The Ministry of Corporate Affairs has notified section 230(11) and section 230 (12) of the Companies Act, 2013, which pertain to takeover offers in case of an unlisted company, vide its notification dated 3 February 2020. Section 230 (11) of the Companies Act provides that takeover offer in case of unlisted companies can be made through a scheme of compromise or arrangement, while in case of listed companies, takeover offers must be made as per regulation prescribed by Securities and Exchange Board of India (SEBI). The newly notified provisions are significant since they introduce a mechanism for the squeeze-out of minority shareholders through a court-approved scheme. The mechanism for such takeover offers in case of unlisted companies have been specified in the Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2020 (Amendment Rules), notified on 3 February 2020 amending Rule 3 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (2016 Rules).
As per the amendment rules, a member of an unlisted company, or members of an unlisted company acting together, holding not less than three fourths of the shares in the company, may make an application to the National Company Law Tribunal (NCLT) for a takeover offer in terms of section 230 (11), to buy out the minority shareholders holding the remaining “shares”. The application has to be made together with the remaining submissions to be made to the NCLT under the 2016 Rules. For the purpose of these Amendment Rules, the term “shares” means mean the equity shares with voting rights including any securities, such as depository receipts, which entitles the holder to exercise voting rights.
The application of arrangement for the takeover offer is also required to be accompanied by a valuation report issued by registered valuer disclosing the details of valuation of shares proposed to be acquired by the shareholder, which valuation shall be determined basis the following factors: (i) the highest price paid by any person or group of persons for acquisition of shares during last 12 months; and (ii) 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, book value of shares, earning per share, price earning multiple vis-à-vis the industry average, and such other parameters as are customary for valuation of shares of such companies. The application should also contain details of the separate bank account to be opened for the purpose of the takeover offer, in which bank account, the applicant should have deposited at least half of the takeover consideration basis the valuation ascribed to the shares.
The notification of section 230 (11) of the Companies Act and the amendment rules, provide an additional mechanism for majority shareholders to buy out minority shareholders of unlisted companies through a scheme of arrangements.
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