The Ministry of Corporate Affairs (MCA) vide Notification dated 3rd February, 2020 has notified sub-sections 11 and 12 of Section 230 which allow a takeover offer to be made by way of a compromise or arrangement in an unlisted company. The MCA has also amended the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 ("Rules") as a consequence of sub-section 11 and 12 of Section 230 being notified.
This amendment allows compromise or arrangements between the shareholders of a company by submitting an application to the National Company Law Tribunal (NCLT) by holders of 75% shares for the acquisition of the remaining shares. Prior to this Notification, most of the majority shareholders preferred the capital reduction route under Section 66 of the Act by passing a special resolution to squeeze-out Minority sh hareholders, as apart from the stringent requirements, a Capital Reduction has always been considered as an internal matter of the Company by the Indian courts.
In terms of the amendment, to make such application for takeover through a compromise or arrangement, the shares proposed to be acquired need to be valued by a registered valuer after taking into account the highest price paid for acquisition of shares during last twelve months and 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.
In addition, the applicants also need to open a separate bank account and deposit therein at least half of the total consideration of the takeover offer. The details of such bank account also need to be provided in the application to the NCLT.
By this addition it has been ensured that to move forward with the minority squeeze-out it is essential that the applicants deposit at least 50% of the total consideration to be provided to the Minority shareholders to exit the company. As mentioned in Section 230 (12) an aggrieved shareholder is allowed to make an application to the tribunal with respect to any grievances with the takeover offer, to ensure the rights of the Minority shareholders are protected and the squeezeout is effected in a fair manner. This Notification applies to unlisted companies only as the Securities and Exchange Board of India (SEBI) under the SAST Regulations requires the acquirers to make an open offer of atleast 26% on acquiring 25% of the company in case of listed companies.
The endgame of the minority squeeze-out provisions was to make sure that only value-enhancing squeeze-outs would be approved setting aside those squeeze-outs which were mainly aimed at removing the minority shareholders (based on malafide intentions) from the company. The fact that a separate account needs to be created and one half of the consideration is to be deposited thereunder would restrict unnecessary squeeze-outs, provide fair and equitable value to the minority shareholders and increase compliance under the said provisions by reducing the Capital reduction techniques to enforce minority squeeze-outs.
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