HINDUSTAN LEVER EMPLOYEES' UNION v. HINDUSTAN LEVER LIMITED AND ORS

Citation: [1994] SUPP. 4 S.C.R. 723; 1994 INSC 483

Court: Supreme Court of India

Bench: A.M. AHMADI , R.M. SAHAI, S.C. SEN

Judgment date: 1994-10-24

Case summary

1994 INSC 483. Supreme Court of India judgment dated 1994-10-24. HINDUSTAN LEVER EMPLOYEES' UNION v. HINDUSTAN LEVER LIMITED AND ORS. Read the judgment and...

Judgment text

724 SUPREME COURT REPORTS [1994] SUPP. 4 S. C. R. HINDUSTAN LEVER EMPLOYEES' UNION v. HINDUSTAN LEVER LIMITED AND ORS. OCTOBER 24, 1994 (A. M. AHMADI, CJ, R. M. SAHAI AND S. C. SEN, JJ. ] Companies Act, 195~Sections 393 and 394-Amalgamation or merger of two companies-Approval of-Jurisdiction of Court-Expression 'Public interest'-Scope-Scheme for amalgamation between a subsidiary company of a multi-national and an Indian based company-Objective of national economy-Exchange ratio-Method of determination of By an order dated 3rd March, 1994, the Court u/s 391/394 of the · Companies Act sanctioned the Scheme of Amalgamation of the Tata Oil M_ills Company Limited (TOMCO) with the Hindustan Lever- Limited (HLL), a subsidiary of Uni Lever, a London based multi national company.

The Scheme provided for transfer and vesting in HLL of the undertaking and business of TOMCO together with assets and abilities excluding certain assets and/or litense right to use certain premises; transfer of employees of TOMCO to HLL on the basis that their service shall be deemed to be continuous and the conditions of service after the transfer shall not be less favourable; preferential allotment of equity shares to UL of face value of Rs. 10 each at the price of Rs. 105 per s~are so as to ensure Its post amalgamation shareholding level at 51 % of the equity capital of HLL, etc. etc. The Scheme was approved by 99. 72% of equity shareholders In terms of values and 86. 72% in terms of numbers. Nominal shareholders of TOMCO, Federation of Employees Union of both the TOMCO and HLL and Consumer Education and Research Center filed five appeals u/s 391 (7) against the judgment and o. rder of the High Court sanctioning the Scheme of Amalgamation.

The appellants alleged that the scheme should not be sanctioned for (i) statutory violation of Section 393 (l)(b) of the Act in not making required disclosures in the explanatory statement; (ii) violation of share exchange ratio being grossly loaded in favour of HLL; (iii) ignoring the effects of provisions of the Monopolies and Restrictive Trade Practices Act; (iv) interest of employees of both the companies was not adequately taken care of; (v) preferential allotment of shares less than market price to Unilever which was not in pnblic interest and. (vi) malafides on account of existences of quid pro quo between Unil~ver and Tata Sons Ltd. All the five appeals were dismissed.

The High Court held that there was no violation of Section 391(1)(a) and the claim that the disclosure in the explanatory statement were not as required was 'without basis as it was not established that the statement did not disclose correct financial position of TOMCO; that the petitioner failed to es~blisb any fraud or prejudice; that a well reputed valuer of a renowned firm of chartered accountants and a Director of TOMCO deter· mined the exchange ratio by combining all three well known methods, namely, the net worth method, the market value method and the earning method and lb• mere fact that the determination done by slightly different method might have resultod in different conclusion would not justify interference unless it was found to be unfair; that the approval to scheme of merger should not be withheld till the complaint filed before Monopolies & Restrictive Trade Practices Commission was finally decided; that interest of emplqyees of the two companies was adequately taken care of as service conditions of TOMCO, the transferor company, having been protected it ,could not claim it to be prejudicial either because they were not assured of same conditions of service as was operative in HLL or that · there was n~ similar provision protecting the interest of HLL employees and the apprehension of the employees against probable retrenchment was rejected since such dispute if necessary could be raised in labour court and that th~ preferential allotment of shares to UL on less than market value was neither illegal nor violative of public interest.

The High Court having (oun! l that the price of Rs. 105 having been worked out on the basis of price earning multiple of 15 based on the last published balance sheet of· HLL, held it was fair and reasonable. This petition bad been filed against the Judgment of the High Court. One of the shareholders of TOMCO questioned the justification of the ratio of allotment of shares, 2 shares of HLL in exchange of 15 shares of TOMCO, as entirely unsatisfactory and unfair to the TOMCO shareholders. It bad been contended that the Board of Directors of TOMCO di'1 not explain the Scheme of Amalgamation in the explanatory statement clrculated among the shareholders, in particular, bow the share exchange r11tio was arrived at; that the shareholders were not told that the joint valuet was none other than a Director of TOMCO and a Senior Partner of ,Mis S. B. Billimoria and Company; that the reasons for the -. HINDUSTAN LEVER EMPLOYEES UNIONv. HINDUSTANLEVERLID.

725 Board accepting certain proposals to make preferential allotment of shares at Rs. 105 per share had not been properly explained; that the valuation report was erroneous as a combination of different methods of valuation was adopted which was against the law; that the preferential allotment of shares to Unilever was part of the Scheme of Amalgamation and the Board should have explained why Rs. 366 was being paid for every . HLL share by TOMCO, when Unilever was paying only Rs. 105 per HLL share. Dismissing the Appeals, this Court · HELD: [Per Sen, I. for himself ond Venkatachaliah, Cl. ] 1. 1 The overwhelming majority of the shareholders had approved the scheme at the meeting called for this purpose and had approved the exchange ratio. A proposal for amendment of the exchange ratio 'Y"" also· rejected by the overwhelming majority of 99% shareholders. There was no reason to presume that the shareholders did not know what they were doing.

If the market price of the shares of the two companies as _on 17. 7. 1993 was compared, the exchange ratio of2:15 was very fair. [748-D, 750·FJ 1. 2 In . case of amalgamation a combination of all or some of the methods of valuation may be adopted for the piirpose of flXation of the exchange ratio of the shares of the two companies. For arriving at the proper exchange ratio, the usual rule Is that shares of the going concern must be taken at quoted market Value. The joint valuer adopted a com· blnation of three well-accepted methods, the field method, the asset value method and the market value method. After considering all the factors, the valuer recommended an exchange ratio of 2 equity shares of HLL for every 15 ordinary shares ofTOMCO. The method adopted was explained to the Board of Directors. The financial Institution;.

who held 41 % of th~ shares or TOMCO, did not find any fault in the method ofvaluation of the shares: ~-~ The teSt or fairness -of this valuation is not whether the offer is fail- to particular shareholder. When the overwhelming majority of the shareholders had approved of the valuation, the Court should not interfere with such valuatio'!. HLL. had no difficulty In accepting the share excliange ratio fJXed by the joint valuer even though he was a Director of TOMCO. If there was any _bias, it should ruive been in favo~r of TOMCO and not . again~t TOMCO. This . exchange ratio was endorsed by two other eminent firms of Chartered Accountants and also by ICICI. There was no violation ' ' . - - . of Section 2i6 (3) of the Companies Act ·when both the companies going to be amalgamated; had choosen a Director of TOMCO to ftx the share exchange ratio. (750-H, 751-A, 752-D-E, 753-C-H) Commission of Wealth Tax v. Mahadeolalan, (86) ITR 621, relied on; Commissioner of Gift Tax, Bombay v. Smt.

Kusumben D. Mahad,,. ,ia, (122) ITR 38, distinguished. Weinberg and Blank, Tiike-Overs and Mergers, referred to•. , In the facts of this case, considering the overwhelming manner In which the share holders, the creditors, the debentnre holders, the financial Institutions, who had 41% shares in TOMCO, had supported the Scheme and had not complained abont any lack of notice or lack of understanding of what the Scheme was about, it will not be right to hold that the explanatory statement was not proper or was lacking In material par- · ticulars. (757-BJ Jitendra R. Sukhadia v. Alembic Chemical Works Co. Ltd. , (1987) 3 Company Law Journal 141, relied on. . , ·, 2. Section 393(1) (a) requires particulars to be given of any materia Interest of some persons connected with the company, including the directors and management director. The Interest that is contemplated In Section 393 (1) (a) Is interest material for consideration of the scheme by the shareholders.

