Several months ago, we had mentioned that the validity of shares with differential voting rights (DVRs), particularly as a defence against takeovers, was challenged before the Company Law Board (CLB) in the Jagatjit Industries Case. Today’s Economic Times reports that the CLB has passed its order upholding the resolution to allot shares with DVRs to the promoter of the company. A brief background of the facts set out in this report is as follows:
“The two brothers, Anand and Jagatjit, moved the CLB against the company decision in 2004 on preferential allotment of shares with DVRs, giving Karamjit 64% voting rights on his 32% stake in the company.
They had petitioned the court to declare as ‘null and void’ a June 16, 2004, resolution passed at the company EGM, allotting 2.5 million preference shares — each with 20 voting rights — to LP Jaiswal & Sons, a firm-controlled by Karamjit.
The preferential allotment saw Karamjit’s voting rights in the company touch 64% even though his stake, or economic interest, increased to just over 32% from 23.59% earlier.”
It would be interesting to see the reasoning provided by CLB once the order is available. The issue of DVRs has invoked significant discussions in the past (see here and here), and the Companies Bill, 2008 (in its current form) even proposes to do away with DVRs altogether by reverting to the “one-share one-vote” rule, thereby probably making equity shares with DVRs a fairly short-lived instrument.