Andhra HC (Pre-Telangana)
Vadlamudi Rama Rao vs Asian Coffee Ltd., Sec'Bad on 24 March, 2000
Equivalent citations: 2000(3)ALD600, 2000(3)ALT371
Author: P. Venkatarama Reddi
Bench: P. Venkatarama Reddi
ORDER P. Venkatarama Reddi, J.
1. This group of appeals arise out of the judgment rendered by learned Company Judge allowing the CP No.199 of 1998 and dismissing the Company Applications Nos.674, 686, 687 and 688 of 1998. The main petition in CP No.199 of 1998 was filed by Asian Coffee Limited (hereinafter referred to as 'ACL')-a public limited Company, under Section 394 read with Section 391(2) praying for approval of the scheme of amalgamation with Consolidated Coffee Limiled (hereinafter referred to as 'CCL') which is also a public limited Company. The applications mentioned above were filed by various shareholders of the Company, the chief amongst them being the applicant in CA No.674 of 1998. He holds 60,764 shares as against the nominal shares of 48, 24 and 89 held by the other three applicants. The applicants prayed the Court not to confirm the Scheme of Amalgamation at the proposed exchange ratio and to direct the respondent Company-ACL to work out the share exchange ratio based on the valuation by an independent auditor. The said applications were dismissed by the learned single Judge. Hence these appeals.
2. At the outset, it may be mentioned that the Scheme of Amalgamation envisages not only the amalgamation of ACL but also three other Companies with CCL. These three Companies, it appears, filed petitions under Section 394 before the High Court of Karnataka and the same were allowed by the High Court. As ACL has registered Office at Secunderabad, it has moved this Court for similar relief.
3. The appellants are aggrieved by one of the terms of the Scheme under which the members of the transferor Company i.e., ACL will get one equity share of Rs.10/-each in the transferee company i.e., CCL for every six fully paid up equity shares of Rs.10/- each held by them in ACL. A consequential provision has been made to the effect that the new equity shares in the transferee Company to be issued as above shall rank pari passu in all respects with the existing equity shares of the transferee Company, save and except that such new equity shares wilt be entitled to dividend in relation to any financial year commencing on or after the appointed date. It is contended that the exchange ratio of 6:1 provided under the Scheme is unfair to the appellants and other share holders of ACL and there should have been allotment of more number of shares, had an independent and objective assessment been made by the persons in charge of the management of the transferor or transferee Company. It is therefore contended that the amalgamation on such unfavourable terms to the share holders of AC1 should not be approved, it is suggested, on the basis of report of Chartered Accountants-Narasimha Rao and Associates, that the fair exchange ratio should be atleast 3 : 1.
4. The learned Company Judge did not agree with the contentions advanced by the appellants herein. The learned Judge referred to various considerations that should weigh with the Court in sanctioning a Scheme of compromise or arrangement under Section 394 as laid down in Miheer H. Mafatlal v. Mafatlal industries Limited, , and observed that there was no material before the Court to hold that the valuation for the purpose of arriving at the exchange ratio was unfair or unreasonable. The learned Judge recorded the conclusion that the proposed Scheme of Amalgamation was not violative of any provision of law and it is just, fair and reasonable. The petition for amalgamation was therefore allowed.
5. The learned single Judge in our view has adopted a right approach and proceeded to consider the objections put forward by the appellants in the light of the broad parameters laid down by the Supreme Court which a Company Court called upon to approve a Scheme envisaging amalgamation, should adhere to. While it is not in doubt that the Court has to be satisfied that a fair procedure had been adopted and an honest attempt was made to arrive at a fair and reasonable share exchange ratio in the interests of the general body of share holders and creditors, the Court should nevertheless refrain from embarking on an exercise of evaluation on its own to test the correctness of the figures reached by the experts. Apart from the fact that the Court is not equipped with expertise to go into the intricacies and mechanics of share evaluation, the Court has to take note of the fact that its role in according approval to the Scheme of Amalgamation under Section 394 is nothing more than a supervisory role. The role is approximately close to the judicial review of administrative action. In the context of such review, it is often said that the Constitutional Court is not concerned so much with the actual decision reached by the administrative or statutory authority as the manner of reaching such decision.
