Squeeze-out in private companies: legal validity and valuation challenges

Introduction

A crucial element of corporate management and ownership is the consensus among shareholders over operational and decision-making processes. Nevertheless, it would not always be feasible to get consensus from all shareholders, which gives rise to the idea of “majority-owned and controlled corporations.”^[1] The notion of “majority rule” was established in “Foss v. Harbottle”^[2] case which is based on the fundamental premise of corporate democracy, which holds that the majority should decide the best course of action for the company.

The Companies Act of 2013 gives majority shareholders the right to force minority owners to sell their interests. This is known as a “freeze-out” or “squeeze-out.” In this procedure, the majority buys the shares owned by the minority, which means that the minority no longer has a position in the corporation, and the majority group has full control.^[3] The regulation of “squeeze-outs” in the Indian legal framework is a recent issue that has garnered increased attention and criticism lately. The frequency of squeeze-outs in India has increased over the past decade, accompanied by heightened media attention and discussion on the topic.^[4] In consideration of this, the article discusses the legal mechanisms used for squeezing out minority shareholders in private companies, focusing on fairness, valuation disputes, and protections under company law.

Legal position of squeeze-out in India

In 2020, the Ministry of Corporate Affairs (MCA) published notifications^[5] amending section-230^[6] of the Act to incorporate sub-sections (11) and (12) (“2020 Amendment”). Additionally, the Companies (Compromises, Arrangements, and Amalgamations) Amendment Rules, 2020^[7] (“CAARules”) and the National Company Law Tribunal (Amendment) Rules, 2020^[8](“NCLT Rules”) were promulgated, collectively referred to as the “Takeover Notification,” as the amendments predominantly pertained to the acquisition of minority shareholding by the majority.^[9] To begin with, section-230(11) of the Act says that any deal or compromise includes a takeover proposal. According to Rule 3(5) of the CAA Rules, shareholders collectively possessing a minimum of 75% of the voting equity shares, including depository receipts with voting rights, may petition the NCLT to obtain the remaining shares owned by “minority shareholders”. The transaction must be executed by remitting an equitable price for the shares. The NCLT Rules address methods for obtaining minority shares. Upon approval of the application by the NCLT, the majority shareholders may compel minority owners to divest their interests through an imposed obligation.

Obtaining minority shares pursuant to Section 235

Unless the NCLT has issued a contrary order upon application by the dissenting shareholders, the Act permits the compulsory purchase of shares held by “minority shareholders”, provided that 90% of the shareholders endorse the plan or contract within two months after informing the dissenting shareholders. The 90% requirement aligns with the majority concept, as stated in the Foss case.

Nevertheless, in the case of “AIG (Mauritius) LLC v. Tata Tele Ventures,”^[10], an effort was made to spread the idea of shareholder democracy in India by looking at section-395 of the Companies Act, 1956, which is comparable to section-235 of the Act. Only by including “different and distinct persons” could the 90% criterion be met. This criterion was developed to rationalise the prioritisation of majority interests above those of “minority shareholders”, however it poses distinct issues in the realm of “closely-held private and unlisted companies^[11].” The shareholding of such companies may be concentrated among a small number of individuals, each possessing significant shares. In such a scenario, it would be challenging for them to achieve this criterion.

Obtaining minority shares pursuant to Section-236

Under section- 236, the buyer is provided with another means of acquiring the minority shares. In accordance with the aforementioned provision, “a majority shareholder holding at least 90% of the equity shares” may notify the company of their intention to acquire minority shares by a merger, share exchange, conversion of securities, or any other method. However, minority owners are not required to sell their shares if the provision is read literally. Section- 236(9) further states that the Act shall continue to control the remaining minority owners in the event that the majority shareholders do not buy all minority shares.

The modifications ensure the acquisition rights of majority owners while providing strong protections for minority shareholders. According to Section-230(12) of the Act, minority shareholders of unlisted firms who are dissatisfied may petition the NCLT about issues pertaining to takeover offers. Moreover, the principal shareholders are required to deposit a “minimum of 50% of the takeover bid” consideration into a designated bank account.

According to the NCLT’s ruling in “S. Gopakumar Nair v. OBO Bettermann India Private Limited”^[12]90% of the “majority shareholders” can buy out the minority shareholders if “amalgamation, share exchange, conversion of securities or for any other reason”—the specific events listed in Section-236(1) occurs. The NCLAT used the concept of ejusdem generis and held that “for any other reason” can only include situations similar to mergers, stock exchanges, or conversions of securities. Section-236 permits the acquisition of shares solely from assenting shareholders contingent upon the occurrence of certain specified conditions, but Section-235 provides for the acquisition of shares from dissenting shareholders at any time.

