Allowed

Organon (India) Limited v. ---------------------------------

Bombay HC7 Jun 2010CSP/101/2010

Case brief

AI extract

What is this about?

The Bombay High Court sanctioned the reduction of equity share capital in Organon (India) Ltd. The court rejected objections regarding the fairness of the scheme, the voting method, and the share valuation, finding the proposal equitable and supported by an independent valuer's report accepted by the overwhelming majority of non-promoter shareholders.

What did the court decide?

Sanction and confirmation of the special resolution for the reduction of equity share capital of the Petitioner Company.

Organon (India) Limited Vs… — Company and Corporate | Bombay HC (2010)

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IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION

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COMPANY SCHEME PETITION NO.101 OF 2010

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In the Matter of Reduction of Equity Share Capital of Organon (India) Limited

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Organon (India) Limited

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... Petitioner

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Dr. V. V. Tulzapurkar, Senior Advocate, a/w Mr.S.Parikh for the Petitioner.

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Mr. D. V. Lakhani in person-objector.

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CORAM : S. J. KATHAWALLA, J.

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Reserved on : 14th April, 2010. Pronounced on : 7th June, 2010.

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JUDGEMENT:

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By this Company Scheme Petition, Organon (India) Limited (the Petitioner Company) seeks sanction and confirmation by this Court with regard to the special resolution passed by the Petitioner's shareholders in its Extraordinary General Meeting (“EGM”) held on 15th October, 2009, for the reduction of its equity share capital.

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The Authorized, issued, subscribed and paid up share capital of the Petitioner Company, as on 31st December, 2008 is as under:

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Share Capital	Rupees
Authorized:	10,00,00,000/-
1,00,00,000 Equity Share of Rs.10/- each
Issued, Subscribed and Paid up:	6,07,61,600/-
(60,76,160 Equity Shares of Rs. 10/- each
fully paid up)
Total:	6,07,61,600/-

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Of the above, 98.43% of the paid up equity share capital of the Petitioner Company is held by the promoter shareholder, namely Organon Participations B. V. (“promoter shareholders”). The balance of the paid up equity share capital of the Petitioner Company is held by 1490 members having shares of the Petitioner Company. There has been no change in the share capital of the Petitioner Company from 31st December, 2008 till the date of filing the present petition.

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The Petitioner Company's equity shares were listed on the Calcutta Stock Exchange Association Limited and the National Stock Exchange. Subsequently, in accordance with Regulation 21(3)(a) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, the promoter shareholders made an open offer to the public shareholders at Rs. 285/- per equity share of Rs. 10/- each fully paid up and over a period of time, acquired 29, 16, 546 shares

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from the public. However, the public shareholding of the Petitioner Company fell below the 10% limit as provided under the Stock Exchange norms and the shares of the petitioner company were de-listed from the Calcutta Stock Exchange Association Limited with effect from 26th August, 2002 and subsequently from the National Stock Exchange with effect from 9th October, 2002. As per the requirements of the concerned Stock Exchanges, the promoter shareholders sent offer letters to the public shareholders in respect of the acquisition of the equity shares in the Petitioner Company at a de-listing price of Rs.285/- per equity share as per the de-listing guidelines under the Security and Exchange Board of India (De-listing of Securities) Guidelines, 2003. The promoter shareholders extended to the shareholders of the Petitioner Company an exit option at the de-listing price of Rs.285/- per equity share. This offer was terminated by a letter dated 9th April, 2009 addressed to the shareholders.

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Section 100 of the Companies Act, 1956 (“the Act”) and Article 50 of the Articles of Association of the Petitioner Company empower the Petitioner Company, by way of a special resolution to reduce its share capital in any manner. The Board of Directors of the Petitioner Company proposed the reduction of the equity share capital of the Company. The reason for the reduction of the equity share capital of the Petitioner Company reads as follows:

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“The Company's securities being de-listed to individual shareholders do not have a tradable security for exit. This prevents shareholders from realizing the optimal value and returns on their investments in the Company. Further, over a period of time, the management's focus on overall profitability and financial discipline including effective management of the net working capital has significantly reduced the capital requirements of the company.”

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It was proposed by the Petitioner Company that its paid up equity share capital be reduced by paying off the equity shareholders (other than promoter-shareholders) an aggregate sum of Rs.425/- towards each equity share, with a face value of Rs. 10/-, which would therefore include a premium of Rs. 415/per equity share. Thus the Petitioner Company sought to extinguish 95, 106 equity shares and reduce it’s paid up equity share capital by Rs. 9, 51, 060/-. A copy of the valuation report of the certified individual valuer, M/s Grant Thornton (“valuer”), appointed by the Petitioner Company is annexed to the petition.