6. In this context, it is apposite to refer to the weighty observations made in Para 47 of the judgment in Fertiliser Corporation Kamnagar Union v. Union of India, AIR 1981 SC 344. These observations were also quoted in Hindustan Lever Employees' Union v. Hindustan Lever Limited, , a case arising under Section 394 of the Companies Act.
"Certainly, it is not part of the judicial process to examine entrepreneurial activities to ferret out flaws. The Court is least equipped for such oversights. Nor, indeed, is it a function of the Judges in our constitutional scheme. We do not think that the internal management, business activity or institutional operation of public bodies can be subjected to inspection by the Court. To do so, is incompetent and improper and therefore, out of bounds. Nevertheless, the broad parameters of fairness in administration, bona fides in action, and the fundamental rules of reasonable management of public business, if breached, will become justiciable."
The role of the Court and the scope for interference when it is called upon to sanction the compromise or arrangement which includes within its sweep a scheme for amalgamation has been succinctly laid down by the Supreme Court in Mafatlal Industries case (supra). Majmudar, J. speaking for the Supreme Court observed:
"On a conjoint reading of the relevant provisions of Sections 391 and 393 it becomes at once clear that the Company Court which is called upon to sanction such a scheme has not merely to go by the ipse dixit of the majority of the shareholders or creditors or their respective classes who might have voted in favour of the scheme by requisite majority but the Court has to consider the pros and cons of the scheme with a view to finding out whether the scheme is fair, just and reasonable and is not contrary to any provisions of law and it does not violate any public policy. This is implicit in the very concept of compromise or arrangement which is required to receive the imprimatur of a Court of law. No Court of law would ever countenance any scheme of compromise or arrangement arrived at between the parties and which might be supported by the requisite majority if the Court finds that it is an unconscionable or an illegal scheme or is otherwise unfair or unjust to the class of shareholders or creditors for whom it is meant. Consequently it cannot be said that a Company Court before whom an application is moved for sanctioning such a scheme which might have got the requisite majority support of the creditors or members or any class of them for whom the scheme is mooted by the concerned company, has to act merely as a rubber stamp and must almost automatically put its seal of approval on such a scheme. It is trite to say that once the scheme gets sanctioned by the Court it would bind even the dissenting minority shareholders or creditors. Therefore, the fairness of the scheme qua them also has to be kept in view by the Company Court while putting its seal of approval on the concerned scheme paled for its sanction".
The limits inherent in the jurisdiction of the Court under Section 394 were highlighted in Paragraph 29 in the following words:
"However, further question remains whether the Court has jurisdiction like an Appellate Authority to minutely scrutinise the scheme and to arrive at an independent conclusion whether the scheme should be permitted to go through or not when the majority of the creditors or members or their respective classes have approved the scheme as required by Section 391 sub-section (2). On this aspect the nature of compromise or arrangement between the company and the creditors and members has to be kept in view. 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 appellant. The Court acts like an umpire in a game of cricket who has to see that both the teams play their game 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 broad contours of jurisdiction of the Court called upon to consider the scheme of amalgamation were spelt out at Page 601 in the form of nine propositions as follows:
"1. The sanctioning Court has to see to it that all the requisite statutory procedure for supporting such a scheme has been complied with and that the requisite meetings as contemplated by Section 391(1)(a) have been held.
2. That the scheme put up for sanction of the Court is backed up by the requisite majority vote as required by Section 391, sub-section (2).
3. That the concerned meetings of the creditors or members or any class of them had the relevant material to enable the voters to arrive at an informed decision for approving the scheme in question. That the majority decision of the concerned class of voters is just and fair to the class as a whole so as to legitimately bind even the dissenting members of that class.
