2016 (1) TMI 506 - HC - Companies Law

Auction and the buy out - Validity of MOU - validity of board meetings and the resolutions passed therein - suppression of facts - discard of valuation report and the reliance upon the same by Muthu Group is an act of oppression - Held that - The appeal filed by Lesaffre is maintainable. The petition filed by Nafan was rightly not dismissed by the Board on the ground of suppression of facts. The declaration given by the Board that MOU is valid, effective, and enforceable document and its terms are binding, cannot be sustained as it is beyond the jurisdiction of the Board, and needs to be agitated in the suit, which is pending. Prima facie, no unquestionable intention can be culled out from the MOU. The Board meetings held on 29 January 2009, 23 May 2009, and 25 May 2009 and the resolutions passed therein, are invalid, illegal, and oppressive, so also the issuance of duplicate share certificates. The Board has rightly discarded the valuation report and the reliance upon the same by Muthu Group is an act of oppression. The comments made by the Board on the valuation report, were justified. The direction of the Board to Muthu Group to rectify register of SAF Yeast by restoring the shareholding of Nafan and Lesaffre is valid and proper. The direction given by the Board to Nafan and Lesaffre to transfer their shareholding to Muthu Group is not sustainable and has to be set aside. Nafan is entitled to a buyout as prayed for in its petition. However, it will be in the interest of SAF yeast that the litigation ends and if Muthu group agrees to withdraw the suit and undertake not file further proceedings based on the MOU then the dispute can be put an end to by holding a forward competitive bid. If Muthu Group is not agreeable then buyout in favour of Nafan will follow. For overseeing the two options, as suggested by the Board, Justice J.N.Patel is appointed as an Administrator. M/S Ernst and Young is appointed as Chartered Accountants to carry out the valuation. A regards the modalities for holding the auction and the buy out, the modalities suggested by Nafan are proper and can be adopted. A. The declaration by the Board that the MOU dated 23 January 2009 is valid, effective and enforceable document and the terms thereof are binding upon the Petitioner and Lesaffre Group, is quashed and set aside in light of what is observed above. B. The declaration by the Board that the Valuation Report prepared by Sharp and Tannan is biased, partial and in contravention of the statutory guidelines and rules to carry out the valuation of shares of a going concern and the direction to set it aside, is confirmed. C. i) The declaration by the Board that the Board Meeting held on 29 January 2009 is invalid and illegal, is confirmed. ii) The declaration that the Resolutions passed in the Board Meeting held on 29 January 2009 are not oppressive, is quashed and set aside. iii) It is declared that the Resolutions passed in the Board Meeting held on 29 January 2009, are oppressive. D. i) The declaration by the Board that the Board Meetings held on 23 May 2009 and 25 May 2009 are non-est, illegal and void, is confirmed. ii) The direction by the Board that the Resolutions passed in both these meetings are set aside being illegal and oppressive to the Nafan and Lasaffre, is confirmed. E. The directions by the Board setting aside the transfer of shares in favour of the A.M.Muthiah and canceling the duplicate shares issued in favour of the A.M.Muthiah, are confirmed. F. The direction by the Board that the shareholding of Nafan and Lasaffre stands restored, is confirmed. G. The direction by the Board to Muthu Group to rectify the Register of Members of the SAF Yeast as per law, is confirmed H. The direction by the Board to Nafan and Lasaffre to transfer the 80,722 shares held by them to the Muthu Group proportionately to their respective shareholdings, is quashed and set aside. I. If within six weeks from today Muthu group withdraws the civil suit and associated proceedings filed by them and files an undertaking on affidavit in the registry of this court that they will not take any proceedings on the basis of the MOU in question, then Part-I of this order will come in operation. If the above mentioned steps are not taken by Muthu Group within the stipulated period as above, Part-II of the order will come into effect forthwith and prayer clause (a) sought for by Nafan in its company petition will stand granted on the terms mentioned in Part II. PART - I a. The Board of Directors, including the powers of the Managing Director, is immediately and completely suspended. b. Mr. Justice J.N. Patel, Retired Chief Justice of Calcutta High Court is appointed as an Administrator on the same emoluments and immunity, as directed by the Board with the powers of the Chairman of the Company s Board of Directors, and the Managing Director, to supervise the functioning of the Company on an interim basis until the process of sale/purchase is complete; upon appointment of the Administrator, Respondent Nos.26 in the petition (Muthu Group) shall forthwith deposit with the Administrator signed, duly filled in but undated share transfer forms along with the original share certificates in regard to all the shares held by them in the Company. c. Until the process of sale/purchase is complete, the powers of the Board of Directors shall be vested in an equal number of Directors/alternate directors nominated by Nafan and the Muthu Group (as one group) with the Administrator holding the casting vote, the Directors/alternate Directors nominated by Nafan and the Muthu group shall be entitled to attend meetings of the Board and/or general meeting of the Company; all such meetings, whether meeting of the Board or General Meetings, if any, shall be convened and presided over by the Administrator alone. d. Until the process of sale/purchase is complete, the SAF Yeast and the Administrator shall not (except in the ordinary course of business), (a) sell or otherwise dispose of or encumber the Company s assets, (b) incur liabilities, (c) distribute funds from the Company, (d) enter into any contracts to be performed for a period longer than six months for or on behalf of the Company, (e) change the nature of the business of the Company, (f) alter or increase the share capital or issue further shares of the Company, or (g) enter into any related party transactions for or on behalf of the Company. e. The Administrator shall be entitled to appoint ,at an appropriate monthly compensation to be paid by the Company as the administrator deems fit, an independent, suitably qualified person conversant with the yeast industry to assist him in the functioning of the Company. f. Nafan shall be provided complete and unimpeded access within seven days from the date of the order to the statutory and other records books and all the relevant documents as indicated in the Schedule to Note on Modalities given by Nafan, and shall be allowed full and unimpeded access to the Company s industrial plants. g. Access shall also be made available to any such Chartered Accountant nominated in writing by Nafan and the said access shall be provided continuously on a day-today basis for a period of forty five days from today. h. After the said forty five days of Nafan