Case: Hindustan Lever Employees' Union Vs. Hindustan Lever

is to be taken into account as an element against approval of amalgamation would include a mere future possibility of the merger resulting in a situation where the interests of the consumer might be adversely effected. If, however, in future the working of the company turns out to be against the interest of the consumers or the employees, suitable corrective steps may be taken by appropriate authorities in accordance with law. As has been said in the case of Fertilizer Corporation Kamgar Union v. Union of India " . . . it is not a part of the judicial process to examine entrepreneurial activities to ferret out flaws. The court is least equipped for such oversights. Nor, indeed, it is the function of the judges in our constitutional scheme". Now merely because the scheme envisages allotment of 51 per cent. equity shares to Unilever, the scheme cannot be held to be against public interest.Next it was argued on behalf of the employees of TOMCO that the scheme will adversely affect them. This argument is not understandable. The scheme has fully safeguarded the interest of the employees by providing that the terms and conditions of their service will be continuous and uninterrupted and their service conditions will not be prejudicially affected by reason of the scheme. The grievance made, however, is that there is no job security of the workers, after the amalgamation of the two companies. It has been argued that there should have been a clause in the scheme ensuring that no retrenchment will be effected after the amalgamation of the two companies. There was no assurance on behalf of the TOMCO that the workers will never be retrenched. In fact, the performance of TOMCO over the last three years was alarming for the workers. It cannot be said that after the amalgamation they will be in a worse position than they were before the amalgamation. We do not find that the amalgamation has caused any prejudice to the workers of TOMCO. The stand of the employees of HLL is equally incomprehensible. It has been stated that if the TOMCO employees continue to enjoy the terms and conditions of their service as before, then two classes of employees will come into existence. The terms and conditions of HLL employees were much worse than those of TOMCO employees. If there are two sets of terms and conditions under the same company, then a case of discrimination will arise against the HLL employees. We do not find any substance in this contention. The TOMCO employees will continue to remain on the same terms and conditions as before. Because of this arrangement, it cannot be said that prejudice has been caused to HLL employees. They will still be getting what they were getting earlier. TOMCO employees who were working under better terms and conditions, will continue to enjoy their old service conditions under the new management.Fear has been expressed both by TOMCO employees as well as HLL employees that the results of the amalgamation would necessitate streamlining of the operations of the enlarged company and the workers will be prejudiced by it. No one can envisage what will happen in the long run. But on this hypothetical question, the scheme cannot be rejected. As of now, it has not been shown how the workers are prejudiced by the scheme. Lastly, there was a vague allegation of mala fides, because of some trade arrangement between Unilever and Tata Sons Limited. It appears that three properties belonging to Tata Sons Limited, were being used by TOMCO as licensee with no enforceable rights. Occupation was purely permissible, TOMCO never considered these properties or rights relating to these properties as their assets. They were never shown in the balance-sheet of the company. Tata Sons could get back possession of these properties by revoking the licence. It was not necessary for Tata Sons to obtain the help of HLL or Unilever for getting back the possession. Under the scheme, the properties are to be transferred at the market rate, which has to be independently assessed. The determination of the market price has been entrusted by the court to reputed valuers. There is no reason to doubt their competence. No case of mala fides has been established.An argument was also made that as a result of the amalgamation, a large share of the market will be captured by HLL. But there is nothing unlawful or illegal about this. The court will decline to sanction a scheme of merger, if any tax fraud or any other illegality is involved. But that is not the case here. A company may, on its own, grow to capture a large share of the market. But unless it is shown that there is some illegality or fraud involved in the scheme, the court cannot decline to sanction a scheme of amalgamation. It has to be borne in mind that this proposal of amalgamation arose out of a sharp decline in the business of TOMCO. Dr. Dhavan has argued that TOMCO is not yet a sick company. That may be right, but TOMCO at this rate will become a sick company, unless