It had not been shown that the joint valuer had any Interest . In the scheme. U he had any shares In TOMCO, then his Interest would be like that of any shareholders. His specialized services were utilized for the. purpose of arriving al a fair exchange ratio. Both TOMCO and HLL reposed faith In his professional skilL Non- diSclosure of the fact that he was a Director of the Company, had been appointed Valuer, will not - detract from the Scheme In any way. This will also not to suppression of any material Interest of a Director In the Scheme. (757-D-EJ · Unilever, a foreign Company, held 51% of shares of HLL. The scheme envisaged that Unilever will continue. to hold 51% of the share; of HLL even af! er amalgamation. It was decided to make preferential allotment of shares lo Unilever al a price of RS. 105 per share; for the purpose of maintaining shareholding of 51% even after amalgamation.

For this ·purpose, two conditions were Imposed: (1) Unilever shall not be able to HINDUSTANLEVEREMPLOYEESUNIONv. HINDUSTANLEVERLTD. 727 sell the shares allotted to them on preferential basis for a period of 7 years, (2) In case Unilever decides to sell these shares after the expiry of 7,years but before 12 years after the date of preferential allotment, they · shall sell the shares to the Indian shareholders of Unilever at a price of 15 times earning per share calculated on the basis of the last andited balance sheet. These two conditions were important depreciatory factors in the preferential allotment of shares to Unilever. The shares issued to Unilever would be franked by restrictive covenants. These shares could not be compared to the other shares of HLL which could be freely traded in the market. (754-B-E] 2. 2. The shareholder has no interest in the assets of the company while the company is in exisience.

It is only at the stage of liquidation of the company that the shareholders become interested in the assets of the company. The share of any member in a company is movable property and transferable in the manner provided by the Articles of the company. This · is provided by Section 82 of the Companies Act. The definition of 'goods' in the Sale of Goods Act, 1930 specifically includes stocks and shares. A share represents a bundle a> rights which includes, inter alia, the rights (i) to elect directors; (ii) to voie on resolutions of meetings of the company; (iii) to enjoy the profits of the company, if and when dividends is declared and distributed; and (iv) to share in the surplus, if any, on liquidation. In any event, whether Unilever was paying the proper price for the share or not, was a question which was pending before the Bombay High Court in a separate proceeding. This question could not be pursued in this proceeding any further. (754-F-G, 756-A] Bacha F. Gujdar v. C. /. T.

, AIR (1955) SC 74, relied on. 3. A merger or amalgamation is not now snbject to the prior approval of the Central Government. Bnt, if the working of the company is found to be prejndicial to public interest or bas led to the adoption in monopolistic or restrictive trade practice, the Central Government may, after being satisfied as to the requirement of the s_ection of division of the ' undertaking, act according to· law. (761-G] As a result of the amalgamation, if it is found that the working of the Company is being conducted in a way which brings it within the mischief of the MRTP Act, it would be open to the authority under the MRTP Act to go iuto it and decide the controversy as it thinks fit. (762-B] 730 · SUPREMECOURTREPORTS (1994)SUPP. 4S. C. R. · no( as better as it would ha~e been if another method would have been adopted.

What is Imperative is that ·such determination should not have been contrary to law and that it was not unfair for the shareholders of the company which was being merged. The Court's obligation is to be satisfied that valuation \vas in accordance with . law and it was carried out by an independent b. ody. Even though the Chartered Accountant who performed · this function was a director of TOMCO but he did so as a member of . renowned firm or chartered accountants. His determination was further ·got checkfd and approved by two other independent bodies at the instance of shareholders of TOM CO by the High Court and it had been found that the determination did not suffer from any infirmity. The company. Court, therefore, did not commit any error in refusing to interfere _with it. May be that if some other method would have been adopted probably the determination of valuation could have been bit ·more In favour of the shareholders. But since admittedly more than 95% of the .

shareholders who were the best judge of their interest. and were better conversant with market trend agreed to the valuation determined It could not be interfered by courts as, '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. The internal management, business activity or in- . stitutional operation of public bodies cannot be subjected to inspection by · the Court. To do so; Is incompetent and improper and, therefore, out of hounds. Nevertheless, the broad parameters. of fairness In administration, bona /ides in action and the fundamental rules of reasonable management of public business, if breached, will become jnsticiable. (734-H, 735-A-G) . - ·--- . -- -- - -~c. _·Fertilizer Corporation Kamgar Union (Regd) v. Union of India, (1981) 2 SCR 52, relied on. . · Buckley on Companies Act 4th Ed.

; Palmer on Company Law, 23rd Ed. , referred to. . .... ·2. A scheme of amalgamation cannot be faulted on apprehension and speculation as to what. might possibly happen In future. The present Is certain and taken care of by Clauses 11. 1, 2 and 3 of the scheme. And unfriendly throwing out being amply protected· by taking recourse to labour Court no unfairness arises apparent or Inherent. Nor the claim that merger shall result In, •syiiergies' can render the scheme bad. Im- HINDUSTANLEVEREMPLOYEESUNIONv. HINDUSTANLEVERLTD. 725 Board accepting certain proposals to make preferential allotment of shares at Rs. 105 per share bad not been properly explained; that the valuation report was erroneous as a combination of different methods of valuation was adopted which was against the law; that the preferential allotment of shares to Unilever was part of the Scheme of Amalgamation and the Board should have explained why Rs.

366 was being paid for every HLL share by TOMCO, when Unilever was paying only Rs. 105 per HLL share. Dismissing the Appeals, this Court HELD: [Per Sen, J. for himself and Venkatacltaliah, CJ. } 1. 1 The overwhelming majority of the shareholders had approved the scheme at the meeting called for this purpose and bad approved the exchange ratio. A proposal for amendment of the exchange ratio was also· rejected by the overwhelming majority of 99% shareholders. There was no reason to presume that the shareholders did not know what they were doing. If the market price of the shares of the two companies as on 17 . 7 . 1993 was compared, the exchange ratio of 2:15 was very fair. [748-D, 750-F] 1. 2 In . case of amalgamation a combination of all or some of the methods of valuation may be adopted for the purpose of fixation of the exchange ratio of the shares of the two companies.

For arriving at the proper- exchange ratio, the usual rule is that shares of the going concern must be taken at quoted market value. The joint valuer adopted a combination of three well-accepted methods, the field method, the asset value method and the market value method. After considering all the factors, the valuer recommended an exchange ratio of 2 equity shares of HLL. for every 15 ordinary shares of TOMCO. The method adopted was explained to the Board of Directors. The financial institutions who held 41% of the shares ofTOMCO, did not find any fanlt in the method ofvaluation of the shares. The test of fairness of this valuation is not whether the offer is fair to a particular shareholder. When the overwhelming majority of the shareholders bad approved of the valuation, the Court should not interfere with such valuation. HLL bad no difficulty in accepting the share exchange ratio fixed by the joint valuer even though be was a Director of TOMCO. If there was any .

bias, it should have been in favour of TOMCO and not against TOMCO. This exchange ratio was endorsed by two other eminent firms of Chartered Accountants and also by ICICI. There was no violation of Section 226 (3) of the Companies Act when both the companies going to be amalgamated, had choosen a Director of TOMCO to fix the share exchange ratio. (750-H, 751-A, 752-D-E, 753-C-H] Commission of Wealth Tax v. Mahadeo ! a/an, (86) ITR 621, relied on. Commissioner of Gift Tax, Bombay v. Smt. Kusumben D. Mahadevia, (122) ITR 38, distingnished. Weinberg and Blank, Take-Overs and Mergers, referred to.

In the facts of this case, considering the overwhelming manner in which the share holders, the creditors, the debentnre holders, the financial institutions, who had 41% shares in TOMCO, had snpported the Scheme and had not complained about any lack of notice or lack of understanding of what the Scheme was about, it will not be right to hold that the explanatory statement was not proper or was lacking in material particulars. (757-B] Jitendra //.. Sukhadia v. Alembic Chemical Works Co. Ltd. , (1987) 3 Company Law Journal 141, relied on. 2. Section 393(1) (a) requires particulars to be given of any materia interest of some persons connected with the company, including the directors and management director. The intel'l'st that is contemplated in Section 393 (1) (a) is interest material for consideration of the scheme by the shareholders. It had not been shown that the joint valuer had any interest in the scheme.

If be bad any shares in TOMCO, then his interest would be like that of any shareholders. His specialized services were utilized for the purpose of arriving at a fair exchange ratio. Both TOMCO and HLL reposed faith in his professional skill. Non- disclosure of the fact that he was a Director of the Company, had been appointed Valuer, will not detract from the Scheme in any way. This will also not to suppression of any material interest of a Director In the Scheme. (757-D-E] Unilever, a foreign Company, held 51 % of shares of HLL. The scheme envisaged that Unilever will continue to hold 51 % of the shares of HLL even after amalgamation. It was decided to make preferential allotment of shares to Unilever at a price of Rs. 105 per share, for the purpose of maintaining shareholding of 51 % even after amalgamation. For this purpose, two conditions were imposed: (1) Unilever shall not be able to HINDUSTANLEVEREMPLOYEESUNIONv. HINDUSTANLEVERLTD.

