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PPT_Garima Tyagi

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Garima Tyagi

This document discusses squeeze outs of minority shareholders under the Companies Act, 2013. It defines squeeze outs as when the majority shareholder buys out minority shareholders to acquire 100% control of a company. There are three main methods of squeeze outs discussed: (1) under section 235 which has strict compliance requirements; (2) by reducing share capital under section 66, with modifications from the previous act; and (3) the newly introduced section 236 which allows the majority shareholder owning 90% of shares to notify the company of their intention to buy the remaining shares. Judicial trends show courts generally approve squeeze outs if the majority of minority shareholders approve and a fair price is offered to minorities.

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The contents of this document are confidential SQUEEZE OUT OF MINORITY SHAREHOLDERS: IMPACT OF THE 2013 ACT 1 Garima Tyagi January 9, 2015
What is Squeeze Out of Minority Shareholders? Also known as Freeze Outs or Minority Buy Outs. Process where the majority shareholder (or the controller) of a company, in order to acquire 100% stake in the company, buys out minority shareholders for a cash consideration. Example: If the target firm is XYZ Ltd and it has a 55% controller (ABC Ltd), then a squeeze out would arise if ABC decided to acquire 100% control of XYZ. This often results in the non ABC shareholders of XYZ (i.e., the minorities) receiving cash for their 45% shares of XYZ. 2
3 Methods of Squeeze Out
Governed by section 235 of the Companies Act, 2013 (2013 Act). Corresponding to section 395 of the Companies Act, 1956 (1956 Act). Section 235 has not been notified yet. Only provision which deals with compulsory acquisition of shares of minority. Rarely used due to strict compliances. 4 Acquisition of shares of Dissenting Shareholders
5 Process of squeeze out under section 235
Acquirer holds 70% shares in the company and wishes to squeeze out the remaining shareholders. It has to: 1. Make an offer under a scheme or a contract to the minorities holding 30% of the shares. 2. The offer must be accepted by shareholders holding at least 27% shares in the company (i.e. 90% of 30% shares). 3. The acquirer sends notice to the dissenting shareholders (10% of 30% shares) to acquire their shares. Given the onerous nature of the provision, this method is seldom used by acquirers. 6 Example
1. Section 235 and section 230 Section 235 governs acquisition of minority shares, section 230 govern arrangements. Does not require court approval. Approval by 90% of the minority shareholders. 1. Section 235 and section 395 Payment to dissenting shareholders within 60 days. 7 Comparisons
8 Squeeze Out by way Reduction of Capital Governed by section 100-105 (1956 Act) and section 66 (2013 Act). Section 66 has not been notified yet.
Following are the important modifications made to section 66 of the 2013 Act: 1. No requirement of authorization by AOA. 2. In case of listed companies, Tribunal has to issue notices to the Central government, Registrar and to SEBI in addition to creditors. Also, consent from creditors is now mandatory. 3. A company in arrears in repayment of any deposit cannot reduce its share capital. 4. Nothing in s. 66 will apply to buy back of securities under s. 68 of the 2013 Act. 5. Conformity with Accounting Standards. 9 Reduction of Capital: Changes in the 2013 Act
