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TMI Blog1983 (2) TMI 212X X X X Extracts X X X X X X X X Extracts X X X X ..... transferor company is to be merged and vested in the transferee company. I will consider at the appropriate places as to whether this peculiar feature of the scheme has any bearing on the larger question as to whether the court should or should not accord its sanction to the scheme in question. It would be profitable to briefly advert to certain particulars of the transferor company and the transferee company so as to appreciate the relevant and material aspects which have a bearing on the question of according sanction to the scheme in question. The transferor company was incorporated on September 5, 1888, as a company limited by shares under section 36 of the Indian Companies Act, 1882. The original name under which the transferor company was incorporated was "Tricomlal Harilal Spg. Mfg. Co. Ltd." which was subsequently changed to its present name, that is, "Maneklal Harilal Spg. Mfg. Co. Ltd.". The registered office of the transferor company is situate in the area known as Saraspur within the City of Ahmedabad. The authorised share capital of the transferor company is Rs. 3,00,00,000 divided into 4,500 4 % cumulative redeemable preference shares of Rs. 50 each and 1,48, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of association have been also resolved upon accordingly. The objects of the transferee-company, as detailed in its memorandum and articles of association, are, inter alia , business of manufacturing and dealing in textiles and yarns. It appears that at the respective meetings of the board of directors of the transferor company and the transferee company held on August 17, and August 18, 1982, respectively, it was resolved to evolve and approve a scheme of amalgamation whereby the entire undertaking of the transferor company is to be transferred and be vested in the transferee company. The circumstances that have necessitated the proposed scheme of amalgamation are, broadly stated, as under: (1)The transferee company is a subsidiary of the transferor company, inasmuch as the transferor company holds 4,303 shares out of 5,600 equity shares issued by the transferee company. (2)The transferee company is a sick unit in the sense that it has been incurring losses since last about 7 to 8 years except the accounting year 1978, and the debit balance of the company as on December 31, 1982, is Rs. 1,48,60,252, and its current liability is to the tune of Rs. 2,22,50,560 and has also ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he scheme being sanctioned, the transferee company shall, without further application, allot to every member of the transferor company one equity share of Rs. 200 each fully paid up in the transferee company for one equity share of Rs. 200 each held by such member in the transferor company, and all the members of the transferor company shall accept the shares so allotted in the transferee company in lieu of their shareholding and for that purpose surrender to the transferee company for cancellation of their share certificates in respect of their holding in the transferor company, so as to enable the transferee company to issue necessary certificates for the shares so allotted in the transferee company, and all such shares to be issued and allotted as aforesaid by the transferee company shall rank pari passu in all respects with the existing shares in the transferee company. All the shares held by the transferor company in the transferee company shall stand cancelled. There will be no break in the services of the employees in the employment of the transferor company and their services would be taken over with all their rights and liabilities intact by the transferee company. The pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 394 of the Companies Act, 1956, which has been accordingly submitted by him on December 13, 1982, in connection with the affairs of the transferor company. At the time of hearing of these two petitions, Mr. J. J. Yagnik, learned advocate, has filed his appearance on behalf of Shri P. C. Shah, a shareholder, who had opposed the scheme in the meeting of the equity shareholders of the transferee company. Another shareholder of the transferee company, Shri J. P. Bakriwala, who had opposed the scheme, has appeared in person. The Regional Director has been represented by the learned advocate, Shri S. R. Shah. Since the present scheme of amalgamation with which I am concerned is slightly of an unusual type, inasmuch as the transferor company which is a prosperous and healthy unit has decided to merge itself in the transferee company which is a sick and a non-viable unit, the entire matter was examined from the relevant angles. What is the periphery jurisdiction of the company court in the matter of according sanction under section 394(2) of the Companies Act, 1956, has been examined by this court as well as other courts, particularly in the context where a scheme of amalgamatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce, for what purpose it was set up, who were its promoters, who were controlling it and what was the precise object which was sought to be achieved through promotion of the transferor company, and why was it being dissolved by merging it with the transferee company. The court thus examined in Wood Polymer's case ( supra ), the different factual aspects and having regard to the totality of the circumstances including the report of the official liquidator that the transferor company appeared to have been created solely to facilitate the transfer of the building to the transferee company without attracting the liability to pay capital gains tax, refused to accord sanction to the scheme. The approach of the court, therefore, is not conditional as it is in the proceedings where the courts or the tribunals proceed on advisory basis, but it has inquisitorial and supervisory role to play requiring it to form an independent and informed judgment as indicated by this court in Mahindra Ugine Steel Co.'s case ( supra ). Shortly stated, the approach of the court is to see for itself whether the scheme is reasonable, just and fair to all the interests concerned: vide Carron Tea Co. Ltd., In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the aforesaid classical book in para. 105 at p. 4 in the following terms: "The distinction between a take-over and a merger is that in a takeover the direct or indirect control over the assets of the acquired company passes to the acquirer; in a merger the shareholding in the combined enterprise will be spread between the shareholders of the two