4. That all necessary material indicated by Section 393(1)(a) is placed before the voters at the concerned meetings as contemplated by Section 391, subsection (1).
5. That all the requisite material contemplated by the proviso to subsection (2) of Section 391 of the Act is placed before the Court by the concerned applicant seeking sanction for such a scheme and the Court gets satisfied about the same.
6. That the proposed scheme of compromise and arrangement is not found to be violative of any provision of law and is not contrary to public policy. For ascertaining the real purpose underlying the scheme with a view to be satisfied on this aspect, the Court, if necessary, can pierce the veil of apparent corporate purpose underlying the scheme and can judiciously X-ray the same.
7. That the Company Court has also to satisfy itself that members or class of members or creditors or class of creditors, as the case may be, were acting bona fide and in good faith and were not coercing the minority in order to promote any interest adverse to that of the latter comprising of the same class whom they purported to represent.
8. That the scheme as a whole is also found to be just, fair and reasonable from the point of view of prudent men of business taking a commercial decision beneficial to the class represented by them for whom the scheme is meant.
9. Once the aforesaid broad parameters about the requirement of a scheme for getting sanction of the Court are found to have been met, the Court will have no further jurisdiction to sit in appeal over the commercial wisdom of the majority of the class of persons who with their open eyes have given their approval to the scheme even if in the view of the Court there could be a better scheme for the company and its members or creditors for whom the scheme is framed. The Court cannot refuse to sanction such a scheme on that ground as it would otherwise amount to the Court exercising appellate jurisdiction over the scheme rather than its supervisory jurisdiction".
These parameters, it was pointed out, are not exhaustive, but only illustrative of the "contours of Court's jurisdiction".
7. Their Lordships of the Supreme Court referred to with approval the observations of Gujarat High Court in Kamala Sugar Mills Limited Re, 1984 (55) CC 308:
"Once the exchange ratio of the shares of the transferee-company to be allotted to the shareholders of the transferor-Company has been worked out by a recognised firm of Chartered Accountants who are experts in the field of valuation and if no mistake can be pointed out in the said valuation, it is not for the Court to substitute its exchange ratio, especially when the same has been accepted without demur by the overwhelming majority of the shareholders of the two companies or to say that the shareholders in their collective wisdom should not have accepted the said exchange ratio on the ground that it will be detrimental to their interest,"
8. The Supreme Court then observed that the usual rule is that the shares of the going concern must be taken at quoted market value. As it was not the case of the appellant that the Chartered Accountant had not taken into consideration the quoted market value of the shares, the Supreme Court rejected the contention that the exchange ratio was ex facie unfair.
9. In Hindustan Lever Employees' case (supra), the Supreme Court noted that the expert valuer adopted the combination of three well-known methods of valuation of shares to arrive that the exchange ratio of two Companies i.e., (1) 'Yield value' (2)'asset value' and (3) 'market value' of the shares of the two companies to which appropriate weightages were given. The fact that the financial institutions which held 41% of the shares in the transferor Company did not find fault with the method of valuation of shares, was also noted as one of the relevant factors.
10. Coming to the merits of the contentions urged on behalf of the appellants, the foremost objection voiced by them before the learned single Judge and before us by all the learned Counsel is that the valuation has not been done by an independent person. It is pointed out that M.N. Raiji and Company are the statutory auditors of Consolidated Coffee Limited i.e., the transferee Company. A.F. Ferguson and Company are the statutory aidotos of their associated Company by name TISCO and ANZ Bank Limited., which has approved the valuation done by the aforesaid Chartered Accountants is the banker of Tata Tea Limited. Tata Tea Limited has 64.49% of shareholding in the transferor Company and 54.34% shareholding in the transferee Company. In effect, the argument is that Tata Tea Limited which has substantial stake in both the Companies had so manipulated to see that the Valuer of its choice was appointed to derive undue advantage to the detriment of minority shareholders. We agree with the learned single Judge that this contention does not merit acceptance.
