Provisions exist in the Companies Act, 2013 (referred to as “the Act”) to protect minority shareholders from oppression and mismanagement in the form of s. 245.[1] However, in-ground reality there are still instances of breach of minority rights. This paper seeks to analyze a form of oppression against minorities, i.e., squeeze out of minority shareholders from companies by reduction of share capital, as this is one of the most common forms of minority oppression since the introduction of the Act.[2]

This paper will discuss how a squeeze out occurs by way of capital reduction, analyze the cases in the recent years where such transactions have occurred and how the judiciary has protected the minority from it, and lastly, give an understanding of the tools the minority may have in its hands to protect itself from the squeeze-out, whether these tools are enough and suggest some reforms that may improve the situation of these minority shareholders.

Research question

Whether laws regulating the squeeze-out of minority shareholders in India by reduction of the capital method are sufficient to protect the minority shareholders?

Research methodology

The paper uses the secondary data collection method. It utilizes case laws to prove a trend in the judgments, statutes, views of legal scholars, journals, articles, and other writings to analyze the problem and suggest reforms.

Majority Rule

The case of Foss v. Harbottle laid down the ‘majority rule’ that was followed in India as well.[3] The majority rule means that shareholders that own majority shares in the company, run that company, and make all its decisions by virtue of their majority vote.[4] Consequently, minority shareholders have to agree with the actions of this majority.[5] This holding was found on the basis of the separate legal personality of a company, and that the judiciary will not interfere with its internal matters which have been ratified by the majority.[6]

This case laid down exceptions to its majority rule where protection may be given to the minority shareholders[7]: (a) an ultra vires act; (b) where a special majority is required; (c) acts infringing personal rights; (d) acts of fraud committed by those in control.[8] The common law cause of Foss v. Harbottle was well accepted in India, with the exceptions given in the case protecting Indian minority shareholders. In modern times though, it is the Act that lays down several provisions for the protection of minority shareholders. The sections dealing with ‘oppression’ and ‘mismanagement’ of shareholders have been enacted under chapter XVI of the Act.[9]

Minority Threshold

Section 244 of the Act lays down the minimum threshold for the minority which is – not less than 100 members or not less than one-tenth of the members, whichever is less, or any member or members not holding less than one-tenth of the issued share capital of the company.[10] However, if an application is made to the National Company Law Tribunal on this behalf, it may waive the criteria set in the aforementioned section and allow members to bring an application to the Tribunal that the controlling members have acted in prejudice, as mentioned under section 241 of the Act.[11]

The application for prejudice to minority members’ interests or the interests of the company has been added newly in the 2013 legislation.[12] Despite the statute and the addition to it, there is a gap between the protection provided by the legislation to minority shareholders and the ground reality of cases in India.[13] There are still many instances of oppression and mismanagement carried out by the majority against the minority, and according to the most recent case laws, it is mainly the “squeeze out” of minority shareholders from companies that are the trend nowadays.[14]

What is a squeeze-out?

In a “squeeze out”, the majority shareholders of a company enter into a transaction to acquire the remaining shares held by the minority of that company.[15] This transaction gives the majority the supreme power to oust minorities from the company by forcing them to accept a price for their shares. If all the minorities are squeezed out, then the company may turn into a privately traded company.

In India, there are 3 kinds of transaction structures that can be implemented to effect a squeeze-out – compulsory acquisition mechanism, the scheme of the arrangement, and reduction of capital.[16] The recent cases regarding minority shareholders mainly pertain to squeeze-outs of these minority shareholders by way of the capital reduction under s. 66 of the Act,[17] and hence this paper is concentrating only on the capital reduction method of squeeze-outs. Because most firms in India are controlled by families or through concentrated shareholding, it is a high possibility that squeezeouts only increase with time.[18]

