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2005 (5) TMI 665
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....id-up share capital and its reserves to the extent of about Rs. 159,20,58,240/-. This petition is filed by the petitioner company under Sections 101-105 of the Companies Act (in short the 'Act'), inter alia, seeking reduction of this share capital. 2. It is stated in the petition that in February, 2003 the equity shares of the company were mandatorily de-listed from the Stock Exchange in accordance with Regulation 21(3)(a) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Take Over) Regulation 1997 (hereinafter referred to as the 'SEBI Regulations'). The market value of the shares of the company, immediately prior to de-listing was Rs. 247/- per share. Pursuant to directions received from the Stock Exchange in relation to the mandatory de-listing of the company, Lancaster SL (for short 'Lancaster') made an exit offer to acquire shares of the company under Regulation 21 of the aforesaid SEBI Regulations. The said exit offer was opened on May 9, 2003 and was valid till May 18, 2003. Price of Rs. 260/- per share was offered in the said exit offer. This fact is stated to indicate the value of the shares at relevant time. ....
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....ioner company has capital excess of its requirements to the extent of Rs. 6,63,35,760/-, constituting about 20.15% of its issued and paid up share capital. The petitioner company has also reserves consisting of general reserves, balance in the profit and loss account, capital reserves, modernization and expansion reserves and the share premium account, in excess of its requirements to the extent of Rs. 159,20,58,240/-. The petitioner company has evaluated the effect of such over-capitalisation upon its functioning and has carefully examined the various options available to it such as alternate business prospects and/or restructuring the share capital in the interests of the shareholders. In the absence of adequately attractive acquisition opportunities in the present market scenario, the restructuring of the petitioner company's existing capital structure becomes imperative. Section 100(1)(c) of the Act provides that a company may either with or without extinguishing or reducing liability of any of any of its shares, pay off any paid-up share capital which is in excess of the wants of the company. 6. The proposed move is also justified by stating that de-listing of the equit....
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.... Plc, holding company of the petitioner. 45.25% shares are held by Lancaster and public holding is 3.75%. The present position of the shareholding and consequence of reduction would be as under:- Present position:- S.No. Shareholder(s) Details of Shareholding Amount (in rupees) 1 Reckitt Benckiser Plc 1,67,85,726 Equity shares of Rs. 10/- each fully paid-up constituting 51% of the issued and paid up share capital of the Petitioner Company 16,78,57,260 2 Lancaster Square Holding SL 1,48,93,374 Equity Shares of Rs. 10/- each fully paid-up constituting about 45.25% of the issued and paid up share capital of the Petitioner Company (including 3,65,088 Equity Shares being subject to the receipt of approval of the RBI and 5,973 Equity Shares held in an Escrow account) 14,89,33,740 3 Public Shareholders 12,34,088 Equity Shares of Rs. 10/- each fully paid-up constituting about 3.75% of the issued and paid up share capital of the Petitioner Company 1,23,40,880 Position after proposed reduction: S.No. Shareholder(s) Details of Shareholding Amount (in rupees) ....
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....reduction of share capital provided in Section 100(1) of the Act and no case for need or necessity to reduce the share capital is made out. (ii) The proposed reduction is discriminatory, unfair and mala fide to extinguish the class of public shareholders. The reduction is not effected on equal proportionate basis but selectively aimed at mainority shareholders. The motive is to buy back the shares of the public, including the petitioner, who belongs to this class. (iii) Once the effect is to buy back the shares of the petitioner by the company, provisions of Section 77A of the Act are also required to be followed, which has not been done. Alternatively, in such a case, provisions of Section 391 of the Act would also be attracted and procedure contained therein is also not followed. (iv) Shares of a company is movable property of the shareholder, who is absolute owner thereof and is entitled to deal with it in any manner he deems fit. There cannot be forcible acquisition of these shares, which is sought to be achieved. It will also violate the right of property vested in a person by the Constitution of India. (v) Attempt also amounts to forcing mi....
