Rule of Majority: Provisions for takeover of unlisted companies notified by the MCA

While sub-section 1 to 10 of section 230 has been operative since 2016, the MCA, after a gap of almost three years, has finally notified some of the key provisions under section 230. These notified provisions pertain to the takeover of unlisted companies by majority shareholders (through squeezing out of minority shareholders) under a scheme of compromise or arrangement. Takeover offers with respect to listed companies in India will continue to be governed by the relevant regulations framed by the Securities and Exchange Board of India.

Section 230(11) provides that any scheme of compromise or arrangement involving unlisted company can include a takeover offer made in a prescribed manner. Further, section 230(12) permits any party aggrieved by the takeover offer to present its grievances with respect to the takeover offer before the National Company Law Tribunal (“NCLT”) by filing an application in a prescribed manner. The MCA, simultaneously with the commencement of sections 230(11) and 230(12) of CA 2013, also notified the consequential amendments in the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (“C&A Rules”) and the National Company Law Tribunal Rules, 2016 (“NCLT Rules”) which deals with the procedural aspects of the takeover offer.

As per the C&A Rules, an application for a takeover would need to contain, amongst other aspects, the report of a registered valuer disclosing the details of the valuation of the shares proposed to be acquired by the majority shareholders.

The recently notified provisions allow the majority shareholder(s) holding not less than 3/4^th of the total shares (i.e., equity shares of the company carrying voting rights, and includes any securities, such as depository receipts, which entitles the holder thereof to exercise voting rights) in an unlisted company to make a takeover offer for acquiring any part of the remaining shares of the company, through an application for the arrangement to be submitted with the NCLT.

As per the C&A Rules, an application for a takeover would need to contain, amongst other aspects, the report of a registered valuer disclosing the details of the valuation of the shares proposed to be acquired by the majority shareholders. The C&A Rules further provides that the valuation report should be prepared by a registered valuer after taking into account (a) the highest price paid by any person or group of persons for the acquisition of shares of the company during last 12 months, and (b) the valuation parameters including return on net worth, the 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 such companies. It appears that the provisions regarding valuation of shares have been inserted in the rules for the purpose of ensuring a fair exit price to the minority shareholders. However, considering that valuation has always been a debatable issue which depends on a number of factors, including sound judgment of the concerned valuer, it remains to be seen if the above guidelines would be helpful in ensuring a fair exit price to the minority shareholders.

As far as protection of minority interest is concerned, it appears from the C&A Rules that the only protection available to the minority shareholders would be payment of a fair price for the shares held by them in the company.

The C&A Rules also cast an obligation on the majority shareholders proposing to acquire the shares under the takeover offer to deposit a sum equivalent to at least 50% of total consideration amount of the takeover offer in a separate bank account. It is evident that this has been done with a view to secure the consideration to be paid to the minority shareholders. However, considering that substantial time would be involved in the disposal of the application by the NCLT, this may lead to a liquidity crunch for the shareholders proposing to acquire the shares under the takeover offer as the funds would remain blocked in a separate bank account.

It is pertinent to note that the C&A Rules by way of an explanation provides that the provisions of section 230(11) of the CA 2013 including the rules made thereunder would not apply to any transfer or transmission of shares through a contract, arrangement or succession, as the case may be, or any transfer of shares made in pursuance of any statutory or regulatory requirement. Therefore, in effect, any transfer of shares under a private arrangement would continue to be governed as per the contractual terms agreed between the parties and shall be outside of the purview of section 230(11) of the CA 2013.

The CA 2013 also provides other modes through which exit of minority shareholders can be ensured from the company, such as through selective reduction of capital under section 66 of the CA 2013 or through the purchase of minority shareholding under section 236 of the CA 2013.

As far as protection of minority interest is concerned, it appears from the C&A Rules that the only protection available to the minority shareholders would be payment of a fair price for the shares held by them in the company. While section 230(12) and rules made thereunder provides an avenue to the parties aggrieved from the takeover offer to put forward their grievances before the NCLT, it is not clear as to what relief that they would be able to secure from the NCLT except a payment of fair price for their shareholding in the company. This clearly establishes the rule of majority under the CA 2013, whereby the shareholders holding the majority interest in the company would be able to push out the minority upon payment of a fair price. It would therefore now be more important for minority shareholders to have appropriate protective covenants in the shareholders’ agreement/ articles of association of the company. This can help in ensuring that the provisions of section 230(11) are not utilised by the majority shareholders for forcefully removing the minority shareholders from the company.

To conclude, it can safely be said that commencement of sections 230(11) and 230(12) and the rules thereunder is a welcome move which will certainly facilitate the purchase of the minority interest in the company.

The CA 2013 also provides other modes through which exit of minority shareholders can be ensured from the company, such as through selective reduction of capital under section 66 of the CA 2013 or through the purchase of minority shareholding under section 236 of the CA 2013. However, the commencement of section 230(11) would certainly provide an additional measure for ensuring the exit of the minority shareholders. Each of the aforesaid modes has its separate process and preconditions, and the mode to be opted out for the purchase of minority interest would need to be decided on a cases to cases basis. The factors which would need to be kept in mind while selecting a mode for acquisition of minority interest in a company would include the timelines for completion of acquisition of the minority interest, the tax implication arising out from the transaction and the stamp duty, if any, to be paid on the transaction value. One of the important aspects which single out the takeover offer under section 230(11) of the CA 2013, is that all other modes for purchase of minority interest are required to be followed as a separate process under the CA 2013. However, the takeover offer under section 230(11) can form a part of a scheme of compromise or arrangement proposed by the company or its members or creditors and is not required to be followed separately.

To conclude, it can safely be said that commencement of sections 230(11) and 230(12) and the rules thereunder is a welcome move which will certainly facilitate the purchase of the minority interest in the company. However, the protection which it will offer to the minority shareholders and the nature of their grievances which would be taken into account by the NCLT while adjudicating upon the application involving takeover offer would only become clear with time.

For any clarification or further information, please contact:

Neetika Ahuja

Associate Partner

E: neetika.ahuja@clasislaw.com

Vikrant Anand

Senior Associate

E: vikrant.anand@clasislaw.com