S. B. Majmudar & N. P.

Singh

Mafatlal Fine Spinning &

Manufacturing Co Ltd Miheer H Mafatlal
(MFL)
1931 Director OF MFL &
R.O., Bombay SH of MIL
(Objection to the Scheme)
Textiles & fluorine
based Chemicals

Mafatlal Industries Ltd (MIL)

Name Change 1974 Cotton Spinners Wool, silk, jute and
RO – Ahmadabad hemp spinners… linen manu., to work
(New Shorrock Spinning & Manu. Co. spinning and weaving mills, cotton mills,
jute mills cotton spinners
Ltd) 1913
Battle royal - Fought between - Contesting parties
– Arvind Mafatlal & Miheer Mafatlal
 At the time of the death of the said Bhagubhai
the said Hemant was just 9 years of age.
 For all practical purposes managed by the said
Navinchandra
 On the death of Navinchandra, the Mafatlal
Group was managed by Arvind Mafatlal,
Yogindra Mafatlal, Rajesh Mafatlal
 Family arrangement to divide into four groups
was not given effect
 MM sold the shares in the MIL – suit filed to
validate the sale – pending before court
 Reasons for Amalgamation
 Proposed amalgamation will Pave the way for better, more
efficient & economical control in the running of operations.
 Economics in administrative & management costs will improve
in combined profitability
 Amalgamated Co. will have the benefit of the combined reserves,
manufacturing assets, manpower & cash flows of the two Co’s.
The combined technological, managerial & financial resources
are expected to enhance the capability of the amalgamated Co. to
invest in larger and sophisticated projects to ensure rapid
growth.
 Amalgamated Co. will have a strong & large resource
base. With a strong resource base, the risk bearing capacity
of the amalgamated Co. will be substantial . Hitherto,
with limited resources & capacity, opportunities which
would otherwise have been profitable to the group.
 American Airlines
Merger with US Airways
• $11 billion deal - Creates the world’s biggest airline.
• Reasons:
• “Combined airline will have the scale, breadth and
capabilities to compete more effectively and
profitably in the global marketplace,”
• “Combined network will provide a significantly more
attractive offering to customers, ensuring always the
ability to take them where the customers want to go.”
(Parker) (Business Times) (Feb 14, 2013)
•
 MM - No objection in - Bombay High Court -
Party to the passing of the resolution
 Bombay High Court had Sanctioned
 Approached - High Court of Gujarat for
sanctioning – the Scheme on behalf of the
Transferee – Co. (moved on 8th February 1994)
 MM was also SH of MIL - Nine Objections to
the Scheme (holding 40,567 shares)
Single Judge & Division Bench
Sanctioned the Scheme
 Meeting
 Meeting was attended by 5522 members (Holding 20,48513 fully
paid equity shares of Rs. 100/each)
 Resolution was passed without modification by the
requisite majority as 5298 members holding 19,36,964
fully paid equity voted in favour of the Scheme
 143 members holding 86,061 fully paid opposed
Scheme
 Report of - Chairman was submitted to the High Court
 MIL filed Co. Petition No.22 of 1994 u/s. 391(2)
 Application was ordered to be published in local newspapers as
well as in the Bombay edition of the said newspaper.
 Notice was also issued to –Reg. Dir., CLB, Western Region,
Bom.
 Notice issued to CG (Sec. 394A) (not to make any
representation in favour or against)
 Miheer’s Objections? Shanti Bhushan
 MIL did not disclose the interest of the
directors, viz. Arvind Mafatlal & Hrishikesh
Mafatlal - in the explanatory statement
supporting the Scheme & SH’s were misled &
could not come to an informed decision in
approving the Scheme. Hence, majority to the
said Scheme vitiated.
Scheme as proposed was unfair to the
minority SH’s represented MM &
consequently it ought not to have been
sanctioned by the Court;
 Miheer’s Objections
 Scheme - Unfair to the equity SH’s as the
exchange ratio of equity shares of the transferor
& transferee Co’s was ex facie unreasonable &
unfair to the SH’s of the transferee – Co. (5:2)
 That MM represented a distinct class of equity
SH’s so far as the transferee – Co. &
consequently separate meeting so far as his
group is concerned should have been convened
by the Co. Court & as that has not been done
the Scheme is liable to be rejected.
 MIL’s Arguments – Soli Sorabjee
 No illegality either procedural or substantive vitiating
the Scheme & that there was no suppression of relevant
material from the SH’s when the Scheme was put to vote
 Nothing to do with the question of sanctioning the
Scheme for its better economic viability
 Personal disputes of Directors two Co’s - Irrelevant - out
of consideration of - Equity SH’s - Not at all concerned
with - internal feuds & Non-disclosure of such disputes
had no adverse effect on the decision of the majority
SH’s who had approved the Scheme with a thumping
majority of about 95% & MM who was objecting to the
Scheme was in microscopic minority of 5% of the total
voting strength.
 MIL – Cont….
