CADBURY INDIA LIMITED V/S HIGH COURT OF BOMBAY, 2014

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CADBURY INDIA LIMITED V/S HIGH COURT OF BOMBAY, 2014

CITATION	(2015) 125 CLA 77
DATE OF JUDGMENT	9^th MAY, 2014
COURT	HIGH COURT OF BOMBAY
APPELLANT	CADBURY INDIA LIMITED
RESPONDENT	HIGH COURT OF BOMBAY
BENCH	G.S. PATEL, J.

INTRODUCTION

Though the essence of chocolate may be saccharine, sweetness is not invariably guaranteed, a fact apparent in the case of “Cadbury India Limited v. High Court of Bombay”. The legal conundrum surrounding the following case deals with equity share capital reduction, an acquisition’s impact on a company, and the relationship between a majority versus a minority stakeholder. In this case analysis, we will examine the details of the issue: the facts, issues, contentions, judgement of the court, the ratio decidendi and a critical analysis of the law. A subsidiary of Mendelez International, the Indian arm of Cadbury was the central character in the case. Further, it was a subsidiary of Cadbury Plc in the United Kingdom, which was notable. The company was set up by the Companies Act of 1956 and achieved fame for its sweet products ranging from chocolates, cocoa blends, milk products, confectionery, and hot chocolate.

FACTS OF THE CASE

This case deals with a merger and acquisition (M&A) issue. The decisions of the Cadbury India Ltd. company concerning its share capital were influenced by its acquisition. Cadbury has had a long-lasting policy stipulating that its parent company, Cadbury Schweppes is allowed to solely operate in the global market via wholly-owned subsidiaries. From here, we find the root of the matter. In some instances, the subsidiary’s law contradicts the pre-existing policies of the parent company – here is where exceptions to the regulation arise. A situation like this occurred when Cadbury India Ltd. needed to align with the Indian economic policies in the 1970s. The parent company ended up needing to reduce its shareholding to 60% of the value, which brought about a dilution of ownership.

In the aftermath of economic liberalisation around 2002, foreign investors were permitted to inject 100% Foreign Direct Investment (FDI). Cadbury India Ltd grew increasingly worried about its equity ownership following these economic changes. 93.24% of the company’s shareholding was acquired in this period after the Cadbury group spoke of an offer. Public shareholding value needed to be at a minimum of 25% as per a mandate. However, due to the acquisition of Cadbury India Ltd., its shareholding value fell below what was necessary, leading to its delisting from NSE and BSE. After the exchange, the assumption was that Cadbury Group would be delisted at the exit price of Rs. 500. However, shares were accepted by the company until 2006, so the Cadbury Group’s shareholding had, in reality, increased to 97.44%, The delisting buy-back process was initiated when Cadbury India Ltd. was then acquired by Kraft Foods. At 11,16,505 shares, the final price was settled at Rs. 1030.

To buy out the minority shareholders, the share capital of the company was reduced from Rs. 3218.32 lacs to Rs. 3106.70 lacs, as the company’s choice. Majority shareholders helped garner support for an extraordinary general meeting to be convened under Section 100 of the Companies Act for this purpose. Unfortunately, the present case was filed at the Bombay High Court by dissenting minority shareholders as a petition against the majority decision.

M/s. Bansi S. Mehta Co. and SSPA & Co. were deemed flawed evaluators. They were dismissed by the High Court due to their mistakes. In their wake, Ernst & Young (E&Y) was appointed as the next independent evaluator. The Discounted Cash Method (DCF) was used to value the shared assigned to E&Y. The final share value was determined to be Rs. 2014.50.

Samant group stood as the main dissenting party. They considered the resolution to be unfair and the E&Y valuation to be unreasonable, finding several flaws in the process.

ISSUES RAISED

Was the valuation performed by Ernst & Young valid? Should the Bombay High Court be concerned with endorsing the share capital reduction of the company even though there are raised objections against the majority decision resolution?
Is the court responsible for evaluating minority shareholders’ rights? What is their stance? Have the rights of minority shareholders potentially been violated as a result of the minimal share that has been allocated to them?

CONTENTIONS OF APPELLANT

At a noteworthy general meeting, the plan to reduce share capital was endorsed with majority support. Cadbury India wishes for the Court to approve this specific resolution.
The reasoning behind the reduction is in alignment with Cadbury India’s parent company policy. It prefers to operate through branches or wholly-owned subsidiaries as long as it is permitted.
An array of buy-backs and open offers were conducted before Cadbury India submitted this petition. Upon the submission of the petition, a general meeting was assembled to ratify a special resolution to reduce capital with or without any subsequent amendments as its final goal. No grievances were reported as the meeting took place with all the proper arrangements.
Most of the members of the meeting voted in favour of the resolution, however, a minority voted against it. A substantial portion of the voters belonged to the non-promoter minority.

CONTENTIONS OF RESPONDENT

The Original Valuation Price was contested but many stakeholders at first but in the end they all agreed upon the Revised Valuation Price.
The two groups that did not accept the Revised Valuation Price were deemed the Objectors. Objectors presented a myriad of arguments against the resolutions, like the valuation reports lacking disclosed valuation basis, the evaluation method being employed by the independent firm, whether a control premium was applicable, or how much weightage each evaluation method should be given.
The objections and arguments of the opposing side ultimately culminated in an extended legal battle.
There were three fundamental arguments addressed by the court, although there were several more objections brought up by dissenting parties. These contentions included selling property in Mumbai, Kraft’s global acquisition of Cadbury, and how comparable companies could be using the same growth rate.