727 sell the shares allotted to them on preferential basis for a period of 7 years, (2) In case Unilever decides to sell these shares after the expiry of 7, years bot before 12 years after the date of preferential allotment, they shall sell the shares to the Indian shareholders of Unilever at a price of 15 times earning per share calculated on the basis of the last audited balance sheet. These two conditions were important depreciatory factors in the preferential allotment of shares to Unilever. The shares issued to Unilever would be franked by restrictive covenants. These shares could not be compared to the other shares of HLL which could be freely traded in the market. (754-B-E] 2. 2. The shareholder has no interest in the assets of the company while the company is in existence. It is only at the stage of liquidation of the company that the shareholders become interested in the assets of the company.

The share of any member in a company is movable property and transferable in the manner provided by the Articles of the company. This · is provided by Section 82 of the Companies Act. The definition of 'goods' in the Sale of Goods Act, 1930 specifically includes stocks and shares. A share represents a bundle qJ rights which includes, inter a/ia, the rights (i) to elect directors; (ii) to vOte on resolutions of meetings of the company; (iii) to enjoy the profits of the company, if and when dividends is declared and distributM; and (iv) to share in the surplus, if any, on liquidation. In any event, whether Unilever was paying the proper price for the share or not, was a question which was pending before the Bombay High Court in a separate proceeding. This question could not be pursued in this proceeding any further. (754-F-G, 756-A] Bacha F. Gujdar v. C. /. T. , AIR (1955) SC 74, relied on. 3. A merger or amalgamation is not now subject to the prior approval of the Central Government.

But, if the working of the company Is found to be prejudicial to public interest or has led to the adoption in monopolistic or restrictive trade practice, the Central Government may, after being satisfied as to the requirement of the s_ection of division of the undertaking, act according to·law. (761-G) As a result of the amalgamation, if it is found that the working of the Company is being conducted in a way which brings it within the mischief of the MRTP Act, it would be open to the authority under the MRTP Act to go into it and decide the controversy as it thinks fit. (762-B] What has been expressly authorized by the statute cannot be struck down as being agllinst the public policy. A foreign company under the new economic policy of the Government has been allowed to acquire controlling share of any Indian company. This has been done by express amendment of the Foreign E~change Regulation Act.

(762-F] Merely bec~use a foreign shareholder acquires 51 % shares in an Indian company,· it cannot be said that this is against public interest or public policy. Section 11 of Foreign Exchange Regulation Act, 1973 which had empowered the Reserve Bank to put restriction on transfer of any asset in India to" person resident outside India or a person intending to become resident ~utside India, has now been repealed w. e. f. 8. 1. 1993 by the Amending Act 29 of 1993. The entire object is to allow the non resident to do business in India and to deal with assets in India with greater freedom. Merely because $1 % of the shares of the HLL is being given to a foreign company, the Sc~eme cannot be said to be against public interest. The Foreign Exchange Regulation Act has been amended specilically to encourage foreign participation in business in India. The bar to having more than 40% shares in an Indian Company by a non-resident has been lifted.

The Amending 4ct 29 of 1973 is not under challenge. In order to give greater freedom to the companies for doing business in India, the MRTP Act has been amended. Prior approval of Government of India is not necessary for amalgamation of companies any more. In fact, it is in public interest that TOMCO with its 60,000 shareholders and also a very large work-force did n~t deteriorate into a sick company. (763-C-G) 4. 'Public interest' which is to be taken into account as an element against approval of amalgamation would not include a mere future possibility of merger resulting in a situation where the interest of the consumer might be ~dversely effected. If, however, in future the working of the Company turns out to be against the interest of the consumers or the employees, suitable corrective steps may be taken by appropriate authorities in accordance with law. (763-H, 764-A-B) , Merely bec~use the scheme envisaged allotment of 51 % equity shares to Unilever, the !

\cheme could not be held to be against public interest. [764-C) FeTtiliur Corporation Kamgar Union v. Union of India, (1981] 2 SCR 52, relied on. HINDUSIANLEVEREMPLOYEESUNJONv. HINDUSIANLEVERLTD. 729 The scheme had fully safeguarded the interest of the employees by providing that the terms and conditions of their service will be continuous and uninterrupted service and their service conditions will not be prejudicially affected by reason of the Scheme. The grievance made, however, was that there was no job security of the workers, after the amalgamation of the two Companies. There was no assurance on behalf of the TOMCO that the workers will never be retrenched. In fact, the performance of TOMCO over the last three years was alarming for the workers. It could not be said that after the amalgamation they will be in a worse position than they were before the amalgamation. [764-D-F] The TOMCO employees will continue to remain on the same terms and conditions as before.

It could not be said that a prejudice had been caused to HLL employees. They will still be getting what they were getting earlier. TOMCO employees who were working under better terms and conditions, will continue to enjoy their old service conditions nuder the new management. [765-A-B] 5. The Court will decline to sanction a scheme of merger, if any tax fraud or any other illegality is involved. But that was not the case here. A company, on its own, grow up to capture a large share of the market. But unless it is shown there is some illegality or fraud involved in the sch<me, the Court cannot decline to sanction a scheme of amalgamation. In the last two years, TOMCO had sold its investments and other properties. If \ this proposal of amalgamation was not sanctioned, the consequence for TOMCO might be very serious. The shareholders, the employees, the creditors would all suffer.

[765-G, 766-A] The scheme bad been sanctioned almost unanimously by the shareholders, debenture holders, secure creditors, unsecured creditors and preference shareholders of both the Companies. There must exist very strong reason for withholding sanction to such a scheme. (766-B] Per (SAHA! , J) (Concurring) 1. The jurisdiction of the Court in sanctioning a claim of merger is not to ascertain with mathematical accuracy if the determination satisfied the arithmatical test. A company court does not exercise an appellate jurisdiction. It exercises a jurisdiction founded on fairness. It is not required to interfere only because the figure arrived at by the valuer was not as better a~ it would have been if another method would have been adopted. What is imperative is that such determination should not have been contrary to law and that it was not unfair for the shareholders of the company which was being merged.

The Court's obligation is to be satisfied that valuation was in accordance with law and it was carried out by an independent body. Even though the Chartered Accountant who performed this function was a director of TOMCO but he did so as a member of renowned firm pf chartered accountants. His determination was further got checked an~ approved by two other independent bodies at the instance of shareholders of TOMCO by the High Court and it had been found that the determination did not snlier from any infirmity. The company Court, therefore, did iiot commit any error in refusing to interfere with it. May be that if some other method would have been adopted probably the determination of valuation could have been bit more in favour of the shareholders.

BUt since admittedly more than 95% of the shareholders who were the best judge of their interest and were better conversant with market trend a~ed to the valuation determined it could not be interfered by courts as, 'certainly, it is not part of the judicial process to examine entrepreneurial activities to ferret out flaws. The court is least equipped for snch oversights. Nor, indeed, is it a function of the judges in our constitutional scheme. The internal management, business activity or in· stitutional operation of public bodies cannot be subjected to inspection by · the Court. To l(o so, is incompetent and improper and, therefore, out of bounds. Nevertlieless, the broad parameters offairness in administration, bona fides in action and the fundamental roles of reasonable management of public business, if breached, will become justiciable. (734-H, 735-A-G] Fertilizer C01poration Kamgar Union (Regd) v. Union of India, (1981] 2 SCR 52, relied on. Buckley qn Companies Act 4th Ed.

; Palmer on Company Law, 23rd Ed. , referred to. , 2. A scheme of amalgamation cannot be faulted on apprehension and speculation as: to what might possibly happen in future. The present is certain and taken care of by Clauses 11. 1, 2 and 3 of the scheme. And unfriendly throwing out being amply protected by taking recourse to Labour Court no unfairness arises apparent or inherent. Nor the claim that merger s'1all result In, 'synergies' can render the scheme bad. Im· HINDUSfANLEVER EMPLOYEES UNIONv. HINDUSfAN LEVER LTD. 731 proved technology and scientific method results in better employment prospects. Anxiety should be to protect workers and not to obstruct development and growth. May be that advanced technology may reduce the manpower but so long those who are working are protected they are not entitled to hinder in modernization or merger under misapprehension that future employment of same number of worker may stand curtailed.

