Takeover modes through arrangement under the Companies Act, 2013-

Bringing out the true colors of difference between the takeover provisions
Pammy Jaiswal | Partner
Vinod Kothari and Company
[email protected]

Background
The syndrome of the majority trying to gobble up the minority may be reminiscent of the era of
raiders, kingdoms and fiefdoms, but the corporate world still has the same avarice for complete
control that has lived through ages. There may be various reasons and circumstances where the
majority may want to throw out the minority and gain absolute control over the company. The
minority may have been marginalised over years of creeping acquisition by the promoter block,
or it may be a rival group, or it may just be shareholders who have become disinterested in the
running of the company over time.

The Companies Act, 2013 (‘Act, 2013’ or ‘Act’) contains several provisions for minority
protection; the Act also contains some provisions for fortification of majority control. Sections
230 (11), 235 and 236 are those
provisions for what may result into
“ek chhatra raj” of the majority
Even though sections 230 (11), 235 and 236
Generally a company is taken over have a similar nature of giving a forceful exit,
with an intention to oust hostile
group of shareholders or minority however, each of these are very different from
shareholders and thus continue or the other in terms of its applicability and
establish complete control over the approach which is worth discussing!
acquired entity (Target Company).
There can be various means to
provide an exit opportunity offer to
the shareholders of the Target
Company like buy back offer, reduction of share capital, consolidation of share capital. While the
aforesaid means are not in the nature to force the exit of the target group, however, if we look at
the provisions of Chapter XV, the nature of exit offer mentioned therein is more of an expulsion
tied with the payment of fair value to the outgoing shareholders (target group).

Chapter XV of the Companies Act, 2013 (‘Act, 2013’ or ‘Act’) deals with the said modes under three
separate sections viz.:

 Section 230 (11)1

 Section 235; and
 Section 236

While the prima facie nature of all the three sections is same, however, there lies significant
difference between the three w.r.t to the involvement of scheme, applicability of each of these
section, procedure, etc. to name a few, which is worth discussing in this write up.

Sec 230 (11) – Takeover of an unlisted company through an arrangement

Some of the features of the arrangement procedure:

1
Enforced vide MCA notification dated 4th February, 2020
Further Companies (Compromise and Arrangement) Rules and NCLT Rules have been amended to give effect
to the said enforcement.
 This section can be used for takeover of shares of an unlisted company considering the
fact that SEBI (Substantial Acquisition of Shares and Takeover) Regulations as well as the
SEBI (Securities Contract Regulation Act) and other relevant regulations are already in
place to look after and regulate the takeover of shares of a listed company. Further,
looking at the threshold for being eligible acquirer(s), this section becomes useless for
listed companies since public category shareholders may not find a way to propose
takeover.

 The acquirer(s)needs to be a member of the Target Company and is required to hold

atleast 75% of the total share capital of such company where the term shares have been
defined to mean securities having voting rights

 The offer of acquisition has to be for the remaining portion of shares not held by the
potential acquirer(s).

 A scheme of arrangement needs to be drafted for the said takeover and an application has
to be filed with the Hon’ble National Company Law Tribunal.

 The application is required to be accompanies with the various relevant documents

including the valuation report given by the registered valuer wherein the value arrived at
should have been post the consideration of the following:

o Highest price paid for the shares of the Target Company by any person in the
preceding 12 months;
o Consideration of the possible pricing parameters (PPP) for arriving at the fair
value of the shares.

 The application shall also contain the details of the bank account wherein atleast 50% of
the total consideration is deposited. As far as the question of the time by which the amount
is supposed to be deposited, is concerned, in our view, it should be ideally done at the
time of filing the application for takeover (i.e. once the requisite approval has been
secured from the creditors and members.

