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TMI Blog2003 (2) TMI 337X X X X Extracts X X X X X X X X Extracts X X X X ..... imously contended that I should pronounce on the preliminary issue of whether the said section has been properly and correctly invoked by respondent No. 1. It is only in the event that this Court comes to the conclusion that respondent No. 1 was authorised, competent and entitled in law to unilaterally purchase or requisition or expropriate the petitioner s holding in respondent No. 2, would the further question arise of whether the price fixed by respondent No. 1 should be accepted by the Court to be a fair and proper valuation. 2. Respondent No. 2 was incorporated in March 1995 and changed its name to the present one in March 2000. In June 1995 Tata Industries Limited, Bell Canada International Inc. Bell Canada International (Mauritius) Inc., and Respondent No. 2 entered into a Joint Venture Agreement (JVA) for obtaining a License in respect of cellular services in India. The petitioner was associated with the JVA from its inception and had acquired the aforementioned shares of Respondent No. 2 at the very inception stage. In November 1995 the respondent No. 2 was awarded a license to establish and provide Cellular Mobile services in Andhra Pradesh. In December 1995, the peti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ondent No. 2 on one side and Birla s and AT T who had combined their interests in the form of BACL on the other. Respondent No. 1 has averred that a Letter of Offer, seeking to purchase their shares under section 395 of the Act, was despatched under U.P.C. to all the shareholders of respondent No. 2 including the petitioner, but receipt of this communication has been specifically denied by the petitioner. It will be seen that the identity of respondent No. 1 and respondent No. 2 are almost the same, once the corporate veil is lifted. On such a important matter, it could be expected that the respondent No. 1 would have been prudent to despatch the Letter of offer by recorded/registered post so as to set speculation to rest. The petitioner contends, however, that it came to know of the letter dated 26-4-2001 for the first time on the receipt of the subsequent notice dated 24-7-2001. In this interregnum, the scheme of the merger of respondent No. 2 with BACL was sanctioned by this Court on 28-5-2001. It is necessary to underscore that no reference in the scheme to the offer dated 26-4-2001 of respondent No. 1 to all the shareholders of respondent No. 2, and also that respondent No. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent No. 1 intended to convey; even if I have misconstrued the clause, so could the public at large. 4. On 23-5-2001, 92 per cent of the shareholders in respondent No. 2 consented to the amalgamation, as must surely have already been anticipated by all concerned. It has been emphasised on behalf of the respondents that the petitioner neither supported nor opposed the scheme, but it must be kept in perspective that the expropriation by respondent No. 1 of the petitioner s shares in respondent No. 2 was not a part of the proposed scheme of amalgamation. So far as the petitioner was concerned, even if it did not have a direct or distinct role in the new amalgamated company, its participation continued by virtue of its share- holding in respondent No. 2. The scheme of Merger was approved by this Court on 28-5-2001. In the event the petitioner could legitimately have expected to receive share in the reduced ratio of 376 for 400 shares as have been given to respondent No. 1, the Company formed pursuant to the amalgamation, namely Idea Cellular, has stayed this exercise awaiting the decision in these proceedings. The notice for the acquisition of the petitioner s shareholding in resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. This gives rise to avoidable controversy. In contrast to the amendments by our Parliament, with each amendment in English Company Law, minute care has been taken to delete the superfluous, and re-organise the provisions wherever necessary. As will be seen below, the law pertaining to Takeovers has been detached from those dealing with Arrangements, Reconstruction and Amalgamation in the English statute of 1985. This is of significance since it has been contended by Shri Chidambaram that section 395 of the Act should be viewed and applied in a manner distinct to the other provisions of Chapter V. Myriad amendments have also been effected in the remaining sections of the Act. Section 390 of the Act interprets the expressions "company", "arrangement" and "unsecured creditors" for the purposes of sections 391 and 393 of the Act, thereby showing that the two provisions are bonded to each other. Thereafter section 394(4)( b ) states that "Transferee Company" does not include any company other than a company within the meaning of the Companies Act; but "Transferor Company" includes any body corporate. This definition also applies