something can be done to improve its performance. In the last two years, it has sold its investments and other properties. If this proposal of amalgamation is not sanctioned, the consequence for TOMCO may be very serious. The shareholders, the employees, the creditors will all suffer. The argument that the company has large assets is really meaningless. Verymany cotton mills and jute mills in India have become sick and are on the verge of liquidation, even though they have large assets. The scheme has been sanctioned almost unanimously by the shareholders, debenture holders, secured creditors, unsecured creditors and preference shareholders of both the companies. There must exist very strong reasons for with holding sanction to such a scheme. Withholding of sanction may turn out to be disastrous for the 60, 000 shareholders of TOMCO and also a large number of its employees.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]According to the appellants, the scheme should not be sanctioned for the following reasons(A) Violation of section 393(1)(a) of the Act in not making the required disclosures in the explanatory statement.(B) Valuation of share exchange ratio is grossly loaded in favour of HLL.(C) Ignoring the effect of provisions of the Monopolies and Restrictive Trade Practices Act (the MRTP Act).(D) Interest of employees of both the companies was not adequately taken care of.(E) Preferential allotment of shares at less than market price to Unilever which is not in public interest.(F) Mala fides on account of existence of a quid pro quo between Unilever and Tata Sons Ltd :TOMCO manufactures and sells products like soaps, detergents, toiletries and animal feeds. HLL also manufactures and sells similar products. Both companies have their registered office at Bombay. TOMCO has more than 60, 000 shareholders with the following:22 per cent. : Tata group41 per cent. : Financial institutions (FI)37 per cent. : General publicHLL has nearly 1, 30, 000 shareholders with the following:51 per cent. : Unilever PLCcompany incorporatedunder the English Companies Act, having its registered office at London.16 per cent. : FI33 per cent. : General publicOriginally,parent company of100 per cent. shareholding in HLL.The decline in the business of TOMCO began in2, TOMCO incurred loss of Rs. 13 crores. In the next six months the loss increased to over Rs. 16 crores. The board of directors of TOMCO considered various alternatives for TOMCO including its association with HLL which was a more prosperous and a larger company operating in the same field of activities. Accordingly, the board of directors of TOMCO put up a proposal before the board of directors of HLL. Both availed of the professional service of Mr. Y. H. Malegam, senior partner of S. B. Billimoria and Company, chartered accountants, former President of the Institute of Chartered Accountants and a director of the Reserve Bank of India, for the purposes of evaluation of the share price of the two companies in order to arrive at a fair share exchange ratio. On March 19, 1993, Mr. Malegam gave a valuation report and recommended an exchange ratio of two equity shares of HLL for every fifteen ordinary shares of TOMCO. The board of directors of both the companies at their separate and independent meetings accepted the recommendation and approved the scheme of amalgamation.The scheme, inter alia, provides. for transfer and vesting in HLL of the undertaking and business of TOMCO together with assets and liabilities excluding certain assets and/or licence rights to use certain premises. The salient features of the scheme are to be found in clauses 1.7(d), 4.5, 11 and 13. Clause 1.7(d) sets out the details of excluded properties in which TOMCO has no more than licensee rights. Clause 4 provides for transfer of 5 assets (immovable property) to be transferred to companies nominated by Tata Sons Ltd. at fair market value as will be independently assessed. Clause 5 provides that TOMCO shall (before or after the effective date) transfer to Tata Sons Ltd. or its nominee certain investments/shares owned by TOMCO at the then prevailing market value and in the case of unlisted shares at a value to be determined by Mr. Y. H. Malegam. Clause 11 provides for transfer of employees of TOMCO to HLL on the basis that their service shall be deemed to be continuous and the conditions of service after the transfer shall not be less favourable. Clause 13 refers to preferential allotment to UL of equity shares of the face value of Rs. 10 each at the price of Rs. 105 per share so as to ensure its post amalgamation shareholding level at 51 per cent. of the equity capital ofCompany Application No. 250 of 1993 filed by TOMCO the court passed an order on April 29, 1993, directing the company to call the meetings of the debenture holders, creditors, ordinary shareholders and preference shareholders on June 29, 30, 1993, naming the chairman of the meetings and calling upon him to submit the report withindays after conclusion of the