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TMI Blog2001 (4) TMI 865X X X X Extracts X X X X X X X X Extracts X X X X ..... ferred to as "the Companies Act"), which was later changed into a public limited company on July 1, 1990. The authorised and issued, subscribed and paid up share capital of the transferor-company as on March 31, 1999, are as under : "Share Capital .- Authorised : 80,00,000 equity shares of Rs. 10 each divided into 2,00,000 redeemable preference shares of Rs. 100 each and 60,00,000 equity shares of Rs. 10 each. Rs. 8,00,00,000 Issued, subscribed and paid up capital : 52,65,400 equity shares of Rs. 10 each Rs. 5,26,54,000 (a) Of the above 32,08,800 equity shares of Rs. 10 each fully paid up represents bonus shares allotted by capitalisation of reserves. (b) Of the above, 15,020 equity shares of Rs. 10 were allotted as fully paid up pursuant to a contract without payments being received in cash. The petitioner has set out the objects of the transferor-company and also its financial position. In so far as the transferee-company, DRL Ltd. is concerned, the said company is having its registered office at Hyderabad. The financial position and its objects are set out in the petition. Be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the meeting, it was resolved that the entire undertaking of the transferor-company would be merged with DRL Ltd. subject to the approval of the shareholders and confirmation by this court as well as by the High Court of Andhra Pradesh. It is stated that the board of directors of the transferee-company, DRL Ltd. also, at the meeting held on March 6, 2000, approved the scheme of amalgamation. The scheme of amalgamation as found in annexure A-5 provides for the transfer of all assets and liabilities of the amalgamating company in favour of DRL Ltd. The scheme contains usual clauses for the transfer of undertakings and for continuation of legal proceedings. The scheme also contains a clause dealing with the profit that would accrue in favour of the transferor-company after the effective date. In so far as the swap ratio is concerned, the scheme contains a clause that for every 12 equity shares of Rs. 10 each held by the shareholders in the transferor-company, one equity share of Rs. 10 each in the transferee-company, DRL Ltd. credited as fully paid up would be allotted. The scheme also provides that DRL Ltd. is operating in Hyderabad at leased premises and its employees have a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers are holding shares ranging from 10 to 1500. The shareholder, who has voted against the resolution, has filed his objection and this court ordered notice to the dissenting shareholder. He also appeared in person and raised his objection. I heard Mr. Krishna Srinivas, learned counsel appearing for the petitioner, the objector and also learned counsel appearing for the Central Government. There is no doubt that the issued paid up share capital of the transferee-company DRL Ltd. is Rs. 2,648.73 lakhs and it has reserves of Rs. 40,012.14 lakhs and its miscellaneous expenditure is Rs. 1,747.59 lakhs. The balance-sheet as on March 31,2000, shows that DRL Ltd. has reserves and surplus of a sum of Rs. 4,35,16,30,000 and its secured and unsecured loans come to Rs. 1,74,65,95,000. Its fixed assets and net current assets after taking into account its current liabilities and provisions come to Rs. 2,23,39,31,000. As already noticed, even after taking over the liabilities of the transferor-company in C. P. No. 464 of 2000, DRL Ltd. would be in a financially sound position. There is no doubt about it. The only issue that arises is whether the scheme of amalgamation is fair or not. The m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 and the decision of the Bombay High Court in Blue Star Ltd., In re [2000] 2 Comp LJ 245 (Bom); [2001] 104 Comp Cas 371 . Learned counsel also referred to the relevant passages of the decisions. Learned counsel relied upon the decision of this court in the case of Coimbatore Cotton Mills Ltd., In re [1980] 50 Comp Cas 623 and the decisions of the Supreme Court in the cases of CWT v. Mahadeo Jalan [1972] 86 ITR 621; [1973] 3 SCC 157 and in Hindustan Lever Employees' Union v. Hindustan Lever Ltd. [1995] 83 Comp Cas 30. Learned counsel also relied upon the decisions of the Calcutta High Court in the matter of Canon Tea Co. Ltd. [1966] 2 Comp LJ 278 ; Katni Cement and Industrial Co. Ltd., In re [1937] 7 Comp Cas 348 (Bom) and in Hindustan General Electric Corporation Ltd., In re [1959] 29 Comp Cas 46 (Cal). He also relied upon the decision of the Bombay High Court in the case of Piramal Spinning and Weaving Mills Ltd., In re [1980] 50 Comp Cas 514 . It is now necessary to consider the decisions relied upon by counsel appearing for the petitioner before considering the objection raised by the objector. In Miheer H. Mafatlal's case [1996] 87 Comp Cas 792 ; AIR 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its own view of fairness of the scheme in opposition to-so very large a majority of 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.' We may also refer to a decision of the Madras High Court in Kamala Sugar Mills Ltd., In re [1984] 55 Comp Cas 308 dealing with an identical objection about the exchange ratio adopted in the scheme of compromise and arrangement. The court observed as under (headnote) : 'Once the exchange ratio of the shares of the transferee-company to be allotted to the shareholders of the transferor-company has been worked out by a recognised firm of chartered accountants who are experts in the field of valuation and if no mistake can be pointed out in the said valuation, it is not for the court to substitute its exchange ratio, especially when the same has been accepted without demur by the overwhelming majority of the sharehold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le of valuation. If that method of valuation is adopted, then the exchange ratio fixed in this case cannot be described as unfair to the company's shareholders in any way. If profits earning method had been adopted, the ratio would have been very much worse for TOMCO shareholders. This problem of valuation in the case of amalgamation of two companies has been dealt with by Weinberg and Blank in the book Take-overs and Mergers, in which it has been stated that some or all of the following factors