2014 (5) TMI 825 - HC - Companies Law

Shareholder Meetings Essential for Scheme Approval: Court Emphasizes Inclusiveness and Transparency

In Re: Wadala Commodities Limited and Godrej Industries Limited

The court held that the approval of a Scheme of Amalgamation cannot be solely through postal ballot and electronic voting, emphasizing the necessity of ... Scope of Companies Act, 2013 - Elimination of all meetings except those required in certain limited circumstances - whether in view of the provisions of Section 110 of the Companies Act, 2013 and SEBI Circular dated 21st May 2013, a resolution for approval of a Scheme of Amalgamation can be passed by a majority of the equity shareholders casting their votes by postal ballot, which includes voting by electronic means, in complete substitution of an actual meeting - Held that:- Section 110 is an evolution of old Section 192A. Where old Section 192A contain a non-obstante clause relating to the 'foregoing' sections of the 1956 Act, i.e., sections before old Section 192A, Section 110 of the 2013 Act contains a broad and omnibus non-obstante clause. The frame of Section 110 of the 2013 Act is that for such items of business as the Central Government notifies, a company must transact that business only by postal ballot. A clue as to what is intended by this clause, Section 110 (1)(a) of the 2013 Act is to be found in Rule 22 of the Companies (Management and Administration) Rules, 2014. As presently advised, these Rules are yet to be gazetted; this is another matter on which I will comment a little later. Absent evidence of any such gazette notification, they are referred to here only for such interpretive value as they might have. Rule 22(xvi) contains a very long list of ten items of business that, apparently, are intended to be transacted only by means of a postal ballot. All provisions for compulsory voting by postal ballot and by electronic voting to the exclusion of an actual meeting cannot and do not apply to court-convened meetings. At such meetings, provision must be made for postal ballots and electronic voting, in addition to an actual meeting. Electronic voting must also be made available at the venue of the meeting. Any shareholder who has cast his vote by postal ballot or by electronic voting from a remote location (other than the venue of the meeting) shall not be entitled to vote at the meeting. He or she may, however, attend the meeting and participate in those proceedings. The effect, interpretation and implication of the provisions of the Companies Act, 2013 and the relevant SEBI circulars and notifications, to the extent that they mandate a compulsory or even optional conduct of certain items of business by postal ballot (which includes electronic voting) to the exclusion of an actual meeting are matters that require a fuller consideration. The Central Government, through the Additional Solicitor-General, and SEBI will both need to be heard. The Company Registrar shall send an authenticated copy of this order to both the learned Additional Solicitor General and to SEBI requesting them to appear before the Court when this matter is next taken up for a consideration of this issue. On a prima-facie view that the elimination of all shareholder participation at an actual meeting is anathema to some of the most vital of shareholders' rights, it is strongly recommended that till this issue is fully heard and decided, no authority or any company should insist upon such a postal-ballot-only meeting to the exclusion of an actual meeting. Since this is evidently a matter of some importance, the Company Registrar is directed to make a submission and obtain necessary directions on the administrative side to have the matter placed before an appropriate Bench. At such a hearing, further safeguards can also be evolved. For instance, it is entirely possible to have a Company Scheme Petition, one that follows an order on and compliance with a Company Summons for Direction, uploaded to the case status system of this Court. All such Company Scheme Petitions must have appended to them the report of the Chairman of the court-convened meeting and the scrutineers' report. Making the petition available in its full form on a free and publicly accessible website such as the High Court, in addition to reports now being uploaded to the websites of the company and the stock exchanges would go a long way to ensuring the necessary information spread. Till such time as these rules are gazetted, or there is some provision made for the dispensation of official gazette notification, none of the rules in the Ministry of Corporate Affairs PDF document that are not yet gazetted can be said to be in force. Issues Involved:1. Whether a resolution for approval of a Scheme of Amalgamation can be passed by postal ballot and electronic voting without an actual meeting.2. Interpretation and application of Section 110 of the Companies Act, 2013.3. Applicability of SEBI circulars mandating electronic voting.4. The necessity of actual meetings for shareholder participation.5. Legal and procedural implications of electronic voting and postal ballots.Detailed Analysis:1. Whether a resolution for approval of a Scheme of Amalgamation can be passed by postal ballot and electronic voting without an actual meeting:The primary issue is whether the provisions of Section 110 of the Companies Act, 2013, and SEBI Circular dated 21st May 2013, allow for the approval of a Scheme of Amalgamation solely through postal ballot and electronic voting, eliminating the need for an actual meeting. The judgment clarifies that while postal ballot and electronic voting are intended to increase shareholder participation, they cannot substitute the need for an actual meeting. The court emphasizes that shareholder meetings are essential for discourse, debate, and informed decision-making, which cannot be achieved through postal ballots alone.2. Interpretation and application of Section 110 of the Companies Act, 2013:Section 110 of the Companies Act, 2013, allows for certain business transactions to be conducted via postal ballot. However, the court highlights that this provision does not eliminate the need for actual meetings, especially for significant decisions like Schemes of Amalgamation. The court notes that the legislative intent behind postal ballots and electronic voting is to supplement, not replace, actual meetings. The judgment stresses that the right to ask questions, seek clarifications, and engage in discussions is fundamental to shareholder democracy and cannot be disregarded.3. Applicability of SEBI circulars mandating electronic voting:The SEBI circular dated 17th April 2014, which mandates electronic voting, is discussed in the judgment. The court points out that there is some ambiguity regarding the enforcement of this circular, as it has been deferred until 1st October 2014. The court also notes that SEBI's guidelines on electronic voting are intended to enhance shareholder rights and participation but cannot override the necessity of actual meetings. The judgment concludes that SEBI circulars mandating exclusive electronic voting for court-convened meetings are unlawful and contrary to the intent of the Companies Act.4. The necessity of actual meetings for shareholder participation:The judgment strongly advocates for the necessity of actual meetings for shareholder participation. It argues that the right to vote is an expression of an informed decision, which requires the opportunity to ask questions, seek clarifications, and engage in discussions. The court emphasizes that corporate governance demands transparency and inclusiveness, which can only be achieved through actual meetings. The judgment rejects the notion that electronic voting and postal ballots can entirely replace the need for physical meetings.5. Legal and procedural implications of electronic voting and postal ballots:The judgment discusses the legal and procedural implications of electronic voting and postal ballots. It highlights several grey areas, such as the requirement for a quorum, the possibility of amending proposals during meetings, and the determination of electronic votes. The court concludes that while electronic voting and postal ballots should be provided as additional facilities, they cannot replace actual meetings. The judgment also calls for a more comprehensive consideration of the relevant provisions of the Companies Act and SEBI circulars, with input from the Central Government and SEBI.Conclusion:The judgment concludes that provisions for compulsory voting by postal ballot and electronic voting cannot apply to court-convened meetings to the exclusion of actual meetings. It mandates that provision must be made for postal ballots and electronic voting in addition to actual meetings. The court also calls for further consideration of the relevant provisions of the Companies Act and SEBI circulars, with input from the Central Government and SEBI. The judgment emphasizes the importance of shareholder participation, transparency, and informed decision-making in corporate governance.