TMI Blog2005 (5) TMI 665X X X X Extracts X X X X X X X X Extracts X X X X ..... signed to M/s. T.R. Chadha and Co., Chartered Accountants. They submitted their valuation report which reflects that 'Net Asset Valuation Method' (Asset approach) and 'Earning Per Share Method' (Income method) was adopted. Using the 'Net Valuation Method' value per share works out to ₹ 61=73p. per share. Under the 'Earning Per Share Method' the earning per share was computed at ₹ 18=90p. The Chartered Accountants accordingly determined the value per share of the petitioner company using PE multiple, which is based on the PE multiples of comparable companies in the faster moving consumer goods sector. Based on this methodology the value per share of the petitioner company was ascertained at ₹ 231=62p. From the report it is clarified that the valuer has assigned a greater weight to the earnings per share method and accordingly the fair value per share, based on a weighted average of the aforementioned two methods was determined at ₹ 174.99 per share, which amount is 43% lower than the price of ₹ 250/- per share being offered by the petitioner company to its shareholders whose shareholding is proposed to be reduced. In view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and its reserves to the extent of about ₹ 159,20,58,240/-. This petition is filed by the petitioner company under Sections 101-105 of the Companies Act (in short the 'Act'), inter alia, seeking reduction of this share capital. 2. It is stated in the petition that in February, 2003 the equity shares of the company were mandatorily de-listed from the Stock Exchange in accordance with Regulation 21(3)(a) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Take Over) Regulation 1997 (hereinafter referred to as the 'SEBI Regulations'). The market value of the shares of the company, immediately prior to de-listing was ₹ 247/- per share. Pursuant to directions received from the Stock Exchange in relation to the mandatory de-listing of the company, Lancaster SL (for short 'Lancaster') made an exit offer to acquire shares of the company under Regulation 21 of the aforesaid SEBI Regulations. The said exit offer was opened on May 9, 2003 and was valid till May 18, 2003. Price of ₹ 260/- per share was offered in the said exit offer. This fact is stated to indicate the value of the shares at relevant time. 3. The Board ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of ₹ 6,63,35,760/-, constituting about 20.15% of its issued and paid up share capital. The petitioner company has also reserves consisting of general reserves, balance in the profit and loss account, capital reserves, modernization and expansion reserves and the share premium account, in excess of its requirements to the extent of ₹ 159,20,58,240/-. The petitioner company has evaluated the effect of such over-capitalisation upon its functioning and has carefully examined the various options available to it such as alternate business prospects and/or restructuring the share capital in the interests of the shareholders. In the absence of adequately attractive acquisition opportunities in the present market scenario, the restructuring of the petitioner company's existing capital structure becomes imperative. Section 100(1)(c) of the Act provides that a company may either with or without extinguishing or reducing liability of any of any of its shares, pay off any paid-up share capital which is in excess of the wants of the company. 6. The proposed move is also justified by stating that de-listing of the equity share by the SEBI has resulted in non-tradability of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re held by Lancaster and public holding is 3.75%. The present position of the shareholding and consequence of reduction would be as under:- Present position:- S.No. Shareholder(s) Details of Shareholding Amount (in rupees) 1 Reckitt Benckiser Plc 1,67,85,726 Equity shares of ₹ 10/- each fully paid-up constituting 51% of the issued and paid up share capital of the Petitioner Company 16,78,57,260 2 Lancaster Square Holding SL 1,48,93,374 Equity Shares of ₹ 10/- each fully paid-up constituting about 45.25% of the issued and paid up share capital of the Petitioner Company (including 3,65,088 Equity Shares being subject to the receipt of approval of the RBI and 5,973 Equity Shares held in an Escrow account) 14,89,33,740 3 Public Shareholders 12,34,088 Equity Shares of ₹ 10/- each fully paid-up constituting about 3.75% of the issued and paid up share capital of the Petitioner Company 1,23,40,880 Position after proposed reduction: S.No. Shareholder(s) Details of Shareholding Amount (in rupees) 1 Reckitt Benckiser Plc 1,67,85,726 Equity shares of ₹ 10/- each fully paid-up constituting about 63.87% of the issued and paid up share capital of the Petitioner Company 16, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion is not effected on equal proportionate basis but selectively aimed at mainority shareholders. The motive is to buy back the shares of the public, including the petitioner, who belongs to this class. (iii) Once the effect is to buy back the shares of the petitioner by the company, provisions of Section 77A of the Act are also required to be followed, which has not been done. Alternatively, in such a case, provisions of Section 391 of the Act would also be attracted and procedure contained therein is also not followed. (iv) Shares of a company is movable property of the shareholder, who is absolute owner thereof and is entitled to deal with it in any manner he deems fit. There cannot be forcible acquisition of these shares, which is sought to be achieved. It will also violate the right of property vested in a person by the Constitution