companies. Often the distinction is a question of degree; if the dominant company (M. Co.) makes a share-for-share exchange offer for a target company (S. Co.), a company of roughly the same size, the former shareholders of S. Co. will finish up holding roughly 50 per cent, of the share capital of H. Co. and the operation ought undoubtedly to be called a merger. If H. Co. is many times the size of S. Co., the operation ought generally to be regarded as a take over of S. Co. by H. Co., although even in such a case, the result might be, if the shareholding in H. Co. was far more widely dispersed than in S. Co., that H. Co. comes under the joint effective control of the former controllers of H. Co. and the former controllers of S. Co., or even under the sole effective control of the former controllers of S. Co." This last alternative is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the net assets of H. Co.; if the equity capital to be issued by S. Co. as consideration for the acquisition exceeds the amount of the equity share capital of S. Co. in issue prior to the acquisition ; or if the issue of shares in S. Co. would result in a change in control of S. Co. through the introduction of a minority holder or group of holders." The above is, therefore, a precise and brief discussion of what is known as take over by reverse bid. Judging the present arrangement by diverse tests, which have been indicated for purposes of finding out whether an arrangement is in the nature of reverse take-over, it is manifestly clear that the three tests, viz ., ( i ) the assets of the transferor company being greater than the transferee company, ( ii ) equity capital to be issued by the transferee company pursuant to the acquisition exceeding its original issued capital, and ( iii ) the change of control in the transferee company, clearly indicate that the present arrangement is an arrangement which is a typical illustration of take-over by reverse bid. The motives which may operate behind the decision of take-over or merger are broadly classified into four main classes by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter alia , as to where the transferee company has large undistributed profits which it is desired to keep unfrozen or the advantage of the continuation of the listing which the transferee company enjoys at the stock exchange, or where the transferee company has the benefit of active management pursuing a dynamic policy of acquisition or where the directors of the transferee company and the transferor company take the decision having regard to the attitude of their respective shareholders. So far as the first question is concerned, I am of the opinion that having regard to the following facts and circumstances, the decision of the transferor company to merge itself into the transferee company is justified. The reasons need not be elaborately discussed since there is no worthwhile opposition to the proposed scheme. Notwithstanding the absence of such objections, I have myself examined the question about the justness of the decision of the transferor company to merge itself into the transferee company from different angles. It should be recalled that the transferee company is a subsidiary of the transferor company, since as many as 4,303 equity shares out of 5,600 equity shares issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ulterior purpose or with a view to secure some unfair advantages to its shareholders. Having regard, therefore, to the percentage of its shareholding in, and the extent of advances to, the transferee company, the transferor company was well advised to have a scheme of amalgamation, since the total failure of the undertaking of the transferee company may have adverse consequences and far-reaching repercussions on the fortunes of the transferor company as well. It should be recalled that the transferor company and the transferee company are in the same line and they have the standing of about 94 years and 52 years, respectively. Both the companies are carrying on business in manufacturing textiles. The transferor company got hold of the transferee company when it purchased in about three parts, the entire block of shares aggregating to 4,303 in the month of August, 1982. The decision of the transferor company to purchase the equity shares of the transferee company appears also to be justified, since having regard to the book value of the block of the company of Rs. 1,99,30,850 and the depreciated value of Rs. 58,24,657, the deal was really in the interest of the transferor company. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out of which, I am told, the built up area is 28,837 sq. metres with the available vacant land of 56,427 sq. metres, and as per the municipal bye-laws, the land which will be available for further construction will be about 50% thereof, that is, 27,590 sq. metres. The transferor company, therefore, would have also an advantage of undertaking the development of the textile unit of the transferee company. In these circumstances, therefore, I do not think that the decision of the transferor company to merge itself into the transferee company can be said to be unjustified. In the course of discussion of this larger question, it was also examined as to whether the decision of the transferor company to merge itself with the transferee company offends or violates any statutory provision. Since the transferor company will have after the merger with the transferee company the benefit, inter alia , of claiming set off of all the accumulated losses and unabsorbed depreciation against future profits of the transferee company. This aspect was required to be examined, since the formalities prescribed under section 72A of the I.T. Act, 1961, providing for the carrying forward or set off of acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s just and fair to the members of the transferor company. The relevant provision about the exchange ratio is to be found in clause 5 of the scheme. Clause 5 of the scheme provides as under: "5. Upon the scheme being sanctioned by Honourable High Court at Ahmedabad and transfers taking place as stipulated under clause 1 hereof; ( a )Bihari shall without further application allot to every member of M.H. one equity share of Rs. 200 each fully paid-up in Bihari for every one equity share of Rs. 200 each held by such member in M.H. All the members shall accept the aforesaid shares to be allotted as aforesaid in lieu of their shareholdings in M.H. ( b )Every member of M.H. shall surrender to Bihari for cancellation of his share certificate(s) in respect of shares held by him in M.H. and take all steps to obtain from