Options for squeeze-out of minority shareholders

Squeezing out typically involves a voluntary or mandatory purchase of shares held by minority shareholders, and is primarily used to gain complete control over a company, for operational ease and/or to reduce costs of maintaining and servicing small shareholders while providing an attractive exit for sometimes illiquid investments. While the Companies Act, 1956, and jurisprudence affirm that the rights of minority shareholders are to be safeguarded, companies have successfully used several provisions in the act to squeeze out minority shareholders.

Section 395

Section 395 specifies a process whereby if a scheme or contract involving the transfer of shares from one company to another is approved by shareholders with 90% of the value of shares whose transfer is involved (plus under certain circumstances, constituting three-fourths in number), the dissenting shareholders can essentially be bought out by the transferee company, unless they obtain a court order to the contrary.

In AIG (Mauritius) v Tata Televentures, Delhi High Court held that to satisfy the rationale of section 395 and justify overriding the minority interest, the 90% majority should not be the same as the party seeking to acquire the shares. There are therefore practical difficulties in using section 395 to effectuate a minority squeeze-out and this section has been rarely used.

Puja Sondhi is a partner and Mayank Vikas is a senior associate designate at Amarchand & Mangaldas & Suresh A Shroff & Co. The views expressed in this article are those of the authors and do not reflect the position of the firm.