In exercise of the powers conferred by sub-sections (1) and (2) of section 469 read with section 230 of the Companies Act, 2013 (18 of 2013), the Central Government hereby made the following rules, to amend the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, namely, ‘the Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2020‘ effective from 07th February 2020.

Background

1. CHAPTER XV of the Companies Act, 2013 deals with Compromises, Arrangements and Amalgamations, contains 10 section 230-240. Section 230 comprises of 12 subsections, out of which subsection (1-10) is effective from 15th December 2016, while the subsection 11 and 12 are notified on 03rd of February 2020, are reiterated herein below:

Section 230(11) Any compromise or arrangement may include takeover offer made in such manner as may be prescribed:

Provided that in case of listed companies, takeover offer shall be as per the regulations framed by the Securities and Exchange Board.

Section 230(12) An aggrieved party may make an application to the Tribunal in the event of any grievances concerning the takeover offer of companies other than listed companies in such manner as may be prescribed and the Tribunal may, on the application, pass such order as it may deem fit.

Explanation.—For the removal of doubts, it is hereby declared that the provisions of section 66 shall not apply to the reduction of share capital effected in pursuance of the order of the Tribunal under this section.

Section 230(1) Provides for compromise or arrangement:

a. between a company and its creditors or any class of them; or

b. between a company and its members or any class of them.

2. Concerning the supra section, the Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2020 notified by the Central Government, which provides for the following sub-rule namely 5 and 6 under rule 3, are reiterated herein below:

Rule3(5)  A member of the company shall make an application for arrangement,for a takeover offer in terms of sub-section (11) of section 230, when such member along with any other member holds not less than three-fourths of the shares in the company, and such application has been filed for acquiring any part of the remaining shares of the company.

Explanation I – “shares” means the equity shares of the company carrying voting rights, and includes any securities, such as depository receipts, which entitles the holder thereof to exercise voting rights.

Explanation II-Nothing in this sub-rule shall apply to any transfer or transmission of shares through a contract, arrangement or succession, as the case may be, or any transfer made in pursuance of any statutory or regulatory requirement.

Rule3(6) An application of arrangement for takeover offer shall   contain:

a.      the report of a registered valuer disclosing the details of the valuation of the shares proposed to be acquired by the member after taking into account the following factors:

1. the highest price paid by any person or group of  persons for the acquisition of shares during the last twelve months;

2. the fair price of shares of the company to be determined by the registered valuer after taking into account valuation parameters including return on net worth, the book value of shares, earning per share, price earning multiple vis-d-vis the industry average, and such other parameters as are customary for valuation of shares of such companies.

b. details of a bank account, to be opened separately, by the member wherein a sum of an amount not less than one-half of the total consideration of the takeover offer is deposited.

Potential Impact

In simple terms, a shareholder or a group of a shareholder holding 75% or more i.e. one-third of the paid-up capital (potential acquirer individual/ group), will be able to throw the minority shareholder/s (unwilling loser), with the sanction and approval of the Hon’ble NCLT. The desire and willingness of the majority on utmost, while of the minority on stake.

1. The procedure provided under law to perpetuate the same are discussed hereinbelow:

a. Potential acquirer individual/ group has to move an application u/s-230 before the Hon’ble NCLT, having jurisdiction for its approval with dispensation or with the requirement of the convening meeting of creditors, /class of creditors/ members/class of members. The following two possibilities are there, as explained below:

If meeting dispensed If meeting convened
Required,at least ninety per cent value, agree and confirm, by way of affidavit, to the scheme of compromise or arrangement.u/s-230(9)

No further requirement, except due  procedure to be followed

Approval of three fourths in value of creditors/ members as the case may be agreed to the Scheme, the NCLT may approve the Scheme. After approval, it shall be binding on all the creditors and members of the company. u/s-230(6)

 

2. Practical Issue with Consequences thereof:

a. For potential acquirer individual/ group holding the majority stake of 75%, to get the nod from creditors, /class of creditors/ members/class of members will be turnout an effortless child’s play.

b. In such a scheme, no creditors or regulators stake will be on jolt to whom the notice is served u/s- 230(5) of the Act, to make a representation before NCLT.

c. Also, the scheme will only have to cover the proposal to acquire the stake of the minority andthere is no prima facie need to furnish the details of benefit that the takeover may result into the company.

d. Hon’ble NCLT shall have to satisfy itself that requisite conditions and procedure provided under the law have been complied as provide under Rule3 (6)of CAA rules, provided above.