 That it is wrong to assume that the transferee Co.
was a family concern and was managed by families
(AM & HM 2 out of 13 directors) - 40% shares were
held by outside financial institutions
 Not – Unfair – MM never remained present
personally at meeting - Sent proxies – No right to
speak
 C.C. Chokshi & Co. - Reputed CA’s, had considered all the
pros and cons - Suggested the Share Exchange Ratio and
such an expert opinion - endorsed by financial institution
ICICI.
 MM - Director of the transferor Co. - Approved the Share
Exchange Ratio – acting for MFL (transferor)
 No question of coercing - Minority by the majority – MM
not remained present.
 Miheer H. Mafatlal v. Mafatlal Industries Ltd.
AIR 1997 SC 506 , (1997) 1 SCC 579;
 Co. Court which is called upon to sanction such
a scheme has not merely to go by the ipse
dixit of the majority of the SH’s or
creditors or their respective classes who
might have voted in favour of the scheme
by requisite majority
But the Court has to Consider:
Pros & Cons of the scheme with a view to
finding out whether scheme is
Fair, just & reasonable &
Not contrary to any provisions of law &
Does not violate any public policy
 Cannot be said - rubber stamp
 If Court finds - it is an unconscionable or an
illegal scheme or is otherwise unfair or unjust
to the class of SH’s or creditors for whom it is
meant.
 It cannot be said that – Court - has to act
merely as a rubber stamp & must almost
automatically put its seal of approval
 It is trite to say that once the scheme gets
sanctioned by the Court it would bind even the
dissenting minority SH’s or creditors.
 Therefore - Fairness of the scheme qua them
also has to be kept in view by the Court while
putting its seal of approval
 Lawful & Just and fair
To be seen whether the proposed
scheme is lawful &
Just & fair to the whole class of
creditors or members - Including the
dissenting minority to whom it is
offered for approval
Which has been approved by such class
of persons with requisite majority vote
 Question Remains!!!
Whether the Court has jurisdiction
like an Appellate Authority to
minutely scrutinize the scheme
&
To arrive at an Independent
Conclusion - Whether the scheme
should be permitted to go through or
not
 Commercial wisdom?
 Commercial Wisdom of the parties to the
scheme?
Who have taken an informed decision
About the usefulness & propriety of the
scheme by supporting it by the requisite
majority vote.
Court certainly would not act as a Court
of appeal & sit in judgment
 Over the informed view of the concerned
parties to the compromise as the same would be
in the realm of corporate & commercial wisdom
of the concerned parties.
SUPERVISORY & NOT APPELLANT
Court has neither the expertise nor the
Jurisdiction
To delve deep into the commercial
wisdom exercised by the creditors and
members of the Co. who have ratified
the Scheme by the requisite majority.
Court’s jurisdiction to that extent
Is peripheral & supervisory & not
appellant.
UMPIRE IN A GAME OF CRICKET?
• Court to act like an umpire in a game
of cricket?
• Who has to see that both the teams
play their game according to the
rules and do not overstep the limits.
• But subject to that how best the
game is to be played is left to the
players & not to the umpire.
 Buckley - Exercising its power of sanction the
Court will see?
 That the –
1. Provisions of the statute - Complied with
2. Class was fairly represented by those who
attepnded the meeting and that the statutory
majority are acting bona fide and are not coercing
the minority in order to promote interest adverse to
those of the class whom they purport to represent,
and
3. Scheme is such as an intelligent and honest man, a
member of the class concerned and acting in respect
of this interest, might reasonably approve.
 Infrastructure Leasing & Financial Services Ltd. v
B.P.L. Ltd, 2015 (1) SCALE 186 (see para 22)
 Buckley
Court does not sit merely to see that the
majority are acting bona fide and
thereupon to register the decision of the
meeting,
 but at the same time, the Court will be slow to
differ from the meeting,
Unless either the:-
Class has not been properly consulted,
or
Meeting has not considered the matter
with a view to the interest of the class
which it is empowered to bind, or
Some bolt is found in the Scheme.
Prudent Business Management Test
In amalgamation of Co’s
Courts have evolved,
Principle of

 that the scheme should not be a device to evade

law.
 The Following Broad Contours Of Such Jurisdiction Have
Emerged:
• Not exhaustive - But only broadly illustrative of the
Contours of the Court’s jurisdiction
1. Sanctioning Court has to see to it, that all
the requisite statutory procedure for
supporting such a scheme has been
complied with & that the requisite
meetings as contemplated by Sec. 391
(1)(a) have been held.
2. That the scheme put up for sanction of the
Court is backed (UP) by the requisite
majority vote as required by Sec.391(2)
CONCERNED MEETINGS - MAJORITY DECISION

