share capital considered a separate class in themselves and are kept out of the purview of such reduction, however this distinction is not maintained for the purposes of voting during a resolution.

Though in the instant case even of separate meetings were conducted the result would be the same as a majority of the non promoters had also consented to the scheme.

Decision Of Single Judge Bench
The Single judge bench in Sandvik case opined that Section 100 needs to have a provision that offers protection to the minority shareholders, as in Section 391 of the Companies. Court relied on Miheer H. Mafatlal v. Mafatlal Industries Ltd., where the Supreme Court had quoted Palmer’s Treaties Company law (24th ed.) : if within a class of shareholders they can be divided into different groups having varied interests, such groups should be treated as a separate class for the purposes of a scheme. Hence the court held that in the instant case of Elpro the meetings for promoters and non promoters should have been conducted separately.

Section 100 of the Companies Act was closed for companies for the selective reduction of share capital. Justice Radhakrishnan opined that even a single shareholder unhappy with a scheme should be entitled with a chance to oppose such a scheme in court. In the instant case since the minority constituted only 4.46 percent, the promoters had “virtually bulldozed” them into selling their shares. Therefore the extraordinary general meeting should be conducted separately conducted for promoters and non promoters in order to avoid any injustice to the minority shareholders.

Decision On Appeal:
The division bench on appeal, relied on a judgment with similar fact situation wherein the non promoters formed a small portion of shareholders and demanded their share in the company ( no other pecuniary terms were demanded), and the House of Lords held that the objections of the minority shareholders could not be sustained. This scheme was approved by a division bench of the Bombay High Court, again at Rs 850.

The fairness of the price provided to the squeezed out shareholders is not in issue here, the issue is that whether an owner can be forced to divest his property and give up his vested right to hold his property. Another issue arising from these cases is that the power of stock exchange to analyze the schemes under clause 24 (f) of the Listing Agreement have been extinguished completely.

Suzlon
Suzlon energy( SE) is the parent company and Re power ( Germany ) subsidiary acquired in 2008 by SE. SE had 95.16 % of shares in RE .In 2011, attempting to buyout the minority shares .Since the acquisition SE had been trying to acquire full ownership of the company but failed to do so in the wake of the economic downturn and cash crunch of the company. SE could not get through with the squeeze out proceedings due to the large amount of debt and instead had to resort refinancing and reduction of working capital.

Under Germany’s regulatory rules, a majority of 95% of the shareholders can initiate the squeezeout of minority shareholders. After the squeeze out SE will become the third largest wind turbine maker in terms of market share.

Finally in October the squeeze out was carried out by passing of a resolution at shareholders meeting at 142.77 euros amounting to a total of 63 million euro.

Cadbury
Cadbury had previously gone through 4 buyback procedures which reduced the public shareholding to 2.42% , in November 2011 the shareholders held a general meeting and passed a special resolution for the reduction of share capital by squeeze out of minority shareholders at 1360 rs per share.

However the minority shareholders demand Rs 3000 per share, they are contending that the process itself of selective reduction was discriminatory. Investors Grievance Forum on behalf of the minority shareholders claims this to be unjust.

Cadbury was bought in 2010 by Kraft Foods Inc. for 19.6 billion. The accounting firm Ernst and Young had estimated the buyback at Rs. 1,743 , however the minority shareholders have rejected this value and demanded that since it was a compulsory buyback a premium on the value was justified. Due to the settled law on selective reduction of share capital, most Supreme court lawyers said that it was unlikely that any success would come out of the claim of minority shareholders of Cadbury.

On behalf of minority shareholders:
Cadbury has a total of 8088 shareholders, out of which 800 are non promoters, at the extra ordinary general meeting only 79 shareholders were present. Hence it was contended that since they were not even given a chance to be heard it, was a violation of Article 300A of the Constitution of India. A shareholder however small portion he holds in a company cannot be told to discontinue his shareholding in a particular company merely because the majority decides to do so. Section 395 provides for squeeze out on transfer of shares requiring consent of 90% of the minority being squeezed out. It is argued that the spirit of 395, to reduce capital on a uniform basis , can be read into section 100 as well. This section is criticized on the grounds that in most cases as in Cadbury, the majority already owns more than 75% of the shares, hence it is suggested that this minimum requirement should be with respect to all classes of shareholders Parent company’s has right to operate in all jurisdictions through a subsidiary or a branch, this contention of Cadbury was responded to by the IGF by stating that since Cadbury had accepted Kraft Foods takeover bid in February 2010, Cadbury’s right have been shifted to Kraft Foods now. Hence any decision relating to reduction or issuance of fresh shares was to be decided by Kraft.

On behalf of promoters of Cadbury:
The reduction of share capital has been held to be a domestic issue, and a company is free to either proportionately reduce shares from all the classes of shares or completely extinguishing one set of shares, while the other shares being totally unreduced. Supporters of selective reduction contend that there are enough safeguards provided for the minority shareholders, the decision is taken by the shareholders themselves with the consent of the courts, therefore it cannot be considered to be discriminatory. This reduction was brought about by the majority shareholders under section 100 of the Companies act, which states that a company by special resolution can reduce its capital in “any way.”