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The Board of Directors of the Petitioner Company had sent a Notice and an Explanatory Statement dated 27th August,

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2009 in due compliances of the provisions of the said Act for convening an Extraordinary General Meeting of the equity shareholders of the Petitioner Company on 15th October, 2009 to consider, inter alia, the passing of the following special resolution:

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“RESOLVED THAT pursuant to section 100 and other applicable provisions of the Companies Act, 1956 and subject to the consent/confirmation/approval of the Hon'ble High Court of Judicature at Bombay and other appropriate authorities, and pursuant to Article 50 of the Articles of Association of the Company, the paid-up equity share capital of the Company be reduced by paying off/returning to the holders of the equity shares (other than the promoter-share holder of the company, namely Organon Participations B.V. ), a sum of Rs.425/- (Rupees four hundred twenty five only) per share being the face value of Rs.10 (Rupees ten only) and a premium of Rs.415 (Rupees four hundred fifteen only) per share and thereby canceling and extinguishing all such shares.”

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Accordingly, the EGM of the shareholders of the Petitioner Company was held on 15th October, 2009. At the said meeting, 38 members were present in person, by proxy and

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through authorized representatives, wherein, amongst others, the resolution, as set out in paragraph No.6 above, was passed by way of show of hands under Section 100 and other applicable provisions of the Act. However, two shareholders, holding a total of 160 shares, which amounts to 0.002633242% of the total shareholding, had opposed the aforesaid resolution.

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On the date of filing of this petition i.e. 31st October, 2009, there were no secured creditors of the Petitioner Company. There were 245 unsecured creditors (trade creditors including sundry creditors) and the amount payable to these unsecured creditors aggregated to Rs.31,10,10,746/-. The Petitioner Company paid off 192 unsecured creditors, representing 62.83% of the total value of credit and obtained the consent of 44 of the remaining unsecured creditors representing 36.24% of the total value of the Credit to the reduction of share capital. There remained around 10 unsecured creditors, representing a minimal of 1.06% of the total value of credit who neither consented nor were re-paid by the Petitioner Company.

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The Petitioner Company had filed Company Application No. 57 of 2010 for requisite direction for dispensation of the provisions and the procedure prescribed under Section 101(2) of the Act. By an order dated 22nd January, 2010, this

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Court has dispensed with the provisions of, and the procedure prescribed under Section 101(2) of the Act and has accepted the undertaking of the Company Secretary to give individual notices of hearing of the petition to the said 10 unsecured creditors holding a minimal 1.06 of the total value of credit, referred to above in paragraph 8. By an affidavit dated 16th April, 2010, the petitioner Company has pointed out that it has received No objection/Consent letters from all unsecured creditors for sanction of the proposed reduction of equity share capital.

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By the Minutes of Order, dated 11th February, 2010, passed by this Court in the above petition, the Petitioner Company was also directed to get the notice of hearing published in two newspapers and in the Official Gazette of the Government of Maharashtra. The petitioner company has complied with the same and has filed an affidavit of publication dated 9th March, 2010. It is therefore submitted on behalf of the Petitioner Company that the reduction of the equity share capital as embodied in the said resolution passed by the shareholders at the EGM, held on 15th October, 2009, does not prejudice the shareholders or the creditors of the Petitioner Company in any manner whatsoever. The Petitioner Company has further submitted that this offers an opportunity to the remaining individual shareholders of the Petitioner Company to liquidate

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their entire shareholding at an attractive price. It is therefore prayed that the reduction of equity share capital as embodied in special resolution passed at the EGM be confirmed by this Court.

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As set out herein above, the hearing of this petition was advertised in two newspapers circulated in Mumbai, and published in the Maharashtra Government Official Gazette in its issue for the period from 25th February, 2010 to 3rd March, 2010. Only one objector i.e. Mr. Dinesh Vrajlal Lakhani (holding 80 shares of the Petitioner Company jointly with his wife Smita D. Lakhani) has come forward to object to the grant of relief prayed for in the above petition. Mr. Lakhani has filed an affidavit dated 10th March, 2010 setting out his objections to which, an affidavit in rejoinder, dated 25th March, 2010 is filed by the Petitioner Company.

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Mr. Lakhani has first submitted that such reduction of the share capital proposed by the Petitioner Company, by paying off the public holders of equity shares, other than the promotershare holders and giving them certain compensation, amounts to a forceful acquisition of the shares held by them. He states that such action on the part of the Petitioner Company is against the principles of natural justice, corporate democracy and corporate governance. He states that such reduction tantamounts to a

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sophisticated corporate mafiaism.

