Amalgamation of Companies in Public Interest by Snigdha Mohapatra at LexCliq

Where the Central Government is satisfied that it is essential in the public interest that two or more companies should amalgamate, then the Central Government may order the amalgamation of those companies into a single company with such constitution, with such property, powers, rights, interests, authorities and privileges and with such liabilities, duties and obligation as may be specified in the order. This has been specified under section 237(1) of the Companies Act.

Section 237 provides for the amalgamation of two or more companies at the instance of Government, in the public interest, so as to obviate delays by the observance of the usual procedure laid down in the Act in such cases. Although section 237 does not specifically, refer to Government companies and their amalgamation in the public interest, provisions of the corresponding section of the earlier Act (Section 396) have so far been invoked only for the purposes of amalgamation of two or more Government companies.

A sort of elucidation of the concept of public interest can be seen in the case of the merger of TOMCO with Hindustan Lever Ltd. Brief facts are as under —

The two companies involved in this case were Tata Oil Mills Company Ltd. (TOMCO) and Hindustan Lever Ltd. (HLL), which is a subsidiary of Unilever (UL), a multinational company. Both these companies were manufacturers of soaps, detergents, toiletries and animal feeds. As TOMCO was incurring losses from 1990-91, its Board of directors decided to amalgamate their company with HLL, which was a more prosperous company in the same field of activities and the proposal was accepted
by HLL. The scheme of amalgamation was accepted by the Board of directors of both the companies, a large majority of shareholders, debenture holders and others.

However, two of the shareholders of TOMCO, holding a nominal percentage of shares and two workers’ unions and others opposed the scheme of amalgamation on various grounds of statutory violations, procedural irregularities of provisions of the Companies Act, The Monopolies and Restrictive Trade Practices Act(MRTP), undervaluation of shares including preferential allotment on less than the market price to the multinational company which was against the public interest. On preferential allotment of shares to Unilever on less than market value, the High Court held that HLL was already the holder of 51 per cent shares before any allotment, therefore, the allotment at a lower price which placed them at par with the same holding was neither illegal nor violative of public interest. The matter was referred to the Supreme Court.

Two separate but concurring judgments were delivered by the Supreme Court Judges. Dealing in a more elaborate way the question of public interest, Justice Sen stated that merely because 51 per cent of shares of HLL were being given to a foreign company, the scheme could not be said to be against the public interest. In fact, the Foreign Exchange Regulation Act had been amended specifically to encourage foreign participation in business in India. Further, with a view to give greater freedom to the companies for doing business in India, the MRTP Act had also been amended and prior approval of the Government
was not necessary for the amalgamation of companies anymore. In fact, it was in the public interest that TOMCO with its 60,000 shareholders and also a very large workforce, did not become a sick company, the Judge observed.

However, he added, that public interest which should be taken into account as an element against approval of amalgamation would not include a mere future possibility of merger resulting in a situation where the interest of the consumer might be adversely affected. If, however, in future, the working of the company turned out to be against the interest of the consumers or the employees, suitable corrective steps could be taken by appropriate authorities in accordance with the law.

Justice Sahai, in his judgment, also stated that the transfer of assets at a lower price could not be upheld as violative of public interest. The reasons put forth by the Judge in support of his judgment were that in the case of amalgamation of companies the principle of “prudent business management test” is to be applied. When the court is concerned with a scheme of merger with a subsidiary of a foreign company then the test is not only whether the scheme would result in maximising the profits of the shareholders or whether the interest of the employees was protected but it has to ensure that the merger shall not result in impeding promotion of industry or shall not obstruct the growth of the national economy. The merger should not be contrary to the basic national objective of liberalised economic policy. Even assuming that the assets were being transferred for a very meagre sum, that by itself would not render the agreement bad or against public policy, elucidated Justice Sahai.

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