S.J. Kathawalla, J.@mdashBy this company scheme petition, Organon (India) Ltd. ("the petitioner-company) seeks sanction and confirmation by this Court with regard to the special resolution passed by the petitioner''s shareholders in its extraordinary general meeting held on October 15, 2009, for the reduction of its equity share capital.
2. The authorised, issued, subscribed and paid-up share capital of the petitioner-company, as on December 31, 2008, is as under:
3. Of the above, 98.43 per cent. of the paid-up equity share capital of the petitioner-company is held by the promoter shareholder, namely Organon Participations B.V. ("promoter shareholders"). The balance of the paid-up equity share capital of the petitioner-company is held by 1,490 members having shares of the petitioner-company. There has been no change in the share capital of the petitioner-company from December 31, 2008, till the date of filing the present petition.
4. The petitioner-company''s equity shares were listed in the Calcutta Stock Exchange Association Ltd. and the National Stock Exchange. Subsequently, in accordance with Regulation 21(3)(a) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, the promoter shareholders made an open offer to the public shareholders at Rs. 285 per equity share of Rs. 10 each fully paid-up and over a period of time, acquired 29,16,546 shares from the public. However, the public shareholding of the petitioner-company fell below the 10 per cent. limit as provided under the stock exchange norms and the shares of the petitioner-company were delisted from the Calcutta Stock Exchange Association Ltd., with effect from August 26, 2002 and subsequently from the National Stock Exchange with effect from October 9, 2002. As per the requirements of the concerned stock exchanges, the promoter shareholders sent offer letters to the public shareholders in respect of the acquisition of the equity shares in the petitioner-company at a delisting price of Rs. 285 per equity share as per the delisting guidelines under the Securities and Exchange Board of India (Delisting of Securities) Guidelines, 2003. The promoter shareholders extended to the shareholders of the petitioner-company an exit option at the delisting price of Rs. 285 per equity share. This offer was terminated by a letter dated April 9, 2009, addressed to the shareholders.
5. Section 100 of the Companies Act, 1956 ("the Act") and Article 50 of the articles of association of the petitioner-company empower the petitioner-company, by way of a special resolution to reduce its share capital in any manner. The board of directors of the petitioner-company proposed the reduction of the equity share capital of the company. The reason for the reduction of the equity share capital of the petitioner-company reads as follows:
The company''s securities being delisted to individual shareholders do not have a tradable security for exit. This prevents shareholders from realising the optimal value and returns on their investments in the company. Further, over a period of time, the management''s focus on overall profitability and financial discipline including effective management of the net working capital has significantly reduced the capital requirements of the company.
6. It was proposed by the petitioner-company that its paid-up equity share capital be reduced by paying off the equity shareholders (other than promoter-shareholders) an aggregate sum of Rs. 425 towards each equity share, with a face value of Rs. 10 which would therefore include a premium of Rs. 415 per equity share. Thus, the petitioner-company sought to extinguish 95, 106 equity shares and reduce its paid-up equity share capital by Rs. 9,51,060. A copy of the valuation report of the certified individual valuer, M/s. Grant Thornton ("valuer"), appointed by the petitioner-company is annexed to the petition.
7. The board of directors of the petitioner-company had sent a notice and an explanatory statement dated August 27, 2009, in due compliance of the provisions of the said Act for convening an extraordinary general meeting of the equity shareholders of the petitioner-company on October 15, 2009, to consider, inter alia, the passing of the following special resolution:
Resolved that pursuant to Section 100 and other applicable provisions of the Companies Act, 1956 and subject to the consent/confirmation/approval of the hon''ble High Court of Judicature at Bombay and other appropriate authorities, and pursuant to Article 50 of the articles of association of the company, the paid-up equity share capital of the company be reduced by paying off/returning to the holders of the equity shares (other than the promoter-shareholder of the company, namely, Organon Participations B.V.), a sum of Rs. 425 (rupees four hundred twenty-five only) per share being the face value of Rs. 10 (rupees ten only) and a premium of Rs. 415 (rupees four hundred fifteen only) per share and thereby cancelling and extinguishing all such shares.