to section 395, as specifically mentioned in its sub-s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 209, on the other hand, the matter may never come to the court at all. If it does not come to the Court, then the onus is cast on the dissenting minority to demonstrate the unfairness of the scheme. There are, therefore, good reasons for requiring a smaller majority in favour of a scheme under section 206 than the majority which is required under section 209 if the minority is to be expropriated." (p. 638) 6. The Companies Act, 1956, prescribes varying requirements for decisions to attain binding force on the company and with sound and profound reasons. As is evident from a reading of sections 189 and 190 of the Act, some decisions are efficacious on receiving the assent of a simple majority whilst others require that there must be not less than three times the number of votes cast in favour of a Resolution than those opposed to it. Section 391 of the Act, which deals with compromises and arrangements, contemplates the consent of three-fourths in value of the affected persons for the decision to be binding on the remainder. Chapter VI, comprising sections 397 to 409 of the Act, protects the rights of persons constituting a minority, holding not less than ten per cent of the me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the court ought to regard the scheme as a fair one inasmuch as it seems to me impossible to suppose that the court, in the absence of very strong grounds, is to be entitled to set up its own view of the fairness of the scheme in opposition to so very large a majority of the shareholders who are concerned. Accordingly, without expressing a final opinion on the matter, because there may be special circumstances in special cases, I am unable to see that I have any right to order otherwise in such a case as I have before me, unless it is affirmatively established that, notwithstanding the views of a very large majority of shareholders the scheme is unfair." 7. While assenting with this view, Tek Chand, J. has in Benarsi Das Saraf v. Dalmia Dadri Cement Ltd. [1958] 28 Comp. Cas. 435 (Punj.) opined that the "principle underlying section 395 is that where a company obtains 90 per cent of the shares or class of shares under a scheme of arrangement, it can compel the dissentient minority to part with its shares. Conversely the dissenting shareholders are also entitled to compel the company to acquire their shares as well as and on the same terms. Section 395 of the Companies Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een Navjivan and its creditors and shareholders? and, secondly, whether it can be sanctioned under section 391? Second question raised by Mr. Shah will also stand answered by this decision that such a scheme would be covered by section 395 and the procedure contemplated therein should have been carried out. When the scheme in the National Bank case was being considered in the Chancery Division, a contention was in terms raised that the scheme was not one under section 206 (section 391 of our Companies Act) but one under section 209 (section 395 of our Companies Act). Both the contentions are answered in favour of the company proposing the scheme. Such a scheme can be said to be a scheme of arrangement between the company whose shares are being taken over and its creditors and shareholders and that such a scheme can be sanctioned under section 391 and it is not obligatory to carry out the procedure prescribed under section 395. The scheme has in fact been sanctioned. It, therefore, appears both on principle as well as on authority well settled that where by a scheme partially of compromise and partially of arrangement the shares of one company are being taken over by another company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e share capital of another company notwithstanding the fact that 90 per cent of the shareholders do not agree as envisaged by section 395, the same can still be sanctioned under section 391 and it is no answer to the problem that such a scheme can only be considered under section 395. At this stage, one submission of Mr. Shah may be noticed. It was urged that section 209 of the English Companies Act differs in one respect from section 395 of our Companies Act inasmuch as there is no provision analogous to sub-section (4A) of section 395 in section 209 of the English Companies Act. That hardly makes any difference. Sub-section (4A) was introduced to protect the interests of the shareholders. If, therefore, anyone takes resort to section 395, he is bound to carry out the procedure prescribed under sub-section (4A) if the scheme is in terms a scheme under section 391, it could not be rejected on the ground that the procedure prescribed in sub-section (4A) of section 395 is not carried out. In fact the consenting majority required in section 391 is adversely kept lower than the consenting majority require under section 395. When a scheme under section 391 