TMI Blog1994 (10) TMI 211X X X X Extracts X X X X X X X X Extracts X X X X ..... attack varied from statutory violation, procedural irregularities of provision of the Act to ignoring effect of the provisions of Monopolies Restrictive Trade Practices Act, 1969 under valuation of Shares, its preferential allotment on less than the market price to the multi national, failure to protect the interest of employees of both the companies and above all being violative of public interest. The High Court was not satisfied that either the merger was against public interest or that the valuation of the shares was prejudicial to the interest of the shareholders of TOMCO or that the interest of the employees was not adequately protected. It was held that there was no violation of Section 391(1)(a) of the Act and the claim that the disclosures in the explanatory statement were not as required was without basis as it was not established that the statement did not disclose correct financial position of TOMCO. Nor there was anything to show that the material was not disclosed. The Court held that the petitioner failed to establish any fraud or prejudice. On valuation of share for exchange ratio the Court found that a well reputed valuer of a renowned firm of chartered accounta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance with settled financial norms and practice and its action was vitiated as he was one of the directors of the TOMCO. Comparative figures of the shares of the two companies their market' value, their holding in the market etc. were placed to demonstrate that the calculation was vitiated. 3. But what was lost sight of that the jurisdiction of the Court in sanctioning a claim of merger is not to ascertain with mathematical accuracy if the determination satisfied the arithmetical test. A company court does not exercise an appellate jurisdiction. It exercises a jurisdiction founded on fairness. It is not required to interfere only because the figure arrived at by the valuer was not as better as it would have been if another method would have been adopted. What is imperative is that such determination should not have been contrary to law and that it was not unfair for the shareholders of the company which was being merged. The Court's obligation is to be satisfied that valuation was in accordance with law and it was carried out by an independent body. The High Court appears to be correct in its approach that this test was satisfied as even though the Chartered Accountant wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... grievance of the employees that no safeguard has been provided for Hindustan Lever Employees Union appears to be off the mark as it is the interest of the employees of TOMCO which had to be protected. Even the submission that merger will create unemployment or that it may result in many employees of the TOMCO being rendered surplus does not carry much weight as these are matters which can be taken care of by the Labour Court if the contingency arises. The learned Counsel for the petitioner time and again took strong exception to the observation made by the High Court that any dispute about retrenchment etc. could be adjudicated by the Labour Court. He vehemently submitted that the availability of remedy after retrenchment should not have coloured the vision of the court to adjudicate upon the reasonableness of the scheme. The submission overlooks the primary duties and functions of a company court in matters of merger. When the court found that service conditions of the merged company shall not be to their prejudice it was fully justified in rejecting the claim of employees as it was neither unfair nor unreasonable. Further the Court in its anxiety to be fair to the employees recor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by which their legal rights or liabilities are affected. It does not mean anything so narrow as mere curiosity, whereas the interest of the particular locality which may be affected by the letters in question. Interest shared by the citizens generally in affairs of local, State or national Government.' It is an expression of wide amplitude. It may have different connotation and understanding when used in service law and yet a different meaning in criminal law than civil law and its shade may be entirely different in Company Law. Its perspective may change when merger is of two Indian companies. But when it is with subsidiary of foreign company the consideration may be entirely different. It is not the interest of shareholders or the employees only but the interest of society which may have to be examined. And a scheme valid and good may yet be bad if it is against public interest. 