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TMI Blog1994 (5) TMI 167X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 333 of 1993 is by HLL - both for the similar relief of sanction. On these two petitions impugned order was passed. Since these appeals are against a common judgment they have been heard together and are being disposed of by this judgment. 2. Appeal No. 244 of 1994 is by the Federation of Tata Oil Mills and Allied Companies Employees' Unions in Company Petition No. 332 of 1993 connected with Company Application No. 250 of 1993. Appeal No. 298 of 1994 is by Mr. Rabindra Hazari - a shareholder of TOMCO in Company Petition No. 332 of 1993 connected with Company Application No. 250 of 1993. Appeal No. 224 of 1994 is by the Hindustan Lever Employees' Union in Company Petition No. 333 of 1993 connected with Company Application No. 251 of 1993. Appeal No. 301 is by Consumer Action Group and other similar organisations, in Company Petition No. 333 of 1993 connected with Company Application. No. 251 of 1993. Appeal No. 331 of 1994 is by the Consumer Education & Research Centre in Company Petition No. 333 of 1993 connected with Company Petition No. 251 of 1993. 3. Having heard the learned counsel for the parties and respondent Mr. M.G. Jajoo in person at length we are satisfied that no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the professional service of Mr. Y.H. Malegam, Senior Partner of S.B. Billimoria & Co., Chartered Accountants, former President of Institute of Chartered Accountants and the Director of Reserve Bank of India, for the purposes of evaluation the share price of two companies in order to arrive at a fair share exchange ratio. On 19-3-1993, Mr. Malegam gave a valuation report and recommended an exchange ratio of two equity shares of HLL for every fifteen ordinary shares of TOMCO. The board of directors of both the companies at their separate and independent meetings accepted the recommendation and approved the scheme of amalgamation. 5. The Scheme, inter alia, provides for transfer and vesting in HLL of the undertaking and business of TOMCO together with assets and liabilities excluding certain assets and/or licence rights to use certain premises. Salient features of scheme are to be found in clauses 1.7( d), 4.5,11 and 13. Clause 1.7(d) sets out the details of excluded properties in which TOMCO has no more than licenses rights. Clause 4 provides for transfer of 5 assets (immovable property) to be transferred to companies nominated by Tata Sons Ltd. at fair market value as will be i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares as envisaged in the scheme. 99.64 per cent of ordinary shareholders voted against amend- ment and 99.72 per cent voted in favour of the scheme as proposed. Debenture holders voted 99 per cent, secured creditors voted 100 per cent, unsecured creditors voted 84.30 per cent and preference shareholders voted 100 per cent in favour of the scheme. The scheme as proposed was thus approved in all the five meetings by 99.72 per cent of equity shareholders in terms of value and 86.72 per cent in terms of number. 7. In Company Application No. 251 of 1993 filed by HLL also similar direction for convening meeting of the equity shareholders and creditors were issued by the Court on 29th April for convening the meeting on 30-6-1993. Similar procedure was followed in this also. On 30-6-1993 shareholders of HLL at their extra-ordinary general meeting approved by the requisite majority the proposed issue of shares to UL pursuant to section 81(1A) of the Act. The Court convened meeting of the equity shareholders was held on 30-6-1993 and the meeting of the creditors was held on 2-7-1993 under the chairmanship of Chairman of HLL Mr. S.M. Datta as directed by the Court. The meeting of the equit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... val has to be by the majority in number representing 3/4ths in value of the members present and voting. The approval by such large majority of the members/creditors is recog-nized by the Act to be prima facie in their business interest. The Court according sanction to the scheme becomes binding on all including those dissenting members/creditors. Section 394 (which is corresponding to section 208 of the English Act) provides that the scheme of amalgamation may provide for the whole or any part of the undertaking, property and liability of any company shall be transferred to another company in which case the Court will pass consequential orders in relation to the transfer of the undertaking to the transferee-company. Section 394A of the Act provides that a notice of application under section 391/394 should be given to the Central Government and the Court shall take into consider-ation the representation, if any, made by the Government to consider public interest before passing any order. Section 393(1)(a) as well as Company Court Rules require notices to be given only to the creditors and members of the company. 