Miheer H. Mafatlal Vs.

Mafatlal Industries Ltd1: A Case Study

- Chhavi Agarwal*

The Court sanctioned a Scheme of Amalgamation of two Public Limited companies,

namely Mafatlal Industries Limited ('MIL') being the transferee-company with which
Mafatlal Fine Spinning and Manufacturing Company Limited ('MFL' for short) being the
transferor-company was to be amalgamated. In order to appreciate the grievance of the
appellant it will be necessary to glance through a few relevant background facts.

PART I: FACTS OF THE SITUATION:

The respondent-company MIL was incorporated in 1913 under the name 'The New
Shorrock Spinning & Manufacturing Co. Limited' and its name was subsequently changed
to 'Mafatlal Industries Limited' as per the fresh Certificate of Incorporation in Jan’74 as
sanctioned by the Registrar of Companies. The objects of the transferee-company MIL as
per its Memorandum of Association, inter alia, included activity of carrying on all or any
of the businesses such as cotton spinners and doublers, wool, silk, flax, jute and hemp
etc. The Authorised Share Capital of the respondent-company was Rs. 100,00,00,000
divided into 30,05,500 equity shares of Rs. 100 each and 69,94,500 unclassified shares
of Rs. 100 each. The subscribed Share Capital of the respondent-company as on 31st
March 1993 was Rs. 26.30 divided into 26,90,000 equity shares of Rs. 100 each.

The MFL being transferor-company was incorporated on 20th April 1931 under the
Baroda State Companies Act and had been carrying on the business of manufacture and
sale of textile piece goods and chemicals. Its registered office was situated at Bombay. It
was engaged in the manufacture and sale of textiles and fluorine based chemicals. The
Authorised Share Capital of the transferor-company was Rs. 30 crores divided into
30,00,000 ordinary shares of Rs. 100 each. The Subscribed Share Capital of the
transferor-company as on Mar’93 was Rs. 26,25,77,100 divided into 26,25,771 ordinary
shares of Rs. 100 each. Subsequent to 31st March 1993 the transferor-company had
allotted 382 ordinary shares of Rs. 100 each. The transferor-company had also issued
and allotted further 1,00,000 ordinary shares of Rs. 100 each at a premium of Rs. 200
per share on conversion of 1,00,000 Partly Convertible Debentures of the face value of
Rs. 2,000 each issued to Financial Institutions with effect from 1st February 1994 by the
transferor-company

*Chhavi Agarwal, 3rd Year Hidayatullah National Law University, Raipur (C.G)
1
JT 1996 (8) 205
The transferor-company MFL is proposed to be amalgamated with the respondent-
company MIL. Hitherto, with limited resources and capacity, either company had to
forego business opportunities which would otherwise have been profitable to the group
etc. The director of the respondent-company MIL and transferor-company MFL approved
the proposal for amalgamation of the MFL with MIL and pursuant to the respective
Resolutions passed by them the detailed Scheme of Amalgamation was finalised. The
directors of both the companies of the opinion that such amalgamation was in the
interest do both the companies

The appellant who has objected to the amalgamation is himself one of the directors of
the transferor-company being MFL. So far as the transferor-company MFL is concerned
as its registered office is located at Bombay the corresponding application on behalf of
the transferor-company for sanctioning this very Scheme of Amalgamation was moved in
the Bombay High Court. The appellant at this stage did not object to this very Scheme
for amalgamation. The Bombay High Court sanctioned the said Scheme. As the
registered office of the transferee-company is located at Ahmedabad the respondent
transferee-company had approached the High Court of Gujarat for sanctioning this very
Scheme of Amalgamation on behalf of the transferee-company. It is at this stage that
the appellant who was one of the shareholders of the transferee-company filed his
objection to the Scheme of Amalgamation moved under Section 391of the Act

Earlier the learned Single Judge directed convening of meeting of equity shareholders of
the respondent-company where overwhelming majority of the equity shareholders
approved the Scheme. At the said meeting, resolution was passed without modification
by the requisite majority as 5298 members holding 19, 36, 964 fully paid equity shares
voted in favour of the Scheme and 143 members holding 86, 061 fully paid equity shares
voted against the Scheme. Thereafter the respondent-company MIL filed Company
Petition No. 22 of 1994 under Section 391(2) of the Act. In response to the notice issued
to the Central Government under Section 394A of the Act the learned Additional Central
Government Standing Counsel appeared before the High Court and submitted to the
orders of the Court making it clear that the Central Government is not to make any
representation in favour or against the proposed Scheme