The mere fact that one of the Chartered Accountants/Valuers is a statutory auditor of the transferee Company, does not lead to a reasonable inference that the choice of such Valuer was stage-managed by Tata Tea Limited. A statutory auditor has an independent role to play if he has to effectively perform his part. The imputations of bias cannot lightly be made against a professional Chartered Accountant who is expected to discharge the duties according to the obligations cast on him by the Statute and the well established principles of professional conduct and etiquette. Even testing from the angle of reasonable likelihood of bias, we do not think that on taking an overall picture, the appellant's apprehension is well founded. The valuation in order to arrive at the proposed exchange ratio was got done by another reputed Chartered Accountant by name Ferguson and Company who is unconnected with both the Companies and Tata Tea Limited. That apart, the report of these Chartered Accountants was referred to another independent expert agency, namely, the Investment Division of ANZ Grindlays Bank Limited. The fact that TTL holds an account in the said Bank and has banking transactions is too remote a factor to impute bias or interestedness to that expert agency. There is nothing to suggest that TTL is in a commanding position by virtue of its being a constituent of the Bank to wield influence over the the experts in the Bank. The learned Counsel pointed out that in Mafatlal case as well as Hindustan Lever case (supra), the valuation was done by an independent expert unrelated to any Company and therefore, the Supreme Court found no cause for complaint on the the score of bias. Here also, the position is not substantially different. We cannot countenance the argument that all or any of the expert valuers are disqualified on account of bias in favour of the Management of Tata Tea Limited, or that they are not truly independent.
11. It is not dispute that for arriving at the proportionate share exchange ratio, the Valuers applied the three well known methods which were accepted in Hindustan Lever case (supra) (i) not asset value method; (ii) earning capitalisation method and (iii) market price method. The learned Judge perused the valuation report and the accompanying documents and found that the calculations were made form the stand point of these well accepted accounting principles.
12. The appellant's Counsel in OSA No.48 of 1999 submitted the valuation report of M/s. Narasimha Rao and Associates, Chartered Accountants which arrived at the share exchange ratio of 1:3.65. Based on this report, it is submitted that in view of the vast discrepancy, it is a fit case to refer the valuation to another independent auditor. The learned single Judge found that the report of M/s. Narasimha Rao and Associates was not prima facie acceptable for more than one reason set out in Paragraph 40 of the impugned judgment. One of the reasons given is that the share market quotations have not been taken into account by the learned auditor. That apart, as rightly pointed out by the learned single Judge, there is no good reason why the appellant should not circulate that valuation report to the shareholders and take steps to have it placed before the Extraordinary General Meeting. In the absence of inherent defects or other vitiating factors in the valuation got done by the Management of transferor and transferee Companies, it is not permissible for the Court to suspect the correctness or bona fides of those reports in the light of the subsequent valuation report which the appellant produced at the time of hearing of the Company application.
13. The learned Counsel for the appellant in OSA No.50 of 1999 pointed out that TTL had offered one equity share for every five shares of the transferee Company and purchased the shares at Rs. 15 per share in the year 1995. In view of the growing business of the Company, the share exchange ratio cannot be less. As rightly observed by the learned single Judge, in view of the lapse of three long years, the share exchange ratio need not remain at the same level. In fact, according to the estimates of the appellants themselves, the share exchange ratio does not remain at that level and the same yardstick cannot be applied now.
14. Another contention of the learned Counsel is that although the transferor Company has been a profit earning Company, no dividend was declared for the year 1997-98 deliberately with a view to reduce the average dividend and the exchange ratio. This contention is more in the realm of surmise. In the absence of any material, it is too much to assert that merger was contemplated in the year 1997-98. It is not possible to arrive at the conclusions that the TTL was instrumental in not declaring the dividend for the year 1997-98. Certain relevant reasons were given in Para 4 of the counter affidavit for not declaring the dividend for that year, one of them being that the Bank of America, Taiwan from whom ECB was taken for the development of the factory, made a stipulation that only 50% of the profits can be utilised for dividends and the balance should be retained in the operations. Moreover, no explanation is forthcoming as to why the appellant and other shareholders should have kept silent, if the dividend was not declared for some ulterior purpose. Hence, we cannot give any credence to this plea.
