2016 (10) TMI 212 - HC - Companies Law

Scheme of arrangement between the Transferor company and the Transferee Company - shares swaping - Held that - The recommendations of SR Batliboi & Co. LLP records that the share exchange ratio for the proposed equity share swap of Transferor company for the equity shares of the Transferee company could not be mathematically determined since the equity value of the Trasnferor company was NIL. Neither the valuation of the assets under transfer nor the share swap ratio was doubted by the shareholders and unsecured creditors or any question raised inter alia about the EOD and MA both disclosed in the scheme as also the explanatory statement accompanying it nor has it been put to any serious challenge on any plausible ground even in the course of proceedings before this court. In fact the scheme has been supported by about 99.99% of the equity shareholder value and 99.952% of unsecured creditors. The option to the equity shareholder of the transferor company to swap their shares for the shares of the Tranferor Company--a listed one--opens an exit to the minority shareholder of the Transferor Company who have been seeking an exit for about a decade. There is also no allegation of the inadequacy of consideration for the transfer of the telecom assets of the transferor company constituted of each of ₹ 5/- face value being ₹ 27.65 crores shares and Indian Rupees equivalent of upto US 300 Million under the EOD subject to its terms. The payment of Indian Rupees equivalent of upto US 300 Million under the EOD is subject to approval of DoT for contiguity and combined use of spectrum and these facts have been set put in report dated 30-10-2015 prepared by SR Batliboi & Co. LLP. It is evident from the scheme in issue that both EOD and the Merger agreement have been referred in the scheme itself. The first being between three parties and the second being between eleven parties, to provide for the overall frame work for transfer of business undertaking of the transferor company to the transferee company. The multiparty documents are confidential recording the rights and obligations of others alongwith the Transferor and Transferee companies. As such the transferor company is bound by the confidentiality obligations in the said agreements and they are even otherwise not required to be disclosed as part of the statutorily required disclosure of material facts under the proviso to Section 391(2) of the Act of 1956 as held hereinabove. It is important to note that the bonafides of the scheme of arrangement in issue have not at all been questioned and it has not been denied that the scheme would help the Transferor company in deleveraging its balancesheet including reduction of debts and outgo and help creation of value for shareholders who do not exercise the option of swapping of their shares and migrating to the Transferee company. It has also not been denied that the scheme of arrangement would consolidate the telecom wireless business of transferee company and with the transferor company as its shareholder to the extent it turns out after the Transferor Company s shareholders exercise their option to swap their shares in the transferor company for that of the transferee company, it would be to its benefits too. The upshot of the aforesaid discussion is that the company petition for sanctioning the scheme of arrangement between the Transferor company and the Transferee Company is just, fair and reasonable, fully compliant with prescribed statutory provisions for its approval, not opposed in any manner to law or public policy and is therefore allowed in the following terms i) The objections filed by the Regional Director and the Registrar of Companies are rejected; ii) The objections filed by Manisha Tele Sanchar Private Limited and Mr. Srinivasraghvan Seshadri are also rejected. iii) The objections filed by M/s. Jindal Securities Private Limited and M/s. Aman Finvest Private Limited are rejected with costs of ₹ 1 lac payable to the Common Pool fund of the Official Liquidator within three months from today. iv) The petition filed by the petitioner transferor company for sanctioning the scheme of arrangement being Exhibit-A is allowed and the scheme of arrangement is sanctioned. The scheme of arrangement shall be binding creditors and equity shareholders of both the Transferor and Transferee companies. v) The petitioner transferor company is allowed to file the sanction order of this court with the Registrar of Companies within a period of thirty days from the date of approval from the Department of Telecommunications for transfer/ merger of licenses/ authorizations as set out in the scheme Annexure-A. vi) The order in prescribed Form No.42 be issued separately by the Registrar as per Rule 84 of the companies (court) Rules, 1959 after the approval by the Department of Telecommunication for transfer/ merger of licenses. vii) The Official Liquidator shall be entitled to ₹ 50,000/- from the Transferor company towards miscellaneous expenses.

