Case: Hindustan Lever Employees' Union Vs. Hindustan Lever Limited and Others


Decision reasoning: 0[ds]3. Having heard learned Counsel for the parties and respondent Mr. M.G. Jajoo in person at length we are satisfied that no case for interference in appeal with the impugned order exists. Here are our reasons.Keeping the above basic principles in view we proceed to deal with the five groundsGround (A) : Violation of section 391(1)(a) of the Act in not making required disclosures in the explanatory statement. Nature of disclosures required to be made by section 393(1)(a) in the explanatory statement is quite different from the nature of disclosures required in the notice of the special general meeting of the Company under section 173 under which a statement setting out all material facts concerning each item of business including in particular the nature of concern or interest, if any, therein of every director, managing agent, and other specified office bearers have to be stated. Even under section 173 too rigid interpretations which would hamper the conduct of the business cannot be adopted. After all the explanatory statement is a business document intended to give clear idea of the nature of business to be conducted and must be used in a common sense business way. Minor insignificant matters do not render the proceedings null and void. contrasted with section 173, the provisions of section 391 are quite different, the necessity of disclosure being quite different from the necessity of disclosure required under sectionof the above provisions would reveal that the statement is required to state clearly : (i) the compromise or arrangement and its effect, (ii) the manner in which the material interests, if any, of specified categories of persons in any capacity are likely to be affected by the scheme, in case the effect is different from the effect on the like interest orcategories of persons. The purpose of such disclosure is to enable the shareholders to make their objections because once they have approved the scheme there is no chance of questioning its arithematics subsequently. The question is thus not purely and everycannot be fatal unless it is fradulent and has prejudicially affected the decision making process of the member as held by the Karnataka High Court in the case of (SuriNair Ltd. v. Spray Metal (Pvt.) Ltd.)5, 54 Company Cases 868.14. Alleged non disclosures pertain to (i) correct financial position of TOMCO, (ii) reasons behind the operating business losses, (iii) names of owners of the three properties mentioned in Clause 1.7(d), (iv) Mr. S.M. Datta, the Chairman of HLL being responsible for the interest of UL in India. The grievance is altruistic. We do not notice any non disclosure about correct financial position of TOMCO. No material is suppressed. There is nothing conflicting. Company can be financially sound and yet may incur business losses. This exactly was and is the position of TOMCO. There were and can be varieties of reasons behind operating business losses, competition by more efficient and prosperous company being one of them. Criticism that losses were manipulated only for the purposes of scheme has no foundation whatsoever. In the properties mentioned in Clause 1.7(d) the TOMCO had no more rights than that of licensee which as held by this Court in the ratio of (The Associated Building Co. Ltd. and others v. Union of India and others)6, in Petition No. 270 of 1984, decided on 20th July, 1993 by Division Bench of this Court, were not transferable and were not assets of TOMCO and hence were not included in theof TOMCO. We fail to see how Mr. Datta being responsible for interest of UL in India constituted his "material interest" as contemplated under section 393(1)(a). It is pertinent to notice that Mr. Datta being a representative of UL had been disclosed in the meeting of the members before voting took place. HLEU even otherwise knew this fact. No objection was raised when Mr. Datta was appointed as the Chairman of the meeting in pursuance of the order of the Company Judge dated 29th April, 1993. Against the said judgment, appeal was filed and even there in no such objection was taken. It is a common ground that Mr. Datta did not own any shares of TOMCO or UL and this fact was disclosed in the explanatory statement.15. Validity of the explanatory statement was raised before the Company Registrar in Company Application No. 250 of 1993 inter alia on the grounds ofThe Company Registrar after going through all the papers and objections settled the explanatory statement and approved the disclosures. The Central Government in its report has also regarded the disclosure as sufficient. Many of the points were discussed in the meeting and considered before voting. Sale of TOMCO was at the market price. Clause 4 has been amended by the Court. For all these reasons the question has only theoretical value. No fraud or prejudice is demonstrated. In our view therefore there has been substantial compliance with the letter and spirit of the provisions.16. (B): Valuation of share exchange ratio is grossly loaded in favour of HLL.For arriving at the fair value of the share the valuer Mr. Malegam has adopted a combination of three wellknown methods. (1) The net worth method, (2) the market value method, and (3) the earning method. The valuation of shares is essentially a technical method requiring expertise. There can be genuine differences of opinion about the correct value of shares of any given company. If there is more than one method