8. Accordingly, the extraordinary general meeting of the shareholders of the petitioner-company was held on October 15, 2009. At the said meeting, 38 members were present in person, by proxy and through authorised representatives, wherein, amongst others, the resolution, as set out in paragraph No. 6 above, was passed by way of show of hands u/s 100 and other applicable provisions of the Act. However, two shareholders, holding a total of 160 shares, which amounts to 0.002633242 per cent. of the total shareholding, had opposed the aforesaid resolution.
9. On the date of filing of this petition, i.e., October 31, 2009, there were no secured creditors of the petitioner-company. There were 245 unsecured creditors (trade creditors including sundry creditors) and the amount payable to these unsecured creditors aggregated to Rs. 31,10,10,746. The petitioner-company paid off 192 unsecured creditors, representing 62.83 per cent. of the total value of credit and obtained the consent of 44 of the remaining unsecured creditors representing 36.24 per cent. of the total value of the credit to the reduction of share capital. There remained around 10 unsecured creditors, representing a minimal of 1.06 per cent. of the total value of credit who neither consented nor were repaid by the petitioner-company.
10. The petitioner-company had filed Company Application No. 57 of 2010 for requisite direction for dispensation of the provisions and the procedure prescribed u/s 101(2) of the Act. By an order dated January 22, 2010, this Court has dispensed with the provisions of, and the procedure prescribed u/s 101(2) of the Act and has accepted the undertaking of the company secretary to give individual notices of hearing of the petition to the said 10 unsecured creditors holding a minimal 1.06 of the total value of credit, referred to above in paragraph 8. By an affidavit dated April 16, 2010, the petitioner-company has pointed out that it has received no objection/consent letters from all unsecured creditors for sanction of the proposed reduction of equity share capital.
11. By the minutes of order, dated February 11, 2010, passed by this Court in the above petition, the petitioner-company was also directed to get the notice of hearing published in two newspapers and in the Official Gazette of the Government of Maharashtra. The petitioner-company has complied with the same and has filed an affidavit of publication dated March 9, 2010. It is therefore submitted on behalf of the petitioner-company that the reduction of the equity share capital as embodied in the said resolution passed by the shareholders at the extraordinary general meeting, held on October 15, 2009, does not prejudice the shareholders or the creditors of the petitioner-company in any manner whatsoever. The petitioner-company has further submitted that this offers an opportunity to the remaining individual shareholders of the petitioner-company to liquidate their entire shareholding at an attractive price. It is therefore prayed that the reduction of equity share capital as embodied in special resolution passed at the extraordinary general meeting be confirmed by this Court.
12. As set out hereinabove, the hearing of this petition was advertised in two newspapers circulated in Mumbai, and published in the Maharashtra Government Official Gazette in its issue for the periods from February 25, 2010 to March 3, 2010. Only one objector, i.e., Mr. Dinesh Vrajlal Lakhani (holding 80 shares of the petitioner-company jointly with his wife Smita D. Lakhani) has come forward to object to the grant of relief prayed for in the above petition. Mr. Lakhani has filed an affidavit dated March 10, 2010, setting out his objections to which, an affidavit in rejoinder, dated March 25, 2010, is filed by the petitioner-company.
13. Mr. Lakhani has first submitted that such reduction of the share capital proposed by the petitioner-company, by paying off the public holders of equity shares, other than the promoter-shareholders and giving them certain compensation, amounts to a forceful acquisition of the shares held by them. He states that such action on the part of the petitioner-company is against the principles of natural justice, corporate democracy and corporate governance. He states that such reduction tantamounts to a sophisticated corporate mafiaism.
14. In dealing with this objection, I shall briefly discuss the position of law on the issue. The law relating to reduction of share capital of a company is contained in Sections 100 to 105 of the Companies Act, 1956. Section 100 authorises the company limited by shares, having a share capital, if so authorised by its articles of association, by special resolution to reduce its share capital in any way. A company may therefore reduce its share capital:
(i) If there is a provision in its articles of association permitting it to do so;
(ii) If it has passed a special resolution for that purpose; and (iii) If such a resolution is sanctioned by the court. In the leading case of British and American Trustee and Finance Corporation v. Couper (1894) AC 399 (HL), Lord Macnaghten observed on the point:
If there is nothing unfair or inequitable in the transaction, I cannot see that there is any objection to allowing a company limited by shares to extinguish some of its shares without dealing in the same manner with all other shares of the same class.
