THE TAKEOVER METHOD: SQUEEZING OUT OR BALANCING OUT?

Recent Amendments and Squeezing Out

The provisions in relation to takeover offer through compromise or arrangement were incorporated under the Companies Act, 2013 (the “Act”) for the first time by way of sections 230(11) and 230(12). However, the aforesaid provisions of the Act have been recently notified by the Ministry of Corporate Affairs on February 03, 2020.[1] Consequently, the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (“Compromise Rules”) have also been amended and enforced since February 03, 2020 to give effect to the notified provisions.[2]

The phrase ‘squeezing out’ the minority shareholders from a company in simple words means the acquisition of shareholding of minority by the majority shareholders. The squeezing out principle is not new to the Act and there are various provisions under the Act itself that provide for squeezing out, for instance, consolidation of share capital (under section 61), reduction of share capital (under section 66 of the Act) and acquisition of minority shares (under sections 235 and 236 of the Act).

Applicability of Section 230(11)

After the recent amendments, the majority shareholders have been given an additional means to squeeze out the minority shareholders (who  hold equity shares or securities which carry voting rights)[3] of an unlisted company. It is pertinent to note that the takeover offers for listed companies will continue to be governed by Securities Exchange Board of India (Substantial Acquisitions of Shares and Takeover) Regulations, 2011. Moreover, explanation to rule 3(5) of the Compromise Rules clarifies that the provisions in relation to takeover offer under section 230(11) of the Act shall not be applicable in cases where the acquisition of shares takes place through any contractual arrangement between the parties or for reasons of succession or due to any statutory or regulatory requirement.

Squeezing Out Through Takeover Method

The provisions of sections 235 and 236 of the Act require  consent of at least 90% (ninety percent) of the shareholders to initiate the process of acquisition of the remaining shares, thus squeezing out the minority shareholders. Whereas, section 230(11) read with Rule 3(5) of the Compromise Rules provides that any shareholder or group of shareholders jointly, who hold three-fourth or more of the shares in the company may approach the National Company Law Tribunal (“NCLT”) for obtaining the permission for a takeover offer. It is relevant to note that the takeover offer need not be for all the shares held by the remaining shareholders but may only be for acquisition of any part of the remaining shares of the company.

It is pertinent to note that the takeover offer under section 230(11) of the Act has to be compliant with the other requirements of section 230 (which are applicable to a scheme of compromise or arrangement). In addition to the aforesaid compliances, the shareholders making the takeover offer are required to open a separate bank account and deposit an amount not less than 50% (fifty percent) of the takeover offer price, as determined by a registered valuer in accordance with the Compromise Rules.

Moreover, section 236(1)  of the Act mandates the majority shareholders who have already acquired at least 90% (ninety percent) of the shares in a company to notify the company of their intention to acquire the remaining shares. However, the remaining shareholders are not bound to accept the offer. Similarly, section 236(3) of the Act provides that the remaining shareholders can also require the majority shareholders to purchase their shares. However, this protection is not available to the minority shareholders under section 230(11) of the said Act as the majority shareholders are not bound to give the takeover offer to every minority shareholder. Therefore, the minority shareholders may be able to take advantage of the right provided under section 236(3) of the Act, and require the majority shareholders to purchase the remaining shares from the minority shareholders only if the majority shareholders cross the threshold of 90% (ninety percent) under the takeover offer.

Furthermore, section 230(11) of the Act and the Compromise Rules do not require that the takeover offer must be made to all the remaining shareholders on a pro-rata basis. Therefore, the majority shareholders, (in this case having more than 75% shareholding ), can pick and choose: (i) the minority shareholders to whom the offer has to be made; and/or (ii) the percentage of shares which has to be acquired. Again, the minority shareholders may not be able to enforce the statutory exit rights as provided under section 236 of the Act, unless the majority shareholders exceed the threshold of 90% (ninety percent).

Protection to Minorities

It might have been very prejudicial to the minority shareholders if there were no protections given to them in cases of such forceful exits. Thereby, the amendments provide the following protection to minority shareholders:

• Valuation parameters: The notification ensures that the registered valuer while determining the value of shares shall take into account the same parameters as required under section 236, such as the highest price paid by any person or group of persons for acquisition of shares during last twelve months, net worth, book value of shares, etc.
• Right to object: Section 230(4) of the Act already provided that the shareholders holding not less 10% (ten percent) shares may object to a scheme of compromise or arrangement proposed under section 230. In addition to the aforesaid section, section 230(12) now gives right to any party who is aggrieved by the takeover offer to file an application to the NCLT. It is pertinent to note that unlike section 230(4), section 230(12) does not require any threshold or any other parameter for filing of the application objecting the takeover offer. Moreover, the powers of NCLT are also very wide under this section which might make the squeezing out procedure difficult.

Conclusion

In light of the aforesaid discussion, it could be concluded that though the amendments provide for another way of squeezing out the minority shareholders under the Act, they simultaneously try to shield the minorities against unfair pricing. However, there are other wide and open-ended parameters involved that need clarity. Therefore, we would need to wait to see how the regulators and the judiciary interpret these provisions.

The views and opinions expressed in this article belong solely to the author and do not reflect the position of TLH, Advocates & Solicitors.

[1] S.O. 525(E), published on February 03, 2020, available at http://www.mca.gov.in/Ministry/pdf/Notification_04022020.pdf

[2] G.S.R. 79(E), The Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2020, published on February 03, 2020, available at http://www.mca.gov.in/Ministry/pdf/Rules1_04022020.pdf

[3] Explanation I of rule 3(5) of the Compromise Rules.