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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
COMPANY SCHEME PETITION NO.101 OF 2010
In the Matter of Reduction of Equity Share
Capital of Organon (India) Limited
Organon (India) Limited ... Petitioner
....
Dr. V. V. Tulzapurkar, Senior Advocate, a/w Mr.S.Parikh for the
Petitioner.
Mr. D. V. Lakhani in person-objector.
ig ....
CORAM : S. J. KATHAWALLA, J.
Reserved on : 14th April, 2010.
Pronounced on : 7th June, 2010.
JUDGEMENT:
1. By this Company Scheme Petition, Organon (India)
Limited (the Petitioner Company) seeks sanction and
confirmation by this Court with regard to the special resolution
passed by the Petitioner’s shareholders in its Extraordinary
General Meeting (“EGM”) held on 15th October, 2009, for the
reduction of its equity share capital.
2. The Authorized, issued, subscribed and paid up share
capital of the Petitioner Company, as on 31st December, 2008 is
as under:
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Share Capital Rupees
Authorized: 10,00,00,000/-
1,00,00,000 Equity Share of Rs.10/- each
Issued, Subscribed and Paid up: 6,07,61,600/-
(60,76,160 Equity Shares of Rs. 10/- each
fully paid up)
Total: 6,07,61,600/-
3. Of the above, 98.43% of the paid up equity share
capital of the Petitioner Company is held by the promoter
shareholder, namely Organon Participations B. V. (“promoter
shareholders”). The balance of the paid up equity share capital of
the Petitioner Company is held by 1490 members having shares
of the Petitioner Company. There has been no change in the
share capital of the Petitioner Company from 31st December,
2008 till the date of filing the present petition.
4. The Petitioner Company’s equity shares were listed on
the Calcutta Stock Exchange Association Limited and the
National Stock Exchange. Subsequently, in accordance with
Regulation 21(3)(a) of the Securities and Exchange Board of India
(Substantial Acquisition of Shares and Takeovers) Regulations,
1997, the promoter shareholders made an open offer to the public
shareholders at Rs. 285/- per equity share of Rs. 10/- each fully
paid up and over a period of time, acquired 29, 16, 546 shares
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from the public. However, the public shareholding of the Petitioner
Company fell below the 10% limit as provided under the Stock
Exchange norms and the shares of the petitioner company were
de-listed from the Calcutta Stock Exchange Association Limited
with effect from 26th August, 2002 and subsequently from the
National Stock Exchange with effect from 9th October, 2002. As
per the requirements of the concerned Stock Exchanges, the
promoter shareholders sent offer letters to the public shareholders
in respect of the acquisition of the equity shares in the Petitioner
Company at a de-listing price of Rs.285/- per equity share as per
the de-listing guidelines under the Security and Exchange Board
of India (De-listing of Securities) Guidelines, 2003. The promoter
shareholders extended to the shareholders of the Petitioner
Company an exit option at the de-listing price of Rs.285/- per
equity share. This offer was terminated by a letter dated 9th April,
2009 addressed to the shareholders.
5. Section 100 of the Companies Act, 1956 (“the Act”) and
Article 50 of the Articles of Association of the Petitioner Company
empower the Petitioner Company, by way of a special resolution
to reduce its share capital in any manner. The Board of Directors
of the Petitioner Company proposed the reduction of the equity
share capital of the Company. The reason for the reduction of the
equity share capital of the Petitioner Company reads as follows:
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“The Company’s securities being de-listed to
individual shareholders do not have a tradable
security for exit. This prevents shareholders from
realizing the optimal value and returns on their
investments in the Company. Further, over a period of
time, the management’s focus on overall profitability
and financial discipline including effective
management of the net working capital has
significantly reduced the capital requirements of the
company.”
6. It was proposed by the Petitioner Company that its paid
up equity share capital be reduced by paying off the equity
shareholders (other than promoter-shareholders) an aggregate
sum of Rs.425/- towards each equity share, with a face value of
Rs. 10/-, which would therefore include a premium of Rs. 415/-
per equity share. Thus the Petitioner Company sought to
extinguish 95, 106 equity shares and reduce it’s paid up equity
share capital by Rs. 9, 51, 060/-. A copy of the valuation report of
the certified individual valuer, M/s Grant Thornton (“valuer”),
appointed by the Petitioner Company is annexed to the petition.
