TMI Blog2010 (6) TMI 325X X X X Extracts X X X X X X X X Extracts X X X X ..... sponse of Grant Thornton to every objection raised by Mr. Lakhani pertaining to the valuation carried out by Grant Thornton. The report of Grant Thornton sets out the basis for arriving at the final opinion. The report clearly mentions that valuation is done by giving predominant weightage to the value computed under the Market Multiple Method and Discounted Cash Flow Method, with a lower weight being given to the value computed under the NAV method. Thus Company Scheme Petition is allowed - COMPANY SCHEME PETITION NO. 101 OF 2010 - - - Dated:- 7-6-2010 - S.J. KATHAWALLA, J. Dr. V.V. Tulzapurkar and S. Parikh for the Petitioner. D.V. Lakhani for the Respondent. JUDGMENT 1. By this Company Scheme Petition, Organon (India) Limited (the Petitioner Company) seeks sanction and confirmation by this Court with regard to the special resolution passed by the Petitioner s shareholders in its Extraordinary General Meeting ("EGM") held on 15-10-2009, for the reduction of its equity share capital. 2. The Authorized, issued, subscribed and paid-up share capital of the Petitioner Company, as on 31-12-2008 is as under : Share Capital Rupees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital in any manner. The Board of Directors of the Petitioner-Company proposed the reduction of the equity share capital of the Company. The reason for the reduction of the equity share capital of the Petitioner-Company reads as follows : "The Company s securities being de-listed to individual shareholders do not have a tradable security for exit. This prevents shareholders from realizing the optimal value and returns on their investments in the Company. Further, over a period of time, the management s focus on overall profitability and financial discipline including effective management of the net working capital has significantly reduced the capital requirements of the company." 6. It was proposed by the Petitioner Company that its paid-up equity share capital be reduced by paying off the equity shareholders (other than promoter-shareholders) an aggregate sum of Rs. 425 towards each equity share, with a face value of Rs. 10, which would therefore, include a premium of Rs. 415 per equity share. Thus, the Petitioner-Company sought to extinguish 95,106 equity shares and reduce its paid-up equity share capital by Rs. 9,51,060. A copy of the valuation report of the certified i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing a minimal of 1.06 per cent of the total value of credit who neither consented nor were re-paid by the Petitioner-Company. 10. The Petitioner-Company had filed Company Application No. 57 of 2010 for requisite direction for dispensation of the provisions and the procedure prescribed under section 101(2) of the Act. By an order dated 22-1-2010, this Court has dispensed with the provisions of, and the procedure prescribed under section 101(2) of the Act and has accepted the undertaking of the Company Secretary to give individual notices of hearing of the petition to the said 10 unsecured creditors holding a minimal 1.06 of the total value of credit, referred to above in paragraph 8. By an affidavit dated 16-4-2010, the Petitioner-Company has pointed out that it has received No objection/Consent letters from all unsecured creditors for sanction of the proposed reduction of equity share capital. 11. By the Minutes of Order, dated 11-2-2010, passed by this Court in the above petition, the Petitioner-Company was also directed to get the notice of hearing published in two newspapers and in the Official Gazette of the Government of Maharashtra. The Petitioner-Company has complied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ticles of Association permitting it to do so; ( ii )If it has passed a special resolution for that purpose; and ( iii )If such a resolution is sanctioned by the Court. 15. In the leading case of British American Trustee Finance Corpn. v. Couper [1894] AC 399 Lord Macnaghten observed on the point : "If there is nothing unfair or inequitable in the transaction, I cannot see that there is any objection to allowing a company limited by shares to extinguish some of its shares without dealing in the same manner with all other shares of the same class." However, in the same case, Lord Herschell, L.C. made the following observations : "There can be no doubt that any scheme which does not provide for uniform treatment of shareholders whose rights are similar, would be most narrowly scrutinized by the Court, and that no such scheme ought to be confirmed unless the Court be satisfied that it will not work unjustly or inequitably." The Madras High Court, while referring to the same judgment in Panruti Industrial Co. (P.) Ltd. In re AIR 1960 (Mad.) 537 held that the Court s power to sanction any reduction is to be determined by whether such reduction is fair and equi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trimental