 Since the takeover is a compromise and arrangement falling under section 230, the
complete set of compliances as required to be followed under section 230 for any
mainstream compromise and arrangement is also required to be followed for the
application filed under this sub-section which prima facie involves the following:

o Filing of application with NCLT;

o Calling of the meeting of the members and creditors by the NCLT;
o Approval of the scheme by members holding three-fourth in value of the total
value of creditors and members;
o Sending out the copy of the application to the applicable regulatory authorities
like the Registrar of Companies, Regional Director, IT Authorities, etc.
o Filing an application with NCLT for approval of the scheme of arrangement

 Once the application is approved, the outgoing shareholders are supposed to take their
requisite share of consideration and transfer their shareholding in the name of the
applicant(s) (potential acquirer(s)).

 Two fold minority protection -

o During the hearing of the application, the minority can be one of the respondents
objecting to the takeover
o In case the takeover has been approved, the minority being an aggrieved party
can file an application.
  Since the provisions are silent on the time period within which the aggrieved party can
file an application, the law of Limitation Act should ideally be followed wherein a time
frame of 3 years can be allowed for filing the said application.

Meaning of the term ‘aggrieved party’ under section 230 (12)

While the language of the said section seemingly allows any aggrieved party to file an application,
however, one needs to understand the intent of the said provision and then refer to the proviso to sub-
section(4) which reads as follows:

“Provided that any objection to the compromise or arrangement shall be made only by persons holding
not less than ten per cent. of the shareholding or having outstanding debt amounting to not less
than five per cent. of the total outstanding debt as per the latest audited financial statement.”

Further, para 19 of the J.J. Irani Committee Report also discusses the part that any obstructing
shareholder should not be allowed to raise objections. The obstructing minority should also a significant
stake which would be to streamline the procedure of articulation of the minority interest while restricting
obstructionist attitude on the part of any section of minority.

Section 235 –Corporate acquirer with majority approval

Following are the features of the acquisition under this section:

 Any company with the intention of acquiring the shares of another company will make an
offer through a scheme or contract.

 There is no provision under the section which prescribes the minimum shareholding of
the proposed acquirer. However, the flavour of takeover under this section seems to be a
friendly rather than hostile since, 90% in value of the total shareholders are anyway in
agreement with the takeover by the acquirer company.

 Within 4 months from the date of offer for acquisition, the shareholders holding 90% of
the value of total shares of the Target Company is required to approve the scheme
(excluding the shareholding of the proposed acquirer along with the shareholding of its
nominees or that of its subsidiary company.

 Once the scheme is approved by the requisite majority, the proposed acquirer shall send
notice to acquire shares of the dissenting shareholders in form CAA-14 to such
shareholders within 2 months from the expiry of the four month.

 On the expiry of the said one month, the proposed acquirer shall acquire the shares of the
Target Company unless such dissenting shareholder makes an application to the NCLT
within one month of the date of notice and the NCLT disposes the application otherwise.

 The acquirer shall send a notice along with instrument of transfer and pay the amount of
consideration to the Target Company who shall deposit such amount in a separate bank
account and make arrangements to disburse the same within 60 days.

 Finally the Target Company shall send an intimation to the dissenting shareholder
informing them about share transfer registration and receipt of consideration.
Section 236 – Takeover through minority squeeze out by the majority shareholders

Section 236 is an extremely powerful section that showcases the might of the super majority
shareholders of a company. It is has the simple intent of gaining the complete control of a
company in which the acquirer already has 90% shareholding. This section has the features as
follows:

 Fair value fixed by following the valuation provisions under the Act, 2013;
 Suo moto offer for acquisition of the minority shares;
 Issue of duplicate share certificates in lieu of undelivered share certificates;
 Price negotiation by the majority of the minority.

Our detailed write on minority squeeze out discussing the concept with global provisions can be
viewed here.
Comparing the features for forceful exit
Now that we have discussed the basis features and procedures of each of these three sections, it will be interesting to bring out the differences between
the three sections.

