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TMI Blog1994 (10) TMI 211X X X X Extracts X X X X X X X X Extracts X X X X ..... e provisions of Monopolies & Restrictive Trade Practices Act, 1969 under valuation of Shares, its preferential allotment on less than the market price to the multi national, failure to protect the interest of employees of both the companies and above all being violative of public interest. The High Court was not satisfied that either the merger was against public interest or that the valuation of the shares was prejudicial to the interest of the shareholders of TOMCO or that the interest of the employees was not adequately protected. It was held that there was no violation of Section 391(1)(a) of the Act and the claim that the disclosures in the explanatory statement were not as required was without basis as it was not established that the statement did not disclose correct financial position of TOMCO. Nor there was anything to show that the material was not disclosed. The Court held that the petitioner failed to establish any fraud or prejudice. On valuation of share for exchange ratio the Court found that a well reputed valuer of a renowned firm of chartered accountants and a director of TOMCO determined the rate by combining three well known methods, namely, the net worth method ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O. Comparative figures of the shares of the two companies their market' value, their holding in the market etc. were placed to demonstrate that the calculation was vitiated. 3. But what was lost sight of that the jurisdiction of the Court in sanctioning a claim of merger is not to ascertain with mathematical accuracy if the determination satisfied the arithmetical test. A company court does not exercise an appellate jurisdiction. It exercises a jurisdiction founded on fairness. It is not required to interfere only because the figure arrived at by the valuer was not as better as it would have been if another method would have been adopted. What is imperative is that such determination should not have been contrary to law and that it was not unfair for the shareholders of the company which was being merged. The Court's obligation is to be satisfied that valuation was in accordance with law and it was carried out by an independent body. The High Court appears to be correct in its approach that this test was satisfied as even though the Chartered Accountant who performed this function was a director of TOMCO but he did so as a member of renowned firm of chartered accountants. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mark as it is the interest of the employees of TOMCO which had to be protected. Even the submission that merger will create unemployment or that it may result in many employees of the TOMCO being rendered surplus does not carry much weight as these are matters which can be taken care of by the Labour Court if the contingency arises. The learned Counsel for the petitioner time and again took strong exception to the observation made by the High Court that any dispute about retrenchment etc. could be adjudicated by the Labour Court. He vehemently submitted that the availability of remedy after retrenchment should not have coloured the vision of the court to adjudicate upon the reasonableness of the scheme. The submission overlooks the primary duties and functions of a company court in matters of merger. When the court found that service conditions of the merged company shall not be to their prejudice it was fully justified in rejecting the claim of employees as it was neither unfair nor unreasonable. Further the Court in its anxiety to be fair to the employees recorded the statement of the learned Advocate General who appeared for HLL that no employee of HLL has been rendered surplus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest of the particular locality which may be affected by the letters in question. Interest shared by the citizens generally in affairs of local, State or national Government.' It is an expression of wide amplitude. It may have different connotation and understanding when used in service law and yet a different meaning in criminal law than civil law and its shade may be entirely different in Company Law. Its perspective may change when merger is of two Indian companies. But when it is with subsidiary of foreign company the consideration may be entirely different. It is not the interest of shareholders or the employees only but the interest of society which may have to be examined. And a scheme valid and good may yet be bad if it is against public interest. 