Majority of Minority Rule: Public Shareholder Approval Requirement for Listed Company Mergers

The rule that minority shareholders must approve the merger does not come from the Companies Act. It comes from a SEBI circular of February 2013. Accordingly –

The special resolution approving the scheme of arrangement (merger) shall be acted upon only if the votes cast by public shareholders in favour of the proposal amount to at least two times the number of votes cast by public shareholders against it.

Public shareholders (i.e. shareholders who do not form part of the promoter / promoter group) of both companies must approve the merger by simple majority for it to be approved.

Click here for the full SEBI circular

Application of Majority of Minority Rule to Unlisted/ Private Companies

The majority of minority rule is applicable only to public listed companies and does not apply to private / unlisted companies. In case one of the two companies is publicly listed, public shareholders of that company will have to approve the merger by simple majority.

Related Part Transactions – Section 188 of the Companies Act

 

Placing reliance on section 188 of the Companies Act, 2013 which deals with Related Party Transactions is incorrect as far as mergers, acquisitions and other corporate arrangements are concerned.

Section 188 of the Companies Act provides that . . . . . “no related party transaction . . . . . shall be entered into except with the prior approval of the company by a special resolution:

Provided further that no member of the company shall vote on such special resolution, to approve any contract or arrangement which may be entered into by the company, if such member is a related party”.

The same section 188 defines what Related Party Transactions are. Accordingly, Related Party Transactions include:

• Sale, purchase or supply of any goods or materials;
• Selling or otherwise disposing of, or buying, property of any kind;
• Leasing of property of any kind;
• Availing or rendering of any services;
• Appointment of any agents for purchase or sale of goods, materials, services or property;
• Related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company; and
• Underwriting the subscription of any securities or derivatives of the company.

While the intention of section 188 is to keep a check on the management; mergers, acquisitions and other corporate arrangements are not covered under section 188 as Related Party Transaction. At least not as per Section 188. There is a separate chapter in the Act which  deals with minority shareholders in case of corporate arrangements.

Compromise, Arrangements and Corporate Amalgamations under the Companies Act (Section 235 and 236 of Companies Act, 2013)

Note: Section of Chapter XV of the Companies Act 2013 (section 230 to 240) dealing with Compromise, Arrangements and Corporate Amalgamations have not yet been notified yet. Reference may be drawn to the provisions contained in Section 391 – 394 of Companies Act, 1956, dealing with compromise, arrangements and reconstruction remain in force (updated 17^th June 2015).

The Companies Act does not lay down anything which gives any meaningful power to minority shareholders with respect to approval of mergers other than the fact that:

“Valuation of shares for the purpose of acquisition of dissenting shareholders shall be done by a ‘registered valuer’. In essence, if an acquirer manages to acquire 90% shareholding of the target company, then the registered valuer will set a price at which the balance 90% shall be acquired.”

Further, any sense which this provision could have made is vitiated by the fact that these ‘registered valuers’ are to be appointed by the audit committee of the company, or in its absence, by the board of directors of the target company.

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