Squeezing-out minority shareholders in a company is always a difficult task because of inter alia time-consuming court procedures and uncertainties involved in exit share valuation. Section 395 (S. 395) of the Companies Act, 1956 (1956 Act) permits majority shareholders to do so to a limited extent but given the need for prior consent of majority shareholders whose transfer is involved along with dissenting shareholders’ consent and other practical difficulties and ambiguities under this provision, the ability to compel a ‘squeeze out’ becomes redundant. Considering the practical difficulties under this section, companies have chosen to use the route of a ‘selective’ reduction of share capital under Section 100 of the 1956 Act (S. 100), to squeeze-out minority shareholders. Cases in point are applications by Sandvik Asia Limited, Organon (India) Limited, Wartsila India Limited, Reckitt Benckiser (India) Limited and Cadbury India Limited. However, here too certain companies are facing difficulties on share valuation in the absence of prescribed valuation guidelines. A cursory reading of the new Section 236 (S. 236) of the Companies Act, 2013 (2013 Act) appears to give comfort to corporate shareholders that this provision would address their concerns on minority squeeze-outs and ensure a smooth and hassle-free process. This article attempts to assess whether the provision creates more confusion than clarity.
Dissecting Section 236
Broadly, this section permits an acquiring entity, holding at least 90% or more of the issued equity share capital of a company to buy out the minority shareholders at an exit price determined by a registered valuer. It differs from earlier minority buy-out provisions in many ways. First, in terms of who is covered as the acquiring entity – this includes ‘acquirer’ or ‘persons acting in concert’ as defined under the Indian takeover code as against the earlier provision covering only ‘companies’. Further, the provision elaborates and specifies that the acquisition could stem from ‘an amalgamation, share exchange conversion of securities or for any other reason’ and not merely an acquisition pursuant to a ‘transfer of shares’ as the current buy-out provisions indicate. A welcome change is the requirement of an exit price determination by a registered valuer; this removes ambiguity that existed in squeeze-outs under S 100 applications. Setting a time-limit of 60 days for disbursal of proceeds on determination of exit price, to the minority shareholders will help expedite the buy-out process. The minority shareholders are also entitled to a share in any additional compensation received by shareholders on a sale subsequent to the minority buy-out, if such sale is at a higher price than the minority buy-out price. Also, importantly, these minority buy-outs may be completed without court intervention, eliminating the rigmarole of painstaking court procedures.
The significant missing link in the new provision is whether the minority shareholders are in fact bound to accept the majority shareholders’ offer to purchase their shares (Offer). To elaborate, the provision first requires the majority shareholder to “notify the company of their intention to buy the remaining equity shares” and then directly jumps to creation of an obligation on the majority shareholders to deposit proceeds of the sale shares acquired by it, in a separate bank account. Whether the obligation to accept the Offer is mandatory or optional, is not specified. The presumption that there may not be a mandatory obligation on the minority shareholders to sell their shares is corroborated by a sub-clause under the provision that discusses a scenario where a ‘majority equity shareholder fails to acquire full purchase of the shares of the minority equity shareholders’. If S. 236 had language (similar to that under S. 235 of the 2013 Act and S. 395 of the 1956 Act) stating that the majority shareholder is ‘entitled and bound to acquire all the shares set out in the Offer notice’, the provision may have been less ambiguous even in the absence of a categorical statement requiring the minority shareholders to compulsorily sell. By way of example, a similar provision of ‘entitled and bound to’ finds place in the UK Companies Act, 2006, under its section on ‘squeeze out’.
Besides the absence of a clear mandatory obligation as discussed above, S. 236 also appears inadequate as it does not contemplate and address several other scenarios including drawing distinction between acquisition of shares in the same or different classes, treatment of shares allotted to minority shareholders post the Offer notice date and the content of the Offer notice. Further, a dichotomy exists on how S. 395, retained in most part under Section 235 of the 2013 Act would co-exist with S. 236. Both provisions regulate transfers to majority shareholders and the processes around it and appear to overlap.
To summarise, it is difficult to conclude that S. 236 is in fact a constructive blend of S. 395 and S. 100. Until the issues raised in the foregoing paragraphs are resolved, it will be challenging for companies to change course and proceed under this new S. 236 as against S. 100 or S. 395, to squeeze-out minority shareholders.