Summary

Issues Involved:
1. Fixed Appointed Date
2. Valuation Report Completeness
3. Treatment of Fractional Shares
4. Legality of Rights Shares Issued in 2011
5. Validity of Board Resolution
6. Scheme Expiry Date
7. Non-disclosure of Material Facts (EOD and Merger Agreement)
8. Alleged Tax Evasion
9. Objections by Minority Shareholders
10. Objections by Unsecured Creditors
11. Alleged False Declaration of Legal Proceedings

Detailed Analysis:

Fixed Appointed Date:
The court held that the absence of a fixed appointed date in the scheme, instead equating it with the effective date, does not violate any legal requirement. This was justified by the necessity for regulatory approvals specific to the telecom business, similar to the precedent set by the Madras High Court in Equitas Finance Limited.

Valuation Report Completeness:
The objection regarding the valuation report being incomplete was rejected. The valuation report prepared by S.R. Batliboi & Co. LLP was detailed and supported by an overwhelming majority of shareholders and unsecured creditors. No specific objections were raised during the statutory meetings.

Treatment of Fractional Shares:
The court accepted the submission that the issue of fractional shares would be addressed post-sanction by a committee formed by the Board of Directors of the Transferor Company. The proceeds from consolidated fractional shares would be distributed proportionately among entitled shareholders.

Legality of Rights Shares Issued in 2011:
The objection concerning the rights shares issued in 2011 was deemed irrelevant for the scheme's sanction. The court noted that any statutory violations could be pursued separately by the authorities. The rights issue was conducted under a letter of offer, which served as a deemed prospectus, complying with Section 64 of the Companies Act, 1956.

Validity of Board Resolution:
The court found no merit in the objection that the Board of Directors could not have considered the EOD and Merger Agreement dated 2-11-2015 in their meeting on 30-10-2015. The resolution merely authorized the signing of these documents, which were subsequently executed.

Scheme Expiry Date:
The objection that the scheme had expired by 30-6-2016 was rejected. The court noted that clause 19.2 of the scheme allowed for its extension, which was duly agreed upon by authorized representatives of both companies.

Non-disclosure of Material Facts (EOD and Merger Agreement):
The court held that the non-disclosure of the EOD and Merger Agreement did not constitute a failure to disclose material facts under the proviso to Section 391(2) of the Companies Act, 1956. These documents were deemed confidential and not necessary for the statutory disclosures required for the scheme's sanction.

Alleged Tax Evasion:
The court rejected the allegation of tax evasion, noting that clause 11.1.2 of the scheme provided for the treatment of monies received under the EOD in accordance with applicable laws. The court clarified that the sanction of the scheme would not foreclose the jurisdiction of the Income Tax Department to assess and levy due taxes.

Objections by Minority Shareholders:
The objections by minority shareholders, primarily concerning the failure to provide an exit option and the share swap ratio, were dismissed. The court noted that the scheme provided a fair exit option through the share swap ratio and that previous litigation on the issue had been conclusively resolved.

Objections by Unsecured Creditors:
The objections by unsecured creditors, including claims of non-inclusion in the list of creditors and alleged suppression of legal proceedings, were dismissed. The court noted that the transferor company would continue to exist post-sanction, allowing creditors to pursue their claims.

Alleged False Declaration of Legal Proceedings:
The court found no merit in the objection regarding false declarations of pending legal proceedings. Clause 8.1 of the scheme pertained only to legal proceedings related to the transferred undertaking, not to the transferor company as a whole.

Conclusion:
The court sanctioned the scheme of arrangement between the Transferor Company and the Transferee Company, rejecting all objections raised by the Regional Director, Registrar of Companies, and other objectors. The scheme was deemed fair, just, reasonable, and compliant with statutory provisions, benefiting both companies and their stakeholders.