ARSH KAUL

SEMESTER VII

ROLL NO. 29

I.D. N.O. – 018/2018/1975

Answer 1 –

Abstract

Intr0ducti0n:

• M/s. Mafatlal Industries Limited [MIL], the transferee c0mpany, and Mafatlal Fine
Spinning and Manufacturing C0mpany Limited [MFL], the transfer0r c0mpany, prepared a
scheme 0f amalgamati0n.

• In C0mpany Petiti0n N0. 22 0f 1994, the Gujarat High C0urt's Learned Single Judge
sanctified the system.

• In Appeal N0. 16 0f 1994, an appeal was br0ught against the impugned judgment bef0re the
Divisi0n Bench 0f the Gujarat High C0urt, but the appeal was dismissed.

• Dissatisfied with the Divisi0n Bench's decisi0n, the Appellant filed a Special Leave Appeal
with the Supreme C0urt.

The case's background facts are as follows:

1. Transfer0r C0mpany: [MFL]: MFL was established 0n April 20, 1931, under the Bar0da
State C0mpanies Act, and has been engaged in the manufacturing and sale 0f textile item
g00ds and chemicals. Its registered 0ffice was in Mafatlal Centre in B0mbay's Nariman
P0int. It was in the business 0f pr0ducing and selling textiles and flu0rine-based chemicals.

2. Transferee C0mpany: [MIL]: MIL was f0unded 0n January 20, 1913, under the name 'The
New Sh0rr0ck Spinning & Manufacturing C0. Limited,' and its name was changed t0
'Mafatlal Industries Limited' 0n January 24, 1974, acc0rding t0 new Certificates 0f
Inc0rp0rati0n. The c0mpany's registered 0ffice was in Ahmedabad, Gujarat. Carrying 0n all
0r any 0f the enterprises such as c0tt0n spinners and d0ublers, w00l, silk flax, jute and hemp
spinners and d0ublers, etc. are am0ng MIL's 0bjects.

3. Appellant: The appellant, wh0 has 0bjected t0 the amalgamati0n bef0re the Gujarat High
C0urt, is 0ne 0f MFL's direct0rs.

4. Amalgamati0n: A meeting 0f the C0mpany's shareh0lders was called, and the Scheme was
appr0ved by an 0verwhelming maj0rity 0f shareh0lders.

The Appellant in this instance submitted the f0ll0wing f0ur imp0rtant c0nsiderati0ns as
gr0unds f0r appeal.

1. N0n-Discl0sure 0f Direct0rs' Interests: When MIL placed the scheme bef0re the equity
shareh0lders meeting, it failed t0 discl0se the direct0rs' interests, namely Shri Arvind
Mafatlal and Shri Hrishikesh Mafatlal, in the explanat0ry statement acc0mpanying the
Scheme, and thus the shareh0lders were misled and c0uld n0t make an inf0rmed decisi0n.

2. The Scheme is unjust t0 min0rity st0ckh0lders.

3. The appellant represented a different class 0f equity shareh0lders as far as the resp0nsible
transferee -c0mpany is c0ncerned, and the C0mpany C0urt sh0uld have c0nvened a separate
meeting as far as his gr0up is c0ncerned.

The share exchange ratio was excessive:

 As per the Scheme, tw0 equity shares 0f the transferee c0mpany shall be all0tted
against five equity shares 0f the transfer0r c0mpany, each with a face value 0f Rs.
100/- per share.

Discussi0n 0f the f0ll0wing legal issues:

The Company Court's Jurisdiction's Scope and Ambition:

 The br0ad ideas c0ncerned with the C0mpany C0urt's Jurisdicti0n were laid d0wn.
While c0nsidering and sancti0ning the Amalgamati0n scheme, the C0urt must ensure
 that: 1. The required legislative pr0cedure f0r appr0ving such a scheme has been
f0ll0wed, and that the appr0priate meetingas c0ntemplated by Secti0n 391(1) (a) has
taken place.

 That the pr0p0sal is supp0rted by a maj0rity v0te, as required by Secti0n 391 (2).

 That the c0ncerned meetings 0f the credit0rs, members, 0r any class 0f them have the
necessary inf0rmati0n t0 all0w the v0ters t0 make an inf0rmed ch0ice 0n whether 0r
n0t t0 appr0ve the plan in questi0n.

 That all 0f the inf0rmati0n required by Secti0n 393(1) (a) is presented t0 the v0ters at
the c0ncerned meetings.

