Can a company buyback the shares of its public shareholders without their express consent? At a price fixed by the company? At a price that is far below the market price at the time of buyback? When the buyback is selective and applicable only to the public shareholders, mainly the small shareholders? Yes, Yes, Yes and Yes!!!! This is as also seen as a recent case (Elpro International Ltd., In re (2008) 86 SCL 47 (Bom.)) and the facts stated herein are drawn from what is stated or submitted in that case. This case, though, is not the first case of such buybacks but some years back, by a critically worded order, the Bombay High Court, in Sandvik Asia’s case, had rejected such a proposal and it appeared that such buybacks would not happen again. However, the Elpro’s case raises concerns of it being becoming a precedent for many such cases to follow.
What are forced buyback really and what were the specific facts in Elpro’s case as stated in the decision?
Buyback of shares in the normal course has to be voluntary and one cannot forcibly buy back the shares of a shareholder. In fact, under the SEBI Buyback Regulations, the shareholder has to specifically come forward and offer his shares in writing. However, buyback of shares is technically also a reduction of capital and hence it is possible to avoid the detailed buyback Regulations notified by SEBI and, instead, prepare a scheme under Section 100/101 of the Companies Act, 1956 and take the matter the court. If the scheme provides that shares of selected persons – say the public shareholders – would be bought back at a price specified by the company and without the specific consent of the shareholders and if such scheme is sanctioned, the shares of such shareholders would be bought back.
This is even if they have voted against such resolution and even rejected the proposal in writing provided that the majority shareholders of the prescribed percentage of approved the scheme. Even more strangely, this majority who approve the scheme need not be those whose shares are being bought back. For example, the Promoters may be holding 75% shares. The Promoters’ shares are not to be bought back but the shares of the public shareholders are to be bought. The Promoters, however, vote for the resolution and hence the minimum legally required majority is obtained.
In the Elpro’s case, as per facts stated in the decision, something similar seems to have happened if, again, we go by the facts and submissions stated therein. The company had a capital of 35.57 lakhs shares and desired that 25% shares be bought back at Rs. 183 which was ten percent higher than the price ruling at the time when the buyback was originally initiated. However, at the time of actual buyback, the price was Rs. 322. The Promoters appear to have held 60% of the capital. The company had 3859 shareholders to whom notices were sent under postal ballot scheme under which they were to convey their vote in favor or against the proposal – note though their negative vote would not mean that they could avoid the buyback even if they wanted to. The company received 136 valid responses representing 25.94 lakhs shares of which 112 responses representing 25.81 lakhs shares voted for the proposal. This means about shareholders holding 73% shares voted in favor of the resolution though as discussed earlier this does not mean that these are the persons whose shares were to be bought back! The remaining 27% simply did not vote. Of those who voted, thus, 99.50% voted in favor of the resolution.
To view these figures from yet another angle, since it appears to me that Promoters’ have voted in favor of the buyback, it would mean that of the 25.81 lakhs shares who voted for the Scheme, 21.34 lakhs belonged to the Promoters who voted in favor of the buyback though they themselves were not offering their shares for the buyback.
The Hon’ble Court rightly noted that the statutory minimum to approve such a scheme is 75% and thus this hurdle was crossed. The Bombay Stock Exchange, however, had disapproved this scheme under the Listing Agreement. Before the Hon’ble Court, it also put up a strong case and argued that this would cause injustice to the small shareholders who do not wish that their shares be so bought back. The BSE also pointed out that the Promoters, whose percentage holding in the reduced capital would have increased, could sell their shares at the then higher ruling price.
The Hon’ble Court, however, it is respectfully submitted, rightly noted that the majority as required under law had duly approved the scheme. However, with the utmost and highest respect to the Court, the Court should have taken into account the sheer injustice to the small shareholders whose shares are effectively forcibly bought back at a company-determined price, and should have allowed buyback of only those shareholders who expressly wanted such buyback.
A few years back, the Bombay High Court had rejected Sandvik Asia from carrying out a similar buyback (121 Comp. Cas. 58 (Bom.)). There too, 99.50 of those who voted, voted for the scheme but it was also noted that the Promoters themselves held 95.54% and whose shares were not to be bought back. The Court also noted that against the buyback price of Rs. 850, the market price had seen levels of 1650, 3050 and even 6850 in the past. The Court endorsed the minority shareholders’ submissions that “the proposal had no option and in any event the proposal was highly inequitable, unjust, unfair, in the sense that the minority shareholders will have to leave the company. Therefore, the promoters group would virtually bulldoze the minority shareholders and purchase their shares at the price dictated by them which…. is totally unfair and unjust”. The Court dismissed and rejected the scheme and proposal before it and even awarded costs to the minority shareholders who had objected the Scheme.
It also appears that Sandvik’s decision was not brought before the Court in the recent Elpro’s case or at least it was not discussed. It is submitted with great respect that Elpro’s decision needs reconsideration.
A relevant point is that of 3859 shareholders, only about 140 or so actually voted. Why did not the remaining 3700 – about 96% shareholders did not even vote when the voting was by postal ballot where they just had to send their replies in prepaid envelopes? It is highly probably, I think, that they did not read what document they were sent. Such schemes run into numerous pages, in small print, wholly in complicated legalese. It is beyond the skills of even average lawyers, much less small shareholders, to accurately and fully unravel such schemes.
The Court though noted in Elpro’s case that BSE was free to take action against the company with reference to clause 24(f) of the Listing Agreement or otherwise. This clause, which is unfortunately quite poorly drafted, requires the company to submit the scheme for approval of the stock exchange. It is not known whether the BSE has taken any action or whether this decision is in appeal.
I think the law needs to be amended to specifically prohibit such buybacks without the consent of the shareholders. The provisions of the Companies Act, 1956 relating to reduction are too general in this regard. Even SEBI could take initiative and specifically ban such forced buyback. It is true that reduction of capital falls within the jurisdiction of High Courts but SEBI would be within its powers to lay down additional provisions for buyback of shares where they are to protect small shareholders’ interests. It is also submitted with respect that courts should reject such schemes to the extent that the permit such forcible buyback of shares. Clearly, a person acquires shares in a company of his own free will and should have the same free will of exit.
Jayant Thakur, CA