1. Amalgamation of two public limited companies under Section 391(2) of the Companies Act, 1956 — Objection by a minority shareholder regarding disclosure and fairness. (Para 3 , 11 )
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1996 Supreme(SC) 1430
SUPREME COURT OF INDIA
N.P.Singh : S.B.Majmudar
Miheer H.Mafatlal
Versus
Mafatlal Industries
Case No. : .
Date of Decision : 9/11/96
Advocates Appeared: Bhushan Shanti : Das J.K. : Ganesh S. : Kapadia P.N. : Parekh Darshan : Rana U.A. : Salve Jay : Sorabjee J. : Thakore Miheer : Tyagi Rajiv : Vakil S.B.
The Company Court's jurisdiction in sanctioning amalgamation schemes is supervisory, not appellate. It ensures statutory compliance, bona fide action by the majority, and that the scheme is fair and reasonable, but it cannot override the commercial wisdom of shareholders unless the scheme is manifestly unfair or fraudulent.
Headnote:
Companies Act, 1956 - Section 391 - Certificate of Incorporation - Linen manufacturers to work spinning and weaving mills cotton mills jute mills and mills of any other description - Appeal by special leave arises out of the judgment and order of division bench of High court of Gujarat in Original Jurisdiction Appeal - Division bench by the impugned judgment dismissed appeal of appellant and confirmed order of Single Judge in Company Petition and sanctioned Scheme of Amalgamation of two public limited companies namely Mafatlal Industries Limited being transferee- Company with which Mafatlal Fine-Spinning and Manufacturing Company Limited being transferor-Company was to be amalgamated – Held, When court enquired Senior Counsel for the appellant as to which special interest according to him of Director Arvind Mafatlal was required to be communicated to the voters as per Section he stated that there was pending litigation between appellant on the one hand and Mafatlal on other in Bombay High court - That Mafatlal had sought declaration in a pending suit against the appellant that the latter was required to sell off his shareholding in the transferee-Company MIL to the plaintiff Mafatlal who was the Director of MIL - In this very suit the appellant had filed counter-claim to effect that Mafatlal and his group were required to transfer their shareholding in the transferee-Company in favour of appellant as per the family arrangement - This connection submitted that though Single Judge had taken the view that this type of special interest of Director Mafatlal was not relevant and germane to requirement of Section division bench in appeal had taken contrary view and that such special interest was required to be communicated to equity shareholders in their meeting as per provision – Order accordingly
Legal Category Hierarchy
Table of Contents
2. Non-disclosure of directors' special interests — Unfair exchange ratio — Coercion of minority shareholders — Requirement for separate class meetings under Section 391. (Para 22 , 23 )
3. Company Court's jurisdiction is supervisory, not appellate — Commercial wisdom of the majority prevails unless the scheme is manifestly unfair, illegal, or fraudulent. (Para 28 , 29 )
4. Sanctioning court ensures statutory compliance and fairness but cannot substitute its own commercial judgment for that of the majority shareholders. (Para 29 )
5. What is the scope of the Company Court's jurisdiction when sanctioning a scheme of amalgamation?
The jurisdiction is supervisory and peripheral, not appellate. The court verifies statutory compliance, ensures the majority acted bona fide without coercing the minority, and confirms the scheme is reasonable, but it does not sit in judgment over the commercial wisdom of the parties. (Para 29 )
6. Under Section 393(1)(a) of the Companies Act, 1956, when must a director's interest be disclosed in the explanatory statement?
Disclosure is mandatory when the director has a special interest different from other members, the proposed arrangement affects that interest, and the effect on that interest differs from the effect on similar interests of other persons voting. (Para 31 )
7. What criteria does a court use to determine if a scheme of arrangement is fair and reasonable?
The court assesses whether the arrangement is such that an intelligent and honest man, being a member of the class concerned and acting in his own interest, might reasonably approve it, ensuring it is not unconscionable, illegal, or contrary to public policy. (Para 28 , 29 )
JUDGMENT
S.B.MAJMUDAR
(1) LEAVE granted.
(2) BY consent of the learned advocates of parties this appeal was taken up for final hearing. We have heard the learned advocates of parties. The appeal is being disposed of by this judgment.
(3) THIS appeal by special leave arises out of the judgment and order of a division bench of the High court of Gujarat in Original Jurisdiction Appeal No. 16 of 1994 decided on 12/7/1996. The division bench by the said impugned judgment dismissed the appeal of the appellant and confirmed the order of the learned Single Judge in Company Petition No. 22 of 1994 and sanctioned a Scheme of Amalgamation of two public limited companies, namely, Mafatlal Industries Limited (MIL for short) being the transferee- Company with which Mafatlal Fine-Spinning and Manufacturing Company Limited (MFL for short) being the transferor-Company was to be amalgamated. The learned Single Judge granted requisite sanction to the applicant transferee-Company MIL to amalgamate in it the transferor- Company MFL under Section 391 (2 of the Companies Act, 1956 (hereinafter referred to as the Act). In order to appreciate the grievance of the appellant who objected to the Scheme moved by the respondent- Company MIL, as ventilated before us by its learned Senior Counsel Shri Shanti Bhushan, assisted by the learned counsel Shri M.J. Thakore, it will be necessary to glance through a few relevant background facts. Background facts
(4) THE respondent-Company MIL which was the petitioner before the learned Single Judge has its registered office at Ahmedabad in Gujarat State. It was incorporated on 20/1/1913 under the name "The New Shorrock Spinning & Manufacturing Co. Limited" and its name was subsequently changed to "Mafatlal Industries Limited" as per the fresh Certificate of Incorporation dated 24/1/1974 consequent upon change of name, as sanctioned by the Registrar of Companies, Gujarat, Ahmedabad. The objects of the transferee-Company MIL as per its Memorandum of Association, inter alia, included activity of carrying on all or any of the businesses such as cotton spinners and doublers, wool, silk, flax, jute and hemp spinners and doublers, linen manufacturers, to work spinning and weaving mills, cotton mills, jute mills and mills of any other description. The authorised share capital of the respondent-Company was Rs. 1,00,00,00,000.00 (Rupees one hundred crores only) divided into 30,05,500 equity shares of Rs. 100.00 each and 69,94,500 unclassified shares of Rs. 100 each. The subscribed share capital of the respondent-Company as on 31/3/1993 was Rs.26.30 crores (Rupees twenty-six crores thirty lakhs only) divided into 26,90,000.00 equity shares of Rs. 100 each.
(5) THE respondent-Company commenced the business of textiles and had been carrying on the same since incorporation. The respondent-Company is a large multi-division, multi-locational company carrying on diversified activities including manufacturing and sale of textiles, dyes - intermediates and chemicals, professional grade connectors, plastic processing machineries and promoting various companies through Project Promotion Division.
(6) THE MFL being the transferor-Company was incorporated on 20/4/1931 under the Baroda State Companies Act and had been carrying on the business of manufacture and sale of textile piece goods and chemicals. Its registered office was situated at Mafatlal Centre, Nariman Point, Bombay. It was engaged in the manufacture and sale of textiles and fluorine-based a chemicals. There were three units of the Textiles Division situated at (1 Vejalpur Road, Navsari, (2 Mazagon, Bombay and (3 Lower Parel, Bombay and the unit of the Chemicals Division was situated at Bhestan, District Surat.
(7) THE authorised share capital of the transferor-Company as on 31/3/1993 was Rs.. 30 crores (Rupees thirty crores only) divided into 30,00,000.00 ordinary shares of Rs. 100.00 each. The subscribed share capit