to the company." The Learned Bench granted sanction to the reduction of capital, overruling the order of the Learned Single Judge in Sandvik Asia Ltd. s case ( supra ), and posited as follows : "Once it is established that non-promoter shareholders are being paid the fair value of their shares, at no point of time it is even suggested by them that the amount that is being paid is way less and even the overwhelming majority of non-promoter shareholders having voted in favour of the resolution shows that the Court will not be justified in withholding its sanction to the resolution." (para 9) An SLP [Petition for Special Leave to Appeal (Civil) No. 12418/2009] filed therefrom, was dismissed by the Hon ble Apex Court, by its order dated 13-7-2009. Thus, this Court is bound by the decision of the Learned Division Bench and cannot withhold sanction to the special resolution for reduction of capital, unless there is some patent unfairness regarding the fair value of the shares or there is lack of an overwhelming majority of non-promoter shareholders who vote in favour of the resolution. 18. It is next contended by Mr. Lakhani that at the said EGM, proxies were allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after the meeting was concluded. Interestingly, the Court finds that Mr. Lakhani has not expressed any doubts in his letter, regarding the lack of majority in the passing of the special resolution, or of notice of the meeting not being dispatched to 1,490 shareholders. Despite the fact that under section 176(7) of the Act, Mr. Lakhani was entitled, during the period of 24 hours before the time fixed for the commencement of the meeting and ending with conclusion of the meeting to inspect the proxies lodged, he chose not to conduct any inspection. Again, although his letter dated 21-10-2009, addressed to the Company Secretary of the Petitioner-Company inter alia records that at the time of the EGM around 20 to 25 persons were present and most of them appeared to be either employees of the company or representatives of legal firms and auditing firms, it is only on 23-12-2009 that Mr. Lakhani sought copies of the attendance register in respect of the EGM held on 15-10-2009 along with particulars regarding the shareholders and proxies who were present at the meeting. These facts establish beyond doubt that Mr. Lakhani who, as can be seen from his letter dated 15-10-2009, wrote to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 11-2-2010, the Petitioner-Company published notices of hearing of the petition for reduction of capital under section 100 of the Act in two local newspapers, and no objection has been received in relation to the present petition save and except from Mr. Lakhani. This contention therefore lacks merits and is rejected. 23. Mr. Lakhani has next pointed out that the explanatory statement under section 173(2) of the Act, to the notice dated 27-8-2009 mentions that : "The Board has recommended in accordance with the first-in-last-out principle , and Organon Participations B.V. has agreed vide letter dated August 25, 2009 that they being the Promoter-shareholder, should not be returned any of its capital contribution before the public shareholders are returned their capital contribution." Mr. Lakhani submits in this regard that the promoters and directors prior to the open offer held 50.43 per cent of the paid-up capital of the Company. Post the open offer, as of 31-12-2001, the promoter s holding was 94.38 per cent, whereas presently the promoters holding is 98.43 per cent and the remaining 1,490 shareholders hold 1.57 per cent of the paid-up capital. Therefore he subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnexed as "Exhibit A" to the affidavit in rejoinder of the Petitioner-Company dated 25-3-2010. According to Mr. Lakhani, the Petitioner-Company followed one method of valuation at the time of open offer in October/November, 2001 and another method of valuation under the present proposal of reduction of capital which is not proper. He submits that the present proposal by the Petitioner-Company should be on the basis of that method of valuation, which gives higher value i.e., either on the basis of book value of the earning per share, or the PE. ratio and the difference in Sensex then and now, so as to add a reasonable premium for the total buyout of shares. 