10. Palmers Companies Act, 23rd edn. (Paras 79.13 to 79.15) states tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncludes 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 ...." (p. 279) 11. It is not for the Court to substitute its judgment for the collective wisdom of the shareholders/creditors of the two companies who by and large, are not rustic illiterates but are the well informed men of practical commercial world. This is not to suggest that the Court must act merely as a rubber stamp to sanction a scheme approved by majority. It has a duty to scrutinize, but the scrutiny is not with the eye of expert or exactness of an accountant as observed by Gujarat High Court in Alembic Chemical Works Co. Ltd., In re [1988] 64 Comp. Cas. 186. Even if scheme is open to some criticisms that is not enough. Obvious weaknesses of the scheme must be affirmatively shown as held by this Court in the case of M.G. Investment & Industrial Co. Ltd v. New Shorrock Spg. & Mfg. Co. Ltd [1972] 42 Comp. Cas. 145. All these cases clearly indicate tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the appropriate forums like Industrial/Labour Courts. 13. Keeping the above basic principles in view we proceed to deal with the five grounds seriatum. Ground (A): Violation of section 391(1)(a) of the Act in not making required disclosures in the explanatory statement. Nature of disclosures required to be made by section 393(1)(a ) in the explanatory statement is quite different from the nature of disclosures required in the notice of the special general meeting of the company under section 173 of the Act under which a statement setting out all material facts concerning each item of business including in particular the nature of concern or interest, if any, therein of every director, managing agent and other specified office bearers have to be stated. Even under section 173 too rigid interpretations which would hamper the conduct of the business cannot be adopted. After all the explanatory statement is a business document intended to give clear idea of the nature of business to be conducted and must be used in a common sense business way. Minor in significant matters do not render the proceedings null and void. Contrasted with section 173, the provisions of section 391 are q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e criticism that losses were manipulated only for the purposes of the scheme had no foundation whatsoever. In the properties mentioned in clause 1.7(d) , the TOMCO had a mere gratuitous permission which as held by this Court in the case of Associated Building Co. Ltd. v. Union of India [Writ Petition No. 270 of 1984, dated 20-7-1993] is not a right, power, authority or privilege, as contemplated under the Textile Undertakings (Taking over Manage-ment) Act, 1983. The said right is held to be not transferable and is not an asset. It is pertinent to notice that these properties are not included in the balance sheet of TOMCO. We failed to see how Mr. Datta being responsible for interest of UL in India constituted his 'material interest' as contem- plated under section 393(1)(a). It is pertinent to notice that Mr. Datta being a representative of UL had been disclosed in the meeting of the members before voting took place. The HLL Employees' Union even otherwise knew this fact. No objection was raised when Mr. Datta was appointed as the Chairmand of the meeting in pursuance of the order of the Company Judge dated 29-4-1993. Against the said judgment, appeal was filed and even therein no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The board of directors of both the companies availed of professional services of Mr. Malegam, a person with repute and positions. He recom-mended the exchange ratio of 2 equity shares of HLL for every 15 ordinary shares of TOMCO by his report dated 19-3-1994. The draft valuation report, the working of the scheme, the share exchange ratio, all were discussed in advance with TOMCO, HLL and Financial Institutions having 40 per cent shareholding of TOMCO. The basis of the exchange ratio and the methodology applied were also explained to the board of directors of both the companies at their separate meeting held on 19-3-1993 in which Mr. Ramakrishnan, nominee of the LIC on the Board of TOMCO was also present. The valuation report was kept open by TOMCO at its registered office for inspection by shareholders between 10-6-1993 to 29-6-1993. In the Court convened meeting of the shareholders dated 29-6-1993 the Chairman of TOMCO had requested Mr. Malegam to clarify the queries raised by shareholders regarding valuation. It was also explained that all the quoted investments proposed to be transferred were to be sold at the market value and the unquoted investments were to be sold on the bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should not be made effective till the MRTP Commission considers the matter and finally makes pronouncement