Measures to safeguard minority shareholders

Indian company law has certain protections in place to make sure that both majority and minority shareholders are treated fairly. These safeguards are as follows:

Right Against Oppression and Mismanagement

According to “Chapter XVI of the Companies Act of 2013, minority shareholders” have legal recourse if they consider the business’s activities are being handled in a way that is harmful to the firm or the public interest.^[13] I If minority shareholders believe there has been oppression or mismanagement, they can file a complaint with the NCLT under Section-241. Furthermore, minority shareholders may seek legal redress if there has been a major change in the company’s management or control that might impair shareholders’ or creditors’ interests^[14] In the case of “Tata Consultancy Services Ltd. v. Cyrus Investments (Pvt.) Ltd.”^[15], the SC declared that even removing a director is neither oppressive or detrimental.

Section-244 establishes specified requirements for qualified members to apply under section-241. The applicant for NCLT must own at least 1/10^th  of the company’s issued share capital, with all calls and monies owing for shares paid.^[16] Alternatively, qualified members must represent at least 100 or one-tenth of the entire membership, whichever is less. If the firm has no share capital, qualified members must account for at least one-fifth of the entire membership. However, a caveat to section-244 states that the NCLT may waive these conditions in an application.^[17]

Class Action Suit

Section-245 of the Companies Act of 2013 gives “minority shareholders” the power to launch a class action suit against the firm in the NCLT if their rights or interests are violated. The clause permits a group of minority shareholders with comparable concerns against the corporation to bring a single lawsuit together.

Appointment of Small Shareholders Directors

According to Section-151 of the Companies Act, minority shareholders of a publicly traded business have the authority to select a shareholder of their choosing to the board as a “Small Shareholders Director”. A “minimum of 1000 small shareholders, or 1/9^th” of the total number of such shareholders, may apply for the appointment. section-149(6) of the Act requires the chosen director to fulfil the criteria for an independent director. However, huge institutional investors should not abuse this option, as it may jeopardise the interests of passive retail shareholders. It is vital to highlight that this right is only available to listed firms.

Valuation Challenges and Disputes

Essential to a “minority squeeze-out” is a fair share price and value. The completion of a valuation study is required for a takeover to take place. This report must specify the “fair price of shares””^[18] of the relevant company and the maximum price that any individual might have received for selling a share in the previous 12 months.

Absence of Uniform Valuation Method

Section-236(2) requires a registered valuer to ascertain the fair price; however, a standardised methodology is absent. The equitable valuation of shares must be ascertained based on many considerations, including earnings per share and return on net worth. Courts have acknowledged “Net Asset Value (NAV), Discounted Cash Flow (DCF), and Market Price Method” as valid, albeit the selection is contingent upon context.

Indian courts often refrain from examining value unless they believe there are intrinsic flaws in the valuation process.^[19] The court in “Sandvik Asia Ltd. v. Bharat Kumari Padamsi”^[20], held that it would not refuse to accept a resolution to lower share capital if minority owners were adequately paid and the motion was backed by a significant majority of shareholders. Comparable arguments were articulated in “Re Organon (India) Ltd. v. Unknown”^[21] and “Wartsila India Ltd. v. Janak Mathuradas”^[22].

Conflict of Interest and Lack of Independent Oversight

Valuation is sometimes performed by valuers selected by majority shareholders, leading to potential conflicts of interest. In contrast to publicly traded corporations, private company transactions do not need an independent fairness assessment or regulatory scrutiny by SEBI.

In the Cadbury India Limited judgment^[23], decided upon particular criteria to ascertain if a selective reduction in share capital is equitable. To achieve these criteria, share prices have to be properly evaluated, taking into consideration both current and historical share prices and offers.

Recent instances highlight the inconsistency and unpredictability in the treatment of squeeze-out transactions by Indian tribunals.^[24] In September 2024, the NCLT Kolkata dismissed Philips India’s capital reduction proposal, which would have enabled the Dutch corporation to augment its ownership from 96% to 100%^[25]. Philips India has subsequently lodged an appeal with the NCLAT about this ruling. Conversely, Bharti Telecom obtained a favourable NCLAT verdict in April 2025 to acquire the 1% shareholding owned by minority shareholders, reversing a 2019 refusal by NCLT Chandigarh. Nonetheless, the prospect of more appeals and postponements persists for Bharti Telecom^[26].

Conclusion

In the global corporate environment, the preservation of “minority shareholders”’ rights in the event of “squeeze-outs” is a major concern. Although minority shareholders’ rights were explicitly protected in India’s Companies Act of 2013, these rules have not been adequately implemented, leaving minority owners vulnerable.

Increased regulatory scrutiny and other actions are required to better protect the interests of “minority shareholders”. This issue may be much improved with the addition of independent directors, internal agreements, financial review committees, and other modifications. The goal of the legislation, which is to safeguard minority interests, may be assuredly fulfilled by these means. It is imperative to encourage responsible leadership and transparency in order to reach a balance between minority shareholder rights and corporate democracy. Transparent and equitable procedures that take into account the needs of all parties involved may help achieve this goal. The efficient running of the company and the protection of “minority shareholders’ rights” depend on these processes being followed to the letter.

