(First published on Linkedin)
Minority squeeze-outs of a delisted company often involve a capital reduction by the previously listed entity and payment of consideration by such company, as was seen in the case of Cadbury India and Sandvik. However, the lack of liquidity can impede such capital reduction, leading companies to explore alternative routes.
Background:
In a recent order, the National Company Law Tribunal (NCLT) approved a scheme involving the secondary acquisition of shares under Sections 230-232 of the Companies Act, 2013 by the promoters. This was achieved at a valuation determined by independent valuers, providing an exit opportunity to the residual public shareholders of a formerly public company. The shares acquired in this manner were extinguished upon the scheme’s effectiveness, and the consideration was directly deposited into the bank accounts of the minority shareholders.
Key Analysis:
Section 230(11) of the Companies Act, 2013, provides that the takeover offer made by the majority shareholder(s) must be at a price determined by a registered valuer. This provision facilitates minority squeeze-outs by allowing the promoter group to acquire the remaining shares of the company held by public shareholders. The scheme’s effectiveness hinges on compliance with several statutory requirements, including the establishment of an escrow account as mandated by the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016.
Key Takeaways:
1. Valuation Integrity: The offer price for the shares should be based on a fair valuation conducted by independent valuers to protect minority shareholders’ interests.
2. Escrow Requirement: At least 50% of the total consideration for the takeover must be deposited into a designated bank account before the scheme’s approval, ensuring that funds are secured for minority shareholders.
3. Exit Opportunity: This approach provides an efficient exit mechanism for minority shareholders, especially in cases where direct capital reduction is not feasible due to liquidity constraints.
The recent NCLT order demonstrates that minority squeeze-outs through secondary acquisitions are possible under a Scheme of Arrangement, provided that all procedural safeguards are in place to protect minority shareholders. This paves the way for delisted companies to streamline their shareholder base and optimize corporate structures efficiently, without undertaking capital reduction.