16. However, in the same case, Lord Herschell, L. C. made the following observations:
There can be no doubt that any scheme which does not provide for uniform treatment of shareholders whose rights are similar, would be most narrowly scrutinised by the court, and that no such scheme ought to be confirmed unless the court be satisfied that it will not work unjustly or inequitably.
17. The Madras High Court, while referring to the same judgment in Panruti Industrial Co. P. Ltd. In re AIR 1960 Mad 37, held that the court''s power to sanction any reduction is to be determined by whether such reduction is fair and equitable.
18. In the landmark case of
It has to be kept in view that the question of bona fides of the majority shareholders or the alleged suppression by them of the minority shareholders or their attempt to suffocate their interest has to be judged from the point of view of the class as a whole. The question is whether the majority equity shareholders while acting on behalf of the class as a whole had exhibited any adverse interest against the appellant''s minority shareholders also having similar interest as members of the same class, while approving the scheme or had acted with any oblique motive to whittle down such a class interest of the minority.
19. This court is however bound by the decision of the Division Bench of this Court reported in Sandvik Asia Ltd. v. Bharat Kumar Padamsi (2009) 151 Comp Cas 251 : (2009) 111 (4) Bom. LR 1421, concerning the reduction of capital of M/s. Sandvik Asia Ltd. The learned single judge of this Court, had refused confirmation of the proposal for reduction of M/s. Sandvik Asia Ltd., on the ground that the promoters'' group could virtually bulldoze the minority shareholders and purchase their shares at the price dictated by them. The learned single judge found that the minority shareholders were not given any option under the proposal. Hence the learned single judge concluded that such schemes for reduction of capital were totally unfair and unjust. In appeal, the hon''ble Division Bench held that they were bound by the law laid down by the hon''ble apex court in
The dissentient shareholders do not demand, and never have demanded, better pecuniary terms, but they insist on retaining their holdings which in all reasonable probability can never bring profit to any of them and may be detrimental to the company.
20. The learned Bench granted sanction to the reduction of capital, overruling the order of the learned single judge in Sandvik Asia Ltd. In Re (2009) 121 Comp Cas 58 (Bom), and posited as follows:
Once it is established that non-promoter shareholders are being paid the fair value of their shares, at no point of time it is even suggested by them that the amount that is being paid is way less and even the overwhelming majority of non-promoter shareholders having voted in favour of the resolution shows that the court will not be justified in withholding its sanction to the resolution.
21. An SLP (Petition for Special Leave to Appeal (Civil) No. 12418 of 2009) filed therefrom, was dismissed by the hon''ble apex court, by its order dated July 13, 2009. Thus, this Court is bound by the decision of the learned Division Bench and cannot withhold sanction to the special resolution for reduction of capital, unless there is some patent unfairness regarding the fair value of the shares or there is lack of an overwhelming majority of non-promoter shareholders who vote in favour of the resolution.
22. It is next contended by Mr. Lakhani that at the said extraordinary general meeting, proxies were allowed to vote by show of hands. He submits that under the provisions of the Act, proxies are required to vote on poll only and not by show of hands. Hence, even if the articles of association of the petitioner-company permit proxies to vote by show of hands, the provisions of the Act should prevail. The court cannot agree with Mr. Lakhani''s contention on this point. As per the proviso to Section 176(1) of the Act, a proxy is to vote only on poll at the meetings of a company, unless the articles of association provides otherwise. Mr. Lakhani has himself admitted that the articles of association of the petitioner-company allow voting by proxies through show of hands. This makes the aforesaid objection untenable and it is, therefore, rejected.