meeting. TOMCO filed the notices and explanatory statements under section 393(1)(a) of the Act along with a proxy form before the Company Registrar, who after considering, all objections settled the explanatory statements and approved the disclosures made therein. Individual notices of the said meetings together with a copy of the scheme of amalgamation, the statement as settled by the Company Registrar and as required under section 393(1)(a) and a proxy form were sent to concerned members as required by law. On June 21, 1993, a joint communication to shareholders of TOMCO and HLL was alsoCompany Application No. 251 of 1993 filed by HLL also, similar directions for convening meetings of the equity shareholders and creditors were issued by the court on April 29, for convening the meeting on June 30, 1993. Similar procedure was followed in this also. On June 30, 1993, shareholders of HLL at their extraordinary general meeting approved by the requisite majority the proposed issue of shares to UL pursuant to section 81(1A) of the Act. The meeting of the creditors was held on July 2, 1993, under the chairmanship of the chairman of HLL, Mr. S. M. Datta, as directed by the court. The meeting of equity shareholders was attended by 2, 528 members including proxies holding 9, 59, 27, 477 equity shares. In all 13 amendments were proposed but more than 96 per cent. voted against the amendments. The creditors also voted for theare unable to uphold any of the above contentions raised by Mr. Dholakia. The overwhelming majority of the shareholders had approved the scheme at the meeting called for this purpose and had approved the exchange ratio. In fact, a proposal for amendment of the exchange ratio was also rejected by an overwhelming majority of 99 per cent. shareholders. There is no reason to presume that the shareholders did not know what they were doing.Being dissatisfied with the valuation made by Mr. Malegam, Mr. Jajoo had insisted on independent valuation and that was one. Two independentF. Ferguson and N. M. Raiji andvalued the shares and come to the conclusion that the exchange ratio of 15 : 2 was correctly determined by Mr. Malegam.Faced with this situation, Mr. Dholakia sought to produce a valuation report made by another valuer, G. Rai and Co., chartered accountants. According to this report, the book value of an equity share of TOMCO as on March 31, 1992, based on the audited and printedof the company was Rs. 57.58 per share ; whereas the book value of an equity share of HLL as on December 31, 1992, based on its audited and printedwas only Rs. 28.84 per share. This, according to Mr. Dholakia, demonstrated the absurdity of the valuation that had been made of the shares of the two companies. The exchange ratio was obviously unfair to the shareholders of TOMCO. This report is produced before this court for the firstthe background of these facts, it cannot be said that the market price as on June 17, 1993, did not reflect the true picture of the value Of the companys shares. If the market price of the shares of the two companies as on June 17, 1993, is compared, the quoted price of HLL was Rs. 375 per share ; whereas the quoted price of TOMCO was Rs. 52.50 per share. The earning per TOMCO share had come down from Rs. 5.19 on March 31, 1991, to Rs. 0.50 on March 31, 1992, and Rs. 0.30 on March 31, 1993. As against this, the dividend paid on HLL shares was 42 per cent. in the year ending on December 31, 1990, 38.50 per cent. on enlarged capital after the issue of bonus shares in the ratio of 1 : 2 in the year ending on December 31, 1991, and 42.00 per cent. again in the year ending on December 31, 1992. It is true that the book value per share of TOMCO was higher than that of HLL. But, even without any bonus issue, the book value of TOMCO shares had come down from Rs. 36.17 per share on March 31, 1991, to Rs. 29.75 per share on March 31, 1993.What emerges from all these figures is that on the market price basis as on June 17, 1993, the last price available before the circular letter dated June 21, 1993, issued to the shareholders of the two companies, the exchange ratio of 2 : 15 was very fair. If the yield method is adopted, the ratio would be astronomically high in favour of HLL. But, if the book value is taken per share, then TOMCO shares would be of higher value than HLLis also difficult to follow the argument that Mr. Malegams report is not acceptable to the TOMCO shareholders, because he was a director of TOMCO. HLL had no difficulty in accepting the share exchange ratio fixed by Mr. Malegam, even though he was a director of TOMCO. If there was any bias, it should have been in favour of TOMCO and not against TOMCO. This exchange ratio was endorsed by two other eminent firms of chartered accountants and also by ICICI. We are unable to uphold the contention that there was any impropriety in the valuation of the shares. The argument based on section 226(3) of the Companies Act is misleading. An officer or an employee of the company may not be appointed as an