7. The Board of Directors of the Petitioner Company had
sent a Notice and an Explanatory Statement dated 27th August,
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2009 in due compliances of the provisions of the said Act for
convening an Extraordinary General Meeting of the equity
shareholders of the Petitioner Company on 15th October, 2009 to
consider, inter alia, the passing of the following special resolution:
“RESOLVED THAT pursuant to section 100 and other
applicable provisions of the Companies Act, 1956 and
subject to the consent/confirmation/approval of the
Hon’ble High Court of Judicature at Bombay and
other appropriate authorities, and pursuant to Article
50 of the Articles of Association of the Company, the
paid-up equity share capital of the Company be
reduced by paying off/returning to the holders of the
equity shares (other than the promoter-share holder of
the company, namely Organon Participations B.V. ), a
sum of Rs.425/- (Rupees four hundred twenty five
only) per share being the face value of Rs.10 (Rupees
ten only) and a premium of Rs.415 (Rupees four
hundred fifteen only) per share and thereby canceling
and extinguishing all such shares.”
8. Accordingly, the EGM of the shareholders of the
Petitioner Company was held on 15th October, 2009. At the said
meeting, 38 members were present in person, by proxy and
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through authorized representatives, wherein, amongst others, the
resolution, as set out in paragraph No.6 above, was passed by
way of show of hands under Section 100 and other applicable
provisions of the Act. However, two shareholders, holding a total
of 160 shares, which amounts to 0.002633242% of the total
shareholding, had opposed the aforesaid resolution.
9. On the date of filing of this petition i.e. 31st October,
2009, there were no secured creditors of the Petitioner Company.
There were 245 unsecured creditors (trade creditors including
sundry creditors) and the amount payable to these unsecured
creditors aggregated to Rs.31,10,10,746/-. The Petitioner
Company paid off 192 unsecured creditors, representing 62.83%
of the total value of credit and obtained the consent of 44 of the
remaining unsecured creditors representing 36.24% of the total
value of the Credit to the reduction of share capital. There
remained around 10 unsecured creditors, representing a minimal
of 1.06% of the total value of credit who neither consented nor
were re-paid by the Petitioner Company.
10. The Petitioner Company had filed Company
Application No. 57 of 2010 for requisite direction for dispensation
of the provisions and the procedure prescribed under Section
101(2) of the Act. By an order dated 22nd January, 2010, this
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Court has dispensed with the provisions of, and the procedure
prescribed under Section 101(2) of the Act and has accepted the
undertaking of the Company Secretary to give individual notices
of hearing of the petition to the said 10 unsecured creditors
holding a minimal 1.06 of the total value of credit, referred to
above in paragraph 8. By an affidavit dated 16th April, 2010, the
petitioner Company has pointed out that it has received No
objection/Consent letters from all unsecured creditors for
sanction of the proposed reduction of equity share capital.
11. By the Minutes of Order, dated 11th February, 2010,
passed by this Court in the above petition, the Petitioner
Company was also directed to get the notice of hearing published
in two newspapers and in the Official Gazette of the Government
of Maharashtra. The petitioner company has complied with the
same and has filed an affidavit of publication dated 9th March,
2010. It is therefore submitted on behalf of the Petitioner
Company that the reduction of the equity share capital as
embodied in the said resolution passed by the shareholders at the
EGM, held on 15th October, 2009, does not prejudice the
shareholders or the creditors of the Petitioner Company in any
manner whatsoever. The Petitioner Company has further
submitted that this offers an opportunity to the remaining
individual shareholders of the Petitioner Company to liquidate
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their entire shareholding at an attractive price. It is therefore
prayed that the reduction of equity share capital as embodied in
special resolution passed at the EGM be confirmed by this Court.
12. As set out herein above, the hearing of this petition
was advertised in two newspapers circulated in Mumbai, and
published in the Maharashtra Government Official Gazette in its
th rd
issue for the period from 25 February, 2010 to 3 March, 2010.
Only one objector i.e. Mr. Dinesh Vrajlal Lakhani (holding 80
shares of the Petitioner Company jointly with his wife Smita D.
Lakhani) has come forward to object to the grant of relief prayed
for in the above petition. Mr. Lakhani has filed an affidavit dated
10th March, 2010 setting out his objections to which, an affidavit
in rejoinder, dated 25th March, 2010 is filed by the Petitioner
Company.
13. Mr. Lakhani has first submitted that such reduction of
the share capital proposed by the Petitioner Company, by paying
off the public holders of equity shares, other than the promoter-
share holders and giving them certain compensation, amounts to
a forceful acquisition of the shares held by them. He states that
such action on the part of the Petitioner Company is against the
principles of natural justice, corporate democracy and corporate
governance. He states that such reduction tantamounts to a
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sophisticated corporate mafiaism.
14. In dealing with this objection, I shall briefly discuss the
position of law on the issue. The law relating to reduction of share
capital of a company is contained in Sections 100 to 105 of the
Companies Act, 1956. Section 100 authorizes the company
limited by shares, having a share capital, if so authorized by its
Articles of Association, by special resolution to reduce its share
capital in any way. A company may therefore reduce its share
capital:
(i) If there is a provision in its Articles of Association
permitting it to do so;
(ii) If it has passed a special resolution for that purpose; &
(iii) If such a resolution is sanctioned by the Court.
