Takeover of Unlisted Companies: A New Route

Squeeze out of minority shareholders of companies has been a controversial area. As a co-author and I had discussed, there are a number of methods by which squeeze outs can be effected in Indian companies. By way of a recent set of notification and rule-making efforts, the Ministry of Corporate Affairs (MCA) has just added another method that would be applicable to unlisted companies.

Among the few provisions of the Companies Act, 2013 yet to be notified were sub-sections (11) and (12) of section 230. The broader section deals with schemes of arrangement and compromise. These two sub-sections have now been made effective from 3 February 2020. In order to operationalize these provisions, the MCA has also notified rule 3(5) of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016. This rule provides that any shareholder (along with others) holding at least three-fourths of the shares in the company can initiate an arrangement for acquiring the shares of the remaining shareholders of the company. This is subject to conditions. First, 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 acquisition of shares in the previous 12 months. The registered valuer must also determine the fair price after taking into account various valuation parameters prescribed therein. Second, the acquirer must deposit into a bank account at least half of the total consideration for the takeover.

A number of considerations seem to appear at first sight. Although the wording of rule 3(5) is not explicit (in that it does not stipulate an obligation on the part of the offeree minority shareholders to mandatorily sell their shares), the scheme appears intended to operate as a squeeze out of the minority shareholders. Hence, any set of shareholders with a 75% shareholding obtain the right to acquire the shares of the remaining minority. For the purpose of computation, the rule clarifies that “shares” refers to shares with voting rights and also includes securities such as depository receipts that grant voting rights.

When it comes to price determination, the highest price is with reference to the price at which “any person or group of persons” has acquired shares in the preceding 12 months. It is not clear whether the references to “person” and “group” is to the acquirer or even to the minority, although logically it should apply only to the acquirers. The principal constraint on the acquirers is the requirement that the price paid be fair, and that half the consideration be put on the table up front. In case the minority shareholders are aggrieved by such acquisition plans, they have a specific remedy by which they can approach the National Company Law Tribunal under section 230(12), for which the MCA has now prescribed the procedure.

Clearly, this method of acquisition is available only to unlisted companies, as listed companies will be subject to the procedures under the regulations prescribed by the Securities and Exchange Board of India (SEBI). In case of listed companies, it might be that they ought to first pursue the route of delisting the company, and then avail of this new mechanism to squeeze out minority shareholders.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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