auditor. An auditor must be independent of the board of directors of the company. He is expected to play the role of aon behalf of thethe company. But, in this case, the two companies are going to be amalgamated, both the companies have chosen Mr. Malegam, a director of TOMCO to fix the share exchange ratio. If HLL agreed to accept Mr. Malegam as the valuer and there was no objection from TOMCO, we fail to see how TOMCO shareholders have been prejudiced.On the question of valuation of shares, another issue has been raised. It was argued that Unilever, a foreign company, held 51 per cent. of the shares of HLL. The scheme envisaged that Unilever will continue to hold 51 per cent. of the shares of HLL even after amalgamation. It was decided to make preferential allotment of shares to Unilever at a price of Rs. 105 per share, for the purpose of maintaining the shareholding of 51 per cent. even after amalgamation. For this purpose, two conditions were imposed (1) Unilever shall not be able to sell the shares allotted to them on preferential basis for a period of seven years. (2) In case Unilever decides to sell these shares after the expiry of seven years but before 12 years after the date of preferential allotment, they shall sell the shares to the Indian shareholders of Unilever at a price 15 times the earning per share calculated on the basis of the last auditedwas contended by Mr. Andhyarujina, and in our opinion rightly, that these two conditions are important depreciatory factors in the preferential allotment of shares to Unilever. The shares issued to Unilever would be franked by restrictive covenants. These shares cannot be compared to the other shares of HLL which could be freely traded in theare unable to uphold this argument. The shareholder has no interest in the assets of the company while the company is in existence. It is only at the stage of liquidation of the company that the shareholders become interested in the assets of the company. The share of any member in a company is movable property and transferable in the manner provided by the articles of the company. This is provided by section 82 of the Companies Act. The definition of "goods" in the Sale of Goods Act, 1930, specifically includes stocks and shares. A share represents a bundle of rights which includes, inter alia, the rights (i) to elect directors ; (ii) to vote on resolutions at meetings of the company ; (iii) to enjoy the profits of the company, if and when dividends are declared and distributed ; and (iv) to share in the surplus, if any, on liquidation. In the case of Bacha F. Guzdar the position of anext point urged by Mr. Dholakia is that proper disclosure of all material facts was not made in the explanatory statement accompanying the proposal to amalgamate TOMCO with HLL. Their shareholders were not given full particulars on the basis of which they couldis another aspect of this case. Should the fact that Mr. Malegam was a director of a company have been disclosed ? Section 393(1)(a) requires particulars to be given of any material interests of some persons connected with the company, including the directors and managing director. The interest that is contemplated in section 393(1)(a) is interest material for consideration of the scheme by the shareholders. It has not been shown that Mr. Malegam had any interest in the scheme. If he had any shares in TOMCO, then his interest would be like that of any other shareholder. His specialised services were utilised for the purpose of arriving at a fair exchange ratio. Both TOMCO and HLL reposed faith in his professional skill. We are of the view that nondisclosure of the fact that Mr. Malegam, a director of the company, had been appointed valuer, will not detract from the scheme in any way. This will also not amount to suppression of any material interest of a director in theargument of Ms. Jaising was supported by Dr. Dhavan, appearingon behalf of theFederation of Tata Oil Mills and Allied Companies Employees Union. It was argued that the scheme will attract the antimerger jurisdiction of the Monopolies and Restrictive Trade Practices Commission straightaway. The two big companies in the same field of consumer articles are merging to ensure that there was no inter se competition. Under the Monopolies and Restrictive Trade Practices Act, injunction can be granted under section 12A during an enquiry even where the impugned trade practice was likely to affect prejudicially the public interest or the interest of the consumers generally. The Commission may, for preventing such a situation from developing, restrain the undertaking involved from carrying on any monopolistic or restrictive unfair trade practice until the enquiry is concluded. It was argued that the judgment under appeal has severely curtailed the jurisdiction of the Monopolies and Restrictive Trade Practices Commission. Lastly, it was contended that preferential allotment of a larger number of shares to Unilever at a throwaway price is a part of the scheme of amalgamation