of valuation, valuation cannot be exactly the same by adopting different methods. As held by this Court in the case of (Primal Building Spg. and Wvg. Ltd.)7, 50 Company Cases 514  "unless the person who challenges the valuation satisfies the Court that the valuation is unfair, the Court will not disturb the scheme of amalgamation which has been approved by the shareholders of two companies, who are by and large, well informed men of commercial world." It is difficult to set aside the valuation of experts in the absence of fraud or mala fide on the part of the experts as held by Madras High Court in the case of (Coimbatore Cotton Mills and Lakshmi Mills Co. Ltd.)8, 50 Company Cases 623. There are various methods of arriving at a break up value but it is universally accepted that the quotation of a share on the stock market provides largely reliable index. Keeping the aforesaid principles in view, let us notice some material facts on valuation.The Regional Director, Department of Company Affairs, Bombay, was served with a notice under section 394 pursuant to the direction given by the Company Court on 4th August, 1993. The Regional Director called for detailed information on various issues including valuation. The information was supplied after which the Regional Director had submitted the report dated 9th December, 1993 in which there is not a whisper against the valuation.20. Mr. Jajoo, a shareholder in TOMCO who personally argued this appeal in support of his objection to valuation had himself taken out Judges Summons No. 593 of 1993, inter alia, praying for a direction to M/s. A.F. FergusonCo. and M/s. RaijiCo. to give their opinion on the valuation report. He had written a letter dated 18th December, 1993 jointly to the above auditors asking for certain information to which a reply dated 6th January, 1994 was sent answering the queries raised by Mr. Jajoo. Mr. Jajoo sent another letter dated 10th January, 1994 to those auditors, who confirmed their opinion but resisted repeated correspondence. Even as per Mr. Jajoo the share exchange ratio comes to 6,098:4:68 and 4:08. Mr. Jajoos study and findings clearly indicate that there can always be difference in the figures arrived at by applying different methods. At least one ratio arrived at by Mr. Jajoo goes very near the ratio arrived at by Mr. Malegam. For all those reasons there is nothing objectionable about valuation specially when some measure is applied to shares of both companies to fix the share exchange ratio.21. (C): Ignoring the effect of provisions of the Monopoly Restrictive Trade Practice Act (the MRTPsubmission is not well founded. There is no such legal requirement. In the original MRTP Act, merger and amalgamation of certain undertakings was dealt with under section 23. No merger or amalgamation could be sanctioned by the Court until it has been approved by the Central Government which had to take decision in terms of its economic policy. Central Government could under section 20(6) refer the question to the MRTP Commission for its opinion which was not binding on the Central Government in view of section 20(7).22. As a result of new economic policy nearly whole of Chapter III including section 23 has been repealed by amending Act, 1991. The only part of Chapter III which has remained is section 27 under which opinion in the matter of division of an undertaking can be taken on the aspect of public interest. Under section 27 as amended, Commission can even suo motu make enquiry, though nature of its jurisdiction is still advisory. Thus Commission has no part to play in the case of amalgamation. In this background the controversy as to whether issuance of Companys own share amounts to "trade" or "trade practice" as defined under section 2(s) and 2(u) of the said Act need not detainpoint raised is essentially relating to Administrative Law and under that law of requiring exhaustion of administrative remedies where a claim is cognizable in the first instance by administrative agency alone. In such cases judicial interference is withheld until the administrative process has run its course. We have indicated as to how the MRTP Commission has no role to play in the matter of amalgamation of companies and hence the course suggested for suspension of proceedings cannot be adopted. That may not be even in public interest. Matters like this cannot remain in suspended state for no justificable reason. Our attention was invited to the following two American decisions. (1) (United States v. Western Pacific Railroad Company)9, 352 U.S. 59 and (2) (General American Tank Car Corporation v. El Dorado Terminal Company)10, 308 U.S. 422. These cases pertain to the exclusive primary jurisdiction of theCommerce Commission under the Interstate Commerce Act for deciding tariff rates for railroad shipments by the United States. Principles enunciated therein will have no application to the matter at hand.24. (D): Interest of employees of both the Companies is not adequately taken careis no reference to transferee companys staff, workmen and employees, obviously because the merger contemplated is of the transferer company into transferee company. Whenever an undertaking is transferred, either statutorily or by Courts order to the another employer, it is usual formula to protect the workers of the transferred undertaking by providing that service will be continuous and uninterrupted and service conditions will not be prejudicially affected by reasons of transfer. Such provisions are made in the scheme. Merger of the two