TMI Blog1983 (2) TMI 212X X X X Extracts X X X X X X X X Extracts X X X X ..... he appropriate places as to whether this peculiar feature of the scheme has any bearing on the larger question as to whether the court should or should not accord its sanction to the scheme in question. It would be profitable to briefly advert to certain particulars of the transferor company and the transferee company so as to appreciate the relevant and material aspects which have a bearing on the question of according sanction to the scheme in question. The transferor company was incorporated on September 5, 1888, as a company limited by shares under section 36 of the Indian Companies Act, 1882. The original name under which the transferor company was incorporated was "Tricomlal Harilal Spg. & Mfg. Co. Ltd." which was subsequently changed to its present name, that is, "Maneklal Harilal Spg. & Mfg. Co. Ltd.". The registered office of the transferor company is situate in the area known as Saraspur within the City of Ahmedabad. The authorised share capital of the transferor company is Rs. 3,00,00,000 divided into 4,500 4½% cumulative redeemable preference shares of Rs. 50 each and 1,48,875 equity shares of Rs. 200 each. The issued, subscribed and paid up capital is Rs. 98,25 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as detailed in its memorandum and articles of association, are, inter alia, business of manufacturing and dealing in textiles and yarns. It appears that at the respective meetings of the board of directors of the transferor company and the transferee company held on August 17, and August 18, 1982, respectively, it was resolved to evolve and approve a scheme of amalgamation whereby the entire undertaking of the transferor company is to be transferred and be vested in the transferee company. The circumstances that have necessitated the proposed scheme of amalgamation are, broadly stated, as under: (1)The transferee company is a subsidiary of the transferor company, inasmuch as the transferor company holds 4,303 shares out of 5,600 equity shares issued by the transferee company. (2)The transferee company is a sick unit in the sense that it has been incurring losses since last about 7 to 8 years except the accounting year 1978, and the debit balance of the company as on December 31, 1982, is Rs. 1,48,60,252, and its current liability is to the tune of Rs. 2,22,50,560 and has also raised loans against security and otherwise to the extent of Rs. 2,22,19,802, as against its assets and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the transferor company one equity share of Rs. 200 each fully paid up in the transferee company for one equity share of Rs. 200 each held by such member in the transferor company, and all the members of the transferor company shall accept the shares so allotted in the transferee company in lieu of their shareholding and for that purpose surrender to the transferee company for cancellation of their share certificates in respect of their holding in the transferor company, so as to enable the transferee company to issue necessary certificates for the shares so allotted in the transferee company, and all such shares to be issued and allotted as aforesaid by the transferee company shall rank pari passu in all respects with the existing shares in the transferee company. All the shares held by the transferor company in the transferee company shall stand cancelled. There will be no break in the services of the employees in the employment of the transferor company and their services would be taken over with all their rights and liabilities intact by the transferee company. The provision pertaining to the change of name of the new company after amalgamation has some bearing since some ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion with the affairs of the transferor company. At the time of hearing of these two petitions, Mr. J. J. Yagnik, learned advocate, has filed his appearance on behalf of Shri P. C. Shah, a shareholder, who had opposed the scheme in the meeting of the equity shareholders of the transferee company. Another shareholder of the transferee company, Shri J. P. Bakriwala, who had opposed the scheme, has appeared in person. The Regional Director has been represented by the learned advocate, Shri S. R. Shah. Since the present scheme of amalgamation with which I am concerned is slightly of an unusual type, inasmuch as the transferor company which is a prosperous and healthy unit has decided to merge itself in the transferee company which is a sick and a non-viable unit, the entire matter was examined from the relevant angles. What is the periphery jurisdiction of the company court in the matter of according sanction under section 394(2) of the Companies Act, 1956, has been examined by this court as well as other courts, particularly in the context where a scheme of amalgamation has been adopted either unanimously or on the substantial unanimity of the interests concerned. In exercise of its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht to be achieved through promotion of the transferor company, and why was it being dissolved by merging it with the transferee company. The court thus examined in Wood Polymer's case (supra), the different factual aspects and having regard to the totality of the circumstances including the report of the official liquidator that the transferor company appeared to have been created solely to facilitate the transfer of the building to the transferee company without attracting the liability to pay capital gains tax, refused to accord sanction to the scheme. The approach of the court, therefore, is not conditional as it is in the proceedings where the courts or the tribunals proceed on advisory basis, but it has inquisitorial and supervisory role to play requiring it to form an independent and informed judgment as indicated by this court in Mahindra Ugine Steel Co.'s case (supra). Shortly stated, the approach of the court is to see for itself whether the scheme is reasonable, just and fair to all the interests concerned: vide Carron Tea Co. Ltd., In re [1966] 2 Comp. LJ 278 (Cal.). It is in view of this settled legal position that I have to examine whether the sanction should be accord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the direct or indirect control over the assets of the acquired company passes to the acquirer; in a merger the shareholding in the combined enterprise will be spread between the shareholders of the two companies. Often the distinction is a question of degree; if the dominant company (M. Co.) makes a share-for-share exchange offer for a target company (S. Co.), a company of