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In dealing with this objection, I shall briefly discuss the position of law on the issue. The law relating to reduction of share capital of a company is contained in Sections 100 to 105 of the Companies Act, 1956. Section 100 authorizes the company limited by shares, having a share capital, if so authorized by its Articles of Association, by special resolution to reduce its share capital in any way. A company may therefore reduce its share capital:

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(i) If there is a provision in its Articles of Association permitting it to do so;

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(ii) If it has passed a special resolution for that purpose; &

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(iii) If such a resolution is sanctioned by the Court.

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In the leading case of British and American Trustee

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and Finance Corporation v. Couper ( [1894] AC 399 ) Lord Macnaghten observed on the point:

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“If there is nothing unfair or inequitable in the transaction, I cannot see that there is any objection to allowing a company limited by shares to extinguish some of its shares without dealing in the same manner

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with all other shares of the same class.”

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However, in the same case, Lord Herschell, L.C. made the following observations:

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“There can be no doubt that any scheme which does not provide for uniform treatment of shareholders whose rights are similar, would be most narrowly scrutinized by the Court, and that no such scheme ought to be confirmed unless the Court be satisfied that it will not work unjustly or inequitably.”

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The Madras High Court, while referring to the same judgment in Re Panruti Industrial Co. Private Ltd, AIR 1960 Mad 537 held that the Court’s power to sanction any reduction is to be determined by whether such reduction is fair and equitable.

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In the landmark case of Miheer H. Mafatlal v. Mafatlal Industries Ltd., (AIR 1997 SC 506) , the Hon’ble Apex Court was called upon to decide on the validity of a Scheme of Amalgamation of two public limited companies under Section 391/393 of the Companies Act. Certain principles posited by the Hon’ble Court are relevant for the present matter:

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“It has to be kept in view that the question of bonafide of the majority shareholders or the alleged suppression by them of minority shareholders or their attempt to suffocate their interest has to be judged from the point of view of the class as a whole. Question is whether the majority shareholders while acting on behalf of the class as a whole had exhibited any adverse interest against the appellant’s minority shareholders also having a similar interest as members of the same class, while approving the scheme, or had acted with any oblique motive to whittle down such a class interest of the minority.” (para 38)

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This Court is however bound by the decision of the Division Bench of this Court, reported in Sandvik Asia Ltd. v. Bharat Kumar Padamsi [2009 Vol. 111 (4) Bom. LR 1421], concerning the reduction of capital of M/s. Sandvik Asia Ltd. The Learned single-judge of this Court, had refused confirmation of the proposal for reduction of M/s. Sandvik Asia Ltd. on the ground that the promoters group could virtually bulldoze the minority shareholders and purchase their shares at the price dictated by them. The Learned Single Judge found that the minority shareholders were not given any option under the proposal. Hence the Learned Single Judge concluded that such schemes

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for reduction of capital were totally unfair and unjust. In appeal, the Hon'ble Division Bench held that they were bound by the law laid down by the Hon’ble Apex Court in Ramesh B. Desai v. Bipin Vadilal Mehta [ (2006) 5 SCC 638 ] where the Apex Court recognized the judgment of the House of Lords in the case of British and American Trustee and Finance Corporation [supra] . The Learned Bench also referred to the judgment in Poole & ors v. National Bank of China Ltd. [ (1907) A.C. 229 (HL) ], the relevant portion of which is as follows:

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“The dissenting shareholders do not demand, and never have demanded, better pecuniary terms, but they insist on retaining their holdings which in all reasonable probability can never bring profit to any of them and may be detrimental to the company.”

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The Learned Bench granted sanction to the reduction of capital, overruling the order of the Learned Single Judge in Sandvik Asia Ltd. (supra) , and posited as follows:

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“Once it is established that non-promoter shareholders are being paid the fair value of their shares, at no point of time it is even suggested by them that the amount that is being paid is way less and even the

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overwhelming majority of non-promoter shareholders having voted in favour of the resolution shows that the Court will not be justified in withholding its sanction to the resolution.” (para 9)

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An SLP (Petition for Special Leave to Appeal (Civil) No. 12418/2009) filed therefrom, was dismissed by the Hon'ble Apex Court, by its order dated 13th July, 2009. Thus this Court is bound by the decision of the Learned Division Bench and cannot withhold sanction to the special resolution for reduction of capital, unless there is some patent unfairness regarding the fair value of the shares or there is lack of an overwhelming majority of nonpromoter shareholders who vote in favour of the resolution.

