In this tripartite blog series, the authors take a gestalt perspective to carefully analyse and examine the reduction of share capital proposed by Cadbury India Ltd. in 2009 which finally received the sanction of the court in 2014. This case has been analysed from the lens of minority squeeze-out and with the intention of examining the several available modes to facilitate such squeeze-outs. Such transactions have brought to the fore confusion surrounding the understanding of several provisions of Company law and their inter-relationship. Several conflicting judgments over a period of time being simultaneously accompanied by amendments to the statute have necessitated a thorough examination of the law in light of the Cadbury case.
Part I of the blog provides a proper understanding of minority squeeze outs to the readers, the various methods of minority-squeeze outs and their inter-relationship in light of the amendments to the Companies Act.
Part III of the blog critiques the reasoning of the judgment taking into account its context and examines the possible options of minority squeeze-outs that Cadbury India could have employed and their viability thereof.
DETAILS OF THE DEAL
Cadbury India Ltd. was incorporated on 19th July 1948 under the name of Cadbury Fry (India) Pvt. Ltd. Cadbury India is a subsidiary of Cadbury Schweppes Overseas Limited which in turn is held by Cadbury Plc, UK.[i] Some time back Kraft Food Inc. took over the grandparent company of Cadbury India Ltd.[ii] Cadbury has a policy of operating globally only through wholly-owned subsidiaries. This is only deviated from when mandated by the law of the country. In 1977, in order to ensure compliance with the economic policy of India, Cadbury Schweppes reduced its shareholding to 60% in Cadbury India Ltd.
Following economic liberalisation of 2002, FDI was allowed up to 100%. The Cadbury group made an offer to acquire 49% of the paid-up capital of Cadbury India as on 18 January 2002 at Rs. 500 per equity share. Consequently, the Cadbury Group acquired 39.24% of the paid-up equity share capital of Cadbury India. The group made another offer to purchase 9.76% public shares at the price of Rs. 500 per equity share. The duration of this offer was from 20 May 2002 to 19 November 2002. Consequently, the shareholding of the Cadbury group saw another rise and reached 93.47%. This resulted in the delisting of Cadbury from the BSE and NSE in 2002.[iii] BSE imposed a condition on Cadbury India to provide an exit price of Rs. 500 per equity share which was open from 16 December 2002 to 15 December 2003. However, Cadbury continued to accept shares at this exit price until 2006. Consequently, the shareholding of the Cadbury Group increased to 97.44%.
From 2006 to 2009 Cadbury made a series of four buy-back offers to its non-promoter shareholders. On 5 May 2006, Cadbury made an offer to buy-back 1,354,667 equity shares of Rs. 10 from the public shareholders at a price of Rs. 750 per share. Out of these 1,352,605 shares were offered for buy-back. Following the norm of having a one year gap between two successive buy-backs, on 11 May 2007, another offer for buy-back was made for 1,153,374 equity shares at a price of Rs. 815 per equity share. Following this offer, 1,153,374 equity shares were bought back. Another buy-back offer was made in 2012 for 1,020,408 shares at Rs. 980. In pursuance of this offer, 1,020,300 shares were bought back. At an annual general meeting held in May 2009, the last offer for buyback was made for a total of 1,116,505 equity shares at Rs. 1,030. This resulted in the buy-back of 1,116,168 equity shares and a reduction in the paid-up Share Capital to Rs. 3106.70 lacs from Rs. 3218.32 lacs.[iv]
Cadbury India convened an Extraordinary General Meeting in November 2009[v] and passed a special resolution for the reduction of share capital under Section 100, Companies Act 1956. Reliance was placed on share valuation reports of two valuers, M/s. Bansi S. Mehta & Co. and M/s. SSPA & Co. Out of a total of 30,331,248 votes, 99.96% votes were in favour of the resolution. With respect to the non-promoter shareholders, a majority of the minority voted in favour of the resolution. A petition was filed in December 2009 before the High Court of Bombay seeking approval for a scheme of reduction of share capital. As on 14 December 2009, the Cadbury Group held 97.583% of the equity share capital in Cadbury India.
