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TMI Blog2000 (3) TMI 1024X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the other three applicants. The applicants prayed the court not to confirm the scheme of amalgamation at the proposed exchange ratio and to direct the respondent-company ACL to work out the share exchange ratio based on the valuation by an independent auditor. The said applications were dismissed by the learned single judge. Hence these appeals. At the outset, it may be mentioned that the scheme of amalgamation envisages not only the amalgamation of ACL but also three other companies with CCL. These three companies, it appears, filed petitions under section 394 before the High Court of Karnataka and the same were allowed by the High Court. As ACL has registered office at Secunderabad, it has moved this court for similar relief. The appellants are aggrieved by one of the terms of the scheme under which the members of the transferor-company i.e. , ACL will get one equity share of Rs. 10 each in the transferee-company, i.e. , CCL for every six fully paid up equity shares of Rs. 10 each held by them in ACL. A consequential provision has been made to the effect that the new equity shares in the transferee-company to be issued as above shall rank pari passed in all respects wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e court has to take note of the fact that its role in according approval to the scheme of amalgamation under section 394 is nothing more than a supervisory role. The role is approximately close to the judicial review of administrative action. In the context of such review, it is often said that the constitutional court is not concerned so much with the actual decision reached by the administrative or statutory authority as the manner of reaching such decision. In this context, it is apposite to refer to the weighty observations made in para. 47 of the judgment in Fertilizer Corporation Kamgar Union v. Union of India [1981] 59 FJR 237; AIR 1981 SC 344. These observations were also quoted in Hindustan Lever Employees' Union v. Hindustan Lever Ltd. [1995] 83 Comp. Cas. 30; AIR 1995 SC 470, a case arising under section 394 of the Companies Act, 1956 (page 37 of 83 Comp. Cas.) : "... certainly, it is not part of the judicial process to examine entrepreneurial activities to ferret out flaws. The court is least equipped for such oversights. Nor, indeed, is it a function of the judges in our constitutional scheme. We do not think that the internal management, business activity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... while putting its seal of approval on the concerned scheme placed for its (Sanction." The limits inherent in the jurisdiction of the court under section 394 were highlighted in paragraph 29 in the following words (page 813 of 87 Comp. Cas.): "However, the further question remains whether the court has jurisdiction like an appellate authority to minutely scrutinize the scheme and to arrive at an independent conclusion whether the scheme should be permitted to go through or not when the majority of the creditors or members or their respective classes have approved the scheme as required by section 391, subsection (2). On this aspect the nature of compromise or arrangement between the company and the creditors and members has to be kept in view. It is the commercial wisdom of the parties to the scheme who have taken an informed decision about the usefulness and propriety of the scheme by supporting it by the requisite majority vote that has to be kept in view by the court. The court certainly would not act as a court of appeal and sit in judgment over the informed view of the concerned parties to the compromise as the same would be in the realm of corporate and commercial wisdom o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t members or class of members or creditors or class of creditors, as the case may be, were acting bona fide and in good faith and were not coercing the minority in order to promote any interest adverse to that of the latter comprising the same class whom they purported to represent. 8.That the scheme as a whole is also found to be just, fair and reason able from the point of view of prudent men of business taking a commercial decision beneficial to the class represented by them for whom the scheme is meant. 9.Once the aforesaid broad parameters about the requirement of a scheme for getting sanction of the court are found to have been met, the court will have no further jurisdiction to sit in appeal over the commercial wisdom of the majority of the class of persons who with their open eyes have given their approval to the scheme even if in the view of the court there could be a better scheme for the company and its members or creditors for whom the scheme is framed. The court cannot refuse to sanction such a scheme on that ground as it would otherwise amount to the court exercising appellate jurisdiction over the scheme rather than its supervisory jurisdiction." These parame ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has approved the valuation done by the aforesaid chartered accountants, is the banker of Tata Tea Ltd. Tata Tea Ltd. has 64.49 per cent, of shareholding in the transferor-company and 54.34 per cent, shareholding in the transferee-company. In effect, the argument is that Tata Tea Ltd. which has substantial stake in both the companies had so manipulated to see that the valuer of its choice was appointed to derive undue advantage to the detriment of minority shareholders. We agree with the learned single judge that this contention does not merit acceptance. The mere fact that one of