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 II of the blog lays down the details of deal and summarises the judgment of the court.

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.

ANALYSIS OF THE JUDGEMENT

The judgment ought to be praised for its structure and the coherence. However, there are certain internal logical inconsistencies within the judgment. On one hand, the Court pointed out the decision of the Apex court in an earlier case:

“…the sanctioning court has no power or jurisdiction to exercise any appellate functions over the scheme. It is not a valuer. It does not have the necessary skills or expertise. It cannot substitute its own opinion for that of the shareholders. Its jurisdiction is peripheral and supervisory, not appellate.”[i]

On the other hand, after stating this, the court goes into an examination of the CCM method and the DCF method. J. Patel goes into inquiries such as, why the valuation proposed by the Samant and the Churiwala group is inappropriate,[ii] what the impact of the take-over of Cadbury Plc. by Kraft Foods Inc. would be.[iii] This seems to directly contradict the claim made by the court. At another level, the very fact that the court-appointed an independent valuer despite having found no bias in the first report of M/s. Bansi S. Mehta & Co. and SSPA & Co seems problematic. The court did not stop at this and went another step ahead by asking for another report, using a different technical method of valuation, from the valuer it had itself appointed. In doing so, the initial valuation of Rs. 1,342 ended up at Rs. 2014.50, while the court was ostensible not engaging in the appellate role having stated that valuation is not an exact science but is merely an estimation.

However, the court has laid down a high threshold for an objecting shareholder.[iv] It is very difficult to show any valuation as being ex facie unreasonable. The court has claimed to not have the expertise to engage in exact valuation and hence would mostly defer to the decision of the valuer. To this extent, the minority does not have too many options left at their disposal in situations of reduction of share capital.

CONTEXT OF THE JUDGEMENT

The Cadbury case cannot be examined without the context since it marks a culmination of a series of cases. In Sandvik Asia Ltd.[v] the factual scenario was very similar to the one in the Cadbury case. A minority squeeze-out was sought to be executed through the provisions on the reduction of share capital and the requisite votes had been duly obtained. The single judge held that the promoter group could virtually bulldoze the minority shareholders and purchase their shares at the price dictated by them and hence refused to sanction the reduction.[vi] On appeal, the division bench held that since all the statutory requirements had been complied with, the only question that remained was whether the scheme is unfair and inequitable.[vii]

This decision seems inappropriate since the court only looked at the statutory provisions while it ignored the underlying presumption in the whole procedure prescribed for reduction of minority shareholders which seems to be that of a uniform reduction of share capital.[viii] The courts seem to be reluctant to exercise powers to strike down schemes executed by parties. This approach of the court is markedly distinct from the approach adopted by courts in other more progressive jurisdictions such as Delaware where the courts seems to be more proactive.[ix] This coupled with the lack of adequate statutory protection of the minorities render the minority susceptible to easy squeeze-outs.

In Re: Elpro International Ltd.[x] also dealt with a similar situation and followed the reasoning followed by the division bench in the Sandvik case. The 75% of the votes in the special resolution came as a result of the votes of the promoter and abstentions by several non-promoter shareholders. The price at which the buy-back was sanctioned was also significantly lower than the market price of the shares. Hence, the sanction in this case also seems to display the same infirmities as pointed out in the Sandvik Case. In Re Organon (India) Limited[xi] the court stated that it is bound by the decision of the division bench in the Sandvik case.

In Chetan G. Cholera v. Rockwool (India) Limited[xii] the court approved a scheme of reduction of the share capital while adopting a “minority friendly approach.”[xiii] The court cited constitutional provisions concerning the protection of minority and made the claim that substantive and procedural compliance with the provisions is not sufficient. In saying so, the court again enhanced confusion prevailing in this area.[xiv]

Cadbury seems to be following the same line of reasoning that the courts in the Sandvik case and the Elpro case have done. In doing so, the same aforementioned criticisms that can have been mounted against two cases could be mounted against the Cadbury case as well.

But the distinguishing factor is Cadbury case is the fact that the objecting shareholders had agreed to the valuation by the independent valuer in front of the court and then they later sought to deviate from the same for certain frivolous reasons. This, accompanied by the fact that the price being offered was above the market price show that the conclusion of the court in the case seems appropriate.

VIABILITY OF THE OPTIONS

Amongst the abovementioned methods, the most commonly used method is that of reduction of share capital since it accords minimal protection to the minority shareholders.[xv] The provisions on compulsory acquisition under Section 235 explicitly provides for minority squeeze-outs. However, this provision seems to be very onerous since it requires the assent of 90% of the affected shareholders. In order to circumvent the burdensome provision, companies have tried to find loopholes but the courts have generally not allowed so. For instance, the text of the Section does not expressly exclude counting shares held by related parties in the computation of 90%, which companies have tried to use but the court has disallowed.[xvi]

In the reduction of share capital done by Cadbury India, the Cadbury group held 97.583% of the shares which implies that 2.417% shares were held by other shareholders. A compulsory acquisition could have been achieved given the fact that the Samant and the Churiwala group formed only 0.25% of the non-promoters.[xvii] This shows that 99.75% of the non-promoter shareholders (which is way above the 90% requirement) agreed to the price offered. Hence despite being onerous this provision could have been utilised by the parties. The court’s jurisdiction to allow or prevent the squeeze out in such cases is circumscribed.[xviii]

The difference between compulsory acquisition on one hand and arrangement and reduction of capital lies in the fact that in the former the oversight of the court is triggered after the transaction and its sanction is not mandatory. However, under arrangement and reduction of share capital the sanction of the court is a prerequisite. For a buy-back under Section 68, the court’s sanction is not required at all.

