By: Dhruv Kaushal, Associate at Qui Prior Law Associates
On 3rd February 2020, the Ministry of Corporate Affairs (MCA) notified Sections 230(11) and 230(12) of the Companies Act, 2013, which pertains to takeover offers in unlisted companies. Section 230 of the Act provides for arrangements between a company and its creditors or members or any class of them, specifying the procedure to be followed to make such a compromise or arrangement. The proposed plan, i.e. introduction of Section 230(11) provides that any compromise or settlement may include a takeover offer, coupled with Section 230(12) which permits an aggrieved party to make an application, stating its objection before the National Company Law Tribunal. The MCA has further amended the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (“CAA Rules”) and the NCLT Rules, 2016, corresponding to the above provisions. Sub-rules 5 and 6 have been added to Rule 3 of the CAA Rules, and Rule 80A has been inserted in the NCLT Rules, detailing the manner in which the applications may be made under Sections 230(11) and 230(12), respectively. However, these rules are not applicable to any 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.
The new provisions would allow majority shareholders, holding 3/4th of the shares, in a company to make a takeover offer to acquire any part of the remaining shares, by way of an application before the NCLT. For the sake of clarity, shares under the aforementioned provisions may include equity shares or securities such as depository receipts, i.e. securities which grant the holder with voting rights. The takeover application shall contain the report of a registered valuer disclosing the details of the valuation of the shares proposed to be acquired and details of a separate bank account, to be separated by the majority shareholder(s) making the takeover offer, wherein a sum of not less than 50% of the total consideration of the takeover offer shall be deposited. The report of the valuer must take into account the highest price paid by any person or group of persons for the acquisition of shares during the previous 12 months and the fair price of shares of the company (for the avoidance of doubt, the fair price shall be determined 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). Furthermore, the amendments to the NCLT Rules specifies the form and manner in which a party (either minority shareholder or any other party) aggrieved by the offer may make an application bringing their grievance before the NCLT under Section 230(12) of the Act.
The new takeover regulation is likely to serve as another formal and simpler avenue for majority shareholders to squeeze-out minority shareholders from the company. Prior to the aforementioned provisions, the minority shareholder squeeze-out is accomplished by selective reduction of share capital under Section 66 and Section 236 of the Act. Hence, the newly introduced takeover regulation appears to be in compliance with the jurisprudence that has sprung up regarding the squeeze-out of minority shareholders through such selective reduction. The revised framework introduced by the above provisions protects against any inherent right of minority shareholders to retain their shares in the face of a fair settlement and provide offered to them.