23. The next objection of Mr. Lakhani is that the special resolution put forward at the extraordinary general meeting for approval by the shareholders appears to have not been passed with requisite majority. According to him, at the extraordinary general meeting, he along with one Mr. Aspi Besania, were the only two public shareholders present in person. The remaining people present in the hall happened to be either employees of the petitioner-company or representatives of the legal firms and auditing firms, including proxies and authorised representatives. He states that the petitioner-company did not clarify as to how many shareholders were present in person or by proxy or by corporate authorisation. He further states that although he sought documents from the petitioner-company like photocopies of the attendance register, and of the authorised representation and proxy register, the petitioner-company failed to provide the same. Although the petitioner-company provided copies of the articles of association, annual reports, open offer letters and the valuation report, the minutes of the meeting were sent to him only on December 11, 2009 and in the said minutes, the break-up of the exact number of shareholders present in person or through proxies and authorised representation is not given. It is also submitted that there is no proof that extraordinary general meeting notice was sent to 1,490 members of the company.
24. Mr. Lakhani had admittedly not expressed any apprehension about the special resolution appearing to have been passed without the requisite majority, at the time when the said resolution was passed or even when he issued a letter to the company secretary of the petitioner-company immediately after the meeting was concluded. Interestingly, the court finds that Mr. Lakhani has not expressed any doubts in his letter, regarding the lack of majority in the passing of the special resolution, or of notice of the meeting not being dispatched to 1,490 shareholders. Despite the fact that u/s 176(7) of the Act, Mr. Lakhani was entitled, during the period of 24 hours before the time fixed for the commencement of the meeting and ending with conclusion of the meeting to inspect the proxies lodged, he chose not to conduct any inspection. Again, although his letter dated October 21, 2009, addressed to the company secretary of the petitioner-company, inter alia, records that at the time of the extraordinary general meeting around 20 to 25 persons were present and most of them appeared to be either employees of the company or representatives of the legal firms and auditing firms, it is only on December 23, 2009, that Mr. Lakhani sought copies of the attendance register in respect of the extraordinary general meeting held on October 15, 2009, along with particulars regarding the shareholders and proxies who were present at the meeting. These facts establish beyond doubt that Mr. Lakhani who, as can be seen from his letter dated October 15, 2009, wrote to the company secretary immediately after the extraordinary general meeting, had not objected qua the proxies or authorised representatives who were present and voted at the said meeting and qua the passage of the special resolution and has gradually come up with the aforesaid objections only as an afterthought.
25. In the minutes of the meeting, it is, inter alia, clearly recorded by the petitioner-company that 38 members were present in person by proxies and through authorised representatives and that the chairman informed the members of the receipt of 29 valid proxies representing 99 equity shares within the prescribed time, as well as an intimation from one member, holding 59, 76, 832 equity shares, appointing an authorised representative to attend the meeting. The chairman also informed the members that the documents mentioned in the explanatory statement annexed to the notice were open for inspection till 11.00 a.m. Neither party contends that any of the contents of the minutes of the extraordinary general meeting of the petitioner-company, dated October 15, 2009, is incorrect. Therefore, the minutes clearly spell out the attendance at the meeting as being 38 members, from whom 29 were valid proxies and one member was an authorised representative. This implies that 8 members were present in their capacity as public shareholders, including Mr. Lakhani and Mr. Besania. Mr. Lakhani has hence wrongly submitted that no break-up of exact number of shareholders present in person, through proxies and through authorised representation was provided. This objection raised by Mr. Lakhani, therefore, completely lacks bona fide and seems to be raised only with the intention of creating hurdles for the petitioner-company that seeks relief from this Court as prayed for in the petition.
26. Mr. Lakhani has then submitted that in a similar petition of Cadbury India Ltd. before this Court, his Lordship, Justice Dr. D. Y. Chandrachud had ordered that individual notice be sent to the shareholders and hence similarly in the present petition this Court should direct the petitioner-company to issue individual notices to the shareholders. However, I find that the order passed by my learned brother judge, Justice Dr. D. Y. Chandrachud, is passed while disposing of the company application filed by Cad-bury India Ltd. and not at the stage of final hearing of the petition. Moreover, in complying with the order of this Court, dated February 11, 2010, the petitioner-company published notices of hearing of the petition for reduction of capital u/s 100 of the Act in two local newspapers, and no objection has been received in relation to the present petition save and except from Mr. Lakhani. This contention therefore lacks merits and is rejected.
