The letters from M.C.A. on ‘TAKE-OVER’

The letters from M.C.A. on ‘TAKE-OVER’

(The article is provided solely for information purposes. This is not a legal advice and no professional-client relationship is created when you read or access this article.  The information presented in this Article does not constitute any legal or professional advice and should not be relied upon for such purposes or used as a substitute for any legal advice.)

(i) The most interpreted section  and the most judicially looked upon section by the Courts and the Tribunals is section 230. The ancestors of this young kid are section 391, 393 and 394A of the Companies Act, 1956. The ancestors have seen a greater level of interpretation ranging from the desk of the Registrar of Companies until the bench of the Hon’ble Supreme Court of India.
(ii) In comparison to the sections of Companies Act 1956 and Companies Act 2013, Companies Act 2013 provides for legislating new forms of corporate transactions which was pre-existing in the corporate world. Section 230 treads toward making certain disclosure during certain corporate transaction such as including the details on the reduction of share capital of the Company, the details to be provided by an auditor through an audit report such as liquidity etc, which would eventually make the transaction more transparent and ensure that the investors make an informed decision.

(i) The Ministry of Corporate Affairs on 3rd February 2020, by way of an notification, has enforced sub section (11) and sub section (12) of section 230.
(ii) The notified sub sections provides that, any compromise and arrangement made under section 230, may include an offer for takeover the details of which are regulated by way of rules made by the central government in this regard. However, the companies whose shares are listed on the stock exchange shall follow the regulations made by the Securities and Exchange Board of India, for the purpose of takeover.
(iii) Further, it also informs us the fact that any person aggrieved by the act of the company in making such offer for takeover as stated above, has an opportunity to approach the tribunal for necessary relief, stating their grievances in such offer and the tribunal upon receipt of such application pass orders as through fit by the respective tribunal. Furthermore, the companies whose shares are listed on the stock exchange shall follow the regulations made by the Securities and Exchange Board of India, for this purpose and shall not approach the tribunal under this sub clause.
(iv) The Tribunal can decide on an application involving a reduction of share capital under section 230 and no separate procedure is required to be complied for reduction of the share capital separately under section 66. From the explanation in section 230, it would be evident that for passing an order under section 230 to compromise or make arrangement with creditors and members, the provisions of section 66 should not apply for reduction of share capital and such order could be passed by the Tribunal under section 230.

(i) We all are aware of the relationship that exists between an substantive law and a procedural law. They share a closer relationship beyond the most sacrament concept of marriage as identified in the Indian Matrimonial Laws. A substantive law without a procedural law in a legally crippled law.
(ii) Pursuant to the notification of sub-section (11) and sub-section (12), necessary rules were also being inserted in the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, which would enable the substantive law i.e., sub-section (11) and sub-section (12), to walk and run around the corporate sphere. The Ministry of Corporate Affairs on 3rd February 2020, by way of an notification, has amended Rule 3 of Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, and sub-rule (5) and sub-rule (6) are being insertion accordingly.
(iii) It provides that, an application shall be made by a person or person’s holding not less that 3/4th i.e. 75% of the shares in the company intending to buy the remaining part of the shares of the Company. The shares has been explained to mean equity shares with voting rights and includes securities such as depository receipts etc.
(iv) Further, it explains that, nothing in this sub-rule shall apply to any transfer of shares made through a contract, arrangement or succession, or any transfer according to statutory or regulatory requirements. Further it also provides that an separate bank account be opened and an amount equivalent to 50% of the total consideration to be deposited by the transferee.
(v) It is interesting to note that, a single kid would be desolated when he is alone, he required friends to play around. Therefore, we have a corresponding amendment made in another rule to accompany the new kid in the town.
(vi) The Ministry has also, amended the National Company Law Tribunal Rules, 2016, by way of inserting rule 80A, which provides for the format in which the application under sub-section (12) of the section 230 be made and also prescribes the documents to be filed with such application.

(i) We understand that the Companies Act, 2013 now empowers the companies which intends to occasion an act of compromise or arrangement, under the provisions of the Companies Act, 2013 can also include an offer of takeover in such manner as prescribed in the sub-rule (5) and sub-rule (6) of rule 3 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016.
(ii) As rightly mentioned by Voltaire, “If you wish to converse with me, DEFINE your terms” now let’s quickly see what is a “compromise” and an “arrangement”. The Companies Act, 2013 do not define the term’s compromise or arrangement. A small attempt is seen in explanation under sub section (1) of section 230 where it mentions that an arrangement includes reorganization of the company’s share capital by the consolidation of shares of different classes or by the division of shares into shares of different classes, or by both of those methods. This might not help us in understanding the meaning of such terms.
(iii) Now, let’s look out for help outside the Companies Act, 2013 to understand the meaning of these terms. We understand that the courts/tribunals have attempted to provide meaning to these terms, lets examine one of such meaning. “Compromise” is an expression which implies the existence of a dispute such as relating to rights, which it seeks to settle, but the word “arrangement” is a term of very wide import, and its meaning is not to be limited to something analogous to a compromise. All modes of reorganizing the share capital takeover of shares of one company by another including interference with preferential and other special rights attached to shares can properly from part of an arrangement with members.

(iv) From the above we can identify two important elements, namely;
(a) A Compromise is an act between a creditor(s) and the Company, which would be on a pre-text of an existing dispute. However, an act of arrangement is between a member(s) of a Company and the Company, a dispute need not be a pre-text in this case.
(b) The concept of takeover had already been included in the term “arrangement” by the Court during pronouncement of this judgement, in the year 1960. Therefore, the notification of sub-section (11) and sub-section (12), makes no new move by the Ministry of Corporate Affairs, it could be stated as clarifying an existence law in force.
(v) Other quick pointers in this HUMAN LENS are:
(a) From the plain reading of sub-section (11) of section 230, we can understand that, a takeover is a mere ingredient under a scheme for either compromise or arrangement or both under section 230, and do not have an independent identity per se. An application for such compromise or arrangement or both, may include for a prayer of takeover and not otherwise.
(b) One should also note that, the grievance redressal option granted to the member under sub-clause (12) of the section 230 precisely limits the scope of Tribunal to grant relief only in the case of  grievance with respect to takeover offer. Any other prayers cannot be honoured under sun-section (12) of the section 230.
(c) The term securities is being used in the amended rules, and the Companies Act, 2013 defined ‘securities’ to mean as so defied in the Securities Contracts (Regulation) Act, 1956  , which covers typically all types of instruments. We need to closely observe how the courts would work around this definition, since this is an open ended definition.
(d) It is interesting to note that, there is a clear non-applicability clause in the amended rule which excludes all the transfer or transmission of shares through a contract, arrangement or succession, or any transfer made in pursuance of any statutory or regulatory requirement. A contract would include the existing shareholders and share-purchase agreements, thereby not disturbing the understandings in such agreements. This also throws out an understanding that, in the case of companies which do not have such structured understanding, the law would be their recourse in enabling such right for the takeover.
(e) Opening of a separate bank account is required with deposit of 50% of such total consideration of the takeover. This would be difficult at several instances, we have to again closely observe the position of law as taken by the court’s with respect to identification of any alternate mode of deposit or a partial or complete waiver of such deposit on case to case to basis.

However, being a well-informed minority shareholder or investor and foreseeing any infringement of rights by the acts of the majority of shareholders, one can always find recourse under rule 25 of the National Company Law Tribunal Rules, 2016, which enables him to file a caveat petition and ensures no ex-parte orders are being passed, against his interest.

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