Valuation reports: Holy Grail or Pandora’s box?

The law relating to valuation reports in the context of corporate restructuring is fairly settled. Two landmark judgments of the Supreme Court, in the Hindustan Lever case (1995) and the Miheer Mafatlal case (1996), have stood the test of time, laying down the principle that once the court finds that a scheme has met the broad parameters of the requirements for getting court sanction, the court has no further jurisdiction to sit in appeal over the commercial wisdom of the majority of the class of persons who have given their approval. The court has neither the expertise nor the jurisdiction to delve into the commercial wisdom exercised by persons who have ratified the scheme with the requisite majority. Therefore the court, in the absence of strong grounds, cannot be entitled to set up its own view of fairness.

The application of the above ruling in cases relating to selective reduction of capital is examined below.

Popular method

In the absence of statutory compulsory squeeze-out mechanisms, a selective reduction of the capital held by minority shareholders has become a preferred form of squeeze-out that is being adopted by promoter shareholders. Courts have held that this does not amount to a forcible acquisition or elimination of the public shareholders. Several judgments state that so long as the minority shareholders are paid “fair value” and the selective reduction is approved by the requisite majority of shareholders, courts are not justified in withholding their sanction to the resolution on selective reduction.

Akila Agrawal is a partner at Amarchand & Mangaldas & Suresh A Shroff & Co. The views expressed in this article are those of the author and do not reflect the position of the firm.