1. The contents of this document are confidential
SQUEEZE OUT OF MINORITY
SHAREHOLDERS: IMPACT OF THE
2013 ACT
1
Garima Tyagi
January 9, 2015

2. What is Squeeze Out of Minority Shareholders?
• Also known as “Freeze Outs” or “Minority Buy Outs”.
• Process where the majority shareholder (or the controller) of a
company, in order to acquire 100% stake in the company, buys
out minority shareholders for a cash consideration.
• Example: If the target firm is XYZ Ltd and it has a 55% controller
(ABC Ltd), then a squeeze out would arise if ABC decided to
acquire 100% control of XYZ. This often results in the non ABC‐
shareholders of XYZ (i.e., the minorities) receiving cash for their
45% shares of XYZ.
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3. 3
Methods of Squeeze Out

4. • Governed by section 235 of the Companies Act, 2013
(2013 Act). Corresponding to section 395 of the
Companies Act, 1956 (1956 Act).
• Section 235 has not been notified yet.
• Only provision which deals with compulsory acquisition of
shares of minority.
• Rarely used due to strict compliances.
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Acquisition of shares of Dissenting
Shareholders

5. 5
Process of squeeze out under section 235

6. • Acquirer holds 70% shares in the company and wishes to
squeeze out the remaining shareholders. It has to:
1. Make an offer under a scheme or a contract to the
minorities holding 30% of the shares.
2. The offer must be accepted by shareholders holding at least
27% shares in the company (i.e. 90% of 30% shares).
3. The acquirer sends notice to the dissenting shareholders
(10% of 30% shares) to acquire their shares.
• Given the onerous nature of the provision, this method is seldom
used by acquirers. 6
Example

7. 1. Section 235 and section 230
• Section 235 governs “acquisition” of minority shares, section
230 govern “arrangements”.
• Does not require court approval.
• Approval by 90% of the minority shareholders.
1. Section 235 and section 395
• Payment to dissenting shareholders within 60 days.
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Comparisons

8. 8
Squeeze Out by way Reduction of Capital
• Governed by section 100-105 (1956 Act) and section 66 (2013
Act). Section 66 has not been notified yet.

9. • Following are the important modifications made to section 66 of the
2013 Act:
1. No requirement of authorization by AOA.
2. In case of listed companies, Tribunal has to issue notices to the
Central government, Registrar and to SEBI in addition to
creditors. Also, consent from creditors is now mandatory.
3. A company in arrears in repayment of any deposit cannot
reduce its share capital.
4. Nothing in s. 66 will apply to buy back of securities under s. 68
of the 2013 Act.
5. Conformity with Accounting Standards.
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Reduction of Capital: Changes in the 2013 Act

10. Introduction of section 236: Purchase of
minority shareholding
• Finds its basis in section 395 A of the Companies (Amendment) Bill,
2003,which did not become a law.
• Right of the Acquirer, who is the owner of 90% or more of the equity
share capital of the company, to notify the company of their intention
to buy the remaining equity shares of the company (Minority buy-out).
• 90% shareholding can be by virtue of amalgamation, share
exchange, conversion of security or any other reason.
• Similar right available to the minority shareholders u/s 236(3)
(Minority sell-out).
• Majority shareholder can be a person or group of persons, “acquirer”
or “person acting in concert with such acquirer” as defined under the
Takeover Code.

11. Novel features of section 236
1. Available to all “minority shareholders” and not just “dissenting
minority shareholders”.
2. No Court intervention needed.
3. Exit price to be determined by Registered Valuer.
4. Safeguards for minorities:
• Concept of minority sell-out.
• Renegotiated price by majority.
• Separate bank a/c and disbursement within 60 days.

12. Is Compulsory Squeeze Out really available
under section 236?
• Overlap b/w s. 235 and s. 236 of the 2013 Act.
• Under s. 236,unlike section 235, the minority shareholders
are not bound to accept the Acquirer’s offer. Absence of
any provision which stipulates the above.
• Section 236(9) discusses a scenario where “majority equity
shareholder fails to acquire full purchase of the shares of
the minority equity shareholders”.

13. Judicial Trends
• Very little protection against squeeze out of minority
shareholders.
• Elpro International Ltd. In re [2008] Bombay High Court
• Selective reduction of capital allowed. Under section 100
and 101 of the 1956 Act, a company can reduce the share
capital of “any shareholder” in “any way”.
• Procedure should be fair and approval of majority (75%)
should be taken.
• Court agreed to the power of the stock exchanges under
24(f) of the Listing Agreement.

14. Sandvik Asia Limited v. Bharat Kumar Padamsi,
2009, Bombay High Court
• Sandvik Asia Ltd, on delisting, sought to dispose of the
public shareholders. Thus, initiated reduction of capital of
only non-promoter shareholders.
• Single bench rejected the scheme of reduction of capital.
• Overruled by the Division Bench.
• Under section 100, reduction is permissible is “any
way”. Thus selective reduction of capital allowed.
• MoM voted in favor of reduction.
• Fair value of shares was offered.

15. Cadbury Judgment
• “Majority of Minority (MoM)” Rule
Special resolution for reduction of capital (99.96% Majority, 0.04%
Minority)
Independent Valuation ordered by High Court on objection by minority
Judgment in favour of Cadbury
Public Shareholders
(2.42%)
Cadbury Group
(97.58%)
Cadbury India

16. Continued…..
• Considerations for approval by court:
1. Had the majority of non-promoter shareholders voted in favor
of the resolution?
2. Was a fair and reasonable value being offered to the minority
shareholders?
3. Was the valuation fair, reasonable and devoid of evident
faults?
• Court not an expert on valuation. Its jurisdiction is supervisory and
not appellate.
• Commercial wisdom of MoM cannot be disregarded.

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Thank You