1968 (3) TMI 81 - HC - Companies Law

Summary

Issues Involved:

1. Scheme of amalgamation under Sections 391 and 394 of the Companies Act.
2. Valuation of shares for the purpose of amalgamation.
3. Objections raised by the Central Government regarding the fairness of the share exchange ratio.
4. Approval and fairness of the scheme of amalgamation by the court.

Issue-wise Detailed Analysis:

1. Scheme of Amalgamation under Sections 391 and 394 of the Companies Act:

The petitions were filed under Sections 391 and 394 of the Companies Act, 1956, for the amalgamation of two companies, the transferor company and the transferee company. Both companies, initially private, became public companies under Section 43A of the Companies Act. The scheme proposed that all properties, rights, and liabilities of the transferor company would be vested in the transferee company. The transferee company would allot 2 fully paid-up equity shares for every 3 equity shares held by the members of the transferor company.

2. Valuation of Shares for the Purpose of Amalgamation:

The petitioners based their valuation on the break-up value of shares, considering the balance-sheet for the period ended December 31, 1965, and the average of the preceding three years. The Central Government contested this method, suggesting it was not proper as it did not account for the earning power of the shares. They proposed a fair value of Rs. 25 per share for the transferor company and Rs. 60 per share for the transferee company, based on a commercial basis of valuation.

3. Objections Raised by the Central Government Regarding the Fairness of the Share Exchange Ratio:

The Central Government argued that the proposed share exchange ratio was unduly favorable to the members of the transferor company. They suggested a ratio of 5 shares of the transferee company for 12 shares of the transferor company. The petitioners challenged this computation and requested the basis for the Central Government's calculation. The Central Government responded with an additional representation, explaining their method and emphasizing the importance of considering the earning power and safety of capital assets in the valuation.

4. Approval and Fairness of the Scheme of Amalgamation by the Court:

The court noted that the legislature did not specify the grounds for sanctioning or withholding approval of an amalgamation scheme under Sections 391 and 394. The court emphasized that the valuation method should fairly reflect the value of the shares and that a common yardstick should be used for both companies. The court acknowledged the difficulties in applying standard valuation factors due to the nature of the companies' investments and the lack of stock exchange quotations for their shares.

The court referred to precedents, highlighting that the onus is on the objector to prove why the scheme should be rejected. The court found that the scheme had been unanimously approved by the shareholders of both companies, with no objections from any shareholders or creditors. The official liquidator reported no prejudicial conduct by the transferor company. The court concluded that the valuation proposed in the scheme was fair, given the unanimous approval and the absence of allegations of fraud or undue influence.

Conclusion:

The court sanctioned the scheme of amalgamation, finding the proposed valuation of shares fair and reasonable in the circumstances. The court emphasized the importance of shareholder approval and the absence of objections or allegations of misconduct in reaching its decision. The formal order was to be drawn up and filed with the Registrar of Companies within fourteen days, with no order as to costs.