Company Registration

A Complete Analysis of Section 235 of the Companies Act, 2013

calendar18 Nov, 2022
timeReading Time: 3 Minutes
A Complete Analysis of Section 235 of the Companies Act, 2013

Minority squeeze-out is a mode of the takeover process by which majority shareholders acquire or cause to acquire the shares held by minority shareholders compulsorily by providing them with compensation in exchange. These often end up being detrimental to the rights of minority shareholders, and they have little to no remedy left as the courts, following the majority rule laid down in the English case of Foss v Harbottle, refrain from interfering with decisions made by a company when they are made with the consensus of the majority shareholders. Scroll down to check more information regarding Section 235 of the Companies Act, 2013.

What is Section 235 of the Companies Act, 2013?

Section 235 of the Companies Act, 2013 (Act) deals with the “power to acquire shareholders’ shares  dissenting from scheme or contract approved from the majority”. Section 235 is more of an exit opportunity provided to the minority shareholders where the majority shareholders have the upper hand in the transaction. Section 235 of the Companies Act, 2013 corresponds to Section 395 of the Companies Act, 1956.

Section 235 (1) of the Companies Act lays down that when an offer is made under a contract or scheme by the transferee Company to the transferor Company to acquire the company’s shares, the same would be valid if the shareholders holding 90% of the value of shares accept the offer within four months. After the expiry of 2 months from the said four months, the acquirer company make send an offer by sending a notice (Form CAA 14 Rule 26 of CAA Rules, 2016) to the minority shareholders offering compensation to the tune of the price paid to the majority shareholders while acquiring their shares.

Section 235(2) of the Act allows the dissenting shareholders to approach the Tribunal within one month from the date of notice to oppose the offer. As provided in the explanation of Section 235 of the Companies Act, 2013 “dissenting shareholders” includes those shareholders who have not consented to the transfer of shares and have refused to transfer their shares to the transferee company in tune with the scheme or contract. 

If such an application is not made by the shareholders or the application, though made, has been dismissed by the Tribunal, the acquirer company would be entitled to forcibly affect an instrument of transfer and acquire the shares of the dissenting shareholders at the tune of the price paid to the majority shareholders while acquiring their shares, unless the Tribunal feels that the dissenting shareholder has a right to not part with the shares. The transfer company ought to register the transferee company as the holder of shares and inform the dissenting shareholders, within one month of the registration, the fact of the acquisition and of the receipt of money payable to them. (Section 235(3) of the Companies Act).

Section 235 (4) of the Act mandates that any money by the transferor company ought to be disbursed to the shareholders within 60 days. The courts have mandated that for Section 235 of the Act to apply, the transferor company and transferee company ought to be separate entities [AIG(Mauritius) LLC v Tata Tele Ventures]

Section 235 (5) of the Act mandates that this section would be applied retrospectively to the offers which were made even before the commencement of this Act.

Section 235 of the Companies Act, 2013, is one of the exceptions to the rule that members cannot be expelled. From a bare reading of the provision, it is seen that the dissenting shareholders do not have adequate remedies to oppose the transfer except to present an application before the Tribunal. The courts have laid down in various cases that the dissenting shareholders have to prove that the scheme or contract is fraudulent or unconscionable and was solely made to force out the minority or that the price paid in exchange is not fair. Only when the dissenting shareholders succeed in proving the above can the challenge to the scheme or contract succeed. Moreover, there is no legitimate procedure laid down to determine the “fair price” of shares as is present in Section 236 of the Act, which lays down that the fair price would be determined by the Registered Valuer according to the CCA Rules, 2016. The dissenting shareholders are required to accept the price paid during the transfer of majority shares approved by the majority shareholders.

Conclusion

Section 235 of the Companies Act 2013 clearly gives major power to the majority shareholders and can often be used as a tool to expedite the transfer of shares and avoid a deadlock situation. However, there is a clear imbalance of power, and the minority shareholders often end up being in a disadvantageous situation. Although other provisions of the Act provide certain protections to the minority shareholders, like the right to a class action, the right to approach NCLT[1] for unfair treatment or mismanagement, the progress of a company can truly happen only when the minority shareholders are involved in the decision-making process and opportunities are provided to raise and have their grievances redressed.

Read Our Article:Types of companies under Companies Act, 2013

Sherin Jose

Sherin has degrees in Law and English Literature from the University of Delhi. She is adept at legal research and writing and enjoys discussing and analysing important legal developments. Her primary interests lie in Corporate, FinTech and IPR Law and she is always on the lookout for exploring new developments in the area. She is an avid reader who loves classics and contemporary fiction. She likes to travel, bake and obsess over cat videos in her free time.

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