Squeeze-outs in India are governed by delisting regulations issued by SEBI (in a case where delisting precedes the squeeze out), and by the Indian Companies Act, 2013 statute which allows the majority to effect a squeeze-out (whether delisting occurs or not).[19] Since delisting regulations heavily protect minority shareholders by giving them power over the price at which the controller may acquire shares and requiring a supermajority of their votes, it is a less preferred and infrequently used method of squeeze-outs.[20] For this reason, controllers go directly via s. 66 of the Act to implement a squeeze-out without having to undergo delisting.[21]

Selective Buyback

As per s. 66 of the Act, to reduce its capital for a squeeze-out, the company repurchases some of its shares, i.e., selective buyback, and then cancels those repurchased shares.[22] To achieve a reduction in its share capital, there has to be a special resolution in the general meeting of the company proposing a reduction, this resolution must be passed by 75% votes of members at the meeting.[23] Subsequently, the reduction must be approved by the High Court, after which the court order must be filed with the Registrar of Companies to effectuate the reduction in capital.[24]

While the statute provides grounds that must be satisfied for a squeeze-out, these grounds are flexible and do not seriously constrain controllers from reducing the capital to allow a squeeze-out.[25] This method gives a controller of a company sufficient power to carry out the reduction since it merely requires 75% approval of votes polled by shareholders of any class, as opposed to the other two methods of squeeze-outs.[26] This method also protects the controllers from suffering any direct financial cost for buyback of shares, since the buyback occurs with the company’s funds, and they gain full ownership rights of the company.[27] And it is due to these loose constraints that a vast number of squeezeouts have been carried out by this method in India in recent years.[28]

Discussed below are a few recent cases that involve squeeze out of minority shareholders by capital reduction. Discussing these cases will illustrate the ground reality of share capital reduction in India, and analyze the trend as to how controllers of companies concerned in the below-mentioned cases have used the statute to exploit minority shareholders.

1. In re: Cadbury India Limited (2014)

In this case, Cadbury India was a public listed company and a subsidiary of Cadbury Plc, UK.[29] The company entered into several transactions that reduced the public shareholding of the company which then fell below the minimum required for a public listed company.[30] Once the company was delisted, the company initiated a capital reduction scheme to buy out the leftover minority shareholders.[31] Independent valuers decided the share value price, this was passed by a special resolution in the company and was then brought before the High Court for its approval.[32]

The minority challenged the share value price.[33] Here, the Court stated that minority shareholders have to prove whether the value offered for the shares is unreasonable, or that there was discrimination as a sufficient majority had not approved of the special resolution.[34] However, none of these were present in this matter.[35] There was also no scope for prejudice against a class of shareholders in this case as the massive number of non-controlling shareholders voted in favor of the special resolution.[36] Through this case, the court set a high standard for when minorities may successfully challenge a share valuation given by the company.[37] It also laid down general principles that courts must follow when dealing with similar cases.[38]

As is evident by this case, the court has consistently followed its policy on limited intervention in capital reduction cases.[39] Reviewing capital reduction matters requires certain discretion from courts, this case gave guidelines on how to exercise that discretion so that “transparency, certainty and clarity” remain, and thus there is a high threshold for objecting shareholders to meet for reduction to be successfully challenge.[40]

2. Bharti Telecom Ltd. and Ors. v.The Registrar of Companies and Ors. (2019)

Bharti Telecom, a promoter company for Bharti Airtel, was de-list from the stock exchange in 2000.[41] Thereafter in 2019, the company followed a capital reduction scheme and made offers to buy back the shares of the remaining minority shareholders.[42] The special resolution to this effect was move under s. 66 of the Act.[43] This move was criticize to be discriminatory and oppressive to the minority shareholders as the powerful majority shareholders essentially force their exit out.[44] However, the company has maintain that since the delisting of Bharti Telecom, the minority shareholders were looking for an exit route, and the capital reduction scheme was an opportunity for the minority shareholders which was complete within the framework of the Act.[45]

3. In Re: Jubilant Clinsys Limited (2017 – NCLT – Allahabad)

Here, the company propose under section 66 of the Act to reduce its share capital by way of a special resolution being pass.[46] No shareholder had voted against the proposed share capital reduction.[47] The court here found that according to the fact facts and circumstances surrounding the case, there was no prejudice caused or unfairness in allowing the reduction.[48] All statutory requirements were duly complie with and met, and no objections were receive against the scheme.[49] Thus, the reduction of capital was allow.[50] The court also cited Hindustan Commercial Bank Ltd. v. Hindustan General Electric Corporation Ltd. to state that reducing capital is a domestic affair to be decided by the majority of the company,[51] thus ensuring again that courts intervene minimally in these matters.