The wage differential arising between employees of two companies could not result in making the merger as unfair since the service conditions of TOMCO workers have been protected they couldnot claim that unless they were paid the same emoluments as is being paid by Hindustan Lever the merger was unjust. When more than 95% of the shareholders had agreed to the valuation determined by the chartered accountant all procedure irregularities that the workers, shareholders were not permitted to attend the meeting or that material facts were concealed from them, could not vitiate the determination. [736-F·H, 737-A-B) 3. 1. Indian Law enjoys a duty on the court to examine objectively and carefully if the merger was not violative of public interest. What would be public interest is a· dynamic concept Which keeps on changing. It is an expression of wide amplitude. Its perspective may change when merger is of two Indian companies.

But when it is with subsidiary of foreign company the consideration may be entirely different. It Is not the interest of shareholders or the employees only but the interest of society which may have to be examined and a scheme valid and good may yet be bad if it is against public interest. [737-D, Fl 3. 2 Section 394 casts an obligation ·on the court to be satisfied that the scheme for amalgamation or merger was not contrary to public Inter· est. The basic principle of such satisfaction is none other than the broad and general principles inherent in any compromise or settlement entered between parties that it should not be unfair or contrary to public policy or unconscionable. In amalgamation of companies, the courts have evolved, the principle of, prudent 'business management test' or that the scheme should not be a device to evade law.

But when the Court is concerned with a scheme of merger with a subsidiary of a foreign company then the test is not only whether the scheme shall result In maximizing profits of the shareholders or whether the interest of employees was protected but it has to ensure that merger shall not result in impeding promotion of industry or shall obstruct growth of national economy. Liberalized ~conomic policy is to achieve this goal. The merger, therefore, should not be contrary to this objective. (737-H, 738-A-B] The jutisdiction of the court in this regard is comprehensive. Custine Re Hoare, (1933) AER Ch. 103; Bugle Press UC, (1961) Chancery Di)'ision 270, relied on. 3. 3 The legislature itself has amended Foreign Exchange Regulation Act, 1973 by ~ct 29 of 1993, the Monopolies and Restrictive Trade Practices Act, 1969 anll Companies Act, 1956 by Act of 58 of 1991. The Scheme of amalgamation did not run counter to any legislative provision or policy of the Govern111ent.

The claim that the assets were being transferred for a very meager sum by itself would not render the agreement bad or against public policy. Once the FERA was amended and assets of the Indian company co'lld be transferred to foreign company then the amalgamation could not be withheld when the shareholders themselves did not raise any objection nor was it raised by financial institutions or statutory bodies. (740-F, 741-G, 742-C] 4. Transfer of share to a foreign company on nnder valuation is a matter of concern. The transfer of shares by one company to another company is J! rimarily to be determined by the shareholders and, therefore, if the 99% are of the view that the valuation of the shares was reasonable and fair then the conrt should be slow to interfere with it. But a shareholder may not be i11terested in the ultimate effect of allotting shares to a multi-national on a low price valuation, but the court certainly is.

That the valuation was low-priced was found even by the High Court. Therefore, it was not op*n to the respondents to argue that the valuation of Rs. 105 having been accepted by majority of almost all the shareholders, no public interest was involved in it. No further need be said as allotment of shares to UL at Rs. lOS was not approved by the Reserve Bank oflndia. It bas been challenged before the High Court and was pending adjndication. [742-D-G) CIVII. ,APPELLATE JURISDICTION: Special Leave Petition (C) No. 11006 of 1994 etc. etc. From the Judgment and Order dated 18. 5. 94 of the Bombay High Court in AplJeal No. 224 of 1994. S. K Dhoiakia, Rajeev Dhawan and Ms. Indra Jaisingh, Sanjay I HINDUSTA-1\ILEVER EMPLOYEES UNION'· HINDUSTAN LEVER LID. [SAHAI,J. J 733 Singhvi, B. M. Singhvi, Brij Bhushan, Arvind Minocha, Ms. Veena Minocha, Ms. Aparna Vishwanathan, V. S. Chauhan, R. Santhana Krishnan, Gopal Singh, Sanjay Parikh and Ms. Aparna Bhat for the Petitioner. Ashok H. Desai, T. R.

Andhyarujina, H. A. Desai, Ashish Wad, Ms. Tamali Wad, Mrs. J. Wad, Ravinder Narain, Aditya Narain, Mohit Kapoor, Rajan Narain, D. N. Mishra and Rajeev Kumar Singh for the Respondents. P. H. Parekh for the Intervenor. The Judgment of the Court was delivered by R. M. SAHAI, J. Merger under the Companies Act, 1956 (in brief 'the Act,) of the two big companies-one, Hindustan Lever Limited {HLL), a snbsidiary of Uni Lever (UL), London based multi national company, and other Tata Oil Mills Company Ltd. (In brief 'TOMCO') the first Indian company found in 1917 and public since 1957 which has been found by the High Court to be still 'not financially insolvent or sick company' was unsuccessfully challenged in the High Court by few rather nominal shareholders of TOMCO, Federation of Employees Union of both the TOMCO and HLL, Consumer Action Group and Consumer Education and Research Centre.

The attack varied from statutory violation, procedural irregularities of provision of the Act to ignoring effect of the provisions of Monopolies & Restrictive Trade Practices Act, 1969 under valuation of Shares, its preferential allotment on less than the market price to the multi national, failure to protect the interest of employees of both the companies and above all being violative of public interest. The High Court was not satisfied that either the merger was against public interest or that the valuation of the shares was prejudicial to the interest of the shareholders of TOMCO or that the interest of the employees. was not adequately protected. It was held that there was no violation of Section 391{1){a) of the Act and the claim that the disclosures in the explanatory statement were not as required was without basis as it was not established that the statement did not disclose correct financial position of TOMCO.

• Nor there was anything to show that the material was not disclosed. The Court held that the petitioner failed to establish any fraud or prejudice. On valuation of share for exchange ratio the Court found that a well reputed valuer of a renowned firm of chartered accountants and a director of TOMCO determined the rate by comhining three well known methods, namely, the net worth method, the market value method and the earning method. The figure so arrived could not be shown to be vitiated by fraud and mala fide aod the mere fact that the determination done by slightly different method might have result in different conclusion would not justify interference unless it was found to be unfair. And in that the petitioner failed miserably.

The High Court did not agree that the approval to scheme of merger should be withheld till the complaint filed before Monopolies & Restrictive Trade Practices Commission was not finally decided as the jurisdiction exercised by the High Court under the Act aod that by the Commission under MRTP Act were entirely different. Nor did it find aoy merit in the challenge that interest of employees of the two companies was not adequately taken cate of. It was held that service conditions of TOMCO, the traosferor compaoy, having been protected it could not claim it to be prejudicial either because they were not assured of same conditions of service as was operative in HLL or that there was no similar provision protecting the interest of HLL employees. The apprehension of the employ~es against probable retrenchment as the employees of HLL were already surplus was rejected as of no substaoce since such disputes if necessary could be raised in labour Court.

On preferential allotment of shares lo UL on less thao market value the Court held that HLL was holder of 51 % share from before aoy allotment therefore the allotment which placed them at par with same holding was neither illegal nor violative of public interest. ,E Same grievaoces have been reiterated by the shareholders, the Employees Union aod the Consumer Action Group before this Court with fresh dressings aod flourish. The sentinel nature of jurisdiction exercised by the High Court in Company jurisdiction was emphasised with veheme11ce. It has urged that the High Court which is expected to act as guardian in compaoy matters failed to exercise its jurisdiction aod was swayed by considerations which were neither legal nor relevaot.

Attempt was made to show that the determination of valuation was vitiated as the chartered accountaot to whom the duty was entrusted did not perform its function• objectively aod in accordaoce with settled finaocial norms aod practice aod its action was vitiated as he was one of the directors of the TOMCO'. Comparative figures of the shares of the two companies their market value, their holding in the market etc. were placed to demonstrate that the calculation was vitiated. But what was lost sight of that the jurisdiction of the Court in .. HINDUSTAN LEVER EMPLOYEES UNION'· HINDUSTAN LEVER LTD. (SAHA! , J. ) 735 sanctioning a claim of merger is not to ascertain with mathematical accuracy if the determination satisfied the arithmatical test. A company court does not exercise an appellate jurisdiction. It exercises a jurisdiction founded on fairness.

