Role and Rights of Minority Shareholders in Strategic Corporate Decisions
chillibreeze writer — Priya Mahapatra
Recently, the creditors and shareholders of Reliance Petroleum Limited (RPL) approved a Scheme of merger of RPL with Reliance Industries Limited (RIL). In a meeting on April 9, 2009, convened at the instance of the Court, the Equity Shareholders, Unsecured Creditors and Secured Creditors of RPL, (99.745% of the shareholders in number and 99.9999% in value), voted in favor of the Scheme.
Only 0.0001% of shareholders in terms of total value of shares voted against the arrangement, while all the Creditors voted for the Scheme of Amalgamation. (Source: moneycontrol: Related News http://www.relianceinsider.com/2009/04/rpl-shareholders-approve-merger-with-reliance-industries2347). The figure of 0.001% of dissenting shareholders raised certain interesting questions as to the role of a miniscule section of shareholders during the process of corporate amalgamation and similar strategic decisions taken by the majority.
Sections 391 to 396 of The Companies Act, 1956 guide the legal procedure for corporate strategies, including mergers, amalgamations and reconstructions. Sections 391 to 394 inter-alia give the Court the power to sanction, enforce and supervise a compromise or arrangement between a company and its creditors/members subject to certain conditions. These include providing for the availability of information required by creditors and members of the concerned company when acceding to such an arrangement and facilitating the reconstruction and amalgamation of companies, by making an appropriate application to the Court.
Section 395 gives the right to acquire the shares of dissenting shareholders from the scheme or contract, which has been approved by the majority. Section 396 deals with the powers of the Central Government to provide for an amalgamation of companies in the national interest.
In any scheme of amalgamation, both the amalgamating company and the amalgamated company are required to comply with the requirements specified in Sections 391 to 394 and submit the details of all the formalities for consideration of the Court. Though no protection is available to any dissenting minority shareholders on this issue, the Courts, while approving the scheme, follow a judicious approach of publishing a notice in the newspapers, inviting objections, if any, against the scheme from the stakeholders. Any interested person, including a minority shareholder may appear before the Court.
There have been occasions when the minority shareholders have raised objections and have succeeded in preventing the implementation of a scheme of arrangement. A lone minority shareholder of Tainwala Polycontainers Ltd (TPL), Dinesh V Lakhani, had apparently forced the company to call off its merger plans with Tainwala Chemicals and Plastics (India) Ltd (TCPL). Lakhani had opposed the proposed merger on several grounds including allegations of willful suppression of material facts and malafide intention of promoters in floating separate companies (TPL and TCPL).
A division bench of the Bombay High Court had stayed the proposed TPL-TCPL merger. After almost two years of courtroom battle, the company decided to withdraw the amalgamation petition without citing any reasons.
There have however been some instances when shareholders holding a small number of shares, have made frivolous objections against the scheme, just with the objective of deferring the implementation of the scheme. The courts have, on a number of occasions, overruled their objections. But Companies had to bear the consequences in the form of time and cost over-runs.
In 2003, Parke-Davis India Limited and Pfizer Limited were considering implementation of a Scheme of Merger. The Minority shareholders of Parke-Davis India Ltd objected to the Scheme on the grounds that the approval from the requisite majority as prescribed under the Companies Act, 1956 had not been obtained. They filed an urgent petition before the division bench of the Bombay High Court. The division bench of the Bombay High Court by its order executed a stay order in March 2003 restraining the company from taking further steps in the implementation of the scheme of amalgamation, which was further extended till September 2003. The dissenting shareholders filed a Special Leave Petition with the Supreme Court. The turmoil came to an end when the Supreme Court dismissed the petition filed by the shareholders. Parke-Davis then proceeded to complete the implementation of the scheme of amalgamation with Pfizer.