companies into one very likely may necessiate adjustments in the service conditions in certain areas but that is a matter for industrial adjudication by appropriate forums. Principal grievance was about absence of clause to the effect that no retrenchement of workers of either companies will be made by HLL in future only by reason ofseems to us that he is correct. Rightly has our attention been drawn to the provisions of section 25(N) of the Industrial Disputes Act, 1947 (the ID Act) which would apply to the instant case and which prevents retrenchment of workers without proper justification and permits it only on obtaining Governments approval. No doubt HLL has surplus labour force since last 5 years but it has not retrenched workers and has offered voluntary retirement scheme giving cash benefits and at least 1000 workers have availed of that scheme. HLL has repeatedly stated in various proceedings that it will not retrench any workman, all workers will be given jobs commensurate with their skill and status and we see no reason to doubt the bona fides of that stand. In case HLL goes back ever their stand, the workers are not remedyless. Company Court in these proceedings cannot act on mere speculations. At present there is no reason to doubt the correctness of its stand that merger is bound to result into increasing prosperity of HLL which will bring about increased employment. It is HLEUs own case that HLL is poised for big prosperity. It is of great importance and relevance to note in these proceedings that merger had not been planned as a device to effectobjection is altruistic. Merger is of TOMCOthe transferor company. Protection by scheme is necessary only to its workers. In this context section 25(FF) of the ID Act may behas even made written suggestions pertaining to service conditions including withdrawal of certain cases, parity of conditions, and protection from retrenchment. All these are typical industrial disputes calling for industrial adjudication. In this connection, one cannot lose sight of sectionof the ID Act under which no change in service conditions can be carried out without notice to theis pertinent to notice that communication dated 19th March, 1993 by Mr. N.S. Sundar Rajan of TOMCO states that as per understanding between two companies the merged company will retain TOMCOs investment in specified companies which includes KALYANI. Now, in the whole background the demand of these workers is perfectly justified, but it appears that Clauses 8 and 9 of the scheme would take care of the settlement and it would not be possible for the HLL to go behind the settlement which is binding on them. Indeed this position is fairly not disputed by HLL. Ex abundanti cantela we record that settlement dated 12th November, 1991 would be binding on HLL. This, in our judgment should take care of the grievance. No change in the scheme on that account is therefore necessary.29. (E): Preferential allotment of shares less than market price to UL which is not in public interest.This by far is the most controversial and important issue. Shares are 29847 in number and break of price of Rs. 125/is Rs. 10/towards capital and Rs. 95/towards premium. Market price at the material date would be around Rs.Certain basic facts relevant to the subject are these:(i) HLL is a subsidiary company of UL which is a parent company. UL holds 51% of the issued, subscribed and paid up capital of HLL.(ii) As a result of issuance of 28,67,314 equity shares to TOMCO shareholders under the scheme of amalgamation the holding of UL in HLL become diluted to little less than 50%.(iii) The preference share allotment ensures post amalgamation shareholding level of UL at 51%.(iv) Initial shareholding of UL was 100%.(v) UL has contributed in varieties of way in the phenomenal growth and prosperity of HLL. This subsidiary status has enabled HLL to get inter alia free of cost the benefits of research and development, technology, knowhow, marketing supportdomestic as well as internationalmanagement systems, training facilities and above all international brand names of UL such as LUX, LUX INTERNATIONAL LIFEBOY, PEARS, DOV, SURE, SUNLIGHT in soaps, SUNSILK in shampoo, andin tooth paste.In the above background, there seems to be nothing objectionable in the preferential allotment of shares to enable UL to maintain old 51%in the new set up. Real controversy can be and is about the price of Rs. 105/which is admittedly much below the market price at the material date.30. The price of Rs. 105/has been worked out on the basis of the price earning multiple of 15 based on the last publishedof HLL. This formula was considered fair and reasonable even by the FIs having 16% shares as is clear from their approval in the meeting of shareholders dated 30th June, 1993. Common case is that approval was on the basis of policy of FIs then adopted. It appears that this formula was in conformity with the discussions at the meeting held by the Associated Chamber of Commerce and Industries (ASSOCHAM) on the subject of pricing of preferential allotment of shares to Indian promoters and foreign collaborators. This is clear from the confidential communication dated 18th March, 1993 issued by the Secretary General of the ASSOCHAM to the members of the Managing Committee, Special invitees and Promoter Chambers. HLLs earning per share for the year ended December, 1990 was Rs. 7/per share. Applying the multiple of Rs. 15/the price of Rs. 105/was worked out. No other formula was in the field when the meeting was convened