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Takeover of Unlisted Companies: Implementation of New Rules by MCA

Recently, the MCA (Ministry of Corporate Affairs) has implemented new rules for the takeover of unlisted companies. This said implementation was pending from a long time since the reference about the same was made in section 230 (11) of the Companies Act, 2013. Further, Section 230 of the Companies Act, 2013 prescribes a set procedure for a scheme of arrangement between a concerned company and its shareholders and creditors. Also, it is significant to note that these types of schemes are required to be approved by the NCLT (National Company Law Tribunal).

If a scheme concerned embraces a proposal for the merger or demerger of a company, then, in that case, the procedure prescribed in section 232 of the Companies Act, 2013 would have to be followed. Further, the question arises can a scheme declare that a shareholder or any concerned person will have to obtain the shares of other shareholders of the company? This matter was addressed when the Companies Act, 2013 was enacted, and as a consequence, a provision was included which permitted a Scheme to embrace a takeover offer. The rules and regulations for such a takeover offer were supposed to be notified earlier. But, now on February 3, 2020, the Indian government had notified the said provisions and also declared the rules in this concern by issuing the Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2020 which has amended the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016.

Applicability of the New Rules Implemented by MCA

The new rules implemented by MCA (Ministry of Corporate Affairs) are applicable in the case when a takeover offer is planned to be made for the acquisition of shares of an unlisted company.

Further, the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 are applicable in the case of listed companies. These regulations prescribe a set procedure for a takeover offer of shares of the listed company and, and others. Furthermore, this process needs an acquirer in order to make an open offer for acquiring the shares of the company, if the concerned acquirer acquires shares of the company above the specified threshold or percentage. Lastly, the shares can be acquired by the acquirer, whether by way means of a primary infusion or by a secondary acquisition.

It is significant to note that the newly implemented rules will not be applicable to any transfer or transmission of shares by way of a contract, arrangement or succession, as the case may be. Further, these rules will not apply to any transfer made in the pursuance of any statutory or regulatory condition. Thus, a voluntary arrangement between the parties for the transfer of shares will continue to be governed and administered by the agreed contractual terms between the concerned parties.

Who is eligible to make a takeover offer?

As per the newly implemented rules, a shareholder of a company is qualified to make an application to NCLT (National Company Law Tribunal) for a takeover offer only if such shareholder together with any other shareholder have a holding over at least three-fourth of the total equity shares carrying voting rights or any securities, such as the depository receipts, which enables the holder thereof to exercise the voting rights, in the company.

Hence, a takeover offer can only be prepared by an existing shareholder, unlike the case of the listed companies where an open offer can easily be prepared by an acquirer offering to acquire shares in the concerned company which would allow the acquirer and the persons acting in concert to exercise 25 per cent or more of the voting rights in that company.

What is the concept and scope of a takeover offers?

Takeover offer’ is not precisely defined anywhere. However, the rules implemented provides that a shareholder if satisfies the above-mentioned criteria he or she can easily file an application for a takeover offer in order to acquire any part of the remaining shares of the concerned company. Thus, there seems to be flexibility, as the acquiring shareholder is allowed to acquire the number of extra shares that a shareholder can also acquire the shareholders from whom the additional or extra shares can be acquired.

However, it is significant to note that since the term ‘shares’ has been clearly defined in the rules implemented, as the equity shares and any securities carrying voting rights, it lookslike a takeover offer cannot be made for the preference shares or non-voting shares.

Further, one can easily foresee that this issue is being closely scrutinized and examined by the courts in order to decide whether the concerned application of the preventive definition of shares should be limited only to calculating the holding of a shareholder who desires to make a takeover offer or it should further extend to determining what types of shares such a shareholder can acquire.

Concept of Pricing

Usually, a takeover offer would primarily include acquisition of the shareholding belonging to the minority shareholders. It is imperious that the price offered for the shareholding must be fair and also the interests of the minority shareholders are duly protected. For achieving this objective, the newly implemented rules provide that a report of a registered valuer known as the Valuation Report is needed to be obtained disclosing all the details and particulars of the valuation of the shares planned to be acquired but after taking into account the following listed factors –

• Firstly, the highest amount paid by any person or group of persons for the acquisition of shares during the last 12 months; and
• Secondly, the fair price of the shares of a company are to be determined by the registered valuer only after taking into consideration the valuation parameters such as the return on net worth, the book value of the shares, earning per share (EPS), price earning multiple about the industry average, and such other parameters or factors as are customary for the valuation of shares of such companies.

Normally, the highest price paid by any person or a group for the acquisition of shares throughout the last 12 months is required to be taken into consideration, an unusual issue that may arise is that what happens if a minute number of shares are transferred for a significantly high price (appreciably higher than the fair value of the shares) all through the preceding 12months?. In such a case, would the considered shareholder making the takeover offer will be obligated to pay such a higher price?

Interestingly, the Rules implemented merely provides that an application made for a takeover offer must contain the Valuation Report which discloses all the details and particulars of the valuation of the shares declared to be acquired after taking into account the factors or parameters mentioned above. Further, the Rules do not openly provide what the minimum offer price must be. This is different from the SEBI Takeover Regulations, which clearly specifies the minimum price at which the shares can be easily acquired under an open offer.

Deposit of price

The newly implemented rules clearly provide that an application of the arrangement for takeover offer must contain all the details and particulars of a bank account, which is to be opened separately, by the concerned member wherein a sum of the amount not less than one-half of the total consideration of the takeover offer is required to be deposited. Hence, it appears that an acquirer is needed to upfront deposit half of the total consideration proposed to be paid in cash in a bank account. Also, there are chances which would have been welcomed if instead of only hard cash, an acquirer was given other substitutes such as the deposit of a bank guarantee.

