Introduction

The recent amendments to the Companies Act, 2013 [‘Act’] provides a right to the Majority Shareholder(s) of a company to propose a Takeover Offer to purchase the shareholding of the remaining minority shareholder(s) of the said company. This article is a brief write-up on the latest development in this regard.

Relevant Provisions

Chapter XV of the Act deals with ‘Compromise, Arrangement and Amalgamations’. Section 230 of the Act deals with the ‘Power to Compromise or make an Arrangement. Though Sections 230(11) and 230(12) existed as a part of the Companies Act, 2013, such provisions were made effective only recently on the 3rd of February 2020. Further, the Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2020 [‘Rules’] has introduced new provisions into the relevant Rules in this regard.

Takeover Offer by majority shareholders

As on date the compulsory exit of minority shareholders from a Company can be achieved by a Company through a ‘Schems of Arrangement’ or a ‘Reduction of share capital.’

The new provisions provide that a ‘Compromise’ or ‘Arrangement’ can include a Takeover Offer by the Majority Shareholders of a company to purchase the shareholding of the remaining minority shareholder(s) of the said company. The Rules contain certain specific requirements in this regard.

A member or members of a company holding not less than three-fourths of the shares in a company are now entitled to make such Takeover Offer.

If the Takeover Offer involves the shares of a listed company, such Takeover Offer is required to be made as per the regulations framed by the Securities and Exchange Board [‘SEBI’].

“Shares” means the equity shares of a company with voting rights, and includes any Securities, such as depository receipts, which entitles the holder thereof to exercise voting rights. Therefore, all Securities having voting rights are covered under this provision.

Brief Process

The Takeover Offer is to be proposed as a ‘Scheme of Arrangement’ [‘Scheme’] which is to be filed by the Majority Shareholders before the appropriate National Company Law Tribunal [‘NCLT’] seeking the sanction of such Takeover Offer.

A Court convened meeting of the members of the company will be held in which the approval from three-fourth of the members of the said company who are present and voting will be required. The NCLT can also appoint an independent Chairman for such Court convened meeting.

The procedure for obtaining the sanction to a Scheme has to be meticulously followed and ultimately the Scheme will be considered by the NCLT for its sanction. It is the discretion of the NCLT to either sanction or reject a Scheme.

If a Scheme is sanctioned, the implementation of the Takeover will be as per the mechanics set-out in such Scheme.

Valuation and Exit Price to be offered

The exit price is the ‘Fair Price’ which is to be determined by a registered valuer through a valuation of the Shares of the Company. The registered valuer is required to take into account various valuation parameters including the return on net worth, book value of shares, earning per share, price earning multiple vis-à-vis the industry average and such other parameters as are customary for valuation of shares of the company. The registered valuer is also required to consider the highest price paid by any person or group of persons for acquisition of shares during the last twelve months.

Deposit of consideration into a separate bank account

The Majority Shareholders will also have to deposit at least one-half of the total consideration of the Takeover Offer into a bank account opened for such purpose. This condition has been prescribed with a view to get the Majority Shareholders to establish their bonafides and to probably their financial ability to make such payments as well. The timing of this deposit is not specified and this aspect requires clarity.

This condition is intended to secure the interests of the minority shareholders. However, this condition will be onerous on the Majority Shareholders as a substantial sum of money could get locked-in for about 5 to 6 months.

The manner in which the remaining consideration will be paid by the Majority Shareholders to the Minority Shareholders should be clearly set-out in the Takeover Offer.

Also, in several companies, the details of many small shareholders are usually not traceable and hence suitable requirements in this regard could have been incorporated into the new provisions.

Rights of aggrieved Minority Shareholders

Any aggrieved person can make an Application to the NCLT setting out the grievances with respect to the Takeover Offer [other than those made in relation to listed companies]. These grievances must be taken up in accordance with the requirements under the Act in this regard.

Conclusion

The Majority Shareholders of a company now have an opportunity to take full shareholding control of a Company through a Court process.

The minority shareholders of a private limited company or an unlisted public limited company usually do not have an easy and/or feasible exit option as compared to listed companies. Such shareholders can make use of a Takeover Offer to liquidate their stake if the proposed Takeover Offer is acceptable to them.

The author, P.S. Suman, is a Corporate Lawyer and Partner of A.K. Mylsamy & Associates LLP.

The author can be reached at suman@akmllp.com for any further information or clarification. The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

The views in this article are the personal views of the author.