6. Section 394 casts an obligation on the court to be satisfied that the scheme for amalgamation or merger was not contrary to public interest. The basic principle of such satisfaction is none other than the broad and general principles inherent in any compromise or settlement entered between parti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompetition and it would result in creating virtual monopoly in favour of HLL which could result not only in deterioration of quality, but in escalation of price. The learned Counsel pointed out that even though HLL was a subsidiary of UL and claims to have the benefit of technical know-how etc., yet the quality of soaps produced by TOMCO was much better as compared to HLL. 8. In reply it was urged that the maintenance of 51% of paid-up equity share of UL was distinctively advantageous to HLL because the UL has become a source of major strength of HLL and has been responsible in several ways for its phenomenal growth and prosperity. This status, it was urged, enable HLL to have from UL free of cost the benefits of Research and Development technology, know how, marketing support, both domestic and international including brand names, managements systems, training facilities and other resources in normal course of business. It was further urged that as a result of HLL being a subsidiary of UL, HLL is able to utilise international brand names of UL, such as soaps under the brand names Lux, Lux International, Lifebuoy, Pears, Dove, Surf, Sunlight, etc, It was urged that the price of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany. The learned Counsel urged that in these circumstances, the High Court having found that the price of ₹ 105 having been worked out on the basis of price earning multiple of 15 based on the last published balance sheet of HLL, it was fair and reasonable and it was not liable to interference by this Court. Reliance was placed on Needle Industries (India) Ltd. and Ors. v. Needle Industries Newly (India) Holding Ltd. and Ors. [1981]3SCR698 , where this Court approved the principle laid down by Lord Davey in Hilder v. Dexter (1902) AC 474 at 480 that there was no law which obliged a company to issue its share at par because they were saleable at a premium in the Market. It was vehemently argued that since it were the shareholders who were primarily concerned with the company's finances and they have decided almost unanimously to allot the share to the parent company at the price of ₹ 105, it cannot be urged that the members of the HLL were not acting in the interest of the company as a whole. 9. Each of these challenges claimed to be violative of public interest have to be examined in the prevailing atmosphere which opted for liberalisation of the Government pol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Section 31 prohibited any company in which non-resident Indian had more than 40% share from acquiring or holding any immovable property in India. By Act 29 of 1993 Section 11 has been repealed and Sections 29 and 31 have been amended and there is no restriction now on a non-resident company holding in excess of 40% share. In Companies Act, Section 108-A to 108-I have been added. 11. The scheme of amalgamation does not run counter to any legislative provision of policy of the Government. The claim of the Petitioners that the transfer for a paltry sum of ₹ 30 crores was mala fide as it was a quid pro quo arrangement between UL and Tata Sons Limited by which the immovable assets of TOMCO were virtually given to Tata Sons Limited and in lieu of UL has been allotted 2984347 equity shares of the face value of ₹ 10 each at the price of ₹ 100 per share so as to ensure that the share of UL which stood diluted continued to remain at 51% was not found to have any merit as the valuation was determined by renowned and authorised valuers. It was held that sale by open public auction or inviting tenders from general public may have fetched more price due to competition, but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidiary company of a multi-national and an Indian company in the liberalised economic policy. S.C. Sen, J. 15. A Scheme of Amalgamation of two Companies - Tata Oil Mills Company Limited and Hindustan Lever Limited - is the subject matter of dispute in this case. 16. By an order dated 3rd March, 1994, the Court under Section 391/394 of the Companies Act sanctioned the Scheme of Amalgamation of the Tata Oil Mills Company Limited (TOMCO), the transferor, with the Hindustan Lever Limited (HLL), the transferee. 17. Aggrieved by the said Judgment and order dated 3.3.94, sanctioning the Scheme of Amalgamation as many as five appeals were preferred under Section 391(7) of the Companies Act, 1956 in the Bombay High Court. 18. Appeal No. 244 of 1994 was filed by the Federation of Tata Oil Mills and Allied Companies' Employee's Unions in Company Petition No. 332 of 1993 connected with Company Application No. 250 of 1993. Appeal No. 298 of 1994 was filed by Mr. Rabindra Hazari a shareholder of TOMCO in Company Petition No. 332 of 1993 connected with Company Application No. 250 of 1993. Appeal No. 224 of 1994 was filed by the Hindustan Lever Employees' Union in Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a, for the purposes of evaluation of the share-price of two Companies in order to arrive at a fair share exchange ratio. On 19th March, 1993, Mr. Malegam gave valuation report and recommended an exchange ratio of two equity shares of HLL for every fifteen ordinary shares of TOMCO. The Board of Directors of both the Companies at their separate and independent meetings accepted the recommendation and approved the Scheme of Amalgamation. 