Introduction of section 236: Purchase of minority shareholding Finds its basis in section 395 A of the Companies (Amendment) Bill, 2003,which did not become a law. Right of the Acquirer, who is the owner of 90% or more of the equity share capital of the company, to notify the company of their intention to buy the remaining equity shares of the company (Minority buy-out). 90% shareholding can be by virtue of amalgamation, share exchange, conversion of security or any other reason. Similar right available to the minority shareholders u/s 236(3) (Minority sell-out). Majority shareholder can be a person or group of persons, acquirer or person acting in concert with such acquirer as defined under the Takeover Code.
Novel features of section 236 1. Available to all minority shareholders and not just dissenting minority shareholders. 2. No Court intervention needed. 3. Exit price to be determined by Registered Valuer. 4. Safeguards for minorities: Concept of minority sell-out. Renegotiated price by majority. Separate bank a/c and disbursement within 60 days.
Is Compulsory Squeeze Out really available under section 236? Overlap b/w s. 235 and s. 236 of the 2013 Act. Under s. 236,unlike section 235, the minority shareholders are not bound to accept the Acquirers offer. Absence of any provision which stipulates the above. Section 236(9) discusses a scenario where majority equity shareholder fails to acquire full purchase of the shares of the minority equity shareholders.
Judicial Trends Very little protection against squeeze out of minority shareholders. Elpro International Ltd. In re [2008] Bombay High Court Selective reduction of capital allowed. Under section 100 and 101 of the 1956 Act, a company can reduce the share capital of any shareholder in any way. Procedure should be fair and approval of majority (75%) should be taken. Court agreed to the power of the stock exchanges under 24(f) of the Listing Agreement.
Sandvik Asia Limited v. Bharat Kumar Padamsi, 2009, Bombay High Court Sandvik Asia Ltd, on delisting, sought to dispose of the public shareholders. Thus, initiated reduction of capital of only non-promoter shareholders. Single bench rejected the scheme of reduction of capital. Overruled by the Division Bench. Under section 100, reduction is permissible is any way. Thus selective reduction of capital allowed. MoM voted in favor of reduction. Fair value of shares was offered.
Cadbury Judgment Majority of Minority (MoM) Rule Special resolution for reduction of capital (99.96% Majority, 0.04% Minority) Independent Valuation ordered by High Court on objection by minority Judgment in favour of Cadbury Public Shareholders (2.42%) Cadbury Group (97.58%) Cadbury India
Continued.. Considerations for approval by court: 1. Had the majority of non-promoter shareholders voted in favor of the resolution? 2. Was a fair and reasonable value being offered to the minority shareholders? 3. Was the valuation fair, reasonable and devoid of evident faults? Court not an expert on valuation. Its jurisdiction is supervisory and not appellate. Commercial wisdom of MoM cannot be disregarded.
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PPT_Garima Tyagi

