Acquiring Minority Of Unlisted Companies
With time, the acquisition of a minority stake in the company has become a topic of intense discussion. The Promoters with deep-pockets are generally eager in finding out ways to acquire such stakes, directly or indirectly. The Companies Act, 2013 (“Act”) provided various methods already through which minority stake can be acquired by the majority. Again, with a recent set of notifications dated 03.02.2020, sub-section (11) and (12) of Section 230 of Act have been notified. The notification provides for the takeover of the minority by a majority in unlisted companies through a scheme of arrangement. The procedural aspects of such takeovers are governed by the amended Companies (Compromise, Arrangements, and Amalgamations) Rules, 2016(“CAA Rules”), and National Company Law Tribunal Rules, 2016.
Takeover under Section 230
Earlier, Section 230 used to govern only compromise and arrangement between the company and its members or class of members or creditors or class of creditors, but since the aforesaid notifications rolled-out, it also administers takeover of unlisted companies through an arrangement.
The said Section and CAA Rules empowers majority shareholders holding at least three-fourth of shares of the target company to enter into an arrangement for acquisition of any part of its remaining shares. The term ‘shares’ has been defined as vide Explanation to Rule 3(5) of CAA Rules to mean equity shares carrying voting rights or any other security carrying voting rights. Such acquisition shall be made at the price determined by the registered valuer.
The application of arrangement for takeover is required to be filed at NCLT in form NCLT-1 along with notice of admission (NCLT-2), affidavit (NCLT-6), copy of takeover-offer and fees of INR 5,000 and attachments provided in Section 230(2) and Rule 3(6) of CAA Rules.
Thereafter, if creditors/class of creditors having at least 90% value, confirm and agree to the scheme, then the requirement of calling a meeting by NCLT is dispensed with. Or else, The NCLT may, after considering the application, call for and direct the manner of convening meeting. The notice of such meeting shall be sent to the persons and in the manner provided in Section 230(3), Rule 6, 7, and 11.
Moreover, under Section 230(5) and Rule 8, Company shall send notice to all regulatory authorities and such authorities shall be required to make representations to NCLT and concerned companies within 30 days from receipt of such notice.
The meeting requires special approval i.e. of the majority of members/creditors who represent at least three-fourth of the value of members or creditors. Once the meeting is approved, the company shall file a petition in form CAA-5 to NCLT seeking confirmation of said arrangement and if confirmed, then NCLT shall pass an order in Form no. CAA-6 while providing for any of the matter(s) specified in Section 230(7).
Thus, after following the said procedure, the takeover can be concluded (minority-stake can be acquired).
Minority Rights under Takeover
Although the Act has introduced a new method of acquiring the shares of minorities, it confers certain rights to them.
The member/s are entitled to object to such scheme under proviso to Section 230(4), subject to the condition of minimum shareholding of 10% (Also, the creditors having an outstanding debt of at least 5% have the right to object to such arrangement.). Thus, this is a qualified right and does not protect minority interests at best.
However, under Section 230(12), an aggrieved party has an unqualified right to apply to the NCLT in case of any grievances with the said takeover in Form no. NCLT-1 along with the necessary documents.
Thus, both aforesaid rights can be said to be ensuring shareholders’ democracy in a company.
Implications of the Notifications and the Amendments
The notified subsection is an addition to methods of eliminating minority smoothly vide scheme of arrangement in unlisted companies. This is indeed a proactive step for the consolidation of shareholdings by majority-shareholders of private companies.
The requirement of valuation and deposit of one-half of the total consideration in a separate bank account is significant procedural safeguards in the interest of the minority. However, for the majority, it can be argued that such funds remain locked in the process until the conclusion of the takeover.
Critically, one of the issues which this method of takeover poses is the requirement to compute shareholding threshold through equity-shares and other securities carrying voting rights which may result in puzzlement and cause exclusion of certain security-holders from the process. Thus, the determination of “majority” and “minority” shareholders would be a chaotic task.
Although the minority is conferred with the power to file grievances under Section 230(12), no parameter has been laid down for NCLT to evaluate such grievances which seem absurd, as the court has nothing to begin supervision over such grievances. Thus, it is more likely that there would be confusion regarding the implementation of such arrangements.
It can be said that Section 230(11) is another enabling provision for the majority-shareholders of a private company to eliminate minority-shareholders from the company. Even the individuals are allowed to take over a company unlike Section 235 where the company is acquired by another company.
Thus, only the views of NCLT, NCLAT, and the Supreme Court can now decide the material-effect and fate of notifications.
However, it is important for minority shareholders to understand all methods through which their holding can be acquired by the majority and to be aware of rights enjoined upon them to protect their interests.
ABOUT THE AUTHOR
Aiyush Gupta is currently pursuing Law at University School of Law and Legal Studies, GGSIPU.
They can be contacted at https://www.linkedin.com/in/aiyush-gupta-0183ba104/
.Edited by: Swathi Ashok Nair
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