Squeeze Out Provisions Applicable To Minority Shareholders

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1 Minority Shareholders1.1 Squeeze out of minority shareholders

1.1.1 3. Step 3- Deposit half of the total consideration into a bank:

1.1.2 Protection available to minority shareholders:

1.1.2.1 Statutory protection:

1.1.2.2 Contractual protection:

1.1.2.3 Explicit mention in the articles of association of the company:

1.1.3 Refernce

1.1.4 Related

Minority Shareholders

The Ministry of Corporate Affairs vides its notification S.O. 525(E) dated 3rd February 2020 notified sub-clause 11 and 12 of Section 230 of the Companies Act, 2013[1] and amended the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (hereinafter referred to as “Notification”). By virtue of this Notification, a squeeze-out mechanism for minority shareholders of unlisted companies has been introduced. However, it must be noted that these rules are not applicable to any transfer or transmission of shares through a contract, arrangement or succession, as the case may be, or any transfer made in pursuance of any statutory or regulatory requirement.[2]

Squeeze out of minority shareholders

The Notification creates a provision of squeeze out of minority shareholders of unlisted companies. The Notification enables shareholders of unlisted companies holding at least 75% (seventy-five percent) shares[3] to acquire or make a takeover offer for the acquisition of any part of the remaining 25% (twenty-five percent) shares (shareholders of such remaining part are hereinafter referred to as “Minority Shareholders”) in such company pursuant to the following procedure:

1. Step 1- Obtain approval by creditors of the company. [4] 

2. Step 2- Pricing and valuation: The conditions in connection with the pricing of shares behind the initiation of the takeover mentioned herein are as follows:

(a). The pricing must be based on the report of a registered valuer who must consider the highest price at which “any person or group of persons” has paid for the acquisition of shares in the last twelve months.[5]

(b). The registered valuer must also determine the fair price after taking into account various valuation parameters including return on net worth, the book value of shares, earning per share, price earning multiple vis-d-vis the industry average, and such other parameters as are customary for valuation of shares of such companies.[6]

3. Step 3- Deposit half of the total consideration into a bank: 

The acquirer must deposit into a bank account

at least half of the total consideration for the takeover.[7]

4. Step 4- Filing of application with the NCLT: An application of compromise or arrangement (“Application”) is to be filed before the National Company Law Tribunal (“NCLT”)

under section 230 of the Companies Act.[8]  The Application shall contain the following:

(a). the report of a registered valuer disclosing the details of the valuation of the shares obtained in accordance with

the principles mentioned under Step 1.

(b). details of the bank account opened in accordance with Step 3.

(c). once the Application is approve by the NCLT, the order of the NCLT would be binding on all the Minority Shareholders and

they would mandatorily be require to sell their shares to the Acquiring Shareholder. 

It must be noted that this method of minority squeeze-out is only available to unlisted companies and listed companies will be subject to the regulations prescribed by the Securities and Exchange Board of India.

Protection available to minority shareholders:

Statutory protection: 

In case the minority shareholders are aggrieved by the takeover, they can approach the NCLT under section 230(12). However, there is a lack of clarity in connection with any additional factors that need to be taken into account by the NCLT while considering the rights of such Minority Shareholders. Accordingly, there may be a situation wherein such takeover regulations may be misuse in certain cases, when for instance: 

(i) such takeover is make immediately prior to a company entering into a lucrative transaction; or (ii) such takeover is done when the company is lowly value, even if that period is transitory. More clarity from the NCLT is await in such cases.

Contractual protection: 

All contractual arrangements must explicitly give Minority Shareholders the veto right or affirmative voting right to block any takeover offers. 

Explicit mention in the articles of association of the company:

The articles of association of the company must also explicitly state that the consent of the Minority Shareholders must be require

prior to a takeover of their shares, as is provided herein.

However, it must be noted that if the contractual arrangements or articles of association of the company are silent in connection with such consent, affirmative voting rights, or veto powers, then only a statutory grievance

redressal mechanism is available to the Minority Shareholders, clarity on which is still await.

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Refernce

[1] http://ebook.mca.gov.in/notificationdetail.aspx?acturl=6CoJDC4uKVUR7C9Fl4rZdatyDbeJTqg3bjwbNXz7wq1phEwErU3PIHQqPAGVQRd5

[2] Explanation 2 of Rule 3 (5) of Companies (Compromises, Arrangements and Amalgamations) Rules, 2016.

[3] Explanation 1 of Section 230 (5) states that “shares” means the equity shares of the company carrying voting rights, and includes any securities, such as depository receipts, which

entitles the holder thereof to exercise voting rights.

[4] Section 230 (6) of Companies Act, 2013.

[5] Rule 3 (6) (i) of Companies (Compromises, Arrangements and Amalgamations) Rules, 2016.

[6]  3 (6) (ii) of Companies (Compromises, Arrangements and Amalgamations) Rules, 2016.

[7] Rule 3 (6) (b) of Companies (Compromises, Arrangements and Amalgamations) Rules, 2016.

[8] 3 (5) of Companies (Compromises, Arrangements and Amalgamations) Rules, 2016.