15. In the leading case of British and American Trustee
and Finance Corporation v. Couper ( [1894] AC 399 ) Lord
Macnaghten observed on the point:
“If there is nothing unfair or inequitable in the
transaction, I cannot see that there is any objection to
allowing a company limited by shares to extinguish
some of its shares without dealing in the same manner
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10with all other shares of the same class.”
However, in the same case, Lord Herschell, L.C. made the
following observations:
“There can be no doubt that any scheme which does
not provide for uniform treatment of shareholders
whose rights are similar, would be most narrowly
scrutinized by the Court, and that no such scheme
ought to be confirmed unless the Court be satisfied
that it will not work unjustly or inequitably.”
The Madras High Court, while referring to the same judgment in
Re Panruti Industrial Co. Private Ltd, AIR 1960 Mad 537 held
that the Court’s power to sanction any reduction is to be
determined by whether such reduction is fair and equitable.
16. In the landmark case of Miheer H. Mafatlal v. Mafatlal
Industries Ltd., (AIR 1997 SC 506), the Hon’ble Apex Court was
called upon to decide on the validity of a Scheme of
Amalgamation of two public limited companies under Section
391/393 of the Companies Act. Certain principles posited by the
Hon’ble Court are relevant for the present matter:
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“It has to be kept in view that the question of bonafide
of the majority shareholders or the alleged suppression
by them of minority shareholders or their attempt to
suffocate their interest has to be judged from the point
of view of the class as a whole. Question is whether
the majority shareholders while acting on behalf of the
class as a whole had exhibited any adverse interest
against the appellant’s minority shareholders also
having a similar interest as members of the same
class, while approving the scheme, or had acted with
any oblique motive to whittle down such a class
interest of the minority.” (para 38)
17. This Court is however bound by the decision of the
Division Bench of this Court, reported in Sandvik Asia Ltd. v.
Bharat Kumar Padamsi [2009 Vol. 111 (4) Bom. LR 1421],
concerning the reduction of capital of M/s. Sandvik Asia Ltd. The
Learned single-judge of this Court, had refused confirmation of
the proposal for reduction of M/s. Sandvik Asia Ltd. on the ground
that the promoters group could virtually bulldoze the minority
shareholders and purchase their shares at the price dictated by
them. The Learned Single Judge found that the minority
shareholders were not given any option under the proposal.
Hence the Learned Single Judge concluded that such schemes
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for reduction of capital were totally unfair and unjust. In appeal,
the Hon’ble Division Bench held that they were bound by the law
laid down by the Hon’ble Apex Court in Ramesh B. Desai v.
Bipin Vadilal Mehta [ (2006) 5 SCC 638 ] where the Apex Court
recognized the judgment of the House of Lords in the case of
British and American Trustee and Finance Corporation
[supra]. The Learned Bench also referred to the judgment in
Poole & ors v. National Bank of China Ltd. [ (1907) A.C. 229
(HL) ], the relevant portion of which is as follows:
“The dissenting shareholders do not demand, and
never have demanded, better pecuniary terms, but they
insist on retaining their holdings which in all reasonable
probability can never bring profit to any of them and
may be detrimental to the company.”
The Learned Bench granted sanction to the reduction of capital,
overruling the order of the Learned Single Judge in Sandvik Asia
Ltd. (supra), and posited as follows:
“Once it is established that non-promoter shareholders
are being paid the fair value of their shares, at no point
of time it is even suggested by them that the amount
that is being paid is way less and even the
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13overwhelming majority of non-promoter shareholders
having voted in favour of the resolution shows that the
Court will not be justified in withholding its sanction to
the resolution.” (para 9)
An SLP (Petition for Special Leave to Appeal (Civil) No.
12418/2009) filed therefrom, was dismissed by the Hon’ble Apex
Court, by its order dated 13th July, 2009. Thus this Court is bound
by the decision of the Learned Division Bench and cannot
withhold sanction to the special resolution for reduction of capital,
unless there is some patent unfairness regarding the fair value of
the shares or there is lack of an overwhelming majority of non-
promoter shareholders who vote in favour of the resolution.
18. It is next contended by Mr. Lakhani that at the said
EGM, proxies were allowed to vote by show of hands. He
submits that under the provisions of the Act, proxies are required
to vote on poll only and not by show of hands. Hence, even if the
Articles of Association of the Petitioner Company permit proxies
to vote by show of hands, the provisions of the Act should prevail.
