A scheme of merger of XYZ Ltd with ABC Ltd was approved by the shareholders at an extraordinary general meeting and the exchange ratio of 3 shares of ABC Ltd for 20 shares in XYZ Ltd was approved. The proposal was also okayed by a lending financial institution which held 45% shares in XYZ Ltd. The valuation was carried out by one of the directors of XYZ Ltd who is a member of the Institute of Chartered Accountants of India. The valuation was affirmed by three independent valuers nominated by the shareholders in general meeting. However, certain leaseholder properties, under license, which were not transferable, were not taken into account in the valuation. While the scheme was awaiting the Court's sanction, it was challenged by certain shareholders on the ground that the exclusion of leasehold assets in the valuation made the scheme 'Unfair'. Decide giving reasons:
(i) Whether the contention of the shareholders is tenable?
(ii) What factors would the Court take into account in approving the exchange ratio?
(i) Whether the contention of the shareholders is tenable?
(ii) What factors would the Court take into account in approving the exchange ratio?
The contention of the shareholders in this case shall not be tenable. The court is not to disturb a scheme unless the person who challenges the valuation satisfies the court that the valuation arrived at was grossly unfair. Valuation in this case was approved by the shareholders and also okayed by the lending institution(s) which are usually well-informed and scrutinize the scheme with expert’s eye and which are also presumed to act bonafide. In the similar case of Tata Oil Mills Ltd. Re. (1994), the court held that the presumption of fairness was writ large on the face of the scheme. The Court did not attach importance to the fact that certain leasehold assets and properties held under license were excluded from valuation. Such assets, the court said, were neither transferable nor heritable. They are in the nature of a personal privilege. The Supreme Court affirmed this decision in Hindustan Lever Employee‘s Union v. Hindustan Lever Ltd., (1994) and accepted the exchange ratio proposed. The Supreme Court found no objection to the
valuation being done by one of the directors of TOMCO (XYZ Co. in this case). His report did not show any prejudice and was also affirmed by the independent valuers. Supreme Court also enumerated all the possible methods of valuation such as, market price, book value and yield basis and pointed out that a combination of all or some of the methods, may have to be adopted in circumstances of a particular case. Thus based on the above explanation and the decisions given by the Supreme Court, it can be concluded that the contention of the shareholders that the
exclusion of certain leasehold assets in the valuation has made the scheme unfair, shall not be tenable.