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.... device is adopted whereby under the garb of reducing the share capital that too selectively, the promoter and Lancaster proposed to control 100% shareholding if their move is successful. 12. It is further submitted that artificially three classes of equity shares are created, namely, promoters, Lancaster and the general public. There is no such distinction in law. The three categories are created only to wipe off the so-called category to which the objector belongs. Otherwise, admittedly Lancaster is a subsidiary of the promoter and is acting in concert with the petitioner company as well as the promoter. The reduction of the share capital of the Lancaster is a make-belief in order to give it a legitimate hue. 13. The objector has also questioned the criteria for arriving at a fair valuation of shares, namely, the book value. It is further stated that even the book value is not arrived at correctly, as company has not valued and considered, for the purpose of valuation, the brands of the company, namely, Mortein, Harpic, Kleen, Lizol, Robin, Cherry Blossom, Analjesic, Detol soap and liquid and shaving cream, etc., which are growing very fast and command very high market. Har....
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....o the generality of the foregoing power, may-- (a) extinguish or reduce the liability on any of its shares in respect of share capital not paid up; (b) either with or without extinguishing or reducing liability on any of its shares cancel any paid-up share capital which in list, or unrepresented by available assets; or (c) either with or without extinguishing or reducing liability on any of its shares, pay off any paid-up share capital which is in excess of the wants of the company, and may, if and so far as is necessary, alter its memorandum by reducing the amount of its share capital and of its shares accordingly. (2) A special resolution under this section is in this Act referred to as a resolution for reducing share capital. 15. Sub-section (1) entitles a company, under certain circumstances, to reduce its share capital in any way. For doing this the company should be one which is limited by shares or limited by guarantee and having a share capital and Article of Association of the company should authorise a company to reduce its share capital. Once these conditions are fulfillled, then reduction can be by special resolution. Without affec....
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....rescribed majority of the shareholders with the decision whether there should be a reduction of capital, and, if so, how it should be carried into effect...." 18. This judgment was followed by the appeal Court in Poole v. National Bank of China, 1907 AC 229, and by Calcutta High Court in the case of Hindustan Commercial Bank Ltd. v. Hindustan General Electric Corporation, (1960) 3 CC 367 (Cal.). 19. House of Lords have, also in the case of ex parte Westbern Sugar Refineries Ltd., (1951) 1 All. E.R. 881 (HL) reiterated this principle by observing that "the general rule is that the prescribed majority of the shareholders is entitled to decide whether there should be a reduction of capital, and, if so, in what manner and to what extent it should be carried into effect". Same principle is restated by Madras High Court in Re. Panruti Industrial Company (Private) Ltd., AIR 1960 Mad. 537, that "...the question of reduction of capital has been treated as a matter of domestic concern, one for the decision of the majority of the shareholders of the company". 20. The principles, which can be distilled from the aforesaid judicial dicta, are summarised as under: (i) The questi....
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.... its own shares and, thus, the purchase in question was ultra vires. Claim of the petitioner was, therefore, rejected. In the process the Court made following observations which were relied upon by the learned Counsel for the respondent: " Your Lordships then asked in what case, and under what circumstances, such a purchase could be said to be incidental to the objects of a limited company. In answer to that question the learned Counsel not unnaturally turned to in re. Downfield Stinkstone Coal Company, 17 Ch. D. 76, and suggested that at any rate it might be so when the power was used as an incident of domestic management to buy out shareholders whose continuance in the company was undesirable. That was the way in which the proposition was put in in re. Dronfield, and Co., where matters had come to a deadlock. But I would ask, is it possible to suggest anything more dangerous to the welfare of companies and to the security of their creditors than such a doctrine? Who are the shareholoders whose continuance in a company the company or its executive consider undesirable? Why, shareholders who quarrel with the policy of the Board, and wish to turn the directors out; to an....
