CORPORATE

RESTRUCTURING (CASES)
By:
Mukesh Arora
Assistant Professor
HINDUSTAN LEVER EMPLOYEES UNION V.HINDUSTAN
LEVER LTD.(1994)
(Facts)
• The case was concerning Scheme of Amalgamation of Tata Oil Mills Company Ltd.
(‘TOMCO’), the first Indian company founded in 1917 (and public since 1957) with
Hindustan Lever Ltd. (‘HLL’), a subsidiary of London-based MNC Unilever. This was
sanctioned by Bombay HC on 3rd March 1994.

• Challenge to the Scheme by nominal shareholders of TOMCO, Federation of

Employees Union of TOMCO and HLL, and consumer groups before the Bombay HC ,
however Bombay HC had rejected that challenge, hence the appeal to the Supreme
Court was preferred.

• TOMCO and HLL both manufactured and sold similar products, namely soaps,
detergents, toiletries, etc.

• In 1990-91, TOMCO witnessed a decline in its business and BoD considered various
alternatives including association with HLL – accordingly negotiations commenced and
both availed of services of Mr. Malegam, Senior Partner of Billimoria & Co. (CA firm) to
evaluate the share-price of the companies, and arrive at a fair share exchange ratio.
Facts (Contd.)
• Malegam gave valuation report and recommended an exchange ratio of 2:15
respectively for HLL: TOMCO ordinary equity shares – this was accepted by BoD
of both companies who respectively approved the Scheme.

• Scheme provided for transfer and vesting in HLL of TOMCO’s entire business and
undertaking, including assets and liabilities, aside from some assets/licenses
which would be transferred to TOMCO’s parent Tata Sons Ltd.

• As required under law, communication was sent to shareholders of TOMCO and

HLL, as well as public notices of EGMs issued in print media.

• TOMCO Meeting held on 29 Jun 1993 – at the meeting, it was proposed that 2:15
share exchange ratio be amended to 5:15, but rejected by 99.64% equity
shareholders, while 99.72% shareholders voted in favour of the original Scheme;
99% of debenture holders, 100% of secured creditors, 84.3% of unsecured
creditors, and 100% preference shareholders voted in favour of the Scheme.

• HLL Meeting held on 30 Jun 1993, and while similar amendments were proposed,
over 96% of equity shareholders and 100% creditors voted against the
amendments, and in favour of the original Scheme
Issues

- Violation of S. 393(1)(a) in not making required disclosures in the

explanatory statement ?
- Valuation of share exchange ratio is grossly loaded in favour of HLL?
- Ignoring the effect of provisions of the MRTP Act?
- Interest of employees of both the Companies was not adequately taken
care of?
- Preferential allotment of shares less than market price to Unilever against
public interest?
- Mala fides on account of existence of quid pro quo between Unilever and
Tata Sons Ltd?
- Failure of Bombay HC to exercise its jurisdiction correctly?
Bombay High Court:
• It’s important to add here that on 2 Aug 1994, on request by a TOMCO SH (Mr.
Jajoo), the Bombay court directed two external auditors (A.F. Ferguson & N.M.
Raiji & Co.) to give their opinion on Malegam’s valuation report – both confirmed
the report and share exchange ratio on 6 Jan 1995.
• This valuation was contended to be unsatisfactory and unfair to TOMCO
shareholder + contention that TOMCO failed to disclose that Malegam was the
independent valuer even though he was also a director of TOMCO;

The Court held: The overwhelming majority of the shareholders had approved the
Scheme at the meeting called for this purpose and had approved the exchange
ratio. In fact, a proposal for amendment of the exchange ratio was also rejected by
the overwhelming majority of 99% shareholders. There is no reason to presume
that the shareholders did not know what they were doing. Being dissatisfied with the
valuation made by Mr. Malegam, Mr. Jajoo had insisted for independent valuation
and that was done. Two independent valuers – A.F. Ferguson and N.M. Raiji & Co. -
had valued the shares and came to the conclusion that exchange ratio of 2:15 was
correctly determined by Mr. Malegam.

• The question is what method should be adopted for arriving at a proper exchange
ratio. The usual rule is that shares of the going concern must be taken at quoted
market value. In this case, Mr. Malegam adopted a combination of three well-
accepted methods to arrive at the fair value of the shares. The methods are: (I)
the yield method; (II) the asset value method; and (III) the market value method.
After considering all the relevant factors, the valuer recommended in exchange
ratio of 2 equity shares of HLL for every 15 ordinary shares of TOMCO.
• The Court further held: The valuation of shares is a technical matter. It requires considerable
skill and experience. There are bound to be difference opinion among Accountants as to what is
the correct value of the shares of a company. It was emphasised that more than 99% of the
shareholders had approved the valuation. The test of fairness of this valuation is not whether
the offer is fair to a particular shareholder. Mr. Jajoo may have reasons of his own for not
agreeing to the valuation of the shares, but the overwhelming majority of the shareholders have
approved of the valuation. The Court should not interfere with such valuation.

