Minority Squeeze out- ‘Protection of Minority Interest’ under Company Law

Minority Squeeze out is the compulsory acquisition of minority shares by majority shareholders. Formerly the Companies Act, 1956, Section 395 provided for the squeeze-out options that majority shareholders could resort to, however, have been better elaborated under the Act of 2013, through Section 236. Squeeze out is usually followed by compensation, but at what cost? Although it is in the best interest of the company, minority shareholders are usually forced to give up their shares which is unfair. Commonly used methods adopted by majority shareholders to buy out the minority holders have been briefly mentioned below-

1. Reduction of Share Capital- The method by which certain shares are repurchased by the company and cancelled thereafter[1]. This is the most effective and widely used method adopted to reduce minority shareholdings. It has been embodied under Section 66, of the New Act, which subjects such reduction to a special resolution to be passed by the board followed by a confirmation from the National Companies Law Tribunal (NCLT). This structure also provides the least security to shareholders[2] which, could primarily be due to two reasons- firstly, that achieving the majority (75%) is a simple task for the majority shareholders. A significant controller can himself achieve the majority with ease. Secondly, there is no financial cost caused to the company, instead, the benefit of full ownership is created. In the case of Sandvik Asia Ltd. v Bharat Kumar Padamsi[3], the Court held that if an overwhelming majority has been created and fair compensation has been given to the minorities, then the Court would not interfere in such decisions taken by the company. Since the requirements for capital reduction are low, many opt for this method.

2. Purchase of Minority Shareholding– As stated, it would be the purchase of minority shareholdings as mentioned under Section 236 of the 2013 Act read with Rule 27. The acquisition can happen through a simple notification in a situation where the acquirer has at least 90% of the shareholdings in the company. Rule 27, however, is a proviso to help the minority put forth their price to the majority shareholders. Nevertheless, this doesn’t ensure entire protection to the minorities since the provisions are wide in interpretation thus making it difficult for them to safeguard their interests.[4]

3. Acquisition- In extremely rare or straightforward cases is this method used. The acquirer here is allowed to compulsorily acquire the shares from the dissenting shareholders through a notice sent 4 months from the proposal[5]. However, this is not a simple task as the acquirer must ensure that he has acceptance from all the shareholders holding 90% of shares to whom the offer has been made.[6]

4. Scheme of Arrangement- Section 230 allows companies to make agreements and compromises with their shareholders and creditors in certain situations, effectively creating a squeeze out in the process. It begins when the High Court convenes with the shareholder classes through an application made by the company. This is then followed by approval of the scheme by the majority representing 75% (in value) of each class of shareholders. After this has been achieved, the company must approach the High Court again to approve the scheme.[7] Even though strict procedures are laid down, it does little to protect the interests of minorities, since it doesn’t specifically apply to them, unless they have a different class of shares. In a situation where the scheme is needed for acquiring the shares from the minorities, the controller’s finances are not impacted as the companies funds are used for this squeeze-out.

As seen, Minority interests are barely protected due to wide interpretation of provisions and minimum requirements to effectuate a squeeze-out. Proper procedures and methods must be laid down to ensure that they are given the platform to be heard. Even if their shares are brought out, it must be done reasonably with just compensation. There are however a few methods that minority shareholders can resort to protect and regulate their interests.

1. Valuation and Pricing- Price fairness plays an important role when it comes to squeezing out. The Courts in most situations believe that unless a patent error /illegality in the valuation exercise arises, the minorities don’t have a strong enough stance to challenge the same at court. The case ofHindustan Lever Employees’ Union v. Hindustan Lever Ltd.[8] lays down the exercise of jurisdiction based on fairness. It states that unless there be a violation in the exercise of fairness by the company, they have no authority to hear such matters. All Courts follow this scheme. Since the court is limited in doing so, price discovery mechanisms can be implemented for determination of share prices during minority squeeze-out, so that the prices determined are fair to the minority.
2. Minority Shareholder Voting- Since squeeze out is usually done on the decision of the majority, the minority shareholders must also be given equal power to regulate upon such matters. They must be given equal voting rights and must ensure that “majority of the minority” votes are secured in situations that can affect them. It must be ensured that such decisions of the minority are not in any way influenced by that of the majority.
3. Regulatory Authorities- In Addition to judicial authorities, governmental bodies and self-regulatory organizations must also play supervisory roles in such cases. The central government has the statutory duty to make sure that public interest has been maintained and that no law has been violated. Minority shareholders should be allowed to make their claim to the courts so that it can be taken into consideration in the outcome of the squeeze-out to ensure fairness on a large scale. Recently, companies (listed) are required to file their scheme of squeeze out with that of the stock exchange authority one month before its hearing at court[9] to ensure that no securities law provision of stock exchange requirements has been violated through squeeze-out. Even though SEBI has no supervisory role in the case of unlisted companies or a strong power to restrict or prohibit a value- reducing squeeze out, they display a sense of activism in the protection of minority interests. For example, in the Elparo Case[10], the stock exchange authorities refused to accept the squeeze-out thereby making the company withdraw its proposal on the same. Keeping this in mind, the regulatory authorities should be given stronger power to restrict squeeze-outs and play a more active role in the preservation of minority interests, through formulation, implementation, and regulation of rules that safeguard minority interests.

Minority Squeeze out is always done in the best interest of the business, which should be done in a fair and restricted manner. Enough steps must be taken to ensure that the squeeze-outs are not exploiting the minority to specifically benefit the majority. If under certain circumstances, they are to go forth with the squeeze-out, the majority shareholders must keep in mind that fair compensations on the shares are given. Additionally, the dividends and interest (if any) must be paid as well. It is important to create a balance between a required minority squeeze-out and that of protecting a minority’s interest. Fairness in process and price should be maintained. Effective corporate governance would only exist in a company if such principles are kept in mind while making business decisions.

[1]Vikramaditya KHANNA and Umakanth VAROTTIL, “Regulating Squeeze Outs In India: A Comparative Perspective”, 2019

[2]Ibid.

[3] 2009 (3) Bom CR 57 (Div bench)

[4] Kirthana Singh, “SQUEEZING OUT MINORITY SHAREHOLDERS- AN INDIAN PERSPECTIVE”, 2019

[5] Ibid.

[6] Supra note 1

[7] Vikramaditya KHANNA and Umakanth VAROTTIL, “Regulating Squeeze Outs In India: A Comparative Perspective”, 2019

[8] AIR 1995 SC 470

[9] Listing Agreement, Clause 24(f)

[10] In re Elpro International Limited, [2009] 149 Comp. Cas. 646 (Bom)

Author Details: Janavi Venkatesh (OP Jindal Global University)