TaxTMI 
TaxTMI 
2010 (6) TMI 325
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....moter shareholder, namely Organon Participations B.V. ("promoter shareholders"). The balance of the paid-up equity share capital of the Petitioner Company is held by 1490 members having shares of the Petitioner Company. There has been no change in the share capital of the Petitioner Company from 31-12-2008 till the date of filing the present petition. 4. The Petitioner Company's equity shares were listed on the Calcutta Stock Exchange Association Limited and the National Stock Exchange. Subsequently, in accordance with Regulation 21(3)(a ) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, the promoter shareholders made an open offer to the public shareholders at Rs. 285 per equity share of Rs. 10 each fully paid-up and over a period of time, acquired 29,16,546 shares from the public. However, the public shareholding of the 'Petitioner-Company fell below the 10 per cent limit as provided under the Stock Exchange norms and the shares of the petitioner-company were de-listed from the Calcutta Stock Exchange Association Limited with effect from 26-8-2002 and subsequently from the National Stock Exchange with effect fro....
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.... the Petitioner-Company on 15-10-2009 to consider, inter alia, the passing of the following special resolution :- "Resolved that pursuant to section 100 and other applicable provisions of the Companies Act, 1956 and subject to the consent/confirmation/approval of the Hon'ble High Court of Judicature at Bombay and other appropriate authorities, and pursuant to Article 50 of the Articles of Association of the Company, the paid-up equity share capital of the Company be reduced by paying off/returning to the holders of the equity shares (other than the promoter-shareholder of the company, namely Organon Participations B.V.), a sum of Rs. 425 (Rupees four hundred twenty five only) per share being the face value of Rs. 10 (Rupees ten only) and a premium of Rs. 415 (Rupees four hundred fifteen only) per share and thereby cancelling and extinguishing all such shares." 8. Accordingly, the EGM of the shareholders of the Petitioner-Company was held on 15-10-2009. At the said meeting, 38 members were present in person, by proxy and through authorized representatives, wherein, amongst others, the resolution, as set out in paragraph No. 6 above, was passed by way of show of hands under sec....
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....whatsoever. The Petitioner-Company has further submitted that this offers an opportunity to the remaining individual shareholders of the Petitioner-Company to liquidate their entire shareholding at an attractive price. It is therefore prayed that the reduction of equity share capital as embodied in special resolution passed at the EGM be confirmed by this Court. 12. As set out hereinabove, the hearing of this petition was advertised in two newspapers circulated in Mumbai and published in the Maharashtra Government Official Gazette in its issue for the period from 25-2-2010 to 3-3-2010. Only one objector i.e., Mr. Dinesh Vrajlal Lakhani (holding 80 shares of the Petitioner-Company jointly with his wife Smita D. Lakhani) has come forward to object to the grant of relief prayed for in the above petition. Mr. Lakhani has filed an affidavit dated 10-3-2010 setting out his objections to which, an affidavit in rejoinder, dated 25-3-2010 is filed by the Petitioner-Company. 13. Mr. Lakhani has first submitted that such reduction of the share capital proposed by the Petitioner-Company, by paying off the public holders of equity shares, other than the promoter-shareholders and giving th....
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.... in view that the question of bona fide of the majority shareholders or the alleged suppression by them of minority shareholders or their attempt to suffocate their interest has to be judged from the point of view of the class as a whole. Question is whether the majority shareholders while acting on behalf of the class as a whole had exhibited any adverse interest against the appellant's minority shareholders also having a similar interest as members of the same class, while approving the scheme, or had acted with any oblique motive to whittle down such a class interest of the minority." (para 38) 17. This Court is however bound by the decision of the Division Bench of this Court in Sandvik Asia Ltd. v. Bharat Kumar Padamsi [2009] 92 SCL 272, concerning the reduction of capital of M/s. Sandvik Asia Ltd. The Learned Single-Judge of this Court, had refused confirmation of the proposal for reduction of M/s. Sandvik Asia Ltd. on the ground that the promoters group could virtually bulldoze the minority shareholders and purchase their shares at the price dictated by them. The Learned Single Judge found that the minority shareholders were not given any option under the proposal. Hence ....
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....f the Act, a proxy is to vote only on poll at the meetings of a company, unless the Articles of Association provides otherwise. Mr. Lakhani has himself admitted that the Articles of Association of the Petitioner Company allow voting by proxies through show of hands. This makes the aforesaid objection untenable and it is therefore rejected. 19. The next objection of Mr. Lakhani is that the special resolution put forward at the EGM for approval by the shareholders appears to have not been passed with requisite majority. According to him, at the EGM, he along with one Mr. Aspi Besania, were the only two public shareholders present in person. The remaining people present in the hall happened to be either employees of the Petitioner-Company or representatives of legal firms and auditing firms, including proxies and authorized representatives. He states that the Petitioner-Company did not clarify as to how many shareholders were present in person or by proxy or by corporate authorization. He further states that although he sought documents from the Petitioner-Company like photocopies of the attendance register, and of the authorized representation and proxy register, the Petitioner-Co....
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.... in person by proxies and through authorized representatives and that the Chairman informed the members of the receipt of 29 valid proxies representing 99 equity shares within the prescribed time, as well as an intimation from one member, holding 59,76,832 equity shares, appointing an authorized representative to attend the meeting. The Chairman also informed the members that the documents, mentioned in the explanatory statement annexed to the notice were open for inspection till 11.00 a.m. Neither party contends that any of the contents of the Minutes of the EGM of the Petitioner-Company, dated 15-10-2009 is incorrect. Therefore, the Minutes clearly spell out the attendance at the meeting as being 38 members, from whom 29 were valid proxies and one member was an authorized representative. This implies that 8 members were present in their capacity as public shareholders, including Mr. Lakhani and Mr. Besania. Mr. Lakhani has hence wrongly submitted that no break-up of exact number of shareholders present in person, through proxies and through authorized representation was provided. This objection raised by Mr. Lakhani, therefore, completely lacks bona fide and seems to be raised on....