  • 1. The contents of this document are confidential SQUEEZE OUT OF MINORITY SHAREHOLDERS: IMPACT OF THE 2013 ACT 1 Garima Tyagi January 9, 2015
  • 2. What is Squeeze Out of Minority Shareholders? Also known as Freeze Outs or Minority Buy Outs. Process where the majority shareholder (or the controller) of a company, in order to acquire 100% stake in the company, buys out minority shareholders for a cash consideration. Example: If the target firm is XYZ Ltd and it has a 55% controller (ABC Ltd), then a squeeze out would arise if ABC decided to acquire 100% control of XYZ. This often results in the non ABC shareholders of XYZ (i.e., the minorities) receiving cash for their 45% shares of XYZ. 2
  • 4. Governed by section 235 of the Companies Act, 2013 (2013 Act). Corresponding to section 395 of the Companies Act, 1956 (1956 Act). Section 235 has not been notified yet. Only provision which deals with compulsory acquisition of shares of minority. Rarely used due to strict compliances. 4 Acquisition of shares of Dissenting Shareholders
  • 5. 5 Process of squeeze out under section 235
  • 6. Acquirer holds 70% shares in the company and wishes to squeeze out the remaining shareholders. It has to: 1. Make an offer under a scheme or a contract to the minorities holding 30% of the shares. 2. The offer must be accepted by shareholders holding at least 27% shares in the company (i.e. 90% of 30% shares). 3. The acquirer sends notice to the dissenting shareholders (10% of 30% shares) to acquire their shares. Given the onerous nature of the provision, this method is seldom used by acquirers. 6 Example
  • 7. 1. Section 235 and section 230 Section 235 governs acquisition of minority shares, section 230 govern arrangements. Does not require court approval. Approval by 90% of the minority shareholders. 1. Section 235 and section 395 Payment to dissenting shareholders within 60 days. 7 Comparisons
  • 8. 8 Squeeze Out by way Reduction of Capital Governed by section 100-105 (1956 Act) and section 66 (2013 Act). Section 66 has not been notified yet.
  • 9. Following are the important modifications made to section 66 of the 2013 Act: 1. No requirement of authorization by AOA. 2. In case of listed companies, Tribunal has to issue notices to the Central government, Registrar and to SEBI in addition to creditors. Also, consent from creditors is now mandatory. 3. A company in arrears in repayment of any deposit cannot reduce its share capital. 4. Nothing in s. 66 will apply to buy back of securities under s. 68 of the 2013 Act. 5. Conformity with Accounting Standards. 9 Reduction of Capital: Changes in the 2013 Act
  • 10. Introduction of section 236: Purchase of minority shareholding Finds its basis in section 395 A of the Companies (Amendment) Bill, 2003,which did not become a law. Right of the Acquirer, who is the owner of 90% or more of the equity share capital of the company, to notify the company of their intention to buy the remaining equity shares of the company (Minority buy-out). 90% shareholding can be by virtue of amalgamation, share exchange, conversion of security or any other reason. Similar right available to the minority shareholders u/s 236(3) (Minority sell-out). Majority shareholder can be a person or group of persons, acquirer or person acting in concert with such acquirer as defined under the Takeover Code.
  • 11. Novel features of section 236 1. Available to all minority shareholders and not just dissenting minority shareholders. 2. No Court intervention needed. 3. Exit price to be determined by Registered Valuer. 4. Safeguards for minorities: Concept of minority sell-out. Renegotiated price by majority. Separate bank a/c and disbursement within 60 days.
  • 12. Is Compulsory Squeeze Out really available under section 236? Overlap b/w s. 235 and s. 236 of the 2013 Act. Under s. 236,unlike section 235, the minority shareholders are not bound to accept the Acquirers offer. Absence of any provision which stipulates the above. Section 236(9) discusses a scenario where majority equity shareholder fails to acquire full purchase of the shares of the minority equity shareholders.
  • 13. Judicial Trends Very little protection against squeeze out of minority shareholders. Elpro International Ltd. In re [2008] Bombay High Court Selective reduction of capital allowed. Under section 100 and 101 of the 1956 Act, a company can reduce the share capital of any shareholder in any way. Procedure should be fair and approval of majority (75%) should be taken. Court agreed to the power of the stock exchanges under 24(f) of the Listing Agreement.
  • 14. Sandvik Asia Limited v. Bharat Kumar Padamsi, 2009, Bombay High Court Sandvik Asia Ltd, on delisting, sought to dispose of the public shareholders. Thus, initiated reduction of capital of only non-promoter shareholders. Single bench rejected the scheme of reduction of capital. Overruled by the Division Bench. Under section 100, reduction is permissible is any way. Thus selective reduction of capital allowed. MoM voted in favor of reduction. Fair value of shares was offered.
  • 15. Cadbury Judgment Majority of Minority (MoM) Rule Special resolution for reduction of capital (99.96% Majority, 0.04% Minority) Independent Valuation ordered by High Court on objection by minority Judgment in favour of Cadbury Public Shareholders (2.42%) Cadbury Group (97.58%) Cadbury India
  • 16. Continued.. Considerations for approval by court: 1. Had the majority of non-promoter shareholders voted in favor of the resolution? 2. Was a fair and reasonable value being offered to the minority shareholders? 3. Was the valuation fair, reasonable and devoid of evident faults? Court not an expert on valuation. Its jurisdiction is supervisory and not appellate. Commercial wisdom of MoM cannot be disregarded.

Editor's Notes

  • #15: Implication: If controller promoter holds 75% or more shares, he can easily squeeze out minority shareholders, even if they do not consent to the scheme of reduction.