on the subject. The submission is not well founded. There is no such legal requirement. In the original MRTP Act, merger and amalgamation of certain undertakings was dealt with under section 23. No merger or amalgamation could be sanctioned by the Court until it has been approved by the Central Government which had to take decision in terms of its economic policy. The Central Government could under section 20(6) refer the question to the MRTP Commission for its opinion which was not binding on the Central Government in view of section 20(7) of the MRTP Act. 22. As a result of new economic policy nearly whole of Chapter III including section 23 has been repealed by Amending Act, 1991. The only part of Chapter III which has remained is section 27 under which opinion in the matter of division of an undertaking can be taken on the aspect of public interest. Under section 27 as amended Commission can even suo motu make enquiry, though nature of its jurisdiction is still advisory. Thus, Commission has no part to play in the case of amalgamation. In this background the controversy a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... another employer, it is usual formulae to protect the workers of the transferred undertaking by providing that service will be continuous and uninterrupted and service conditions will not be prejudi-cially affected by reasons of transfer. Such provisions are made in the scheme. Merger of the two companies into one very likely may necessitate adjustments in the service conditions in certain areas but that is a matter for industrial adjudication by appropriate forums. Principal grievance was about absence of clause to the effect that no retrenchment of workers of either companies will be made by HLL in future only by reason of amalgamation. 25. The learned advocate general appearing for HLL, submitted that though no retrenchment was at all contemplated, HLL has not done that before even though it had surplus labour force, HLL was poised for growth after amalgamation and no such possibility exists in near future, its freedom to act within laws after merger if occasion arises in some time in posterity cannot be taken away. Such freedom exists even today and must continue to remain in future. It seems to us that he is correct. Rightly has our attention been drawn to the provisions of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of settlement dated 12-11-1991. Kalyani is jointly promoted by TOMCO and Government of West Bengal. TOMCO has 24 per cent shareholding in Kalyani. Calcutta factory was running in losses and was required to close. In that context, settlement was reacted with workers who as a package deal contained in the settlement agreed for closure and opted to be employees of Kalyani. Under that settlement service conditions of work- ers were protected while they were in service of Kalyani and plant and machinery at the Calcutta factory was to be dismantled and installed and commissioned at Kalyani. Apprehension of those employees is that as a result of merger and transfer of TOMCO properties to HLL, they would suffer adversely and may not be in a position to enforce against HLL their rights protected under the settlement. Employees had filed a suit in the High Court at Calcutta being suit No.365 of 1993 restraining TOMCO from effecting merger with HLL in a manner by which their rights will be adversely affected. Application for interim relief was made and in appeal arising out of order Division Bench of Calcutta High Court while passing order expressed the hope that at the time of sanctioning th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hareholding in the new set up. Real controversy can be and is about the price of Rs. 105 which is admittedly much more the market price at the material date. 30. The price of Rs. 105 has been worked out on the basis of the price earning multiple based on the last published balance sheet of HLL. This formula was considered fair and reasonable even by the FIs having 16 per cent shares, as is clear from their approval in the meeting of shareholders dated 30-6-1993. Common case is that approval was on the basis of policy of FIs then adopted. It appears that this formula was in conformity with the discussions at the meeting held by the Associated Chamber of Com-merce and Industries (ASSOCHAM) on the subject of pricing of preferen-tial allotment of shares to Indian promoters and foreign collaborators. This is clear from the confidential communication dated 18-3-1993 issued by the Secretary General of the ASSOCHAM to the members of the Managing Committee, Special Invitees and Promoter Chambers. HLL's earning per share for the year ended December 1990 was Rs. 7 per share. Applying the multiple of Rs. 15 the price of Rs. 105 was worked out. No other formula was in the field when the meetin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by passing a special resolution under section 81(1A). 