6. Section 394 casts an obligation on the court to be satisfied that the scheme for amalgamation or merger was not contrary to public interest. The basic principle of such satisfaction is none other than the broad and general principles inherent in any compromise or settlement entered between parties that it should not be unfair or contrary to public policy or unconscionable. In amalgamation of companies, the courts have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut in escalation of price. The learned Counsel pointed out that even though HLL was a subsidiary of UL and claims to have the benefit of technical know-how etc., yet the quality of soaps produced by TOMCO was much better as compared to HLL. 8. In reply it was urged that the maintenance of 51% of paid-up equity share of UL was distinctively advantageous to HLL because the UL has become a source of major strength of HLL and has been responsible in several ways for its phenomenal growth and prosperity. This status, it was urged, enable HLL to have from UL free of cost the benefits of Research and Development technology, know how, marketing support, both domestic and international including brand names, managements systems, training facilities and other resources in normal course of business. It was further urged that as a result of HLL being a subsidiary of UL, HLL is able to utilise international brand names of UL, such as soaps under the brand names Lux, Lux International, Lifebuoy, Pears, Dove, Surf, Sunlight, etc, It was urged that the price of Rs. 105 per share comprising of Rs. 10 towards the capital and Rs. 95 towards premium for preferential allotment to UL was worked out on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f price earning multiple of 15 based on the last published balance sheet of HLL, it was fair and reasonable and it was not liable to interference by this Court. Reliance was placed on Needle Industries (India) Ltd. and Ors. v. Needle Industries Newly (India) Holding Ltd. and Ors. [1981]3SCR698 , where this Court approved the principle laid down by Lord Davey in Hilder v. Dexter (1902) AC 474 at 480 that there was no law which obliged a company to issue its share at par because they were saleable at a premium in the Market. It was vehemently argued that since it were the shareholders who were primarily concerned with the company's finances and they have decided almost unanimously to allot the share to the parent company at the price of Rs. 105, it cannot be urged that the members of the HLL were not acting in the interest of the company as a whole. 9. Each of these challenges claimed to be violative of public interest have to be examined in the prevailing atmosphere which opted for liberalisation of the Government policies to promote economic growth of the country. What is remarkable is that the Legislature itself has amended Foreign Exchange Regulation Act, 1973 by Act 29 of 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 11 has been repealed and Sections 29 and 31 have been amended and there is no restriction now on a non-resident company holding in excess of 40% share. In Companies Act, Section 108-A to 108-I have been added. 11. The scheme of amalgamation does not run counter to any legislative provision of policy of the Government. The claim of the Petitioners that the transfer for a paltry sum of Rs. 30 crores was mala fide as it was a quid pro quo arrangement between UL and Tata Sons Limited by which the immovable assets of TOMCO were virtually given to Tata Sons Limited and in lieu of UL has been allotted 2984347 equity shares of the face value of Rs. 10 each at the price of Rs. 100 per share so as to ensure that the share of UL which stood diluted continued to remain at 51% was not found to have any merit as the valuation was determined by renowned and authorised valuers. It was held that sale by open public auction or inviting tenders from general public may have fetched more price due to competition, but that could not result in vitiating the determination of the valuation. The amalgamation cannot be faulted for this reason. 12. Even assuming that the assets are being transferred f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver Limited - is the subject matter of dispute in this case. 16. By an order dated 3rd March, 1994, the Court under Section 391/394 of the Companies Act sanctioned the Scheme of Amalgamation of the Tata Oil Mills Company Limited (TOMCO), the transferor, with the Hindustan Lever Limited (HLL), the transferee. 17. Aggrieved by the said Judgment and order dated 3.3.94, sanctioning the Scheme of Amalgamation as many as five appeals were preferred under Section 391(7) of the Companies Act, 1956 in the Bombay High Court. 18. Appeal No. 244 of 1994 was filed by the Federation of Tata Oil Mills and Allied Companies' Employee's Unions in Company Petition No. 332 of 1993 connected with Company Application No. 250 of 1993. Appeal No. 298 of 1994 was filed 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 was filed by the Hindustan Lever Employees' Union in Company Petition No. 333 of 1993 connected with Company Application No. 251 of 1993. Appeal No. 301 was filed by Consumer Action Group and other similar Organisations, in Company Petition No. 333 of 1993 connected with C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 24. 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 the Scheme are to be found in Clauses l,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 licensees 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 independently assessed. Clause 5 provides that TOMCO shall (before or after the effective date) transfer to Tata Sons Ltd. or its nominee certain investments/shares owned by TOMCO at the then prevailing market value and in the case of unlisted shares at a value to be determined by Mr. Y.H. Malegam. Clause 11 provides for transfer of employees of TOMCO to HLL on the basis that their service shall be deemed to be continuous and the conditio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of values and 86.72% in terms of number. 