1996 (9) TMI 488 - SC - Companies Law

Whether the respondent-company was guilty of hiding the special interest of its director Shri Arvind Mafatlal from the shareholders while circulating the explanatory statement supporting the Scheme and whether thereby the voting by the equity shareholders got vitiated? Whether the Scheme is unfair and unreasonable to the minority shareholders represented by the appellant? Whether the proposed Scheme of Amalgamation was unfair and amounted to suppression of minority shareholders represented by the appellant and hence, liable to be rejected? Whether separate meeting of minority shareholders represented by the appellant was required to be convened on the basis that the appellant s group represented a special class of equity shareholders? Whether the exchange ratio of two equity shares of MIL for five equity shares of MFL was ex facie unfair and unreasonable to the equity shareholders of MIL and consequently, the Scheme of amalgamation on that account was liable to be rejected? Held that - Appeal dismissed. Management of the company is not at all a germane consideration for the Scheme. Conse-quently, whether the management remains with Arvind Mafatlal or in future may get changed and go in the hands of the appellant is not a consideration which has any linkage or nexus with the Scheme. Conse-quently, the interest of Arvind Mafatlal in the shareholding or likely future impact thereon by the litigation was de hors the Scheme in question and was not required to be placed before the voters. The first point for determination is, therefore, answered in the negative. The appellant s own conduct, therefore, belies his apprehension that the Scheme as proposed was in any way unfair to him or that there were any mala fides behind the Scheme attributable to Shri Arvind Mafatlal who is the director of the transferee-company. The second point for determination, therefore, also is found to be factually not sustainable. It is, therefore, held that the Scheme of Compromise and Arrangement is neither unfair nor unreasonable to the minority share-holders represented by the appellant. When the Scheme of Compromise and Arrangement was cleared and proposed by the board of directors of both the transferor and transferee-companies and also at the stage when the Scheme was put to vote before the meeting of equity shareholders forming a common class of which the appellant was also a member though a minority member. Consequently, point No. 3 will also have to be answered in the negative on the same lines and for the same reasons on the basis of which point No. 2 is answered. Unless a separate and different type of Scheme of Compromise is offered to a sub-class of a class of creditors or sharehold-ers otherwise equally circumscribed by the class no separate meeting of such sub-class of the main class of members or creditors is required to be convened. On the facts of the present case the appellant has not been able to make out a case for holding a separate meeting of dissenting minority equity shareholders represented by him. The fourth point for determination therefore, is answered in the negative There is no substance in this contention canvassed on behalf of the appellant that the exchange ratio was ex facie unfair to the equity shareholders of the transferee-company. The fifth point for determination is also, therefore, answered in the negative.

Issues Involved:
1. Non-disclosure of the special interest of a director.
2. Fairness and reasonableness of the Scheme to minority shareholders.
3. Alleged suppression of minority shareholders.
4. Requirement of a separate meeting for a distinct class of equity shareholders.
5. Fairness of the exchange ratio of shares.

Detailed Analysis:

Issue 1: Non-disclosure of the special interest of a director
The appellant contended that the explanatory statement did not disclose the interest of director Arvind Mafatlal, which misled the shareholders, vitiating their approval. The Court examined whether the special interest of the director, which was not disclosed, had any impact on the voting pattern. The Court concluded that the personal family dispute between the appellant and Arvind Mafatlal regarding shareholding had no linkage with the Scheme of Amalgamation. The decision of the equity shareholders was based on commercial wisdom, unaffected by the non-disclosure of the pending litigation. The Court found that the non-mentioning of the litigation had no vitiating effect on the majority decision approving the Scheme with an overwhelming majority.

Issue 2: Fairness and reasonableness of the Scheme to minority shareholders
The appellant argued that the Scheme was unfair to him as a minority shareholder. The Court noted that the majority shareholders, including financial institutions holding about 40% shares, acted bona fide and in the interest of the class as a whole. The appellant, who was a director of the transferor-company, had approved the Scheme and did not object before the Bombay High Court. The Court found no evidence of the majority acting unfairly or with any oblique motive against the appellant. The Scheme was deemed fair and reasonable from the perspective of prudent businessmen.

Issue 3: Alleged suppression of minority shareholders
The appellant claimed that the Scheme suppressed the minority shareholders' interests. The Court observed that the Scheme of Amalgamation did not adversely affect the appellant's shareholding. If the appellant succeeded in his counter-claim, he would gain a larger shareholding in the transferee-company. The Court found that the majority shareholders acted in good faith, and the Scheme did not suppress the minority shareholders' interests.

Issue 4: Requirement of a separate meeting for a distinct class of equity shareholders
The appellant contended that a separate meeting for his group of minority shareholders should have been convened. The Court noted that the Act and the articles of association did not provide for such a class within the class of equity shareholders. The appellant's interest as an equity shareholder was common with other equity shareholders. The Court held that no separate meeting was required as the Scheme was offered to the entire class of equity shareholders on the same terms.

Issue 5: Fairness of the exchange ratio of shares
The appellant argued that the exchange ratio of 2 shares of the transferee-company for 5 shares of the transferor-company was unfair. The Court noted that the exchange ratio was determined by C.C. Chokshi & Co., a reputed firm of chartered accountants, and approved by the board of directors of both companies. The appellant did not provide any contrary expert opinion. The Court emphasized that the exchange ratio was part of a package deal considered by the shareholders, who approved it with an overwhelming majority. The Court found no basis to interfere with the commercial judgment of the shareholders.

Conclusion:
The Court dismissed the appeal, finding that the Scheme of Amalgamation was fair, reasonable, and in the best interest of the shareholders as a class. The non-disclosure of the director's special interest had no impact on the voting pattern, and the exchange ratio was deemed fair by the majority of shareholders. The appellant's objections were found to be without merit.

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