and it will result in Unilevers acquisition of 51 per cent. shares in the enlarged company and thereby Unilever will be able to control the market more effectively.In order to appreciate this argument, it is necessary to refer to the various provisions of the Monopolies and Restrictive Trade Practices Act, 1969. This Act, in consonance with the new economic policy of the Government, has undergone drastic amendment with effect from September 27,intention behind deletion of section 23 is obvious : the require merit of prior approval of the Central Government before sanctioning a scheme of merger or amalgamation has been done away with. The effect of the deletion of this section cannot be nullified by giving an unnatural and artificial interpretation of the words of the statute.It is being argued that even though section 23 has been deleted, there are other provisions in the Act under which it is necessary to have prior sanction of the Central Government or the Monopolies and Restrictive Trade Practices Commission before a scheme of amalgamation or merger can be sanctioned. If this argument is to be accepted, then in the first place it has to be held that the provisions of section 23 were wholly unnecessary and otiose, because even otherwise sanction or clearance of the Central Government was a condition precedent for effecting a scheme of amalgamation or merger. Such a construction must be avoided. The enquiry must be as to what was the mischief which was sought to be cured by the Legislature by the amendment. By deleting section 23, the Legislature removed the requirement of prior approval of the Central Government to a scheme of merger before the court could sanction it.Section 27A and section 27B are the only sections in Chapter III of the Act which have been retained by the Legislature. Section 27 deals with division of undertaking and enables the Commission in the circumstances specified in that section, to pass an order for the division of any trade or undertaking, orundertaking, into such number of undertakings as the circumstances of the case may justify. Section 27A empowers the Central Government to protect severance ofbetween undertakings. Section 27B lays down the manner in which any order passed under section 27 or section 27A shall be carried out. The provisions as to restriction on the acquisition and transfer of shares by certian bodies corporate (section on 28 to section 30G) have been entirely deleted. The intention of the Legislature is clear. A merger or amalgamation is not now subject to the prior approval of the Central Government. But, if the working of the company is found to be prejudicial to public interest or has led to the adoption of monopolistic or restrictive trade practices, the Central Government may, after being satisfied as to the requirements of the section or division of the undertaking, act according to law.We are unable to uphold the contention of Ms. Jaising that the Monopolies and Restrictive Trade Practices Commission erred in law in not passing an order of injunction under section 12A of the Act, restraining the implementation of the scheme of amalgamation. We are of the view that it was not necessary to obtain any prior approval from the Central Government or the Monopolies and Restrictive Trade Practices Commission before the scheme could be sanctioned by the court. This requirement has been specifically deleted from thecontroversy has got another aspect which has been highlighted by Dr. Dhavan and Mr. R. K. Jain. It has been argued that a very large company is coming into existence which will have a substantial share of the market, . A foreign company will have controlling interest in HLL after amalgamation. This is against public policy. In my judgment, what has been expressly authorised by the statute cannot be struck down as being against the public policy. A foreign company under the new economic policy of the Government has been allowed to acquire controlling share of any Indian company. This has been done by express amendment of the Foreign Exchange Regulationcould such a person or company acquire the whole or any part of any undertaking in India of any company carrying on any trade, commerce or industry or purchase the shares in India of any such company. The object of section 29, inter alia, was to ensure that a company (other than a banking company) in which theinterest was more than 40 per cent. must reduce it to a level not exceeding 40 per cent. (Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holdings Ltd. But, now this restriction of 40 per cent. has been removed by an amendment by the Act 29 of 1993. A company in whichinterest is more than 40 per cent. can carry on business without having to obtain permission from the Reserve Bank of India. The underlying idea of this liberalisation is clear.persons were being invited to invest in India and/or in Indian companies. If anyinvests in Indian company, it is but natural that dividends payable by an Indian company will be enjoyed by theAll