 That the Applicant has presented all 0f the required materials in fr0nt 0f the C0urt as
required by Secti0n 391(2) 0f the Act.

 That the pr0p0sed system 0f c0mpr0mise and acc0mm0dati0n is n0t deemed t0 be in

vi0lati0n 0f any statute 0r detrimental t0 public p0licy.

 That the C0mpany C0urt must als0 satisfy itself that members 0r classes 0f members
0r credit0rs 0r classes 0f credit0rs, as the case may be, were acting in g00d faith and
n0t c0ercing the min0rity in 0rder t0 pr0m0te any interest c0ntrary t0 that 0f the latter
c0mprising 0f the same class wh0m they purp0rted t0 represent.

 That the plan as a wh0le is f0und t0 be equitable, fair, and reas0nable fr0m the
perspective 0f resp0nsible businessmen making a c0mmercial decisi0n that benefits
the class f0r wh0m the pr0gram is intended.

0nce the ab0ve br0ad criteria ab0ut the c0nditi0ns 0f a scheme f0r 0btaining sancti0n
fr0m the C0urt are f0und t0 have been satisfied, the C0urt will have n0 m0re
jurisdicti0n t0 sit in appeal 0ver.

The concept of commercial wisdom is as follows:

Company Court's Jurisdiction:

  • The C0mpany C0urt answered n0 t0 the questi0n 0f whether the C0mpany C0urt has
jurisdicti0n like an appellate auth0rity t0 scrutinize the scheme in detail and reach an
independent c0nclusi0n 0n whether the scheme sh0uld be all0wed t0 g0 thr0ugh 0r
n0t when it is appr0ved by the maj0rity 0f the credit0rs 0r members 0f the c0mpany.

The f0ll0wing lines are qu0ted in this regard:

“It is the commercial wisdom of the parties to the scheme who have taken an informed
decision about the usefulness and propriety of the scheme by supporting it by the requisite
majority vote that has to be kept in view by the Court. The Court certainly would not act as a
court of appeal and sit in judgment over the informed view of the concerned parties to the
compromise as the same would be in the realm of corporate and commercial wisdom of the
concerned parties. The Court has neither the expertise nor the jurisdiction to delve deep into
the commercial wisdom exercised by the creditors and members of the company who have
ratified the Scheme by the requisite majority. Consequently the Company Court’s
jurisdiction to that extent is peripheral and supervisory and not appellate. The Court acts
like an umpire in a game of cricket who has to see that both the teams play their according to
the rules and do not overstep the limits. But subject to that how best the game is to be played
is left to the players and not to the umpire.”
On issues raised:
1. On Non – Disclosure of interest of a director:
 This issue was dismissed and the f0ll0wing 0bservati0ns were made in this regard.

“If the special interest which the director has is in any way likely to be affected by the Scheme
and if non-disclosure of such an interest is likely to affect the voting pattern of the class of
creditors or shareholders who are called upon to vote on the scheme, then only such special
interest of the director is required to be communicated to the voters as per Section 393(1) (a)
  C0nsequently the interest 0f Arvind Mafatlal in the share-h0lding 0r likely future impact there0n
by the litigati0n was de h0rs the Scheme in questi0n and was n0t required t0 be placed bef0re the
v0ters. Theref0re the same is n0t valid gr0und 0f 0bjecti0n.

2. On the Scheme being unfair and unreasonable.

 The Supreme C0urt declared that the Scheme 0f C0mpr0mise and Arrangement is neither unfair
n0r unreas0nable t0 the min0rity shareh0lders represented by the appellant as the scheme was
appr0ved by the 0verwhelming maj0rity 0f the shareh0lders 0f the C0mpany and it is n0t pr0ved
that the interest 0f the min0rity is prejudiced by the scheme.

 It was stated that the financial instituti0ns and statut0ry c0rp0rati0ns held substantive percentage 0f
shares in resp0ndent-c0mpany. This class 0f shareh0lders wh0 are naturally well inf0rmed ab0ut
the business requirements and ec0n0mic needs and the requirements 0f c0rp0rate finance wh0lly
appr0ved the Scheme if it was c0ntrary t0 the interest 0f shareh0lders as class. The f0ll0wing lines
are qu0ted in this regard:

     “It could not be said that the majority shareholders had sacrificed the class interest of
appellant minority shareholders when they voted with overwhelming majority in favour of
the Scheme.”
3. On Appellant’s plea to be treated as a separate class of shareholders:
Qu0ting Palmer in this Treatise C0mpany Law 24th Editi0n, it was held that unless a separate and
different type 0f Scheme 0f C0mpr0mise is 0ffered t0 a sub- class 0f a class 0f credit0rs 0r
shareh0lders n0 separate meeting 0f such sub-class 0f the main class 0f members 0r credit0rs is
required t0 be c0nvened

4. On Valuation of shares:
 In this regard, reference was made t0 a decisi0n 0f the Gujarat High C0urt in Kamala Sugar Mills
Limited [55 C0mpany Cases P.308] which dealt with an identical 0bjecti0n ab0ut the exchange
rati0 ad0pted in the Scheme.

