Takeover rules for unlisted companies only protect the price, say experts

India has perhaps become the first major country to bring out takeover rules for unlisted companies. However, a week after it was notified, the jury is still out on the implications of the regulations. Experts point out that there are several ambiguities in the rules and that the exact purpose is not clear, given that takeover rules had so far been limited to public listed companies. 

“The intention even when the provision (takeover rules for unlisted companies) was first introduced in the Companies Act in 2013 was not clear. It seems to be a departure from the stance that you cannot buy the minority forcefully,” said Lalit Kumar, partner at law firm J Sagar Associates.

The overarching theme of the provision experts said is to protect minority shareholders from getting a raw deal while selling their stake and letting the tribunal make the final decision on the matter. However, Section 230 (11) of the Companies Act, 2013 does not mention if the consent of the minority is required when a person holding 75 per cent equity shareholding wants to acquire the rest of the shares, experts say. 

“If all conditions are met — a fair valuation from registered valuer and half the amount deposited in a bank account — the National Company Law Tribunal (NCLT) will allow the take over according to the rules,” Kumar said. To many calling it a takeover itself is a misnomer; squeeze out is a better description, they argue. 

According to legal experts, a takeover is when a non-controlling shareholder takes control and a squeeze-out is when a controlling shareholder squeezes out minority shareholders. 

“The rules are only protecting the price... They are not minority friendly,” said Sandeep Parekh, managing partner, Finsec Law Advisors.  

Experts note that a member of a company holding 75 per cent of the shares gets all the rights, such as passing a special resolution, entering mergers and acquisitions, and even changing the name of the company. 

Also the wording of the rule, which allows an acquirer to take over “any part of the remaining shares of the company”, adds to the ambiguity. “Who will this be acquired from if a person wants to increase his shareholding from 75 to 90 per cent, for instance... will it put some party or the other at a disadvantage?” asked Kumar.

An additional measure taken to safeguard the minority is Sub-section 12, which gives an aggrieved minority shareholder the option to approach the NCLT against any such deal. “He/she will be at a disadvantage. The NCLT is already clogged with insolvency cases. Getting a remedy will take more than a year, at least,” Parekh said. 

Legal pundits dissecting the rules also said while it seems that half the proposed amount has to be deposited upfront in a separate bank account when the takeover offer is made, lack of a clear timeline may leave certain matters open to interpretation. 

Section 236 of the Companies Act covers the subject of the purchase of minority shareholding and prescribes a time limit of 60 days to make the disbursement to the entitled shareholders. “Other provisions in the Companies Act or shareholder’s agreement mention a time-frame, and so do the Sebi takeover guidelines. In what manner this has to be paid is not clear,” said Astha Pandey, senior resident fellow, Vidhi Centre for Legal Policy. 

Based on the Rules, the acquisition would be cash-only and not a swap ratio, or through any other method, putting a strain on the company's liquidity situation as well. 

“It is also not clear what happens to Section 236, where an acquirer with 90 per cent equity can squeeze out the minority without the tribunal’s approval,” Pandey said. The inter-play and overlaps between the existing provisions need to be examined, she added. 

In jurisdiction other than India, transactions involving mergers and acquisitions (M&A) of unlisted companies are largely governed by the respective company law statutes and other ancillary laws, such as laws governing contracts, competition, tax, labour, environment and foreign exchange. 

“Globally, while parties usually have a significant degree of freedom in negotiating the terms of such arrangements, compliance with relevant provisions of company laws is required and there are no specific takeover codes governing M&A transactions where unlisted entities are concerned,” Pandey added.  

Company law experts also say that while the latest rules do not apply to any transfer or transmission of shares through a contract, arrangement or succession, all shareholder agreements will have to align with the new law going forward.

For instance, the much-talked-about Tata versus Cyrus Mistry case, where analysts believe these rules may have a bearing, Tata Sons have been barred by the Supreme Court from using the provision in its Articles of Association to buy-out minority. 

“If two set of shareholders in a privately-held company have entered into an agreement, as long as it does not contradict the law, it will stand,” Kumar said. 

To that extent, the latest notification provides ample room for the majority shareholder to buy-out minority, but not let them go without paying a fair price.