being given continuous access as provided above, a continuing competitive bid auction shall take place within fifteen days and the bidding shall be only between Nafan and the Respondent Nos.2 to 6Muthu Group as one. The party bidding the highest cash amount for 100% of the shares under the auction shall be entitled to buy 100% of the shares of the Company with the successful bidder getting credit for its own shares (either 51% for Nafan or 49% for the Muthu Group-Respondent Nos.2 to 6); the process of auction shall be conducted under the supervision of the Administrator. i. The successful bidder will deposit in Court by Bankers cheque (Demand Draft) the amount payable, along with all applicable taxes, within fifteen business days after being declared by the Court as the successful bidder. j. On such payment, the shares will be transferred to the buyer, the Register of Members of the Company shall be updated accordingly, the Administrator will be replaced by the board of directors appointed by the successful bidder, and payment will be released by the Court to the seller. k. If the successful bidder does not deposit in Court the amount payable within fifteen business days after being designated as the successful bidder, the other party will be entitled to buy the shares of the defaulting party for a price equal to the higher of either Euros 28 Million (i.e. ₹ 196,83,79,380/at the current rate of exchange), or the amount of the next highest bid (with the unsuccessful bidder getting credit for its own shares - either 51% for Nafan or 49% for the Muthu Group Respondent Nos.2 to 6) less a twenty-five per cent reduction, by depositing the amount payable in Court within fifteen business days after default. l. Upon the completion of the exercise of transfer of shares and its consequent registration in the Register of Members of the Company, the functioning of the Administrator appointed shall stand terminated automatically and at this time, the process of sale/purchase will be deemed complete. m. The currency for any payments made hereunder shall be Indian rupee. n. The Nafan as well as the Muthu Group Respondent Nos.2 to 6 shall fully cooperate in the completion of all formalities, including signing and execution of share transfer forms, compliance with any and all necessary requirements under the Company law to effect the transfer of their shares in favour of the successful bidder under the auction. PART - II a. M/s.Ernst and Young, Chartered Accountants are appointed to value the 49% shares of the Company held by Respondent Nos.2 to 6 Muthu group including, if required, a forensic audit/ due diligence of the records, books and accounts of the Company within three months from today. b. For the purpose of (a) above, the Chartered Accountant so appointed shall convene a preliminary meeting with Nafan and the Muthu group-Respondent Nos.2 to 6 to decide the valuation methods and both parties shall be entitled to make recommendations/suggestions in writing to the Chartered Accountant in that regard. c. The appointed Chartered Accountant shall determine the fair market value of the Muthu group Respondent Nos.2 to 6 s 49% shareholding interest, as on today, using such generally accepted valuation methodologies for valuing a going concern as the Chartered Accountant deems fit and proper in the facts and circumstances of the present case, after hearing the parties. d. Nafan shall be provided complete and unimpeded access within seven days from the date of the order to the statutory and other records books and accounts of Saf Yeast, and such other relevant documents as indicated in the Schedule to Note on Modalities given by Nafan and shall be allowed full and unimpeded access to the industrial plants. e. The Board of Directors, including the powers of the Managing Director, is immediately and completely suspended. f. Mr.Justice J.N. Patel, Retired Chief Justice of Calcutta High Court is appointed as an Administrator on the same emoluments sand immunity as directed by the Board, with the powers of the Chairman of the Company s Board of Directors, and the Managing Director, to supervise the functioning of the Company on an interim basis until the process of sale/purchase is complete; upon appointment of the Administrator, Respondent Nos.26 in the petition (Muthu Group) shall forthwith deposit with the Administrator signed, duly filled in but undated share transfer forms along with the original share certificates in regard to all the shares held by them in the Company. g. Until the process of sale/purchase is complete, the powers of the Board of Directors shall be vested in an equal number of Directors/alternate directors nominated by Nafan and the Muthu Group (as one group) with the Administrator holding the casting vote, the Directors/alternate Directors nominated by Nafan and the Muthu group shall be entitled to attend meetings of the Board and/or general meeting of the SAF Yeast; all such meetings, whether meeting of the Board or General Meetings, if any, shall be convened and presided over by the Administrator alone. h. Until the process of sale/purchase is complete, the SAF Yeast and the Administrator shall not (except in the ordinary course of business), (a) sell or otherwise dispose of or encumber the Company s assets, (b) incur liabilities, (c) distribute funds from the Company, (d) enter into any contracts to be performed for a period longer than six months for or on behalf of the Company, (e) change the nature of the business of the Company, (f) alter or increase the share capital or issue further shares of the Company, or (g) enter into any related party transactions for or on behalf of the Company. i. The Administrator shall be entitled to appoint (at an appropriate monthly compensation to be paid by the Company as the administrator deems fit) an independent, suitably qualified person conversant with the yeast industry to assist him or her in the functioning of the Company. j. Upon the completion of the exercise of valuation, the valuation report, including the Chartered Accountant s opinion of the fair market value of the Respondents shareholding interest, shall be delivered to the Court, Nafan and Muthu group, and within a period of thirty days after receipt, Nafan shall deposit by Bankers cheque (Demand Draft) payment as per the valuation of the Chartered Accountant which will then be transferred by the Court to the Respondent Nos.2 to 6 in the appropriate amounts based on their shareholding interest. k. Against payment by the Administrator to the Respondent Nos.2 to 6 (a) Respondent Nos.2 to 6-Muthu group s 49% shareholding shall be transferred in favour of Nafan and the Muthu group-Respondent Nos.2 to 6 shall fully cooperate in the transfer of the said shares, including signing and executing share transfer forms, complying with any and all necessary requirements under the Company law; (b) appropriate entry shall be made in the Register of Members of the Company; (c) the mandate of the Administrator shall stand automatically terminated after he hands over the original share certificates and duly executed and signed share transfer forms (given pursuant to above clause to Nafan, and (d) the process of sale/purchase will be deemed complete. L. The currency for any payments made hereunder shall be Indian Rupee.

