NCLT orders Simpson and Company to set up trust on dissenting shareholders row

National Company Law Tribunal (NCLT) has asked Simpson and Company Ltd. (an Amalgamation group firm) to facilitate setting up of a trust to address the concerns of dissenting shareholders who opposed the move by the Chennai-based firm to consolidate shares.

The dissenters are displeased with the price offered by the company for fractional shares arising out of share consolidation.

Simpson Company Ltd., a kind of holding company of the Amalgamation group, has offered a price of Rs. 14,680 per share of the face value of Rs 10, each.

The offer price was fixed based on the advice of external valuation experts. The valuation exercise followed a decision to consolidate the 250 shares of Rs. 10 each into a single share of Rs.2500 a piece.

Prior to the consolidation, the total paid-up share capital of the company stood at Rs.7,37,50,000 comprising 73,77,500 shares of Rs. 10 each. The company has 185 shareholders. Minority shareholders, numbering 167, hold 0.39% of the holding.

The rest is controlled by promoters (comprising Amalgamation Private Ltd. and 16 others) and an insurance company.

The share consolidation was sought to be implemented by the unlisted closely-held company to ease the cumbersome procedural formalities in the administration. Simultaneously, the objective was to offer small shareholders an exit option.

When the proposal came up at a special general body meeting in November 2019, 47 shareholders holding 10,492 shares voted against the proposal. Yet, it was carried since the majority voted in favour of it.

Some dissenting shareholders did not agree with the offer price for fractional share. The company insisted that the valuation exercise itself was done to provide a window to encash the fractional entitlement arising out of share consolidation. The company pointed out that the offer price was much higher than the Rs.10,500 a share for the buy-back offer it made in 2018.

Also, the book value of the company as on March 2019 was Rs.2212 a share of the face value of Rs. 10 each. And, the consolidation value was fixed to the nearest multiple of Rs.500 at Rs.2500 a share, which is equivalent to 250 shares of Rs.10 each. The company reported an income of Rs.1,650 crore in 2018-19 and a profit after tax of Rs.176 crore.

The dissenters contended that a majority of the public shareholders (0.0924%) voted against the consolidation move. They alleged that the move was to benefit the promoters. Considering the assets of the company and value of its subsidiary firms, they felt the offer price for fractional shares was very low.

The tribunal, however, said it could observe no inappropriateness in the valuation. “The dissenting shareholders are certainly free to enjoy their constitutional rights of holding these shares after consolidating by institutionalising a trust or selling these shares for a better price than what is offered by the applicant company, if there are buyers,” the tribunal said. The NCLT relied on judgements elsewhere that provided for a trust-kind solution for fractional shares in share consolidation instances.

What does it mean to establish a trust for resting the fractional shares? Simply put, the proposed trust (by virtue of holding the fractional shares) will be shareholders of the company. The individual holding fractional shares is at liberty to sell his/her shares at any price to anyone. Once, he/she sells, the new the buyer's name will be included in the trust. The individual fractional shareholders will have no direct connection with the company, however.

To be sure, share consolidation is a way to provide an exit option for non-promoter small shareholders in a closely-held and unlisted company. In many instances, a single-share investor in a company has often raised avoidable roadblocks in managing the affairs of an organisation. In an unlisted holding company sort of an entity, non-promoter shareholders may be limited and hence will have very little say. Their options are few. Share consolidation in these kinds of entities is both a carrot and stick option. It is good or bad, depending upon how one views it.

According to knowledgeable sources in the legal fraternity here, the trust option for fractional shares in this instance is much better than the hobson's choice handed out to minority shareholders in Chennai-based Chettinad Cement Corporation Ltd. in a similar case. Post-delisting Chettinad Cement, too, came out with a share consolidation exercise.

The fractional shares in Chettinad Cement were settled willy-nilly. Long-time observers of unlisted family enterprises are of the view that share consolidation could turn out to be a normal exercise in these entities, and the trust model could be the way forward to address the fractional share issue.