Approval of the takeover offer along with its binding nature  

As we know that the takeover offer has to mandatorily be the part of a Scheme, so the provisions mentioned under section 230 of the Companies Act, 2013 has to be duly followed. Further, under section 230, an application is required to be made to National Company Law Tribunal. Generally, the NCLT pass orders of a meeting of the creditors or the class of creditors, or of the members or the class of members, as the case may be.

Further, a notice of the meeting called by the NCLT is also needed to be sent to the Central Government, Reserve Bank of India, Income-Tax Authorities, SEBI (Securities and Exchange Board of India), Registrar of Companies (ROC), the Official Liquidator, Recognized Stock Exchanges and such other sectoral regulators or the authorities which are expected to be affected by the compromise or an arrangement.

If in the meeting stated above, the majority of persons on behalf of the three-fourths in value of the creditors, or the class of creditors or the members or class of members, as per the case, agrees to any compromise or arrangement and if such compromise or arrangement is duly sanctioned by the NCLT by way of an order, the same shall be binding on the concerned company, all its creditors, or the class of creditors or members of the class of members, as the case may be. Thus, once a scheme comprising of a takeover offer is duly approved by the NCLT, it would be binding and applicable on all the shareholders including the minority shareholders whose shares are required to be acquired under the Scheme.

An order passed by NCLT approving a Scheme could offer for a variety of matters, including an exit offer to the dissenting shareholders, as are in the opinion of the NCLT essential to efficiently implement all the terms of the compromise or arrangement.

Read, More: Can a struck off company get restored?.

Role of creditors

According to section 230(1) of the Companies Act, 2013, a Scheme can be planned between a company and its creditors or any class of the creditors, or between a concerned company and its members or any class of members. Further, in case of a Scheme concerning a takeover offer, it may be argued that the said Scheme will not affect the creditors’interests of the company and thus the said scheme would be a scheme only between the related company and its shareholders. Lastly, this argument may be appropriate to determine whether or not the consent of creditors should be required.

Differentiation amongst the Minority Shareholders

As stated above, a shareholder is allowed to make a takeover offer for any portion of the company’s remaining shares. Hence, the takeover offer can be made only for some of the shares held by the minority shareholders as the acquiring shareholder determines.

Further, the said rules are silent about whether the said offer has to be made to all the concerned minority shareholders on a proportionate basis. Thus, effectively and efficiently, a selective minority squeeze-out can be seen under the new Rules.

Purchase of the Minority Shareholding

The newly implemented rules are to be read together with section 236 of the Companies Act, 2013, which came into effect on December 7, 2016. Under section 236(1) of the Companies Act, 2013, in the occasion an acquirer, or a person acting in the concert with such acquirer, grow into the registered holder of 90 per cent or more of the issued equity share capital of the concerned company, or in the event of any person or the group of persons becoming 90 per cent majority or holding 90 per cent of the issued equity share capital of the concerned company, by virtue of an amalgamation, conversion of securities share exchange or for any other reason. Such acquirer, person or the group of persons, as the case may be, is mandatorily required to notify the company of their intention of buying the remaining equity shares. Further, the company’s minority shareholders also have the power to make an offer to the majority shareholders for the purchase of the minority equity shareholding of the company. Furthermore, the prices offered to the minority shareholders has to be duly determined on the basis of the valuation done by a registered valuer.

Thus, the minority shareholders whose shareholding is not obtained under a takeover offer can have remedy by using section 236 of the Companies Act, 2013 provided that pursuant to the takeover offer, the acquiring shareholder and the persons acting in the concert with such acquirer becomes the registered holder of 90 per cent or more of the total issued equity share capital of the concerned company.

The Remedy available to the aggrieved Minority Shareholders

An aggrieved party is eligible to make an application to NCLT (National Company Law Tribunal) in the occasion of any grievances with respect to the takeover offer, and the NCLT can pass such order as it may deem fit. Further, the scope of the provision is quite extensive in as much as any other party (and not essentially only the shareholder whose shares are being acquired) can easily make an application and such other person can have a grievance or issues on any ground. Further, the scope and ambit of the powers conferred on NCLT are also very wide under this provision. Thus, one can easily guess that most of the grievances would rotate around the concept of pricing and also that the forceful exits are prejudicial and detrimental to the interests of the minority shareholders.  

Moving forward

The Rules appear unclear in certain aspects, and there are still several issues pending which are required to be addressed. Pending any changes to the newly implemented rules, one can predict the courts and tribunals being called upon to interpret and construe various provisions. However, the newly implemented rules are crucial and will surely be discovered by many companies thinking to ‘restructure’ minority shareholding.

One thing is definite that since takeover offers will be covered under the umbrella of Schemes, the jurisprudence which has grown over the decades regarding Schemes would apply to the takeover offers and the most basic principle being that Schemes must be just and fair towards all the interests affected and must not be against the public interest.

Conclusion

The newly implemented Rules passed by the MCA (Ministry of Corporate Affairs) talks about the takeover of the unlisted companies. The implementation of the said rules was pending from a long time since the reference about the same was made in section 230 (11) of the Companies Act, 2013. Further, a set prescribed procedure for a scheme of arrangement between a concerned company and its shareholders and creditors is provided under section 230 of the Companies Act. Lastly, it is noteworthy to note that these types of schemes are now required to be approved by the NCLT. Hence, the powers and autonomy of the NCLT are now expanded. Lastly, as per the newly implemented rules, a shareholder of a company is qualified to make an application to NCLTfor a takeover offer only if such shareholder together with any other shareholder has a holding over at least three-fourth of the total equity shares carrying voting rights or any securities.

Also, Read: Role of NCLT in Promoting Interest of Banks and Financial Institution.