It is not required to interfere only because the figure arrived at by the valuer was not as better as it would have been if another method would have been adopted. What is imperative is that such determination should not have been contrary to law and that it was not unfair for the shareholders of the company which was being merged. The Court's obligation is to be satisfied that vuluation was in accordance with law and it was carried out by an independent body. The High Court appears to be correct in its approach that this test was satisfied as even though the Chartered Accountant who performed this function was a director of TOMCO but he did so as a member of renowned firm of chartered accountants. His determination was further got checked and approved by two other independent bodies at the instance of shareholders of TOMCO by the High Court and it has been found that the determination did not suffer from any infirmity.

The company court, therefore, did not commit any error in refusing to interfere with it. May be as argued by the learned counsel for the petitioner that if some other method would have been adopted probably the determination of valuation could have be~n a bit more in favour of the shareholders. But since admittedly more than 95% of the shareholders who are the best judge of their interest and are better conversant with market trend agreed to the valuation determined it could not be interfered by courts as, '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 p to inspection by the Court. To do so, is incompetent and improper and, therefore, out of bounds.

Nevertheiess, 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. ' Fertiliser Corporation Kamgar Union (Regd. ), Sindri & Ors. v. Union of India & Ors. , (1981) 2 S. C. R. 52. See Buckley on Companies Ac4 14th Ed. P. 473 & 474 & Palmer on Company Law, 23rd Ed. para 79. 16. Nor is there much merit in the claim of the employees that their interest had not been adequately protected. The scheme of amalgamation provides that all the staff, workmen or other employees in the service of the transferor company (TOMCO} immediately preceding the effective date shall be<;ome the staff, workmen and employees of the transferor company. Clajlse 11. 1 provides that their services shall be deemed to have been continuing and not have been interrupted. Clauses 11. 2 and 11.

3 protect the interest by providing that the terms and conditions of such employees shiill not be less favourable and all benefits such as PF etc. shall stand transferred to the HLL. The grievance of the employees that . no safeguard has been provided for Hindustan Lever Employees Union appears. to be off the mark as it is the interest of the employees of TOMCO which had to be protected. Even the submission that merger will create unemployment or that it may result in many employees of the TOMCO being rendered surplus does not carry much weight as these are matters which can be taken care of by the Labour Court if the contingency arises. The learned' counsel for the petitioner time and again took strong exception to the observation made by the High Court that any dispute about retrenchment etc. could b~ adjudicated by the Labour Court.

He vehemently submitted (hat the availability of remedy after retrenchment should not have coloured the vision of the court to adjudicate upon the reasonableness of the scheme. The submission overlooks the primary duties and functions of a comp~ny court in matters of merger. When the court found that service conditions of the merged company shall not be to their prejudice it was fully jnstified in rejecting the claim of employees as it was neither unfair nor unreasonable. Further the Court in its anxiety to be fair to the employee$ recorded the statement of the learned Advocate General who appeared for HLL that no employee of HLL has been rendered surplns and in such contingency the company has resorted to friendly handshake by either giving lump sum or pension. A scheme of amalgamation cannot be faulted on apprehension and speculation as to what might possibly happen in future. The present is certain and taken care of by Clauses 11. 1, 2 and 3 qf the scheme.

And unfriendly throwing out being amply protected by taking recourse to Labour Court no unfairness arises apparent or inherent Nor the claim that merger shall result in, 'synergies' can render the sch~me bad. Improved technology and scientific method results in better employment prospects. Anxiety should be to protect workers and not a obstruct development and growthc May be that advanced technology .. may reduce the manpower but so long those who are working are protected they are not entitled to hinder in modernisation or merger under misapprehension that future employment of same number of workers may stand HINDUSTAN LEVER EMPLOYEES UNION v. HINDUSTAN LEVER LID. [SAHA! , J. ) 737 curtailed .. The wage differential arising between employees of two companies cannot result in making the merger as unfair since the service conditions of TOMCO workers having been protected they cannot claim that unless they are paid the same emaluments as is being paid by Hindus- ' .

tan Lever the merger was unjust. Various subsidiary submissions that the workers, shareholders were not permitted to attend the meeting or that material facts were concealed from them, does not appear to be correct as when more than 95% of the shareholders have agreed to the valuation determined by the chartered accountant all these procedural irregularities cannot vitiate the determinations. What requires, hO\yever, a thoughtful consideration is whether the company court has applied its mind to the public interest involved in the merger. In this regard the Indian law is a departure from the English law and it enjoins a duty on the court to examine objectively and carefully if the merger was not violative of public interest. No such provision exists in the English law. What would be public interest camiot be put in a straight jacket. It is a dynamic concept which keeps on changing.

It has been explained in Black's Law Dictionary as, 'something' in which the public, the community at large, has some pecuniary interest, or some interest by which . their legal rights or liabilities are affected. It does not mean anything so narrow as mere curiosity, whereas the interest of the particular locality which may be affected by the letters in question. Interest. shared by the citizens generally in affairs of local, State or national Government. ' It is an expression of wide amplitude. It may have different connotation and understanding when used in service law and yet a different meaning in criminal law than civil law and its shade may be entirely different in Company Law. Its perspective may change when merger is of two Indian companies. But when it is with subsidiary of foreign company the consideration may be entirely different. It is not the interest of shareholders or the employees only but the interest of society which may have to be • examined.

And a scheme valid and good may yet be bad if it is against public interest. Section 394 casts an obligation on the court to be satisfied that the scheme for amalgamation or merger was not contrary to public interest. The basic principle of such satisfaction is none other than the broad and general principles inherent in any compromise or settlement entered between parties that it should not be unfair or contrary to public policy or unconscionable. In amalgamation of companies, the courts have evolved, the principle of, 'prudent business management test' or that the scheme should not be a device to evade law. But when the court is concerned with a scheme of 11). erger with a subsidiary of a foreign company then the test ' " is not only wi).

ether the scheme shall result in maximising profits of the shareholders or whether the interest of employees was protected but it has to ensure that merger shall not result in impeding promotion of industry or shall obstrqct growth of national economy. Liberalised economic policy is to achieve this goitl. The merger, therefore, should not be contrary to this objective.. Reliance on English decision for Custina Re Hoare, 1933 AER Ch. 105 and Bugle Press UC, 1961 Chancery Division 270 that the power of the court is to be satisfied only whether the provisions of the Act have been COlJlplied w;th or that the class or classes were fully represented and the arrangement was such as a man of business would reasonably approve between two private companies may be correct and may normally be adhered \o but when the merger is with a subsidiary of a foreign company then economic interest of the country may have to be given precedence. 'the jurisdiction of the court in this regard is comprehensive.

In this case it was specifically claimed that the agreement was contrary to public interest. It was supported by relying on the terms of agreement wjierein it is mentioned that immoveable assets of TOMCO, except those which are specifically excluded, shall stand, transferred to HLL. It was 1ll'ged that even though the valuation of such assets was nearly Rs. 800 crores it was being transferred for Rs. 30 crores only. Another objection violating public interest, according to the learned counsel, was that as a resQit of merger the share holding of UL from 51 % was reduced to approximately 49%, but it was being brought on par by transferring 29,84,43,437 equity shares by preferential allotment by reducing the price of shares with the result that the multi-national shall have enormous advantages Which is not conducive to the society. The learned counsel submitted tbi>t there were only two renowned competing companies who were manufacturing soap and detergent.

With the merger of TOM CO with HLL there would be no competition and it would result in creating virtual monopoly in favour of HLL which could result not only in deterioration of quality, but in escalation of price. The learned counsel pointed out that even though HLL was a subsidiary of UL and claims to have the benefit of technical know-how etc. , yet the quality of soaps produced by TOMCO HINDUSTAN LEVER EMPWYEES UNION'· HINDUSTAN LEVER LTD. [SAllAI,J. J 739 was much better as compared to HLL. In reply it was urged that the maintenance of 51 % of paid-up equity share of UL was distinctively advantageous to HLL because the UL has become a source of major strength of HLL and has been responsible in several ways for its phenomenal growth and prosperity.

This status, it was urged, enable HLL to have from UL free of cost the benefits of Research and Development technology, know how, marketing support, both domes-tic and international including brand names, managements systems, train-ing facilities and other resources in normal course of business. It was further urged that as a result of HLL being a subsidiary of UL, HLL is able to utilise international brand names of UL, such as soaps under the , brand names Lux, Lux International, Lifebuoy, Pears, Dove, Surf, Sunlight, etc, It was urged that the price of Rs. 105 per share comprising of Rs. 10 towards the capital and Rs. 95 towardspremium-for preferential allotment to UL was worked out on the basis of norms jointly evolved by Apex Chambers of Commerce and Industry operating a( the national leve~ such as ASSOCHAM with Public Financial Institutions which own substantial shareholding in the publicly quoted companies, including HLL.