Capital Reduction

It is important to understand the trend follow by the courts in these cases involving capital reduction so that reforms can be suggest to deal with this growing problem. The courts in each of the cases have decided the matter on the face of it, and not gone into the depths. They have only commented on whether the share value offered was acceptable. It is hence very hard for minority shareholders to challenge capital reduction by companies in court. There is a gap between the legal tools of protection available for minorities and the ground reality of cases in the country.

Hence, reforms are necessary to deal with the problem so that minority shareholders was protecting and disinvestment does not occur. However, before discussing new reforms, it is important to briefly list the tools the minority already have to protect them from such squeeze-outs –

Minority Squeez-out

(i)The minority shareholders may challenge the reduction of capital in court. Each case of squeeze out by capital reduction is decide by the court individually looking at the facts. However, the court’s role is limit because of the understanding that capital reduction is a domestic concern.[52] Courts may disapprove of capital reductions only in cases where there isn’t fairness in process and fairness in price.[53] It is evident Judges follow this process of consideration when deciding these matters from the trends in the abovementioned cases as well. In the landmark case, Sandvik Asia Limited v. Bharat Kumar Padamsi,[54]the court had decided that if the minority is paid a fair value for their shares, and that the scheme was only brought about by an “overwhelming majority” of the minority shareholders, then the scheme of reducing capital of the company is justified.[55]

Independent Auditor or Banker

Thus, courts generally do not interfere if the share valuation is done by an independent auditor or banker, and there is a sufficient majority that has approve the squeeze-out.[56] In Hindustan Lever Employees’ Union v. Hindustan Lever Ltd,[57]the court even said that in case there is a difference in valuations of share price calculated by different bodies, does not mean capital reduction cannot be sanctioned.[58] Only in cases of patent illegality in the valuation would the court interfere, as it is not acting in an appellate capacity but rather as a decider of fairness in the scheme.[59] Thus the minority is in a vulnerable position where chances of successfully challenging the valuation are low.[60]

(ii)Minority shareholders may even be protect by regulatory oversight as per the law laid down in In Re Elpro International Ltd.,[61] where the Bombay Stock Exchange challenged the reduction of capital on the grounds that the silence of minorities was taken as their approval.[62] While the Court upheld this method of reduction, it also clarified that the stock exchange was entitle to recourse under the listing agreement in case there was a securities laws violation.[63] Elpro ultimately had to strike its squeeze-out scheme down because of this.[64]

Thus, in cases such as that of Elpro, the stock exchange can protect minority shareholders who are being squeezed out.[65] But a huge caveat of this case is that for stock exchanges to be able to exercise their powers, the company must be list, which isn’t always the case for companies exercising squeeze out.

SEBI

(iii)Another protection available is that SEBI and the stock exchanges may comment on company proposals for reduction.[66] These observations can be apply when shareholders are approving the scheme or the court is sanctioning the scheme so that regulatory concerns are consider by all parties.[67] However, this role of SEBI and the stock exchanges cannot restrict the company from a capital reduction for squeeze out and is only limit to list companies.[68]

The tools mentioned in the hands of minorities haven’t proved sufficient in protecting them. To strike a balance between the majority and minority shareholders, when it comes to squeeze-outs in companies, new reforms that are compatible with India’s characteristic of concentrate shareholding are needs.