3…Concerned meetings of the

creditors/members/any class of them had
the relevant material to enable the
voters to arrive at an informed decision
for approving the scheme in question.
…Majority decision of the concerned
class of voters is Just & Fair to the
class as a whole so as to legitimately
bind even the dissenting members of
that class.
 NECESSARY/ REQUISITE MATERIAL

4. …All necessary material indicated by

S. 393(1)(a) is placed before the voters
at the concerned meetings as
contemplated by S. 391(1).
5. …All the requisite material contemplated by S.
391(2) Proviso of the Act is placed before the
Court by the concerned applicant seeking
sanction for such a scheme & the Court gets
satisfied about the same.
 CAN PIERCE THE VEIL
6. …Proposed scheme of compromise &
arrangement is
 Not found to be violative of any provision of
law &
 Is not contrary to public policy.
 Can ascertain the real purpose underlying the
Scheme with a view to be satisfied on this aspect,
 The Court, if necessary,
 Can Pierce the Veil of Apparent Corporate
purpose underlying the scheme &
Can Judiciously X-ray the same
 Not Coercing the Minority + Act as Prudent Men of Business
7. Court has also to satisfy itself that members or
class of members or creditors or class of creditors, as
the case may be,
 Were acting bona fide & in good faith &
 Were not coercing the minority in order to
promote any interest adverse to that of the latter
comprising of the same class whom they purported to
represent.
8. That the scheme as a whole is also found
to be Just, Fair & Reasonable
From the point of view of Prudent men of
business
Taking a commercial decision beneficial
to the class represented by them
COMMERCIAL WISDOM OF THE MAJORITY

9.Once the aforesaid broad parameters

about the requirement of a scheme for
getting sanction of the Court are found
to have been met,
 the Court will have no further
jurisdiction to sit in appeal over
the commercial wisdom of the
majority of the class of persons
 Who with their open eyes have given
their approval to the scheme
 BETTER SCHEME (9… Cont…)
 Even if in the view of the Court there would
be a better scheme for the Co. & its
members or creditors for whom the scheme
is framed.
 Court cannot refuse to sanction such a
scheme on that ground
 as it would otherwise amount to the Court
exercising Appellate Jurisdiction over the
scheme rather than its supervisory
Jurisdiction.
 What constitutes a class?
 “… e.g. Rights of ordinary SH’s are to be altered, but those of
preference shares are not touched, a meeting of ordinary SH’s
will be necessary but not of preference SH’s. If there are different
groups within a class the interests of which are different from the
rest of the class, or which are to be treated differently under the
Scheme, such groups must be treated as separate class for the
purpose of the scheme.
 …it may happen that one class will consist of a small No.
of persons who will all be willing to bound by the
scheme. In that case it is not the practice to hold a
meeting of that class, but to make the class a party to the
scheme & to obtain the consent of all its members to be
bound. It is however, necessary for at least one class
meeting to be held in order to give the Court jurisdiction
U/T/S.”
 Miheer Mafatlal Case
“It is, therefore, obvious that unless a
separate & different type of scheme of
compromise is offered to a sub-class of a
class of creditors or SH’s otherwise equally
circumscribed by the class no separate
meeting of such sub-class of the main class
of members or creditors is required to be
convened.”
 Indequip Ltd. v. Maneckchowk & Ahmedabad Manufacturing Co. Ltd., by
Provisional Liquidator 1969 INDLaw Guj 8

