Miheer H. Mafatlal Vs. Mafatlal Industries Ltd.

Background

This case[1] was brought before the Gujarat High Court Division Bench on special leave.
The Division Bench had previously rejected the appellant’s appeal and upheld the order of the Single Judge in the company petition, sanctioning a Scheme of Amalgamation of two Public Limited companies, Mafatlal Industries Limited (‘MIL’) being the transferee-company and Mafatlal Fine Spinning and Manufacturing Company Limited (‘MFL’) being the transferor-company.

Facts

The respondent-company MIL was proposed to be merged with the transferor-company MFL. The directors of the MIL and MFL accepted the plan for amalgamation, and the comprehensive Scheme of Amalgamation was finalised as a result of their respective Resolutions.
The appellant, who filed an objection to the merger with the Gujarat High Court, is one of the directors of the transferor-company, MFL.
The transferee-registered company’s office was located in Ahmadabad. The respondent transferee-company had petitioned the Gujarat High Court to get this Scheme of Amalgamation approved.
At this point, the appellant, who was one of the transferee-shareholders, company’s filed his opposition to the Scheme of Amalgamation, which was brought under Section 391 of the Act[2].
The Scheme was accepted by a vast majority of the equity shareholders of the respondent transferee company at a meeting of equity shareholders convened pursuant to a High Court order.

Issue

IS the amalgamation arrangement harmful to minority shareholders’ interests?

Grounds of appeal:

In this case, the Appellant brought up the following relevant points.

When presenting the scheme to the equity shareholders conference, MIL failed to disclose the directors’ interest, namely Shri Arvind Mafatlal and Shri Hrishikesh Mafatlal, in the explanatory statement supporting the Scheme, and as a result, the shareholders were misled and were unable to make an informed decision.
The Plan is unjust to minority shareholders.
In the case of the respondent transferee -company, the appellant represented a distinct class of equity owners, and the Company Court should have called a separate meeting for his party.
The Scheme specifies that two equity shares of the transferee company will be allotted against five equity shares of the transferor company, each with a face value of Rs. 100/-.

Contentions

The directors of the Respondent Company, Shri Arvind Mafatlal and Shri Hrishikesh Mafatlal, did not disclose their financial interests.

The Scheme, as proposed, was unfavourable to the appellant’s minority shareholders.

The Scheme was otherwise unfair to equity owners because the exchange ratio between the transferor and transferee companies’ equity shares was ex ante irrational and unfair to the transferee-shareholders.

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In terms of the respondent transferee-company, the appellant represented a distinct class of equity owners, and as a result, a special meeting for his party should have been called by the Company Court, and since it has not been accomplished, the Scheme is likely to be dismissed.

Held

Only such special interest of the director must be conveyed to the voters if non-disclosure of interest is likely to influence the voting pattern of the class of creditors or shareholders who are called upon to vote on the scheme, under Section 393(1)(a).
The Scheme of Compromise and Arrangement is neither unjust nor unreasonable to the appellant’s minority shareholders.
It is not for the court to rectify the exchange ratio until a recognised firm of chartered accountants who are specialists in the field of valuation has worked out the exchange ratio of the shares of the transferee-company to be allotted to the shareholders of the transferor-company, and if no error can be pointed out in the said valuation. Especially when the vast majority of the shareholders have agreed to it without question.
A separate meeting of such sub-class of the main class of members or creditors is not necessary unless a separate and different form of Scheme of Compromise is provided to a sub-class of a class of creditors or shareholders otherwise similarly circumscribed by the class.
Broad principles governing the Company Court’s jurisdiction were established. The Court must consider and approve the Amalgamation Scheme when considering and sanctioning it.

That the necessary legislative process for endorsing such a scheme has been followed and that the meeting required by Section 391(1) (a) has taken place.
That the scheme has received the necessary majority vote under Section 391 of the Constitution (2).
That the appropriate material was available at the concerned creditors’ or members’ or any class of them’s meetings in order for the voters to make an informed decision on whether or not to approve the scheme in question.
At the meetings in question, all of the information required by Section 393(1) (a) is presented to the voters.
The Applicant has provided the Court with all of the required material as specified by Section 391(2) of the Act.
That the proposed compromise and arrangement scheme is not found to be in violation of any statute or contrary to public policy.
The Company Court must also be satisfied that members, or classes of members, or creditors, or classes of creditors, as the case may be, is acting in good faith and not coercing the minority in order to advance any interest contrary to that of the latter, which they purport to represent.
That the scheme all together is found to be just, equitable, and logical from the perspective of cautious businessmen making a commercial decision that benefits the class for which the scheme is intended.
The Court will no more have jurisdiction to hear appeals until the above general parameters regarding the conditions of a scheme for obtaining Court permission are found to have been met.
The Court replied no to the question of whether the Business Court, as an appellate authority, has jurisdiction to scrutinise the scheme in detail and reach an impartial decision on whether the scheme should be allowed to proceed or not until it is accepted by a majority of creditors or members of the company.

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In this regard, the following lines are quoted:

“It is the commercial wisdom of the parties to the scheme who have taken an informed decision about the usefulness and propriety of the scheme by supporting it by the requisite majority vote that has to be kept in view by the Court. The Court certainly would not act as a court of appeal and sit in judgment over the informed view of the concerned parties to the compromise as the same would be in the realm of corporate and commercial wisdom of the concerned parties. The Court has neither the expertise nor the jurisdiction to delve deep into the commercial wisdom exercised by the creditors and members of the company who have ratified the Scheme by the requisite majority. Consequently the Company Court’s jurisdiction to that extent is peripheral and supervisory and not appellate. The Court acts like an umpire in a game of cricket who has to see that both the teams play their according to the rules and do not overstep the limits. But subject to that how best the game is to be played is left to the players and not to the umpire.”

The appeal failed and was dismissed.

References:

[1] Miheer H. Mafatlal Vs. Mafatlal Industries Ltd., AIR 1997 SC 506, (1997) 1 SCC 579.

[2] The Companies Act, 1956, s. 391.