Bihari a certificate for shares in Bihari to which he may be entitled under sub-clause ( a ) hereof, and all the shares to be issued and allotted shall rank pari passu in all respects to the existing shares in Bihari. ( c )All the shares in Bihari held by M.H. shall stand cancelled." In order to decide about the reasonableness of the exchange ratio, it is necessar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bihari Mills Ltd. was Rs. 19,77,848." In other words, the value of the shares as estimated by the said auditors of the transferor company is Rs. 1,125 per share while that of the transferee company is nil. This opinion is corroborated by the auditors assisting the official liquidator for the purpose of reporting to this court as to whether the affairs of the transferor company have been managed in a manner prejudicial to the interest of the shareholders or public interest. The auditors appointed by the official liquidator to assist him, namely, M/s. Mehta Lodha and Co., have, in their report to the official liquidator, inter alia , stated to the effect that taking the paid-up capital and reserves together, the book value of the shares of the transferor company as per the balance-sheet as on December 31, 1981, would come to Rs. 1,125 while in the case of the transferee company, namely, Bihari Mills Ltd., it would be Rs. 1,921. It is no doubt true that both the auditors have opined as above about their estimate of the valuation of the shares of the respective companies on the application of break-up value method. In determining the break-up value of the shares, one has to ascerta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the court is in the following terms: "Where the shares are of a public company and are quoted on the stock exchange and there are dealings in them, the price prevailing on the valuation date is the value of the shares." The court further pointed out that in cases of public companies whose shares are not quoted on the stock exchange, the value may be determined by reference to the dividends, or on the application of yield method. It is in this background that I have to determine whether the auditors were justified in arriving at the valuation of the shares of both the transferor company and the transferee company on application of the break-up value method. It is no doubt true that so far as the question of valuation of shares in mergers and take-overs is concerned, the transferor company is not to be wound up but none the less it is to be dissolved without formal winding up. If, therefore, in such a context an attempt is made to evaluate the break-up value of the transferor company, it cannot be said that the approach is unjustified. If once, therefore, in relation to the transferor company the break-up value has been arrived at, it would be reasonable to find out the break- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issued after the amalgamation comes to about Rs. 1,173. In that view of the matter also, no exception can be taken to the exchange ratio particularly because the break-up value of the transferor company as on December 31, 1981, is Rs. 1,125. In order to find out as to what is the value of the shares of the transferor company on yield basis, further particulars and estimation were called for. The statement of computation has been furnished along with the affidavit of Shri S. R. Sanghvi, secretary of the transferor company. The average profits for the years 1977 to 1981 have been taken into consideration so as to have a long time view. The valuation is also made on the alternative basis of four years and three years average of the profits, and according to the estimation, the value per share on five years, four years and three years average profit basis comes to Rs. 868, Rs. 985 and Rs. 972, respectively. The intrinsic value of the shares which will be issued on amalgamation is much higher than the value estimated on the yield basis as above. The relevant factors which are to be taken into account in determining the final share exchange ratio have been enumerated in the Weinberg and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... possibly for other reasons discussed earlier), it may be decided that S. Co. should acquire the undertaking of H. Co. in exchange for an issue to H. Co. of shares in S. Co. In this way, control of H. Co. remains firmly with its existing controllers, H. Co. acquires a controlling block of shares in S. Co. and the original shareholders of S. Co. remain as minority shareholders in S. Co......" For the aforesaid reasons, I am of the opinion that examining the question of exchange ratio from any angle and particularly in the context of take-over by reverse bid in the present arrangement cannot be opposed on the ground that it is not just and fair, and that a prudent and reasonable businessman will never accept. All the relevant aspects necessary to be borne in mind while considering the question of grant of sanction to a scheme of arrangement are, in my opinion, satisfied and, therefore, the consent should be accorded to the proposed scheme under section 394 of the Companies Act. A short question remains to be dealt with. An objection has been raised on behalf of the Regional Director of Company Law Board, Western Region. The objection which has been sought to be raised on behalf of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (21-3-1983.) This note has been for speaking to minutes on behalf of the applicant-company for purposes of clarification as to whether the transferee company can use the new name prescribed under the scheme of amalgamation of the two companies, viz ., the Bihari Mills Ltd. and Maneklal Harilal Spg. Mfg. Co. Ltd., (described as "transferee company" and "transferor company", respectively, in the order according sanction to the scheme). The clarification is required since while granting sanction to the amalgamation of the aforesaid company by the order of this court of February 8, 23, 1983, the following direction has been given: "For the reasons aforesaid, therefore, the scheme of amalgamation of the transferor company and the transferee company, as approved and adopted by the interests concerned of both the companies which is annexure "A" to both the petitions, is sanctioned subject to the transferee company making an application for approval to the change of the name under section 21 of the Companies Act latest by April 30, 1983, and all the reliefs as prayed for in the petitions should be granted." (emphasis supplied) This conditional accord of sanction has caused some a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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