24. The Scheme, inter alia, provides for transfer and vesting in HLL of the Undertaking and business of TOMCO together with assets and liabilities excluding certain assets and/or licence rights to use certain premises. Salient features of the Scheme are to be found in Clauses l,7(d), 4, 5, 11 and 13. Clause 1.7(d) sets out the details of excluded properties in which TOMCO has no more than licensees rights. Clause 4 provides for transfer of 5 assets (immovable property) to be transferred to companies nominated by Tata Sons Ltd. at fair market value as will be independently assessed. Clause 5 provides that TOMCO shall (before or after the effective date) transfer to Tata Sons Ltd. or its nominee certain investments/shares owned by TOMCO at the then p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enture holders voted 99%, secured creditors voted 100%, unsecured creditors voted 84.30% and preference shareholders voted 100% in favour of the Scheme. The Scheme as proposed was thus approved in all the five meetings by 99.72% of equity shareholders in terms of values and 86.72% in terms of number. 27. In Company Application No. 251 of 1993 filed by HLL also similar direction for convening meeting of the equity shareholders and creditors were issued by the Court on 29th April for convening the meeting on 30th June, 1993. Similar procedure was followed in this also. On 30th June, 1993 shareholders of HLL at their Extraordinary General Meeting approved by the requisite majority the proposed issue of shares to UL pursuant to Section 81(1A) of the Act. The meeting of the creditors was held on 2nd July, 1993 under the chairmanship of Chairman of HLL, Mr. S.M. Datta, as directed by the Court. The meeting of equity shareholders was attended by 2,528 members including proxies holding 9,59,27,477 equity shares. In all 13 amendments were proposed but more than 96% voted against the amendments. The creditors also voted for the Scheme. 28. On 2nd August, 1993 Judges summons was taken o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is of any independent verification. It is also significant that Mr. Malegam was a Director of ICICI. It was also contended that the valuation report was erroneous. A combination of different methods of valuation was adopted, which was clearly against the law laid down by the Supreme Court in the case of Commissioner of Gift Tax, Bombay v. Smt. Kusumben Mahadevia [1980]122ITR38(SC) . If the valuation was done by the net asset method, the exchange ratio should have been 1:2 in favour of TOMCO. Moreover, market value of the shares of the two Companies was taken at a point of time when the price of TOMCO shares was the lowest for a period of 27 months. Lastly, it was contended that the preferential allotment of shares to Unilever was part of the Scheme of Amalgamation. The Board should have explained why ₹ 366 was being paid for every HLL share by TOMCO, when Unilever was paying only ₹ 105 per HLL share. 32. We are unable to uphold any of the above contentions raised by Mr. Dholakia. The overwhelming majority of the shareholders had approved the Scheme at the meeting called for this purpose and had approved the exchange ratio. In fact, a proposal for amendment of the exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vestments and ₹ 18.04 crores on account of refund of Excise Duty pertaining to prior periods. In fact, in the Directors' Report of the year 1992-93, it was stated that the Company had suffered severe set back resulting in operating loss. The position got worse in the year 1993-94. The Company suffered operating loss in the region of ₹ 16 crores and had to sell not only investments, but also fixed assets of the Company. 37. In the background of these facts, it cannot be said that the market price as on 17.6.93 did not reflect the true picture of the value of the Company's shares. If the market price of the shares of the two Companies as on 17.6.93 is compared, the quoted price of HLL was ₹ 375 per share; whereas the quoted price of TOMCO was ₹ 52.50 per share. The earning per TOMCO share had come down from ₹ 5.19 on 31.3.91 to ₹ 0.50 on 31.3.92 and ₹ 0.30 on 31.3.93. As against this, dividend paid on HLL shares was 42% in the years ending on 31.12.90 38.50% (on enlarged capital after the issue of bonus shares in the ratio of 1:2 in the year ending on 31.12.91 and 42.00% again in the year ending on 31.12.92. It is true that book va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. If profits earning method had been adopted, the ratio would have been very much worse for TOMCO shareholders. 43. This problem of valuation in the case of amalgamation of two Companies has been dealt with by Weinberg and Blank in the book TAKEOVERS AND MERGERS , in which it has been stated that some of all of the following factors will have to be taken into account in determining the final share exchange ratio : (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. It is often difficult to induce a shareholder, particularly an institution, to agree to a merger or a share-for-share bid if it involves a reduction in his dividend income. (3) The relative growth prospects of the two companies. (4) The cover (ratio of after-tax earnings to dividends paid during the year) for the present dividends of the two companies. The fact that the dividend of one company is better covered than that of the other is a factor which will have to be compensated for at least to some extent. (5) In the case of equity shares, the relat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It is also to be noted that the financial institutions who held 41% of the shares of TOMCO, did not find any fault in the method of valuation of the shares. 