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It is next contended by Mr. Lakhani that at the said EGM, proxies were allowed to vote by show of hands. He submits that under the provisions of the Act, proxies are required to vote on poll only and not by show of hands. Hence, even if the Articles of Association of the Petitioner Company permit proxies to vote by show of hands, the provisions of the Act should prevail. The Court cannot agree with Mr. Lakhani’s contention on this point. As per the Proviso to Section 176(1) of the Act, a proxy is to vote only on poll at the meetings of a company, unless the Articles of Association provides otherwise. Mr. Lakhani has

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himself admitted that the Articles of Association of the Petitioner Company allow voting by proxies through show of hands. This makes the aforesaid objection untenable and it is therefore rejected.

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The next objection of Mr. Lakhani is that the special resolution put forward at the EGM for approval by the shareholders appears to have not been passed with requisite majority. According to him, at the EGM, he along with one Mr. Aspi Besania, were the only two public shareholders present in person. The remaining people present in the hall happened to be either employees of the Petitioner Company or representatives of legal firms and auditing firms, including proxies and authorized representatives. He states that the Petitioner Company did not clarify as to how many shareholders were present in person or by proxy or by corporate authorization. He further states that although he sought documents from the Petitioner Company like photocopies of the attendance register, and of the authorized representation and proxy register, the Petitioner Company failed to provide the same. Although the Petitioner Company provided copies of the Articles of Association, Annual Reports, open offer letters and the valuation report, the minutes of the meeting were sent to him only on 11th December, 2009 and in the said minutes, the break-up of the exact number of shareholders present in

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person or through proxies and authorized representation is not given. It is also submitted that there is no proof that EGM notice was sent to 1490 members of the Company.

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Mr. Lakhani had admittedly not expressed any apprehension about the special resolution appearing to have been passed without the requisite majority, at the time when the said resolution was passed or even when he issued a letter to the Company Secretary of the Petitioner Company immediately after the meeting was concluded. Interestingly, the Court finds that Mr. Lakhani has not expressed any doubts in his letter, regarding the lack of majority in the passing of the special resolution, or of notice of the meeting not being dispatched to 1490 shareholders. Despite the fact that under Section 176 (7) of the Act, Mr. Lakhani was entitled, during the period of 24 hours before the time fixed for the commencement of the meeting and ending with conclusion of the meeting to inspect the proxies lodged, he chose not to conduct any inspection. Again, although his letter dated 21st October, 2009, addressed to the Company Secretary of the Petitioner Company inter alia records that at the time of the EGM around 20 to 25 persons were present and most of them appeared to be either employees of the company or representatives of legal firms and auditing firms, it is only on 23rd December, 2009 that Mr. Lakhani sought copies of the

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attendance register in respect of the EGM held on 15th October, 2009 along with particulars regarding the shareholders and proxies who were present at the meeting. These facts establish beyond doubt that Mr. Lakhani who, as can be seen from his letter dated 15th October, 2009, wrote to the Company Secretary immediately after the EGM, had not objected qua the proxies or authorized Representatives who were present and voted at the said meeting and qua the passage of the special resolution and has gradually come up with the aforesaid objections only as an afterthought.

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In the Minutes of the meeting, it is inter alia clearly recorded by the Petitioner Company that 38 members were present in person by proxies and through authorized representatives and that the Chairman informed the members of the receipt of 29 valid proxies representing 99 equity shares within the prescribed time, as well as an intimation from one member, holding 59, 76, 832 equity shares, appointing an authorized representative to attend the meeting. The Chairman also informed the members that the documents mentioned in the explanatory statement annexed to the notice were open for inspection till 11.00 a.m. Neither party contends that any of the contents of the Minutes of the EGM of the petitioner company, dated 15th October, 2009 is incorrect. Therefore, the Minutes

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clearly spell out the attendance at the meeting as being 38 members, from whom 29 were valid proxies and one member was an authorized representative. This implies that 8 members were present in their capacity as public shareholders, including Mr. Lakhani and Mr. Besania. Mr. Lakhani has hence wrongly submitted that no break-up of exact number of shareholders present in person, through proxies and through authorized representation was provided. This objection raised by Mr. Lakhani, therefore, completely lacks bonafide and seems to be raised only with the intention of creating hurdles for the Petitioner Company that seeks relief from this Court as prayed for in the petition.