In a similar instance, Reliance Industries Limited (RIL) had filed a petition seeking approval for the scheme to de-merge the company's power, finance and telecom businesses as part of a settlement between the Ambani brothers, Mukesh and Anil Ambani. As per the Scheme, post demerger, every RIL shareholder would be entitled to a share each in Reliance Communication Ventures Ltd, Reliance Energy Venture Ltd, Reliance Capital Ventures Ltd and Global Fuel Management Services Ltd. The de-merger scheme had been approved by the majority shareholders of RIL at an Extraordinary General Meeting (EGM) held on 21st October 2005.
Kalpesh Mankad, a minority shareholder had raised objections in the EGM, but was not convinced with the company’s reply to him. On 25th November, 2005 he moved the court objecting to the proposal by filing a 16-point objection before the Bombay High Court alleging that the 'Scheme of Arrangement' was based on "vague assumptions" that gave vast discretionary powers to the Ambani brothers and was detrimental to the company's shareholders.
Hearing his plea, the Court had asked Kalpesh Mankad to file a detailed reply in an affidavit and adjourned the matter till 2nd December. The arguments between the Company and Kalpesh Mankad concluded on 5th December 2005. The latter clarified during the course of hearing on December 5 that he was not per se opposed to the de-merger scheme but was only against the procedure in which it was being carried out.
The RIL counsel had admitted that the company observed some kind of ‘typographical errors’ existing in the text of its scheme submitted to the court.
However, they completely refuted Mankad's allegations that the de-merger scheme was unfair to the shareholders. Mankad had sought a stay for six weeks on the High Court order to enable him to file an appeal to the Higher Court, but the court refused to grant his prayers, rejected the objections filed by Mankad and approved the de-merger scheme. In the process, the Company had to suffer the loss in the form of cost and time over-runs.
Similarly, in the case of the merger of Tomco with HLL, the minority shareholders put forward an argument that, as a result of the amalgamation, a large share of the market would be captured by HLL. However, the court turned down the argument and observed that there was nothing unlawful or illegal about it.
Section 395 provides that if 90% or more shareholders of a company approve a scheme of arrangement, then the same may be imposed on the remaining shareholders of the company. However, the dissenting shareholders shall have the right to file their objection with the Company Law Board. Unless the Company Law Board orders otherwise, the acquirer shall be entitled to acquire the shares of the target company.
In the case of a listed company, the acquirer has to follow the procedure laid down under the SEBI Substantial Acquisition of Shares and Takeover Regulations and the Listing Agreement with stock exchanges. In particular, an acquirer must comply with clauses 40A and 40B of the listing Agreement which, among other things, require a purchaser acquiring shares of 20 per cent (or more), to make an offer to all the shareholders of the company to acquire their shares at a price at which the acquirer has already acquired or agreed to acquire shares of 10 per cent or more, or at a price which is the average of the high and low of the price quoted on the stock exchange during the preceding six months, whichever is higher.
The Company Law Board would allow the scheme or contract of takeover under Section 395 if the fairness standard is met and the onus to prove otherwise shall be on the dissenting shareholders. In AIG (Mauritius) versus Tata Televentures Holdings Ltd, the Delhi High Court rejected the offer of the acquirer company on the basis that on lifting the corporate veil, the acquirer company was really the same as the approving shareholders of the target company.
In actual practice, the companies interested in the scheme have to obtain the consent of the majority of shareholders and not all the shareholders. However, if the objection raised by the dissenting minority shareholders is of major significance and is unfair to the shareholders opposed to the provisions of the applicable statues and establishes as malafide on the part of the company, then the court is likely to consider the objections in depth and refute the decision of the majority shareholders.
On the contrary, if the scheme approved by the majority of shareholders is bona fide and is in consonance with all the provisions of the Companies Act, 1956, then the court, in all probability, would overlook the objections raised by the minority shareholders and approve the scheme.
In the recent RPL and RIL merger case, a few of the dissenting members of RPL moved the Company Law Board praying for striking down the scheme on the grounds that the interest of small investors is not protected. But, subsequently they could not prove the point and the majority decision was upheld.
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