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....l of the hotel, and should take upon themselves the obligations of the company under the lease of the hotel, and indemnified them against loss in respect of the hotel. It was also a part of the arrangement that such shareholders should surrender their shares to the company and that the capital of the company should be reduced to the extent of such shares. A special resolution was passed to the effect that nominal capital of the company should be reduced by paying the capital represented by the shares of such shareholders and by extinguishing the liability thereon. All the creditors and shareholders assented to this arrangement. When the petition by the company was filed for confirmation by the Court, the Court did not treat it as purchase of its shares by the company but looked it as a sale of some of its assets for not less than their cash value in consideration of a relief from heavy burdens. Thus, while affirming the principle laid down in Trevor v. Whitworth (supra), the proposed reduction of capital was sanctioned in the following words: "This appears to us to be a transaction which the company can carry out, with the consent of the debenture-holders/ under the compan....
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.... of 1867 and 1877, which would render it incumbent on the Court to refuse to confirm such a resolution, or which shows that it would be ultra vires to do so. I do not see any danger in the conclusion that the Court has power to confirm such a scheme as that now in question, or, any reason to doubt that this was the intention of the Legislature. The interests of creditors are not involved, and I think it was the policy of the Legislature to entrust the prescribed majority of the shareholders with the decision whether there should be a reduction of capital, and if so, how it should be carried into effect. The interests of the dissenting minority of the shareholders (if there be such) are properly protected by this: that the decision of the majority can only prevail upon it be confirmed by the Court. This is a complete answer to the argument ably urged by Counsel for the respondent that if all the shareholders of the same class were not dealt with in precisely the same fashion, the interests of the minority might be unjustly sacrified to those of the majority. There can be no doubt that any scheme which does not provide for uniform treatment of shareholders whose rights are similar, w....
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....e of the reduction, and the application or disposition of any capital moneys which the proposed reduction may set free." 27. Nothing the amendment made in the Companies Act, 1877, he also declared that while sanctioning such a reduction, the Court must look at the arrangement as a whole and have regard to all the circumstances of the case and the consequences which the reduction involves. Reduction of capital is a matter which concern or may concern, the public. Therefore, the Court must take everything into account before confirming the reduction. He, however, added that Act of 1877 had not tended to narrow the scope of 1867 and the generality of the powers conferred by 1867 was left fully untouched. 28. In the present case, admittedly requirements as contained in (i) to (iv) of para 21 have been complied with. Most of the arguments of the objectors stand answered in view of the principles of law laid down in the aforesaid judgments. It is clear that majority shareholders have decided to reduce the share capital. Normally, decision of the majority is to prevail. It is also their right to decide the manner in which the shareholding is to be reduced and in the process they can....
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....and it was also stipulated in that notice that separate meetings for (i) the shareholders of the petitioner company whose shareholding was proposed to be reduced, and (ii) the shareholders of the petitioner company whose shareholding is not proposed to be reduced, would be held at the same time and at the same venue as the meeting of all the equity shareholders, for the purpose of determining their will separately in relation to the proposed reduction of capital and return of share capital with a view to protecting the interests of the minority shareholders. These meetings were held and the resolutions were passed with a special majority at both separate class meetings. No doubt, in the case of in Re. Sandvik Asia Ltd., (2004) 121 CC 58 (Bom.), the Bombay High Court treated the promoter shareholders distinct from non-promoter shareholders and held that they constitute separate classes and, therefore, concluded that two separate class meetings should be held for these classes. Learned Counsel for the petitioner tried to distinguish this judgment. However, it is not necessary to go into that aspect as is the present case, separate class meetings were held for the shareholders whose s....
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.... also joined the objector. Statement was made by learned Counsel for the petitioner that if these objectors do not want to part with their equities, the company shall not insist upon the same. In view of this statement, in fact, nothing survive in the objections, as the objections are not going to be affected by the proposed reduction of share capital, because their share would remain intact and they would continue to be the shareholders. After all, on the exit offers given by the Lancaster earlier, many shareholders sold their shares to Lancaster. Out of the shareholders left now, if others who have not come forward and objected to the move of the petitioner inference can be drawn that they have no objection to part with their shares at the offered rates and, therefore, if the share capital held by them is reduced, the objectors cannot have any grievance as far as others are concerned as their rights are protected. 34. As far as valuation of shares is concerned, it may be noted that this task was assigned to M/s. T.R. Chadha and Co., Chartered Accountants. They submitted their valuation report which reflects that 'Net Asset Valuation Method' (Asset approach) and 'Ea....