47. Mr. Ashok Desai, appearing on behalf of TOMCO, has argued that the evaluation of shares had to be done according to well-known methods of accounting principles. The valuation of shares is a technical matter. It requires considerable skill and experience. There are bound to be difference opinion among Accountants as to what is the correct value of the shares of a company. It was emphasised that more than 99% of the shareholders had approved the valuation. The test of fairness of this valuation is not whether the offer is fair to a particular shareholder. Mr. Jajoo may have reasons of his own for not agreeing to the valuation of the shares, but the overwhelming majority of the shareholders have approved of the valuation. The Court should not interfere with such valuation. 48. It is also difficult to follow the argument that Mr. Malegam's report is not acceptable to the TOMCO shareholders, because he was a Director of TOMCO, HLL had no difficulty in accepting the share exchange ratio fixed by Mr. Malegam, even thou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The shareholder has no interest in the assets of the company while the company is an existence. It is only at the stage of liquidation of the company that the shareholders become interested in the assets of the company. The share of any member in a company is movable property and transferable in the manner provided by the Articles of the company. This is provided by Section 82 of the Companies Act. The definition of 'goods' in the Sale of Goods Act, 1930 specifically includes stocks and shares. A share represents a bundle of rights which include, inter alia, the rights (i) to elect directors; (ii) to vote on resolutions at meetings of the company; (iii) to enjoy the profits of the company, if and when dividends is declared and distributed; and (iv) to share in the surplus, if any, on liquidation. In the case of Bacha F. Guzdar v. C.I.T. [1955]27ITR1(SC) , the position of a shareholder was explained thus : There is nothing in the Indian Law to warrant the assumption that a shareholder who buys shares, buys any interest in the property of the company which is juristic person entirely distinct from the shareholders. The true position of a shareholder is that on buying share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r any class of members, is called under Section 391 (a) With every notice calling the meeting which is sent to a creditor member there shall be sent also a statement setting forth the terms of the compromise or arrangement and explaining its effect; and in particular, stating any material interests of the directors, managing director, managing agent, secretaries and treasurers or manager of the company, whether in their capacity as such or as member or creditors of the company or otherwise, and the effect on those interests, of the compromise or arrangement, if, and in so far as, it is different, from the effect on the like interests of other persons; and.... 56. The grievance voiced by Mr. Jajoo is not shared be more than 99% of the shareholders. An explanatory statement had been sent on the basis of which Mr. Jajoo had taken inspection of all relevant documents. 57. Notice must be taken of the fact that even after these points were raised in the meeting, the overwhelming majority of shareholders voters for the Scheme. That the explanatory statement was approved by the Registrar, is itself a relevant factor. 58. A similar question came up for consideration before a Div ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctment. The question of merger of HLL and TOMCO has to be considered in the background of the provisions of the said Act. Since this very issue is under consideration by the MRTP Commission, the Court exercising company jurisdiction should not pass any order which may prejudice the proceedings before the MRTP Commission. Alternatively, it has been argued that assuming that the jurisdiction of the Company Court is not barred but it is parallel, then as a matter of propriety the Company Court should await the decision of the MRTP Commission with regard to the issues involved. The allegation before the MRTP Commission is that the proposed merger was in violation of the provisions of Monopolies Restrictive Trade Practices Act. The decisive question whether the issues arising before the MRTP -Commission are the same as are now before this Court. 63. It was further argued that even if the proposed amalgamation is sanctioned by this Court, it must be made subject to the final outcome of the proceedings pending before the MRTP Commission. The MRTP Commission gravely erred in rejecting the application for interim order under Section 12A of the Monopolies Restrictive Trade Practices A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the new economic policy of the Government has undergone drastic amendment with effect from 27.9.91. The relevant provisions for the purpose of this case are as under : 2. In this Act, unless the context otherwise requires,- ... ... ... (o) restrictive trade practice means a trade practice which has, or may have, the effect of preventing, distorting or restricting competition in any manner and in particular (i) which tends to obstruct the flow of capital or resources into the stream of production, or (ii) which tends to bring about manipulation of prices, or conditions of delivery or to affect the flow of supplies in the market relating to goods or services in such manner as to impose on the consumers unjustified costs or restrictions; ... ... ... (s) trade means any trade, business, industry