1943 (3) TMI 12 - HC - Companies Law

Shares of shareholders dissenting from scheme or contract approved by majority Power and duty to acquire

Issues Involved:
1. Interpretation and application of Section 153B of the Indian Companies Act, 1913.
2. Burden of proof on dissenting shareholders.
3. Validity of the valuation method used for the acquisition of shares.
4. Justification for the court's intervention in the acquisition process.
5. Costs associated with the legal proceedings.

Detailed Analysis:

1. Interpretation and Application of Section 153B of the Indian Companies Act, 1913:
Section 153B allows a transferee company to compulsorily acquire shares from dissenting shareholders if a scheme or contract for the transfer of shares has been approved by the holders of not less than three-fourths in value of the shares affected. The section provides that the transferee company is entitled and bound to acquire the shares on the same terms as those accepted by the approving shareholders, unless the court orders otherwise. The court's role is limited to deciding whether the dissenting shareholders' refusal is reasonable and whether there are grounds to prevent the compulsory acquisition.

2. Burden of Proof on Dissenting Shareholders:
The judgment emphasizes that the burden of proof lies on the dissenting shareholders to show why the court should order otherwise. The dissentients must provide reasons to demonstrate that the majority of shareholders were wrong in accepting the offer. The court should assume that the majority of shareholders understand their own business and were right in accepting the offer unless proven otherwise by the dissenting shareholders.

3. Validity of the Valuation Method Used for the Acquisition of Shares:
The valuation of the Bombay Telephone Co., Ltd.'s assets was a significant point of contention. The dissenting shareholders argued that the valuation was based on incorrect principles, particularly criticizing the assumption that the value of assets in March 1941 was the same as in March 1940. The court noted that while the valuation might be open to criticism, the dissenting shareholders failed to provide evidence that the valuation errors resulted in a substantially lower offer than what was fair. The court found it irrelevant to point out valuation errors unless it was shown that these errors significantly undervalued the shares.

4. Justification for the Court's Intervention in the Acquisition Process:
The court considered various grounds on which it might intervene, such as misrepresentation, unfair dealing, or conflicts of interest. However, in this case, no such grounds were established. The court concluded that the dissenting shareholders did not discharge their burden of proof by merely criticizing the valuation. The court emphasized that the majority of shareholders had accepted the offer based on all available facts, and there was no substantial evidence to suggest that the offer was unfair or unreasonable.

5. Costs Associated with the Legal Proceedings:
The court decided not to award costs to either party, considering that this was the first case under Section 153B and the petitioners had succeeded in persuading the lower court. However, the court noted that this should not be regarded as the normal order in future cases under Section 153B, where costs would typically follow the event.

Conclusion:
The appeal was allowed, and the petition dismissed, as the dissenting shareholders failed to prove that the offer accepted by the majority was unfair or unreasonable. The court emphasized the burden of proof on the dissenting shareholders and the limited scope of its intervention under Section 153B. The decision highlights the importance of providing substantial evidence when challenging the majority's acceptance of an offer in the context of compulsory share acquisition.

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