27. Mr. Lakhani has next pointed out that the explanatory statement u/s 173(2) of the Act, to the notice dated August 27, 2009, mentions that:
The board has recommended in accordance with the ''first-in-last-out principle'', and Organon Participations B.V. has agreed vide letter dated August, 25, 2009, that they being the promoter-shareholder, should not be returned any of its capital contribution before the public shareholders are returned their capital contribution.
28. Mr. Lakhani submits in this regard that the promoters and directors prior to the open offer held 50.43 per cent. of the paid-up capital of the company. Post the open offer, as of December 31, 2001, the promoter''s holding was 94.38 per cent., whereas presently the promoters'' holding is 98.43 per cent. and the remaining 1,490 shareholders hold 1.57 per cent. of the paid-up capital. Therefore, he submits that the shares acquired by the promoters in open offer was much later than those of shareholders like him, who had received shares in public offers sometime in the year 1984 and also received bonus shares in the ratio of 3 : 5 in the year 1996. In view of the principle of "first-in-last-out", the subsequent shares acquired by the promoter through open offer should also be subject to reduction of capital before those of shareholders like him.
29. In response to this objection, the petitioner-company has submitted that the principle of "first-in-last-out" referred to by the petitioner-company implies that the promoter shareholders being the initial shareholders of the petitioner-company would exit last. Admittedly, the petitioner-company became a shareholder prior to Mr. Lakhani and therefore should exit later than him. Subsequent acquisition of shares by the promoter shareholders would not affect the status of the promoter shareholders being the initial shareholders. Moreover, the petitioner-company submits that Section 100 of the Act does not prohibit the classification of shares for the purpose of effecting the reduction of capital. A special resolution to the effect of proposed reduction of the equity share capital need not affect the shares held by the promoter shareholders. Therefore, the said objection of Mr. Lakhani is untenable. On a reading of Section 100, I find that the submission of the petitioner-company is correct and this objection of Mr. Lakhani, raised on the principle of "first-in-last-out" is, therefore, rejected.
30. Mr. Lakhani''s final objection pertains to the valuation report of M/s. Grant Thornton India ("Grant Thornton"), who were appointed by the petitioner-company to conduct the valuation of its equity shares for the purpose of the proposed reduction of share capital, as per the provisions of the Act. The objections pertaining to the valuation method are set out in Clauses 6(a) and (e) of Mr. Lakhani''s affidavit dated March 10, 2010. He submits that these objections should be considered by this Court before passing any orders on the petition filed by the petitioner-company. The said objections were therefore forwarded by the petitioner-company to Grant Thornton, who in turn have, by their letter dated March 24, 2010, responded to each objection. The letter dated March 24, 2010, along with the response of Grant Thornton to the objections is annexed as exhibit A to the affidavit in rejoinder of the petitioner-company dated March 25, 2010. According to Mr. Lakhani, the petitioner-company followed one method of valuation at the time of open offer in October/November, 2001 and another method of valuation under the present proposal of reduction of capital which is not proper. He submits that the present proposal by the petitioner-company should be on the basis of that method of valuation, which gives higher value, i.e., either on the basis of book value of the earning per share, or the P. E., ratio and the difference in sensex then and now, so as to add a reasonable premium for the total buyout of shares.
31. The above objections/suggestions is responded to by Grant Thornton as follows:
Grant Thornton, India was appointed to conduct a valuation of Organon (India) Ltd.''s (''the company'') equity shares for the purpose of a proposed reduction of its share capital as per the provisions of the Companies Act, 1956. For this purpose, we understand that there are no prescribed methods/guidelines for carrying out the valuation under the Companies Act, 1956, particularly in cases where the companies are no longer listed on stock exchanges. Therefore, for this purpose, as detailed in our valuation report the standard of value used in our valuation analysis is ''fair value'' which is often defined as the price, in terms of cash or equivalent, that a buyer could reasonably be expected to pay, and a seller could reasonably be expected to accept, if the business were exposed for sale on the open market for a reasonable period of time, with both buyer and seller being in possession of the pertinent facts and neither being under any compulsion to act.