Finally, protecting “minority shareholders” during “squeeze-outs” is a complex subject that calls for careful discussion and strict regulations. There is still room for improvement, even if the new law has fixed many problems with the old one. India can strengthen the protection of minority shareholder rights, promote good governance, and hold companies accountable through a multi-pronged strategy that includes regulatory oversight, independent directors, and the reforms mentioned above. This will help to maintain balance among the company’s stakeholders.

Author:- Divya Saini, in case of any queries please contact/write back to us atsupport@ipandlegalfilings.com or   IP & Legal Filing.

^[1] Lakshmikumaran & Sridharan, Squeeze out clause: A perspective, Lakshmisri Insights, https://www.lakshmisri.com/insights/articles/squeeze-out-clause-a-perspective/.

^[2] Ilias Bantekas, Why Is the Rule in Foss v. Harbottle Such an Important One?, 39 Bus. L. Rev. 229 (2018), https://kluwerlawonline.com/journalarticle/Business+Law+Review/39.6/BULA2018032.

^[3] Squeeze-Out Mergers in India: How Are They Different from Global Standards?, Ctr. for Bus. & Com. Laws, NLIU Bhopal (June 30, 2021), https://cbcl.nliu.ac.in/mergers-acquisitions/squeeze-out-mergers-in-india-how-are-they-different-from-global-standards/.

^[4] Somasekhar Sundaresan, ‘Minority Shareholders Can Be Thrown Out’ (2009) BUS. STANDARD http://www.business-standard.com/article/economy-policy/minority-shareholders-can-be-thrown-out109050400001_1.html.

^[5] Ministry of Corporate Affairs, Notification S.O. 547(E) (Feb. 4, 2020), https://www.mca.gov.in/Ministry/pdf/Notification_04022020.pdf

^[6] Harshil Matalia, ‘Comparative Analysis of Provisions enabling Minority Shareholders to Squeeze Out Minorities’ (2020) http://vinodkothari.com/2020/02/minority-squeeze-out/.

^[7] Ministry of Corporate Affairs, Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2020, https://www.mca.gov.in/Ministry/pdf/Rules1_04022020.pdf

^[8] Ministry of Corporate Affairs, National Company Law Tribunal (Amendment) Rules, 2020, G.S.R. 80(E), (Feb. 3, 2020), available at https://www.mca.gov.in/Ministry/pdf/Rules3_04022020.pdf.

^[9] Ajith N. Kale & Rupa Veena S, Squeeze-out Mergers in India: How are they different from Global Standards?, CBCL, NLIU Bhopal, https://cbcl.nliu.ac.in/mergers-acquisitions/squeeze-out-mergers-in-india-how-are-they-different-from-global-standards/

^[10] Bharat Kumar Padamsi v. Sandvik Asia Ltd., 103 (2003) DLT 250.

^[11] Ease of Minority Squeeze-Out: An Analysis of the New Squeeze-Out Provisions, CBCL, NLIU Bhopal, https://cbcl.nliu.ac.in/company-law/ease-of-minority-squeeze-out-an-analysis-of-the-new-squeeze-out-provisions/

^[12] S. Gopakumar Nair & Anr. v. OBO Bettermann India Pvt. Ltd., 2019 SCC OnLine NCLAT 402

^[13] The Companies Act, 2013, s. 241(1)

^[14] The Companies Act, 2013, s. 241(2).

^[15] (2021) 9 SCC 449

^[16] The Companies Act, 2013, s. 244(1)(a).

^[17] The Companies Act, 2013, s. 244(1)(b).

^[18] A New Method of Minority Squeeze-Out, Mondaq (Jan. 14, 2020), https://www.mondaq.com/india/shareholders/893724/a-new-method-of-minority-squease-out

^[19] Miheer H. Mafatlal v. Mafatlal Industries Ltd., JT (1996 (8) 205

^[20] Miheer H. Mafatlal v. Mafatlal Industries Ltd., JT 1996 (8) 205 (SC).

^[21] Sandvik Asia Ltd. v. Bharat Kumar Padamsi, [2010] 101 SCL 270 (Bom).

^[22]Bennett Coleman & Co. Ltd. v. Union of India, [2010] 101 SCL 270 (Bom). [2010] 104 SCL 616 (Bom).

^[23] “Minority Squeeze-Out in Re Cadbury India Ltd. – Part II,” The Law Blog (June 25, 2020), https://thelawblog.in/2020/06/25/minority-squeeze-out-in-re-cadbury-india-ltd-part-ii/

^[24] “Time to Lift the Squeeze on Squeeze-Outs,” Touchstone Partners (Jan. 2021), https://touchstonepartners.com/time-to-lift-the-squeeze-on-squeeze-outs/

^[25] Philips India Limited, CP/312(KB)2023

^[26] Shirish Vinod Shah (HUF). Vs. Bharti Telecom Ltd & Ors., Comp. App. (AT) No. 273 of 2019