Nine objections were raised by the appellant. Prolonged hearing the learned Single Judge
S.D. Shah, J., over-ruled these objections. The Division Bench of the High Court to which
the appellant carried the matter in appeal confirmed the aforesaid decision of the learned
Single Judge. Hence, this appeal

Court in proceedings:
The aforesaid provisions of the Act2 show that compromise or arrangement can be
proposed between a company and its creditors or any class of them or between a
company and its members or any class of them. Such a compromise would also take in
its sweep any scheme of amalgamation/merger of one company with another. When
such a scheme is put forward by a company for the sanction of the Court in the first
instance the Court has to direct holding of meetings of creditors or class of creditors or
members or class of members who are concerned with such a scheme and once the
majority in number representing three-fourths in value of creditors or class of creditors
or members or class of members, as the case may be, present or voting either in person
or by proxy at such a meeting accord their approval to any compromise or arrangement
thus put to vote, and once such compromise is sanctioned by the Court, it would be
binding to all creditors or class of creditors or members or class of members, as the case
may be, which would also necessarily mean that even to dissenting creditors or class of
creditors or dissenting members or class of members such sanctioned scheme would
remain binding. Before sanctioning such a scheme even though approved by a majority
of the concerned creditors or members the Court has to be satisfied that the company or
any other person moving such an application for sanction under Sub-section (2) of
Section 391 has disclosed all the relevant matters mentioned in the proviso to Sub-
section (2) of that Section. So far as the meetings of the creditors or members, or their
respective classes for whom the Scheme is proposed are concerned, it is enjoined by
Section 391(1)(a) that the requisite information as contemplated by the said provision is
also required to be placed for consideration of the concerned voters so that the parties
concerned before whom the scheme is placed for voting can take an informed and
objective decision whether to vote for the scheme or against it. On a conjoint reading of
the relevant provisions of Sections 391 and 393 it becomes at once clear that the
Company Court which is called upon to sanction such a scheme has not merely to by go
by the ipse dixit of the majority of the shareholders or creditors or their respective
classes who might have voted in favour of the scheme by requisite majority but the pros
and cons of the scheme with a view to finding out whether the scheme is fair, just and
reasonable and is not contrary to any provisions of law and it does not violate any public
policy. It is trite to say that once the scheme gets sanctioned by the Court it would bind
even the dissenting minority shareholders or creditors. It can be postulated that even in
case of such a Scheme of Compromise and Arrangement put up for sanction of a
Company Court it will have to be seen whether the proposed scheme is lawful and just
and fair to the whole class of creditors or members including the dissenting minority to

2
391 and 393 of the Act.
whom it is offered for approval and which has been approved by such class of persons
with required majority vote. The question which arose was:

Whether the Court has jurisdiction like an appellate authority to minutely scrutinise the
scheme and to arrive at an independent conclusion whether the scheme should be
permitted to go through or not when the majority of the creditors or members or their
respective classes have approved the scheme as required by Section 391 Sub-section
(2)?

It is the commercial wisdom of the parties to the scheme who have taken and informed
decision about the usefulness and propriety of the scheme by supporting it by the
requisite majority vote that has to be kept in view by the Court. The Court certainly
would not act as a court of appeal and sit in judgment over the informed view of the
concerned parties to the compromise as the same would be in the realm of corporate
and commercial wisdom of the concerned parties. The supervisory jurisdiction of the
Company Court can also be culled out from the provisions of Section 392 of the Act. Of
course this Section deals with post-sanction supervision. It is obvious that the supervisor
cannot ever be treated as the author or a policy maker.3

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 that it should not be unfair or contrary to public policy or unconscionable.
In amalgamation of companies, the courts have evolved, the principle "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 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.4

PART II: ISSUES RAISED

In view of the aforesaid settled legal position, therefore, the scope and ambit of the
jurisdiction of the Company Court has clearly got earmarked. The following broad
contours of such jurisdiction have emerged:

3
In Re. Alabama, New Orleans Texas and Pacific junction Railway Company reported in 1891 (1) C D 213, -
Continental Supply Co. Ltd., Re. (1992) 2 Ch. 723, Re. Mankam Investments Ltd. and Ors. (1995) 4 Comp LJ;
Hindustan Lever Employee's Union v. Hindustan Lever Ltd. and Ors. MANU/SC/0101/1995
4
Reliance on English decisions Home & Co. Ltd., Re 1933 All ER Rep 105, Ch D; Bugle Press Ltd. Re. 1961 ch
1. The sanctioning court has to see to it that all the requisite statutory procedure for
supporting such a scheme has been complied with and that the requisite meetings as
contemplated by Section 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 Section 391 Sub-Section (2).

3. That the concerned meetings of the creditors or members or any class of them had
the relevant material to enable the voters to arrive at an informed decision for approving
the scheme in question. That the majority decision of the concerned class of voters is
just and fair to the class as a whole so as to legitimately bind even the dissenting
members of that class.

4. That all necessary material indicated by Section 393(1)(a) is placed before the voters
at the concerned meetings as contemplated by Section 391 Sub-section (1).

5. That all the requisite material contemplated by the proviso of Sub-section (2) of
Section 391 of the Act is placed before the Court by the concerned applicant seeking
sanction for such a scheme and the Court gets satisfied about the same.

POINT NO: 1: It was vehemently contended that the explanatory statement placed for
consideration of the meeting of equity shareholders was not a complete statement and
relevant material indicating the interest of the director of MIL Shri Arvind Mafatlal was
not placed before the voters with the result that the majority vote supporting the
scheme got vitiated.5 The special grievance of the appellant is to the effect that the
director Shri Arvind Mafatlal and his group were at the helm of affairs of the transferee-
company. In this connection submitted that under Section 393(1)(a) of the Act the
company is enjoined to mention any material interest and the effect of the compromise
on such special interest, which did not happen. Now a mere look at
Section 393(1)(a) shows that the special interest must satisfy the following requirements

5
It is proposed to amalgamate MF with MIL so as to enable the carrying on of the combined business more
economically and advantageously. Amalgamation of both the companies would lead to substantial benefits in
view of synergy of operations. The amalgamation of both the companies would give improved capital structure
which would lend better flexibility in capital gearing which would enable the amalgamated company to raise
required finance at better terms. A larger company would generate more confidence in the investors and with the
persons dealing with the company and will afford access to resources easily and at lower costs. The
amalgamation of M.F. with MIL will pave the way for better, more efficient and economic control in the
running operations and would lead to economy in the administrative and management cost, resulting in
improving profitability. The amalgamated company will have a strong and large resource funds. The combined
Technological Managerial and financial resources would enhance the capability of the amalgamated company to
invest in larger and sophisticated projects to ensure rapid growth. The amalgamated company's Textiles
Division with five operative units at its disposal will have flexibility in its operation
before it can be treated to be a relevant special interest: 1. The director's interest must
be a special interest different from the interest of other members who are the voters at
the meeting. 2. The compromise which is put to vote must have an effect on such
special interest of the director. 3. Such effect must be different from the effect of
compromise on similar interest of other persons who are called upon to vote at the
meeting. The appellant stated that there was a pending litigation between the appellant
and Shri Arvind Mafatlal in Bombay High Court. That Shri Arvind Mafatlal had sought a
declaration in a pending suit against the appellant that the latter was required to sell off
his share-holding in the transferee-company MIL to the plaintiff Arvind Mafatlal who was
director of MIL. In this very suit the appellant had filed a counter-claim to for requiring
transferring AM share-holding in the transferee-company in favour of the appellant as
per the Family Arrangement of 1979. The court failed to appreciate how the personal
family dispute can have any linkage or nexus with the Scheme of Amalgamation of these
two companies which was put to vote before the equity shareholders. That such non-
disclosure of interest had no impact on the voting pattern. From the pattern of voting it
became apparent that out of 100% of the share capital 75.75 per cent in value
participated of which 95.75 per cent voted in favour of the proposed Scheme. Out of
95.75 per cent of the votes in value, a paltry 8.43 per cent votes had been attributed to
Arvind Mafatlal group consisting of individuals and trust. 39.45 per cent were the votes
attributable to financial institutions which can be said to have no interest other than their
own interests as men of business in considering the proposed Scheme. Over 23 per cent
votes have been attributed to public limited companies or private limited companies
which held the shares of MIL and in which Arvind Mafatlal was also alleged to have
interests. Thus non-mentioning of the private dispute had in fact no impact. Moreover,
the appellant had not thought it fit to remain present in the meeting of equity
shareholders and on the contrary he got himself represented through proxy who had no
night to speak. It may also be kept in view that the explanatory statement no way
emphasised that it is the management of the transferee-company by Shri Arvind Mafatlal
which is going to be better monitored and managed by him after the merger in question.
Consequently the interest of Arvind Mafatlal in the share-holding or likely future impact
thereon by the litigation was de hors the Scheme. The first point for determination is,
therefore, answered in the negative

