GOVERNMENT TELEPHONES BOARD LTD Vs. HORMUSJI MANEKJI SEERVAL

JUDGEMENT

(1.) This is an appeal from a decision of Mr. Justice Chagla making an order on a petition under Section 153B of the Indian Companies Act, 1913, directing that the purchasing company should not be at liberty to acquire the shares of the minority shareholders in the transferor company. That section is a new section, and is in these terms : 153B(1). Where a scheme or contract involving the transfer of shares or any class of shares in a company (in this section referred to as the transferor company ) to another company, whether a company within the meaning of this Act or not (in this section referred to as the transferee company ), has within four months after the making of the offer in that behalf by the transferee company been approved by the holders of not less than three-fourths in value of the shares affected, the transferee company may, at any time within two months after the expiration of the said four months, give notice in the prescribed manner to any dissenting share- holder that it desires to acquire his shares, and where such a notice is given the transferee company shall, unless on an application made by the dissenting share- holder within one month from the date on which the notice was given the Court thinks fit to order otherwise, be entitled and bound to acquire those shares on the terms on which under the scheme or contract the shares of the approving share- holders are to be transferred to the transferee company : What the section does is to provide that where there is a contract or scheme for the acquisition by one company of shares in another company, which has been accepted by the statutory majority of shareholders in the latter company, in India three-fourths and in England, under a corresponding section, nine-tenths, the transferee company can acquire compulsorily the shares of the minority, unless the Court orders otherwise. But it is to be noticed that that is all the section does. It does not confer any right on the Court to consider the merits of the contract so far as concerns the majority of share-holders who have accepted it. In their case the matter is complete; the contract has gone through. The only question is whether the minority share-holders are to be left in possession of their shares, or whether they can be compelled to sell their shares on the same terms as those which the other shareholders have accepted. The section seems to be based on the view that prima facie the minority are acting unreasonably in refusing to come into line with the majority, and ought to be forced into line, unless the Court orders otherwise. The Court, as it seems to me, must consider whether the attitude of the minority was reasonable.

(2.) The only reported case on this section is one which came before Lord Maugham (then Mr. Justice Maugham) in England, Re Hoare and Company Limited (1933) 150 L.T. 374. The learned Judge in that case pointed out that the Legislature had not seen fit to indicate in any way the grounds on which the Court ought to order otherwise, and that prima facie the Court ought to assume that the majority of shareholders who have accepted the offer know their own business, and that the Court ought not lightly to differ from the view accepted by the majority of shareholders, so that the reasons for inducing the Court to order otherwise are reasons which must be supplied by the dissentients who take the step of making an application to the Court, and that the onus is on them of giving a reason why their shares should not be acquired by the transferee company. Mr. Justice Chagla in the Court below accepted that principle, and held that the burden was upon the dissentients to show why the Court should order otherwise. But I think the criticism which can be made upon his judgment is that he held that that burden was discharged too lightly. I will deal with that point presently.

(3.) For myself I accept the view that the burden is upon the dissentients to adduce reasons for thinking that the majority of shareholders were wrong. But if one accepts that principle, one must give some intelligent meaning to it. If the Court ought in the first instance to assume that the majority of shareholders understand their own business, and were right in accepting the offer, it follows that the Court should not take a different view merely because of criticisms advanced by the dissentients on the terms of the offer, and based on matters which were before the majority. As the Legislature has not done so, the Court ought not to limit the class of cases in which the Court should take action under Section 153B, but one is bound to consider in what type of case the Court would be justified in not, accepting the opinion of the majority of shareholders. I should say that instances of such cases would be where there has been misrepresentation which may have influenced the view of the majority of shareholders, or where there is the possibility of some unfair dealing for example, the directors of the transferor company having some ulterior motive in advising the shareholders to accept the offer; or the majority of shareholders having some interest conflicting with that of the minority, for instance, being interested in the transferee company, and, therefore, willing to accept a less value for their shares than they would have accepted if they had had no such interest. In cases of that sort the Court would certainly look critically at the opinion of the majority of shareholders; but nothing of that kind is suggested in this case. Another ground on which the Court might "order otherwise", and that is the ground relied upon by the petitioners in this case, would be if it were proved that the acceptance of the offer was based on a wrong principle of valuing the company's assets, and that as a result of the adoption of that wrong principle the offer for the shares was substantially less than it ought to have been. But if one starts with the presumption that the majority of shareholders were right, it is no good, as it seems to me, allowing counsel for the dissenting shareholders to indulge in detailed criticisms of the valuation on which the offer was based or accepted, where all the facts on which those criticisms are founded were before the company when the majority of shareholders accepted the offer. We felt bound, therefore, to curtail somewhat Mr. Seervai's eloquent and able criticism of the experts report.