32. It appears that the FIs have recently taken a new policy decision and modified their terms for exercising their rights as a shareholder for determining the price of shares for preferential allotment. Policy is to oppose allotment at less than market price. This certainly is not only a permissible decision but a welcome decision. But we fail to see how that subsequent policy decision can affect the exercise already undertaken on the basis of policy then prevailing. After all as observed in Navjivan 's case (supra) "the scheme has to be tested bearing in mind all the circumstances prevailing at the time of meeting called to consider the scheme". 33. There are two depreciatory factors in shares allotted to UL. They seem to be self imposed and are to the effect that (i) the new equity shares to be allotted to UL are not transferable for a period of 7 years from the date of allotment, and (ii) in the event of UL deciding to diversify these shares thereafter within 12 years it will in the first instance after the shares in favour of the members of HLL on a fair and equitable basis at a price worked out by reference to the same f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, norms suggested by the ASSOCHAM and policy adopted by FIs. The Company Court does not sit in appeal over the price fixation. Strong reliance was placed by the objectors on the decision of the Calcutta High Court in the case of Jadabpore Tea Co. Ltd. v. Bengal Dooars National Tea Co. Ltd. [1984] 55 Comp. Cas. 160 in support of a point that Court can interfere with price fixation. In that case, the Court quashed the resolution of price fixation under section 81(1)(a) of the Act on the basis that it was replete with mala fides and hence was void for mismanagement. No such finding is warranted in this case and hence the ratio of that decision will have no application. 36. It is contended that the Court has ample discretion to modify the price and to increase it to market price in larger public interest, specially when the Government of India has expressed doubts about correctness of the decision of preferential allotment. Well-settled principles enunciated in the matter of Court's power to interfere with schemes do not permit us to substitute our judgment on price, in place of near unanimous judgment of the members of the company specially when the decision is not illegal. We close ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no difficulty in the owners of these properties to get back possession if they so choose by merely revoking the licensee specially when TOMCO does not resist. Help of outside agency like HLL or UL in the matter and/or going in such an unusual round about way was not at all necessary. 38. Properties referred to in clause 4 were to be transferred at market rate to be independently assessed. Now independent assessment of market price as has been doubly secured by the Court by entrusting the job of determination of price with the named reputed and authorised valuers - There is no reason to doubt their capacity and/or independence. Sale by open public auction or inviting tenders from general public may fetch more price due to competition, but desire to retain some choice of purchaser is not unreasonable in the whole background. Suitable amend-ments have been made by the Court in the Scheme that has been accepted by TOMCO. 39. On the price aspect, we have said enough. No repeatation is called for. This last point must also therefore fail. 40. There has been settlement dated 28-9-1993 between the Consumers' Education and Research Centre (CERC) and HLL for incorporating the following t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dification was agreed upon. Under the circumstances, modification in the scheme to that extent will be but proper. 41. All that remains is to point out some obvious clarifications/corrections in the impugned judgment/scheme as prayed for by TOMCO to which there seems no objection. Last portion of para 5(d) of the judgment reads thus: "The Board of Directors of TOMCO shall themselves, before dissolution, have those properties valued by Valuers named hereinafter and thereafter before dissolution to convey, transfer or lease them on long-term basis on the basis of such valuation." There can be practical difficulty in having valuation and effecting transfer of the properties before dissolution of board of directors of TOMCO, inter alia, because of provisions of section 269UD of the Income-tax Act, 1961. But the nomination of valuers can certainly be made before that date and actual valuation and transfer can take place after. Amended clause 4 of the scheme reads thus: "The following assets owned by the transferor-company shall from time to time, as may be convenient to all parties concerned be conveyed, transferred or leased on a long-term basis to companies nominated by the Direct ..... X X X X Extracts X X X X X X X X Extracts X X X X
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