Minority Shareholders Cannot Challenge Fair Capital Reduction Absent Proven Unfairness or Prejudice: Supreme Court Upholds Exit Valuation

Held: The Supreme Court held that a reduction of share capital under Section 66 of the Companies Act, 2013, even when it results in exit of identified minority shareholders, is essentially a domestic corporate decision subject to limited judicial scrutiny as to fairness, reasonableness and absence of prejudice. The Court held that Section 66 does not statutorily require a valuation report, and where the company nevertheless undertakes valuation and obtains a fairness opinion, the mere fact that the valuer was affiliated to the company’s internal auditor does not establish bias absent demonstrable prejudice. The Court further held that application of Discount for Lack of Marketability to value unlisted and illiquid shares is not per se illegal, and in the facts of the case the price of INR 196.80 per share, as approved by the NCLT and affirmed by the NCLAT, could not be said to be unfair, unreasonable or oppressive to minority shareholders.

Summary: The appeals arose from a capital reduction undertaken by Bharti Telecom Limited, a closely held unlisted company whose principal business consisted of investment in Bharti Airtel Limited. The company resolved to cancel the equity shares held by identified minority public shareholders, constituting about 1.09% of its shareholding, and provide them an exit under Section 66 of the Companies Act, 2013. A special resolution approving the reduction was passed by more than 99.90% of the shareholders, and a substantial majority of the identified minority shareholders present and voting also supported it. The NCLT, while sanctioning the reduction, rejected deduction of dividend distribution tax and enhanced the consideration to INR 196.80 per share. Before the Supreme Court, the objecting shareholders contended that the process suffered from procedural irregularities, that the notice was misleading, that the valuer lacked independence, that the valuation method was flawed because it applied Discount for Lack of Marketability, and that the price fixed was grossly below fair value. The Court examined the statutory scheme of Section 66 and contrasted it with other provisions of the Companies Act where valuation reports are expressly mandated, holding that no such statutory requirement exists for capital reduction. It further held that the notice could not be termed a “tricky notice” because the exit price was clearly disclosed and relevant documents were kept open for inspection. On valuation, the Court held that fair value in this context is not divorced from market realities and that for unlisted, illiquid shares of a company with no dividend history and no listing, a marketability discount could legitimately be considered. The Court also noted that earlier buy-back and purchase offers, the company’s rights issue, the entry of a strategic investor at a different valuation, and the approved accounting standards all supported the approach adopted. It concluded that no real prejudice, palpable bias or obvious unfairness had been shown so as to justify interference with concurrent findings of the NCLT and NCLAT.

Decision: The appeals were dismissed, the Supreme Court upheld the reduction of share capital sanctioned by the NCLT and affirmed by the NCLAT, rejected the objections of the minority shareholders to the procedure, valuation methodology and share price, and held that the exit price of INR 196.80 per share was not shown to be unfair, unreasonable or prejudicial in law.