POINT NO 2: The fact that what was required to be considered while sanctioning the
scheme was bona fides of the majority acting as a class and not of single person.6 It is
not possible to agree that the majority had acted unfairly to the appellant and had not
protected his interest when what was to be protected was the class interest of minority

6
Hellenic and General Trust Limited reported in (1976) 1 WLR 123
shareholders falling in the same class along with the majority. It is not the contention of
the appellant that while voting by majority in favour of the Scheme the majority had
acted with any oblique motive to fructify any adverse commercial interest. It is also to
be kept in view that the Board of Directors of the respective companies had approved
the Scheme. The appellant was himself one of the directors of the transferor-company
who had no objection. So far as the transferee-company is concerned though appellant
was not a director he was 5% shareholder who did not think it fit to personally remain
present at the time of voting and simply relied upon proxy. It is, therefore, too late in
the day for him to contend that the Scheme was unfair to him. Not only that but even
when that Scheme was put for sanction before the Bombay High Court on behalf of the
transferor-company the appellant did not object meaning thereby appellant had no
objection to the transferor-company losing its identity and getting merged in the
transferee-company pursuant to the proposed Scheme. The second point for
determination, therefore, also is found to be factually not sustainable.

The evidence on record shows that the shareholding of ANM Group can be worked out to
30.42% approximately. As against aforesaid share-holding the share-holding of financial
institutions and MHM group in MIL would work out to 39.03% and that of appellant's
group works out at 29.05% while that of other shareholders would work out to 34.34%.
Hence it cannot be said that Arvind Mafatlal is at the helm of affairs of the respondent-
company. It is also pertinent to note that financial institutions and statutory corporations
held substantive percentage of shares in respondent-company. This class of shareholders
who are naturally well informed about the business requirements and economic needs
and the requirements of corporate finance in the light of their personal interest would
not have wholly approved the Scheme if it was contrary to the interest of shareholders
as a class. Point No. 2 is accordingly answered in the negative

POINT NO 3: In a way the answer to point No. 2 necessarily results in negativing this
point also. Even that apart we fail to appreciate how the Scheme of Amalgamation can
be said to be unfair and amounting to suppression of minority shareholders represented
by the appellant. The transferee-company because of the amalgamation will then be
having more diversified activities and if at all according to the appellant, because of this
future success, if any, in the counter-claim he is going to replace Arvind Mafatlal and his
group in the management of the respondent-company he would have larger field to
operate and larger company to manage. We fair to appreciate as to how such a scheme
from any point of view can amount to suppression of appellant's minority interest in the
share-holding of the company. It has to be kept in view that the question of bona fide of
the majority shareholders or the alleged suppression by them of the minority
shareholders or their attempt to suffocate their interest has to be judged from the point
of view of the class as a whole. Question is whether the majority equity shareholders
while acting on behalf of the class as a whole had exhibited any adverse interest against
the appellant's minority shareholders also having similar interest as members of the
same class, while approving the Scheme or had acted with any oblique motive to whittle
down such a class interest of the minority. As we have seen earlier no such situation
ever existed.

POINT NO 4: The present controversy centres round a meeting of members.