As detailed in our report, to arrive at the fair value of the company''s equity shares, we have applied generally accepted valuation methodologies, which are used in several other situations involving a ''fair value'' standard, e.g., mergers/amalgamations, and accepted by relevant judicial and regulatory authorities of India. It is important to note that these methodologies are also widely practised and applied internationally.
We understand that the offer price of INR 285/per share made during the open offer in October/November, 2001 was based on the ''negotiated price'' under the share purchase agreement dated July 30, 2001 and the SEBI Takeover Regulations (11) for consolidation of holding and delisting of the shares as it clearly indicated in the 2001 letter of offer. We understand that while carrying out the valuation as at June, 30, 2009, it would be incorrect to apply the guidelines that were applicable in October/November, 2001, for the open offer for the following reasons.
The open offer guidelines used in October/November, 2001, are not applicable in the current valuation context, moreover the standard of value applied in the current valuation context is ''fair value''.
The company has been delisted. The offer price in October/November, 2001 was determined based on the ''negotiated price'' of Rs. 285 as per the share purchase agreement entered into between the promoter-shareholder and some of the Indian promoters of the company.
Further, we have also appropriately factored under various methods the book value (referred as net value in our report), earnings per share, earnings based multiples, the prevailing stock market conditions and other factors detailed in our valuation report (refer paragraph IV ''Valuation Methodology'' and ''Organon''s Valuation'').
32. In the light of this response, I find that Grant Thornton has explained in detail why the valuation method suggested by Mr. Lakhani cannot be acceded to.
33. Mr. Lakhani has contended that the open offer at Rs. 285 per share in October/November, 2001 was at 3.07 times of the book value and if the same 3.07 times the present book value is taken into consideration, the price per share would become Rs. 718.38. In response, Grant Thornton have stated that they have considered the book value (net asset value) of the company and the same has been even adjusted to reflect the market value of surplus/non operating assets and the impact of potential contingent liabilities. They have pointed out that this has been explained by them in paragraph IV(1) of the valuation report, which is reproduced hereunder:
Net asset value method (NAV).-The value arrived at under this approach is based on the latest available audited/provisional financial statements of the business and may be defined as shareholders'' funds or net assets owned by the business. Under this method, the net assets as per the financial statements are adjusted for market value of surplus/non operating assets, potential and contingent liabilities if any. To derive value per equity share, the adjusted net assets value is divided by the number of outstanding equity shares. We have used this method for the purpose of estimating the share value.
We have relied on the net asset value of the company as of June 30, 2009 and have adjusted for the market value of surplus assets, i.e., land and reduced the potential contingent liabilities. Since, we have applied various methods and it is important to arrive at a single equity value, we have assigned appropriate weight to the net asset value method.
34. Thus, the book value/net asset value of the petitioner-company was considered by Grant Thornton for the purpose of arriving at the fair value of the petitioners'' shares.
35. Mr. Lakhani has next contended that when the open offer in October/November, 2001, was made at Rs. 285 per share, the earning per share (EPS) was Rs. 14.76. This comes to a PE ratio of 19.31, whereas the present offer of Rs. 425 is at a PE ratio of 9.97, as per the EPS of Rs. 42.64, for the accounting period ending December 31, 2008 (Rs. 42.64 multiplied by 9.97 gives Rs. 425). The above contention of Mr. Lakhani is explained by Grant Thornton as under:
As at the valuation date (June 30, 2009), the company''s shares are delisted and hence, as detailed in our valuation report (paragraph IV(2) and ''Organon''s Valuation'') we have used market multiple method which factors and appropriate measure of earnings multiple and the prevailing market conditions for the comparable companies operating in the multinational pharmaceuticals companies'' sector and further adjusted for the company''s shares towards lack of marketability and being illiquid as it is no longer listed on any stock exchange.