Elpro
Elpro was a company listed on the Bombay stock exchange, it proposed to reduce 25% of its shares and a scheme was issued in lieu of the same. It was approved by 95% of the shareholders, thereafter the company filed a petition seeking court’s confirmation on the scheme A copy of same as under Clause 24(f) of the Listing Agreement was filed with the BSE..

The Bombay stock exchange opposing the scheme contended that the scheme was only voted on by the 112 shareholders out of 3,835 of the shareholders of Elpro, the consent of the rest of the shareholders cannot be assumed, hence only the shareholders who have specifically agreed to the scheme should be subjected to such reduction. The BSE also claimed that the price i.e Rs 183 per share is not sufficient since there had been a rise in the prices of shares since the day of the meeting of the Board.

However the Company’s contention is that the Section 100 clearly provides for selective reduction of capital and also the procedure laid down in Section 101(3) of the Companies Act was followed by them. In response to the insufficient price argument, it was claimed that the value was determined by the valuers of the company taking into consideration the average weighed value of shares as well as the market value of the shares.

The Court relying on the case of Reckitt Benckinser held that the interpretation of section 101 should be plain and any limitations imposed would result in damaging corporate autonomy. The reduction of share capital being a purely domestic concern, shareholders should be free to do so in whatever manner they deem fit. The court has to look two matters namely:

(i) that the transaction is not unfair , (ii) all creditors subject to reduction have either consented , been paid or secured.

Analysis and Conclusion
Now analyzing the theme the emerges from these newspaper articles, the researcher would like to begin in chronological sequence to do the same.

The initial article that reported the Madura Coats case (Hindu Business line, reported 2003), it can clearly sensed from the tone of the article that there is an element of surprise or shock on the use of Section 100 for capital reduction. They report on the facts of the proposed reduction, then they begin to question the motive of the companies. They have been very successful in reading into the actual reason for such an action, as can be clearly seen from the following lines, “it is curious indeed that what is in excess of the company’s wants is equal to the public holding in equity capital.” Questions are raised as to the fairness of this method, whether the companies have actually considered the spirit of this section before undergoing such squeeze out, whether a company had the power to throw out unwilling shareholders out of it? Therefore it was said that since the special resolution safeguard has been proved to be ineffective, other safeguards should be introduced by the authorities in order to protect the interests of the minorities. Further they have also voiced the opinions of the minority side, other experts who have pointed out the loopholes in this route.

In the later articles published around the year 2008 also articles press for the need for revisiting of these provisions. However there lacks any critique or suggestions that come forth from the articles, they have merely penned down what the parties to the dispute and also the judges opined. Articles reporting the recent cases of Suzlon though follow the same pattern as before, but from the fact that ‘squeeze out plan’ is put in quotes and the benefits that the company would bear consequent to the ‘squeeze out’, it can be clearly inferred that the reporter has a negative opinion of the Section 100 route. Further a bias can be seen in the way the article is addressing to the oppression of the minorities and there is not much been said about the company or its majority shareholders, and the only thing said is that how it is a “sweet deal” for them.( the Firm, reported 2009)

Though such schemes cannot be invalidated on the grounds of not being in accordance with the law, however the decision of the court can be held to be erroneous on the grounds of fairness. I The researcher does feel that the court has failed to look at the scheme from perspectives other than price. If seen from the point of view of minority shareholders who intend on keeping their ownership in the company, such a scheme of forceful acquisition is clearly unfair. There is a definite need for separate class meetings, in order to ensure that a few shareholders are not made subject to the will of the majority class.( section 100 to be read with section 189) , separate class would mean a group having similar interests. Also as suggested by the articles also he spirit of section 100,i.e corporate restructuring should be upheld by the courts.

The Companies bill ,2009 stated that shareholders divided into different classes, since rights attached to shares will be varied therefore for the purposes of obtaining consent should be given by three fourth of the shareholders of each group. This can indeed be a positive change that needs to be implemented.