• Therefore, the Court held: We are unable to uphold the contention that there was any
impropriety in the valuation of the shares.

• Should the fact that Mr. Malegam was a Director of a Company have been disclosed?

Section 393(1)(a) requires particulars to be given of any material interests of some persons
connected with the company, including the directors and managing director. The interest that is
contemplated in Section 393(1)(a) is interest material for consideration of the scheme by the
shareholders. It has not been shown that Mr. Malegam had any interest in the scheme. If he had
any shares in TOMCO, then his interest would be like that of any other shareholder. His
specialised services were utilised for the purpose of arriving at a fair exchange ratio. Both TOMCO
and HLL reposed faith in his professional skill. We are of the view that non-disclosure of the fact
that Mr. Malegam, a Director of the Company, had been appointed Valuer, will not detract from the
Scheme in any way. This will also not amount to suppression of any material interest of a Director
in the Scheme.
• Further, the Court held: It is difficult for us to uphold the contention that the
Scheme of Amalgamation is against public interest. Merely because 51% of the
shares of HLL is being given to a foreign company, the Scheme cannot be said to
be against public interest. The Foreign Exchange Regulation Act has been
amended specifically to encourage foreign participation in business in India. The
bar to having more than 40% shares in an Indian Company by a non-resident has
been lifted. The Amending Act 29 of 1973 is not under challenge. In order to give
greater freedom to the companies for doing business in India, the Monopolies &
Restrictive Trade Practices .

• The Scheme has fully safeguarded the interest of the employees by providing that
the terms and conditions of their service will be continuous and uninterrupted
service and their service conditions will not be prejudicially affected by reason of
the Scheme. The grievance made, however, is that there is no job security of the
workers, after the amalgamation of the two Companies. It has been argued that
there should have been a clause in the Scheme ensuring that no retrenchment
will be effected after the amalgamation of the two Companies. There was no
assurance on behalf of the TOMCO that the workers will never be retrenched. In
fact, the performance of TOMCO over the last three years was alarming for the
workers. It cannot be said that after the amalgamation they will be in a worse
position than they were before the amalgamation.
• No one can envisage what will happen in the long run. But on this hypothetical
question, the Scheme cannot be rejected. As of now, it has not been shown how
the workers are prejudiced by the Scheme.
Supreme Court
The High Court appears to be correct in its approach that this test was satisfied as even though
the Chartered Accountant who performed this function was a director of TOMCO but he did so
as a member of renowned firm of chartered accountants. His determination was further got
checked and approved by two other independent bodies at the instance of shareholders of
TOMCO by the High Court and it has been found that the determination did not suffer from any
infirmity. The company court, therefore, did not commit any error in refusing to interfere with it.

Since admittedly more than 95% of the shareholders who are the best judge of their interest
and are better conversant with market trend agreed to the valuation determined it could not be
interfered by courts as, 'certainly, it is not part of the judicial process to examine
entrepreneurial activities to ferret out flaws. The court is least equipped for such oversights.
Nor, indeed, is it a function of the judges in our constitutional scheme. We do not think that the
internal management, business activity or institutional operation of public bodies can be
subjected to inspection by the Court. To do so, is incompetent and improper and, therefore, out
of bounds. Nevertheless, the broad parameters of fairness in administration, bona fides in
action and the fundamental rules of reasonable management of public business, if breached,
will become justiciable.’

A scheme of amalgamation cannot be faulted on apprehension and speculation as to what

might possibly happen in future.
This scheme of arrangement is against
public interest?
• Section 394 (of the Companies Act 1956), when the court is
concerned with a scheme of merger with a subsidiary of a
foreign company then the test is not only whether the
scheme shall result in maximising profits of the
shareholders or whether the interest of employees was
protected but it has to ensure that merger shall not result
in impeding promotion of industry or shall obstruct growth
of national economy. Liberalised economic policy is to
achieve this goal. The merger, therefore, should not be
contrary to this objective. (Prudent Business management
test)- need to look at the economy of the company at
large).

• Government had amended FERA and MRTP Act to allow

for such mergers – Scheme does not run counter to any
legislative provision of Government policy
The challenge, therefore, founded on transfer of assets at
lower price cannot be upheld as violative of public interest.

