Purchase of minority shares without compliance to Companies Act amounts to oppression and Mismanagement

S. Gopakumar Nair & Anr. vs. Obo Bettermann India Pvt. Ltd
NCLAT Company Appeal (AT) No. 272/2018

Held That

Purchase of minority shares without compliance to Companies Act amounts to oppression and mismanagement

BRIEF FACTS

1. The Appellants held 100% shares in Cape Electric India Pvt. Ltd. ("CEIPL").

2. Subsequently, OBO Bettermann Holdings- GMBH Ltd. ("OBO Germany") acquired 76% of the shares in CEIPL, pursuant to a shareholder's agreement entered into with the appellants.

3. Over the course of time, the name of CEIPL was changed to OBO Bettermann India Pvt. Ltd. ("OBO India") and the shareholding of the appellant was reduced to 0.36% in OBO India.

4. OBO Germany made attempts to buy out the equity shares of the appellants pursuant to a put and call option agreement and later, being in control of OBO India, issued notice u/s 236 of the Companies Act, to buy the shares of the appellants in spite of their resistance.

5. A petition was filed before the NCLT u/s 241, which was held as not maintainable. Aggrieved by the order, an appeal was filed before the NCLAT.

ISSUES

6. Whether the appellants' petition filed u/s 241 is maintainable.

7. Whether Section 236 could be invoked to acquire the minority shareholding in the present case.

SECTION 236 OF THE COMPANIES ACT, 2023

(1) In the event of an acquirer, or a person acting in concert with such acquirer, becoming registered holder of ninety per cent or more of the issued equity share capital of a company, or in the event of any person or group of persons becoming ninety per cent majority or holding ninety per cent of the issued equity share capital of a company, by virtue of an amalgamation, share exchange, conversion of securities or for any other reason, such acquirer, person or group of persons, as the case may be, shall notify the company of their intention to buy the remaining equity shares.

(2) The acquirer, person or group of persons under sub-section (1) shall offer to the minority shareholders of the company for buying the equity shares held by such shareholders at a price determined on the basis of valuation by a registered valuer in accordance with such rules as may be prescribed.

(3) Without prejudice to the provisions of sub-sections (1) and (2), the minority shareholders of the company may offer to the majority shareholders to purchase the minority equity shareholding of the company at the price determined in accordance with such rules as may be prescribed under sub-section (2).

(4) The majority shareholders shall deposit an amount equal to the value of shares to be acquired by them under sub-section (2) or sub-section (3), as the case may be, in a separate bank account to be operated by the company whose shares are being transferred for at least one year for payment to the minority shareholders and such amount shall be disbursed to the entitled shareholders within sixty days: Provided that such disbursement shall continue to be made to the entitled shareholders for a period of one year, who for any reason had not been made disbursement within the said period of sixty days or if the disbursement have been made within the aforesaid period of sixty days, fail to receive or claim payment arising out of such disbursement.

(5) In the event of a purchase under this section, the company whose shares are being transferred shall act as a transfer agent for receiving and paying the price to the minority shareholders and for taking delivery of the shares and delivering such shares to the majority, as the case may be.

(6) In the absence of a physical delivery of shares by the shareholders within the time specified by the company, the share certificates shall be deemed to be cancelled, and the company whose shares are being transferred shall be authorised to issue shares in lieu of the cancelled shares and complete the transfer in accordance with law and make payment of the price out of deposit made under sub-section (4) by the majority in advance to the minority by despatch of such payment.

(7) In the event of a majority shareholder or shareholders requiring a full purchase and making payment of price by deposit with the company for any shareholder or shareholders who have died or ceased to exist, or whose heirs, successors, administrators or assignees have not been brought on record by transmission, the right of such shareholders to make an offer for sale of minority equity shareholding shall continue and be available for a period of three years from the date of majority acquisition or majority shareholding.

(8) Where the shares of minority shareholders have been acquired in pursuance of this section and as on or prior to the date of transfer following such acquisition, the shareholders holding seventy-five per cent. or more minority equity shareholding negotiate or reach an understanding on a higher price for any transfer, proposed or agreed upon, of the shares held by them without disclosing the fact or likelihood of transfer taking place on the basis of such negotiation, understanding or agreement, the majority shareholders shall share the additional compensation so received by them with such minority shareholders on a pro-rata basis.

Explanation: For the purposes of this section, the expressions "acquirer" and "person acting in concert" shall have the meanings respectively assigned to them in clause (b) and clause (e) of sub-regulation (1) of regulation 2 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

(9) When a shareholder or the majority equity shareholder fails to acquire full purchase of the shares of the minority equity shareholders, then, the provisions of this section shall continue to apply to the residual minority equity shareholders, even though, —

(a) the shares of the company of the residual minority equity shareholder had been delisted; and

(b) the period of one year or the period specified in the regulations made by the Securities and Exchange Board under the Securities and Exchange Board of India Act, 1992, had elapsed.

DECISION OF NCLAT

8. It was observed that there were only three shareholders in OBO India, which included OBO Germany and the two Appellants.

9. One of the criteria u/s 241 stated that the petition was maintainable if not less than one-tenth of the total number of members had filed an application making grievances of oppression and mismanagement. Thus, it was held that appellants were eligible to file petition on the basis of the number of members.

10. The argument that the petition wasn't maintainable as the Appellants ceased to exist as the members of OBO India was rejected, since the cause u/s 241 arose only when the shares of the appellants were wrongfully acquired u/s 236 of the Companies Act, 2013.

11. In the present case, there was a gradual change in shareholding as per different agreements executed between OBO Germany and the Appellants. However, Section 236 could be invoked only in case of amalgamation, share exchange and conversion of securities and for any other reasons. It was observed that the words "for any other reasons" had to be read ‘ejusdem generis' with the preceding word and must take the same or similar colour. If this was not the intention of the legislature, then it could have generally mentioned that, in the event of any person or group of persons becoming 90% shareholder of the issued equity share capital of the company, such members could express their intention to buyout the remaining stake.

12. Thus, it was held that the respondents could not have invoked Section 236 to acquire the minority shares of the Appellants as the said provision wasn't applicable to their case. Hence, the appeal was allowed.

CONCLUSION

The provisions of Section 236 of the Companies Act, 2013 specifically provides the procedure of acquisition of shares of minority , when a person personally or acting in concert with acquirer, acquires 90% or more issued share capital of the company by virtue of an amalgamation, share exchange, conversion of securities or for any other reason, such acquirer, person or group of persons, as the case may be, shall notify the company of their intention to buy the remaining equity shares. Any procedure used for acquiring minority shareholding than mentioned in Section 236 referred above is an act of Oppression and Mismanagement.

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