TMI Blog1980 (2) TMI 182X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, subscribed and paid up capital is 36,000 equity shares of Rs. 100 each amounting in all to Rs. 36,00,000. All the issued shares are fully paid up. The objects of the company are ginning, spinning and whenever thought fit making arrangements in connection with weaving, dyeing and printing cotton, wool, silk and such other articles and undertaking such processes at Coimbatore and at other places in the Madras Presidency which the company may decide from time to time. The transferee-company was incorporated under the Indian Companies Act, 1882, on April 1, 1910, at Coimbatore with the liability of the members limited by shares. Its present authorised capital is rupees two crores divided into 2 lakhs equity shares of Rs. 50 each and 5 lakhs equity shares of Rs. 25 each. The present issued, subscribed and paid-up capital is 1,42,000 equity shares of Rs. 50 each and 3,55,000 equity shares of Rs. 25 each amounting in all to Rs. 1,59,75,000. The objects for which the transferee-company was formed are to carry on all or any of the businesses of cotton spinners and doublers, wool, flax, jute and hemp and wool merchants, wool combers, worsted spinners, woollen spinners, yarn merchants, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rly, the learned judge directed that a meeting of the equity shareholders of the transferee-company should be held on the 27th March, 1978, at 3 p.m. at its registered office at No. 348, Avanashi Road, Coimbatore, and Mr. K. Sundaram, managing director of the transferor-company, was appointed chairman of the said meeting with directions to report to the court about the proceedings of the meeting on or before 3rd April, 1978. Similarly, the learned judge directed that a meeting of the debenture-holders should be held on the 27th March, 1978, to consider a scheme of amalgamation as proposed at 12 noon on 27th March, 1978, under the chairmanship of Mr. K. Sundaram. Pursuant to the order of this court dated February 20, 1978, a meeting of the equity shareholders of the transferor-company was held at 10 a.m. on March 27, 1978. The meeting was attended by 424 members either in person or by proxy. The value of the shares held by the number of members who attended the meeting came to Rs. 30,08,400. Out of 424 members, 423 members holding 21,211 shares of the value of Rs. 27,27,700, voted in favour of the proposed scheme of amalgamation being adopted and carried into effect. One member, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the debts, liabilities and obligations of the transferor-company, present or contingent, shall be transferred to and undertaken by the transferee-company. It is stated that the assets of the transferor-company and the transferee-company are more than sufficient to meet their liabilities and that the proposed scheme of amalgamation will not in any way affect the rights or interests of the creditors of either of the two companies and that the scheme would not result in any personal gain to the directors of any of the companies. It is further asserted that the proposed merger of the two companies is in public interest. By the merger of the transferor-company with the transferee-company, the transferor-company would get the advantage of setting off losses and unabsorbed depreciation. The merger would enable the transferor-company to enjoy the benefits of centralised bulk purchases of quality material, spares, stores, etc., at competitive prices and also the resources of the transferee-company could be effectively utilised to modernise the machinery of the transferor-company. It is averred that there are common shareholders in the two companies and the amalgamation would benefit t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appropriate authority under section 72A of the Income-tax Act, 1961, by its order No. 2(16)/78-CVS/Ministry of Industry dated January 1, 1979. It is further stated that almost all the creditors of both the companies have been paid off except some minor creditors. Further, as per the proposed scheme all the creditors of the transferor-company will become automatically creditors of the transferee-company. An additional reply affidavit has also been filed on behalf of the two companies. The question for consideration is whether the necessary sanction of the court should be accorded to the proposed scheme of amalgamation. It is settled law that before the court sanctions a scheme under sections 391 and 394 of the Companies Act, it should normally be satisfied of three matters: (1)The court should be satisfied that the resolutions are passed by the statutory majority in value and in number in accordance with section 391(2) of the Companies Act at a meeting or meetings duly convened and held. This factor is jurisdictional in the matter of confirmation of the scheme. The court should not usurp the right of the members or creditors to decide whether they approved the scheme or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the court has to look at the scheme and see whether it is one as to which persons acting honestly, and viewing the scheme laid before them in the interests of those whom they represent, take a view which can be reasonably taken by businessmen." In the present case, from the figures already given, which gave the analysis of the members present and actually voted, it is seen that the proposed scheme of amalgamation has been approved by an overwhelming majority, both in number and value, of the shareholders of both the companies. Thus, the statutory requirement has been fully satisfied. There is no averment that there has been no fair representation of the shareholders at the meetings of both the companies. Of the two debenture-holders of the transferee-company, one debenture-holder voted in favour of the scheme of amalgamation while the other voted against. It is not disputed by the learned counsel for the Regional Director, Company Law Board, that the dissentient debenture-holder has been paid off. There is no allegation of any undue influence or coercion exercised by the majority on the minority shareholders. Further, the petitions have been widely advertised. It is significant t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Rs. 50 share and one "A" class share of Rs. 25 in the transferee-company for every share of Rs. 100 in the transferor-company is fair and reasonable so far as the members of the transferor-company are concerned. M/s. Venkatram and Company, a firm of independent chartered accountants, have also after careful consideration of the financial position of the two companies as well as the value on the basis of yield and break-up value of the shares of the respective companies have come to the conclusion that if one share of Rs. 100 each in the transferor-company is exchanged for one share of Rs. 50 each and one "A" class share of Rs. 25 each in the transferee-company, the exchange will be fair and equitable. The opinion of M/s. Venkatram and Company shows that they have taken into account the break-up value of the shares and also the average market value as quoted on the Madras Stock Exchange. The reports of M/s. Venkatram and Company have been accepted as correct by M/s. Subbachar and Srinivasan, chartered accountants of the transferee-company, and M/s. Jagannathan and Viswanathan, chartered accountants of the transferor-company, by their respective opinions dated October 18, 1979. Mr. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mp. Cas. 663 (Raj.), the law has been stated as follows (headnote): "Valuation of shares in an amalgamation is made on a consideration of some or all of a number of relevant factors. Thus, the stock exchange prices of the shares of the two companies, the dividends paid on the shares, the relevant growth prospects of the companies, the ratio of distributable earnings to dividends paid during the year, the value of the net assets of the two companies, etc., are factors on which the valuation is often rested. The answer to the question whether some or all of these factors can be applied in the case of a given scheme of amalgamation depends on the circumstances of each case. It is necessary, however, that the same factors should be taken into account in assessing the two sets of shares." Pennington in his Principles of Company Law, 1959 Edn., p. 103, mentions four factors which had to be kept in mind in the valuation of shares. They are : (1) Capital cover, (2) Yield, (3) Earning capacity, (4) Marketability. The valuation report of the three firms of chartered accountants go to prove that the exchange ratio has not been fixed merely on the basis of the stock exchange quotation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es as well as by the two firms of chartered accountants." Mr. Swamidurai has not been able to point out any defect or deficiency in the valuation by the chartered accountants. He also does not impute mala fides on the part of the chartered accountants. Therefore, the opinions of the chartered accountants are accepted, as fair and reasonable. In this connection, it is relevant to extract the observation of Maugham J. in In re Hoare Co. Ltd. [1933] 150 LT 374, 375 : "One conclusion which I draw from that fact is that the mere circumstance that the sale or exchange is compulsory is one which ought not to influence the court. It has been an expropriation, but I do not regard that phrase as being very apt in the circumstances of the case. The other conclusion I draw is this, that again prima facie the court ought to regard the scheme as a fair one inasmuch as it seems to me impossible to suppose that the court, in the absence of very strong grounds, is to be entitled to set up its own view of the fairness of the scheme in opposition to so very large a majority of the shareholders who are concerned. Accordingly, without expressing a final opinion on the matter, because ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 979, and that consequently when one wing of the Central Govt. had approved the scheme, it is not fair and reasonable for another wing of the Central Govt. to oppose the same. Section 23 of the MRTP Act, so far as it is relevant for our present purpose, runs thus : "23. (1) Notwithstanding anything contained in any other law for the time being in force, ( a )no scheme of merger or amalgamation of an undertaking to which this Part applies with any other undertaking, ( b )no scheme of, merger or amalgamation of two or more under takings which would have the effect of bringing into existance an under taking to which clause ( a ) or clause ( b ) of section 20 would apply, shall be sanctioned by any court or be recognised for any purpose or be given effect to unless the scheme for such merger or amalgamation has been approved by the Central Government under this Act. (2) If any undertaking to which this Part applies frames a scheme of merger or amalgamation with any other undertaking, or a scheme of merger or amalgamation is proposed between two or more undertakings, and, if as a result of such merger or amalgamation, an undertaking would come into existence to which clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... requirement under section 23(3) of the MRTP Act is satisfied. The second condition to be satisfied under section 23(3) of the MRTP Act, is such inter-connected undertakings should not be dominant undertakings ? A dominant undertaking is denned in section 2( d ) thus : "'Dominant undertaking' means an undertaking which either by itself or along with inter-connected undertakings, ( i )produces, supplies, distributes or otherwise controls not less than one-third of the total goods of any description that are produced, supplied or distributed in India or any substantial part thereof, or ( ii )provides or otherwise controls not less than one-third of any services that are rendered in India or any substantial part thereof;....... Explanation VI. For the purposes of this clause, 'relevant year' means any one year out of the three calendar years immediately preceding the preceding calendar year in which the question whether an undertaking is or is not a dominant undertaking is determined." The petitioners have filed a statement containing the total production figures of both the companies separately as well as their production along with the production of their inter-connec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ..section 23(3) carves out an exception to the general rule which has been enunciated in sub-sections (1) and (2) of section 23. Having regard to the language used in sub-section (3) of section 23 quoted above, it seems to us very clear that in order that the proposed scheme of amalgamation or merger should fall within the ambit of that exception, three conditions are required to be satisfied : ( a ) the amalgamation or merger must relate to or be of inter-connected undertakings ; ( b ) that such inter-connected undertakings should not be dominant undertakings; and ( c ) that these undertakings should be such as produce the same goods. If all these aforesaid three conditions are satisfied, then the proposed scheme of amalgamation or merger between such inter-connected undertakings is taken out of the purview of sub-section (1) or sub-section (2) of section 23. In other words, to such a scheme of merger or amalgamation, no prior approval of the Central Government will be necessary and no application for obtaining such approval of the Central Government need be made before the court is called upon to accord its sanction thereto. We would also like to observe that in each of the three ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cloth. Before the company court the only objector was the Regional Director, Company Law Board, Western Region, Bombay. One of the various contentions advanced on behalf of the Regional Director, Company Law Board, was that it was incumbent upon the petitioner-company to have obtained the previous approval of the Central Govt. for the proposed scheme of amalgamation under section 23 of the MRTP Act as the two companies which were proposed to be amalgamated did not fall within the exception contained in section 23(3) of the MRTP Act. There was no controversy that both the transferor-company and the transferee-company were inter-connected undertakings and neither of them was a dominant undertaking and that consequently conditions 1 and 2 of section 23(3) of the MRTP Act had been satisfied. The controversy between the petitioner-company and the Regional Director, Company Law Board, centered round the third condition. Unlike in this case, the counterpart of Mr. Swamidurai in the Gujarat High Court, Mr. Vakharia on behalf of the Regional Director, Company Law Board, advanced the contention that in order to attract the applicability of section 23(3) the two undertakings must be inter-co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds, the composite undertaking may as well become a dominant undertaking and by the very exception what is sought to be prohibited by the substantive section would be achieved. Therefore, both from the point of view of plain grammatical meaning of the language employed in sub-section (3) as well as the object sought to be achieved by the provision contained in Part A of Chap. II, the meaning that can be assigned to the expression 'as are not dominant undertakings and as produce the same goods' would be that none of the undertakings sought to be amalgamated is dominant undertaking, and they are not producing the same goods. In order, therefore, to attract sub-section (3), three conditions which must be satisfied are that: ( i ) the scheme of amalgamation is in respect of inter-connected undertakings : ( ii ) that none of them is a dominant undertaking ; and ( iii ) the undertakings sought to be amalgamated are not producing the same goods. If these three conditions are satisfied, sub-section (3) will be attracted." On a careful reading of section 23(3) of the MRTP Act and on an anxious consideration of the decisions in Tata Iron and Steel Co. Ltd., In re [1975] Comp. Cas. 355 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mation of a company owning an industrial undertaking or a ship with another company and the Central Government, on the recommendation of the specified authority, is satisfied that the following conditions are fulfilled, namely : ( a )the amalgamating company was not, immediately before such amalgamation, financially viable by reason of its liabilities, losses and other relevant factors ; ( b )the amalgamation was in the public interest; and ( c )such other conditions as the Central Government may, by notification in the Official Gazette, specify, to ensure that the benefit under this section is restricted to amalgamations which would facilitate the rehabilitation or revival of the business of the amalgamating company, then, the Central Government may make a declaration to that effect, and, thereupon, notwithstanding anything contained in any other provision of this Act, the accumulated loss and the unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or, as the case may be, allowance for depreciation of the amalgamated company for the previous year in which the amalgamation was effected, and the other provisions of this Act relating to set-off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the requirements of the MRTP Act are met." These guidelines postulate that the specified authority before approving the proposed scheme of amalgamation under section 72A of the I.T. Act, 1961, is expected to satisfy itself that the requirements of the MRTP Act are satisfied if the amalgamating companies happen to be industrial undertakings registered under the provisions of the MRTP Act. In this connection, my attention has been drawn to question No. 4( c ) of the application dated February 24, 1978, submitted by the petitioners to the specified authority under section 72A of the I.T. Act, 1961, and the reply thereto. " Question : Please indicate whether the scheme of amalgamation would come under the exemption provided under section 23(3) of the MRTP Act from seeking permission under that Act for amalgamation? Answer : The scheme comes under the exemption provided under section 23(3) read with sub-section (9) of the MRTP Act as the undertakings are not dominant undertakings and produce the same goods." The petitioners have, therefore, brought to the notice of the specified authority under section 72A of the I.T. Act, 1961, that the amalgamating companies come withi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned counsel was not able to convince the court in what manner the scheme of amalgamation will be prejudicial to the creditors of the company. Rightly, therefore, Mr. Swamidurai did not pursue this contention further. To sum up, the scheme has been approved and accepted by an overwhelming majority of the shareholders, present in number and in value, of the two companies at the two meetings held separately under orders of this court. The exchange ratio adopted in the scheme of amalgamation has been found to be fair and reasonable on a consideration of the various factors which are necessary to be taken into consideration not only by the respective firms of auditors of the two companies, but also by an independent firm of chartered accountants, M/s. Venkatram and Company. There is no allegation that the books of accounts are not reliable. No grounds have been suggested why the report of the professional body of chartered accountants should not be accepted. There is no allegation of lack of bona fides on the part of the majority of the shareholders, or that the minority has been overriden and coerced into accepting the scheme of arrangement notwithstanding the fact that the sche ..... X X X X Extracts X X X X X X X X Extracts X X X X
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