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Mr. Lakhani has then submitted that in a similar petition of Cadbury India Limited before this Court, his Lordship, Justice (Dr.) D. Y. Chandrachud had ordered that individual notice be sent to the shareholders and hence similarly in the present petition this Court should direct the Petitioner Company to issue individual notices to the shareholders. However, I find that the order passed by my Learned Brother Judge, Justice (Dr.) D. Y. Chandrachud, is passed while disposing of the Company Application filed by Cadbury India Limited and not at the stage of final hearing of the Petition. Moreover, in complying with the order of this Court, dated 11th February, 2010, the Petitioner Company

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published notices of hearing of the petition for reduction of capital under Section 100 of the Act in two local newspapers, and no objection has been received in relation to the present petition save and except from Mr. Lakhani. This contention therefore lacks merits and is rejected.

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Mr. Lakhani has next pointed out that the explanatory statement under Section 173(2) of the Act, to the notice dated 27th August, 2009 mentions that:

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“The Board has recommended in accordance with the 'first-in-last-out principle' , and Organon Participations B.V. has agreed vide letter dated August, 25, 2009 that they being the Promotershareholder, should not be returned any of its capital contribution before the public shareholders are returned their capital contribution.”

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Mr. Lakhani submits in this regard that the promoters and directors prior to the open offer held 50.43% of the paid up capital of the Company. Post the open offer, as of 31st December, 2001, the promoter's holding was 94.38%, whereas presently the promoters' holding is 98.43% and the remaining 1490 shareholders hold 1.57% of the paid up capital. Therefore he submits that the shares acquired by the promoters in open offer

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was much later than those of shareholders like him, who had received shares in public offers sometime in the year 1984 and also received bonus shares in the ratio of 3:5 in the year 1996. In view of the principle of ‘first-in last-out’, the subsequent shares acquired by the promoter through open offer should also be subject to reduction of capital before those of shareholders like him.

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In response to this objection, the Petitioner Company

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has submitted that the principle of ‘first-in last-out’ referred to by the Petitioner Company implies that the promoter shareholders being the initial shareholders of the Petitioner Company would exit last. Admittedly, the Petitioner Company became a shareholder prior to Mr. Lakhani and therefore should exit later than him. Subsequent acquisition of shares by the promoter shareholders would not affect the status of the promoter shareholders being the initial shareholders. Moreover, the Petitioner Company submits that Section 100 of the Act does not prohibit the classification of shares for the purpose of effecting the reduction of capital. A special resolution to the effect of proposed reduction of the equity share capital need not affect the shares held by the promoter shareholders. Therefore, the said objection of Mr. Lakhani is untenable. On a reading of Section 100, I find that the submission of the Petitioner Company is correct and this

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objection of Mr. Lakhani, raised on the principle of ‘first-in last-out’ is therefore, rejected.

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Mr. Lakhani’s final objection pertains to the valuation report of M/s Grant Thornton India (“Grant Thornton”), who were appointed by the Petitioner Company to conduct the valuation of its equity shares for the purpose of the proposed reduction of share capital, as per the provisions of the Act. The objections pertaining to the valuation method are set out in clauses 6-a - 6-e of Mr. Lakhani’s affidavit dated 10th March, 2010. He submits that these objections should be considered by this Court before passing any orders on the petition filed by the Petitioner Company. The said objections were therefore forwarded by the Petitioner Company to Grant Thornton, who in turn have, by their letter dated 24th March, 2010 responded to each objection. The letter dated 24th March, 2010 along with the response of Grant Thornton to the objections is annexed as “Exhibit A” to the affidavit in rejoinder of the Petitioner Company dated 25th March, 2010. According to Mr. Lakhani, the Petitioner Company followed one method of valuation at the time of open offer in October/November, 2001 and another method of valuation under the present proposal of reduction of capital which is not proper. He submits that the present proposal by the Petitioner Company should be on the basis of that method of valuation, which gives

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higher value i.e. either on the basis of book value of the earning per share, or the P.E. ratio and the difference in Sensex then and now, so as to add a reasonable premium for the total buyout of shares.

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The above objections / suggestions is responded to by Grant Thornton as follows:

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“Grant Thornton, India was appointed to conduct a valuation of Organon (India) Limited's (the "Company") equity shares for the purpose of a proposed reduction of its share capital as per the provisions of the Companies Act, 1956. For this purpose, we understand that there are no prescribed methods/ guidelines for carrying out the valuation under the Companies Act, 1956, particularly in cases where the companies are no longer listed on stock exchanges. Therefore, for this purpose, as detailed in our Valuation Report the standard of value used in our valuation analysis is "Fair Value" which is often defined as the price, in terms of cash or equivalent, that a buyer could reasonably be expected to pay, and a seller could reasonably be expected to accept, if the business were exposed for sale on the open market for a reasonable

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period of time, with both buyer and seller being in possession of the pertinent facts and neither being under any compulsion to act.