Some reforms that could be applied are –

(i)There should be a requirement that before being sanction, the capital reduction proposal of the company must be approved by a special committee of independent directors who are beyond the influence of the controllers of the company.[69] The directors who would be independent, inform and uncoerced, would make a credible decision for capital reduction.[70] The selection of these directors could be made by a process requiring the majority and minority shareholders to have equal say so that the committee’s independence isn’t compromise.

(ii)The cases in India involving capital reduction so far, have all had majority votes out of the minority approving the scheme.[71] However, this condition is not a law or a judicial precedent, whereas in the United Kingdom a Majority of Minority vote is a requirement to approve the squeeze-out.[72] India too should fully implement this system as it would give the minority shareholders greater say as it is their interests at stake. Having to conduct a voting system to satisfy a majority of each class of shareholders, instead of just shareholders as a whole, as is prevalent in the scheme of arrangement method of squeeze out – would definitely protect the minority against a forceful exit from the company.

(iii)There should be laws controlling the strategic timing and pricing a company chooses to implement a squeeze-out. There already exist safeguards against this in the United States of America,[73] and may be beneficial to the Indian scenario as well. These laws would fall under the principles set by the Court for fairness in the procedure. Apart from just an overwhelming majority of the minority shareholders, fairness in the procedure must be stretch to include a fair time so that companies do not take advantage of timing and market conditions to force the minority out and buyback

The shares at a lower price than they would have been if not for that particular timing.

(iv)Courts shall adopt a more intervening approach as in the United States of America.[74] Merely deciding whether the value of shares offered is fair does not help protect the minority. It is evident that capital reduction is the most favored method of squeezeouts as it is the easiest for controllers to pull off and provides the least safeguards to the minority.[75] This situation can be remedie if the Courts are more cautious while approving schemes, they shouldn’t just assume the validity of schemes and put the burden of proof on the minority shareholders to convince the Courts that the scheme is unfair or prejudicial. To put the majority and the minority on a more equal pedestal,

The Court should try a more active approach in developing the laws surrounding squeezeouts.

Conclusion

A capital reduction scheme could prove beneficial for the future of the company as it may cause the company to get delist which would mean that the company is govern by lesser regulations as it is now private, and

it may also be beneficial to the controller to make more profits not having to share them with minority shareholders.[76] Indian companies being run mainly by families or other forms of concentrate shareholding use this scheme to squeeze out the minority shareholders, which causes the latter injustice.[77] While a majority vote is require for sanctioning the scheme,

The timing and the price that the minorities get from the company buying back the shares ultimately decide by the company itself, and gaining a majority vote for the scheme is no special feat for a controller of the company to achieve.[78]

Hence, it is necessary that there are rules in place to protect the minority who has no choice but to be force out of the company. The existing protections available to the minority in India are feeble and week,[79] and have to be revised for stronger laws and court intervention. This way, minority investment can protect. Even though squeezeouts are inherently much more beneficial to the majority as compared to the minority.

Minority

They shall not implement to the complete detriment of the minority. Hence, it believes if the reforms suggest are all applied together, they may strengthen the minority shareholders’ standing in a squeeze-out transaction.

Bibliography:

1. The Companies Act, 2013, (India).

2. Vikramaditya Khanna and UmakanthVarottil, Regulating Squeeze-Outs in India: A Comparative Perspective, 63 A.J.C.L. 1009, (2015).

3. Foss v. Harbottle(1843) 2 Hare 461.

4. S. Sadhana and M. Kannappan, A Study on the Oppression of the Minority Shareholders in India with Reference to the Majority Rule, 119 I.J.P.A.M., 887 (2018).

5. Prasad Hegde, Reduction of Share Capital: What Concerns does it raise for Minority Shareholders?, 2J.C.M.S.L. 16 (2019).

6. In Re: Cadbury India Limited, (2014) 125 C.L.A. 77 (India).

7. Vikramaditya Khanna and UmakanthVarottil, Squeeze Outs: Analyzing the Cadbury Decision, IndiaCorpLaw (Aug. 8, 2014).

8. Rishi Ranjan Kala, Bharti Telecom working on exit route for minority shareholders, Financial Express (Jul. 3, 2018, 5:45 AM).