The Court cannot agree with Mr. Lakhani’s contention on this
point. As per the Proviso to Section 176(1) of the Act, a proxy is to
vote only on poll at the meetings of a company, unless the
Articles of Association provides otherwise. Mr. Lakhani has
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himself admitted that the Articles of Association of the Petitioner
Company allow voting by proxies through show of hands. This
makes the aforesaid objection untenable and it is therefore
rejected.
19. The next objection of Mr. Lakhani is that the special
resolution put forward at the EGM for approval by the
shareholders appears to have not been passed with requisite
majority. According to him, at the EGM, he along with one Mr.
Aspi Besania, were the only two public shareholders present in
person. The remaining people present in the hall happened to be
either employees of the Petitioner Company or representatives of
legal firms and auditing firms, including proxies and authorized
representatives. He states that the Petitioner Company did not
clarify as to how many shareholders were present in person or by
proxy or by corporate authorization. He further states that
although he sought documents from the Petitioner Company like
photocopies of the attendance register, and of the authorized
representation and proxy register, the Petitioner Company failed
to provide the same. Although the Petitioner Company provided
copies of the Articles of Association, Annual Reports, open offer
letters and the valuation report, the minutes of the meeting were
sent to him only on 11th December, 2009 and in the said minutes,
the break-up of the exact number of shareholders present in
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person or through proxies and authorized representation is not
given. It is also submitted that there is no proof that EGM notice
was sent to 1490 members of the Company.
20. Mr. Lakhani had admittedly not expressed any
apprehension about the special resolution appearing to have
been passed without the requisite majority, at the time when the
said resolution was passed or even when he issued a letter to the
Company Secretary of the Petitioner Company immediately after
the meeting was concluded. Interestingly, the Court finds that Mr.
Lakhani has not expressed any doubts in his letter, regarding the
lack of majority in the passing of the special resolution, or of
notice of the meeting not being dispatched to 1490 shareholders.
Despite the fact that under Section 176 (7) of the Act, Mr. Lakhani
was entitled, during the period of 24 hours before the time fixed
for the commencement of the meeting and ending with conclusion
of the meeting to inspect the proxies lodged, he chose not to
conduct any inspection. Again, although his letter dated 21st
October, 2009, addressed to the Company Secretary of the
Petitioner Company inter alia records that at the time of the EGM
around 20 to 25 persons were present and most of them
appeared to be either employees of the company or
representatives of legal firms and auditing firms, it is only on 23rd
December, 2009 that Mr. Lakhani sought copies of the
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attendance register in respect of the EGM held on 15th October,
2009 along with particulars regarding the shareholders and
proxies who were present at the meeting. These facts establish
beyond doubt that Mr. Lakhani who, as can be seen from his letter
dated 15th October, 2009, wrote to the Company Secretary
immediately after the EGM, had not objected qua the proxies or
authorized Representatives who were present and voted at the
said meeting and qua the passage of the special resolution and
has gradually come up with the aforesaid objections only as an
afterthought.
21. In the Minutes of the meeting, it is inter alia clearly
recorded by the Petitioner Company that 38 members were
present in person by proxies and through authorized
representatives and that the Chairman informed the members of
the receipt of 29 valid proxies representing 99 equity shares
within the prescribed time, as well as an intimation from one
member, holding 59, 76, 832 equity shares, appointing an
authorized representative to attend the meeting. The Chairman
also informed the members that the documents mentioned in the
explanatory statement annexed to the notice were open for
inspection till 11.00 a.m. Neither party contends that any of the
contents of the Minutes of the EGM of the petitioner company,
dated 15th October, 2009 is incorrect. Therefore, the Minutes
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clearly spell out the attendance at the meeting as being 38
members, from whom 29 were valid proxies and one member was
an authorized representative. This implies that 8 members were
present in their capacity as public shareholders, including Mr.
Lakhani and Mr. Besania. Mr. Lakhani has hence wrongly
submitted that no break-up of exact number of shareholders
present in person, through proxies and through authorized
representation was provided. This objection raised by Mr.
Lakhani, therefore, completely lacks bonafide and seems to be
raised only with the intention of creating hurdles for the Petitioner
Company that seeks relief from this Court as prayed for in the
petition.
22. Mr. Lakhani has then submitted that in a similar
petition of Cadbury India Limited before this Court, his Lordship,
Justice (Dr.) D. Y. Chandrachud had ordered that individual notice
be sent to the shareholders and hence similarly in the present
petition this Court should direct the Petitioner Company to issue
individual notices to the shareholders. However, I find that the
order passed by my Learned Brother Judge, Justice (Dr.) D. Y.