It was further stated that the company had taken advice from the Merchant Banking Division of Industrial Credit & Investment Corporation of India Limited with regard to fair price for the proposed preferential allotment to UL. The figure arrived at by the HLL was approved, it was stated by the Merchant Banking Division of Industrial Credit & Investment Corporation of India Ud. It was pointed out that not only the figure was found to be fair and reasonable by the authorities, but it was ensured further that UL will not transfer the shares for a minimum period of 7 years from the date of allotment and in the event of UL desiring to sell these shares at any time after seven years, but within 12 years from the.

date of the allotment, they would offer do so at the first instance in favour of other members of the company in fair and suitable mariner at a price worked out by reference to price earning multiple of 15_ as per the lasi published accounts of the company available at the time of such disposal. It was also urged that the price of Rs. 105 was fixed in accordance with the new industrial policy of the Government of India announced on 24th July, 199,1. The learned counsel urged that in pursuance of this policy, on 29th May, 1992 the Government of India repealed the Capital Issues Control Act, 1947 by Ordinance No. 9 of 1992 with the result that there was no control on the issues of shares. The determination, it was claimed, was in accord-ance with the guidelines issued by the SEBI on 11th and 17th June, 1992 which required existing companies wishing to raise foreign equity upto 51 % by taking a decision of the shareholders in a special resolution under . ~· Section Sl(l)(A) of the Act.

The learned counsel submitted that even though subsequently the State Bank of India has altered its policy, but that would not affect the determination or valuation done earlier as it was in accordance with the then existing quidelines and was approved by nearly 99% of the shareholders of the company. The learned counsel urged that in these circumstances, the High Court having found that the price of Rs. 105 having been worked out on the basis of price earning multiple of 15 based on the last published balance sheet of HLL, it was fair and reasonable and it was not liable to interference by this Court. Reliance - i was placed on N~eiI/e Industries (India) Ltd. & Ors. v. Needle Industries Newey (India) Holding Ltd. & Ors. , [1981] 3 SCC 333, where this Court approved the principle laid down by Lord Davey in Hilder v. Dexter, (1902) AC 474 at 480 that there was no law which obliged a company to issue its share at par because they were saleable at a premium in the Market.

It was vehemently argued that since it were the shareholders who were primarily concerned with the company's finances and they have decided almost unanimously to allot the share to the parent company at the price of Rs. 105, it cannot be urged that the members of the HLL were not acting in the interest of the company as a whole. Each of these challenges claimed to be violative of public interest have to be examined in the prevailing atmosphere which opted for liberalisation of the Government policies to promote economic growth of the country. What is remarkable is that the Legislature itself has amended Foreign Exchange Regulation Ac~ 1973 by Act 29 of 1993 ('FERA' for short), the Monopolies and Restrictive Trade Practices Act, 1969 and Companies Act, 1956 by Act of 58 of 1991.

The amendment in MRTP Act was effected as : "The basic philosophy behind the MRTP Act was never to inhibit industrial growth in any manner but to ensure that such growth is channelised for the public good and is not instrumental in per-petuating concentration of economic power to the common detriment. With the growing complexity of industrial structure and the need for achieving economies of scale for ensuring higher produc-tivity and competitive advantage in the international market, the HINDUSTAN LEVER EMPLOYEES UNION v. HINDUSTAN LEVER LTD. (SAHA! , J. ] 741 thrust of the industrial policy has shifted to controllinF; and regulat-ing the monopolistic, restrictive and unfair trade practices rather than making it necessary for certain undertakings to obtain prior approval of the Central Government for expansion, establishment of new undertakings, merger, amalgamation, take over and ap-pointment of Directors. It has been t!

te experience of the Government that pre-entry restriction under the MRTP Act on the investment decision of the corporate sector has outlived its utility and has become a hindrance to the speedy implementation of industrial projects". In pursuance of this objective, Sections 20 to 26 were repealed. Section 23 ' . · of it which empowered the Commission to. examine the scheme of amalgamation or merger is no more on the statute book. The argument of the Petitioners that the Commission being court of primary jurisdiction the. Company Court should have stayed its hands and awaited the decision of the Commission does not appear after amendment to be sound. Effect of the merger resulting in monopoly is already pending before the Commission. Therefore, no further comment is called for. hi FEM there was a restriction on holding of assets by non-residents under Section 11 of the Act.

Section 29 prohibited a company which was not incorporated in India or in which the non-resident interest was more than 40% from establishing in India a branch, office or any part of the undertaking without permission from the Reserve Bank of India. Section 31 prolubited any company in which non-resident Indian had more than 40% share from acquiring or holding any immovable property in India. By Act 29 of 1993 Section 11 has been repealed and Sections 29 and 31 have been amended and there is no restriction now on a non-resident company holding in excess of 40% share. In Companies Act, Section 108-A to 108-1 have been added. The scheme of amalgamation does not run counter to any legislative provision of policy of the Government. The claim of the Petitioners that the transfer for a paltry sum of Rs.

30 crores was mala fide as it was quid pro quo arrangement between UL and Tata Sons Limited by which the immovable assets of TOMCO were virtually given to Tata Sons Limited and in lieu of UL has been allotted 2984347 equity shares of the face value of Rs. 10 each at the price of Rs. 100 per share so as to ensure that the share of UL wlj. ich stood diluted continued to remain at 51 % was not found to have any merit as the valuation was determined by renowned and authorised valuers. It was held that sale by open public auction or inviting tenders fwm general public may have fetched more price due to competition, but that C<lmld not result in vitiating the determination of the valuation. The amalgamation cannot be faulted for this reason. Even assuming that the assets are being transferred for a very meagre sum but that by itself would not render the agreement bad or against public policy.

Once the FERA was amended and assets of the Indian company could be transferred to foreign company then the amalgamation cannot be withheld when the shareholders themselves did not • 1 raise any obje~tion nor was it raised by financial institutions or statutory bodies. The cl). allenge, therefore, founded on transfer of assets at lower price cannot be upheld as violative of public interest. Transfer of share to a foreign company on under valuation is of course a matter of concern. It is true that the transfer of shares by one company to another company is primarily to be determined by the shareholders and, therefore, if the 99% are of the view that the valuation of the shares was reasonable and fair then the court should be slow to interfere with! it. But what is necessary to be emphasised is that a shareholder may not be interested in the ultimate effect of allotting shares to a multi-national on a low price valuation, but the court certainly is.

For instance, if the value of the share which has been determined at Rs. 105 for allotment tp HLL is hypothetically determined, say at Rs. 210, then the result would be that the UL will have to pay more in lieu of getting the shares and that could definitely bring more foreign exchange to the national stream. It is just one illustration to demonstrate that how low pricing of the valuation of sijare effects the public interest. That the valuation ·was low-priced was fotind even by the High Court. Therefore, it is not open to the respondents to argue that the valuation of Rs. 105 having been accepted by majority of almost all the shareholders, no public interest is involved in it. No further p. eed be said as allotment of shares to UL at Rs. 105 is not approved by ti). e Reserve Bank of India. It was been challenged before the High Court and is pending adjudication. Even though I have agreed with Brother Sen, J.

that the appeals and petitions are ~able to be dismissed, but I have added a few words to HINDUSTAN LEVER EMPWYEl'S UNION'· HINDUSTAN LEVER LID. (SEN,J. J 743 highlight the expansive power of the court in public interest while approv-ing the scheme for amalgamation between a subsidiary company of multi-national and an Indian company in the liberalised economic policy. SEN, J, A Scheme of Amalgamation of two Companies - Tata Oil Mills Company Limited and Hindustan Lever Limited - is the subject matter of dispute in this case. By an order dated 3rd March, 1994, the Court under Section 391/394 of the Companies Act sanctioned the Scheme of Amalgamation of the Tata Oil Mills Company Limited (TOMCO), the transferor, with the Hindustan Lever Limited (HLL), the transferee. .. Aggrieved by the said Judgment and order dated 3. 3. 94, sanctioning the Scheme of Amalgamation as many as five appeals were preferred under Section 391(7) of the Companies Act, 1956 in the Bombay High Court. Appeal No.

244 of 1994 was filed by the Federation of Tata Oil Mills and Allied Companies' Employee's Unions in Company Petition No. 332 of 1993 connected with Company Application No. 250 of 1993. Appeal No. 298 of 1994 was filed by Mr. Rabindra Hazari a shareholder of TOMCO in Company Petition No. 332 of 1993 connected with Company Application No. 250 of 1993. Appeal No. 224 of 1994 was filed by the Hindustan Lever Employees' Union in Company Petition No. 333 of 1993 connected with Company Application No. 251 of 1993. Appeal No. 301 was filed by Consumer Action Group and other similar Organisations, in Company Petition No. 333 of 1993 connected with Company Application No. 251 of 1993. Appeal No. 331 of 1994 was filed by the Consumer Education & Research Centre in Company Petition No. 333 of 1993 connected with Company Petition No. 251 of 1993. The Appeal Court dismissed all the five appeals.

