India: Buying Out The Minority Stake Or The Residual Stake In A Company

INTRODUCTION

In case of any kind of compromise, arrangement, amalgamations, share exchange, conversion of securities or for any other reason by which an acquirer or any person or group of persons who acquires 90% or more stake in a company, such persons can acquire the residual/remaining shares of the company at a price determined based on the valuation report given by a registered valuer. Section 236 of the Companies Act 2013 under the Chapter XV Compromises, Arrangements and Amalgamations provides for such a buy-out. These regulations were made with an intention to buy-out the stake of dissenting minority shareholders in case of any kind of compromises, arrangements and amalgamations at an agreed price prescribed.

Judicial Pronouncement Relating to Purchase of Minority Shareholding in the National Company Law Appellate Tribunal, New Delhi

S. GOPAKUMAR NAIR AND ORS VS OBO BETTERMANN INDIA PRIVATE LIMITED AND ORS [COMPANY APPEAL (AT) NO. 272/2018]¹

This appeal was filed against the order of the NCLT Chennai Bench. In this case the appellants were holding 100% shares in the respondent company. Later, pursuant to shareholders' agreement OBO Bettermann Holdings - GMBH acquired 74% stake in the company and in addition due to execution of a different agreement it was increased from 74% to 99.64% and the appellants were left with only 0.36% shareholding. Subsequent to that, a "Put and Call Option Agreement" was executed to buy out the remaining shareholding. In relation to this, OBO Bettermann Holdings - GMBH had sent a Put and Call Option Notice to the appellants to sell their shares on sale consideration rather than an agreed price and subsequent to that, one more notice was sent to the appellants invoking the Put and Call Option, calling upon them to sell at an agreed price to be decided by a mutually acceptable Chartered Accountant. Finally, one more notice was issued for the purchase of the minority shareholding under Section 236 of the Companies Act, 2013. Though the appellants disputed these notices, the Company cancelled the appellants' shares under Section 236 of the Companies Act and communicated the same to them.

Appeal was preferred by the appellants against such action to the NCLT Chennai Bench under Sections 241 to 244 read with 246, 337 to 341 of the Companies Act, 2013. But the Tribunal held that since the appellants were no longer shareholders in the company the petition cannot be maintained.

ISSUES DEALT IN THIS APPEAL:

1. Maintainability of Appellants' Petition for Oppression & Mismanagement?

The NCLAT held that Section 244(1) (a) of the Companies Act says that, one of the criteria to apply under Section 241 is that minimum one-tenth of the total number of its members should file the application making grievances for oppression and mismanagement. In this case out of three members two were appellants claiming that their shares were taken by the oppressive act of the majority shareholder, hence, they had the minimum number to admit the application under the Section 241 of the Act. Thus, such application should be admitted.

2. Whether such "Put and Call Option Agreement" is covered under the ambit of Section 236 of Companies Act with regards to buying out minority stake?

The NCLAT observed that Section 236 of the Companies Act 2013, can be invoked in case of amalgamation, share exchange and conversion of securities and for any other reasons. Here the phrase "for any other reasons" should be read ejusdem generis with the preceding word and must take the same or similar colour. If this was not the intention of the legislature they could have generally mentioned that, in the event of any person or group of persons becoming 90% shareholder of the issued equity share capital of the company, such members can express their intention to buyout the remaining stake. Thus, Appellate Tribunal Held that Section 236 cannot be invoked and the notices which were sent under Section 236 and the communication cancelling the shares shall be set aside and considered as illegal.

New Takeover Rules for acquiring minority shares of Unlisted Public Company and private companies

The Ministry of Corporate Affairs vide notification dated February 03 2020, has notified rules regarding acquiring the remaining shares by the Major Stakeholder. According to this new rule now a member/ members having minimum 75% stake in the company can apply to the tribunal expressing their intention to buy out the remaining shares in terms of the subsection (11) of section 230. Such application of arrangement to take over the residual shares shall also contain:

1. Report from the registered valuer disclosing the details of the valuation of the shares proposed to be acquired by the member after taking into account the following factors:

A. The highest price paid by any person or group of persons for acquisition of shares during last 12 months.

B. The fair price of shares of the company to be determined by the registered valuer after taking into account valuation parameters including return on net worth, book value of shares, earning per share, price earning multiple vis-a-vis the industry average, and such other parameters as are customary for valuation of shares of such companies.

2. Separate Escrow account to be opened by the member wherein minimum 50% of total consideration of the takeover offer shall be deposited.

These rules shall not be applicable to any kind of transfer or transmission of shares through a contract, arrangement or succession, as the case may be, or any transfer made in pursuance of any statutory or regulatory requirement.

CONCLUSION

This rule will be helpful for the unlisted public Companies and Private Companies where majority stakeholders are facing obstacles from the minority shareholders in taking some management decisions. By this rule now majority stakeholders having 75% stake in the company can acquire the residual shares of the minority stakeholders as per the price fixed by the registered valuer. The minority shareholder will also have an option to file an application to the tribunal in case of any grievances with respect to the takeover offer, thus ending up in a win – win situation for both the parties.

Footnote

1 https://www.manupatrafast.com

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