Section 82 provides that 'the shares or other interest of any member in a company shall
be movable property, transferable in the manner provided by the articles of the
company'. As per Section86 the share capital of a company limited by shares formed
after the commencements of this Act, or issued after such commencement, shall be of
two kinds only, namely, equity share capital and preference share capital. So far as the
Articles of Association of respondent-company are concerned they also contemplate two
classes of shareholders, namely, equity and preference shareholders. No separate class
of equity shareholders is contemplated either by the Act or by the Articles of Association
of respondent-company. Appellant is admittedly an equity shareholder. Therefore, he
would fall within the same class of equity shareholders whose meeting was convened by
the orders of the Company Court. However it is vehemently contended by learned
Counsel for the appellant that because of the family arrangement of 1979 on which he
relies he was a special class of minority equity shareholder who had separate rights
against the director of the company, therefore, a separate meeting had to be convened
as he represented a class within the class of equity shareholders. It is difficult to agree
with this contention. On the express language of Section 393(1) it becomes clear that
where a compromise or arrangement is proposed between a company and its members
or any class of them a meeting of such members or class of them has to be convened.
This clearly presupposes that if the Scheme of Arrangement or Compromise is offered to
the members as a class and no separate Scheme is offered to any subclass of members
which has a separate interest and a separate Scheme to consider, no question of holding
a separate meeting of such a Sub-class would at all survive. Even otherwise it becomes
obvious that as minority shareholder if the appellant had to dissent from the Scheme his
dissent representing 5% equity shareholding would have been visible both in a separate
meeting if any, of his Sub-class or in the composite meeting where also his 5% dissent
would get registered by appellant either remaining present in person or through proxy.
The Court does not itself consider at this point what classes of creditors or members
should be made parties to the scheme. This is for the Company to decide, in accordance
with what the scheme purports to achieve.
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. Moreover, when the
Company has decided what classes are necessary parties to the scheme, it may happen
that one class will consist of a small number of persons who will all be willing to be
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 and 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 under the Section. The fourth point for determination,
therefore, is answered in the negative

POINT NO. 5: So far as this contention is concerned it has to be kept in view-that before
formulating the proposed Scheme of Compromise and Amalgamation an expert opinion
was obtained by the respondent-company as well as the transferor-company. M/S. C.C.
Chokshi & Co., a reputed firm of Chartered Accountants, having considered all the
relevant aspects suggested the aforesaid exchange ratio keeping in view the valuation of
shares of respective companies. It must at once be stated that valuation of shares is a
technical problem. Pennington in his 'Principles for Company Law' mentions four factors
which had to be kept in mind in the valuation on shares :(1) Capital Cover, (2) Yield, (3)
Earning Capacity, and (4) Marketability. 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.

Appellant himself as a director of that transferor-company gave green single to the

Scheme. It was though submitted that form the point of view of the transferor-company
it was very profitable to have two shares of transferee-company against five shares of
transferor-company. But the difficulty arises only from the point of view of transferee-
company shareholders. According to them the proper exchange ratio would be one share
of transferee-company to six shares of transferor-company. It is difficult to appreciate
this contention of the appellant. It has to be kept in view that appellant never bothered
to personally remain present in the meeting. He sent his proxy only to record his dissent
vote which was in microscopic minority of 5% as compared to 95% majority vote.

Not only that even before the Court he did not submitted and contrary expert opinion for
supporting his ipse dixit that the correct ratio would be 6 : 1. It is not for the Court to sit
in appeal over this value judgment of equity shareholders who are supposed to be men
of reasonability. With open eyes they have okayed this ratio and the entire Scheme. It is
a laid principle that where statutory majority had accepted the offer the onus must rest
on the applicants to satisfy the court that the price offered is unfair.7 In the present case
not only expert like M/s. C.C. Chokshi & Co. had suggested the ratio but another
independent body ICICI Security & Finance Company Limited reached the same
conclusion. Mere look at both the report show that various factors underlying the
Scheme were taken into consideration. The fifth point for determination is also,
therefore, answered in the negative.

Conclusion: This case helped in clarifying situation related to amalgamations. The court
clarified as to the specific situation and compliance the court has to look into before it
sanctions the scheme, like majority etc. It was laid down that things only which has a
nexus with the scheme and can effectively vitiate the voting needs to be disclosed. The
voters should be having all the relevant material for making an informed decision for
approving a scheme. That the majority decision of the concerned class of voters is just
and fair to the class as a whole so as to legitimately bind even the dissenting members
of that class.

7
Maughm, J., In Re Hoare & Co. (No. 2) case (1933) All ER 105 ; Re Kamala Sugar Mills Limited 55
Company Cases p. 308MANU/TN/0005/1980