27. 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 30th June, 1993. Similar procedure was followed in this also. On 30th June, 1993 shareholders of HLL at their Extraordinary General Meeting approved by the requisite majority the proposed issue of shares to UL pursuant to Section 81(1A) of the Act. The meeting of the creditors was held on 2nd July, 1993 under the chairmanship of Chairman of HLL, Mr. S.M. Datta, as directed by the Court. The meeting of equity shareholders was attended by 2,528 members including proxies holding 9,59,27,477 equity shares. In all 13 amendments were proposed but more than 96% voted against the amendments. The creditors also voted for the Scheme. 28. On 2nd August, 1993 Judges summons was taken out by Mr. M.C. Jajoo, praying inter alia for direction to M/s. A.F. Ferguson and M/s. N.M. Raiji & Co., Chartered Accountants, to give their opinion on the valuation report of Mr. Malegam. The Regional Director and the Official Liquidator were given notices of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court in the case of Commissioner of Gift Tax, Bombay v. Smt. Kusumben Mahadevia [1980]122ITR38(SC) . If the valuation was done by the net asset method, the exchange ratio should have been 1:2 in favour of TOMCO. Moreover, market value of the shares of the two Companies was taken at a point of time when the price of TOMCO shares was the lowest for a period of 27 months. Lastly, it was contended that the preferential allotment of shares to Unilever was part of the Scheme of Amalgamation. The Board should have explained why Rs. 366 was being paid for every HLL share by TOMCO, when Unilever was paying only Rs. 105 per HLL share. 32. We are unable to uphold any of the above contentions raised by Mr. Dholakia. The overwhelming majority of the shareholders had approved the Scheme at the meeting called for this purpose and had approved the exchange ratio. In fact, a proposal for amendment of the exchange ratio was also rejected by the overwhelming majority of 99% shareholders. There is no reason to presume that the shareholders did not know what they were doing. 33. Being dissatisfied with the valuation made by Mr. Malegam, Mr. Jajoo had insisted for independent valuation and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to sell not only investments, but also fixed assets of the Company. 37. In the background of these facts, it cannot be said that the market price as on 17.6.93 did not reflect the true picture of the value of the Company's shares. If the market price of the shares of the two Companies as on 17.6.93 is compared, the quoted price of HLL was Rs. 375 per share; whereas the quoted price of TOMCO was Rs. 52.50 per share. The earning per TOMCO share had come down from Rs. 5.19 on 31.3.91 to Rs. 0.50 on 31.3.92 and Rs. 0.30 on 31.3.93. As against this, dividend paid on HLL shares was 42% in the years ending on 31.12.90 38.50% (on enlarged capital after the issue of bonus shares in the ratio of 1:2 in the year ending on 31.12.91 and 42.00% again in the year ending on 31.12.92. It is true that book value per share of TOMCO was higher than that of HLL. But, even without any bonus issue, the book value of TOMCO shares had come down from Rs. 36.17 per share on 31.3.91 to Rs. 29.75 per share on 31.3.1993. 38. What emerges from all these figures is that on the market price basis as on 17.6.93 (the last price available before the circular letter dated 21.6.93 issued to the shareholders of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ratio : (1) The Stock Exchange prices of the shares of the two companies before the commencement of negotiations or the announcement of the bid. (2) The dividends presently paid on the shares of the two companies. It is often difficult to induce a shareholder, particularly an institution, to agree to a merger or a share-for-share bid if it involves a reduction in his dividend income. (3) The relative growth prospects of the two companies. (4) The cover (ratio of after-tax earnings to dividends paid during the year) for the present dividends of the two companies. The fact that the dividend of one company is better covered than that of the other is a factor which will have to be compensated for at least to some extent. (5) In the case of equity shares, the relative gearing of the shares of the two companies. The 'gearing' of an ordinary share is the ratio of borrowings to the equity capital. (6) The values of the net assets of the two companies. Where the transaction is a thorough-going merger, this may be mere of a talking-point-than a matter of substance, since what is relevant is the relative values of the two undertakings as going concerns, (7) The voting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bound to be difference opinion among Accountants as to what is the correct value of the shares of a company. It was emphasised that more than 99% of the shareholders had approved the valuation. The test of fairness of this valuation is not whether the offer is fair to a particular shareholder. Mr. Jajoo may have reasons of his own for not agreeing to the valuation of the shares, but the overwhelming majority of the shareholders have approved of the valuation. The Court should not interfere with such valuation. 