Analysis of the new minority exit option

This article examines the legal regime governing takeover offers that may be made in applications for arrangements under sections 230(11) and (12) (collectively, takeover provisions) of the Companies Act, 2013 (act) read with the Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2020 (new buyout options) that have been brought into force and notified recently. This article seeks to identify the ambiguities in the law, and makes suggestions for consideration by the relevant authorities.

Salient features. New buyout options are applicable to unlisted companies; publicly listed entities will be governed by the regulations of the Securities and Exchange Board of India.

An application for an arrangement involving a takeover offer for acquiring any part of the remaining shares and voting rights of a company may be made under a new buyout option by a member who together with other members holds not less than three-fourths of the equity shares and voting rights in the company (eligible person).

A valuation by and the valuation report of a registered valuer under the new buyout option is required to take into account, among other factors, the highest price paid by any person or group of persons for the acquisition of shares of and voting rights in the company during the preceding 12 months. A clarification from the government limiting the expression, “any person or group of persons”, only to the eligible person(s), will address the price and resulting valuation manipulation concerns arising from the acts of minority shareholders.

Once such an application is sanctioned and approved by the National Company Law Tribunal (NCLT), the takeover offer will bind the minority shareholders and compel them to tender their shares and voting rights under the offer. New buyout options do not apply to any transfer or transmission of shares and voting rights through a contract, arrangement or succession or any transfer made pursuant to any statutory or regulatory requirement.

Valuations and the role of NCLT. A person aggrieved by schemes, whether composite or stand-alone, involving new buyout options (buyout schemes) may make an application to NCLT. Presently, the law is silent on the grounds on which such an application may be made. Since valuation parameters and requirements are integral to buyout schemes these may serve as grounds for challenge. However, there is no guidance as to how such aggrieved persons may challenge the fairness and objectivity of a valuation or valuation report that is relied in buyout schemes, including whether they are required to obtain an alternative valuation as a precondition to such a challenge. Any such precondition will put an economic burden on, and be disadvantageous to the aggrieved persons, who may not have access to all the relevant information or enjoy the cooperation of the company.

Judicial authorities, while considering other schemes and capital reduction applications, have been generally reluctant to interfere with valuations and valuation reports on the grounds that these are matters requiring technical expertise and experts. Judicial interference in valuation matters has been limited to cases of fraud, illegality, unfairness, unreasonableness and cases where reports are so egregiously wrong that judicial conscience will not permit it. NCLT may need to reconsider this approach of deference and limited interference when examining buyout schemes and may consider enhancing the grounds for intervention in case of buyout schemes.

Unlike section 236 of the act read with the applicable rules, the law governing buyout schemes does not provide a detailed mechanism for the execution and implementation of takeover offers. Accordingly, the government may consider prescribing guiding norms for such a mechanism, failing which NCLT will have to evolve these norms. In the absence of specific guidance from the government, the NCLT may need to deal with buyout schemes under the framework governing compromises and arrangements in the act. In this regard, how NCLT addresses the application of the requirement that a three-fourth majority of the shareholders, members, creditors, and debenture holders or class of them approve the buyout schemes and how NCLT delineates and exercises its powers in respect thereof, remain to be seen. In examining the issue of approval of the shareholders and members in buyout schemes, NCLT may have to decide whether the minority shareholders constitute a separate class of members, and whether consent of the majority of such a class of members will be required for any buyout scheme.

New buyout options represent a statutory recognition of the right of the specified majority of shareholders to seek the exit of the minority by providing them a fair exit price subject to NCLT’s examination and sanction. This being said, the evolution of jurisprudence relating to new buyout options, within the legal framework for schemes will make for an interesting study. There are also opportunities to develop new exit structures and to review minority protection mechanisms.

Inder Mohan Singh is a partner and Mohammed Abid Hussain is a principal associate at Shardul Amarchand Mangaldas & Co.

Shardul Amarchand Mangaldas & Co
Nariman Point
Mumbai – 400 021Executive
Chairman: Shardul Shroff
Managing Partner Mumbai: Akshay Chudasama
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