of India. (v) Attempt also amounts to forcing minority shareholders to give up their shares, which would constitute oppression by the minority foreign shareholders. It is also against the interests of the general investing public as it sets wrong precedence and shall also have cascading effect on the market, as no small investor would be willing t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Lancaster and the general public. There is no such distinction in law. The three categories are created only to wipe off the so-called category to which the objector belongs. Otherwise, admittedly Lancaster is a subsidiary of the promoter and is acting in concert with the petitioner company as well as the promoter. The reduction of the share capital of the Lancaster is a make-belief in order to give it a legitimate hue. 13. The objector has also questioned the criteria for arriving at a fair valuation of shares, namely, the book value. It is further stated that even the book value is not arrived at correctly, as company has not valued and considered, for the purpose of valuation, the brands of the company, namely, Mortein, Harpic, Kleen, Lizol, Robin, Cherry Blossom, Analjesic, Detol soap and liquid and shaving cream, etc., which are growing very fast and command very high market. Harpic has over 75%, Robin over 35% and Detol soap and liquid over 48% market share as per the management discussion and analysis report in the Annual Report 2002. It is, therefore, pointed out that intangible assets of the company in the form of goodwill and intellectual rights in the aforesaid brands a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssets; or (c) either with or without extinguishing or reducing liability on any of its shares, pay off any paid-up share capital which is in excess of the wants of the company, and may, if and so far as is necessary, alter its memorandum by reducing the amount of its share capital and of its shares accordingly. (2) A special resolution under this section is in this Act referred to as a resolution for reducing share capital. 15. Sub-section (1) entitles a company, under certain circumstances, to reduce its share capital in any way. For doing this the company should be one which is limited by shares or limited by guarantee and having a share capital and Article of Association of the company should authorise a company to reduce its share capital. Once these conditions are fulfillled, then reduction can be by special resolution. Without affecting this general power, Clause (c) of Sub-section (1) provides that reduction can breather with or without extinguishing or reducing liability of any of its shares, pay off any paid-up share capital, which is in excess of the wants of the company. It is not in dispute that the petitioner company is a company limited by shares and is having share c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion, (1960) 3 CC 367 (Cal.). 19. House of Lords have, also in the case of ex parte Westbern Sugar Refineries Ltd., (1951) 1 All. E.R. 881 (HL) reiterated this principle by observing that the general rule is that the prescribed majority of the shareholders is entitled to decide whether there should be a reduction of capital, and, if so, in what manner and to what extent it should be carried into effect . Same principle is restated by Madras High Court in Re. Panruti Industrial Company (Private) Ltd., AIR 1960 Mad. 537, that ...the question of reduction of capital has been treated as a matter of domestic concern, one for the decision of the majority of the shareholders of the company . 20. The principles, which can be distilled from the aforesaid judicial dicta, are summarised as under: (i) The question of reduction of share capital is treated as matter of domestic concern, i.e. it is the decision of the majority which prevails. (ii) If majority by special resolution decides to reduce share capital of the company, it has also right to decide as to how this reduction should be carried into effect. (iii) While reducing the share capital company can decide to extinguish some of its sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed Counsel not unnaturally turned to in re. Downfield Stinkstone Coal Company, 17 Ch. D. 76, and suggested that at any rate it might be so when the power was used as an incident of domestic management to buy out shareholders whose continuance in the company was undesirable. That was the way in which the proposition was put in in re. Dronfield, and Co., where matters had come to a deadlock. But I would ask, is it possible to suggest anything more dangerous to the welfare of companies and to the security of their creditors than such a doctrine? Who are the shareholoders whose continuance in a company the company or its executive consider undesirable? Why, shareholders who quarrel with the policy of the Board, and wish to turn the directors out; to answer; shareholders who want information which the directors think it prudent to withhold. Can it be contended that capital of the company in keeping themselves in power, or in purchasing the retirement of inquisitive and troublesome critics? xxxx After all, the inconvenience sought to be avoided arises either from restrictions which Parliament has thought right to impose, or from the common misfortune of having to pay for what one wants o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uced by paying the capital represented by the shares of such shareholders and by extinguishing the liability thereon. All the creditors and shareholders assented to this arrangement. When the petition by the company was filed for confirmation by the Court, the Court did not treat it as purchase of its shares by the company but looked