48. It is also difficult to follow the argument that Mr. Malegam's report is not acceptable to the TOMCO shareholders, because he was a Director of TOMCO, HLL had no difficulty in accepting the share exchange ratio fixed by Mr. Malegam, even though he was a Director of TOMCO. If there was any bias, it should have been in favour of TOMCO and not against TOMCO. This exchange ratio was endorsed by two other eminent firms of Chartered Accountants and also by ICICI. We are unable to uphold the contention that there was any impropriety in the valuation of the shares. The argument based on Section 226(3) of the Companies Act is misleading. An officer or an employee of the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sale of Goods Act, 1930 specifically includes stocks and shares. A share represents a bundle of rights which include, inter alia, the rights (i) to elect directors; (ii) to vote on resolutions at meetings of the company; (iii) to enjoy the profits of the company, if and when dividends is declared and distributed; and (iv) to share in the surplus, if any, on liquidation. In the case of Bacha F. Guzdar v. C.I.T. [1955]27ITR1(SC) , the position of a shareholder was explained thus : There is nothing in the Indian Law to warrant the assumption that a shareholder who buys shares, buys any interest in the property of the company which is juristic person entirely distinct from the shareholders. The true position of a shareholder is that on buying shares he becomes entitled to participate in the profits of the company in which he holds the shares, if and when the company declares, subject to the Article of Association, that the profits or any portion thereof should be distributed by way of dividends among the shareholders. He has undoubtedly a further right to participate in the assets of the company which would be left over after winding up. 52. In any event, whether Unilever was paying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erwise, and the effect on those interests, of the compromise or arrangement, if, and in so far as, it is different, from the effect on the like interests of other persons; and.... 56. The grievance voiced by Mr. Jajoo is not shared be more than 99% of the shareholders. An explanatory statement had been sent on the basis of which Mr. Jajoo had taken inspection of all relevant documents. 57. Notice must be taken of the fact that even after these points were raised in the meeting, the overwhelming majority of shareholders voters for the Scheme. That the explanatory statement was approved by the Registrar, is itself a relevant factor. 58. A similar question came up for consideration before a Division Bench of Gujarat High Court in the case of Jitendra R. Sukhadia v. Alembic Chemical Works Co. Ltd. (1987) 3 ComLJ 141. That was also a case of amalgamation. In that case, it was held that the exchange ratio of the shares of the two companies, which were being amalgamated, had to be stated alongwith the notice of the meeting. However this exchange ratio was worked out, however, was not required to be stated in the statement contemplated under Section 393(1)(a). 59. In the facts of this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ait the decision of the MRTP Commission with regard to the issues involved. The allegation before the MRTP Commission is that the proposed merger was in violation of the provisions of Monopolies & Restrictive Trade Practices Act. The decisive question whether the issues arising before the MRTP -Commission are the same as are now before this Court. 63. It was further argued that even if the proposed amalgamation is sanctioned by this Court, it must be made subject to the final outcome of the proceedings pending before the MRTP Commission. The MRTP Commission gravely erred in rejecting the application for interim order under Section 12A of the Monopolies & Restrictive Trade Practices Act. It was submitted that the Commission has erred in refusing to pass an interim order on the ground that any interim order passed will take away the jurisdiction of the Company Court. The Commission has jurisdiction, even after deletion of Section 23, to inquire into monopolies and restrictive trade practices. The Commission has overlooked the fact that the allegations made by the aggrieved parties before it, were not based on 'assumption' but on hard facts. 64. Our attention was invited to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, or (ii) which tends to bring about manipulation of prices, or conditions of delivery or to affect the flow of supplies in the market relating to goods or services in such manner as to impose on the consumers unjustified costs or restrictions; ... ... ... (s) "trade" means any trade, business, industry profession or occupation, relating to the production, supply, distribution or control of goods and includes the provision of any services; ... ... ... (u) "trade practice" means any practice relating to the carrying on of any trade, and includes - (i) anything done by any person which controls or affects the price charged by, or the method of trading of, any trader or any class of traders; (ii) a single or isolated action of any person in relation to any trade; 67. Section 10 empowers the Commission to enquire into any restrictive trade practice or any monopolistic trade practice. Section 12A empowers the Commission