profession or occupation, relating to the production, supply, distribution or control of goods and includes the provision of any services; ... ... ... (u) trade practice means any practice relating to the carrying on of any trade, and includes - (i) anything done by any person which controls or affects the price charged by, or the method of trading of, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave prior sanction of the Central Government or MRTP Commission before a Scheme of Amalgamation or merger can be sanctioned. If this argument is to be accepted, then in the first place it has to be held that the provisions of Section 23 were wholly unnecessary and otiose, because even otherwise sanction or clearance of the Central Government was a condition precedent for effecting a scheme of amalgamation or merger. Such a construction must be avoided. The enquiry must be as to what was the mischief which was sought to be cured by the Legislature by the amendment. By deleting Section 23, the Legislature removed the requirement of prior approval of the Central Government to a scheme of merger before the Court could sanction it. 70. Section 27A and Section 27B are the only sanctions in Chapter III of the Act which have been retained by the Legislature. Section 27 deals with division of undertaking and enables the Commission in the circumstances specified in that section, to pass an order for the division 01 any trade or undertaking or inter-connected undertaking, into such number of undertakings as the circumstances of the case may justify. Section 27A empowers the Central Governm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bstantial share of the market. A foreign company will have controlling interest in HLL after amalgamation. This is against public policy. In my judgment, what has been expressly authorised by the statute cannot be struck down as being against the public policy. A foreign company under the new economic policy of the Government has been allowed to acquire controlling share of any Indian company. This has been done by express amendment of the Foreign Exchange Regulation Act. 75. Under Section 29 of the Foreign Exchange Regulation Act (as it stood originally), a person resident outside India or a company (other than banking companies) which was not incorporated in India or in which the non-resident interest was more 40%, could not carry on business in India or establish in India a branch office or other place of business. Nor could such a person or company acquire the whole or any part of any undertaking in India of any company carrying on any trade, commerce or industry or purchase the shares in India of any such company. The object of Section, 29, inter alia was to ensure that a company (other than banking company) in which the non-resident interest was more than 40% must reduce i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e into a sick company. 78. Nor do we think that 'public interest' which is to be taken into account as an element against approval of amalgamation would include a mere future possibility of merger resulting in a situation where the interests of the consumer might be adversely effected. If, however, in future the working of the Company turns out to be against the interest of the consumers or the employees, suitable corrective steps may be taken by appropriate authorities in accordance with law. As has been said in the case of Fertilizer Corporation Kamgar Union v. Union of India (1981)ILLJ193SC : ...it if not a part of the judicial process to examine entrepreneurial activities to ferret out flows. The Court is least equipped for such oversights. Nor, indeed, it is the function of the judges in our constitutional scheme. Now merely because the scheme envisages allotment of 51% equity shares to Unilever, the scheme cannot be held to be against public interest. 79. Next it was argued on behalf of the employees of TOMCO that the Scheme will adversely affect them. This argument is not understandable. The Scheme has fully safeguarded the interest of the employees by provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, were being used by TOMCO as licensee with no enforceable rights. Occupation was purely permissive. TOMCO never considered these properties or rights relating to these properties as their assets. They were never shown in the balance sheet of the Company. Tata Sons could get back possession of these properties by revoking the licence. It was not necessary for Tata Sons to obtain the help of HLL or Unilever for getting back the possession. Under the Scheme, the properties are to be transferred at market rate, which has to be independently assessed. The determination of the market price has been entrusted by the Court to a reputed valuer. There is no reason to doubt their competence. No case of mala fide has been established. 85. An argument was also made that as a result of the amalgamation, a large share of the market will be captured by the HLL. But there is nothing unlawful for illegal about this. The Court will decline to sanction a scheme of merger, if any tax fraud or any other illegality is involved. But this is not the case here. A company may, on its own, grow up to capture a large share of the market. But unless it is shown there is some illegality or fraud involved i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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