it as a sale of some of its assets for not less than their cash value in consideration of a relief from heavy burdens. Thus, while affirming the principle laid down in Trevor v. Whitworth (supra), the proposed reduction of capital was sanctioned in the following words: This appears to us to be a transaction which the company can carry out, with the consent of the debenture-holders/ under the company's memorandum and articles of association, without the sanction of the Court. The company can sell part of its assets, and it can accept a surrender of its shares under Article 27. No doubt a surrender of shares in consideration of a payment in money or money's worth by the company is a purchase by it of its own shares, and is ultra vires, as pointed out by Lord Macnaghten in Whitworth. But, as we understand this transaction, the company is giving no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs with the decision whether there should be a reduction of capital, and if so, how it should be carried into effect. The interests of the dissenting minority of the shareholders (if there be such) are properly protected by this: that the decision of the majority can only prevail upon it be confirmed by the Court. This is a complete answer to the argument ably urged by Counsel for the respondent that if all the shareholders of the same class were not dealt with in precisely the same fashion, the interests of the minority might be unjustly sacrified to those of the majority. 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 scrutinised 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. But this is quite a different thing from saying that the Court has no power to sanction it. 26. One will find, on going through this judgment, that one of the arguments raised was that reduction of the capital was not proportionate but aimed at a particular class. Lord Watson in his judgment specifically dealt with this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to account before confirming the reduction. He, however, added that Act of 1877 had not tended to narrow the scope of 1867 and the generality of the powers conferred by 1867 was left fully untouched. 28. In the present case, admittedly requirements as contained in (i) to (iv) of para 21 have been complied with. Most of the arguments of the objectors stand answered in view of the principles of law laid down in the aforesaid judgments. It is clear that majority shareholders have decided to reduce the share capital. Normally, decision of the majority is to prevail. It is also their right to decide the manner in which the shareholding is to be reduced and in the process they can decide to target a particular group (of course it is to be seen that this is not with mala fide and unfair motive which aspect is discussed hereinafter). Thus such a step cannot be treated as buying back the shares and the provisions of Section 77A of the Act would not be attracted. Similarly there is no question of following provisions of Section 391 of the Act, although in the instant case even the procedure prescribed therein has been substantially followed. Likewise, provisions of Article 300A of the Consti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the minority shareholders. These meetings were held and the resolutions were passed with a special majority at both separate class meetings. No doubt, in the case of in Re. Sandvik Asia Ltd., (2004) 121 CC 58 (Bom.), the Bombay High Court treated the promoter shareholders distinct from non-promoter shareholders and held that they constitute separate classes and, therefore, concluded that two separate class meetings should be held for these classes. Learned Counsel for the petitioner tried to distinguish this judgment. However, it is not necessary to go into that aspect as is the present case, separate class meetings were held for the shareholders whose shareholding is proposed to be reduced and for the shareholder whose shareholding is not proposed to be reduced. 31. This leaves us with most vital issue raised by the objector i.e. whether the proposed reduction is unfair or inequitable. Two limbs of this aspect are to be considered: (a) alleged motive of the petitioners in extinguishing the entire class of public shareholders; and (b) proper valuation of the shares. 32. While dealing with the first aspect, this Court has to keep in mind the principles laid down by the Courts in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Lancaster. Out of the shareholders left now, if others who have not come forward and objected to the move of the petitioner inference can be drawn that they have no objection to part with their shares at the offered rates and, therefore, if the share capital held by them is reduced, the objectors cannot have any grievance as far as others are concerned as their rights are protected. 34. As far as valuation of shares is concerned, it may be noted that this task was assigned to M/s. T.R. Chadha and Co., Chartered Accountants. They submitted their valuation report which reflects that 'Net Asset Valuation Method' (Asset approach) and 'Earning Per Share Method' (Income method) was adopted. Using the 'Net Valuation Method' value per share works out to ₹ 61=73p. per share. Under the 'Earning Per Share Method' the earning per share was computed at ₹ 18=90p. The Chartered Accountants accordinly determined the value per share of the petitioner company using PE multiple, which is based on the PE multiples of comparable companies in the faster moving consumer goods sector. Based on this methodology the value per share of the petitioner company was a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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