9. In Re : Jubilant Clinsys Limited, (2017) S.C.C. OnLine N.C.L.T. 7341 (India).

10. Hindustan Commercial Bank Ltd. v. Hindustan General Electric Corporation Ltd.,A.I.R. 1960 Cal. 637 (India).

11. Sandvik Asia Limited v. Bharat Kumar Padamsi, (2009) S.C.C. OnLineBom 541 (India).

12. Hindustan Lever Employees’ Union v. Hindustan Lever Ltd., A.I.R. 1995 S.C. 470 (India).

13. In Re Elpro International Ltd., (2007) S.CC. OnLineBom 1268 (India).

14. UmakanthVarottil, Squeezing Out Minority Shareholders: A Recent Judgment, IndiaCorpLaw (May 6, 2009).

Reference

[1] The Companies Act, 2013, No. 18, Acts of Parliament, 2013 (India).

[2] Vikramaditya Khanna and UmakanthVarottil, Regulating Squeeze-Outs in India: A Comparative Perspective, 63 A.J.C.L. 1009, (2015).

[3]Foss v. Harbottle(1843) 2 Hare 461.

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[6] S. Sadhana and M. Kannappan, A Study on the Oppression of the Minority Shareholders in India with Reference to the Majority Rule, 119 I.J.P.A.M., 887 (2018).

[7]Supra note 3.

[8]Sadhana&Kannappan, supra note 6.

[9]Supra note 1.

[10]get

[11]info

[12]pp

Links

[13] Prasad Hegde, Reduction of Share Capital: What Concerns does it raise for Minority Shareholders?, 2J.C.M.S.L. 16 (2019).

[14]Khanna &Varottil, supra note 2.

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[22]Supra note 1.

[23]Khanna &Varottil, supranote 2.

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[29] In Re: Cadbury India Limited, (2014) 125 C.L.A. 77 (India).

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[37]Vikramaditya Khanna and UmakanthVarottil, Squeeze Outs: Analyzing the Cadbury Decision, IndiaCorpLaw (Aug. 8, 2014),https://indiacorplaw.in/2014/08/squeeze-outs-analyzing-cadbury-decision.html.

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[41] Rishi Ranjan Kala, Bharti Telecom working on exit route for minority shareholders, Financial Express (Jul. 3, 2018, 5:45 AM), https://www.financialexpress.com/industry/bharti-telecom-working-on-exit-route-for-minority-shareholders/1229057/.

[42]xx

[43]pp.

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[46]In Re : Jubilant Clinsys Limited, (2017) S.C.C. OnLine N.C.L.T. 7341 (India).

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[51] Hindustan Commercial Bank Ltd. v. Hindustan General Electric Corporation Ltd.,A.I.R. 1960 Cal. 637 (India).

[52]Hegde, supra note 13.

[53]Khanna &Varottil, supranote 2.

[54]Sandvik Asia Limited v. Bharat Kumar Padamsi,(2009) S.C.C.OnLineBom 541 (India).

[55]Khanna &Varottil, supra note 2.

[56]Hedge, supra note 13.

[57]Hindustan Lever Employees’Union v. Hindustan Lever Ltd., A.I.R. 1995S.C. 470 (India).

[58]Hedge, supra note 13.

[59]ii

[60]Khanna &Varottil, supranote 2.

[61]In Re Elpro International Ltd., (2007) S.CC.OnLineBom 1268 (India).

[62]Khanna &Varottil, supra note 2

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[71]Hedge, supranote 13.

[72]Khanna &Varottil, supranote 2.

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[74]UmakanthVarottil, Squeezing Out Minority Shareholders: A Recent Judgment, IndiaCorpLaw (May 6, 2009),https://indiacorplaw.in/2009/05/squeezing-out-minority-shareholders.html.

[75]Khanna &Varottil, supranote 2.

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