Chandrachud, is passed while disposing of the Company
Application filed by Cadbury India Limited and not at the stage of
final hearing of the Petition. Moreover, in complying with the order
of this Court, dated 11th February, 2010, the Petitioner Company
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published notices of hearing of the petition for reduction of capital
under Section 100 of the Act in two local newspapers, and no
objection has been received in relation to the present petition
save and except from Mr. Lakhani. This contention therefore
lacks merits and is rejected.
23. Mr. Lakhani has next pointed out that the explanatory
statement under Section 173(2) of the Act, to the notice dated
27th August, 2009 mentions that:
“The Board has recommended in accordance with
the ‘first-in-last-out principle’ , and Organon
Participations B.V. has agreed vide letter dated
August, 25, 2009 that they being the Promoter-
shareholder, should not be returned any of its capital
contribution before the public shareholders are
returned their capital contribution.”
Mr. Lakhani submits in this regard that the promoters and
directors prior to the open offer held 50.43% of the paid up capital
of the Company. Post the open offer, as of 31st December, 2001,
the promoter’s holding was 94.38%, whereas presently the
promoters’ holding is 98.43% and the remaining 1490
shareholders hold 1.57% of the paid up capital. Therefore he
submits that the shares acquired by the promoters in open offer
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was much later than those of shareholders like him, who had
received shares in public offers sometime in the year 1984 and
also received bonus shares in the ratio of 3:5 in the year 1996. In
view of the principle of ‘first-in last-out’, the subsequent shares
acquired by the promoter through open offer should also be
subject to reduction of capital before those of shareholders like
him.
24. In response to this objection, the Petitioner Company
has submitted that the principle of ‘first-in last-out’ referred to by
the Petitioner Company implies that the promoter shareholders
being the initial shareholders of the Petitioner Company would
exit last. Admittedly, the Petitioner Company became a
shareholder prior to Mr. Lakhani and therefore should exit later
than him. Subsequent acquisition of shares by the promoter
shareholders would not affect the status of the promoter
shareholders being the initial shareholders. Moreover, the
Petitioner Company submits that Section 100 of the Act does not
prohibit the classification of shares for the purpose of effecting the
reduction of capital. A special resolution to the effect of proposed
reduction of the equity share capital need not affect the shares
held by the promoter shareholders. Therefore, the said objection
of Mr. Lakhani is untenable. On a reading of Section 100, I find
that the submission of the Petitioner Company is correct and this
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objection of Mr. Lakhani, raised on the principle of ‘first-in last-out’
is therefore, rejected.
25. Mr. Lakhani’s final objection pertains to the valuation
report of M/s Grant Thornton India (“Grant Thornton”), who were
appointed by the Petitioner Company to conduct the valuation of
its equity shares for the purpose of the proposed reduction of
share capital, as per the provisions of the Act. The objections
pertaining to the valuation method are set out in clauses 6-a – 6-e
of Mr. Lakhani’s affidavit dated 10th March, 2010. He submits that
these objections should be considered by this Court before
passing any orders on the petition filed by the Petitioner
Company. The said objections were therefore forwarded by the
Petitioner Company to Grant Thornton, who in turn have, by their
letter dated 24th March, 2010 responded to each objection. The
letter dated 24th March, 2010 along with the response of Grant
Thornton to the objections is annexed as “Exhibit A” to the
affidavit in rejoinder of the Petitioner Company dated 25th March,
2010. According to Mr. Lakhani, the Petitioner Company followed
one method of valuation at the time of open offer in
October/November, 2001 and another method of valuation under
the present proposal of reduction of capital which is not proper.
He submits that the present proposal by the Petitioner Company
should be on the basis of that method of valuation, which gives
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higher value i.e. either on the basis of book value of the earning
per share, or the P.E. ratio and the difference in Sensex then and
now, so as to add a reasonable premium for the total buyout of
shares.
26. The above objections / suggestions is responded to by
Grant Thornton as follows:
“Grant Thornton, India was appointed to conduct a
valuation of Organon (India) Limited’s (the “Company”)
equity shares for the purpose of a proposed reduction
of its share capital as per the provisions of the
Companies Act, 1956. For this purpose, we
understand that there are no prescribed methods/
guidelines for carrying out the valuation under the
Companies Act, 1956, particularly in cases where the
companies are no longer listed on stock exchanges.
Therefore, for this purpose, as detailed in our Valuation
Report the standard of value used in our valuation
analysis is “Fair Value” which is often defined as the
price, in terms of cash or equivalent, that a buyer could
reasonably be expected to pay, and a seller could
reasonably be expected to accept, if the business were
exposed for sale on the open market for a reasonable
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period of time, with both buyer and seller being in
possession of the pertinent facts and neither being
under any compulsion to act.
As detailed in our report, to arrive at the fair
value of the Company’s equity shares, we have applied
generally accepted valuation methodologies, which are
used in several other situations involving a “Fair Value”
standard e.g. mergers/amalgamations, and accepted
by relevant judicial and regulatory authorities of India.
