Regulatory Alert: Notification of norms for takeover pursuant compromise or arrangement by unlisted companies

Section 230(11) of the Companies Act, 2013 (Cos Act) provides that takeover offer in case of unlisted companies can be made through Scheme of compromise or arrangement, while in case of listed companies, takeover offers must be made as per regulation prescribed by Securities and Exchange Board of India. The Ministry of Corporate Affairs (‘MCA’) has notified the provisions relating to takeover offers in case of unlisted company, vide its notification^[1] dated 3 February 2020.

With a view to introduce proper mechanism to carry out takeover offers in case of unlisted companies, the MCA vide its notification^[2] dated 3 February 2020 has also notified the Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2020.

The key highlights of this notification are summarised below:

• In case of unlisted companies, shareholders holding 75% or more of the “shares” can now make a take-over offer to buy out the minority shareholders holding remaining “shares” by making an application of Arrangement to National Company Law Tribunal (‘Tribunal’). This notification shall not apply to:
  • Transfer or transmission of shares pursuant to a contract, arrangement or succession; or
  • Transfer pursuant to any statutory or regulatory requirement
• The term “Share” would mean the equity shares with voting rights including any securities, such as depository receipts, which entitles the holder to exercise voting rights
• An application of arrangement for takeover offer shall be accompanied by valuation report issued by registered valuer disclosing the details of valuation of shares proposed to be acquired by the shareholder after considering the following factors: 
  • The highest price paid by any person or group of persons for acquisition of shares during last 12 months; and
  • The fair price of shares of the company considering valuation parameters viz. return on net worth, book value of shares, earning per share, price earning multiple vis-a-vis the industry average and any other necessary parameter
• The majority shareholders (holding 75% or more shares) buying out the minority shareholders (holding remaining shares) will have to open a separate bank account and deposit at least 50% of the total consideration to be paid pursuant to such takeover offer
• The notification has prescribed a fee of INR 5,000/- for making any application for compromises, arrangements and amalgamations under Cos Act.   

Section 230(12) of Cos Act allows an aggrieved party having grievances with respect to the takeover offer of companies to make an application to Tribunal in the prescribed manner. The same has also been notified with effect from 3 February 2020. With a view to operationalise this provision, MCA has also notified National Company law Tribunal (Amendment) Rules, 2020 on 3 February 2020.

The key highlights of this notification^_[3] are summarised below:  

• An aggrieved party shall make an application to Tribunal in Form NCLT -1 along with prescribed annexures viz. document supporting grievance, board resolution, memorandum of appearance, vakalatnama etc.
• Payment of a filing fee of INR 5,000/- for making an any such application.

BDO Comments

The new provision provides an additional avenue to the majority shareholder to buy out the minority shareholders of unlisted companies by approaching Tribunal through the route of Scheme of Arrangement. This could give a rise to instances which may lead to a force exit of minority shareholders by majority shareholders though there is also a protection provided to minority shareholders to object any such buy outs.