An interesting issue that arises in relation to the approval of shareholders/creditors to a scheme of arrangement involving merger, demerger, etc. is whether the ‘headcount test’ has been done away with or not under the Companies Act, 2013. In this context, it would be worthwhile to note that Section 391 of the erstwhile Companies Act, i.e. the Companies Act, 1956, included the concept of ‘principle of double majority’. The principle required approval to a resolution pertaining to a scheme of arrangement from:

At least 50 percent of persons in number who participated in the voting, i.e. the headcount test; and

Such persons representing at least 75 percent of the value of shares/debt.

Panel recommendations

The Ministry of Corporate Affairs in December 2004 set up an expert committee under the chairmanship of Dr JJ Irani to advise the government on the new company law. The committee, in its report dated May 31, 2005 to the Ministry of Corporate Affairs, recommended that the requirement of majority in number (i.e. the headcount test) did not serve any useful purpose considering that the value of shares/debt in terms of percentage was simultaneously being considered as a criterion. Besides, international practice also recognised the value of shares/debt in terms of percentage as the determining factor. Therefore, the committee recommended that Indian law may be modified to provide only for the approval by 75 percent in value of the shareholders and creditors, present and voting.

While jurisdictions such as the UK and Singapore follow the principle of double majority, jurisdictions such as Hong Kong and Cyprus give due credence to the value of shares/debt as the determining factor. Through Companies Ordinance passed in 2012, Hong Kong has done away with the concept of headcount test for the shareholders’ approval on a resolution pertaining to an arrangement involving a general offer or takeover offer. The Cyprus Companies Law was amended, whereby the principle of headcount test for the creditors’ approval to the scheme of compromise and arrangement was done away with.

Lack of clarity

It is more than five years since the Companies Act, 2013 replaced the Companies Act, 1956. The different provisions of the Companies Act, 2013 have been brought into effect in a phased manner. On December 7, 2016, the Ministry of Corporate Affairs notified provisions relating to the scheme of arrangements, compromises, mergers, and amalgamation, which were made effective from December 15, 2016.

Section 230 of the Companies Act, 2013 relating to compromises and arrangements corresponding to Section 390, 391, 393 of the Companies Act, 1956 requires approval from majority of persons representing 75 percent in value of the creditors, or class of creditors or members or class of members to a proposed resolution. The words ‘majority in number representing three-fourths in value’, as provided in the erstwhile Companies Act, have been replaced by the words ‘majority of persons representing three-fourths in value’ in the Companies Act, 2013. As a result, a question arises as to whether the headcount test has been done away with or not. In this regard, the following two views may emerge by referring to the language of Section 230 of the Companies Act, 2013:

View 1: Although the words “majority in number” as provided in the erstwhile Company law have been replaced by the words “majority of persons” in the new Company law, the use of different words does not distort the position prevailing under the erstwhile Company law. Hence, one may take a view that the principle of double majority continues to prevail under the new company law as well.

View 2: The words ‘majority of persons’ in the new company law in place of the words ‘majority in number’ as provided in the erstwhile company law have been consciously replaced by taking into consideration the recommendations of the expert committee headed by Dr JJ Irani. Hence, one may take a view that the headcount test has been dropped under the new company law.

In the case of compromise and arrangement, a situation may arise whereby a majority in number of shareholders/creditors having an insignificant stake may nullify the resolution relating to compromise and arrangement that is proposed by the company, if one takes a view that the headcount test has not been done away with under the new company law. For example, ‘A Ltd’, having 1,000 shareholders, proposes a resolution for the approval of shareholders for a composite scheme of arrangement with ‘B Ltd’. As much as 99 percent of the share capital of ‘A Ltd’ is held by three shareholders, whereas the remaining 1 percent share capital is held by the remaining 997 shareholders. In a scenario where three shareholders representing 99 percent of the share capital of ‘A Ltd’ approve the resolution but say ten shareholders with a nominal stake dissent to the resolution, then the resolution cannot be said to have been approved by the requisite majority. Such a scenario could in certain circumstances be a case of oppression by the minority shareholders/creditors.

The flip side

Any power bestowed upon any individual/class of people must be used responsibly and judiciously, and the shareholders/creditors with a minority interest in the company are no exception to this. The possibility of abysmal participation of minority shareholders/creditors in the voting process cannot be ruled out, and therefore it becomes pertinent to analyse the flip side of the legislation aimed at the protection of the interests of the minority. In the context of a scheme of arrangement involving a merger, demerger, etc., an unanswered question that persists is whether the headcount test (which could lead to oppression by minority) under the Companies Act, 2013 is done away with or not? It is imperative that the Ministry of Corporate Affairs, after considering the recommendations of the expert committee headed by Dr JJ Irani and the language used in Section 230 of the Companies Act, issues a circular clarifying the position under the Companies Act, 2013.

Vishal Gada is partner, Jay Parmar is principal, and Akshat Shah is senior associate at Dhruva Advisors LLP. The Views expressed are personal.

First Published:Sept 24, 2019 6:00 AM IST