Unshielded, exposed and defenceless Minority Shareholder/s

3. Section 230(12) provides that an aggrieved party may apply to the NCLT in the event of any grievance concerning takeover offer. However, the requirement provides under Rule 3 (6) of CAAfor the Acquirer is very limited and specific to comply with. Therefore, the ground/defence for minority shareholders to approach the Tribunal for injustice and hardshipthey may have torment has not been properly addressed.

4. Also, the law does not provide for any specific circumstances/ situations, or any triggering point for the potential acquirer individual/ group holding the majority stake to exercise the power to buy out the minority stake.

5. Those who already have say (potential acquirer individual/ group holding the majority stake), will just command and dictate the frail and feeble, (Minority shareholder), to get out and it may be sealed by Hon’ble NCLT sanction.

Majority Rule?

6. Interpretation of Rule (3) (6) (b), for the deposit of purchase consideration for the takeover, by the majority the following are win-win situations as explained below:

a. No guidelines for the operation of the account.

b. No timeline for the remaining 50% of the amount.

c. No pre timeline has been set for the closing of the period within which the Acquirer will release the purchase amount.

To understand the situation the following comparison table enumerates various provisions provided under other section of Act, which deals with the acquisition of shares in a company in certain circumstances, as follows:

Section Scope Terms Percentage
235 Power of transferee company to acquire shares of shareholders of transferor company dissenting from Scheme or contract approved by majority. Amount to be paid by transferee company to the Transferor company’s separate bank account 100% of the purchase consideration
236 Purchase of minority shareholding by Acquirer holding 90% or more of the issued capital of a company Amount to be deposited by Acquirer to a Separate account to be operated by the company 100% of the purchase consideration

(Only for illustrative purpose to elucidate the terms of deposit)

 Legal Validity?

7. Is the Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2020 sacrosanct?

8. To answer this question we have to understand the foundation on which the whole CHAPTER XV of the Companies Act, 2013, been framed;

Section 230(1) Provides for compromise or arrangement:

a. between a company and its creditors or any class of them; or

b. between a company and its members or any class of them.

the Tribunal may, on the application of the company or of any creditor or member of the company, or in the case of a company which is being wound up, of the liquidator, appointed under this Act or the Insolvency and Bankruptcy Code, 2016, as the case may be, order a meeting of the creditors or class of creditors, or the members or class of members, as the case may be, to be called, held and conducted in such manner as the Tribunal directs.

Explanation– For this sub-section, the arrangement includes a reorganisation 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.

9. So primarily the section provides for any arrangement between the following:

  • a company on the one hand and or its creditors or any class of them on the other or:
  • a company on the one hand and its member or any class of them

10. However, the acquisition contemplated under Rule 3 (5) of the CAA Rules, provides for a transaction between two groups of shareholders of a company and without making the company a direct party. Therefore, it shall not fall within the ambit of section 230 of the Act and hence shall not be considered as an arrangement or compromise within the meaning of section 230.

Conclusion

Rules always supplement the Act. They are subject to their parent Act; rules do not have independent authority in the eyes of law. The rules framed to fill the gap in Act.However, rules by no means can go beyond the power conferred by the Act, or extend the same.Time and upcoming litigation shall answer the validity of the amendment Rule, 2020.This question, Majority Rule? Will remain until challenged

Author Bio

Name: AkhilesH
Qualification: LL.B / Advocate
Company: Inmacs Law Offices
Location: New Delhi, New Delhi, IN
Member Since: 14 Apr 2020 | Total Posts: 6
A young enthusiastic lawyer and being an qualified Company secretary and CIA+, having experience in managing legal aspects of organization mergers, joint ventures, funds, and acquisitions. Extensive knowledge of corporate and contract law, M&A transactions. Proficient with corporate banking, par View Full Profile

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