SUMMARY OF THE JUDGMENT
After the petition was filed before the court, several shareholders objected to the valuation done by M/s. Bansi S. Mehta & Co. and SSPA & Co. at Rs. 1340 per equity share. The court did not enter into the details of the valuation or the correctness thereof. Cadbury India agreed for a fresh valuation by an independent valuer, Ernst and Young [E & Y] on the condition that the same would be considered binding upon the parties.[vi] Ernst and Young submitted a report, using the Comparable Companies Multiples [CCM] method of valuations to arrive at a value of Rs. 1,743 per equity share. Subsequently, the court ordered E & Y to conduct another valuation adopting the Discounted Cash Flow [DCF] method. Having used this method, each share was valued at Rs. 2,014.50 through the second report.
While approving the petition for reduction of share capital the court laid down guiding principles for such transactions in the future.
The court held that in order to decline sanction it must be shown that the valuation is ex-facie unreasonable. The mere existence of other possible methods of valuation would not be sufficient to deny sanction to such a scheme. It was held that the assent of the court would be given if: (1) the scheme is not against the public interest; (2) the scheme is fair and just; and (3) the scheme does not unfairly discriminate against or prejudice a class of shareholders.[vii]
Prejudice was stated to imply a “deliberate and studied attempt to force a class of shareholders to divest themselves of their holding at a rate far below what is reasonable, fair and just.” Insofar as reasonableness is concerned, the rate of past open offers also would be considered a relevant factor.
Using reasoning similar to Sandvik Asia Ltd. v. Bharat Kumar Padamsi & Others[viii] the court stated that the fact that the objection has come only from a very few shareholders would also be relevant. It was pointed out that the objectors to the petition [Samant Group and the Churiwala group] represented a minuscule 0.25% of the non-promoter shares and a mere 0.0063% of the total votes cast at the extraordinary general meeting. Having stated the same, the court clarified that it would not be bound by the ipse dixit of the majority. It would see the deal from every aspect to assess whether it is fair and reasonable and not unconscionable. This decision of the single bench has been challenged before a division bench.[ix]
[i] In re: Cadbury India Ltd., (2015) 125 CLA 77 Bom., ¶ 2.27.
[iii] The Securities Contracts (Regulation) Rules, 1957 were amended in 2010 to provide for minimum and continuous public shareholding requirement in listed companies in private sector at 25%.
[iv] CADBURY INDIA LTD- 62ND ANNUAL REPORT, 2009.
[v] CADBURY VERSUS MINORITY SHAREHOLDERS: SWEET DEAL?, The Firm, 16 January 2010, Available at: http://thefirm.moneycontrol.com/news_details.php?autono=436137.
[vi] Supra Note 1.
[viii] 2009 (3) Bom CR 57.
[ix] MINORITY SHAREHOLDERS CHALLENGE BOMBAY HIGH COURT ORDER ON CADBURY INDIA’S BUYBACK offer, Maulik Vyas, Economic Times, 26 September 2014, Available at: http://economictimes.indiatimes.com/markets/stocks/minority-shareholders-challenge-bombay-high-court-order-on-cadbury-indias-buy-back-offer/articleshow/43478653.cms.
ABOUT THE AUTHORS
Harshit Sharma is a B.A., LL.B. (Criminal Law Hons.) graduate from National Law University, Jodhpur and an LLM (Criminal Law) from Mahatma Jyoti Rao Phoole University, Jaipur. He has qualified NTA NET (December 2019) and can be reached at firstname.lastname@example.org.
Rishav Dixit is a B.A., LL.B (Business Law Hons.) graduate from National Law University, Jodhpur (Batch of 2019). Presently he is working as an Associate for Cyril Amarchand and Mangaldas.