15. The learned Counsel for the appellant in OSA No.48 of 1999 has pointed out that valuation was based on certain miscalculations and wrong assumptions. It is pointed that the statement of the Chartered Accountants (valuers) that Consolidated Coffee Limited, manufactures instant coffee is not correct and no manufacturing activity was being carried on. in reply thereto, the learned Counsel for the respondents submits that the annual report of 1997-98 itself makes it clear that there was manufacturing activity. It is submitted by the learned Counsel for respondent that even if the statement is inaccurate, it is not a factor which will lead to a lower share value estimation. The learned Counsel for the appellant in OSA No.60 of 1999 has contended that according to 4.2.2 of the Valuation Report, only future maintainable profit based on past performance was taken into account, but the future projection of the prospects and performance of ACL was left out of consideration. This, according to the learned Counsel, introduces a material infirmity in the mode of valuation. The reason given by the Valuers for such approach is that the performance of Coffee Companies largely depend on unpredictable weather conditions and moreover, the coffee prices depend on the fluctuating international market. These factors cannot be said to be irrelevant.
16. It is relevant to mention, on the question of valuation of shares, the Registrar of Companies who filed the affidavit on behalf of the Regional Director, Department of Company Affairs, Chennai gave the opinion that TTL Company will get more benefits at the cost of all minority shareholders. Therefore, the exchange ratio needs to be suitably amended by the High Court. The reasoning given is as follows:
"That it is humbly submitted that on examination of the scheme of amalgamation in this matter, it is observed that the transferor company viz., M/s. Asian Coffee Limited., has been making profits all through and it is a well managed company, hence there is no reason for downgrading the assets of the company. Further it is provided in the scheme that the share exchange ratio provided is that means that for every shares of transferor company, one share of transferee company viz., M/s. Consolidated Coffee Limited will be allotted. When the scheme is implemented the transferee Company will allot 19,45,966 shares to the shareholders of transferor company at the rate of Rs.10/- amounting to Rs.l,94,59,660/-. On acquiring the shares of ACL i.e., transferor company by way of amalgamation, the transferee company will get shares of Saptagiri Agro Industries Limited, 48,36,030 shares of Rs.10/- each. If the prices of Sapthagiri Agro Industries Limited is taken into account excluding all assets and liabilities the transferee company will make a clear profit of Rs.2.90 crorers since the shares allotted by the transferee company to the shareholders of the transferor company and also acquiring 48,36,030 shares of Sapthagiri Agro industries (a company which is implementing a project to produce mushrooms for export as well as local market) including all assets and liabilities of transferor company. This clearly exploits the exchange ratio of the scheme and is against the interest of the transferor company and will benefit the shareholder of the transferee company to a large extent by way of acquiring large assets through them, the Tata Tea Company, will get more benefits at the expense and cost of other minority shareholders. Since ACL is a subsidiary with 60% holdings by Tata Tea Limited, the remaining 40% shareholders are put to loss if the exchange ratio is not amended by the Hon'ble High Court in public interest".
17. In reply to the stand taken by the Registrar of Companies, the learned Counsel for the respondents pointed out that Saptagiri Agro Industries Limited had become a sick Company and the BIFR has been approached. In view of this fact and the substantial dwindling of the capital of that Company, its share value would nowhere be near the face value and therefore the assumption of the Registrar of Companies is not correct. It is further submitted that the same objection was not accepted by Karnataka High Court while ordering amalgamation of other Companies. We are of the view that the objection raised by the Registrar of Companies is not so formidable as to out-weigh the other considerations which weighed with the expert Valuers in assessing the reasonable share exchange ratio. As already observed, it is not the function of the Court to go into the details of calculations, nor should it be the endeavour of the Court to arrive at share exchange ratio on its own or with the assistance of the experts. So long as the Court is satisfied that the evaluation was done independently and broadly relevant factors have gone into such evaluation and there is nothing demonstrably wrong or mala fide, the ratio of share capital arrived at cannot be faulted by the Court while exercising the jurisdiction under Section 394 of the Companies Act.