Transfer of share to a foreign company on under valuation

is of course a matter of concern. It is true that the transfer of
shares by one company to another company is primarily to
be determined by the shareholders and, therefore, if the
99% are of the view that the valuation of the shares was
reasonable and fair then the court should be slow to
interfere with it. But what is necessary to be emphasised is
that a shareholder may not be interested in the ultimate
effect of allotting shares to a multi-national on a low price
valuation, but the court certainly is.
MIHEER MAFATLAL V. MAFATLAL INDUSTRIES LTD.
Facts:
• Case concerning a Scheme of Amalgamation of two public limited
companies, Mafatlal Industries Ltd. (‘MIL’ or ‘transferee-company’)
and Mafatlal Fine Spinning and Manufacturing Company Ltd. (‘MFL’
or ‘transferor-company’). Appellant had objected to such
amalgamation before Gujarat HC.

• MIL was incorporated on 20 Jan 1913 as ‘The New Shorrock

Spinning & Manufacturing Co. Ltd.’, subsequently changed to MIL as
per fresh certificate of incorporation dt. 24 Jan 1974; Business
included activity of carrying on all or any of the businesses such as
cotton/wool/jute/hemp spinning and weaving.

• MIL is a large multi-division, multi-locational company carrying on

diversified activities including manufacture and sale of textiles, dyes,
intermediates and chemicals, etc. and promoting various companies.
MFL proposed to be amalgamated with MIL for the following reasons (these are also the
general reasons for most mergers and amalgamations):

• The proposed amalgamation will pave the way for better, more efficient and economical
control in the running of operation.

• Economies in administrative and management costs will improve in combined profitability.

• The amalgamated company will have the benefit of the combined reserves, manufacturing
assets, manpower and cash flows of the two companies.

• The combined technological, managerial and financial resources are expected to enhance
the capability of the amalgamated company to invest in larger and sophisticated projects to
ensure rapid growth.

• “Exports” have been identified as a ‘thrust’ area for both the companies and response time to
customers’ needs is considered as a critical area of operations. confidence in dealing with
such a mega company ensures timely delivery of large orders.

• More particularly in the Textiles Division, with 5 operating units at the company’s disposal,
the flexibility in operations will be very much pronounced.

• Both the companies have been subject to the pressures of raw material price fluctuations
and of adverse market conditions in their respective product mix. Hence, the amalgamation
will neutralise the adverse effects of contrary business cycles.
History of Family Conflict:
• The Family business comprising different undertakings was started by Mafatlal Gagalbhai and left it to his
sons Navinchandra and Bhagubhai who maintained shareholding pattern of 50:50

• Navinchandra had 3 sons (including Arvind Mafatlal) while Bhagubhai had 1 son, Hemant – thus Hemant’s
shareholding in the Mafatlal Group of Industries was equal to the aggregate shareholding of
Navinchandra’s 3 sons

• On 16 Aug 1971, Hemant Mafatlal died leaving behind his wife and only son, Miheer

• In 1979, on account of disputes between family members, C.C. Chokshi (a reputed CA) was requested to
prepare a scheme for division of family business concerns, who suggested dividing Mafatlal Group into 4
groups for 4 sets of heirs
•
• Miheer contended that as per this family arrangement, MIL was to be put under his group and other groups
would transfer their shareholding in MIL to Miheer, but that this could not happen because of irreconcilable
differences between Arvind and Miheer – thus family arrangement was not given effect and management of
MIL was not handed over to Miheer.

• Arvind contended that the 1979 family arrangement was reviewed and Miheer himself agreed to sell his
shares in MIL in favour of Arvind.

• Disagreement led to a number of litigations in the 1980s – Arvind had filed a petition claiming that there
was a binding contract between groups to sell shares in favour of Arvind and asking for the share price to
be determined by an arbitrator – Miheer filed a counter-claiming praying for enforcement of 1979 family
arrangement – these suits were pending before Bombay HC
• Directors of MIL and MFL approved the proposal for amalgamation of
MFL with MIL and pursuant to the respective Board Resolutions passed
by them, the detailed Scheme of Amalgamation was finalised. The
directors of both the companies were of the opinion that such
amalgamation was in the interest of both the companies.

• Miheer was himself one of MFL’s directors, but did not object to the
Scheme at that stage, and was party to the Board Resolution approving
it; He was also a shareholder of MIL.

• MIL approached Gujarat HC and moved application for sanctioning

Scheme on 8 Feb 1994; HC directed convening of meeting of MIL’s
equity shareholders, where overwhelming majority of approx. 94.5%
voted in favour of the Scheme.