The offer price in October/November, 2001 was determined based on the ''negotiated price'' of Rs. 285 as per the share purchase agreement entered into between the promoter-shareholder and some of the Indian promoters of the company. Hence, for the purpose of discussion on the intervenor''s arguments, the implied multiples (price/earnings (PE) ratio, price/book value ratios) computed by the inter-venor derived based on the offer price of Rs. 285 are not comparable. Moreover, if the implied multiples are computed based on the ruling market price of the company at that time (price on NSE was Rs. 182.7 and Calcutta Stock Exchange was Rs. 165.5 as stated in the offer document), the multiples would be much lower than what the inter-venor has stated.
In addition, the offer document of October/November, 2001 makes a reference to the industry PE ratio comprising of multinational pharmaceuticals which was at a ratio of 19.0x as per the capital market magazine dated August 5, 2001. If the same source is considered, the P/E ratio of multinational pharmaceuticals is 16.0x, based on an average last four editions preceding the date of valuation, which after adjustment towards lack of marketability of the company''s shares, will be closure to implied P/E ratio of the company as per the current offer price of Rs. 425, the estimated annualised earnings as at June 30, 2009. It is further submitted that as per several researches carried out by academicians and as a general practice, it is common to apply a discount for lack of marketability in the range of 25 per cent. to derive the fair value of equity of an unlisted company.
36. Therefore, the petitioner-company is correct in its contention that the fair value of the share is Rs. 425 as per current PE ratio of the petitioner-company.
37. Mr. Lakhani also has contended that the BSE Sensex is rising and is approximately five and a half times of what it was in 2001. Hence, the present offer price should also take the same into consideration. In response, Grant Thornton explained as follows:
We have factored the stock market conditions prevailing as at the valuation date, which reflected in the market prices of the comparable companies and consequently impacting the markets multiples. We have explained this in paragraph IV and Organon''s Valuation in our Valuation Report.
38. The above answer of Grant Thornton shows that they have already considered the suggestion of Mr. Lakhani while submitting their valuation report and thereafter arrived at fair value of the shares of the petitioner-company.
39. Mr. Lakhani has further contended that if the management of the petitioner-company wants a complete buy out, then it should pay a substantial amount of premium towards the prices arrived at on the basis of the above method of valuation. To this argument, Grant Thornton''s response is as follows:
We have arrived at the fair value of equity shares of the company. The full buy out premium or commonly referred as control premium would be usually applicable when the buyer gets control due to purchase of shares. In the current valuation context, we have valued company''s equity as a whole and not specifically any specific category or class of shareholders (i.e., minority stake). If one has to value a minority stake there could be a possibility of minority discount that would need to be considered as the minority shareholder cannot control the company.
40. I find that Grant Thornton has thereby given cogent reasoning as to why Mr. Lakhani''s suggestion for a full buy out premium cannot be accepted.
41. Mr. Lakhani has further contended that the valuation report methodology used by the valuer and its full disclaimer is not clear as it has valued the assets of the petitioner-company, more particularly the real estate, at current market value. He hence submits that the earlier method of valuation used in October/November, 2001 should be taken into consideration. In response, Grant Thornton has pointed out that the valuation report has considered the petitioner-company''s assets particularly the market value of surplus assets and in addition the business and the interest in which the company operates. This has been dealt with in paragraph IV of the said valuation report.
42. Mr. Lakhani has in this manner raised several concerns regarding the valuation of shares. Before concluding on this point, I must point out certain observations of the courts in the country regarding valuation of shares. Mr. Tulzapurkar, learned senior Counsel appearing for the petitioner-company has relied on the decision of the hon''ble apex court in the case of
Pennington in his Principles of Company Law mentions four factors which has to be kept in mind in the valuation of shares.
(1) Capital cover,
(2) Yield,
(3) Earning capacity, and
(4) Marketability.
Valuation of shares is a technical and complex problem which can be approximately left to the consideration of experts in the field of accountancy. Many imponderables exist in the exercise of the valuation of shares . . .
It has also to be kept in view that which exchange ratio is better is in the realm of commercial decision of well informed shareholders. It is not for the court to sit in appeal over the value judgment of equity shareholders who are supposed to be men of the world and reasonable persons who know their own benefit and interest underlying any proposed scheme. With open eyes they have okayed this ratio and the entire scheme.