  “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 recognized 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  determined to their interest.”
  Theref0re share exchange rati0 fixed by experts wh0 are certified pr0fessi0nals will n0t be
disturbed unless the same is c0ntrary t0 the pr0visi0ns 0f law
 When the 2013 Act is c0mpared t0 that 0f 1956 Act, C0mpany Law has n0t devel0ped much in
terms 0f p0wer given t0 the Tribunal t0 supervise and m0dify the scheme 0f merger and
amalgamati0n. The 0nly difference that can be traced is in terms 0f the instituti0n, i.e. in the 1956
act, this p0wer vested with the High C0urt 0f c0mpetent jurisdicti0n u/s 392 0f the C0mpanies Act,
1956. Later, the p0wer was substituted t0 be vested with the Tribunal, by the C 0mpanies (Sec0nd
Amendment) Act, 2002. Presently, Secti0n 231 deals with such p0wer which is vested with the
Nati0nal C0mpany Law Tribunal.

C0ncept in Brief: The extent 0f p0wer given t0 the Nati0nal C0mpany Law Tribunal, (Previ0usly,
the High C0urt/C0mpany C0urt under The C0mpanies Act, 1956) has been a matter 0f debate in
the past, which can n0w be said t0 be settled with respect t0 the judicial devel0pment 0n the same.
It is inferred that, the sc0pe and extent 0f the p0wer is mere supervis0ry that is, br0adly l00king at
the fulfillment 0f legal c0mpliances and public interest. This can be d 0ne by applying br0ad
principles which are inherent in any settlement, i.e.  0f fairness, public p0licy and c0nsci0us.
It is pertinent t0 menti0n here that such decisi0ns c0uld r0ute fr0m vari0us fact0rs including but
n0t limited t0 expansi0n, tax saving, alterati0n 0f share capital etc. Thus, legal c0mpliance is the
pr0cedure in such scheme and is n0t the very basis 0f such scheme. The scheme 0f merger and
amalgamati0n in essence, is purely a business decisi0n and is a c0nsequence 0f c0mmercial
wisd0m 0f the c0mpany, theref0re the Tribunal must n0t g0 bey0nd such decisi0n.

Additi0nally, the c0urt have n0 further jurisdicti0n t0 sit in appeal 0ver the c0mmercial wisd0m 0f
the maj0rity 0f the class 0f pers0ns wh0 with their 0pen eyes have given their appr0val t0 the
Scheme even if in the view 0f the C0urt there w0uld be a better Scheme f0r the c0mpany and its
members 0r credit0rs f0r wh0m the Scheme is framed.
Answer 2 –

Introduction

0ver the last tw0 decades, the Indian ec0n0my has seen a slew 0f key structural ref0rms aimed at
b0lstering its strength and accelerating its gr 0wth. India has made significant ec0n0mic pr0gress
during the previ0us 25 years. In recent years, India has been regarded as 0ne 0f the w0rld's m0st
rapidly rising ec0n0mies. In terms 0f w0rldwide esteem, the c0untry is regarded as a behem0th in
t0day's devel0ping gl0be. Mergers and acquisiti0ns have bec0me 0ne 0f the m0st imp0rtant
meth0ds 0f restructuring in the aftermath 0f India's m0st rapid expansi0n. SEBI (Securities
Exchange B0ard 0f India) is the main instituti 0n in India that 0versees the numer0us firms that are
listed 0n the Indian st0ck exchange. SEBI has taken a number 0f steps t0 safeguard shareh0lders'
interests.

The SEBI (Substantial Acquisiti0ns 0f Shares and Take0ver) Regulati0ns 1997 were 0verhauled by
the 2011 regulati0ns, which were intr0duced in September 2011. The Regulati0n was primarily
ad0pted t0 g0vern the purchase 0f shares and v0ting rights in Indian public c0mpanies. The many
adjustments made in the new regulati0ns may be traced back t0 the suggesti0ns 0f a c0mmittee that
was primarily f0rmed t0 assess the numer0us pr0visi0ns in the 1997 rules.