• Subsequently, as per statutory requirements, notice was issued to

Central Government (which said no objection), application was published
in newspapers – it was at this point that Miheer filed his objection as SH
of MIL.
Miheer’s contentions were as follows:
• MIL had failed to disclose the special interest of Arvind’s group in the
explanatory statement supporting the Scheme, thus misleading the
shareholders who could not come to an informed decision, and thus
the Scheme was vitiated (What was this special interest? – that
Arvind would come to hold a larger shareholding.

• Scheme was unfair to the minority shareholders represented by

Miheer, as majority voted against the minority, and should not have
been sanctioned by the Company Court.

• Scheme was unfair to the equity shareholders as the exchange ratio

of equity shares of MIL and MFL was unreasonable and unfair to the
shareholders of MIL due to MIL:MFL ratio being 2:5.

• Miheer represented a distinct class of equity shareholders so far as

MIL is concerned, and consequently a separate meeting should have
been convened by the Company Court for him – since not done,
Scheme is liable to be rejected.
The Respondent’s contentions were as
follows:
• MIL and MFL were juristic persons and corporate bodies – thus consideration of
personal disputes between the directors of MIL (Arvind) and MFL (Miheer) was
completely irrelevant and equity shareholders were not at all concerned with
these internal feuds. The Non-disclosure of such disputes did not cause any
adverse effect on the decision of the shareholders who voted in favour of Scheme
with thumping majority of almost 95%.

• Arvind was not in control of MIL as only 2/13 directors were from the family group,
and Arvind’s group was not the largest shareholder since approx. 40% was held
by outside financial institutions .

• No question of unfairness to Miheer, who himself had not cared enough to be

personally present during the meeting of equity shareholders and instead sent a
proxy who had no right to speak or object at the meeting.

• Miheer had failed to controvert the share exchange ratio with any opinion or
evidence of another expert in the field to support his claim of 1:6 (MIL: MFL).

• Miheer was himself on MFL’s Board which approved the Scheme and ratio.
Issues were:

• Whether MIL was guilty of hiding the special interest of its

director Arvind Mafatlal from the shareholders while circulating
the explanatory statement supporting the Scheme and whether
thereby the voting by the equity shareholders got vitiated?

• Whether the Scheme is unfair and unreasonable to the minority

shareholders represented by the appellant?

• Whether the proposed Scheme of Amalgamation was unfair

and amounted to suppression of minority shareholders
represented by the appellant and hence liable to be rejected?.

• Whether the exchange ratio of two equity shares of MIL for five
equity shares of MFL was ex facie unfair and unreasonable to
the equity shareholders of MIL and consequently the Scheme
of Amalgamation on that account was liable to be rejected?
Judgement:
• On a conjoint reading of the relevant provisions of Sections 391 and 393 it becomes at
once clear that the Company Court which is called upon to sanction such a scheme
has not merely to go by the opinion of the majority of the shareholders or creditors or
their respective classes who might have voted in favour of the scheme by
requisite majority but THE COURT HAS TO CONSIDER THE PROS AND CONS OF
THE SCHEME WITH A VIEW TO FINDING OUT WHETHER THE SCHEME IS FAIR,
JUST AND REASONABLE AND IS NOT CONTRARY TO ANY PROVISIONS OF
LAW AND IT DOES NOT VIOLATE ANY PUBLIC POLICY.

• Consequently it cannot be said that a Company Court before whom an application is

moved for sanctioning such a scheme which might have got the requisite majority
support of the creditors or members or any class of them for whom the scheme is
mooted by the concerned company has to act merely as a rubber stamp and must
almost automatically put its seal of approval on such a scheme. IT IS TRITE TO SAY
THAT ONCE THE SCHEME GETS SANCTIONED BY THE COURT, IT WOULD BIND
EVEN THE DISSENTING MINORITY SHAREHOLDERS OR CREDITORS.
THEREFORE, THE FAIRNESS OF THE SCHEME QUA THEM ALSO HAS TO BE
KEPT IN VIEW BY THE COMPANY COURT WHILE PUTTING ITS SEAL OF
APPROVAL ON THE CONCERNED SCHEME PLACED FOR ITS SANCTION.