The appellants have now come before this Court against the judgment of the Appeal Court dated 18th May, 1994. According to the appellants, the scheme should not be sanctioned for the following reasons : (A) Violation of Section 393(1) (a) of the Act in not making required disclosures in the explanatory statement. (B) Valuation of share exchange ratio is grossly loaded in favour of HLL. (C) Ignoring the effect of provisions of the Monopolies and Restric- "~-live Trade Practices Act (the MRTP Act). (D) ,Interest of employees of both the Companies was not adequately taken care of. (E) ,Preferential allotment of shares less than market price to Unilever which is not in public interest. (F) Mala fides on aceount of existence of quid pro quo between . ' Unilever and Tata Sons Ltd. TOMCO manufactures and sells products like soaps, detergents, toiletries and animal feeds. HLL also manufactures and sells similar products. Both the Companies have their registered office at Bombay.

TOMCO has more than 60,000 shareholders with the following break-up: 42% Tata Group 41 % Financial Institutions (FI) ~7% General Public HJ;L has nearly 1,30,000 shareholders with the following break-up: 51% Unilever PLC (UL) - a Company incorporated under the English Companies Act, having its registered office at London. ~6% FI 33% General Public Onginally, Unilever - the parent Company of HLL - had 100% shareholding in HLL. The declined in the business of TOMCO began in 1990-91. During 1991-92, TOMCO incurred loss of Rs. 13 crores. In the next six months the loss increased to over Rs. 16 crores. The Board of Directors of TOMCO consideled various alternatives for TOMCO including its association with HINDUSTAN LEVER EMPLOYEES UNION v. HINDUSTAN LEVER LID. (SEN, I. ] 745 HLL wl)ich was a more prosperous and-a larger Company operating in the same field of activities. Accordingly, the l! oard of Directors of TOMCO put up a proposal before the Board of Directors of HLL. Both availed of .

I'~ the professional service of Mr. Y. H. Malegam, Senior Partner of Mis. S. B . Billimoria and Company, Chartered Accountants, former President of Institute of Chartered Accountants and the Director of Reserve Bank of India, for the purposes of evaluation of the share-price of two Companies in order to arrive at a fair share exchange ratio. On 19th March, 1993, Mr. Malegam gave valuation report and recommended an exchange ratio of two equity shares of HLL for every fifteen ordinary shares of TOMCO. The Board of Directors of both the Companies at their separate and independent meetings accepted the recommendation and approved the Scheme ,. of Amalgamation. The Scheme, inter a/ia, provides for transfer and vesting in HLL of the Undertaking and business of TOMCO together with assets and liabilities excluding certain assets and/or licence rights to use certain premises. Salient features of the Scheme are to be found in Clauses 1,7(d), 4, 5, 11 and 13. Clause 1.

7(d) sets out the details of excluded properties in which TOMCO has no more than licensees rights. Clause 4 _provides for transfer of 5 assets (immovable property) to be transferred to companic:S nominated by Tata Sons Ltd. at fair market value as will be independently assessed. Clause 5 provides that TOMCO shall (before or after the effective date) transfer to Tata Sons Ltd. or its nominee certain investments/shares owned by TOMCO at the then prevailing market value and in the case of unlisted shares at a value to be determined by Mr. Y. H. Malegam. Clause 11 provides for transfer of employees of TOMCO to HLL on the basis that their service shall be deemed to be continuous and the conditions of service after the transfer shall not be less favourable. Clause 13 refers to preferential allotment of equity shares to UL of face value of Rs. 10 each at the price of Rs. 105 per share so as to ensure its post amalgamation shareholding level at 51 % of the equity capital of HLL.

It may be mentioned that (i) investments/shares specified in Clause 5 have been realized and (ii) Clause 4 has been modified by the Company Court (a) by providing for transfer to Companies nominated by the Directors ofTOMCO in place of Tata Sons Ltd. and (b) by naming well reputed 'Chartered Accountants/Government Valuers. In Company Application No. 250 of 1993 filed by TOMCO the Court passed an order of 29th April, 1993 directing to call the meetings of the debenture holders, creditors, ordinary shareholders arid preference shareholders on 29th and 30th June, 1993, naming the Chairman of the meetings and calling upon him to submit the report within 21 days after conclusion of the meeting. TOMCO filed the Notices and explanatory statements under Section 393(1)(a) of the Act along with a proxy form before the Company ~egistrar, who after considering all objections settled the explanatory statements and approved the disclosures made therein.

Individual notices of the said meetings together with a copy of the Scheme of Amalgamation, the statement as settled by the Company Registrar and as require<) under Section 393(l)(a) and a proxy form were sent to .. , concerned members as required by law. On 21st June, 1993 a joint com-munication to shareholders of TOMCO and HLL was also sent. Public notices of the meetings were also issued through the print media. The meeting of the ordinary shareholders was held on 29th June, 1993 and was attended by 1,294 members holding 85,85,009 ordinary shares and by 1,652 members holding 55,18,251 ordinary shares through proxies. In the said meeting an1endment was proposed to the effect that the exchange ratio should be 5:15 shares in place of 2:15 shares as envisaged in the Scheme. 99. 64% of 'Ordinary shareholders voted against amendment and 99. 72% - ' voted in favour of the Scheme as proposed. Debenture holders voted 99%, secured creditors voted 100%, unsecured creditors voted 84.

30% and preference shareholders voted 100% in favour of the Scheme. The Scheme as proposec:I was thus approved in all the five meetings by 99. 72% of equity shareholdets in terms of values and 86. 72% in terms of number. In Company Application No. 251 of 1993 filed by HLL also similar direction for convening meeting of the equity shareholders and creditors were issued by the Court on 29th April for convening the meeting on 30th June, 1993. Similar procedure was followed in this also. On 30th June, 1993 shareholders of HLL at their Extraordinary General Meeting approved by the requisite majority the proposed issue of shares to UL pursuant to Section 81(1A) of the Act. The meeting of the creditors was held on 2nd July, 1993 lu)der the chairmanship of Chairman of HLL, Mr. S. M. Datta, as directed by the Court. The meeting of equity shareholders was attended by 2,528 members including proxies holding 9,59,27,477 equity shares.

In all 13 amendments were proposed but more than %% voted against the • HINDUSTAN LEVER EMPWYEES UNION v. HINDUSTAN LEVER LID. (SEN, I. ) 747 amendments. The creditors also voted for the Scheme. On 2nd August, 1993 Judges summons was taken out by Mr. M. C. Jajoo, praying inter alia for direction to M/s. A. F. Ferguson and M/s. N. M. Raiji & Co. , Chartered Acccillltants, to give their opinion on the valuation report of Mr. Malegam. The Regional Director and the Official Liquidator were given notices of the petitions. In pursuance thereof the Regional Director submitted his report on 9th December, 1993 and Official liquidator submitted his report for winding up without dissolution under Section 394 of the Act. On 6th January, 1994 M/s. Ferguson and M/s. N. M. Raiji by their joint letter with copy to Mr. Jajoo confirmed that the share exchange ratio determined by Mr. Malegam was proper. The facts stated above were noted in the judgment under appeal and are not in dispute.

But a large number of legal issues have been raised in . this Court, questioning the Scheme of Amalgamation. Mr. Dholakia, learned Counsel appearing for Mr. Jajoo, one of the shareholders of TOMCO, has questioned the justification of the ratio of allotment of shares, 2 shares of HLL in exchange of 15 shares of TOMCO. According to Mr. Dholakia, this ratio is entirely unsatisfactory and unfair to the TOMCO shareholders. It has been contended that he Board of Directors of TOMCO did not explain the Scheme of Amalgamation in the explanatory statement circulated among the shareholders. In particular, how the share exchange ratio - 15 TOMCO shares to 2 HLL shares - was arrived at, was not stated in the explanatory statement. Instead of circulat-ing the valuation reports, TOMCO informed the shareholders that the reports were available for inspection at the registered office of the Company between 11. 00 A. M. to 1. 00 P. M. on 14 working days.