is sponsored, at the outset, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 had made an offer or demand for the purchase of the shareholding of the Petitioner. I need not unravel whether this was intentionally separated in time, possibly with a view to remove the latter event from the Court s scrutiny and approval, since this point has not been directly argued by Mr. Vellapally. His contention was that having failed to bring these facts to the Court s notice, and obtain approval for it, post the sanction of the Scheme, the concerned party was precluded from raising it. Mr. Vellapally has justifiably emphasised the inconsistency between the pleadings in paragraph 4( ii ) viz. "that the promotors of Birla AT T Communications Limited had indicated to the Tata Group that they were not inclined to participation of the Petitioner in the Merged Entity to be a three way venture .....". Two aspects must be underscored forthwith. Firstly, that there was perceived to be a Tata Group, thus negating the rationale behind the 90 per cent stipulation in the said section. Secondly, that the Scheme of Amalgamation/Reconstruction could have, and should have contemplated the ouster of the Petitioner at that very stage. 10. In Patrakola Tea Co. Ltd., In re AIR 1967 C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ree company was promoted in order to invoke the powers contained in the said section. In Bugle Press Ltd. s case ( supra ) the Court of Appeals unanimously struck-down the intended compulsory purchase offer and dismissed the Appeal. Lord Evershed M.R. concurred with the lower Courts view that the unusual feature was that the 90 per cent majority shareholders in fact constituted the transferee company. In his opinion it ought to "be borne in mind that In re Hoare , followed in this respect by In re Press Caps Ltd. was a case in which the 90 per cent, of the shareholders who had accepted the offer were persons wholly independent of the offeror or transferee company. Maugham J. (and I will not make further detailed reference to the decision of In re Hoare ), after pointing out that the section gave no guide whatever as to the basis upon which the apparently unlimited discretion is to be exercised, stated that where one has in a case of that kind (which would be the ordinary case) 90 per cent, of the shareholders saying : This is, we think, a good offer or satisfactory offer, the court will not, in the absence of very strong evidence to show there is something wrong with the of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment a case in which, for the purposes of exercising the court s discretion, the circumstances are special - a case, therefore, of a kind contemplated by Maugham J. to which his general rule would not be applicable. Harman L.J., viewed the transaction as a barefaced attempt to evade that fundamental rule of company law which forbids the majority of shareholders, unless the articles so provide, to expropriate a minority. ....I am surprised that it was thought that so elementary a device would receive the Court s approval." The ratio in Bugle Press Ltd. s case ( supra ) is that a perfunctory compliance of the ninety per cent shareholding does not per se empower the majority to expropriate the rights of the minority and that the price of the shares should be reasonably close of their actual value. If resort to the provisions is a subterfuge or scheme in the derogatory sense to acquire the shares of the minority at an unfair price, the court would decline its imprimatur to the offer. 12. Predictably, the legal position in Australia is similar to that prevailing in England and India, as can be gathered from the very recent decision in Capricorn Diamonds Investments (P.) Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issentient shareholders if the transferee company voices and expresses its intent to do so by giving a notice to the dissenting ten per cent within two months of the expiry of the four months period. Once the notice is issued, the transferee company would not be empowered to withdraw this offer. The transferee company may not issue the notice with the result that the dissentients would retain their shares. In the present case it is the second stage that has transpired, since respondent No. 1 has exercised the option to buy out the dissentient Petitioner, by the issuance of the notice dated 24-7-2001. 15. Section 395 has already withstood a constitutional assault and has been held not to impinge upon the rights recognised in Article 19 of the constitution See S. Viswanathan v. East India Distileries Sugar Factories Ltd. AIR 1957 Mad. 341. In my view it is extremely important that the 90 per cent majority should comprise of different and distinct persons since this would then fall in line with the rationale of the section and justify overriding the rights and interests of the dissentients. It is also imperative that this majority should not be same as the party seeking to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been incorporated to take over the holding of the Petitioner, as appears to have been the intention in Bugle Press Ltd. s case ( supra ). While that case may not be binding on me, it has certainly assisted me in arriving at the conclusion expressed herein. I would be loath to treat the path of the single judge in Western Mfg. (Reading) Ltd. v. Adamant Engg. Co. (Luton) Ltd. [1955] 3 All ER 733, and for recondite reasons not follow the unanimous view of seven Learned Judges of the Supreme Court of Canada in Rathi v. Montreal Trust Co. [1953] 2 SCR 204. 