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TMI Blog1994 (3) TMI 280X X X X Extracts X X X X X X X X Extracts X X X X ..... , and the second petition is by HLL, being the transferee-company. It would be convenient to dispose of both the petitions by a common judgment. TOMCO, the transferor-company, was incorporated on December 12, 1917, for the purpose of, inter alia , manufacturing, marketing, selling and/or distributing oils, soaps, detergents, toiletries and animal feeds. HLL, the transferee-company, was incorporated on October 17, 1933, as a private company and converted into a public limited company on November 1, 1956. During 1991-92, according to TOMCO, it incurred operating losses of Rs. 10.11 crores. TOMCO incurred further operating losses of Rs. 16.92 crores for the first six months during 1992-93. In these circumstances, the board of directors of the company, after considering various alternatives, considered merger of TOMCO with HLL. The board of directors of both the companies availed of the professional services of Mr. Y.H. Malegam, a senior partner of S. B. Billimoria and Company, chartered accountants, to evaluate the two companies in order to arrive at a fair exchange ratio. On March 19, 1993, Mr. Malegam accordingly determined the exchange ratio by his valuation report and recommend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar as HLL is concerned, as per directions given by this court on April 29, 1993, meetings of equity shareholders and secured and unsecured creditors were convened. Notices of the said meetings were sent to equity shareholders, secured creditors and unsecured creditors (above Rs. 1 lakh) together with a copy each of the scheme and the statement as required under section 393(1)( a ) of the Companies Act along with a form of proxy. Notices convening meetings were also advertised in newspapers as per the directions given by this court. On June 30, 1993, the meeting of the equity shareholders was duly held and meetings of the secured and unsecured creditors were held on July 2, 1993. The meeting of the equity shareholders was attended by 2,528 members including proxies holding 9,59,27,477 equity shares. Thirteen amendments to the scheme were moved but the same were lost as more than 96 per cent. voted against them. However, the decision of the equity shareholders in favour of the resolution approving the scheme without any amendment was approved by 97.45 per cent. shareholders holding 99.97 per cent. shares. Three of the 13 amendments, viz ., 11, 12 and 13, related to preferential allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction in share capital in respect of which special procedure provided in the Act and the Rules has not been carried out. The third fetter on the court's power is that the court would not ordinarily sanction a scheme which includes something which can ordinarily be effected by resort to other provisions of the Companies Act. Within the limitations set out above, the court will allow the companies the greatest freedom in devising schemes to suit their requirements and will approve those schemes if they are fair to all whose interests are affected. The 'compromise and arrangements', covered by section 391(1), are of the widest character ranging from a simple composition or moratorium to an amalgamation of various companies with a complete reorganisation of their share and loan capital." Keeping in mind the above principles, the role which the courts have to play in this country is more vital and potent ; it is not only an inquisitorial and supervisory role but also a pragmatic role which requires the forming of an independent and informal judgment as regards the feasibility or proper working of the scheme and making suitable modifications in the scheme and issuing appropriate direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 385 (Ch D), it was, inter alia , held (at p. 391): "... the question whether the test of the fairness of the offer is fairness to the individual shareholder or fairness to the body of shareholders as a whole. .. and not whether it is fair to a particular shareholder in the peculiar circumstances of his own case." Vaisey J. in Sussex Brick Co. Ltd., In re [1961] Ch 289, inter alia , observed (at pp. 292, 293): "A scheme must be obviously unfair, patently unfair, unfair to the meanest intelligence. It cannot be said that no scheme can be effective to bind a dissenting shareholder unless it complies to the extent of 100 per cent., with the highest possible standards of fairness, equity and reason ... It must be affirmatively established that, notwithstanding the view of the majority, the scheme is unfair, and that is a different thing from saying that it must be established that the scheme is not a very fair or not a fair one : a scheme has to be shown affirmatively, patently, obviously and convincingly to be unfair." Keeping in mind the above principles, the scheme as approved by the shareholders and creditors of both the companies has to be scrutinised by this court. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned, the chairman has in the same, inter alia , stated that one of the members proposed a resolution that adequate details had not been given on some of the points and, therefore, the main resolution be withdrawn and fresh notice be issued with a fresh explanatory statement and the meeting be reconvened to consider and approve the scheme of amalgamation. The chairman has, inter alia, stated in the report filed in this court that after the main resolution was proposed by him, which was seconded by N.S. Sunder Rajan, he drew the attention of the members to the letter received from K.K. Patel of Nirma Pvt. Ltd, after which he enquired of the members whether they required any clarifications with regard to the scheme. Some clarifications were asked for by members, inter alia , regarding inadequacy of details in respect of subject-matter of clauses 1.7( d ), 4 and 5 of the scheme, that he furnished clarifications and that he rejected the proposal as there was no justification to support these proposals. Mr. Thorat the secretary of the company in his affidavit dated September 21, 1993, has stated that he was present at the meeting of the ordinary shareholders which