JUDGEMENT

Finally, the demands of the objectors were held as invalid. The valuation was set at Rs. 2014.50. In addition to this, the court pointed out that there must be ample evidence proving unreasonableness if one wanted to contest a valuation approval. There must be more of a basis for contesting it other than the presence of other valuation methods that weren’t chosen by opposing parties.

Approving these transactions required certain conditions which the court established after this case. First of all, public interest cannot be contradicted in the reduction scheme. Equity and impartiality must be central to the transaction. Lastly, no specific class of shareholders should be subject to bias or discrimination because of it. All three parts of the consideration should be examined on a case-by-case basis.

“Prejudice” was defined in the third condition by the court. It is an effort to pressure a group of shareholders to divest their resources. As a result, their shareholding was reduced beyond what is thought to be reasonable, fair and equitable.

To gauge reasonableness, the court also underscored how crucial it is to consider other relevant open offers in the past. Furthermore, fairness and reasonableness of a deal can only be determined when all aspects and parts of it are evaluated thoroughly. The Court repetitively highlighted how important democratic practices are to the stable operation of a company. They warned against making important decisions based on statements that could not be proven.

ANALYSIS

This judgement held significant weightage in the realm of corporate law. The Bombay High Court designed guidelines for transactions involving acquisitions, the reduction of equity shares, and the collision between the interests of the majority and the minority in the event of resolutions.

The court diligently relied on established judicial precedents. The precedents were used to provide a context for the case as well as act as a ratio decidendi for the ruling. One of the most notable, relevant cases cited was “Sandvik Asia Limited v. Bharat Kumar Padamsi”. This case also concerned the reduction of equity share capital when certain members approved it. The problem originated from the belief that doing so would prejudice a certain shareholder class. Another judgment that was referenced was “Ramesh B. Desai v. Bipin Vadilal Mehta”, a scenario where the bench addressed a legal question with the same concepts. The court’s judgement rendered stated that discrimination against shareholder groups must be proved with evidence and if this is not possible objections can only be dismissed. Acceptance must be reasonable.

E&Y’s valuation was favoured in the end by the court, drawing upon the conclusions reached by the aforementioned precedents. The validity of the same surpassed that conducted by the company’s internal evaluators. E&Y’s valuation showed no evidence indicating that promoted shareholders or their reduction received any preferential treatment. The court’s justification was simple. To prevent any arbitrary decisions from disproportionately affecting the shareholders, leaving the determination to its examination and assessment was essential. Kraft’s acquisition of Cadbury was also criticised by the court. They concluded that the latter’s shares were hardly affected. Independent analysis was the need of the hour, especially in this case where products were overlapping. One company cannot be relied on for statistics to influence another company.

Though this judgement held deep importance, there are still logical discrepancies and questions left unanswered necessitating further caution before similar situations occur down the line.

First of all, neither the Securities and Exchange Board of India (SEBI) nor the Companies Act of 2013 provide any legal guidelines to manage the reduction of equity share capital and the effect this would have on the decision-making powers of shareholders. Even though a company is allowed to convene for an extraordinary meeting to deal with the issue of equity share capital under the rights provided by Section 100 of the Companies Act, this is still left highly contingent on articles of association permitting these actions. A tremendous amount of power has been allotted to the court to practice discretion. The absence of provisions regarding the same is highlighted in this case, wherein the court was minimally involved in engagement as a valuer since they lacked expertise. Even when they refrained, the unpredictable intervention of the court still was not guaranteed. Furthermore, since no exact regulation is prescribed within the legislation, foreign investors have the opportunity to exploit the delisting process and gain control of the Indian subsidiaries. This is similar to the procedure followed by Cadbury India Ltd. and the Cadbury group.
The court held a higher preference for the valuation performed by E&Y in comparison to the other valuers. This implies that during buy-backs there are possible advantages for majority shareholders, which could prove detrimental to the rights of minority shareholders. To add on, minority shareholders have inadequate statutes and regulations to protect their interests. They have no option but to use evidence to prove their claims.
Moreover, the objecting party is set to an unbelievably high standard. For example, the objector is held to a condition that unreasonableness must be ‘self-evident’ in both valuation and resolution. It must also prove prima facie unreasonableness. These burdens of proof are not always readily accessible to an objector, in which case obtaining the required records or meetings isn’t an option. With such a high probability of getting rejected due to stringent criteria, dissenters may back down from objecting.

CONCLUSION

A precedent was set in the case “Cadbury India Limited v. High Court of Bombay” for any forthcoming judgements regarding a company’s acquisition status or the reduction of its equity share capital. Despite the steps taken forward due to the case, there is still a lack of proper statutory guidelines to balance the criteria for preventing arbitrary actions. Arbitrariness often occurs in cases related to valuation and resolutions regarding share capital reduction. Courts should attempt to implore into the matter more without intrusion into the internal affairs of a country which would be necessary. In this way, minority rights can be safeguarded.

REFERENCES

This Article is written by Eshal Zahur student of National Law University, Odisha; Intern at Legal Vidhiya.

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