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As detailed in our report, to arrive at the fair value of the Company's equity shares, we have applied generally accepted valuation methodologies, which are used in several other situations involving a "Fair Value" standard e.g. mergers/amalgamations, and accepted by relevant judicial and regulatory authorities of India. It is important to note that these methodologies are also widely practised and applied internationally.

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We understand that the Offer Price of INR 285/per share made during the Open Offer in October/ November 2001 was based on the "Negotiated Price" under the Share Purchase Agreement dated July, 30, 2001 and SEBI Takeover Regulations (11) for Consolidation of Holding and Delisting of the Shares as it clearly indicated in the 2001 Letter of Offer. We understand that while carrying out the valuation as at June, 30, 2009, it would be incorrect to apply the guidelines that were applicable in October / November, 2001 for the Open Offer for the following reasons.

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The Open Offer guidelines used in October / November, 2001 are not applicable in the current

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valuation context, moreover the standard of value applied in the current valuation context is "Fair Value".

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The Company has been delisted. The Offer Price in October / November, 2001 was determined based on the "Negotiated Price" of Rs. 285/- as per the Share Purchase Agreement entered into between the Promoter Shareholder and some of the Indian Promoters of the Company.

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Further, we have also appropriately factored under various methods the Book value (referred as Net Value in our report), Earnings per share, Earnings based multiples, the prevailing stock market conditions and other factors detailed in our Valuation Report (Refer paragraph IV "Valuation Methodology" and "Organon's Valuation").

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In the light of this response, I find that the Grant Thornton has explained in detail why the valuation method suggested by Mr. Lakhani cannot be acceded to.

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Mr. Lakhani has contended that the open offer at Rs. 285/- per share in October/November, 2001 was at 3.07 times of the book value and if the same 3.07 times the present book value is taken into consideration, the price per share would become Rs.

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718.38/-. In response, Grant Thornton have stated that they have considered the book value (Net Asset value) of the company and the same has been even adjusted to reflect the market value of surplus/non operating assets and the impact of potential contingent liabilities. They have pointed out that this has been explained by them in para IV (1) of the valuation report, which is reproduced hereunder:-

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“Net Asset Value Method (NAV):

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The value arrived at under this approach is based on the latest available audited/provisional financial statements of the business and may be defined as Shareholders' Funds or Net Assets owned by the business. Under this method, the net assets as per the financial statements are adjusted for market value of surplus/non operating assets, potential and contingent liabilities if any. To derive value per equity share, the adjusted Net Assets value is divided by the number of outstanding equity shares. We have used this method for the purpose of estimating the share value.

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We have relied on the Net Asset Value of the Company as of June 30, 2009 and have adjusted for the market value of surplus assets i.e. Land and reduced the potential contingent liabilities. Since, we

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have applied various methods and it is important to arrive at a single equity value, we have assigned appropriate weight to the Net Asset Value method.”

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Thus, the Book value / Net Asset Value of the Petitioner Company was considered by Grant Thornton for the purpose of arriving at the fair value of the petitioners’ shares.

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Mr. Lakhani has next contended that when the open offer in October/November 2001 was made at Rs. 285/- per share, the Earning Per Share (EPS) was Rs. 14.76/-. This comes to a PE ratio of 19.31, whereas the present offer of Rs. 425/- is at a PE ratio of 9.97, as per the EPS of Rs. 42.64/-, for the accounting period ending 31st December, 2008 (Rs. 42.64/multiplied by 9.97 gives Rs. 425/-). The above contention of Mr. Lakhani is explained by Grant Thornton as under:

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"As at the Valuation Date (June 30, 2009), the

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Company's shares are de-listed and hence, as detailed in our Valuation Report [Paragraph IV(2) and "Organon's Valuation"] we have used Market Multiple method which factors and appropriate measure of earnings multiple and the prevailing market conditions for the comparable companies operating in the multinational pharmaceuticals companies' sector and

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further adjusted for the Company's shares towards lack of marketability and being illiquid as it is no longer listed on any stock exchange.

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The Offer Price in October/November 2001 was determined based on the "Negotiated Price" of Rs. 285/- as per the Share Purchase Agreement entered into between the Promoter Shareholder and some of the Indian Promoters of the Company. Hence, for the purpose of discussion on the Intervenor's arguments, the implied multiples (Price/Earnings(PE) Ratio, Price/Book Value ratios) computed by the Intervenor derived based on the Offer Price of Rs. 285/- are not comparable. Moreover, if the implied multiples are computed based on the ruling market price of the Company at that time (Price on NSE was Rs. 182.7 and Calcutta Stock Exchange was Rs. 165.5 as stated in the Offer Document), the multiples would be much lower than what the Intervenor has stated.

