2010 (11) TMI 834 - HC - Companies Law

Valuation of share - reduction of equity share capital - valuation of shares - objections - minor shareholder - intervenor - held that - In my view KPMG has used the widely accepted methodologies i.e., the Discounted Cash Flows Methodology and the Comparable Companies Methodology which inter alia includes the P/E multiple analysis for valuation of WIL s shares. the role of the court whilst approving such schemes is limited to the extent of ensuring that the scheme is not unconscionable or illegal or unfair or unjust. Merely because the determination of the share exchange ratio or the valuation is done by a different method which might result in a different conclusion, it alone would not justify interference, unless found to be unfair. Even if only the non-promoter shareholders voting is taken into account, the resolution proposing reduction of the share capital of WIL is approved by an overwhelming majority of 93.94 per cent of non-promoter shareholders in number and 85.97 per cent in value in the said EGM. Except for the four intervenors, no other person has come forward to oppose the Petition. Among these intervenors, two of the four did not even attend the EGM. As regards their position - where a shareholder did not attend the meeting and vote against the scheme, it is too late in the day for him to contend that the scheme was unfair to him. The intervenors have not attributed any motives to KPMG, nor commented on its independent professional status or competency, nor have they been able to point out that the method adopted by them in valuing the shares was impermissible or absurd. Company Petition allowed.

Summary

Issues Involved:
1. Approval and confirmation of the reduction of equity share capital.
2. Valuation of shares.
3. Hardship and inconvenience faced by non-promoter shareholders.
4. Legal compliance and procedural aspects.
5. Fairness and reasonableness of the proposed reduction and valuation.

Detailed Analysis:

1. Approval and Confirmation of Reduction of Equity Share Capital:
Wartsila India Limited ("WIL") sought the High Court's approval and confirmation for the reduction of its equity share capital as per a Special Resolution passed in an Extraordinary General Meeting (EGM) held on 10th November 2009. The reduction involved extinguishing 1,34,769 equity shares held by non-promoter shareholders, reducing the paid-up capital from Rs. 12,03,40,000 to Rs. 11,89,92,310.

2. Valuation of Shares:
The valuation of shares was a contentious issue. WIL obtained a valuation report from KPMG, which valued each share at Rs. 377 using the Discounted Cash Flow Methodology (DCF) and Comparable Companies Methodology (COCO). Despite this, WIL proposed to pay Rs. 532 per share, including a premium. The intervenors challenged this valuation, presenting a report from A. Maheshwari & Company, which valued each share at Rs. 1,033. WIL countered this with another report from M/s. N.M. Raiji & Company, valuing each share at Rs. 444, and a critique of the intervenors' valuation by Shailesh Haribhakti, Chairman of BDO Consulting Private Limited.

3. Hardship and Inconvenience Faced by Non-Promoter Shareholders:
Post delisting from NSE and BSE in June 2007, non-promoter shareholders faced liquidity issues. WIL received multiple requests from these shareholders for an exit opportunity. The company decided to offer a one-time exit by reducing the share capital, paying Rs. 532 per share to non-promoter shareholders.

4. Legal Compliance and Procedural Aspects:
WIL complied with the statutory requirements, including obtaining consents from secured creditors and ensuring the procedural aspects of the reduction of share capital were followed. Notices and explanatory statements were sent to shareholders, and the EGM was conducted with the required quorum and voting procedures.

5. Fairness and Reasonableness of the Proposed Reduction and Valuation:
The court reviewed multiple valuation reports and methodologies. It noted that valuation is inherently subjective and can vary. The court emphasized that its role is not to second-guess the commercial wisdom of the shareholders but to ensure the process was fair, reasonable, and in compliance with the law. The court found the valuation by KPMG to be fair and reasonable, as it was based on accepted methodologies and approved by a significant majority of shareholders.

Conclusion:
The High Court of Bombay approved the reduction of equity share capital as proposed by WIL, finding the valuation and process to be fair, reasonable, and in compliance with legal requirements. The court emphasized that valuation is an art, not an exact science, and upheld the commercial judgment of the majority shareholders. The company petition was allowed in terms of the specified prayer clauses.