The rule applies t0 the purchase 0f shares, v0ting rights, 0r c0ntr0l 0f Target C0mpany, whether
directly 0r indirectly.

Acc0rding t0 the new Regulati0n, an acquirer is any pers0n wh0, directly 0r indirectly, acquires 0r
agrees t0 acquire shares v0ting rights in c0ntr0l 0ver a target c0mpany, whether by himself 0r with
pers0ns acting in c0ncert with him; Article 2 (1) (b) "acquisiti 0n" means directly 0r indirectly
agreeing t0 acquire (0r acquiring) shares 0r v0ting rights in, 0r further c0ntr0l 0ver, a target
c0mpany; Article 2 (1)(e) "c0ntr0l." This includes the ability t0 app0int a maj0rity 0f the b0ard 0f
direct0rs, as well as the ability t0 c0ntr0l management and p0licy 0utc0mes individually 0r
c0llectively, pr0vided that a direct0r 0r 0fficer 0f a target c0mpany is n0t c0nsidered t0 be in
c0ntr0l 0f the target c0mpany simply by h0lding such a p0siti0n.

There are several meanings f0r the term "c0ntr0l." "C0ntr0l is the p0wer t0 guide an entity's
administrati0n and p0licies, whether this derives thr0ugh 0wnership 0f v0ting st0cks, c0ntract, 0r
bey0nd," acc0rding t0 Black's Law Dicti0nary.

The c0nventi0nal meaning 0f "c0ntr0l" is "the p0wer 0f applying restricti0n and directi0n 0ver
s0mething." The definiti0n 0f c0ntr0l is a c0mplete definiti0n.

"Any acquirer gaining, directly 0r indirectly, c0ntr0l 0ver a target business shall make a public
n0tificati0n 0f an 0pen 0ffer f0r purchasing shares 0f such target c0mpany," acc0rding t0
Regulati0n 4 0f the SEBI Take0ver Regulati0ns 2011.

SEBI Takeover Regulation Changes of Major Importance

SEBI Takeover Regulation Changes That Are Critical

The SEBI Take0ver Regulati0n includes a number 0f m0dificati0ns and c0mp0nents, including
th0se listed bel0w.

The definiti0n 0f "C0ntr0l" has been changed:

Acc0rding t0 the suggesti0ns 0f the Regulati0ns Advis0ry C0mmittee ('TRAC'), the definiti 0n 0f
'C0ntr0l' was changed in the SEBI Take 0ver Regulati0ns 2011. Acc0rding t0 the 2011 Regulati0ns,
just h0lding a p0siti0n as an 0fficer 0r direct0r 0f a targeted firm d0es n0t c0nstitute c0ntr0l 0ver
that c0mpany. [Article 2(1)(e) 0f the Regulati0ns].

The SEBI Take0ver Regulati0ns 2011 define "0ffer peri0d" as the time fr0m the date 0f the
agreement t0 acquire shares, v0ting rights, 0r c0ntr0l 0ver the firm that requires a public statement
and the date 0f the public ann0uncement.

Pers0ns acting in c0ncert, as defined by SEBI's Article 2 (1) (q), are individuals wh 0, while sharing
a c0mm0n g0al 0r purp0se 0f acquiring shares, v0ting rights, 0r c0ntr0l 0ver a c0mpany, directly 0r
indirectly c0-0perate f0r the purp0se 0f acquiring v0ting rights 0r shares in, 0r exercising c0ntr0l
0ver the target c0mpany, pursuant t0 an agreement 0r understanding.

Point of Inflection

Regulati0n 3 has increased the first thresh0ld limit f0r 0pen 0ffer requirements fr0m 15% t0 25%
0f a c0mpany's v0ting rights. Furtherm0re, if a party currently has at least a quarter 0f the target's
v0ting rights, if that party acquires m 0re than 5% 0f the target's v0ting rights in any financial year,
a required 0pen 0ffer will be triggered.

Open Offer Exemptions have been changed.

The SEBI Take0ver Regulati0ns 0f 2011 pr0vide that the Acquirer must make an 0ffer t0 the
shareh0lders 0f the targeted c0mpany in 0rder t0 pr0vide them with an exit 0pp0rtunity if certain
trigger events 0ccur.

Open Offer is required.

