The Hindu Business Line : Derailment on trivial grounds

MARVIN Townsend is said to have once remarked "My mistake was buying stock in the company. Now I worry about the lousy work I am turning out." Three employees of HCL Infosystems (HCLI) who had stock in the company, did not have to worry about the work they were turning out since they were removed from service. One of them happened to be the company secretary of HCLI during his heyday.

However, when HCLI applied to the Delhi High Court for approval of a scheme of arrangement between it and HCL Technologies and HCL Infinet, these three objected and threatened to derail the scheme of arrangement in their capacity as shareholders although their shareholding went to five decimal places with a zero prior to the decimal.

HCLI followed the rulebook in the course of the scheme of arrangement. The board initially approved the scheme, the scheme was sent to the court, which directed the convening of a meeting of the shareholders and creditors for approval of the scheme. The meeting was conducted and the scheme approved by 99.99 per cent of the shareholders. When the scheme reappeared before the court for sanction, the trio objected.

The objections

The first objection was that they did not approve of the conduct of the company even prior to the proposed scheme of arrangement. The Delhi High Court shot them down by asking them to concentrate on the main issue — their objections to the scheme of arrangement. They then stated that the scheme of arrangement was illegal, fraudulent and without proper and necessary approval of the shareholders since the statutory statements as required under Section 391(1)(a) were not disclosed in the explanatory statement submitted with the notice.

The court viewed this as a flimsy argument and ruled that it would accept bona fides of the explanatory statement and would not investigate into such bona fides unless it could be shown that there was a fraudulent intention involved. The trio then went on to claim that the meeting was no meeting in the eyes of law since only half an hour was given for the meeting which was inadequate.

The court turned this also down since the shareholders present in the meeting had sufficient time to consider the approval of the scheme of arrangement and 99.99 per cent of the shareholders present approved the scheme by noting. Unwilling to relent, the objectors then went on to make a rare objection — the capacity of the hall was small. The court ruled that when 99.99 per cent of the shareholders approved of a decision, the capacity of the hall had no bearing to the point at issue.

HCLI did make a small slip-up by not amending or modifying the resolutions which were circulated in advance as postulated by the Section 188(2) of the Companies Act. From the proceedings of the meeting, it was clear that the chairperson gave an opportunity to all the members to consider the proposed amendment, but none, apart from the troublesome trio, evinced even an iota of interest. The court admitted that there was a minor irregularity but the objection was not sustainable since 99.99 per cent of the shareholders were with the company. The trio then said that shareholders were not provided with adequate information and material on which they could come to a just conclusion in accepting or rejecting the scheme of arrangement. They, however, could not substantiate beyond this. HCLI replied that notices were sent to all shareholders and creditors and explanatory statements, share exchange ratio, value of assets and liabilities to be transferred were sent to all the shareholders.

The Delhi High Court opined that this was sufficient to meet the requirements of the law. The objectors seemed to be viewing whatever HCLI had done as erroneous. They objected that Section 184 of the Companies Act was violated since both the scrutinisers at the meeting were employees of the company which was not permitted. HCLI said that only one of the scrutinisers — ironically the present company secretary — was an employee of the company while the other was not an employee in any of the three companies involved in the scheme of arrangement. This argument met with the approval of the Delhi High Court.

Lesser the better

While we have provisions for prevention of oppression and mismanagement by companies, frivolous cases such as the one discussed probably call for provisions for oppression against companies. Having decided to embark on an ambitious project to cut the Companies Act to a manageable size, the Government should consider the fact that more the number of sections/procedures, more the disputes. The Concept Paper should consider introducing provisions to pre-empt needless litigation.

(The author is a Hyderabad-based chartered accountant.)

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