the chartered accountants valuers is a statutory auditor of the transferee-company, does not lead to a reasonable inference that the choice of such valuer was stage-managed by Tata Tea Ltd. A statutory auditor has an independent role to play if he has to effectively perform his part. Imputations of bias cannot lightly be made against a professional chartered accountant who is expected to discharge the duties according to the obligations cast on him by the statute and the well established principles of professional conduct and etiquette. Even testing from the angle of reasonable likelihood of bias, we do no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment. One of the reasons given is that the share market quotations have not been taken into account by the learned auditor. That apart, as rightly pointed out by the learned single judge, there is no good reason why the appellant should not circulate that valuation report to the shareholders and take steps to have it placed before the extraordinary general meeting. In the absence of inherent defects or other vitiating factors in the valuation got done by the management of transferor and transferee companies, it is not permissible for the court to suspect the correctness or bona fide s of those reports in the light of the subsequent valuation report which the appellant produced at the time of hearing of the company application. Learned counsel for the appellant in O.S. A. No., 50 of 1999 pointed out that TTL had offered one equity share for every five shares of the transferee-company and purchased the shares at Rs. 15 per share in the year 1995. In view of the growing business of the company, the share exchange ratio cannot be less. As rightly observed by the learned single judge, in view of the lapse of three long years, the share exchange ratio need not remain at the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such approach is that the performance of coffee companies largely depend on unpredictable weather conditions and moreover, the coffee prices depend on the fluctuating international market. These factors cannot be said to be irrelevant. It is relevant to mention, on the question of valuation of shares, that Registrar of Companies who filed the affidavit on behalf of the Regional Director, Department of Company Affairs, Chennai gave the opinion that TTL company will get more benefits at the cost of all minority shareholders. Therefore, the exchange ratio needs to be suitably amended by the High Court. The reasoning given is as follows : "That it is humbly submitted that on examination of the scheme of amalgamation in this matter, if is observed that the transferor-company viz ., M/s. Asian Coffee Ltd., has been making profits all through and it is a well managed company, hence there is no reason for downgrading the assets of the company. Further it is provided in the scheme that the share exchange ratio provided is that for every share of transferor-company, one share of transferee-company viz ., M/s. Consolidated Coffee Ltd. will be allotted. When the scheme is implemented the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the evaluation was done independently and broadly relevant factors have gone into such evaluation and there is nothing, demonstrably wrong or mala fide , the ratio of share capital arrived at cannot be faulted by the court while exercising the jurisdiction under section 394 of the Companies Act. It may be mentioned that the official liquidator attached to the High Court supported the scheme of amalgamation. There remains the argument that the complete delta is not contained in the valuation report made available and for lack of knowledge of the details and mode of computation, the appellants were not able to effectively object to the share exchange ratio and in all fairness, there should have been frank disclosure of relevant details, but not merely sketchy information discernible from the summary of the valuers. We cannot accept this contention. Sections 391 and 393 spell out the nature of information and documents to be furnished to the members and creditors before calling for a meeting to take a decision in regard to the proposal scheme of amalgamation. It is not in dispute that such information and documents were furnished. Thus, the propositions 4 and 5 enunciated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding the working sheets of the valuers should be made available- to all the members of the company. Before concluding the judgment, we would like to advert to the fact that broadly speaking, by adopting the share exchange of one share of CCL to six shares of ACL as proposed in the scheme, the resultant shareholding of TTL in CCL will be slightly less than what it could have been if the exchange ratio of 1:2 as suggested by some of the appellants is adopted. In the former case, the resultant shareholding would be 50.31 per cent, whereas in the latter case, it would be 50.70 per cent. The learned single judge therefore, commented in paragraph 41 that it would be more beneficial to TTL if the share exchange ratio is valued as suggested by the appellants. This gives an indicia that TTL would not have acted on the sole consideration of boosting up its own stake and interest in the transferee-company. Finally, it must be mentioned that the scheme of merger as proposed was approved by an overwhelming majority including financial institutions. Even after excluding the shares of TTL, the scheme was approved with 1,44,533 votes cast in its favour as against 61,536 votes against the schem ..... X X X X Extracts X X X X X X X X Extracts X X X X
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