Interpretation of ‘Section 235’ of Companies Act, 2013

Damini Anand

MEANING OF TAKEOVER: – Takeover generally means acquisition of control over the management of the company, where such company  is referred as ‘TARGET COMPANY’

♦ Takeover is not defined under any law for the time being in force.

♦ Methods of taking over the control over the management of any Company (Target Company) may include-

• Acquisition of shares
• Debt route
• Holding subsidiary route (indirect takeover)
• Any other route.

PROVISIONS OF SECTION 235 UNDER COMPANIES ACT, 2013

235. Power to acquire shares of shareholders dissenting from scheme or contract approved by majority

(1) Where a scheme or contract involving the transfer of shares or any class of shares in a company (the transferor company) to another company (the transferee company) has, within four months after making of an offer in that behalf by the transferee company, been approved by the holders of not less than nine-tenths in value of the shares whose transfer is involved, other than shares already held at the date of the offer by, or by a nominee of the transferee company or its subsidiary companies, the transferee company may, at any time within two months after the expiry of the said four months, give notice in the prescribed manner to any dissenting shareholder that it desires to acquire his shares.

(2) Where a notice under sub-section (1) is given, the transferee company shall, unless on an application made by the dissenting shareholder to the Tribunal, within one month from the date on which the notice was given and the Tribunal thinks fit to order otherwise, be entitled to and bound to acquire those shares on the terms on which, under the scheme or contract, the shares of the approving shareholders are to be transferred to the transferee company

NOTE: Notice shall be sent in Form No: CAA 14 as per RULE 26 of CAA RULES 2016

(3) Where a notice has been given by the transferee company under sub-section (1) and the Tribunal has not, on an application made by the dissenting shareholder, made an order to the contrary, the transferee company shall, on the expiry of one month from the date on which the notice has been given, or, if an application to the Tribunal by the dissenting shareholder is then pending, after that application has been disposed of, send a copy of the notice to the transferor company together with an instrument of transfer, to be executed on behalf of the shareholder by any person appointed by the transferor company and on its own behalf by the transferee company, and pay or transfer to the transferor company the amount or other consideration representing the price payable by the transferee company for the shares which, by virtue of this section, that company is entitled to acquire, and the transferor company shall—

(a) There upon register the transferee company as the holder of those shares; and

(b) Within one month of the date of such registration, inform the dissenting shareholders of the fact of such registration and of the receipt of the amount or other consideration representing the price payable to them by the transferee company.

(4) Any sum received by the transferor company under this section shall be paid into a separate bank account, and any such sum and any other consideration so received shall be held by that company in trust for the several persons entitled to the shares in respect of which the said sum or other consideration were respectively received and shall be disbursed to the entitled shareholders within sixty days.

(5) In relation to an offer made by a transferee company to shareholders of a transferor company before the commencement of this Act, this section shall have effect with the following modifications, namely:—

(a) in sub-section (1), for the words “the shares whose transfer is involved other than shares already held at the date of the offer by, or by a nominee of, the transferee company or its subsidiaries,”, the words “the shares affected” shall be substituted; and

(b) In sub-section (3), the words “together with an instrument of transfer, to be executed on behalf of the shareholder by any person appointed by the transferee company and on its own behalf by the transferor company” shall be omitted. Explanation.—for the purposes of this section, “dissenting shareholder” includes a shareholder who has not assented to the scheme or contract and any shareholder who has failed or refused to transfer his shares to the transferee company in accordance with the scheme or contract.

(READ WITH SECTION 236 & 238)

238. Registration of offer of schemes involving transfer of shares.

238. (1) In relation to every offer of a scheme or contract involving the transfer of shares or any class of shares in the transferor company to the transferee company under section 235,—

(a) every circular containing such offer and recommendation to the members of the transferor company by its directors to accept such offer shall be accompanied by such information and in such manner as may be prescribed;

(b) every such offer shall contain a statement by or on behalf of the transferee company, disclosing the steps it has taken to ensure that necessary cash will be available; and

(c) every such circular shall be presented to the Registrar for registration and no such circular shall be issued until it is so registered:

Provided that the Registrar may refuse, for reasons to be recorded in writing, to register any such circular which does not contain the information required to be given under clause (a) or which sets out such information in a manner likely to give a false impression, and communicate such refusal to the parties within thirty days of the application.

(2) An appeal shall lie to the Tribunal against an order of the Registrar refusing to register any circular under sub-section (1).

(3) The director who issues a circular which has not been presented for registration and registered under clause (c) of sub-section (1), shall be liable to a penalty of one lakh rupees

Section 236. Purchase of minority shareholding

236. (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 by1[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, 1[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 1[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.

INTERPRETATION OF THE SECTION

Applicability of the Section:

What is Section 235?

Section 235 provides a power to such ‘acquirer’  (individually or along with PAC) who holds 90%

or

who obtains approval 90% of shareholders of transferee for transfer of shares within a period of 4 months from the date of offer,

of total shares of the Company to Compel the Dissenting shareholder to sell off their shares against their wish.

Calculation of 90%

While calculating 90% shares held by the following shall be EXCLUDED:

 LOGIC: There is no need of Section 235 for taking over a Company as Takeover can be done by becoming biggest shareholder or otherwise.the section favours the Majority and compel the Minority to sell off their shares (by providing Exit Opportunity)

Exit Opportunities to dissenting shareholders: under Companies Act 2013, there are two Subsections where EXIT OPPORTUNITY is provided to Dissenting shareholders.

In reference to the  notice under 235(1) shareholders have the following options

→ He may accept( company is entitled and bound to acquire the shares)

→ He may remain silent (deemed acceptance after a period of 1 month)

→ He may apply to NCLT (within 1month of such notice)

→ But, he cannot reject.

IN CASE DISSENTING SHAREHOLDER DOESN’T ACCEPT THE OFFER GIVEN BY NOTICE

Transferee company within 1 month from the date on which the notice has been given ,or (if decision is pending )then, within 1 month after the application has been disposed off, shall transmit to transferor company the following :

To register the transferee company as the owner and intimate dissenting shareholder that he ceased to be the member of the company.

Other Important points:

• Any sum received shall be paid in a separate bank account.
• Such amount shall be held in trust by the company and shall be disbursed (pay out) within 60 days to the entitled shareholders.
• Offer for transfer of share shall be accompanied with the following :

• Offer shall be presented before the registrar before issuance, however registrar have all the rights to refuse the registration when false information is provided or when the required information is not provided.
• Appeal can be made to NCLT in NCLT-9 with NCLT-6 (affidavit)

COMPLETE TAKEOVER OF UNLISTED COMPANY IN ONE CHART

*Dissenting Shareholders here refers to the shareholders who does not give their assent to the scheme

However Section 236 provides that Any Acquirer + PAC if holds 90% of share capital by way of Amalgamation, Share Exchange, Conversion or any other reason

They shall notify their intention to buy the remaining shares (MANDATORY OFFER) on the price mentioned under Rule 27 of CAA Rules, 2016

NOTE :  SECTION 235 IS AN EXCEPTION TO THE RULE THAT MEMBER CANNOT BE EXPELLED:

{CASE LAW: RE: MALINI BHARTI RAO CASE }

Q. Is Section 235 unconstitutional ?

A. NO, Section 235 is not unconstitutional because power of Acquisition of Shares of dissenting minority shareholders is not ultra vires the constitution of India.

Same is decided in the case law :

S Viswanathan v. East India Distilleries & Sugar Factories Limited