Khanna and Umakanth observe[xix] that the jurisdiction of the court increases in intensity from compulsory acquisition to reduction of share capital to scheme of arrangement. It is agreed that the jurisdiction of the court is more extensive in cases of reduction of share capital and scheme of arrangement vis-à-vis compulsory acquisition. However, there is no discernible difference between the approach adopted by the court in examining schemes of arrangement and reduction of share capital. Khanna and Umakanth, whilst claiming there to be a distinction state under a scheme of arrangement the party has to “affirmatively show that the scheme is unfair” and in the very next paragraph they state that under reduction the court has to “examine whether the reduction is fair and equitable.” Thus, unfairness seems to be ground common to both and there is no reason to draw any distinction, theoretical or practical, between the scrutiny adopted by of the court.

Thus as a matter of choice, buy-back under Section 68 has source-based and magnitude-based restrictions and hence was not adopted by Cadbury for the squeeze-out. However, Cadbury had readily employed this method earlier given the fact that no sanction is required from the court in such cases. Compulsory Acquisition could also have been a viable mode for Cadbury given the overwhelming support received by the squeeze-out.

SEBI as a body which is otherwise proactive in investor protection has also not done much for the protection of minority shareholders in cases of squeeze-outs. In Sterlite Industries the court held that SEBI has no power to challenge the scheme of arrangement. In response to this, the SEBI and the stock exchanges introduced provisions in the listing agreement that require ex-ante approval from them before a scheme of arrangement is entered into. In this manner, the jurisdiction of SEBI was restored to a certain extent. However, such minority squeeze-outs happen in non-listed companies a lot of times since companies tend to delist them first before going for a minority squeeze out. For instance, in the Sandvik Case and also Cadbury Case the companies got delisted before the minority was sought to be squeezed out. In such cases, there is no regulator to oversee the transactions.

[i] Supra Note 1; See Miheer H. Mafatlal vs. Mafatlal Industries Ltd., AIR 1997 SC 506.

[ii] Ibid

[iii] Ibid

[iv] SQUEEZE OUTS: ANALYZING THE CADBURY DECISION, Vikramaditya Khanna & Umakanth Varottil, IndiaCorpLaw, 9 August 2014, Available at: http://indiacorplaw.blogspot.in/2014/08/squeeze-outs-analyzing-cadbury-decision.html.

[v] (2004)121Comp Cas 58 (Bom).

[vi] Ibid

[vii] Sandvik Asia Ltd. v. Bharat Kumar Padamsi, 2009 (3) Bom CR 57

[viii] SQUEEZING OUT MINORITY SHAREHOLDERS: A RECENT JUDGMENT, Umakanth Varottil, IndiaCorpLaw, 6 May 2009, Available at: http://indiacorplaw.blogspot.in/2009/05/squeezing-out-minority-shareholders.html

[ix] REGULATING SQUEEZE OUTS IN INDIA: A COMPARATIVE PERSPECTIVE, Khanna &Varottil, NUS Law Working Paper Series, 2014/009, July 2014 at p. 21.

[x] (2008) 86 SCL 47 (Bom).

[xi] (2010) 101 SCL 270 (Bom).

[xii] (2010) 102 SCL 93 (AP).

[xiii] ANDHRA PRADESH HIGH COURT ON REDUCTION OF SHARE CAPITAL: MORE UNCERTAINTY?, Umakanth Varottil, IndiaCorpLaw, 1 September 2010, Available at: http://indiacorplaw.blogspot.in/2010/09/andhra-pradesh-high-court-on-reduction.html.

[xiv] Ibid

[xv] REGULATING SQUEEZE OUTS IN INDIA: A COMPARATIVE PERSPECTIVE, Khanna &Varottil, NUS Law Working Paper Series, 2014/009, July 2014 at p. 2.

[xvi] AIG (Mauritius) LLC v. Tata Televenture (Holdings) Ltd., 103 (2003) DLT 250 (Delhi).

[xvii] Supra Note 1

[xviii] Leela Mahajan v. T. Stanes & Co. Ltd., AIR 1957 Mad 225.

[xix] REGULATING SQUEEZE OUTS IN INDIA: A COMPARATIVE PERSPECTIVE, Khanna &Varottil, NUS Law Working Paper Series, 2014/009, July 2014 at p. 20.

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ABOUT THE AUTHORS

Harshit Sharma

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 harshitsharmanluj@gmail.com.

Rishav Dixit

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.