It is important to note that these methodologies are
also widely practised and applied internationally.
We understand that the Offer Price of INR
285/per share made during the Open Offer in October/
November 2001 was based on the “Negotiated Price”
under the Share Purchase Agreement dated July, 30,
2001 and SEBI Takeover Regulations (11) for
Consolidation of Holding and Delisting of the Shares
as it clearly indicated in the 2001 Letter of Offer. We
understand that while carrying out the valuation as at
June, 30, 2009, it would be incorrect to apply the
guidelines that were applicable in October / November,
2001 for the Open Offer for the following reasons.
The Open Offer guidelines used in October /
November, 2001 are not applicable in the current
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valuation context, moreover the standard of value
applied in the current valuation context is “Fair Value”.
The Company has been delisted. The Offer
Price in October / November, 2001 was determined
based on the “Negotiated Price” of Rs. 285/- as per the
Share Purchase Agreement entered into between the
Promoter Shareholder and some of the Indian
Promoters of the Company.
Further, we have also appropriately factored
under various methods the Book value (referred as Net
Value in our report), Earnings per share, Earnings
based multiples, the prevailing stock market conditions
and other factors detailed in our Valuation Report
(Refer paragraph IV “Valuation Methodology” and
“Organon’s Valuation”).
In the light of this response, I find that the Grant Thornton
has explained in detail why the valuation method suggested by
Mr. Lakhani cannot be acceded to.
27. Mr. Lakhani has contended that the open offer at Rs.
285/- per share in October/November, 2001 was at 3.07 times of
the book value and if the same 3.07 times the present book value
is taken into consideration, the price per share would become Rs.
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718.38/-. In response, Grant Thornton have stated that they have
considered the book value (Net Asset value) of the company and
the same has been even adjusted to reflect the market value of
surplus/non operating assets and the impact of potential
contingent liabilities. They have pointed out that this has been
explained by them in para IV (1) of the valuation report, which is
reproduced hereunder:-
“Net Asset Value Method (NAV):
The value arrived at under this approach is based on
the latest available audited/provisional financial
statements of the business and may be defined as
Shareholders’ Funds or Net Assets owned by the
business. Under this method, the net assets as per
the financial statements are adjusted for market value
of surplus/non operating assets, potential and
contingent liabilities if any. To derive value per equity
share, the adjusted Net Assets value is divided by the
number of outstanding equity shares. We have used
this method for the purpose of estimating the share
value.
We have relied on the Net Asset Value of the
Company as of June 30, 2009 and have adjusted for
the market value of surplus assets i.e. Land and
reduced the potential contingent liabilities. Since, we
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25have applied various methods and it is important to
arrive at a single equity value, we have assigned
appropriate weight to the Net Asset Value method.”
Thus, the Book value / Net Asset Value of the Petitioner
Company was considered by Grant Thornton for the purpose of
arriving at the fair value of the petitioners’ shares.
28. Mr. Lakhani has next contended that when the open
offer in October/November 2001 was made at Rs. 285/- per
share, the Earning Per Share (EPS) was Rs. 14.76/-. This comes
to a PE ratio of 19.31, whereas the present offer of Rs. 425/- is at
a PE ratio of 9.97, as per the EPS of Rs. 42.64/-, for the
st
accounting period ending 31 December, 2008 (Rs. 42.64/-
multiplied by 9.97 gives Rs. 425/-). The above contention of Mr.
Lakhani is explained by Grant Thornton as under:
“As at the Valuation Date (June 30, 2009), the
Company’s shares are de-listed and hence, as
detailed in our Valuation Report [Paragraph IV(2) and
“Organon’s Valuation”] we have used Market Multiple
method which factors and appropriate measure of
earnings multiple and the prevailing market conditions
for the comparable companies operating in the
multinational pharmaceuticals companies’ sector and
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26further adjusted for the Company’s shares towards
lack of marketability and being illiquid as it is no longer
listed on any stock exchange.
The Offer Price in October/November 2001 was
determined based on the “Negotiated Price” of Rs.
285/- as per the Share Purchase Agreement entered
into between the Promoter Shareholder and some of
the Indian Promoters of the Company. Hence, for the
purpose of discussion on the Intervenor’s arguments,
the implied multiples (Price/Earnings(PE) Ratio,
Price/Book Value ratios) computed by the Intervenor
derived based on the Offer Price of Rs. 285/- are not
comparable. Moreover, if the implied multiples are
computed based on the ruling market price of the
Company at that time (Price on NSE was Rs. 182.7
and Calcutta Stock Exchange was Rs. 165.5 as stated
in the Offer Document), the multiples would be much
lower than what the Intervenor has stated.
