Although most jurisdictions confer powers on controlling (or majority) shareholders to squeeze out minority shareholders, the position under Indian company law does not appear to be all that straightforward. There exists a powerful provision in the form of Section 395 of the Companies Act, 1956 that allows controlling shareholders, in certain circumstances, to compel minority shareholders to sell their shares and exit a company. Curiously though, these powers have been rarely exercised in practice. Not only are the conditions in that provision onerous on controlling shareholders (thereby diminishing its utility in practice), but it also leaves several matters ambiguous and uncertain.
In a recent column in the Mint, Sachin Mehta of AZB Partners examines this issue in some detail and offers some explanations for the under-utilisation of the squeeze-out option and also makes some recommendations for reforms. Here are some extracts:
“… [S]ection 395 is the only provision in the Companies Act that deals with the compulsory acquisition of shares of minority shareholders and there are no corresponding rules or guidelines available in relation to this. In the absence of such guidance notes, wide powers of discretion have been conferred on the Company Law Board to allow or reject an offer to squeeze out a minority group under section 395.
The judicial trend so far (considering that there are not many cases under this provision) suggests that the Company Law Board would allow the scheme or contract if the fairness standard is met and the onus to prove otherwise shall be on the dissenting shareholders.
It is important to note that section 395 does not contain any guiding principles relating to the valuation of shares for the purposes of the takeover offer. …
To conclude, it can be said that the legislature needs to revisit the provision. Keeping in mind that any takeover offer under section 395 requires the approval of nine-tenths of the minority shareholders, presently section 395 only enables a squeeze-out of the dissenting minority shareholders and not all minority shareholders. It does not provide for a situation where the minority block is against the takeover offer, irrespective of the level of their holding in the company or the fairness of the offer.
Therefore, proper minority squeeze-out provisions need to be introduced, providing for a fair exit to minority shareholders and also entitling the controlling block to compulsorily acquire shares held by a minority block.”
We will have to wait and see if the Companies Bill, 2008 modifies the provisions of Section 395 to address some of these concerns.