The Viewpoint: Deft Dissent – Exit Option to Dissenting Shareholders

The Viewpoint: Deft Dissent – Exit Option to Dissenting Shareholders

Bar & Bench

Promoters of Indian listed companies have generally been viewed with a jaundiced eye, if and when a material decision is taken at their behest, with respect to their company.

The recent notification of provisions in relation to dissenting shareholders, by way of insertion of chapter VI-A in the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 appear to further and, in a way, institutionalize this perception.

These provisions require the promoters or persons in control of the listed company to provide shareholders who vote against a proposed variation in fund raising objects or contracts entered into by the company (as described in the prospectus). While these provisions may well have been intended to “protect the interests of investors in securities”, are they really?

Firstly, while admitting that these provisions are in furtherance of sections 13(8) and 27 of the Companies Act, 2013, the very concept of a guarantee or an escape route to shareholders fails to recognize a basic principle underlying equity investments, viz., that a shareholder accepts the inherent risks and vagaries of business as well as the democratic “majority wins” rule in corporate functioning.

The fact that the shareholder has chosen to subscribe to equity of the listed company assumes that the shareholder is a willing risk-taker. Assuming that the shareholder has a genuine issue with variation in fund raising objects or contract entered into by the listed company, such shareholder is free to sell his shares in the secondary market.

Secondly, these provisions do not restrict participation in the exit offer to shareholders who had subscribed to shares of the company on the basis of the prospectus, but also extend to shareholders who have acquired shares of the listed company in the secondary market. Secondary subscribers generally consider factors other than the object for which the listed company had initially raised funds or contracts it had entered into at the time, such as the current market price, the company’s track record, management, the sector/industry in which it is operating and associated risks and returns. To the extent the exit offer is given pro rata to all dissenting shareholders, the secondary subscriber may be given an exit at a premium, while an initial subscriber may receive its exit at a price that is lower than the price of initial subscription, due to the sheer volume of dissenting shareholders seeking exits.

A question therefore arises as to whether a secondary subscriber should be allowed to benefit from an exit offer on the same terms as an initial subscriber, in an event a listed company changes its fund raising objects or contracts entered into, several years after the initial public offer.

Thirdly, these provisions facilitate opportunistic behaviour on the part of shareholders who realize that the variation in fund raising objects or contracts entered into, is actually in the best interests of the listed company but want to benefit from the exit price offered by the promoters, which may be higher than the current market price of the listed company.

The facilitation of opportunistic behaviour is furthered by the fact that the provisions do not mandate a dissenting shareholder to tender his shares in the exit offer. In a way, this entices a shareholder to dissent, so that such shareholder can window shop, by weighing the exit offer price against the current market price, before making an actual decision to tender shares in the exit offer.

Lastly, these provisions do not restrict or bar the listed company from varying the fund raising objects or the contracts entered into by it after passing a special resolution but before completion of the exit offer, and further appear sans consequence(s) if the promoters do not or are unable to provide an exit to the dissenting shareholders.

That said, it can be assumed that general default provisions under the Companies Act, 2013 and the SEBI Act, 1992 would be triggered in addition to consequences under the recently notified SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, such as freezing of promoter/promoter group holding and suspension in trading. Interestingly, on a strict reading of the default provisions under the listing regulations, the stock exchange is required to take action – not SEBI.

This article was authored by Monal Mukherjee (l), Partner and Malek Shipchandler (r), Associate of Shardul Amarchand Mangaldas & Co, Advocates & Solicitors. Views expressed herein are personal and solely that of the authors.

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