will have to be taken into account in determining the final share exchange 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat having regard to the general conditions and background and object of the scheme, the scheme as a whole is fair and reasonable, it is not for the court to substitute its judgment for the collective wisdom of the shareholders of the two companies. If the court finds that the scheme is fair and reasonable the burden will be on the objector to show that the scheme is so unfair and unreasonable that no reasonable man would accept it notwithstanding the views of the large majority of the shareholders that the scheme is a fair and reasonable one .. . Once the exchange ratio of the shares of the transferee-company to be allotted to the shareholders of the transferor-company has been worked out by a recognised firm of chartered accountants who are experts in the field of valuation and if no mistake can be pointed out in the said valuation, it is not for the court to substitute its exchange ratio, especially when the same has been accepted without demur by the overwhelming majority of the shareholders of the two companies or to say that the shareholders in their collective wisdom should not have accepted the said exchange ratio on the ground that it will be detrimental to their interest. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tio, unless it is demonstrated that the stock exchange quotation is not reliable and does not represent the true value." In Hindustan General Electric Corporation Ltd., In re [1959] 29 Comp Cas 46, the Calcutta High Court held as under (headnote) : "Where in a meeting for the sanction of a scheme, holders of shares of the value of Rs. 6,42,700 were present but holders of shares of the value of Rs. 4,42,700 alone voted in favour of the resolution and the others remained neutral, voting neither in favour of, nor against, the resolution ; Held, that there was a unanimous passing of the resolution and the requisite three-fourths majority contemplated by section 391(2) of the Companies Act, 1956, agreed to the scheme of arrangement. Section 81(1) of the Companies Act, 1956, clearly provides that if a company at a general meeting resolves that newly issued shares should be allotted to persons other than equity shareholders, or otherwise than in proportion to their existing shareholding, such decision prevails and is not open to question." In Katni Cement and Industrial Co. Ltd., In re [1937] 7 Comp Cas 348 , the Bombay High Court laid down the law as under (headnote) : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shed is that when the expert has taken into account the market value of shares of both the companies in the case of amalgamation, that should be given due weight. As far as the report of the chartered accountants is concerned, the chartered accountants have taken into account share capital, net worth and earning capacity value of both the companies. The chartered accountants have also taken into consideration the expenditure incurred by both the companies on the research and development activities and the projected turnover and the future earnings of the transferee-company, and determined the market price of shares on the basis of the price quoted in the stock exchange which is an approved method of valuation as held by the Supreme Court in CWT v. Mahadeo Jalan [1972] 86 ITR 621 ; [1973] 3 SCC 157 and in CGT v. Smt. Kusutnben D. Mahadevia [1980] 122 ITR 38 ; AIR 1980 SC 769 wherein the Supreme Court held that in the case of quoted shares, the stock exchange price of shares prevailing on the valuation date would represent the market value of the shares. The chartered accountants found that the value of the quoted shares of DRL Ltd. fluctuated between a high of Rs. 1,810 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not correctly reflect the profit earning capacity. According to the chartered accountants, the earnings per share of DRL Ltd. for the last five years worked out is Rs. 18.40 against Rs. 4.55 in the case of the transferor-company. It is stated that DRL Ltd. declared dividend of Rs. 3 out of the earnings of Rs. 18.40 whereas the transferor-company declared an average dividend of Rs. 1.70 out of the average earnings of Rs. 4.55. It is also stated that in view of the higher percentage retained by DRL Ltd., the net asset value of DRL Ltd. is higher compared to the transferor-company. I have carefully gone through all the reports of the chartered accountants. I find that the share exchange ratio arrived at by the above said three chartered accountant firms adopting three different methods is fair. No doubt, there would be a loss of dividend income, which is the main objection of the objector. As already seen, the chairperson of the meeting of equity shareholders of the transferor-company in her report has stated that out of 79 shareholders, 78 shareholders were present and 77 shareholders holding 45,92,470 shares of the value of Rs. 4,59,24,700 voted in favour of the resolution appr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herein no other has raised the objection. Taking into consideration the position of the transferee-company which has consolidated in the formulation of market both domestic and export and its high potential market in the field of pharmaceuticals and there would be capital appreciation in the value of shares, the objection raised by the objector is not a ground to hold that the scheme is not fair. In the light of the decisions cited supra by learned counsel for the petitioner and various methods of valuation adopted by the chartered accountants and also taking into account that 99.97 per cent, shareholders have approved the scheme with the share exchange ratio 1:12,1 examined the scheme of amalgamation with great care that is needed to prove that the scheme is fair, particularly when the transferee-company is a company holding more than 84 per cent, of shares in the transferor-company and there was an earlier attempt by the transferee-company to purchase all the shares in the transferor-company. It is seen that majority of shareholders approved the scheme of amalgamation except the objector herein and his objection is not against the scheme of amalgamation, but his concern is with r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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