Commercial Democracy - Amalgamation of companies

A stable profitability that in absence of fluctuations in business and a constant output growth and low and stable inflation  and  with the capability of facing recession will be achieved through Merger or de-Merger of two or more companies.

 

The Hon’Ble Courts of Law, when found there is legality, and opined that unless it is clearly forbidden in Law and there is a suppression of material from the shareholders at the time of voting   and there is no place vitiating the Scheme of Amalgamation, do not interfere into the matter and approve the Scheme of Amalgamation., and the decision of the majority members is deemed to be justified and the question of overshadowing the minority members does not arise, unless there is an order from the Court.

 

If the  amalgamation pave the way for better, more efficient and economical control in the running of operations. , and  economics in administrative and management costs will improve in combined profitability., the objections of the minority shareholders may not be accepted by the Hon’Ble Courts. What the majority share holders have to prove that:

 

1. The amalgamated company will be able to source and absorb new technology.

2. The said amalgamation will be surely beneficial to the company in future.

3. The said amalgamation will be beneficial to all the shareholders.

 

The Hon’Ble Court generally see that  whether the amalgamated company is  guilty of hiding any facts from the shareholders. Whether the Scheme is unfair and unreasonable to the minority shareholders. Whether the proposed Scheme of Amalgamation was unfair and amounted to suppression of minority shareholders.

 

In the case of  “ Miheer H. Mafatlal vs Mafatlal Industries Ltd”, the Hon’Ble Supreme Court of India observed that:

 

Whether the Court has jurisdiction like an appellate authority to minutely scrutinise the scheme and to arrive at an independent conclusion whether the scheme should be permitted to go through or not when the majority of the creditors or members or their respective classes have approved the this aspect the nature of compromise or arrangement between the company and the creditors and members has to be kept in view. It is the commercial wisdom of the parties to the scheme who have taken an informed decision about the usefulness and propriety of the scheme by supporting it by the requisite majority vote that has to be kept in view by the Court. The Court certainly would not act as a court of appeal and sit in judgment over the informed view of the concerned parties to the compromise as the same would be in the realm of corporate and commercial wisdom of the concerned parties. The Court has neither the expertise nor the jurisdiction to delve deep into the commercial wisdom exercised by the creditors and members of the company who have ratified the Scheme by the requisite majority. Consequently the Company Court's jurisdiction to that extent is peripheral and supervisory and not appellate. The Court acts like an umpire in a game of cricket who has to see that both the teams play their according to the rules and do not overstep the limits. But subject to that how best the game is to be played is left to the players and not to the umpire.

 

In the case of Re. Alabama, New Orleans Texas and Pacific Junction Railway Company reported in 1891 (1) Chancery Division 213 the relevant observations regarding the power and jurisdiction of the Company Court which is called upon to sanction a scheme of arrangement or compromise between the company and its creditors or shareholders were made by Lindley, L.J. as under :

 

"What the court has to do is to see, first of all, that the provisions of that stature have been complied with; and, secondly, that the minority has been acting bona fide. The court also has to see that the minority is not being overdone by a majority having interests of its own clashing with those of the minority whom they seek to coerce.

 

Further than that, the Court has to look at the scheme and see whether it is one as to which persons acting honestly, and viewing scheme laid before them in the interests of those whom they represent, take a view which can reasonably be taken by businessman. The court must look at the scheme, and see whether the Act has been complied with, whether the majority are acting bona fide, and whether they are coercing the minority in order to promote interests adverse to those of the class whom they purport to represent; and then see whether the scheme is a reasonable on or whether there is any reasonable objection to it, or such an objection to it as that any reasonable man might say that he could not approve it."

 

Learned Single Judge of the Calcutta High Court in the case of Re. Mankam Investments Ltd. and others (1995) 4 Comp LJ 330 (Cal.) relying on a catena of decisions of the English Courts and Indian High Courts observed as under on the power and jurisdiction of the company Court which is called upon to sanction a scheme of merger and amalgamation of companies.

 

"It is a matter for the shareholders to consider commercially whether amalgamation or merge is beneficial or not. The court is really not concerned with the commercial decision of the shareholders until and unless the court feels that proposed merger is manifestly unfair or is being proposed unfairly and/or to defraud the other shareholders. Whether the merged companies will be ultimately benefitted or of expenses is a matter for the shareholders to consider. If  there will be some economies in the matter of expenses is a matter for the shareholders to consider, certainly, there will be some economies in the matter of maintaining accounts, filing of returns and various other matters.

 

However, the court is really not concerned with the exact details of the matter and if the shareholders approved the scheme by the requisite majority, then the court only looks into the scheme as to find out that it is not manifestly unfair and/or is not intended to defraud or do injustice to the other shareholders."

 

See what the Hon’Ble Court observed in the above mentioned case judgment:

“ It is a matter for the shareholders to consider commercially”.

 

That means out of the amalgamation the commercial benefits are expected. In that case whether it is negatively effected to the interest of the minority shareholders is not a justified point at all. It may be difference of opinions, which decision is correct and which is wrong, and in this context, the opinion of the majority has to be taken into consideration and ofcourse, the suggestions and objections of the minority concern may be taken into consideration, but in democracy including Commercial Democracy, the opinion and the decision of the majority for the benefit of the amalgamated company has to be considered, or otherwise, majority will became minority and minority will be the majority and the problem will remain same.

 

“To accept the decision of the majority will be the wise for minority concern and to respect the opinions and suggestions of the minority will be good for majority concern in Commercial Democracy and for Commercial Wisdom”.

 

BY K. PHANI KUMAR

ADVOCATE( CORPORATE LAWS),

HYDERABAD