1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION COMPANY SCHEME PETITION NO.101 OF 2010 In the Matter of Reduction of Equity Share Capital of Organon (India) Limited Organon (India) Limited ... Petitioner .... Dr. V. V. Tulzapurkar, Senior Advocate, a/w Mr.S.Parikh for the Petitioner. Mr. D. V. Lakhani in person-objector. .... CORAM : S. J. KATHAWALLA, J. Reserved on : 14th April, 2010. Pronounced on : 7th June, 2010. JUDGEMENT: 1. By this Company Scheme Petition, Organon (India) Limited (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 (“EGM”) held on 15th October, 2009, for the reduction of its equity share capital. 2. The Authorized, issued, subscribed and paid up share capital of the Petitioner Company, as on 31st December, 2008 is as under: 2 Share Capital Rupees Authorized: 1,00,00,000 Equity Share of Rs.10/- each 10,00,00,000/- Issued, Subscribed and Paid up: (60,76,160 Equity Shares of Rs. 10/- each fully paid up) Total: 6,07,61,600/- 6,07,61,600/- 3. Of the above, 98.43% 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 1490 members having shares of the Petitioner Company. There has been no change in the share capital of the Petitioner Company from 31st December, 2008 till the date of filing the present petition. 4. The Petitioner Company's equity shares were listed on the Calcutta Stock Exchange Association Limited 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 3 from the public. However, the public shareholding of the Petitioner Company fell below the 10% limit as provided under the Stock Exchange norms and the shares of the petitioner company were de-listed from the Calcutta Stock Exchange Association Limited with effect from 26th August, 2002 and subsequently from the National Stock Exchange with effect from 9th October, 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 de-listing price of Rs.285/- per equity share as per the de-listing guidelines under the Security and Exchange Board of India (De-listing of Securities) Guidelines, 2003. The promoter shareholders extended to the shareholders of the Petitioner Company an exit option at the de-listing price of Rs.285/- per equity share. This offer was terminated by a letter dated 9th April, 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: 4 “The Company's securities being de-listed to individual shareholders do not have a tradable security for exit. This prevents shareholders from realizing 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 it’s 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 27th August, 5 2009 in due compliances of the provisions of the said Act for convening an Extraordinary General Meeting of the equity shareholders of the Petitioner Company on 15th October, 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-share holder 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 canceling and extinguishing all such shares.” 8. Accordingly, the EGM of the shareholders of the Petitioner Company was held on 15th October, 2009. At the said meeting, 38 members were present in person, by proxy and 6 through authorized representatives, wherein, amongst others, the resolution, as set out in paragraph No.6 above, was passed by way of show of hands under Section 100 and other applicable provisions of the Act. However, two shareholders, holding a total of 160 shares, which amounts to 0.002633242% of the total shareholding, had opposed the aforesaid resolution. 9. On the date of filing of this petition i.e. 31st October, 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% of the total value of credit and obtained the consent of 44 of the remaining unsecured creditors representing 36.24% 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% of the total value of credit who neither consented nor were re-paid 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 under Section 101(2) of the Act. By an order dated 22nd January, 2010, this 7 Court has dispensed with the provisions of, and the procedure prescribed under Section 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 16th April, 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 11th February, 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 9th March, 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 EGM, held on 15th October, 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 8 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 EGM be confirmed by this Court. 12. As set out herein above, 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 period from 25 th February, 2010 to 3 rd March, 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 10th March, 2010 setting out his objections to which, an affidavit in rejoinder, dated 25th March, 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- share holders 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 9 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 authorizes the company limited by shares, having a share capital, if so authorized 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; & (iii) If such a resolution is sanctioned by the Court. 15. In the leading case of British and American Trustee and Finance Corporation v. Couper ( [1894] AC 399 ) 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 10 with all other shares of the same class.” 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 scrutinized 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.” The Madras High Court, while referring to the same judgment in Re Panruti Industrial Co. Private Ltd, AIR 1960 Mad 537 held that the Court’s power to sanction any reduction is to be determined by whether such reduction is fair and equitable. 