Rajdeep Bhattacharjee and Dhaval Bothra
Introduction
The appraisal rights of minority shareholders have been a contentious tussle in several jurisdictions across the globe, especially in the case of reverse mergers wherein private companies merge/takeover companies that are listed. This poses a plethora of regulatory challenges and obligations and to deliver the minority shareholders their dues would be the least of the concerns of the company taking over.
The regulatory situation in India concerning this remains unclear, as the jurisdiction has not yet encountered a significant test in this regard. However, there have been instances wherein the National Company Law Tribunal (“NCLT”) had to step in; however, most of these cases have been related to capital reduction rather than reverse mergers.
Reverse mergers offer private companies a shortcut to going public while evading tax and disclosure mandates. Instead of undergoing the lengthy and costly process of an initial public offering (“IPO”), private companies merge with existing public companies. This allows them to quickly and efficiently become publicly traded entities without the need for an IPO. By bypassing the traditional IPO route, companies can save time, resources, and potentially avoid certain tax and disclosure requirements. This appeals to companies looking to expedite their entry into the public market, minimize regulatory scrutiny, maintain confidentiality, or gain a strategic advantage. To address these obstacles, SEBI has established provisions. For instance, as per SEBI’s circulars dated 4th February 2013, 21st May 2013, 10th March 2017, and 3rd January 2018, companies involved in mergers must obtain mandatory approval from the SEBI. However, the absence of discussion on the appraisal rights of minority shareholders in such a scenario raises concerns. Appraisal rights are essential as they provide minority shareholders with the opportunity to seek a fair value for their shares in the event of a merger or acquisition. These rights enable minority shareholders to dissent from the proposed transaction and demand an independent evaluation of the true worth of their shares. Appraisal rights serve as a safeguard, ensuring that minority shareholders are not unfairly forced into a merger without the ability to receive a fair price for their ownership interests. Without the explicit enumeration of appraisal rights in the relevant regulations, the extent of protection available to minority shareholders in amalgamations remains ambiguous. Therefore, to obliterate the smokescreen around this issue, this piece shall address three major substantives:
- Appraisal rights of minority shareholders in India and their nexus to reverse mergers
- Appraisal process in reverse mergers
- Challenges in the appraisal process and the recourse available
Overview of Reverse Mergers in India and the Regulatory Landscape
In the Indian context, reverse mergers and appraisal rights are dealt under the Companies Act, 2013 alongside SEBI Regulations. However, reverse mergers in India are viewed as an exit or mode of restructuring for sick companies. This is evident through section 72A of the Income Tax Act, 1961.
The two pertinent regulations on reverse merger provided by SEBI are:
Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015
Section 3 outlines a specific standard of accountability over companies that are listed which extends to cover the ambit of amalgamations. Section 4 enumerates the rights of shareholders in cases of amalgamations. However, any specifics related to appraisal rights have not been enumerated and therefore a parallel sought could only be interpretational.
Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
Section 3 outlines the regulations for amalgamations. Upon a careful reading of the provisos, it is observed that the targeted beneficiaries of such a process are intended to be sick companies as numerous lee-ways are provided when read in conjunction with the Insolvency and Bankruptcy Code, 2016. In the subsequent sections, equitability among shareholders is enumerated but nothing is highlighted with respect to reverse mergers.
Companies Act, 2013
Sections 230 to 232 of the Companies Act deal substantially with amalgamations, however, there lies no specific purview for reverse mergers. However, Section 232(h) elaborates that if an unlisted company merges with a listed one, the final entity will be construed as an unlisted one. This further strengthens the argument that reverse mergers have been envisaged as an exit for sick companies and the greater extent of reverse mergers have been overlooked. Hence, the procedure of appraisal rights of minority shareholders has been overlooked.
Appraisal Rights of Minority Shareholders in India and their relevance to Reverse Mergers
Despite various gaps, reverse mergers in India can be interpreted in light of a conjunctive reading of section 230(9) of the Companies Act and Section 12 of SEBI Regulations, 2011. It provides minority shareholders in India with appraisal rights under certain circumstances, which includes reverse mergers. According to these provisions, any dissenting shareholder may appeal to the NCLT for an order directing the company to purchase their shares at a fair value assessed by an impartial appraiser if an amalgamation scheme has been approved by the majority of shareholders.
Minority shareholders must also adhere to certain procedural requirements to exercise their appraisal rights which shall be elaborated further in the coming sections. Furthermore, minority shareholders must meet the requirements outlined in Section 230(11) to be eligible for appraisal rights. The shareholder’s shares must be fully paid up, they cannot have been transferred between the time of the notice of dissent and the meeting at which the scheme was discussed, and they must not have surrendered their right to oppose the plan or to request an appraisal for their shares.
Appraisal Process in Reverse Mergers
Minority Shareholders must comply with the following procedural requirements:
1. First, they must notify the company of their objections before the meeting where the proposed scheme will be discussed, as required by Section 230(4) of the Companies Act.