A binding 0pen 0ffer must meet a thresh0ld established by the SEBI Take0ver Regulati0ns 0f
2011. The Regulati0ns pr0vide that anytime an acquirer buys m0re shares than the limit set f 0rth in
Regulati0ns 3 and 4 0f the SEBI Regulati 0ns, 2011, the acquirer id must be discl 0sed in a public
statement t0 the target c0mpany's shareh0lders.

The f0ll0wing are the pr0visi0ns 0f Regulati0n 3 0f the SEBI Take0ver Regulati0ns 0f 2011. A
target firm may n0t acquire shares 0r v0ting rights that, when added t0gether, entitle them t0
exercise 25% 0r m0re 0f the v0ting rights in that c0mpany. The 0nly excepti0n is if the acquirer
makes a public n0tificati0n 0f an 0pen 0ffer f0r such target c0mpany's shares in acc0rdance with
these requirements.

Offer has been removed from the marketplace.

Regulati0n 5A 0f the SEBI Take0ver Regulati0ns, 2011, deals with delisting 0ffers in the
f0ll0wing situati0ns:

If an acquirer makes a public n0tice 0f a free 0ffer 0n shares 0f a target business in vi0lati0n 0f
regulati0ns 3, 4, 0r 5, the firm may be delisted under the SEBI (Delisting 0f Equity Shares)
Regulati0ns, 2009. H0wever, at the time 0f publishing the c0mprehensive public declarati0n, the
acquirer must have stated his intenti0n t0 delist.

Voluntary and Open Offers Modifications

An acquirer's v0luntary 0pen 0ffer is 0ne that is made with0ut triggering the required 0pen 0ffer
resp0nsibilities. An acquirer, al0ng with 0thers acting in c0ncert, can have at least 25% 0r m0re
shares in the target firm in the case 0f a v0luntary 0pen 0ffer. The acquirer, as well as th0se wh0
w0rk with them, cann0t buy any shares fr0m the target firm in the 52 weeks bef0re t0 the
acquisiti0n with0ut being required t0 make a public n0tice.

Changes to the 20 percent to 26 percent increase in the offer size

The 2011 legislati0n stipulates that an 0pen 0ffer must be at least 26% 0f the target's v0ting rights
in 0rder t0 be c0nsidered required. As a result, a party p0ssessing at least 25% 0f the target's v0ting
rights can make a "v0luntary" 0pen 0ffer f0r 10% 0r m0re 0f the target's v0ting rights if certain
additi0nal c0nditi0ns are met.
Note to the Public

According to SEBI Regulation 2011, the acquirer must make a public statement 0f an 0pen 0ffer
whenever it acquires the target c0mpany's shares and v0ting rights in the executi0n 0f the limit. The
Public Ann0uncement and the Detailed Public Statement have independent schedules, acc 0rding t0
the Regulati0n.

Announcement to the Public

0n the same day that the 0ffer is finalized, a fast public ann0uncement sh0uld be made. Within 0ne
w0rking day f0ll0wing the brief public ann0uncement's date, a c0py 0f the general statement
sh0uld be sent t0 SEBI and the Target C0mpany.

Regulati0n 14 (3) and (4) – Detailed Public Ann0uncement

Within five w0rking days f0ll0wing the date 0f the brief public statement, the Acquirer can issue a
c0mprehensive public ann0uncement. The c0mplete public n0tificati0n must be published in all
editi0ns 0f any English nati0nal daily, any Hindi nati0nal daily, and any regi0nal language daily
published in the l0cati0n where the targeted c0mpany's registered 0ffice is l0cated.

Controlled judicial decisions

SEBI v. K. Sreenivasa Ra0 (2002 112 C0mp Case 327 AP):

The c0nclusi0n in this case was that when an acquisiti 0n gains c0ntr0l 0f a target firm, the acquirer
must make a public n0tificati0n.

In M/s. Clearwater Capital Partners Ltd. v. SEBI (Appeal N 0. 21 0f 2013, (CCI) dated February 12,
2014), the f0ll0wing is stated:

In the circumstances at hand, pr0viding Clearwater v0ting rights am0unted t0 handing up c0ntr0l 0f
the target c0rp0rati0n.

Conclusion

Shareh0lding in c0rp0rati0ns and business 0wnership have had a huge influence in t 0day's
c0rp0rate w0rld. In a pr0gressive c0untry, it's critical t0 have g00d c0rp0rate g0vernance. Again,
the idea 0f c0ntr0l has bec0me a challenging pr0blem in recent years; as a result, SEBI has
implemented numer0us meth0ds and set laws that w0uld appeal t0 invest0rs and ensure seamless
c0rp0rate g0vernance in a c0untry.