In addition, the Offer document of
October/November 2001 makes a reference to the
Industry PE ratio comprising of multinational
pharmaceuticals which was at a ratio of 19.0x as per
the Capital Market Magazine dated 5th August, 2001.
If the same source is considered, the P/E ratio of
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27
multinational pharmaceuticals is 16.0x, based on an
average last four editions preceding the date of
valuation, which after adjustment towards lack of
marketability of the Company’s shares, will be closure
to implied P/E ratio of the Company as per the current
Offer Price of Rs. 425, the estimated annualized
earnings as at June 30, 2009. It is further submitted
that as per several researches carried out by
academicians and as a general practice, it is common
to apply a discount for lack of marketability in the
range of 25% to derive the Fair Value of equity of an
unlisted company.”
Therefore, the Petitioner Company is correct in its
contention that the fair value of the share is Rs.425/- as per
current PE ratio of the Petitioner Company.
29. Mr. Lakhani also has contended that the BSE Sensex
is rising and is approximately five and a half times of what it was
in 2001. Hence the present offer price should also take the same
into consideration. In response, Grant Thornton explained as
follows:
“….We have factored the stock market conditions
prevailing as at the Valuation Date, which reflected in
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28the market prices of the comparable companies and
consequently impacting the markets multiples. We
have explained this in para IV and Organon’s Valuation
in our Valuation Report”
The above answer of Grant Thornton shows that they have
already considered the suggestion of Mr. Lakhani while submitting
their valuation report and thereafter arrived at fair value of the
shares of the Petitioner Company.
30. Mr. Lakhani has further contended that if the
management of the Petitioner Company wants a complete
buyout, then it should pay a substantial amount of premium
towards the prices arrived at on the basis of the above method of
valuation. To this argument, Grant Thornton’s response is as
follows:
“We have arrived at the fair value of equity shares of
the company. The full buy out premium or commonly
referred as control premium would be usually
applicable when the buyer gets control due to
purchase of shares. In the current valuation context,
we have valued company’s equity as a whole and not
specifically any specific category or class of
shareholders (i.e. Minority stake). If one has to value a
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29minority stake there could be a possibility of Minority
Discount that would need to be considered as the
minority shareholder cannot control the company.”
I find that Grant Thornton has thereby given cogent
reasoning as to why Mr. Lakhani’s suggestion for a full buy out
premium cannot be accepted.
31. Mr. Lakhani has further contended that the valuation
report methodology used by the valuer and its full disclaimer is
not clear as it has valued the assets of the Petitioner Company,
more particularly the real estate, at current market value. He
hence submits that the earlier method of valuation used in
October/November, 2001 should be taken into consideration. In
response, Grant Thornton has pointed out that the valuation
report has considered the Petitioner Company’s assets
particularly the market value of surplus assets and in addition the
business and the interest in which the company operates. This
has been dealt with in para IV of the said Valuation Report.
32. Mr. Lakhani has in this manner raised several
concerns regarding the valuation of shares. Before concluding on
this point, I must point out certain observations of the Courts in
the country regarding valuation of shares. Mr. Tulzapurkar,
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30
Learned Senior Counsel appearing for the Petitioner Company
has relied on the decision of the Hon’ble Apex Court in the case
of Miheer H. Mafatlal [supra]. One of the objections raised by
the appellant therein was that the exchange ratio of the equity
shareholders so far as the Transferee Company is concerned
works very unfairly and unreasonably towards them. As per that
scheme five equity shares of the Transferor Company were to be
exchanged for 2 equity shares of the Transferee Company. It is
pertinent to record the observations of the Hon’ble Apex Court in
this regard:
“…Pennington in his ‘Principles of Company Law’
mentions four factors which has to be kept in mind in
the valuation of shares:
(1) Capital Cover;
(2) Yield;
(3) Earning Capacity;
(4) Marketability….
Valuation of shares is a technical and complex problem
which can be approximately left to the consideration of
experts in the field of accountancy. Many
imponderables exist in the exercise of the valuation of
shares…
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31
…It has also to be kept in view that which exchange
ratio is better is in the realm of commercial decision of
well informed shareholders. It is not for the Court to sit
in appeal over the value judgment of equity
shareholders who are supposed to be men of the world
and reasonable persons who know their own benefit
and interest underlying any proposed scheme. With
open eyes they have okayed this ratio and the entire
scheme.” (para 40)ig
33. In Hindustan Lever Employees Union v. Hindustan
Lever Ltd. (AIR 1995 SC 470), the Hon’ble Apex Court rejected
the argument of the Petitioner therein, that if some other method
was adopted, probably the determination of valuation could have
been more in favour of the shareholders. Merely because some
other method of valuation could be resorted to, which would
possibly be more favourable, that alone cannot militate against
granting approval to the scheme propounded by the Company.