roughly the same size, the former shareholders of S. Co. will finish up holding roughly 50 per cent, of the share capital of H. Co. and the operation ought undoubtedly to be called a merger. If H. Co. is many times the size of S. Co., the operation ought generally to be regarded as a take over of S. Co. by H. Co., although even in such a case, the result might be, if the shareholding in H. Co. was far more widely dispersed than in S. Co., that H. Co. comes under the joint effective control of the former controllers of H. Co. and the former controllers of S. Co., or even under the sole effective control of the former controllers of S. Co." This last alternative is known as taking over by reverse bid. In paragraph 612, at page 80 of the aforesaid book, we find the discussion pertaining to take over by reverse bi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al of S. Co. in issue prior to the acquisition ; or if the issue of shares in S. Co. would result in a change in control of S. Co. through the introduction of a minority holder or group of holders." The above is, therefore, a precise and brief discussion of what is known as take over by reverse bid. Judging the present arrangement by diverse tests, which have been indicated for purposes of finding out whether an arrangement is in the nature of reverse take-over, it is manifestly clear that the three tests, viz., (i) the assets of the transferor company being greater than the transferee company, (ii) equity capital to be issued by the transferee company pursuant to the acquisition exceeding its original issued capital, and (iii) the change of control in the transferee company, clearly indicate that the present arrangement is an arrangement which is a typical illustration of take-over by reverse bid. The motives which may operate behind the decision of take-over or merger are broadly classified into four main classes by the learned authors of the above book on Take-overs and Mergers, and Chapter 3 indicates the classes of take-overs and mergers. One of the classes of such motives n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ys at the stock exchange, or where the transferee company has the benefit of active management pursuing a dynamic policy of acquisition or where the directors of the transferee company and the transferor company take the decision having regard to the attitude of their respective shareholders. So far as the first question is concerned, I am of the opinion that having regard to the following facts and circumstances, the decision of the transferor company to merge itself into the transferee company is justified. The reasons need not be elaborately discussed since there is no worthwhile opposition to the proposed scheme. Notwithstanding the absence of such objections, I have myself examined the question about the justness of the decision of the transferor company to merge itself into the transferee company from different angles. It should be recalled that the transferee company is a subsidiary of the transferor company, since as many as 4,303 equity shares out of 5,600 equity shares issued by the transferee company are held by the transferor company. In other words, more than 75% of the equity shares issued by the transferee company are held by the transferor company. Apart from this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany, the transferor company was well advised to have a scheme of amalgamation, since the total failure of the undertaking of the transferee company may have adverse consequences and far-reaching repercussions on the fortunes of the transferor company as well. It should be recalled that the transferor company and the transferee company are in the same line and they have the standing of about 94 years and 52 years, respectively. Both the companies are carrying on business in manufacturing textiles. The transferor company got hold of the transferee company when it purchased in about three parts, the entire block of shares aggregating to 4,303 in the month of August, 1982. The decision of the transferor company to purchase the equity shares of the transferee company appears also to be justified, since having regard to the book value of the block of the company of Rs. 1,99,30,850 and the depreciated value of Rs. 58,24,657, the deal was really in the interest of the transferor company. The resources position of the transferor company as disclosed from the valuation report of M/s. Talati and Talati, chartered accountants, who were retained for purposes of submitting their valuation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said to be unjustified. In the course of discussion of this larger question, it was also examined as to whether the decision of the transferor company to merge itself with the transferee company offends or violates any statutory provision. Since the transferor company will have after the merger with the transferee company the benefit, inter alia, of claiming set off of all the accumulated losses and unabsorbed depreciation against future profits of the transferee company. This aspect was required to be examined, since the formalities prescribed under section 72A of the I.T. Act, 1961, providing for the carrying forward or set off of accumulated losses and unabsorbed depreciation allowance in the present case of amalgamation would not be required to be gone through. It cannot be said by any stretch of imagination, and without violence to the language, that the amalgamation is only feasible when the sick unit is taken over and could exclude the cases where the prosperous units decide to merge into sick units as has been in the present case. The only short question which was examined was, whether the scheme of amalgamation and merger of the prosperous and healthy unit into the sick ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cept the aforesaid shares to be allotted as aforesaid in lieu of their shareholdings in M.H. (b)Every member of M.H. shall surrender to Bihari for cancellation of his share certificate(s) in respect of shares held by him in M.H. and take all steps to obtain from Bihari a certificate for shares in Bihari to which he may be entitled under sub-clause (a) hereof, and all the shares to be issued and allotted shall rank pari passu in all respects to the existing shares in Bihari. (c)All the shares in Bihari held by M.H. shall stand cancelled." In order to decide about the reasonableness of the exchange ratio, it is necessary to refer to, in the first instance, as to the price of the shares quoted on the stock exchange of the respective scrips of the transferor company and the transferee company at the relevant time. It should