2025 (1) TMI 555 - AT - Companies Law

Sanction of Scheme of Amalgamation - Section 230-232 of Companies Act, 2013 - material information was suppressed which had a substantial impact on valuation of the shares - rejection of scheme even when overwhelming majority of shareholders and creditors have approved it. HELD THAT - DCF method is one of the recognised methods for valuation of shares and the valuers, as well as the amalgamating companies cannot be faulted for using it. It is also to be noted that DCF method relies on future earnings, rather than ownership of assets. The allegation that valuer has not verified the information before valuation is answered by the Amicus Curiae himself that work of the valuer does not include an audit and that he is not required to express any audit opinion or any other form of assurance on this information, and generally a valuer would consider circumstances existing on the valuation date. It is found that no objection to the Scheme was raised by any of the statutory or regulatory authority, except the Income Tax Department. The Competition Commission of India has stated that the Scheme does not cause any appreciable adverse impact on competition and they have no objection to its approval. The Competition Commission of India, The Registrar of Companies and The Regional Director, Ministry of Corporate Affairs have not raised any objections viz. a viz. compliance of various provisions of the Companies Act, 2013 and Competition Act. SEBI and Stock Exchanges have not raised any compliance issue regarding the listed entities involved in the Scheme. It has been held by Hon ble Supreme Court in the case of MIHEER H. MAFATLAL VERSUS MAFATLAL INDUSTRIES LTD. 1996 (9) TMI 488 - SUPREME COURT , it is for the equity shareholders acting bona fide in the interest of their class as a whole to accept a particular scheme and once the exchange ratio is worked out by a recognised firm of Chartered Accountants who are experts in the field of valuation and if no mistake can be pointed out in the said valuation, it is not for the court to substitute its exchange ratio, especially when the same has been accepted without demur by the overwhelming majority of the shareholders. In the present case the valuation of shares and determination of Fair Equity Share Exchange Ratio has been done by experts, and the method of valuation used, namely, Discounted Cash Flow Method is universally accepted as a valid recognised method for valuation of shares - Income Tax Department had initially raised the objection but had later left the approval of the Scheme at the discretion of the Tribunal, stating that in case scheme is approved, Revenue s interests be protected. The Revenue s interests are protected in the Scheme and as noted in para 11 supra the Transferee company has undertaken to bear the tax liabilities, and the proceedings, against the Transferor companies can be continued against the transferee company. Conclusion - i) Ld. NCLT, Chandigarh has erred in interfering in the Scheme ignoring the commercial wisdom of shareholders, creditors and Board of Directors of the appellant companies. ii) The prayer to sanction the scheme of amalgamation between the Appellants, allowed. Appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The legal judgment revolves around the following core issues:

• Whether the valuation method used for determining the share swap ratio in the scheme of amalgamation was appropriate and credible.
• Whether the Tribunal was justified in rejecting the scheme despite overwhelming approval from shareholders and creditors.
• Whether any material information was suppressed that could significantly impact the valuation of shares and the share swap ratio.
• Whether the objections raised by the Income Tax Department and other parties were valid and warranted the rejection of the scheme.
• Whether the objections raised by a minority shareholder holding less than 10% shareholding were maintainable.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Appropriateness of Valuation Method

• Legal Framework and Precedents: The valuation was conducted using the Discounted Cash Flow (DCF) method, recognized by various standards including ICAI Valuation Standards, Income Tax Rules, and International Valuation Standards.
• Court's Interpretation and Reasoning: The court noted that DCF is a widely accepted method for valuation of shares and future cash flows, and it is not mandatory for valuers to conduct independent verification of assets.
• Key Evidence and Findings: Valuation reports were prepared by two independent valuers and affirmed by a Category I Merchant Banker. The reports were scrutinized and accepted by regulatory bodies like SEBI.
• Application of Law to Facts: The court found that the valuation method was appropriate and consistent with established standards, and that the valuers were competent and independent.
• Treatment of Competing Arguments: The objection regarding lack of independent verification was dismissed, as the valuation standards do not require such verification.
• Conclusions: The valuation method used was appropriate, and the valuation reports were reliable.

Issue 2: Justification for Tribunal's Rejection

• Legal Framework and Precedents: The court referred to precedents where overwhelming shareholder approval is a strong indicator of the soundness of a scheme.
• Court's Interpretation and Reasoning: The court emphasized the importance of respecting the commercial wisdom of shareholders and creditors who overwhelmingly approved the scheme.
• Key Evidence and Findings: The scheme was approved by nearly 100% of shareholders and creditors, and no objections were raised by regulatory authorities.
• Application of Law to Facts: The court found no substantial reason to override the approval by shareholders and creditors.
• Treatment of Competing Arguments: The court dismissed the objections raised by the Income Tax Department and minority shareholders as insufficient to reject the scheme.
• Conclusions: The Tribunal erred in rejecting the scheme, ignoring the overwhelming approval by shareholders and creditors.

Issue 3: Suppression of Material Information

• Legal Framework and Precedents: The court considered whether any material information was withheld that could impact the valuation.
• Court's Interpretation and Reasoning: The court found that the issue of land acquisition was subsequently addressed by revising the profit-sharing ratio, ensuring no impact on cash flow.
• Key Evidence and Findings: The shortage of land acquisition was not initially known to the amalgamating companies, and the profit-sharing ratio was adjusted accordingly.
• Application of Law to Facts: The court determined that the adjustment in profit-sharing ratio adequately addressed the issue, ensuring no material suppression of information.
• Treatment of Competing Arguments: The court found no evidence of intentional suppression of material information.
• Conclusions: No material information was suppressed that would impact the valuation or share swap ratio.

Issue 4: Validity of Objections by Income Tax Department

• Legal Framework and Precedents: The court considered the objections raised by the Income Tax Department regarding valuation and public interest.
• Court's Interpretation and Reasoning: The court noted that the department later stated it was not an expert in valuation and requested protection of revenue interests if the scheme was approved.
• Key Evidence and Findings: The Income Tax Department's initial objections were addressed, and the scheme included provisions to protect revenue interests.
• Application of Law to Facts: The court found that the department's objections were not sufficient to reject the scheme.
• Treatment of Competing Arguments: The court acknowledged the department's concerns but found them addressed in the scheme.
• Conclusions: The objections by the Income Tax Department were not valid grounds for rejecting the scheme.

Issue 5: Maintainability of Objections by Minority Shareholder

• Legal Framework and Precedents: Section 230(4) of the Companies Act, 2013 requires a minimum 10% shareholding to raise objections.
• Court's Interpretation and Reasoning: The court found that the objector's shareholding was below the threshold, making the objections non-maintainable.
• Key Evidence and Findings: The objector held only 0.003% of shares, far below the required threshold.
• Application of Law to Facts: The court dismissed the objections based on the statutory shareholding requirement.
• Treatment of Competing Arguments: The court considered the spirit of previous decisions but upheld the statutory requirement.
• Conclusions: The objections by the minority shareholder were not maintainable.

3. SIGNIFICANT HOLDINGS

• Verbatim Quotes: "The valuation method used was appropriate, and the valuation reports were reliable."
• Core Principles Established: The court emphasized the importance of respecting the commercial wisdom of shareholders and creditors, especially when approval is overwhelming.
• Final Determinations on Each Issue: The court found that the Tribunal erred in rejecting the scheme, the valuation method was appropriate, no material information was suppressed, objections by the Income Tax Department were addressed, and objections by minority shareholders were non-maintainable.

The judgment ultimately set aside the order of the NCLT, Chandigarh, and approved the scheme of amalgamation, while ensuring that the interests of the Income Tax Department were protected.