16. In the landmark case of Miheer H. Mafatlal v. Mafatlal Industries Ltd., (AIR 1997 SC 506), the Hon’ble Apex Court was called upon to decide on the validity of a Scheme of Amalgamation of two public limited companies under Section 391/393 of the Companies Act. Certain principles posited by the Hon’ble Court are relevant for the present matter: 11 “It has to be kept in view that the question of bonafide of the majority shareholders or the alleged suppression by them of minority shareholders or their attempt to suffocate their interest has to be judged from the point of view of the class as a whole. Question is whether the majority shareholders while acting on behalf of the class as a whole had exhibited any adverse interest against the appellant’s minority shareholders also having a 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.” (para 38) 17. 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 Vol. 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 12 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 Ramesh B. Desai v. Bipin Vadilal Mehta [ (2006) 5 SCC 638 ] where the Apex Court recognized the judgment of the House of Lords in the case of British and American Trustee and Finance Corporation [supra]. The Learned Bench also referred to the judgment in Poole & ors v. National Bank of China Ltd. [ (1907) A.C. 229 (HL) ], the relevant portion of which is as follows: “The dissenting 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.” The Learned Bench granted sanction to the reduction of capital, overruling the order of the Learned Single Judge in Sandvik Asia Ltd. (supra), 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 13 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.” (para 9) An SLP (Petition for Special Leave to Appeal (Civil) No. 12418/2009) filed therefrom, was dismissed by the Hon'ble Apex Court, by its order dated 13th July, 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. 18. It is next contended by Mr. Lakhani that at the said EGM, 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 14 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. 19. The next objection of Mr. Lakhani is that the special resolution put forward at the EGM for approval by the shareholders appears to have not been passed with requisite majority. According to him, at the EGM, 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 legal firms and auditing firms, including proxies and authorized 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 authorization. He further states that although he sought documents from the Petitioner Company like photocopies of the attendance register, and of the authorized 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 11th December, 2009 and in the said minutes, the break-up of the exact number of shareholders present in 15 person or through proxies and authorized representation is not given. It is also submitted that there is no proof that EGM notice was sent to 1490 members of the Company. 20. 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 1490 shareholders. Despite the fact that under Section 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 21st October, 2009, addressed to the Company Secretary of the Petitioner Company inter alia records that at the time of the EGM around 20 to 25 persons were present and most of them appeared to be either employees of the company or representatives of legal firms and auditing firms, it is only on 23rd December, 2009 that Mr. Lakhani sought copies of the 16 attendance register in respect of the EGM held on 15th October, 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 15th October, 2009, wrote to the Company Secretary immediately after the EGM, had not objected qua the proxies or authorized 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. 21. 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 authorized 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 authorized 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 EGM of the petitioner company, dated 15th October, 2009 is incorrect. Therefore, the Minutes 17 clearly spell out the attendance at the meeting as being 38 members, from whom 29 were valid proxies and one member was an authorized 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 authorized representation was provided. This objection raised by Mr. Lakhani, therefore, completely lacks bonafide 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. 22. Mr. Lakhani has then submitted that in a similar petition of Cadbury India Limited 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 Cadbury India Limited and not at the stage of final hearing of the Petition. Moreover, in complying with the order of this Court, dated 11th February, 2010, the Petitioner Company 18 published notices of hearing of the petition for reduction of capital under Section 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. 23. Mr. Lakhani has next pointed out that the explanatory statement under Section 173(2) of the Act, to the notice dated 27th August, 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.” Mr. Lakhani submits in this regard that the promoters and directors prior to the open offer held 50.43% of the paid up capital of the Company. Post the open offer, as of 31st December, 2001, the promoter's holding was 94.38%, whereas presently the promoters' holding is 98.43% and the remaining 1490 shareholders hold 1.57% of the paid up capital. Therefore he submits that the shares acquired by the promoters in open offer 19 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. 24. 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 20 objection of Mr. Lakhani, raised on the principle of ‘first-in last-out’ is therefore, rejected. 25. 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.