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....se of shareholders like him. 24. In response to this objection, the Petitioner-Company has submitted that the principle of 'first-in last-out' referred to by the Petitioner-Company implies that the promoter shareholders being the initial shareholders of the Petitioner-Company would exit last. Admittedly, the Petitioner-Company became a shareholder prior to Mr. Lakhani and therefore should exit later than him. Subsequent acquisition of shares by the promoter shareholders would not affect the status of the promoter shareholders being the initial shareholders. Moreover, the Petitioner-Company submits that section 100 of the Act does not prohibit the classification of shares for the purpose of effecting the reduction of capital. A special resolution to the effect of proposed reduction of the equity share capital need not affect the shares held by the promoter shareholders. Therefore, the said objection of Mr. Lakhani is untenable. On a reading of section 100, I find that the submission of the Petitioner-Company is correct and this objection of Mr. Lakhani, raised on the principle of 'first-in last-out' is therefore, rejected. 25. Mr. Lakhani's final objection pertains to the valu....
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.... seller being in possession of the pertinent facts and neither being under any compulsion to act. As detailed in our report, to arrive at the fair value of the Company's equity shares, we have applied generally accepted valuation methodologies, which are used in several other situations involving a "Fair Value" standard e.g., mergers/amalgamations, and accepted by relevant judicial and regulatory authorities of India. It is important to note that these methodologies are also widely practiced and applied internationally. We understand that the Offer Price of INR 285/per share made during the Open Offer in October/November 2001 was based on the "Negotiated Price" under the Share Purchase Agreement dated July, 30, 2001 and SEBI Takeover Regulations (11) for Consolidation of Holding and Delisting of the Shares as it clearly indicated in the 2001 Letter of Offer. We understand that while carrying out the valuation as at June, 30, 2009, it would be incorrect to apply the guidelines that were applicable in October/November 2001 for the Open Offer for the following reasons. The Open Offer guidelines used in October/November, 2001 are not applicable in the current valuation context....
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....lue, we have assigned appropriate weight to the Net Asset Value method." Thus, the Book value/Net Asset Value of the Petitioner-Company was considered by Grant Thornton for the purpose of arriving at the fair value of the petitioners' shares. 28. Mr. Lakhani has next contended that when the open offer in October/November 2001 was made at Rs. 285 per share, the Earning Per Share (EPS) was Rs. 14.76. This comes to a PE ratio of 19.31, whereas the present offer of Rs. 425 is at a PE ratio of 9.97, as per the EPS of Rs. 42.64, for the accounting period ending 31-12-2008 (Rs. 42.64 multiplied by 9.97 gives Rs. 425). The above contention of Mr. Lakhani is explained by Grant Thornton as under :- "As at the Valuation Date (June 30, 2009), the Company's shares are de-listed and hence, as detailed in our Valuation Report [Paragraph IV(2) and "Organon's Valuation"] we have used Market Multiple method which factors and appropriate measure of earnings multiple and the prevailing market conditions for the comparable companies operating in the multinational Pharmaceuticals companies' sector and further adjusted for the Company's shares towards lack of marketability and being illiquid as ....
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....above answer of Grant Thornton shows that they have already considered the suggestion of Mr. Lakhani while submitting their Valuation Report and thereafter arrived at fair value of the shares of the Petitioner-Company. 30. Mr. Lakhani has further contended that if the management of the Petitioner-Company wants a complete buyout, then it should pay a substantial amount of premium towards the prices arrived at on the basis of the above method of valuation. To this argument, Grant Thornton's response is as follows :- "We have arrived at the fair value of equity shares of the company. The full buyout premium or commonly referred as control premium would be usually applicable when the buyer gets control due to purchase of shares. In the current valuation context, we have valued company's equity as a whole and not specifically any specific category or class of shareholders (i.e., Minority stake). If one has to value a minority stake there could be a possibility of Minority Discount that would need to be considered as the minority shareholder cannot control the company." I find that Grant Thornton has thereby given cogent reasoning as to why Mr. Lakhani's suggestion for a full bu....
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.... the entire scheme." (para 40) 33. In Hindustan Lever Employees Union v. Hindustan Lever Ltd. [1994] 2 SCL 157 , the Hon'ble Apex Court rejected the argument of the Petitioner therein, that if some other method was adopted, probably the determination of valuation could have been more in favour of the shareholders. Merely because some other method of valuation could be resorted to, which would possibly be more favourable, that alone cannot militate against granting approval to the scheme propounded by the Company. The Court's obligation is to be satisfied that the valuation was in accordance of the law and it was carried out by an independent body. 34.In the case of Tata Oil Mills Co. Ltd. In re [1994] 81 Comp. Cas. 754 (Bom.), this Court observed thus :- ". . . the exchange ratio arrived at by Mr. Malegam has received the approval of shareholders holding more than 99 per cent (in number and value) shares at the meetings. No one except the shareholders holding the minimum percentage of shares has complained before me. The valuation has been confirmed by two eminent firms of auditors. It would be extremely difficult to hold that the same is unfair. In any case, it has been a....