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In addition, the Offer document of October/November 2001 makes a reference to the Industry PE ratio comprising of multinational pharmaceuticals which was at a ratio of 19.0x as per the Capital Market Magazine dated 5th August, 2001. If the same source is considered, the P/E ratio of

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multinational pharmaceuticals is 16.0x, based on an average last four editions preceding the date of valuation, which after adjustment towards lack of marketability of the Company's shares, will be closure to implied P/E ratio of the Company as per the current Offer Price of Rs. 425, the estimated annualized earnings as at June 30, 2009. It is further submitted that as per several researches carried out by academicians and as a general practice, it is common to apply a discount for lack of marketability in the range of 25% to derive the Fair Value of equity of an unlisted company."

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Therefore, the Petitioner Company is correct in its contention that the fair value of the share is Rs.425/- as per current PE ratio of the Petitioner Company.

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Mr. Lakhani also has contended that the BSE Sensex

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is rising and is approximately five and a half times of what it was in 2001. Hence the present offer price should also take the same into consideration. In response, Grant Thornton explained as follows:

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“....We have factored the stock market conditions prevailing as at the Valuation Date, which reflected in

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the market prices of the comparable companies and consequently impacting the markets multiples. We have explained this in para IV and Organon's Valuation in our Valuation Report”

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The above answer of Grant Thornton shows that they have already considered the suggestion of Mr. Lakhani while submitting their valuation report and thereafter arrived at fair value of the shares of the Petitioner Company.

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Mr. Lakhani has further contended that if the management of the Petitioner Company wants a complete buyout, then it should pay a substantial amount of premium towards the prices arrived at on the basis of the above method of valuation. To this argument, Grant Thornton’s response is as follows:

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“We have arrived at the fair value of equity shares of the company. The full buy out premium or commonly

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referred as control premium would be usually applicable when the buyer gets control due to purchase of shares. In the current valuation context, we have valued company’s equity as a whole and not specifically any specific category or class of shareholders (i.e. Minority stake). If one has to value a

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minority stake there could be a possibility of Minority Discount that would need to be considered as the minority shareholder cannot control the company.”

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I find that Grant Thornton has thereby given cogent reasoning as to why Mr. Lakhani’s suggestion for a full buy out premium cannot be accepted.

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Mr. Lakhani has further contended that the valuation report methodology used by the valuer and its full disclaimer is not clear as it has valued the assets of the Petitioner Company, more particularly the real estate, at current market value. He hence submits that the earlier method of valuation used in October/November, 2001 should be taken into consideration. In response, Grant Thornton has pointed out that the valuation report has considered the Petitioner Company’s assets particularly the market value of surplus assets and in addition the business and the interest in which the company operates. This has been dealt with in para IV of the said Valuation Report.

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Mr. Lakhani has in this manner raised several concerns regarding the valuation of shares. Before concluding on this point, I must point out certain observations of the Courts in the country regarding valuation of shares. Mr. Tulzapurkar,

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Learned Senior Counsel appearing for the Petitioner Company has relied on the decision of the Hon’ble Apex Court in the case of Miheer H. Mafatlal [supra] . One of the objections raised by the appellant therein was that the exchange ratio of the equity shareholders so far as the Transferee Company is concerned works very unfairly and unreasonably towards them. As per that scheme five equity shares of the Transferor Company were to be exchanged for 2 equity shares of the Transferee Company. It is pertinent to record the observations of the Hon’ble Apex Court in this regard:

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“…Pennington in his ‘Principles of Company Law’ mentions four factors which has to be kept in mind in the valuation of shares:

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(1) Capital Cover;

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(2) Yield;

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(3) Earning Capacity;

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(4) Marketability….

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Valuation of shares is a technical and complex problem which can be approximately left to the consideration of experts in the field of accountancy. Many imponderables exist in the exercise of the valuation of shares…

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…It has also to be kept in view that which exchange ratio is better is in the realm of commercial decision of well informed shareholders. It is not for the Court to sit in appeal over the value judgment of equity shareholders who are supposed to be men of the world and reasonable persons who know their own benefit and interest underlying any proposed scheme. With open eyes they have okayed this ratio and the entire scheme.” (para 40)

¶148

In Hindustan Lever Employees Union v. Hindustan

¶149

Lever Ltd. (AIR 1995 SC 470) , the Hon’ble Apex Court rejected the argument of the Petitioner therein, that if some other method was adopted, probably the determination of valuation could have been more in favour of the shareholders. Merely because some other method of valuation could be resorted to, which would possibly be more favourable, that alone cannot militate against granting approval to the scheme propounded by the Company. The Court’s obligation is to be satisfied that the valuation was in accordance of the law and it was carried out by an independent body.