Summary

Issues Involved:
1. Maintainability of the company petition and suppression of facts.
2. Legality and enforceability of the Memorandum of Understanding (MOU) dated 23 January 2009.
3. Legality and oppressiveness of the Board meetings held on 29 January 2009, 23 May 2009, and 25 May 2009.
4. Correctness of the valuation report prepared by Sharp & Tannan.
5. Relief to be granted.

Detailed Analysis:

1. Maintainability of the Company Petition and Suppression of Facts:
The Board held that the petition was properly verified and filed as per the Rules. It rejected the argument that Nafan was no longer a member and therefore could not file the Company Petition. The rejoinder and other affidavits were considered part of the pleadings, and it was concluded that Nafan had not suppressed material and vital facts. The petition was not liable to be dismissed on that count.

2. Legality and Enforceability of the MOU Dated 23 January 2009:
The Board held that the MOU was not obtained by fraud or inducement and that Nafan and Lesaffre wanted to sell their shares, agreeing to do so through the MOU. It was held that Muthu Group took immediate steps for withdrawal of the cases at their end. However, the Board concluded that the MOU did not constitute a transfer notice as contemplated under Article 15 of the Articles of Association. The MOU's validity and enforceability were beyond the jurisdiction of the Board and should be left to be decided in the pending civil suit.

3. Legality and Oppressiveness of the Board Meetings:
The Board concluded that the meetings held on 29 January 2009, 23 May 2009, and 25 May 2009 were illegal for want of notice and oppressive. The Board found that the Participation Agreement required notice to be given to directors outside India, which was not done. The meetings lacked quorum and agenda, making them invalid. The issuance of duplicate share certificates was also found to be part of a design to usurp Nafan's shareholding.

4. Correctness of the Valuation Report Prepared by Sharp & Tannan:
The Board concluded that the valuation report prepared by Sharp & Tannan was not reliable, biased, partial, and based on incorrect methods. The valuation deliberately used CCI Guidelines, which were inapplicable. The Board held that the valuation report was a got-up document and liable to be set aside. The valuation did not take into account well-established methods like the Discounted Cash Flow (DCF) method, making it fundamentally flawed.

5. Relief to be Granted:
The Board initially directed Nafan and Lesaffre to transfer their shareholding to Muthu Group, but this was found to be based on irrelevant grounds. The Court held that the majority shareholder should not be directed to exit, especially when acts of oppression by the minority were proven. The Court proposed a forward competitive bid to resolve the dispute, where both parties could bid for 100% of the shares, supervised by an Administrator and a Chartered Accountant.

Conclusion:
The Court set aside the Board's direction for Nafan and Lesaffre to transfer their shares to Muthu Group and proposed a forward competitive bid to resolve the dispute. If Muthu Group withdraws its civil suit and agrees not to rely on the MOU, a competitive bid will be held. If not, a buyout in favor of Nafan will follow. The Court appointed Justice J.N. Patel as the Administrator and M/s Ernst and Young as Chartered Accountants to oversee the process.