was convened pursuant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Acts, 13th edition, at page 409, to the effect that the court does not sit merely to see that the majority are acting bona fide and thereupon to register the decision of the meeting ; but at the same time the court will be slow to differ from the meeting, unless either the class has not been properly consulted, or the meeting has not considered the matter with a view to the interests of the class which it is empowered to bind, or some blot is found in the scheme. Again, it was held in the case of Evertite Lochnuts ( 1938 ) Ltd., In re [1945] 15 Comp Cas 138 (Ch D), following Hoare and Co. Ltd., In re [1933] 150 LT 374, that it will not suffice for the dissenting shareholder merely to show that he regarded himself as, or was in fact, unprovided with all the material upon which he could come to a just conclusion in regard to accepting or rejecting of the scheme, inasmuch as, as rightly argued by Mr. Desai, learned counsel for TOMCO, there would be no limit to the inquiry which would have to be set on a foot as to the extent to which his demands for disclosure ought to be conceded. For the above reasons, I do not see any substance in this objection. ( ii ) The second limb o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the Calcutta High Court in United Bank of India Ltd. v. United India Credit and Development Co. Ltd. [1977] 47 Comp Cas 689 . ( iv ) A further grievance was made by the workers employed at the Sewree Unit of TOMCO. Their grievance was that although they applied for half a day's casual leave in order to attend the meeting, the same was refused. It was the workers' contention that this has been the practice followed in past for over many years. In order to see that the workers would not attend the meeting, such a permission was declined. On behalf of TOMCO, Mr. Desai, submitted that in the past there was no such practice and that the workers were free to take a full day's leave which they did not take and despite their application for half a day's leave having been rejected, several workers numbering 17, in fact turned up at the meeting and attended the same. Mr. Phadnis on behalf of the workers could not satisfy me about the practice, nor could he deny the fact that several workers had in fact attended the meeting. In these circumstances, I do not see any substance as far as this grievance is concerned. ( v ) It was lastly contended by Mr. Phadnis on behalf of the worke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainable profits based on its operation results for the years 1981-82 to 1988-89. Similarly, the material relied on for arriving at the "asset value" and calculation of "market value" is enumerated in detail in the said report. At the general meeting, as the minutes have recorded, after the resolution for approval of the scheme was proposed and seconded, before proceeding further, the chairman requested Mr. Malegam to make a statement as to how the valuation was made, that Mr. Malegam explained at length the basis on which valuations were generally carried out for amalgamations/ mergers and that he highlighted the major aspects considered by him in making the valuation in question. A perusal of the said valuation report, in my opinion, does not contain anything which is vague or ambiguous. The valuation appears to be fair. Not only that but after the filing of the petition, a further opinion was obtained by TOMCO from two well-known auditors, viz. , A.F. Fergusson and Co. and N.M. Raiji and Co., who have by their letter dated September 2, 1993, in response to the request made by the TOMCO to review the methodology used and ratio of exchange determined by S.B. Billimoria and Co. sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g usually well-informed, scrutinise the scheme with an expert's eye and they are presumed to act bona fide and for the benefit of the company as a whole. The workers have also challenged the valuation of shares and had adopted the same line of arguments. However, they have failed to satisfy me as to in what manner the valuation is unfair. This is apart from the fact whether the workers could be heard to be concerned with the valuation. In my opinion, the exchange ratio as arrived at by Mr. Malegam has received the approval of s. areholders holding more than 99 per cent. (in number and value) shares at the meetings. No one except the shareholders holding minimum percentage of shares have complained before me. The valuation has been confirmed to be fair by two eminent firms of auditors. It would be extremely difficult to hold that the same is unfair. In any case, it has been approved by an overwhelming majority of persons affected and there is no basis to doubt their judgment. I, therefore, do not find any substance in this objection. ( c ) As far as item No. 1.7( d ) of the scheme is concerned, the opposition is that these assets should not have been excluded and, secondly, that n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve properties are mentioned therein. The explanation contained in the explanatory note and further amplified in the joint circular dated June 21, 1993, issued after the scheme was circulated clearly shows that HLL is not interested in these immovable properties but would be content with the full market value thereof. Under the scheme, it is not proposed to altogether exclude the items which are owned by TOMCO. What is proposed is to dispose of these items meaning thereby that instead of immovable properties what would remain with TOMCO would be the money equivalent thereof. It is true that clause 4 as contained in the scheme is also approved by shareholders/creditors of TOMCO by a thumping majority of them in number and value. However, why should the board of directors of TOMCO be allowed to abdicate their own function in favour of another company, viz ., Tata Sons Ltd. Moreover, why should valuable assets not be valued by competent valuers to ascertain the fair market value thereof and to ensure that the disposal is at fair market price and, therefore, why should the valuers' names not be provided. The petitioners themselves, viz. , TOMCO, have in their petition shown readiness ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thereof