¶150

In the case of Re Tata Oil Mills Co. Ltd. [ (1994) 81 Comp Cases 754 (Bom) ] , this Court observed thus:

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“…the exchange ratio arrived at by Mr. Malegam has received the approval of shareholders holding more than 99 percent (in number and value) shares at the meetings. No one except the shareholders holding the minimum percentage of shares has complained before me. The valuation has been confirmed by two eminent firms of auditors. It would be extremely difficult to hold that the same is unfair. In any case, it has been approved by an overwhelming majority of persons affected and there is no basis to doubt their judgment.”

¶153

In the landmark case of Gold Coast Selection Trust

¶154

Ltd. v. Humphey (30 TC 209) it was posited as follows:

¶155

“Valuation is an art, not an exact science. Mathematical

¶156

certainty is not demanded, nor indeed is it possible”

¶157

Mr. Tulzapurkar has also relied on an unreported decision of the Learned Single Judge of this Court (Coram: A.M. Khanwilkar, J.) in the case of Reliance Industries Ltd. [Company Application No. 288 of 2009] , dated 29th June, 2009. The learned Single Judge in the said decision has dealt with the criticism of the objectors that the contents of the

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valuation report does not give any forecast or disclose any logic but only conclusion and the opinion of the Valuers/Experts is based on the information provided by the Company, in the following terms:

¶160

"Insofar as the criticism with regard to the contents of the valuation report either on the ground that it does not give any forecast or disclose any logic but only conclusion. Even this argument does not commend to me. As aforesaid, on reading the reports clause by clause and as a whole, no fault can be found with the ultimate opinion reached by the experts regarding share swap ratio, which is founded on tangible material and basis. I am not at all impressed by the argument of the objectors that the report is manifestation of conflicting opinion in any manner. The fact that the language of the report would give an impression that the Expert does not take the responsibility of the accuracy of the figures furnished to them by the Company or that they have not made any independent valuation of the assets and liability of the companies on their own, does not mean that the relevant factors for determination of swap ratio have not been considered by the experts. Obviously, the opinion of the Experts is based on the information provided by the Company. There is nothing to show that the figures available in the Books of Accounts provided to the Experts

¶161

¶162

were incorrect or otherwise. Thus, there is nothing in the said Reports to indicate that the consideration weighed with the Experts in arriving at the opinion is impermissible or unacceptable. It is not possible to countenance the grievance of the objectors that the reports deprive the Court from basic information regarding justification of share swap ratio."

¶163

In the said decision, the learned Single Judge noted that-

¶164

“Even in the present case, no one has doubted the integrity and honesty of the valuers, who have given their share valuation report or fairness report, as the case may be. Nor the objectors have been able to point out that the method adopted by the valuers was impermissible or absurd. If so, I find no reason to discard the valuation of shares or the swap ratio determined by the Experts” (para 14)

¶165

In the present case, the petitioner company does not have any secured creditors as set out herein above. Not a single unsecured creditor has raised objection qua the reduction in capital proposed by the Petitioner Company. The hearing of the petition was advertised by the Petitioner Company as directed by

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this Court in two local newspapers and in the Maharashta Gazette. However, except for Mr. Lakhani, none of the public shareholders have come forward to oppose the petition. I find that the valuation of the shares by the Petitioner Company is therefore also accepted by all the shareholders and creditors with the single exception of Mr. Lakhani. Mr. Lakhani himself has also not attributed any motives to Grant Thornton nor commented on its independent professional status or competency. In fact the Petitioner Company has taken the pains of getting a response of Grant Thornton to every objection raised by Mr. Lakhani pertaining to the valuation carried out by Grant Thornton. The report of Grant Thornton sets out the basis for arriving at the final opinion. The report clearly mentions that valuation is done by giving predominant weightage to the value computed under the Market Multiple Method and Discounted Cash Flow Method, with a lower weight being given to the value computed under the NAV method.

¶168

In view thereof, keeping in view the observations of the Hon'ble Apex Court as well as this Court, I see no reason why the Valuation Report of Grant Thornton, which I find to be fair, reasonable and based on cogent reasoning and which has also been accepted by all the non-promoter shareholders of the Petitioner Company, with the lone exception of Mr. Lakhani,

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should not be accepted by this Court.

¶171

Under the circumstances, the Company Scheme Petition is allowed in terms of prayer clauses (a) and (b).

¶172

Order Accordingly.

¶173

(S. J. KATHAWALLA, J.)

Organon (India) Limited v. ---------------------------------

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Organon (India) Limited v. ---------------------------------

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