Understanding Minority Squeeze-out under Companies Act, 2013: A Comprehensive Guide
Saijeet Mohanty
Xavier Law School, XIM University, Bhubaneswar
INTRODUCTION
The history of Indian company law has not been particularly notable in relation to the minority squeeze-out statute. Legislative policy suggests that the Parliament is hesitant to pass legislation requiring minority shareholders to sell their shares at auction. It is seen by the government as a form of "expropriation." Therefore, Parliament has taken a conformist stance while giving majority owners the ability to "buyout" the shares owned by minority shareholders, in spite of the precise suggestion made by the Dr. JJ Irani Committee. Legislators are hesitant to provide majority shareholders the "right to property," despite the fact that it was eliminated as a basic right under our Constitution. As a result, timid attempts have been made to give majority shareholders complete control over a firm.
In contrast, most country’s Company Act clearly grant the majority shareholders some protections, such as those found in English Companies Act of 2006[i]. English company law is the basis of most of Indian company law, although we have diverged from them in one crucial area.
In general, Section 395 of Companies Act, 1956 and Section 235 of the Companies Act, 2013[ii] are equivalent.
A corporation may notify shareholders who are in disagreement that it wishes to purchase their shares after receiving consent from at least 90% of the owners whose shares are being purchased. It is vital to recall that dissident minority owners whose shares are being acquired by coercion have the right to challenge the acquisition by notifying the NCLT, as per Sections 235(2) and 235(3) of the Act.
Companies have used other strategies, such as selective capital reduction (in compliance with Section 66), for a minority squeeze-out in addition to the restricted process outlined under Section 235. According to the SEBI (Delisting of Equity Shares) Regulation, 2021, listed corporations can also delist their equity shares. In addition to Section 235, the Act adds a new section, Section 236, which deals with the "purchase of minority shareholding".
Layout of Act's Section 236
A part of Sec. 395A of the Companies (Amendment) Bill, 2003[iii] that were discarded are mirrored in Section 236 of the 2013 Act. The aforementioned Bill was never reintroduced after the Government changed, and it expired when the Parliament was dissolved in 2004 for the General Elections. The Irani Committee Report [iv] suggested that 395A be taken into consideration as a foundation for building an acceptable legal framework for purchase of minority shares, even though the Companies (Amendment) Bill, 2003, had expired. Sadly, Section 236 is vaguely worded, which has presented business attorneys with a number of interpretive difficulties. The Notes on Clauses of the Companies Bill, 2013 provide a similarly inadequate explanation of the rationale behind its insertion.
Section 236(1) of the Act stipulates that should an acquirer or their representative amass 90% or more of the company's issued equity share capital, either through direct acquisition or via merger, share exchange, securities conversion, or alternative methods, they are obliged to inform the company of their intent to purchase the remaining equity shares.
According to Section 236(2), the acquirer, an individual, or a group of individuals outlined in Section 236(1) must offer to purchase the equity shares held by the minority shareholders of the company, with the price determined by a registered valuer as per any applicable regulations. Section 236(3) allows the minority shareholders to propose to the majority shareholders to acquire their minority equity stake in the company, with the price determined according to guidelines outlined under Section 236(2), without altering the provisions of Sections 236(1) and 236(2).
It is also important to remember that, in line with Section 247 of the Act and the Companies (Registered Valuers and Valuation) Rules, 2017[v], valuation must be done by a registered valuer for the purposes of Section 236(2). To assess the extent of Sections 236(1) and 236(2), consulting the NCLAT in S. Gopakumar Nair v. OBO Bettermann India Private Limited[vi] is a useful reference. In this particular case, the majority shareholders attempted to acquire the minority shares through the sending of letters in compliance with Section 236. As per the judgment, the majority shareholder(s) are only entitled to invoke Section 236 if any of the "events" outlined in Section 236(1) have occurred. These events necessitate the majority shareholder(s) to either possess or acquire a minimum of 90% of the shareholding through processes such as amalgamation, share exchange, conversion of securities, or similar reasons. The NCLAT's interpretation emphasized that the term "for any other reason" should solely apply to events akin to mergers, share exchanges, and securities conversions, as indicated by the context preceding it.
Is there a separation between Section 236(3) and Sections 236(1) and 236(2)?
The Act's central conundrum is found in Section 236(3), which states that, subject to the other provisions, the minority shareholders may propose to buy the minority equity stake in the company from the majority shareholders at a price determined by the parameters specified in Section 236(2).
Section 236(3) uses the word "may," although Sections 236(1) and 236(2) use the word "shall." This suggests that an individual who attains 90% majority ownership must submit a bid to acquire the minority's shares. On the other hand, minority shareholders are not required to sell their shares to the majority in a forced sale.
The Act's Section 236(9), which states that Section 236 "shall continue to apply to the residual minority equity shareholders" in the event that a majority equity shareholder "fails to acquire full purchase of the shares of the minority equity shareholders," further supports this. Furthermore, one may contend that Section 236(3) is an independent clause that gives minority owners the autonomous right to sell their shares to the majority given that it starts with the phrase "without prejudice to." Should one adopt this perspective, it would essentially mean that minority owners in Indian corporations had an unrestricted "put option" over the dominant shareholder, devoid of any contractual entitlement to such a right.
It is also possible to argue that, because Section 236(3) is a stand-alone clause, the term "minority" does not refer to owners with 10% or less shares; rather, it refers to a scenario in which a minority shareholder with 49% of the shares might exercise a "put option" on the majority shareholder with 51% of the shares. But as stated in the Report of the Parliamentary Standing Committee on Finance[vii], such an interpretation would work against the purpose of Section 236. The PSC Report acknowledges the MCA's opinion that while Sections 236(2) and 236(3) are distinct rules, they are "interlinked" in that Section 236(3) also applies the valuation standards outlined in Section 236(2).
Furthermore, it is important to note it does not use the words "notwithstanding anything contained in sub-sections (1) and (2)" and instead only uses the words "without prejudice to." This suggests that Section 236(3) closely relates to Sections 236(1) and 236(2) and does not grant the minority shareholder a separate statutory "put option" right that is unrelated to the parties' executed Shareholders' Agreement.
Apex Court's decision in A.P. State Financial Corporation v. Gar Re-Rolling Mills[viii] offers instructive insight on this matter and held that inclusion of the phrase "without prejudice to" indicates that the applicability of other provisions is not restricted, and it should not be used to make other sections obsolete. Section 236(3) and the legislative intent suggest a close connection with preceding provisions, indicating that a minority can only present a legally binding proposal to sell their shares once the conditions outlined in the sections have been fulfilled.
Conclusion
As Section 236 does not mandate minority owners to sell their shares at fair market value, it falls short in addressing minority buyouts effectively. The Irani Committee Report's recommendations suggest that Section 236 should have explicitly stated that minority shareholders would be required to sell their shares to the majority at fair market value upon meeting the conditions of the section.
The Act still lacks a feasible mechanism for majority shareholders to acquire minority shares, thus compelling them to explore alternative strategies such as selective capital reduction. Additionally, listed companies have the option to delist equity shares in accordance with the Delisting Regulations; however, this process presents practical challenges, particularly due to the complexities of the "reverse book building process." Moreover, a significant number of small shareholders who refrain from participating in the delisting process continue to hold negligible amounts of shares long after its completion, imposing unnecessary regulatory burdens on these businesses.
It is essential for our legislators to alter the 2013 Act in a way that clearly establishes the legal framework for minority squeeze-outs in India, while also ensuring that the minority is adequately protected.
REFERENCES
[i] Companies Act, 2006 c. 46, Acts of Parliament, United Kingdom
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