for consideration of the scheme of amalgamation including preferential allotment of shares to UL.It appears that the FIs have recently taken a new policy decision and modified their norms for exercising their rights as a shareholder on the price for preferential allotment. Policy is to oppose allotment at less than market price. This certainly is not only a permissible decision but a welcome decision. But we fail to see how that subsequent policy decision can affect the exercise already undertaken on the basis of policy then prevailing. After all as observed in Navjivans case (supra) "the scheme has to be tested bearing in mind all the circumstances prevailing at the time of meeting called to consider the scheme."33. There are two depreciatary factors in shares allotted to UL. They seem to self imposed and are to the effect that (i) the new equity shares to be allotted to UL are not transferable for a period of 7 years from the date of allotment and (ii) in the event of UL deciding to diversify those shares thereafter within 12 years it will in the first instance offer the shares in favour of the members of HLL on a fair and equitable basis at a price worked out by reference to the same formula of P/E multiple of 15 based on the latest audited accounts of the Company at the time of the sale. The objectors contend that the restrictions are merely illusory and are a virtue out of necessity because HLL would normally not be interested in transferring these shares. This controversy need not detain us in view of what is heldis pertinent to notice thatthe price of Rs. 105/has been offered by majority of 99.97% in terms of value. After all the members of the company are its owners and they knew their business interest best.35. The suggestion that majority was influenced by voting of UL to the extent of 51% does not seem to be correct. Even if the persons and votes of UL are disregarded, the remaining shareholders had almost unanimously okayed the preferential share allotment at price of Rs. 105/per share. Not that the subject was not discussed. Three amendments moved to the resolution of preferential allotment were rejected by members with 99.85% majority in terms of value. It is also pertinent to notice that no member of UL has objected in the Court to the scheme of amalgamation including the preferential allotment of shares. The objections have come from workers some of whom may be shareholders. In the matter of price fixation the Court is normally guided by the business sense of the members unless it is established that the majority has acted malafide or to coerce a minority. In the instant case, the decision is nearly unanimous and in line with the prevailing Government policy, norms suggested by the ASSOCHAM and policy adopted by FLs. The Company Court does not sit in appeal over the price fixation.(F): Malafides on account of existence of quid pro quo between UL and Tata Sonsis no reason to doubt their capacity and/or independence. Sale by open public auction or inviting tenders from general public may fetch more price due to competition, but desire to retain some choice of purchaser is not unreasonable in the whole background. Suitable amendments have been made by the Court in the scheme that has been accepted by TOMCO.39. On the price aspect we have said enough. No repeatation is called for. This last point must also thereforeone had prayed for modifying the scheme on that basis either before the learned Single Judge or before us. We have already passed on order on CERCs Appeal No. of 1994. CERC has prayed for incorporation of terms in the scheme. HLL has no objection. It is futile to go into the question as to what caused this delay and confusion. What is important is that the admitted position is that such modification was agreed upon. Under the circumstances, modification in the scheme to the extent will be but proper.41. All that remains is to make some obvious clarification/corrections in the impugned judgment/scheme as prayed for by TOMCO to which there seems no objection. Last portion of para 5(d) of the judgment reads thus :"The Board of Directors of TOMCO shall themselves before dissolution, have those properties valued by Valuers named hereinafter and thereafter before dissolution to convey, transfer or lease them on long term basis on the basis of such valuation."There can be practical difficulty in having valuation and effecting transfer of the properties before dissolution of Board of Directors of TOMCO inter alia because of provisions of sectionof the Income Tax Act. But the nomination of valuers can certainly be made before that date and actual valuation and transfer can take place after. Amended Clause 4 of the scheme reads thus :"The following assets owned by the Transferor Company shall from time to time, as may be convenient to all parties concerned be conveyed, transferred or leased on a long terms basis to companies nominated by the Directors of transferor company before dissolution at valuations done by C.C. ChokseyCo., Chartered Accountants, failing which `Roshan Nanavati who are Government Valuers, failing which Budh Bhatti and Associates, who are also Government Valuers."There seems to be some unintended typing error. The words "before dissolution" instead of appearing after the words "by the directors of transferer company" and before the words "at valuations" should appear before the words "by the directors of transferer company" and after the words "to companies nominated". Judgment and scheme clarified and amended accordingly.