The Court’s obligation is to be satisfied that the valuation was in
accordance of the law and it was carried out by an independent
body.
34. In the case of Re Tata Oil Mills Co. Ltd. [ (1994) 81
Comp Cases 754 (Bom) ], this Court observed thus:
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32
“…the exchange ratio arrived at by Mr. Malegam has
received the approval of shareholders holding more
than 99 percent (in number and value) shares at the
meetings. No one except the shareholders holding the
minimum percentage of shares has complained before
me. The valuation has been confirmed by two eminent
firms of auditors. It would be extremely difficult to hold
that the same is unfair. In any case, it has been
approved by an overwhelming majority of persons
affected and there is no basis to doubt their judgment.”
35. In the landmark case of Gold Coast Selection Trust
Ltd. v. Humphey (30 TC 209) it was posited as follows:
“Valuation is an art, not an exact science. Mathematical
certainty is not demanded, nor indeed is it possible”
36. Mr. Tulzapurkar has also relied on an unreported
decision of the Learned Single Judge of this Court (Coram: A.M.
Khanwilkar, J.) in the case of Reliance Industries Ltd.
[Company Application No. 288 of 2009], dated 29th June,
2009. The learned Single Judge in the said decision has dealt
with the criticism of the objectors that the contents of the
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33
valuation report does not give any forecast or disclose any logic
but only conclusion and the opinion of the Valuers/Experts is
based on the information provided by the Company, in the
following terms:
“Insofar as the criticism with regard to the contents of the
valuation report either on the ground that it does not give
any forecast or disclose any logic but only conclusion. Even
this argument does not commend to me. As aforesaid, on
reading the reports clause by clause and as a whole, no
fault can be found with the ultimate opinion reached by the
experts regarding share swap ratio, which is founded on
tangible material and basis. I am not at all impressed by the
argument of the objectors that the report is manifestation of
conflicting opinion in any manner. The fact that the
language of the report would give an impression that the
Expert does not take the responsibility of the accuracy of
the figures furnished to them by the Company or that they
have not made any independent valuation of the assets and
liability of the companies on their own, does not mean that
the relevant factors for determination of swap ratio have not
been considered by the experts. Obviously, the opinion of
the Experts is based on the information provided by the
Company. There is nothing to show that the figures
available in the Books of Accounts provided to the Experts
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34were incorrect or otherwise. Thus, there is nothing in the
said Reports to indicate that the consideration weighed with
the Experts in arriving at the opinion is impermissible or
unacceptable. It is not possible to countenance the
grievance of the objectors that the reports deprive the Court
from basic information regarding justification of share swap
ratio.”
In the said decision, the learned Single Judge noted that-
“Even in the present case, no one has doubted the
integrity and honesty of the valuers, who have given
their share valuation report or fairness report, as the
case may be. Nor the objectors have been able to point
out that the method adopted by the valuers was
impermissible or absurd. If so, I find no reason to
discard the valuation of shares or the swap ratio
determined by the Experts” (para 14)
37. In the present case, the petitioner company does not
have any secured creditors as set out herein above. Not a single
unsecured creditor has raised objection qua the reduction in
capital proposed by the Petitioner Company. The hearing of the
petition was advertised by the Petitioner Company as directed by
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35
this Court in two local newspapers and in the Maharashta
Gazette. However, except for Mr. Lakhani, none of the public
shareholders have come forward to oppose the petition. I find that
the valuation of the shares by the Petitioner Company is therefore
also accepted by all the shareholders and creditors with the single
exception of Mr. Lakhani. Mr. Lakhani himself has also not
attributed any motives to Grant Thornton nor commented on its
independent professional status or competency. In fact the
Petitioner Company has taken the pains of getting a response of
Grant Thornton to every objection raised by Mr. Lakhani
pertaining to the valuation carried out by Grant Thornton. The
report of Grant Thornton sets out the basis for arriving at the final
opinion. The report clearly mentions that valuation is done by
giving predominant weightage to the value computed under the
Market Multiple Method and Discounted Cash Flow Method, with
a lower weight being given to the value computed under the NAV
method.
38. In view thereof, keeping in view the observations of
the Hon’ble Apex Court as well as this Court, I see no reason why
the Valuation Report of Grant Thornton, which I find to be fair,
reasonable and based on cogent reasoning and which has also
been accepted by all the non-promoter shareholders of the
Petitioner Company, with the lone exception of Mr. Lakhani,
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36
should not be accepted by this Court.
39. Under the circumstances, the Company Scheme
Petition is allowed in terms of prayer clauses (a) and (b).
Order Accordingly.
(S. J. KATHAWALLA, J.)
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