be recalled that the effective date as prescribed under the scheme is January 1, 1982. The prices quoted at the stock exchange for the period of two months immediately preceding the effective date and for the entire calendar year 1982 have been annexed to the additional affidavits of S/Shri Radha-krishan Kabra dated February 14, 1983, and S. R. Sanghvi of even da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Co., have, in their report to the official liquidator, inter alia, stated to the effect that taking the paid-up capital and reserves together, the book value of the shares of the transferor company as per the balance-sheet as on December 31, 1981, would come to Rs. 1,125 while in the case of the transferee company, namely, Bihari Mills Ltd., it would be Rs. 1,921. It is no doubt true that both the auditors have opined as above about their estimate of the valuation of the shares of the respective companies on the application of break-up value method. In determining the break-up value of the shares, one has to ascertain the value of the company's physical assets and deduct therefrom the company's current liabilities and prior charge capital. Broadly speaking, the break-up value of shares means the difference between the assets and the liabilities of the company, vide CWT v. Rajendra Singh Singhi [1969] 72 ITR 245 (Cal). In Diamond on Death Duties, 14th edition, p. 578, it is observed that the break-up value is the amount which the shareholder would receive in the event of liquidation. It is no doubt correct that the break-up value of the shares is to be ascertained where the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the transferee company on application of the break-up value method. It is no doubt true that so far as the question of valuation of shares in mergers and take-overs is concerned, the transferor company is not to be wound up but none the less it is to be dissolved without formal winding up. If, therefore, in such a context an attempt is made to evaluate the break-up value of the transferor company, it cannot be said that the approach is unjustified. If once, therefore, in relation to the transferor company the break-up value has been arrived at, it would be reasonable to find out the break-up value of the transferee company. I do not mean to say that if the stock exchange prices are higher than the break-up value or on the basis of yield method or dividend method, the higher valuation is not justified, and the company seeking to evolve the arrangement of merger or take-over should adopt the best valuation by applying the break-up method, or any other method which is convenient for purposes of obtaining lesser valuation unless there are valid and compelling reasons which may justify lower valuation. I have, therefore, called for the valuation of the shares of the transferor compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deration so as to have a long time view. The valuation is also made on the alternative basis of four years and three years average of the profits, and according to the estimation, the value per share on five years, four years and three years average profit basis comes to Rs. 868, Rs. 985 and Rs. 972, respectively. The intrinsic value of the shares which will be issued on amalgamation is much higher than the value estimated on the yield basis as above. The relevant factors which are to be taken into account in determining the final share exchange ratio have been enumerated in the Weinberg and Blank's classical Treatise, paras. 2052 to 2060 at pp. 519 to 522. Shortly stated, these factors are as under: 1.The stock exchange prices of the shares of the two companies before the commencement of negotiations or the announcement of the bid. 2.The dividends presently paid on the shares of the two companies. 3.The relative growth prospects of the two companies. 4.The cover for the present dividends of the two companies. 5.The relative gearing of the shares of the two companies. 6.The values of the net assets of the two companies. 7.The voting strength in the merged enterprise of the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound that it is not just and fair, and that a prudent and reasonable businessman will never accept. All the relevant aspects necessary to be borne in mind while considering the question of grant of sanction to a scheme of arrangement are, in my opinion, satisfied and, therefore, the consent should be accorded to the proposed scheme under section 394 of the Companies Act. A short question remains to be dealt with. An objection has been raised on behalf of the Regional Director of Company Law Board, Western Region. The objection which has been sought to be raised on behalf of the Regional Director is that since clause 7 of the proposed scheme postulates a change in the name of the company after amalgamation, the court should not make any observation in that behalf since the power of granting sanction to a change in the name of the company is with the Central Govt. No doubt section 21 of the Companies Act enables a company to change its name by making appropriate special resolution in that behalf with the approval of the Central Govt. However, this power under section 29 to grant approval of the Central Govt. has been delegated to the Regional Directors of Company Law Board, Bombay, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given: "For the reasons aforesaid, therefore, the scheme of amalgamation of the transferor company and the transferee company, as approved and adopted by the interests concerned of both the companies which is annexure "A" to both the petitions, is sanctioned subject to the transferee company making an application for approval to the change of the name under section 21 of the Companies Act latest by April 30, 1983, and all the reliefs as prayed for in the petitions should be granted." (emphasis supplied) This conditional accord of sanction has caused some apprehensions in the matter of use of the new name by the transferee company since the use of the name of the transferee company may create some difficulties in the matter of licences, quota, etc., held by the transferor company and the sale of the products of the transferor company in the market, etc. It should be noted that this court has, in its order, held that the approval envisaged in section 21 can be ex post facto since the legislative intent does not appear to be of obtaining previous approval before the change can be made effective. This position is clear having regard to the requirement of the previous approval of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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