Options for squeeze-out of minority shareholders

Squeezing out typically involves a voluntary or mandatory purchase of shares held by minority shareholders, and is primarily used to gain complete control over a company, for operational ease and/or to reduce costs of maintaining and servicing small shareholders while providing an attractive exit for sometimes illiquid investments. While the Companies Act, 1956, and jurisprudence affirm that the rights of minority shareholders are to be safeguarded, companies have successfully used several provisions in the act to squeeze out minority shareholders.

Section 395

Section 395 specifies a process whereby if a scheme or contract involving the transfer of shares from one company to another is approved by shareholders with 90% of the value of shares whose transfer is involved (plus under certain circumstances, constituting three-fourths in number), the dissenting shareholders can essentially be bought out by the transferee company, unless they obtain a court order to the contrary.

In AIG (Mauritius) v Tata Televentures, Delhi High Court held that to satisfy the rationale of section 395 and justify overriding the minority interest, the 90% majority should not be the same as the party seeking to acquire the shares. There are therefore practical difficulties in using section 395 to effectuate a minority squeeze-out and this section has been rarely used.

Section 77A

Section 77A of the act prescribes the process for a company to buy back its shares to reduce its capital within the specified limits. In addition to the requisite corporate authorizations, section 77A prescribes several conditions for carrying out a buyback, including the company having to purchase its shares out of its free reserves, securities premium account or the proceeds of any shares or other specified securities (except from an earlier issue of same kind of shares or specified securities), 365 days having lapsed from offer date of the preceding buyback and the ratio of the company’s debt not exceeding twice the capital and its free reserves after such buyback. Further, being a voluntary process that cannot be selective, there is no certainty that a complete squeeze-out of minority shareholders will be achieved.

Sections 391-394

Companies often undertake a squeeze-out as part of a scheme of compromise or arrangement between a company and its creditors or members or a class thereof under sections 391-394 of the act. The company must hold court-convened class meetings of its shareholders and creditors for the approval of a scheme by each class by a majority in number representing three-fourths in value of those present and voting.

Companies find such schemes attractive because once the court grants sanction, the scheme becomes binding on all shareholders and creditors. However, there is early court involvement and courts have the discretion to determine whether a scheme is against public policy.

Section 100

Companies are increasingly using a selective reduction of share capital under section 100 of the act to squeeze out minority shareholders. Section 100 authorizes a company to reduce its share capital subject to confirmation by a court. Unlike a scheme under sections 391-394, the shareholders of the company approve (by three-fourths majority) the resolution for reduction prior to the petition being filed with the relevant high court. Therefore, the court involvement is at a later stage. Further, in light of Sandvik Asia Limited v Bharat Kumar Padamsi and Others and In Re: Reckitt Benckiser (India) Ltd, unlike a scheme there is no statutory requirement to hold separate class meetings of shareholders in case of selective capital reduction under section 100.

In the Sandvik case, Bombay High Court held that as the shareholders are being paid fair value for their shares and an overwhelming majority of non-promoter shareholders have voted in favour of the resolution, withholding sanction to the special resolution for reduction of capital would not be justified. This approach has subsequently been reaffirmed by Bombay High Court in In Re: Organon (India) Ltd and Chander Bhan Gandhi v Reckitt Benckiser (India) Ltd.

Prior to confirming a reduction under section 100, the court needs to be satisfied that there is no unfair or inequitable transaction, and all the creditors entitled to object to the reduction have either consented or been paid or secured (unlike a scheme where the court orders class meetings of creditors to obtain their approval).

In summary, each method for minority squeeze-out has its pros and cons. A company’s choice should be based on its commercial objectives and surrounding circumstances.

Puja Sondhi is a partner and Mayank Vikas is a senior associate designate at Amarchand & Mangaldas & Suresh A Shroff & Co. The views expressed in this article are those of the authors and do not reflect the position of the firm.