Whilst the concept of squeezing-out minority shareholders has always existed in India (though not tested), it has been explicitly introduced in the new Companies Act, 2013 (“2013 Act”). India is in the process of adopting the 2013 Act, which is set to replace the Companies Act, 1956 (“1956 Act”). The minority squeeze-out mechanism is quite similar to the one provided under the United Kingdom Companies Act, 2006 (“UK Act”), but India has not adopted all provisions incorporated in the UK Act. This article attempts to identify key gaps and issues in the squeeze-out mechanism provided under the 2013 Act.
- Can the minority shareholders be compulsorily bought out? The 2013 Act lays down the process of buying out minority shareholders in certain situations. A majority shareholder, who holds at least 90% of equity shareholding of a company, has the right to notify its intention to buy-out the minority shareholders. The minority shareholders may sell their shares to the majority shareholder at a price to be determined as per the rules prescribed under the 2013 Act.
The concept of buying-out shareholders dissenting to a scheme of contract involving transfer of shares existed in the 1956 Act and has been retained in the 2013 Act. Ambiguity, however, remains on whether the minority shareholders can be forced to sell their shares to the majority shareholders. For instance, the 2013 Act provides that in case the majority shareholders fail to acquire all shares of minority equity shareholders, the residual minority shareholders will continue to be governed by the relevant provisions of the 2013 Act. There are also no prescribed time lines within which the minority shareholders must tender their offers to the majority shareholders, unlike the UK Act. Simply put, it is doubtful whether the 2013 Act actually provides for compulsory minority squeeze-out mechanism.
- Is there clarity on how to calculate the exit price? Minority shareholders have the right to put their shares at a price that is determined by a registered valuer1 as per the draft rules prescribed under the 2013 Act. The current draft of rules (not yet notified) provide following ways of valuing shares of companies:
- in case of public listed companies, the offer price is to be determined in the manner specified by the Securities and Exchange Board of India;
- in case of public unlisted companies and private companies, the offer price is to be determined by considering the highest price paid by the acquirer for acquisition during last twelve months and the fair price of shares as determined by the registered valuer.2
The method of calculating the exit price for minority shareholders has been contested several times in Indian courts (see below). Also, where the exiting shareholder is a foreign investor, the exit price would need to be computed as per the Indian foreign exchange laws and regulations issued thereunder.
- Other checks and balances: There are certain checks and balances set out in the 2013 Act, which are similar to the Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009. For instance, the majority shareholders are required to deposit an amount equal to value of shares in a separate bank account, which will be operated by the transferor company (who acts as the transfer agent) for at least 1 year and the monies shall be disbursed to entitled shareholders within 60 days.
Judicial trend in India
Minority squeeze-outs, through court approved capital reduction schemes, have been lately permitted as long as majority of the minority shareholders have approved such scheme. Indian courts usually do not look into valuation unless they are of the opinion that there are inherent defects in the valuation process. In Sandvik Asia Limited v. Bharat Kumari Padamsi,3 the Bombay High Court held that the court would not withhold sanction to a resolution for reducing share capital if the minority shareholders were being paid fair value and an overwhelming majority of shareholders voted in favour of the scheme. Similar lines of reasoning were provided in Re Organon (India) Limited v. Unknown4 and Wartsila India Limited v. Janak Mathuradas & Ors.5 The Bombay High Court in another case of Elpro International Limited, In Re,6 held that a scheme of reduction can be made applicable to a select group of shareholders as long as the 1956 Act is adhered to. Cadbury India Limited is the first case where the Bombay High Court interfered with the process followed in determining the fair value and ordered another valuation, pursuant to which Cadbury India Limited was ordered pay a much higher value to shareholders than was originally computed in the valuation report prepared by independent valuers.
It remains to be seen whether Indian judiciary would be able to protect the rights of minority shareholders, like in other countries such as the USA. There are several legal doctrines that have been developed through case laws in the US, such as the duty of loyalty of majority shareholders, that includes corporate opportunity doctrine (Guth v. Loft (1939)), fiduciary duty of controlling shareholders when they hold more than 50% of shares in a company (Sinclair Oil Corporation v. Levien (1971)), approval via vote by a majority of the outstanding disinterested shareholders (Fliegler v. Lawrence (1976)) and the entire fairness standard (In Re Wheelabrator Technologies, Inc. Shareholders Litigation (1995)). The Delaware courts, deemed to be the US’ premier business courts, rely on fiduciary duties of shareholders to monitor and ensure responsible corporate behaviour.
The key issue that needs to be addressed is whether minority squeeze-outs are indeed permitted under the 2013 Act. Certainty on interpretation of provisions under the 2013 Act will go a long way in enabling promoters / acquirers to structure mergers, acquisitions and corporate restructuring.