The shareholders were not told that the joint valuer was none other than Mr. Malegam, a Senior Partner of M/s. S. B. Billimoria and Company, and also a Director of TOMCO. Mr. Malegam could not be appointed auditor of TOMCO under Section 226(3) of the Companies Act, 1956. In that view of the matter, Mr. Malegam should not have been appointed Valuer under the Indian Companies Act, 1956. It was next contended that the reasons for the Board accepting certain proposals . to make preferential allotment of shares at Rs. 105 per share has not been properly explained. ICICI had given a valuation report stating that this report was only on the basis of the material supplied by HLL and not on the basis of any independeut verification. It is also significant that Mr. Malegam was a Director of ICICI. It was also contended that tlje valuation report was erroneous.

A combination of different methods of valuation was adopted, which was clearly against the law laid down by the Supreme Court in the case of Commissioner of Gift Tax, Bombay v. Smt. Kusumben Mahadevia, 122 ! TR 38. If the valuation was done by the net asset method, the exchange ratio should have been 1:2 in favour of TQMCO. Moreover, market value of the shares of the two Companies was taken at a point of time when the price of TOM CO shares was the lowe~t for a period of 27 months. Lastly, it was contended that the preferential allotment of shares to Unilever was part of the Scheme of Amalgamation. The Board should have explained why Rs. 366 was being paid for every HLL share by TOMCO, when Unilever was paying only Rs. .. 105 per HLL share. We are unable to uphold any of the above contentions raised by Mr. Dholakia. The overwhelming majority of the shareholders had approved the Scheme at the meeting called for this purpose and had approved the exchange ratio.

In fact, a proposal for amendment of the exchange ratio was also rejected by the overwhelming majority of 99% shareholders. There is no reason to presume that the shareholders did not know what they were doing. . , Being dissatisfied with the valuation made by Mr. Malegam, Mr. Jajoo had insisted for independent valuation and that was done. Two independent valuers -A. F. Ferguson and N. M. Raiji & Co. - had valued the shares and came to the conclusion that exchange ratio of 15:2 was p correctly de\ermined by Mr. Malegam. Faced,with this situation, Mr. Dholakia sought to produce a valnation report made by another valuer, G. Rai & Co. , Chartered Accountants. According tb this report, book value of equity share of TOMCO as on 31 3. 1992 based on audited and printed balance sheet of the Company )Vas ' I Rs. 57. 58 per share; whereas book value of equity share of HLL as on 31. 12. 1992 based on its audited and printed balance sheet was only Rs. 28. 84 per slJare. This, according to Mr.

Dholakia, demonstrated the absnr-dity of the valuation that had been made of the shares of the two Companies The exchange ratio was obviously unfair to the shareholders of TOMCO. 1:his report is produced before this Court for the first time. HINDUSTAN LEVER EMPLOYEES UNION'· HINDUSTAN LEVER LTD. [SEN,J. J 749 There was no dispute as to what should be the book value of TOMCO shares as on 31. 3. 93. The following share charts of the two Companies were enclosed with . the circular letter dated June 21, 1993 addressed to the shareholders of TOMCO and HLL by the Chairmen of two companies : HINDUSTAN LEVER LTD. EQUITY SHARE DATA The Market Price as on 17. 6. 1993 was Rs. 375 As at 31. 12. 92 31. 12. 91 31. 12. 90 Face Value (Rs. ) 10. 00 10. 00 10. 00 Book Value per Share (Rs. ) 23. 80 20. 75 27. 36 Dividend ( % ) 42. 00 38. 50% 42. 00% Earning per share (Rs. ) 7. 03 5. 73 6. 29 *On enlarged capital after the issue of bonus shares in the ratio of 1:2. THE TATA OIL MILLS COMPANY LTD.

EQUITY SHARE DATA The Market price as on 17. 6. 1993 was Rs. 52. 50 As at 31. 3. 93 31. 3. 92 313. 91 Face Value (Rs. ) 10. 00 10. 00 10. 00 Book Value per Share (Rs. ) 29. 75 29. 45 36. 17 Dividend (%) - 12. 50% 20. 00% Earning per share (Rs. ) 0. 30 0. 50 5. 19 The Profit & Loss Accounts of the two Companies for the last three years were also annexed. It appears that TOMCO made profit of Rs. 5. 64 crores in 1990-91. It came down to Rs. 1. 13 crores in 1991-92 and ultimately to Rs. 0. 65 crores in 1992-93; whereas HLL's profit in 1990 was Rs. 58. 74 crores and it went up to Rs. 98. 48 crores in 1992. The Market price of TOMCO share truly reflected the bleak outlook of the Company. It has been stated that in the financial year 1992-93 TOMCO had shown a gross profit of Rs. 27. 18 crores only after taking credit of Rs. 36. 69 crores on sale of investments and Rs. 18. 04 crores on account of refund of Excise Duty pertaining to prior periods.

In fact, in the Directors' Report of the year ... 1992-93, lt was stated that the Company had suffered severe set back resulting ln operating loss. The position got worse in the year 1993-94. The Company,suffered operating loss in the region of Rs. 16 crores and had to sell not oQly investments, but also fixed assets of the Company. In the background of these facts, it cannot be said that the market price as on 17. 6. 93 did not reflect the true picture of the value of the Company's shares. If the market price of the shares of the two Companies as on 17. 6;93 is compared, the quoted price of HLL was Rs. 375 per share; whereas the quoted price of TOMCO was Rs. 52. 50 per share. The earning per TOMCO share had come down from Rs. 5. 19 on 31. 3. 91 to Rs. 0. 50 on 31. 3. 92 and Rs. 0. 30 on 31. 3. 93. As against this, dividend paid on HLL shares was 42% in the years ending on 31. 12. 90 38.

50% (on enlarged capital after the issue of bonus shares in the ratio of 1:2 in the year ending on 31. 12. 91 and 42. 00% again in the year ending on 31. 12. 92. It is true that book value per share of TOMCO was higher than that of HLL. But, even without any bonus issue, the book value of TOM CO shares had come down from Rs. 36. 17 per share on 31. 3. 91 to Rs. 29. 75 per share . on 31. 3. 1993. ~ What emerges from all these figures is that on the market price basis as on 17. 6. 93 (the last price available before the circular letter dated 21. 6. 93 issued to the shareholders of the two Companies) the exchange ratio of 2:15 was very fair. If the yield method is adopted, the ratio would be astronomically high in favour of HLL. But, if the book value is taken per share, then TOMCO shares would be of higher value than HLL shares. The . question is what method should be adopted for arriVing at a proper exchange ratio.

The usual rule is that shares of the going concern must be taken at quoted market value. This principle was also recognised < ' by this Court in the ease of Commissioner of Wealth Tax v. Mahadeo Ja]Qn, 86 ! TR 621, In th1s case, Mr. Malegam adopted a combination of three well-accepted methods to arrive at the fair value of the shares. The methods are: (I) the yield method; (II) the asset value method; and (III) the market value method. After considering all the relevant factors, the valuer recom- HINDUSTAN LEVER EMPLOYEES UNION'· HINDUSTAN LEVER LTD. [SEN, J. ] 751 mended in exchange ratio of 2 equity shares of HLL for every 15 ordinary shares of TOMCO. Mr. Dholakia has contended that a combination of two methods of valuation was condemned by this Court in the case of Commissioner of Gift Tax, Bombay v. Smt. Kusumben D. Mahadevia, 122 ITR 38. The valuation of the shares done by Mr. Malegam was clearly erroneous and contrary to the principles laid down by this Court in that case.

The observations made by this Court in Smt. Kusumben D. Mahadevia's case were in connection with the valuation of shares of a going concern under the provisions of Wealth Tax and Gift tax Acts and the rules framed thereunder. Under those two Acts, at the material time, valuation had to be done on the basis of the price which, in the opinion of the assessing officer, the shares would fetch if sold in the open market. Both Section 6 of the Gift Tax Act and Section 7 of the Wealth Tax Act had adopted the same principle of valuation. If that method of valnation is adopted, then the exchange ratio fixed in this case cannot be described as unfair to the Company's shareholders in any way. If profits earning method had been adopted, the ratio would have been very much worse for TOMCO shareholders. This problem of valuation in the case of amalgamation of two Com- .

• parries has been dealt with by Weinberg and Blank in the book "TAKE- OVERS AND MERGERS', in which it has been stated that some of all of the following factors will have to be taken into account in determining the final share exchange ratio : (1) The Stock Exchange prices of the 'hares of the two companies before the commencement of negotiations or the an-nonncement of the bid. (2) The dividends presently paid on the shares of the two companies. It is often difficult to induce a shareholder, particular- .. ly an institution, to agree to a merger or a share-for- share bid if it involves a r

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