Section 100 revisited: In Re Organon

We have discussed the law on reduction of share capital under Section 100 of the Companies Act previously. A recent decision of a Single Judge of the Bombay High Court has an interesting observation in this regard. In Re Organon (India) Limited [2010] 101 SCL 270 (Bom), Kathawalla J. observes after discussing the previous cases (including British & American Trustees [1894] AC 399, Re Panruti AIR 1960 Mad 537, Miheer Mafatlal [1996] 11 SCL 70, Sandvik Asia [2009] 92 SCL 272):

“This Court is bound by the decision of the learned Division bench (in Sandvik) and cannot withhold sanction to the special resolution for reduction of capital, unless there is some patent unfairness regarding the fair value of the shares or there is lack of an overwhelming majority of non-promoter shareholders who vote in favour of the resolution…” [emphasis added]

It is unclear whether Sandvik is actually an authority for the underlined portion above – it seems that the Court in Organon has read in an additional requirement of an “overwhelming majority” of “non-promoter shareholders” to vote in favour of the resolution.

In an earlier article, Mr. Somashekhar Sundaresan had noted that the effect of Sandvik was that, “Private equity investors holding small stakes without serious rights could easily be thrown out by management using such resolutions. In family-run companies, a segment of the family that holds a minority stake could get thrown by the rest of the family. All that one would need is a special resolution…” Now, if the observation in Organon is to be read as laying down the law on the point, the effect of Sandvik could easily be watered down. A mere special resolution would not be enough – that special resolution would need an overwhelming majority of non-promoter shareholders backing it. This is almost tantamount to giving a veto power to the non-promoter minority shareholders. Interestingly, on the facts of the case, this had no effect on reduction of share capital – of the more than thousand non-promoter shareholders, only one had objected. Nonetheless, the observation (in the form of the statement of law which the Court states it was applying) would perhaps require reconsideration by a larger Bench.