The Ministry of Corporate Affairs (“MCA”) has, by its notification dated February 3, 2020, brought into effect sub-sections (11) and (12) of Section 230 of the Companies Act, 2013 (“Act”) which effectively provides for an additional mechanism for squeezing out the minority shareholders in case of unlisted companies. The MCA has also brought into effect the Companies (Compromises, Arrangements and Amalgamations) (Amendment) Rules, 2020 (“Company Merger Rules”) and the National Company Law Tribunal (Amendment) Rules, 2020 (“NCLT Rules”), which deal with the procedural aspects. These provisions are applicable only in case of unlisted companies i.e. private and public unlisted companies and do not apply to listed companies (which continue to be governed by the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011).
As per the Company Merger Rules, majority shareholders holding at least 3/4th of the shares in an unlisted company have been permitted to make a takeover offer to acquire any part of the remaining shares of the company, as part of any compromise or arrangement under Section 230 of the Act. For this purpose, shares have been defined to mean equity shares carrying voting rights and includes securities such as depository receipts, which entitle the holder thereof to exercise voting rights. The provisions do not specify whether 3/4th threshold applies for each type of securities or the total share capital (consisting of all securities with voting rights).
In terms of the process, the majority shareholder is required to make an application to the NCLT for sanctioning the takeover offer. While making such an application, the majority shareholder is required to deposit at least 50% of the takeover offer consideration in a separate bank account. Further, the shares proposed to be acquired are required to be valued by a registered valuer, based on the: (i) highest price paid by any person or group of persons for acquisition of shares during the last twelve months; and (ii) fair price of the shares of the company to be determined by the registered valuer after taking into account valuation parameters including 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.
Section 230 (12) of the Act also provides for a grievance redressal mechanism pursuant to which any “aggrieved party” can make an application to the NCLT in the event of “grievances in relation to the takeover offer”. The said section, however, does not set out any minimum shareholding requirement or specify any grounds for an aggrieved party to approach the NCLT.
The newly notified provisions appear to have been incorporated in the Act with an objective of facilitating the acquisition of minority shareholders by the majority shareholders in a company. This method of squeeze out is in addition to the other existing options for squeezing out the minority shareholders under Sections 235 and 236 of the Act as well as selective reduction of share capital under Section 66 of the Act. However, the process under the new notifications appear to be more effective than the squeeze-out provisions under Sections 235 and 236 of the Act because of the lower threshold and fewer compliance requirements. While the new mechanism also has challenges from a timing and cost perspective given NCLT’s involvement, nevertheless, it provides a mechanism for the majority shareholders to directly approach the NCLT to cause a forced buyout without having to engage in protracted negotiations with dissenting minority shareholders. Given the role of the NCLT in the process, the efficacy of the new amendments for majority shareholders will depend to a large extent on the approach and level of interference of the NCLT in case of minority shareholder complaints. While this step is indeed positive for unlisted companies, it remains to be seen whether the courts will apply the same principles which they have been applying in selective capital reduction cases, where as long as the minority shareholders are being paid fair value for their shares, the courts have not withheld their sanction for the minority share sale.
Divya Mundra, Partner
Nayanika Ruia, Associate