NCLAT on Purchase of Minority Shareholding under Section 236 of the Companies Act, 2013 – CorpLexia

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Jul 19, 2019
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S. Gopakumar Nair & Anr. Vs. OBO Betttermann India Private Limited & Anr.

Decided by the Hon’ble National Company Law Appellate Tribunal, New Delhi

(Company Appeal (AT) No. 272/2018 – Decided on 09.07.2019)

(Coram – Justice A.I.S. Cheema and Mr. Balvinder Singh)

[Highlights: The provision of purchase of minority shareholding under Section 236 of the Companies Act, 2013 is only applicable to cases of an amalgamation, share exchange, conversion of securities or for other similar reasons, and not every case where 90% or more shareholding in a company is acquired. Second, valuation of shares for the purchase of minority shareholding under Section 236(2) must be done by a “registered valuer” and cannot be replaced by that of a chartered accountant]

Facts of the Case

In this case, the two Appellants started out as 100% shareholders of the R1 Company, Cape Electric India Pvt. Ltd. Thereafter, R2 Company, OBO Bettermann Holdings – GMBH Limited had acquired 74% stake in the company by way of a shareholder’s agreement with the Appellants whereas the remaining 26% shares were to be held jointly by the Appellants.

Gradually, the shareholding of R2 in R1 Company had increased to 99.64% and the Appellants were left with 0.36% shareholding in the Company by way of various agreements between them. Later on, a “Put and Call Option Agreement” was executed between the Appellants and R2 to buy them out of their shareholding. Pursuant to this, R2 had sent a Put and Call Option Notice to the Appellants to sell their shares on sale consideration rather than an agreed price. Giving this up, later on, R2 sent another notice to the petitioners invoking the Put and Call Option, calling upon them to sell at an agreed price to be decided by mutually acceptable Chartered Accountant. Thereafter, R2 issued a Notice to the company for the purchase of the minority shareholding under Section 236(1) of the Companies Act, 2013 (“Companies Act”) which was followed by R1 Company giving another notice asking original petitioners to deliver their shares within 21 days. As per the record, the original petitioners disputed these notices vide their reply. R1 Company, however, cancelled the Appellants’ shares under Section 236 of the Companies Act and communicated the same to them.

Previous Proceedings

Prior to preferring an Appeal to the NCLAT, the Appellants had filed an application for oppression & Mismanagement under Sections 241 to 244 R/w 246 and 337 to 341 of the Companies Act before the Madras Bench of the National Company Law Tribunal. Therein, the NCLT had held that by way of R2’s acquisition of the shares of the Appellants’ shares under Section 236, they were no longer shareholders in the R1 Company and hence could not maintain the company petition.

Section 236 of the Companies Act empowers the acquirer of or person/group holding 90% shareholding of a company, by virtue of an amalgamation, share exchange, conversion of securities or for “any other reason” to acquire the remaining minority shareholding of the company without the consent of the minority shareholders. There are various safeguards provided in this Section to protect the interests of the minority shareholders, like the requirement of valuation by a registered valuer.

Decision of the NCLAT

1. Whether the Appellants’ Petition for Oppression & Mismanagement is maintainable?

Disagreeing with the NCLT, the NCLAT held that from the materials available on the record, it is clear that the Appellants were 2 out of the 3 shareholders of the R1 Company. Further, it was only after their shares were forcefully taken away, which was purported to be under Section 236, that the question of oppression & mismanagement arose. Thus, where the act of oppression is one that has led to the loss of the shareholder’s position for the Appellants, for which they are complaining, and where they had fulfilled the criteria under Section 241(1)(a) (i.e., petition by more than 1/10th of the members) to bring the petition, the NCLT could not have rejected the same on the summary claim of the Respondents that they had only enforced Section 236. Therefore, the NCLAT held that the Petitioners are and were fit to maintain the company petition.

2. Whether provisions for purchase of minority shareholding under Section 236 are applicable in the present case?

Section 236 of the Companies Act empowers the holder(s) of 90% or more shares in a company to acquire the remaining shares of minority shareholders. However, it has been held that Section 236 applies only to the acquisition of 90% or more shareholding in cases where the same is “by virtue of amalgamation, share exchange, conversion of securities or for other reasons”. The term ‘for other reasons” here, must take the colour of the preceding words. This term has to be read along with the other sections in Chapter XV which deal with compromises, arrangements and amalgamations. According to the NCLAT –

“there can be compromise or arrangement or mergers or amalgamation with a certain percentage of persons-members dissenting, or, all could be assenting. Section 236 deals with the residuary in the event of all assenting shareholders and amalgamation or share exchange or conversion of securities taking place need may arise to those who have become 90% majority or are holding 90% to acquire the remaining minority shareholding.” (Para 25)

“There could not be a one-sided takeover by Respondent No.2 who had by way of agreements got 99% shares in Respondent No.1 and thus was akin to Respondent No.1. Thus Section 236 of the Act was inapplicable to the facts of the matter.” (Para 26)

Therefore, the NCLAT has held that the present case is not one fit for the application of Section 236 as the records show only a gradual change in shareholding which is not in congruence with the requirement of an amalgamation, share exchange, conversion of securities or for other similar reasons as the genesis of the 90% or more shareholding. (Para 25 & 26)

3. Notwithstanding the Issue 2 above, whether the purchase of minority shareholding in the present case is congruent with the conditions stipulated under Section 236?

Section 236(2) provides that the offer to the minority shareholder shall be made on the basis of the price determined by a “registered valuer”. In this case, the Notice Given by R2 to the Appellants stated that the value for their shareholding was determined by a “reputed chartered accountant”. Admittedly, valuation was not done by a registered valuer.

It was held that valuation for the purpose of Section 236 done in any manner other than by the registered valuer is in violation of Section 236(2). Simply because the Central Government at that time had not appointed registered valuers or made any rules on the matter, this cannot be justification for the Respondents to forcibly take away property, i.e., shares of the Appellants. (Para 27) Therefore, the Notices purported to be under Section 236, in this case, were illegal and had been set aside by the NCLAT. (Para 30) Choosing to adopt a strict interpretation of the law, NCLAT held the following in its interpretation of Section 236 of the Companies Act:

“the provision of Section 236 has a drastic nature of forcibly transferring the shares. When this is so the Section 236 has to be strictly construed and applied.”

Relevant Extracts of Section 236 of the Companies Act, 2013

236. Purchase of minority shareholding.— (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 by the transferor company 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, the 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 the transferor company 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 dispatch 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.

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Siddharth is the Founder of CorpLexia and serves as its Editor. He is a student of BBA LL.B (Hons.) and has a special focus on corporate, commercial, insolvency, arbitration, securities and competition laws. He can be reached at