(First published on Linkedin)
In a recent ruling, the National Company Law Tribunal (NCLT) rejected a petition that sought to execute a minority squeeze-out through capital reduction under Section 66 of the Companies Act, 2013, of an earlier delisted company, with large base of minority shareholders. The decision was based on a specific interpretation that the grounds—providing liquidity to minority shareholders and reducing administrative costs—did not fall within the scope of Section 66.
Key Takeaways:
1. Inclusive Nature of Section 66: Section 66, much like its predecessor, Section 100 under the Companies Act 1956, is intended to be an inclusive provision. This flexibility allows companies to manage their capital structure in ways that are transparent and fair to all shareholders. A narrow interpretation may overlook the broader purpose of this section.
2. Valuation Considerations: The case highlighted significant discrepancies in the valuation process, with vast differences between the company’s and respondents’ valuations. This discrepancy underscores the importance of ensuring transparency and fairness in determining ‘fair value.’
3. Shareholder Approval and Liquidity Concerns: Despite over 99% of shareholders approving the capital reduction, the NCLT’s decision not to allow it leaves a large number of minority shareholders holding illiquid shares in a company that has been delisted. Without the option of capital reduction, these shareholders are effectively trapped with no viable exit, which contradicts the purpose of such mechanisms.
4. Administrative Burden on the Company: From a company’s perspective, continuing to manage a large number of public shareholders even after delisting imposes a significant administrative burden. The costs and complexities associated with maintaining records, communicating with shareholders, and fulfilling regulatory requirements become disproportionately high compared to the value these minority shareholders represent.
Alternative Strategy?
This brings us to a critical question: If capital reduction under Section 66 is deemed unsuitable for effecting minority squeeze-outs, could a strategy involving secondary acquisition of shares under a Scheme of Arrangement via Sections 230-232 be more viable? I explored this possibility in my earlier post, “Can Minority Takeover (Squeeze-Out) Happen Through Secondary Acquisition of Shares Under a Scheme of Arrangement u/s 230-232 of the Companies Act, 2013?”, wherein I had discussed about a recent approval of the NCLT for minority squeeze out under Section 230(11) of the Companies Act, 2013 – this section provides that a takeover offer may be made by the majority shareholder(s) facilitating minority squeeze-outs by allowing the promoter group to acquire the remaining shares of the company held by public shareholders.