2. They must also vote against the scheme and file an application with the NCLT within thirty days of its approval at the meeting.
3. The NCLT may appoint an impartial appraiser to determine the fair value of the dissident shareholder’s shares after receiving the application. Several factors are considered by the appraiser when determining the fair market value such as the company’s financial situation, prospects, market conditions etc.
4. If the NCLT rules in the shareholder’s favor and determines they are entitled to fair value, the company must pay the amount determined to the shareholder within 30 days of the NCLT’s decision.
Minority shareholders must also meet the requirements outlined in Section 230(11) to be eligible for appraisal rights. These requirements include holding fully paid-up shares, not selling or transferring any shares between the time of the notice of dissent and the meeting at which the plan will be discussed, and reserving the right to contest the plan or have their shares evaluated.
In a situation of reverse merger, minority shareholders can request for an appraisal under the provisions of the Companies Act, and SEBI regulations. Minority shareholders who exercise these rights and meet the eligibility criteria may have their shares appraised by an impartial appraiser chosen by the NCLT.
Common problems and difficulties with the evaluation procedure
There may be several issues and complications during the reverse merger evaluation phase, such as:
1. The dissenting shareholder and the company may have opposing views on the fair value of the shares. The appraisal process seeks to resolve these disagreements through an unbiased evaluation, but the valuation itself may be challenged. The same happened in the case of Cadbury India Ltd. wherein the Bombay High Court appointed an independent valuer to conduct an independent valuation in light of the complaints received by the minority shareholders with respect to the valuation of their shares.
2. Minority shareholders must follow certain procedural rules, such as timely notification of dissent, voting against the plan, and timely application to the NCLT. If these conditions are not met, the shareholders’ eligibility for appraisal rights may be jeopardized.
3. The appointment of a neutral appraiser capable of calculating the fair value of shares is critical. To ensure the appraisal process’s integrity, the appraiser’s expertise and independence must be guaranteed.
Case Studies Revealing Challenges and Gaps in Reverse Merger Jurisprudence in India
It is critical to address these issues and obstacles in reverse mergers to protect minority shareholders’ rights and ensure a fair and transparent evaluation process. We can look at the following case studies:
1. The Yatra Online Inc-Terrapin Acquisition Corporation merger of 2016 involved the merger of Yatra Online Inc, an Indian online travel agency, with Terrapin Acquisition Corporation, a publicly traded special purpose acquisition company (“SPAC”) in the United States. This reverse merger aimed to take Yatra Online public in the U.S. market and highlighted the challenges of cross-border reverse mergers, including regulatory compliance and shareholder rights. It emphasized the need for a robust legal framework to protect minority shareholders and ensure transparency.
2. The Godrej Soaps-Gujarat Godrej Innovative merger of 2017, although not a reverse merger, consolidated the operations of Godrej Soaps, a leading consumer goods company in India, with Gujarat Godrej Innovative, a privately held company within the Godrej Group. It highlighted the importance of protecting minority shareholder rights and ensuring fair treatment during mergers within a corporate group.
3. The Vodafone-Idea merger of 2018, on the other hand, involved a reverse merger structure. Vodafone India, the Indian subsidiary of Vodafone Group, merged with Idea Cellular, a publicly traded telecom operator in India. The merger aimed to create a stronger entity in the Indian telecom market. This case brought attention to issues such as minority shareholder rights, fair valuation, and competition concerns in the telecom industry. It underscored the significance of addressing appraisal rights and protecting the interests of minority shareholders in reverse mergers, particularly in regulated sectors with potential consumer impact.
These case studies highlighted the challenges and gaps in reverse merger jurisprudence in India. They emphasized the importance of appropriate legal frameworks, regulatory oversight, transparency, and protection of minority shareholder rights in order to ensure fair and transparent evaluation processes in reverse mergers.
Conclusion
The appraisal rights of minority shareholders are critical for protecting their interests and ensuring transparency in reverse mergers. The Companies Act and SEBI Regulations include provisions that allow minority shareholders to exercise their appraisal rights in reverse merger situations. If the majority of shareholders approve a merger plan, these rights allow dissident shareholders to petition the NCLT for a fair valuation of their shares.
Notifying the company of disagreement, voting against the plan, and applying to the NCLT by the deadline are all steps in the reverse merger evaluation process. The NCLT appoints an impartial appraiser to determine the fair market value of the dissenting shareholder’s shares, considering several variables.
To address the concerns regarding the evaluation procedure, the integrity of the appraisal process must be ensured, the rights of minority shareholders must be protected, and fairness and transparency must be promoted. To protect the interests of minority shareholders, clear guidelines, objective appraisers, adherence to formalities, and prompt payments are required. Appraisal rights are required to provide minority shareholders with a fair valuation of their shares and to protect their interests. Transparency and fairness in the evaluation process are critical for keeping the playing field level and investor confidence in the Indian market.
The authors are students at Symbiosis Law School, Pune.
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