to issue temporary injunction, if it is proved that 'any undertaking or any person is carrying on, or is about to carry on, any monopolistic or any restrictive, or unfair, trade practice and such monopolistic or restrictive, or unfair, trade practic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Legislature by the amendment. By deleting Section 23, the Legislature removed the requirement of prior approval of the Central Government to a scheme of merger before the Court could sanction it. 70. Section 27A and Section 27B are the only sanctions in Chapter III of the Act which have been retained by the Legislature. Section 27 deals with division of undertaking and enables the Commission in the circumstances specified in that section, to pass an order for the division 01 any trade or undertaking or inter-connected undertaking, into such number of undertakings as the circumstances of the case may justify. Section 27A empowers the Central Government to protect severance of inter-connection between undertakings. Section 27A lays down the manner in which any order passed under Section 27 or Section 27A shall be carried out. The provisions as to restriction on the acquisition and transfer of shares by certain bodies corporate (Section 28 to Section 30G) have been entirely deleted. The intention of the Legislature is clear. A merger or amalgamation is not now subject to the prior approval of the Central Government. But, if the working of the company is found to be prejudicial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stood originally), a person resident outside India or a company (other than banking companies) which was not incorporated in India or in which the non-resident interest was more 40%, could not carry on business in India or establish in India a branch office or other place of business. Nor could such a person or company acquire the whole or any part of any undertaking in India of any company carrying on any trade, commerce or industry or purchase the shares in India of any such company. The object of Section, 29, inter alia was to ensure that a company (other than banking company) in which the non-resident interest was more than 40% must reduce in to a level not exceeding 40% (Needle Industries (India) Ltd. and Ors. v. Needle Industries Newey (India) Holdings Ltd. and Ors. [1981]3SCR698 ). But, now this restriction of 40% has been removed by an amendment by the Act 29 of 1993. A company in which non-resident interest is more than 40% can carry on business without having to obtain permission from the Reserve Bank of India. The underlying idea of this liberalisation is clear. Non-resident persons were being invited to invest in India and/or in Indian companies. If any non-resident in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Corporation Kamgar Union v. Union of India (1981)ILLJ193SC : " ...it if not a part of the judicial process to examine entrepreneurial activities to ferret out flows. The Court is least equipped for such oversights. Nor, indeed, it is the function of the judges in our constitutional scheme." Now merely because the scheme envisages allotment of 51% equity shares to Unilever, the scheme cannot be held to be against public interest. 79. Next it was argued on behalf of the employees of TOMCO that the Scheme will adversely affect them. This argument is not understandable. The Scheme has fully safeguarded the interest of the employees by providing that the terms and conditions of their service will be continuous and uninterrupted service and their service conditions will not be prejudicially affected by reason of the Scheme. The grievance made, however, is that there is no job security of the workers, after the amalgamation of the two Companies. It has been argued that there should have been a clause in the Scheme ensuring that no retrenchment will be effected after the amalgamation of the two Companies. There was no assurance on behalf of the TOMCO that the workers will never be retren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmination of the market price has been entrusted by the Court to a reputed valuer. There is no reason to doubt their competence. No case of mala fide has been established. 85. An argument was also made that as a result of the amalgamation, a large share of the market will be captured by the HLL. But there is nothing unlawful for illegal about this. The Court will decline to sanction a scheme of merger, if any tax fraud or any other illegality is involved. But this is not the case here. A company may, on its own, grow up to capture a large share of the market. But unless it is shown there is some illegality or fraud involved in the scheme, the Court cannot decline to sanction a scheme of amalgamation. It has to be borne in mind that this proposal of amalgamation arose out of a sharp decline in the business of TOMCO. Dr. Dhavan has argued that TOMCO is not yet a sick Company. That may be right, but TOMCO at this rate will become a sick Company, unless something can be done to improve its performance. In the last two years, it has sold its investments and other properties. If this proposal of amalgamation is not sanctioned, the consequence for TOMCO may be very serious. The sharehold ..... X X X X Extracts X X X X X X X X Extracts X X X X
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