Sr. Basis of difference Section 230 (11) Section 235 Section 236
No.
1. Eligible acquirer Any member who holds shares No minimum shareholding Any member holding shares along
along with any other member not prescribed for being an eligible with its person acting in concert of
less than 75% of the shares of the acquirer, however, recourse not less than 90% issued equity
Target Company. under this section is possible only share capital.
with the approval of 90%
shareholding.

2. Eligible Target Can be used by unlisted company. Any company. Any company.
Company
3. Threshold for approval Scheme is required to be approved Approval by members holding No approval required since the offer
by members holding not less than 9/10th in value of the shares of the for acquisition is made by 90%
3/4th in value of the shares and Target Company. shareholders.
creditors holding not less than 3/4th
in value of creditors.

4. Meaning of shares Equity shares as well as securities Equity shares. Equity shares.
having voting rights on all matters.

5. Involvement of scheme Drafting of scheme is involved. Drafting of scheme is involved. No scheme is involved.

6. Involvement of NCLT NCLT is involved in the very first NCLT is not involved in the first On the face of the provisions, NCLT
stage when the application for stage when the offer for is not involved at any stage.
acquisition is filed. acquisition is made.
However, the role of NCLT comes
Further, the application by into picture when any dissenting
dissenting shareholders can also be shareholder files application with
filed in the NCLT. the NCLT.
Sr. Basis of difference Section 230 (11) Section 235 Section 236
No.
7. Suo moto offer by No such provision. No such provision. Can be made.
minority shareholders
8. Exclusion of related Related parties are not excluded for The acquirer company along with Related parties are not excluded for
parties the purpose of considering the its nominees and the subsidiary the purpose of considering the
votes. company of such acquirer are shareholding.
excluded for the purpose of
determining the result of voting
by majority.

9. Scope of filing There is scope for filing application There is scope for filing No explicit provisions, however, one
application by as given under sub-section (12) of application by dissenting may argue that the minority in this
dissenting/ minority section 230. shareholders. case being holders of not less than
shareholders 10% shares of the Target Company
may file an application under
section 241 (case of oppression and
mismanagement).

10. Payment of purchase 50% of the total purchase Consideration has to be paid only Consideration has to be paid only
consideration consideration is required to be when the time allowed to the when the offer for acquisition has
deposited in a separate bank dissenting shareholders for filing been and the time for delivery of
account. application with NCLT or in case share certificates by the minority
This deposit in our view, is required application has been filed then has expired.
to be made only when the approval once the NCLT has decided the
by the shareholder and creditors case in favour of the acquirer
have been secured. company, has expired and the
company has sent the instrument
of transfer to the Target Company
for registration of transfer.

11. Time period for Immediate disbursement on No time period for keeping the Purchase consideration has to be
keeping the purchase approval of the application. purchase consideration in the kept for one year in a separate bank
consideration separate bank account. However,
 Sr. Basis of difference Section 230 (11) Section 235 Section 236
No.
the disbursement has to be made account where disbursement has to
within 60 days. be made within 60 days.

12. Scope for price No scope for price negotiation by No scope for price negotiation. Price negotiation by majority of the
negotiation the minority. minority can be done.

13. Delivery of share No specific provision. Not required as the Target Specific delivery required, however,
certificates Company can on behalf of the in the event of non-delivery then
shareholders execute the transfer. Target Company can do the needful
as an agent for transferring the
shares in favour of the acquirer.

Conclusion
Looking at the differences between the three provisions of takeover through an arrangement, it becomes evident that each of these section has its own
suitability for each type of case. While prima facie it appears that each of these sections have identical provisions, it actually differs when one looks
deep into the language of the same. The only similarity in all the three provisions is the intent of takeover through an arrangement with the members
and paying them a fair price for entering into the same.
Further, it will also be interesting to dig into the possibility of combined implementation of one or more sections amongst the three discussed above
to fulfil the objective of “ek chhatra raj”, which we may take up in our next write-up.