26. The above objections/suggestions is responded to by Grant Thornton as follows : "Grant Thornton, India was appointed to conduct a valuation of Organon (India) Limited s (the "Company") equity shares for the purpose of a proposed reduction of its share capital as per the provisions of the Companies Act, 1956. For this purpose, we understand that there are no prescribed methods/guidelines for carrying out the valuation under the Companies Act, 1956, particularly in cases where the companies are no longer listed on stoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hy the valuation method suggested by Mr. Lakhani cannot be acceded to. 27. Mr. Lakhani has contended that the open offer at Rs. 285 per share in October/November, 2001 was at 3.07 times of the book value and if the same 3.07 times the present book value is taken into consideration, the price per share would become Rs. 718.38. In response, Grant Thornton have stated that they have considered the book value (Net Asset Value) of the company and the same has been even adjusted to reflect the market value of surplus/non-operating assets and the impact of potential contingent liabilities. They have pointed out that this has been explained by them in para IV(1) of the Valuation Report, which is reproduced hereunder : "Net Asset Value Method (NAV) : The value arrived at under this approach is based on the latest available audited/provisional financial statements of the business and may be defined as Shareholders Funds or Net Assets owned by the business. Under this method, the net assets as per the financial statements are adjusted for market value of surplus/non-operating assets, potential and contingent liabilities if any. To derive value per equity share, the adjusted Net Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er has stated. In addition, the Offer document of October/November 2001 makes a reference to the Industry PE ratio comprising of multinational Pharmaceuticals which was at a ratio of 19.0x as per the Capital Market Magazine dated 5th August, 2001. If the same source is considered, the P/E ratio of multinational Pharmaceuticals is 16.0x, based on an average last four editions preceding the date of valuation, which after adjustment towards lack of marketability of the Company s shares, will be closure to implied P/E ratio of the Company as per the current Offer Price of Rs. 425, the estimated annualized earnings as at June 30, 2009. It is further submitted that as per several researches carried out by academicians and as a general practice, it is common to apply a discount for lack of marketability in the range of 25 per cent to derive the Fair Value of equity of an unlisted company." Therefore, the Petitioner-Company is correct in its contention that the fair value of the share is Rs. 425 as per current PE ratio of the Petitioner-Company. 29. Mr. Lakhani also has contended that the BSE Sensex is rising and is approximately five and a half times of what it was in 2001. Hence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the valuation of shares. Before concluding on this point, I must point out certain observations of the Courts in the country regarding valuation of shares. Mr. Tulzapurkar, Learned Senior Counsel appearing for the Petitioner-Company has relied on the decision of the Hon ble Apex Court in the case of Miheer H. Mafatlal ( supra ). One of the objections raised by the appellant therein was that the exchange ratio of the equity shareholders so far as the Transferee-Company is concerned works very unfairly and unreasonably towards them. As per that scheme five equity shares of the Transferor-Company were to be exchanged for 2 equity shares of the Transferee-Company. It is pertinent to record the observations of the Hon ble Apex Court in this regard : ". . . Pennington in his Principles of Company Law mentions four factors which has to be kept in mind in the valuation of shares : (1)Capital Cover; (2)Yield; (3)Earning Capacity; (4)Marketability. . . . Valuation of shares is a technical and complex problem which can be approximately left to the consideration of experts in the field of accountancy. Many imponderables exist in the exercise of the valuation of shares. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Experts is based on the information provided by the Company, in the following terms: "Insofar as the criticism with regard to the contents of the Valuation Report either on the ground that it does not give any forecast or disclose any logic but only conclusion. Even this argument does not commend to me. As aforesaid, on reading the reports clause by clause and as a whole, no fault can be found with the ultimate opinion reached by the experts regarding share swap ratio, which is founded on tangible material and basis. I am not at all impressed by the argument of the objectors that the report is manifestation of conflicting opinion in any manner. The fact that the language of the report would give an impression that the Expert does not take the responsibility of the accuracy of the figures furnished to them by the Company or that they have not made any independent valuation of the assets and liability of the companies on their own, does not mean that the relevant factors for determination of swap ratio have not been considered by the experts. Obviously, the opinion of the Experts is based on the information provided by the Company. There is nothing to show that the figures availab ..... X X X X Extracts X X X X X X X X Extracts X X X X
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