• THE COURT CANNOT, THEREFORE, UNDERTAKE THE EXERCISE OF

SCRUTINISING THE SCHEME PLACE FOR ITS SANCTION WHICH A VIEW TO
FINDING OUT WHETHER A BETTER SCHEME COULD HAVE BEEN ADOPTED BY
THE PARTIES. THIS EXERCISE REMAINS ONLY FOR THE PARTIES AND IS IN
THE REALM OF COMMERCIAL DEMOCRACY. THE ACTIVITIES OF THE
CONCERNED CREDITORS AND MEMBERS OF THE COMPANY WHO IN THEIR
BEST COMMERCIAL AND ECONOMIC INTEREST BY MAJORITY AGREE TO GIVE
GREEN SIGNAL TO SUCH A COMPROMISE OR ARRANGEMENT.
• It is a matter for the shareholders to consider commercially whether
amalgamation or merger is beneficial or not. The court is really not
concerned with the commercial decision of the shareholders until
and unless the court feels that the proposed merger is manifestly
unfair or is being proposed unfairly and/or to defraud the other
shareholders.

with every notice calling the meeting which is sent to a creditor or member,
there shall be sent also a statement setting forth the terms of the compromise
or arrangement and explaining its effect : and in particular, stating any
material interests of the directors, managing director, managing agent,
secretaries and treasurers or manager of the company, whether in their
capacity as such or as members or creditors of the company or otherwise,
and the effect on those interests, of the compromise or arrangement, if, and in
so far as, it is different from the effect on the like interests of other persons;

We fail to appreciate how the personal family dispute between the appellant
on the one hand and Arvind Mafatlal, director of the transferee-company MIL
on the other regarding the right to hold shares in the company can have any
linkage or nexus with the Scheme of Amalgamation of these two companies
which was put to vote before the equity shareholders.
• Conversely if the appellant succeeded in his counter-
claim and director Arvind Mafatlal lost in his suit then all
that would happen is that Arvind Mafatlal will have to
transfer his shareholding and share-holding of his group
in favour of appellant so far as the transferee-company is
concerned. That future possibility would have no
impact on the decision making process which the
equity shareholders of transferee-company had to
undertake at this stage while approving the Scheme.
Consequently such an eventuality was totally
irrelevant for being brought to the notice of the equity
shareholders before whom the scheme was put to
vote.
• It is also to be kept in view that the Board of Directors of
the respective companies, namely, the transferor-
company as well as the transferee-company had
approved the Scheme of Amalgamation before it was put
to vote. The appellant was himself one of the directors of
the transferor-company who had no objection to the
Scheme of Amalgamation from the point of view of the
transferor-company. So far as the transferee-company is
concerned though appellant was not a director he was 5%
shareholder who did not think it fit to personally remain
present at the time of voting and simply relied upon proxy.
• it is vehemently contended by learned Counsel for the
appellant that because of the family arrangement of 1979 on
which he relies he was a special class of minority equity
shareholder who had separate rights against the director of the
company and whose special interest because of the pending
litigation between him and the director Shri Arvind Mafatlal was
likely to be adversely affected by the Scheme, therefore, a
separate meeting had to be convened as he represented a
class within the class of equity shareholders. IT IS DIFFICULT
TO AGREE WITH THIS CONTENTION. A SEPARATE
MEETING OF SUCH SEPARATELY INTERESTED
SHAREHOLDERS SHOULD HAVE BEEN CONVENED. BUT
SUCH IS NOT THE CASE OF THE APPELLANT. IT IS NOT
HIS CASE THAT HIS INTEREST AS AN EQUITY
SHAREHOLDER IN RESPONDENT-COMPANY IS IN ANY
WAY CONFLICTING WITH THE GENERAL INTEREST OF
THE EQUITY SHAREHOLDERS AS A CLASS.
(Regarding Share Exchange Ratio),
• The Court held: So far as this contention is concerned it has to be kept in view-
that before formulating the proposed Scheme of Compromise and Amalgamation
an expert opinion was obtained by the respondent-company as well as the
transferor-company, namely, MFL on whose Board of Directors appellant himself
was a members. M/S. C.C. Chokshi & Co., a reputed firm of Chartered
Accountants, having considered all the relevant aspects suggested the aforesaid
exchange ratio keeping in view the valuation of shares of respective companies. It
must at once be stated that valuation of shares is a technical and complex
problem which can he appropriately left to the consideration of experts in
the field of accountancy.

• That the appellant himself as a director of that transferor-company gave green

signal to the Scheme and to this very ratio of exchange of shares…It has to be
kept in view that appellant never bothered to personally remain present in
the meeting of equity shareholders for pointing out the unfairness of this
exchange ratio to his brother equity shareholders who were likely to be
affected by the very same ratio as the appellant. His interest at least to that
extent was entirely common and parallel to that of other equity
shareholders. But he had no time to remain personally present.