New Delhi, Aug. 19 -- A merger, even one that gets the go-ahead from 99.9% of the present and voting shareholders, will not go through if it fails to secure the assent of 90% of the total shareholders, according to a recent National Company Law Tribunal (NCLT) order.
On July 9, NCLT Kolkata quashed the fast-track merger between Mallcom (India) Ltd and its wholly-owned subsidiary, Mallcom VSFT Gloves Pvt Ltd.
As the order noted, the total number of votes cast in favour of the merger was 51.28 lakh, or 99.99% of the total votes cast on the resolution. Only 93 votes were cast against it. Yet the votes in favour formed just 82.19% of the company's total 62.4 lakh shares. Nearly 18% of the total shareholder base did not participate in the voting.
Since the resolution failed to secure the assent of 90% of the total shareholder base, the tribunal ruled against it.
"The NCLT held that 'total number of shares' means the total issued shareholding of the company, and not merely the shares held by members present and voting," said Karan Sahi of KPMG's deal advisory team. "Accordingly, abstention or non-participation effectively remains part of the denominator. An overwhelming majority of votes cast can't cure the failure to achieve the statutory 90% threshold."
Changing regulatory stance
Regulators have increasingly recognised that securing adequate investor consent is difficult as several shareholders absent themselves from the voting process and some are hard to trace.
The NCLT order flagged this difficulty, too, citing a committee set up by the ministry of corporate affairs.
The Company Law Committee called the 90% consent threshold under the Companies' Act "onerous", particularly for fast-track mergers between a company and its wholly-owned subsidiary.
"The threshold of approval by persons holding ninety per cent of total share capital has been considered onerous by stakeholders since the section requires approval by the persons holding ninety per cent of the company's total share capital and not ninety per cent of shareholders present and voting in the meeting," its report said, adding, "This threshold is particularly difficult to achieve in listed companies. Therefore, the consent threshold significantly delays the approval process, defeating the section's essence that seeks to expedite mergers."
Recognising the problem of absentee investors, the Securities and Exchange Board of India (SEBI) recently issued a consultation paper proposing flexibility in how investor consent is sought for alternative investment funds (AIFs).
AIFs must secure the consent of a majority (two-thirds or three-fourths) of unit holders by value of investment for actions such as material alteration of fund strategy, extension of tenure, or related-party transactions with their manager or sponsor. SEBI suggested that, provided AIFs declare their investor-consent mechanism and related details upfront through PPMs, funds be allowed to choose from three options: deemed consent, present-and-voting, and express voting for approval.
The first includes even absent votes as in favour of a proposal; the second disregards absent investors from the total; and the third counts absent votes as absent, but still includes them in the total.
Published by HT Digital Content Services with permission from VC Circle.