From the cases discussed above, a suggestion in an article reported on rediff will prove quite efficient that a rules stating that silence of shareholders would mean consent, should not be approved. At general meetings, shareholders not present should be given a say in the matter via a postal ballot.
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# [2008] 86 SCL 47 (Bom): [2009] 149 Comp Cas 646 (Bom).
# 2009 (4) Bom LR 1421
# Squeeze out Minority Shareholders by Capital Reduction Schemes in light of Elpro and Sanvik, Sayantan Banerjee available at http://www.taxmann.com/fileopener.aspx?surl=http
# (1965) 35 Com Cases 541.
# (1894) AC 399.
# Madura Coats Ltd.
# Squeeze out Minority Shareholders by Capital Reduction Schemes in light of Elpro and Sanvik, Sayantan Banerjee available at http://www.taxmann.com/fileopener.aspx?surl=http.
# The Securities & Exchange Board of India (SEBI) v. Sterlite Industries (India) Ltd., [2003] 45 SCL 475 (Bom),para 5
# Circular dated May 8,2003.
# Squeeze out Minority Shareholders by Capital Reduction Schemes in light of Elpro and Sanvik, Sayantan Banerjee available at http://www.taxmann.com/fileopener.aspx?surl=http
# Mergers and acquisitions in India, January 1,2012.,page 11 http://www.nishithdesai.com/Research/Paper/M&A Paper.pdf.
# Reduction of share capital or squeeze out of minority shareholders ? A critical Analysis of Sandvik Asia Ltd v. Bharat Kumar Padamsi and ors., Mayur Bhandari and Purvi Dabbiru. ,available at http://www.taxmann.com/datafolder/flash/flashart4-11-09_7.htm.
# Delisted companies and minority shareholders – using 100 for 100, Raghuvir Srinivasan http://www.thehindubusinessline.in/bline/iw/2003/08/31/stories/0.htm, August 31 , 2003.
# Minority shareholders and the threat of squeeze outs, September 1 2008, http://www.livemint.com/Money/dfzhNnJ17ARJB5lcAmTMEI/Minority-shareholders-and-the-threat-of-squeezeouts.html
# Madura Coats plans capital reduction- to repay public shareholders http://www.thehindubusinessline.in/2003/08/11/stories/.htm, August 11,2003.
# Delisted companies and minority shareholders – using 100 for 100, Raghuvir Srinivasan http://www.thehindubusinessline.in/bline/iw/2003/08/31/stories/2003083100090700.htm, August 31 , 2003
# Supra.
# 2004 267 ITR 78 Bom.
# Sandvik Asia scheme- HC frowns on minority capital reduction, Dinesh Narayan http://www.thehindubusinessline.in/2003/12/14/stories/, December 14 2003.
# Sandvik Asia Ltd., [2004] 50 SCL 413 (Bom): [2004] 121 CompCas 58 (Bom) para 15.
# Ibid. 17
# [1996] 10 SCL 70
# Supra 15.
# Sandvik Asia scheme- HC frowns on minority capital reduction, Dinesh Narayan http://www.thehindubusinessline.in/2003/12/14/stories/htm, December 14 2003..
# Poole v National Bank of China Ltd. 1907 AC 229 (HL).
# Sandvik Asia Limited v. Bharat Kumar Padamsi and Ors., 2009 (4) Bom LR 1421: [2009] 92 SCL 272 (Bom), para 26.
# http://www.accessmylibrary.com/article-1G1-199577313/sandvik-asia-gets-hc.html , May 08, 2009.
# Squeeze out Minority Shareholders by Capital Reduction Schemes in light of Elpro and Sanvik, Sayantan Banerjee available at http://www.taxmann.com/fileopener.aspx?surl=http
# Suzlon to hike REPower stake via ‘squeeze out plan’ http://www.indianexpress.com/news/suzlon-to-hike-repower-stake-via--squeeze-out--plan/771634/2,, 5th april 2011.
# German stock exchange act, Section 327a – f.
# Supra.
# Suzlon: completed ‘squeeze out’ process of RE Power minority shareholders,http://online.wsj.com/article/.html October 28, 2011.
# Cadbury’s minority share buyback plan runs into trouble,http://articles.economictimes.indiatimes.com/2009-10-28/news/27641346_1_share-capital-cadbury-india-minority-shareholders, October 28, 2009
# http://www.business-standard.com/article/companies/cadbury-india-willing-to-pay-more-for-buyback1.html jan 10 2011.
# Supra.
# HC appoints valuers for Cadbury shares; investors relieved,http://www.rediff.com/money/report/hc-appoints-valuers-for-cadbury-shares-investors-relieved/20100420.htm April 20 , 2010.
# Claim on behalf of the minority shareholders by Chandu Mehta , counsel for the IGF.
# http://www.livemint.com/Companies/pxNd8MCSDA1YJqfGz6IjBM/Independent-valuer-appointed-for-Cadbury-shares-investors-r.html?facet=print april 20 2010.
# Judgment as per Reckitt Benckiser (India) Ltd., 122 (2005) DLT 612 and In Re: Elpro International Ltd., [2008] 86 SCL 47 (Bom): [2009] 149 Comp Cas 646 (Bom).
# Cadbury versus minority shareholders; Sweet deal http://thefirm.moneycontrol.com/news_details.php?autono= Jan 16
# Cadbury’s minority share buyback plan runs into trouble,http://articles.economictimes.indiatimes.com/2009-10-28/news/27641346_1_share-capital-cadbury-india-minority-shareholders, October 28, 2009.
# Elpro International ltd., in re 2009 4 Comp LJ 406 (Bom).
# Under section 102 of the Companies Act.
# Courts reconfirm: Selective squeeze out is permissible,,http://www.nishithdesai.com/New_Hotline/.htm, March 11,2010.
# Ibid.
# Reckitt Benckiser (India) Ltd., 122 (2005) DLT 612.
# Elpro International ltd., in re 2009 4 Comp LJ 406 (Bom), para 15.
# Clause 42.
# Buyback : where is the choice? http://www.rediff.com/money/2004/oct/11guest1.htm October 11 2004.

The  author can be reached at: thass18@legalserviceindia.com

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