Squeezing out Minority Shareholders, Sec 236 of Companies Act 2013
August 3, 2017 by Srishti Luthra
Over the years, the concept of ‘Majority Rule and Minority rights’ has been a matter of great controversy. It is evident from the principle laid down in ‘Foss v Harbottle’ that the will of the majority shall hold and even the Courts refuse to interfere in the internal matters of a company. However, it is necessary to ensure that the powers of majority are exercised within reasonable limits and it does not result in oppression of the minority.
Companies Act 2013 granted legal recognition to concept of Squeezing out Minority Shareholders under Section 236 which is notified by Ministry of Corporate Affairs with effect from 15th December 2016.
This article seeks to analyze the provision as provided in Act of 2013, the procedure laid down under the Act, the issues arising out of the new provisions.
Meaning of Squeeze out:
As per Black’s Law Dictionary, squeeze out means a change in the structure of a corporation that will eliminate minority share holders or aim to reduce their power. It is a situation where the majority shareholders squeeze or drag out the minority shareholding held by the minority shareholders by purchasing their stake.
Definition of Minority Shareholding:
‘Minority shareholding’ has not been specifically defined under the Act. For the purpose of Section 236 of the Act, the word Minority shareholding has been used in respect of registered holders of the issued equity shares of the company not exceeding ten percent.
Procedure under Sec 236 of Companies Act 2013:
- An acquirer entity or a person acting in concert with such acquirer holding at least 90% of the issued equity share capital(by way of an amalgamation, share exchange, conversion of securities or any other reason), shall notify the company of their intention to buy the remaining equity shares;
- Majority shareholders 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;
- The section also gives opportunity to the minority shareholders to offer their holding to the majority shareholders.
- The majority shareholders are required to deposit an amount equal to the value of shares to be acquired by them , in a separate bank account which shall be operated by the company for payment to the minority shareholders, however, such amount shall be disbursed to the entitled shareholders within sixty days;
Such disbursement/payment of consideration 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
- Company shall:
- Receive and pay the price to minority shareholders
- Deliver Shares to the Majority shareholders on receipt of same.
- Issue new share certificate to the majority shareholders, in the absence of a physical delivery of shares by the shareholders within the time specified by the company.
- Any shares held by such minority shareholders who have died or cease to exist or whose heirs , successors , administrators or assignees have not been brought on record by transmission shall be transferred to the majority shareholder by issuance of duplicate share certificate by the company.
The purchase consideration against the same shall remain in the separate bank account opened by the majority shareholder for a period of 3 years. If it remains unpaid, the amount shall be transferred to IEPF account u/s 125 after 3 years.
Section 236 (8) of the Act provides for a typical negotiation deal between the acquirer and the minority shareholders.
It provides protection to the minority shareholders. Where the shareholders holding 75% or more of minority equity shareholding negotiate or reach an understanding on a higher price for any transfer, proposed or agreed upon, the majority shareholders shallshare the additional compensation so received by them with other minority shareholders.
In other words, the minority shareholders are entitled to a share in any additional compensation received by shareholders on a sale subsequent to the minority buy-out, if such sale is at a higher price than the minority buy-out price.
Procedure after delisting:
When a shareholder or the majority equity shareholder fails to acquire full purchase of the shares of the minority equity shareholders, then, the provisions of this section shall continue to apply to the residual minority equity shareholders, even though, —
- the shares of the company of the residual minority equity shareholder had been delisted; and
- the period of one year or the period specified in the regulations made by the Securities and Exchange Board under the Securities and Exchange Board of India Act, 1992, had elapsed.
Issues arising out of the provisions:
Is it a mandatory or optional offer?
One significant defect in the new provision is that there is no clarity as to whether the minority shareholders are bound to accept the majority shareholders’ offer to purchase their shares.
Sec 236(1) requires that in the event an acquirer or a person acting in concert becomes registered holder of 90% of shares through the prescribed modes, it shall notify the company of their intention to buy the remaining equity shares’ and then directly provides forcreation of an obligation on the majority shareholders to deposit proceeds of the sale shares proposed to be acquired by it, in a separate bank account
This is in contrast with Sec 235 of the Companies Act 2013 and Sec 395 of the Companies Act 1956 which states that the majority shareholder is ‘entitled and bound to acquire all the shares set out in the Offer notice’
The fact that the legislator uses the word ‘in the event of purchase’ in sub-section 5 to Section 236 ,and in sub-section (9) the words ‘where shareholder fails to acquire’, it makes it clear that a situation is contemplated where the offer fails and not all minority shares offer their shares under this Section.
The Act makes it compulsory for the majority shareholders to make an offer to the minority shareholders. It nowhere clearly mentions whether this offer has to be mandatorily accepted by the minority shareholders. Thus, there seems to be ambiguity with regard to the bindingness of the offer on the minority shareholders.
No time lines:
The section does not provide comprehensive time lines regarding the whole squeezing out process. Though the section provides for the time within which disbursement has to be made to the minority shareholders, but it is silent about the time within which offer has to be made or the duration of offer period or the time within which minority shareholders are required to deliver their shares to the company. This may give rise to confusion and varied practices amongst companies.
Separate Meeting :
There is no provision for holding a separate meeting of the minority shareholders to vote against the buy-out. This is unfair to the minority shareholders who do not get a chance to bring forward their concerns relating to the entire offer.
Squeezing Out is a situation where the majority shareholders force the minority shareholders to give up their shareholding to majority shareholders. Section 236 of the Companies Act 2013, contains provisions relating to purchase of minority shareholding. It provides for modes by which an acquirer may acquire 90% shareholding and gives detailed procedure as to whole squeezing out process. Further, the section also provides protection to minority shareholders by giving them a chance to get additional compensation in case the shareholders holding 75% or more of minority equity shareholding negotiate or reach an understanding on a higher price for the transfer.
Companies Act 2013 has welcomed such a striking practice in Indian Corporate Law with open hands but has failed to do justice by not provide clarity. There is a serious need to amend the text of Section 236 and making it clear as to whether the minority shareholders can be forced to give up their shareholding or whether their consent is required; provide proper timeline for events under the entire process.