16. Ordinarily, notices sent under postal certificate may be presumed to have been waived. In normal circumstances, it would be unreasonable to reject the argument of Respondent No. 1 that since the Petitioner does not have an address in India it need not have issued any notice to the Petitioner in Mauritius. The fact remains that the "First step" Notice dated 26-4-2001 under section 395 is stated to have been sent to the Petitioner on 30-4-2001. Had it been sent by recorded/registered acknowledgement due post, speculation as to whether this Notice was served or not may have been put to rest. I am presently not dealing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... la fides . So far as the Scheme of Amalgamation/Merger is concerned the fact remains that the Petitioner was part and parcel of the merged entity BATATA (now Idea Cellular) by virtue of holding shares in Tata Cellulars, albeit that in place of every 400 shares each shareholder of the erstwhile Respondent No. 2 was allotted 327 shares. Keeping in mind the near total identity of Respondent No. 1 and the erstwhile Respondent No. 2 it would have been reasonable for the Tata group to insist that the Petitioner should not be allotted any shares in the BATATA in the Scheme placed for its imprimatur before the company Judge. If this stand had been taken, my learned Brother Cyriac Joseph, J., who was then ruling the roster of the Company Judge, may well have considered the equities involved prior to sanctioning the Scheme of Merger on 28-5-2001. It may be useful to reiterate that had the offerers ( i.e. , Respondent No. 1) been an independent third party these doubts would not have arisen at all. Some of the salient features of Respondent No. 1 s Offer dated 24-5-2001 have been produced above. Inter alia, respondent No. 1 was to purchase the shares of respondent No. 2 including those of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny to purchase these shares. If it intends to do so then the taking-over company/transferee company must record and articulate its intention to purchase the dissentients share by giving a notice in the manner prescribed in the section to the dissentient shareholders within two months of the expiry of four months. It would be of advantage to refer to Patiala Biscuit Mfrs. Ltd. v. Yaddevindra Singhji Maharajadhiraj AIR 1956 Pepsu 86, which appears to have escaped the research of Counsel for the parties. If this construction is not correct, and the transferee company is free to restrict its offer for a shorter period than four months, a hiatus would exist between the first stage and the second stage of section 395. In the present case since the offer was open only for a period of one month it would result in a state of limbo and inertia prevailing for a period of three months. Section 395 could quite easily have ordained that the notice for compulsory acquisition could be issued within two months of the expiry of the period indicated in the offer which period should not exceed four months. Therefore, assuming that the notice dated 26-4-2001 was duly and validly issued, I am of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was fair and one that they wished to accept. I cannot think that it was contemplated that the offeror might limit the period within which the offeree might make these inquiries in such manner as might suit his own, convenience. If the time for acceptance might be limited to two weeks, it might, of course, be limited to a much shorter period and afford the shareholders a wholly inadequate opportunity to make such inquiries as they saw fit to make before deciding upon the acceptance or rejection of the offer. As, in my opinion, the offer made did not comply with the terms of the sub-section, the respondents were not entitled to invoke the assistance of the court to compel the dissentients to transfer their shares." 21. In the concurring Judgment of Rand J. on behalf of himself and Tascheran, it was observed that the offer/proposal should "remain open for approval by any shareholder for the four months mentioned, otherwise the postponement of the rights to proceed by notice against the dissenting shareholder until after the expiration of that period would scarcely make sence." The contrary view of a Single Judge of the Chancery Division in England in the original action in Wester ..... 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