other rights that a shareholder enjoys by virtue of the shareholding will be enjoyed by theMerely because a foreign shareholder acquires 51 per cent. shares in an Indian company, it cannot be said that this is against public interest or public policy.In this connection it should also be noticed that section 11 of the Foreign Regulation Act, 1973, which had empowered the Reserve Bank to put restrictions on transfer of any asset in India to a person resident outside India or a person intending to become resident outside India has now been repealed with effect from January 8, 1993, by the Amending Act 29 of 1993. Here again the intention of the Legislature is quite clear. The entire object is to allow theto do business in India and to deal with assets in India with greater freedomIn view of all these, it is difficult for us to uphold the contention that the scheme of amalgamation is against public interest. Merely because 51 per cent. of the shares of HLL is being given to a foreign company, the scheme cannot be said to be against public interest. The Foreign Exchange Regulation Act has been amended specifically to encourage foreign participation in business in India. The bar to having more than 40 per cent. shares in an Indian company by ahas been lifted. The Amending Act 29 of 1993 is not under challenge. In order to give greater freedom to companies for doing business in India, the Monopolies and Restrictive Trade Practices Act has been amended. Prior approval of the Government of India is not necessary for amalgamation of companies any more. In fact, it is in public interest that TOMCO with its 60, 000 shareholders and also a very largedoes not deteriorate into a sickit was arguedon behalf of theemployees of TOMCO that the scheme will adversely affect them. This argument is not understandable. The scheme has fully safeguarded the interest of the employees by providing that the terms and conditions of their service will be continuous and uninterrupted and their service conditions will not be prejudicially affected by reason of the scheme. The grievance made, however, is that there is no job security of the workers, after the amalgamation of the two companies. It has been argued that there should have been a clause in the scheme ensuring that no retrenchment will be effected after the amalgamation of the two companies. There was no assuranceon behalf of theTOMCO that the workers will never bedo not find any substance in this contention. The TOMCO employees will continue to remain on the same terms and conditions as before. Because of this arrangement, it cannot be said that prejudice has been caused to HLL employees. They will still be getting what they were getting earlier. TOMCO employees who were working under better terms and conditions, will continue to enjoy their old service conditions under the new management.Fear has been expressed both by TOMCO employees as well as HLL employees that the results of the amalgamation would necessitate streamlining of the operations of the enlarged company and the workers will be prejudiced bythe scheme, the properties are to be transferred at the market rate, which has to be independently assessed. The determination of the market price has been entrusted by the court to reputed valuers. There is no reason to doubt their competence. No case of mala fides has been established.An argument was also made that as a result of the amalgamation, a large share of the market will be captured by HLL. But there is nothing unlawful or illegal about this. The court will decline to sanction a scheme of merger, if any tax fraud or any other illegality is involved. But that is not the case here. A company may, on its own, grow to capture a large share of the market. But unless it is shown that there is some illegality or fraud involved in the scheme, the court cannot decline to sanction a scheme of amalgamation. It has to be borne in mind that this proposal of amalgamation arose out of a sharp decline in the business of TOMCO. Dr. Dhavan has argued that TOMCO is not yet a sick company. That may be right, but TOMCO at this rate will become a sick company, unless something can be done to improve its performance. In the last two years, it has sold its investments and other properties. If this proposal of amalgamation is not sanctioned, the consequence for TOMCO may be very serious. The shareholders, the employees, the creditors will all suffer. The argument that the company has large assets is really meaningless. Verymany cotton mills and jute mills in India have become sick and are on the verge of liquidation, even though they have large assets. The scheme has been sanctioned almost unanimously by the shareholders, debenture holders, secured creditors, unsecured creditors and preference shareholders of both the companies. There must exist very strong reasons for with holding sanction to such a scheme. Withholding of sanction may turn out to be disastrous for the 60, 000 shareholders of TOMCO and also a large number of its employees.