have been received by TOMCO. In these circumstances, it is academic to consider in detail the said item and as to on what basis different particulars were given. The opposition was to the effect that TOMCO and HLL had entered into a secret deal to antedate the transfer of various investments of TOMCO to other Tata companies to the detriment of the shareholders and creditors of TOMCO. No other shareholders or creditors, except the individual shareholders have raised any such objection. Moreover, as repeatedly observed by me, by an overwhelming majority of more than 99 per cent. in value and number the shareholders have approved the same. I do not see any substance as far as this objection is concerned. ( f ) This takes me to the next item regarding trade marks. The provision for the same is contained in clause 7 of the scheme. This excludes several trade marks of TOMCO. Objection is taken as to giving of such valuable assets. One has to understand that the HLL is a large manufacturer of similar items and which are marketed under their own trade marks. It is for HLL to give up these trade marks as the said trade marks are associated with Tata name and in view of the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Clause 9 provides that pending legal proceedings against TOMCO and relating to its undertaking regarding its liabilities, obligations and duties shall be continued and enforced against HLL. Thus any orders passed in the said pending litigation at Calcutta would be binding on HLL. HLL is deemed to be aware of, in any case, are now put to notice of the said order passed by the Division Bench of the Calcutta High Court, which is at present seized of the matter relating to the assurances given by TOMCO. In view of the above, the workers represented by Mr. Nakhwa are, in my view, sufficiently protected. There is no substance in the same inasmuch as clauses 8 and 9 of the scheme sufficiently protect the workers of the unit of TOMCO at Calcutta and sufficiently save orders passed by the Calcutta High Court in the matter before it. This brings me to the petition of HLL. Basically two objections are taken one is about the preferential offer and allotment of 29,84,347 equity shares to Unilever, the parent company of HLL and the other is about the apprehension entertained by the workers. ( a )As far as the preferential allotment is concerned, the scheme states that Unilever, the parent c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 at the time of dilution was used, the price would be only Rs. 43 per share. Mr. Singhvi on the other hand cited two instances of companies having used a higher multiple. However, taking an overall view, including the locking in period provided in respect of this allotment, I am satisfied that the price of Rs. 105 is fair and reasonable. Moreover, the additional offer and allotment to Unilever in order to maintain the present proportion of shareholding is also fair and reasonable. The learned Advocate-General is also right in his submission that it is for the shareholders ultimately to decide. This power is exercised by the shareholders as per section 81(1A) of the Companies Act. The Advocate-General rightly relied on the decision in the case of Needle Industries ( India ) Ltd. v. Needle Industries Newey ( India ) Holding Ltd. [1981] 51 Comp Cas 743 (SC); AIR 1981 SC 1298, wherein it is, inter alia, held (at p. 818): "Finally, it is also not true to say, as a statement of law, that directors have no power to issue shares at par, if their market price is above par. These are primarily matters of policy for the directors to decide in the exercise of their discretion and n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at even if Unilever had not voted in favour of the preferential allotment, the situation would not have been much different and even then by a majority of 97.45 per cent. in number and 99.88 per cent. in value, the resolution would have been passed. ( c )In these circumstances, I am of the opinion that not only the preferential allotment in favour of Unilever, but also the price thereof is fair and reasonable. Mr. Singhvi on behalf of the workers expressed the apprehension of the workers by saying that under the scheme in clause 11 thereof, an assurance is given to the workers of TOMCO that the merger would not prejudicially affect them. A similar assurance should also be there as far as HLL workers are concerned. Mr. Singhvi relied heavily on the affidavit of Mr. Nandkumaran dated February 1, 1994, wherein comparative basis of one isolated case of a worker is given in order to show that in some areas the wages received by HLL workers would be less. This would, according to him, lead to labour unrest. It was his further submission that TOMCO's plant at Bombay, is hardly a furlong away from the HLL's plant and, therefore, applying the industry-cum-region formula, the wage struct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Action Group and the Indian Institute of Consumer Studies (Interveners) requested that the decision in the matter of the scheme of amalgamation be reserved in view of the fact that an inquiry was pending before the Commission constituted under the Monopolies and Restrictive Trade Practices Act, 1969. By the Monopolies and Restrictive Trade Practices (Amendment) Act of 1991, extensive amendments were carried out and several sections of Chapter III thereof dealing with concentration of economic power were deleted. Previous section 23 thereof, inter alia, provided that notwithstanding anything contained elsewhere in the Monopolies and Restrictive Trade Practices Act or in any other law for the time being in force, no scheme for amalgamation or merger could be sanctioned by any court without the same having been approved by the Central Government and that no proposal to acquire by purchase, take-over or otherwise an undertaking be given effect to unless the Central Government had approved the same. Previous section 24 of the said Act provided for the consequences for contravention of section 23 of the said Act. In view of the fact that now amalgamation/merger are not made dependable on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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