 “…in order to constitute a class, members belonging to

the class must form a homogeneous group with
commonality of interest.
 If people with heterogeneous interests are combined in
a class, naturally the majority having common interest
may ride rough shod over the minority representing a
distinct interest…
 The Co. will ordinarily be expected to offer an
identical compromise to persons belonging to
one class, otherwise it may be discriminatory. At any
rate, those who are offered substantially
different compromises each will form a different
class.
 Cont….
 Even if there are different groups within a class the
interests of which are different from the rest of the class
or who are to be treated differently in the scheme, such
groups must be treated as separate classes for the
purpose of the scheme…Broadly speaking, a group of
persons would constitute one class when it is shown that they
have conveyed all interest & their claims are capable of being
ascertained by any common system of valuation…
 compromise offered to them must be identical …
The test as stated earlier would be that a class must be
confined to those persons whose rights are not so
dissimilar as to make it possible for them to consult
together with a view to their common interest.”
Mafatlal Industries Ltd. (1996 Indlaw Guj 90 (Guj), (DB)
 “…constituting a class requiring a separate meeting thereof is,
different treatment given to a group under the proposed
scheme & no separate classification is required until a
group is treated differently under the scheme ... The term
“any interest treated differently under the scheme” is important.
 The fact that the SH’s/members of the same class offered the
same terms U/T/Scheme
 Perceive their interest differently or
 Considered that their interest may be affected differently from
others because of
 Their interrelationship or their interests other than as SH
simpliciter, cannot sustain their claim to constitute a class
distinct from others.
 Such interest is to be taken care of by way of expressing their
views & voting during the course of the meeting…”
 Arvind Mills
inter se differences/disputes amongst
some SC’s cannot be the criterion for
constituting separate class of SC’s in
foreign currency.
Personal conflict of interest of the
objectors with ICICI would be totally
foreign to the scope of class meeting
convened by the Co. to consider the
scheme.
 D. A. Swamy v. India Meters Ltd.
1991 Indlaw Mad. 312 (DB)
 “…group of persons would constitute one class
when it is shown that they have conveyed all
interest & their claims are capable of being
ascertained by any common system of
valuation. The group styled as a class should,
ordinarily, be homogeneous & must have
commonality of interest & the compromise
offered to them must be identical.”
 D. A. Swamy v. India Meters Ltd
 “…word ‘class’ is vague, …is meant by it… look
at the scope of the section… as will prevent the
section being so worked as to result in
confiscation & injustice, & that it must be
confined to those persons whose rights are not so
dissimilar as to make it impossible for them to
consult together with a view to their common
interest.
 Osiris Insurance Ltd., In re, Chancery Division (Co’s
Court), in 1999 1 BCLC 182, 188, the case of Sovereign
Life Assurance Co. v. Dodd 1892 2 QB 573 (CA)
 Re Maneklal Harilal Spg & Mfg Co Ltd (1985) 58 Comp. Cas. 6
(Guj.) (Re Bihari Mills)

Formulated a test for Reverse Merger:

 1. Assets of the transferor Co. should be greater
than the transferee Co.;
 2. Equity capital is to be issued by the
transferee Co. pursuant to the acquisition
exceeding its original issued capital;
 3. Change of control in the transferee Co.
should clearly indicate that the present
arrangement was an arrangement which was a
typical illustration of takeover by reverse bid.
 Importance of Valuation of Shares
 Stock Exchange Price – May not Reflect the real worth
of share
 All shares are not quoted on SE - Valuation of shares
necessary for transferring shares from one person to
another person.
 In Case of amalgamation of Co’s - Need for having a fair
valuation of shares know the purchase price.
 Preference shares & debentures - Converted into equity
shares - Fresh valuation method should be adopted for
equity shares to calculate the exchange ratio.
 Obtain loans from FI’s - Shares & debentures can be
offered as security - To assess the real worth of the
shares pledged for getting loans.
 Valuation of shares - Miheer Mafatlal Case
• Is a technical & complex problem,
 Which can be appropriately left to the
consideration of experts in the field of
accountancy.
accountancy
 Pennington in his “Principles of Company
Law” mentions four factors, which had to be
kept in mind in the valuation of shares:
(1) Capital Cover
(2) Yield
(3) Earning Capacity &
(4) Marketability
 Fair Value of Share – in Miheer Mafatlal
For arriving at the fair value of share,
three well-known methods are
applied:
(1) The manageable profit basis
method (the Earning Per Share
Method)
(2) The net worth method or the
break value method, and
(3) The market value method
 Court Not to substitute SER
 Once the exchange ratio of the shares of the transferee
- Co. to be allotted to the SH’s of the transferor - Co.
has been worked out by a recognised firm of CA’s who
are experts in the field of valuation and
 if no mistake can be pointed out in the said valuation,
 it is not for the Court to substitute its exchange ratio,
especially when the same has been accepted without
demur by the overwhelming majority of the SH’s of
the two companies or
 to say that the SH’s in their collective wisdom
should not have accepted the said exchange
ratio on the ground that it will be detrimental to
their interest
 Referring Kamala Sugar Mills Ltd 55 Com. Cas P.308 in Miheer
Mafatlal Case
Weinberg and Blank “TAKE-OVERS AND MERGERS”
Referred in HLL Employees Case 1994 SC
 Combination of methods
• 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