18. It may be mentioned that the Official Liquidator attached to the High Court supported the scheme of amalgamation.
19. There remains the argument that the complete data is not contained in the valuation report made available and for lack of knowledge of the details and mode of computation, the appellants were not able to effectively object to the share exchange ratio and in all fairness, there should have been frank disclosure of relevant details, but not merely sketchy information discernible from the summary of the Valuers. We cannot accept this contention. Sections 391 and 393 spell out the nature of information and documents to be furnished to the members and creditors before calling for a meeting to take a decision in regard to the proposed scheme of amalgamation. It is not in dispute that such informations and documents were furnished. Thus, the propositions 4 and 5 enunciated in Mafatlal's case (supra) are fulfilled. Moreover, as indicated in the explanatory statement circulated to the shareholders along with the notice of meeting, the valuation report was kept for inspection at the registered Office of the Company. The valuation report made available for inspection gives all salient features and the relevant details regarding the methodology of valuation. That apart, none of the appellants asked for any further clarifications or particulars before the general meeting was held. When once the decision was taken by the general body with requisite majority to amalgamate the two Companies, it is not open to the members of the Company to use the process of the Court to make a roving enquiry into each and every detail with a view to search for flaws. This contention therefore fails.
20. The learned Counsel for the respondent has submitted that it is not desirable to furnish detailed calculations and working sheets to the appellants as it would amount to divulging certain confidential information which the appellant-shareholders having a competitor Company, is not expected to know. It is pointed out that CA No.6 of 1999 filed by the appellants for furnishing the details of calculations etc., was rejected by the learned Company Judge on 1-3-1999 by a reasoned order. In reply to this, the learned Counsel for appellant has pointed out that there was no harm in furnishing the entire information bearing on the mode of valuation of shares, especially for the reasons that the future projections of profit and prospects of the company have not been taken into account. In other words, the point sought to be made out by the learned Counsel is that there will be no scope for breach of confidentiality by disclosing the detailed information. As already observed, the valuation reports made available to the members of the Company contains the relevant information and gives a fair idea of the methodology of valuation. No one sought for any clarifications at or prior to the meeting. That apart, even if the future projections are left out of consideration, still, there is reasonable possibility of certain confidential aspects relating to business entering into the arena of consideration by the Valuers. It will not therefore be desirable for the Court to insist that the entire information including the working sheets of the Valuers should be made available to all the members of the Company.
21. Before concluding the judgment, we would like to advert to the fact that broadly speaking, by adopting the share exchange of one share of CCL to six shares of ACL as proposed in the scheme, the resultant shareholding of TTL in CCL will be slightly less than what it could have been if the exchange ratio of 1:2 as suggested by some of the appellants is adopted. In the former case, the resultant shareholding would be 50:31 per cent whereas in the latter case, it would be 50:70 per cent. The learned single Judge therefore, commented in Paragraph 41 that it would be more beneficial to TTL if the share exchange ratio is valued as suggested by the appellants. This gives an indicia that TTL would not have acted on the sole consideration of boosting up its own stake and interest in the transferee-Company.
22. Finally, it must be mentioned that the scheme of merger as proposed was approved by an overwhelming majority including financial institutions. Even after excluding the shares of TTL, the scheme was approved with 1,44,533 votes cast in its favour as against 61,536 votes against the scheme. It is also relevant to mention that the scheme insofar as merger of three other Companies is concerned has already been approved by the Karnataka High Court.
23. For all these reasons, we see no merit in these appeals. The appeals are dismissed without costs.