Dispensation of shareholders�۪ and creditors�۪ meetings for listed entities in amalgamation proceedings

With many wholly owned subsidiary companies merging with their listed holding companies, there were differing views on whether the meetings of the shareholders and the creditors of such listed entities are necessarily required to be conducted or they can be dispensed with. The rationale for this was also in question since the merger was only between wholly owned subsidiaries with their holding companies where there was no dilution in the shareholding of the listed entity nor was there a compromise with the creditors of the holding company.

Relevant Provisions

Before proceeding to discuss the recent judicial precedents, it is helpful to take a glance at the relevant provisions of the Companies Act, 2013 (“Act”). In terms of the Section 230(1) of the Act, for a compromise or arrangement to be fructified, a meeting of creditors or class of creditors or a meeting of members or class of members is a requirement. There is an exception to this requirement when more than 90% (ninety percent) of the creditors and/or the members file their consent and no-objection affidavit towards the scheme of merger as provided under Section 230(9) of the Act and Rule 5 of Companies (Compromises, Arrangements, and Amalgamation) Rules, 2016.

Any compromise or an arrangement may affect the shareholding, and the financial position of the companies involved in such compromise or arrangement and as such, the consent of more than three-fourth of the total value of the creditors and members is required in their respective meetings for such compromise or arrangement to go through.

Earlier Position

There was a great deal of uncertainty regarding the National Company Law Tribunal’s (“NCLT”) authority to dispense with shareholders’ and creditors’ meetings in an arrangement or amalgamation. This resulted from the divergent judgments passed by difference benches of the NCLT. To illustrate, the NCLT Principal bench in New Delhi had ruled in the case of JVA Trading Private Limited and C & S Electric Limited[1] that the power of the NCLT to give dispensation of the meeting is only available to creditors. As a result, NCLT was unable to dispense with the shareholder’s meeting.

Gradually, the Hon’ble National Company Law Tribunals and the National Company Law Appellate Tribunal, New Delhi (“NCLAT”) have developed a jurisprudence wherein a meeting, as specified in Section 230(1) of the Act can be dispensed with, even for a listed company as may be seen in the judicial pronouncements discussed below.

Judicial Precedents

1. In Ambuja Cements Ltd.[2], the NCLAT set aside the order of NCLT, Ahmedabad whereby the application seeking dispensation of meeting of shareholders and creditors of a listed company was rejected because the said company had a large number of shareholders and creditors and none of them had filed their consent and no-objection towards the scheme of merger. The NCLAT set aside this order stating that the merger is between the holding company and its wholly owned subsidiary and as such, there is no reorganization of share capital, and the net worth of the resultant company is highly positive and dispensed with the meetings of the shareholders and the creditors.
2. In Vodafone Idea Ltd.,[3] the NCLT, Ahmedabad considering the averments of the companies held that there is no compromise of the creditors and because the net worth of the companies including the resultant company is positive, held that the meetings of the creditors are not required and were thereby, dispensed with.
3. Similarly, in DLF Limited[4], the Hon’ble NCLAT dispensed with the meetings of the creditors and the shareholders in a merger of the wholly owned subsidiaries with their holding companies on the very fact that there is no adverse impact on the financial position of the Resultant Company.

Conclusion

After the above judgments have come, various benches of the NCLT have been dispensing with the meetings of shareholder and creditors of listed entities primarily on the following grounds:

• Transferor companies are wholly owned subsidiaries if the transferee company, i.e., the listed entity.
• The financial position of the transferee company, i.e., the listed entity is highly positive and will continue to be so even after the merger.
• The proposed amalgamation does not affect the rights of the listed entity’s shareholders and creditors.
• There is no issuance of any new shares and there is no reorganization of share capital of the listed entity.
• There is no compromise with the creditors of the merging companies.

This is a positive step which would certainly reduce the time being taken for closing merger and amalgamation matters before various benches of NCLT and ease the overall process.

[1] Company Petition No. CAA 48/PB/2017.

[2] Company Appeal (AT) No. 19 of 2021.

[3] CA (CAA) NO. 50/NCLT/AHM/2019.

[4] Company Appeal (AT) 180 of 2019.