43. In
44. In the case of Tata Oil Mills Co. Ltd. In re (1994) 81 Comp Cas 754, this Court observed thus (page 770):
...the exchange ratio as arrived at by Mr. Malegam has received the approval of shareholders holding more than 99 per cent. (in number and value) shares at the meetings. No one except the shareholders holding minimum percentage of shares have complained before me. The valuation has been confirmed to be fair by two eminent firms of auditors. It would be extremely difficult to hold that the same is unfair. In any case, it has been approved by an overwhelming majority of persons affected and there is no basis to doubt their judgment.
45. In the landmark case of Gold Coast Selection Trust Ltd. v. Humphrey (Inspector of Taxes) (1949) 17 ITR (Supp.) 19 (HL) : (1943-49) 30 TC 209, it was posited as follows (page 26 of 17 ITR (Suppl.):
Valuation is an art, not an exact science. Mathematical certainty is not demanded, nor indeed is it possible.
46. Mr. Tulzapurkar has also relied on an unreported decision of the learned single judge of this Court (Coram : A. M. Khanwilkar J.) in the case of (since reported in Reliance Industries Ltd.
In so far as the criticism with regard to the contents of the valuation report either on the ground that it does not give any forecast or disclose any logic but only conclusion. Even this argument does not commend to me. As aforesaid, on reading the reports clause by clause and as a whole, no fault can be found with the ultimate opinion reached by the experts regarding share swap ratio, which is founded on tangible material and basis. I am not at all impressed by the argument of the objectors that the report is manifestation of conflicting opinion in any manner. The fact that the language of the report would give an impression that the expert does not take the responsibility of the accuracy of the figures furnished to them by the company or that they have not made any independent valuation of the assets and liability of the companies on their own, does not mean that the relevant factors for determination of swap ratio have not been considered by the experts. Obviously, the opinion of the experts is based on the information provided by the company. There is nothing to show that the figures available in the books of account provided to the experts were incorrect or otherwise. Thus, there is nothing in the said reports to indicate that the consideration weighed with the experts in arriving at the opinion is impermissible or unacceptable. It is not possible to countenance the grievance of the objectors that the reports deprive the court from basic information regarding justification of share swap ratio.
47. In the said decision, the learned single judge noted that (page 140 of 151 Comp Cas):
Even in the present case, no one has doubted the integrity and honesty of the valuers, who have given their share valuation report or fairness report, as the case may be. Nor the objectors have been able to point out that the method adopted by the valuers was impermissible or absurd. If so, I find no reason to discard the valuation of shares or the swap ratio determined by the experts.
48. In the present case, the petitioner-company does not have any secured creditors as set out herein above. Not a single unsecured creditor has raised objection qua the reduction in capital proposed by the petitioner-company. The hearing of the petition was advertised by the petitioner-company as directed by this Court in two local newspapers and in the Maharashtra Gazette. However, except for Mr. Lakhani, none of the public shareholders have come forward to oppose the petition. I find that the valuation of the shares by the petitioner-company is therefore also accepted by all the shareholders and creditors with the single exception of Mr. Lakhani. Mr. Lakhani himself has also not attributed any motives to Grant Thornton nor commented on its independent professional status or competency. In fact the petitioner-company has taken the pains of getting a response of Grant Thornton to every objection raised by Mr. Lakhani pertaining to the valuation carried out by Grant Thornton. The report of Grant Thornton sets out the basis for arriving at the final opinion. The report clearly mentions that valuation is done by giving predominant weightage to the value computed under the market multiple method and discounted cash flow method, with a lower weight being given to the value computed under the NAV method.
49. In view thereof, keeping in view the observations of the hon''ble apex court as well as this Court, I see no reason why the valuation report of Grant Thornton, which I find to be fair, reasonable and based on cogent reasoning and which has also been accepted by all the non-promoter shareholders of the petitioner-company, with the lone exception of Mr. Lakhani, should not be accepted by this Court.
50. Under the circumstances, the company scheme petition is allowed in terms of prayer Clauses (a) and (b).
51. Order accordingly.
