Hindustan Lever Employees’ Union v.

Hindustan Lever Limited & Others

COMPANY LAW

CASE ANALYSIS

SUBMITTED TO: SUBMITTED BY:

MRs. HIRAL MEHTA VIJAY ROHAN KRISHNA
ASSISTANT PROFESSOR, LAW SEMESTER: VI ‘A
NUSRL, RANCHI ROLL: 543

NATIONAL UNIVERSITY OF STUDY AND RESEARCH IN LAW

FACTS

Tata Oil Mills Company Limited (TOMCO for short) is a company that manufactures and sells
products like soaps, detergents, toiletries and animal feeds. Hindustan Lever Limited (HLL for
short) is another company that also manufactures and sells similar products. Both the
Companies have their registered office at Bombay. HLL is a subsidiary of the London based
company Uni Lever (UL).

Due to a decline in the business of TOMCO and also because the company was suffering huge
losses, the Board of Directors of TOMCO put up a proposal of amalgamation before the Board
of Directors of HLL. Both companies availed of the professional service of Mr. Y.H. Malegam,
Senior Partner of M/s. S.B. Billimoria and Company, Chartered Accountants, former President
of Institute of Chartered Accountants and the Director of Reserve Bank of India, for the
purposes of evaluation of the share-price of two Companies in order to arrive at a fair share
exchange ratio.

Mr. Malegam produced the valuation report and recommended an exchange ratio of two equity
shares of HLL for every fifteen ordinary shares of TOMCO. The Board of Directors of both
the Companies at their separate and independent meetings accepted the recommendation and
approved the Scheme of Amalgamation.

After the Scheme was approved, TOMCO and HLL filed the Notices and explanatory
statements under Section 393(1) (a) of the Act along with a proxy form before the Company
Registrar, who after considering all objections settled the explanatory statements and approved
the disclosures made therein. Individual notices of the said meetings together with a copy of
the Scheme of Amalgamation, the statement as settled by the Company Registrar and as
required under Section 393(1) (a) and a proxy form were sent to concerned members as
required by law.

In light of this, a meeting of the shareholders, creditors, debenture holders, etc. was held by
both of the companies. In these meetings, the Scheme of Amalgamation was unanimously
ratified by a vast majority of members. A contention was raised against the unfairness of the
share exchange ratio and a number of amendments were proposed. However, all of these
amendments were unanimously rejected by almost all of the members. The Scheme of
Amalgamation was accepted in its entirety by 96% of the shareholders.
PROCEDURAL HISTORY

The present case has been decided by the Supreme Court in an appeal from the judgement in
In Re: Tata Oil Mills Co. Ltd. and In Re: Hindustan Lever Ltd. 1 of the Bombay High Court.
The High Court had deliberated on the same issues as the Supreme Court.

In fact, the entire judgement of the High Court has been attached to the Supreme Court
judgement as the Apex Court has upheld the decision of the High Court in its entirety. The
Supreme Court only added supplementary reasoning to the judgement of the High Court.
However, for the most part, the judgement of the High Court was kept intact and was held to
be sound in its reasoning.

ISSUE

Whether the share exchange ratio calculated by the Joint Valuer is fair and reasonable?
It is the contention of the appellants that the share exchange ratio that has been recommended
by Mr. Malegam, is grossly in favour of HLL shares and the value of the TOMCO shares has
been underappreciated. It was the contention of the appellants that if a different method was
used, the exchange rate would be more favourable towards the TOMCO shares.
The Counsel appearing on behalf of TOMCO argued that the evaluation of shares had to be
done according to well-known methods of accounting principles. The valuation of shares is a
technical matter. It requires considerable skill and experience. There are bound to be difference
opinion among Accountants as to what is the correct value of the shares of a company. It was
emphasised that more than 99% of the shareholders had approved the valuation. The test of
fairness of this valuation is not whether the offer is fair to a particular shareholder. The
appellants may have reasons of his own for not agreeing to the valuation of the shares, but the
overwhelming majority of the shareholders have approved of the valuation. The Court should
not interfere with such valuation.
The question before the Court was with regards to the method that should be adopted for
arriving at a fair and reasonable share exchange ratio and whether the method that was adopted
by the Joint Valuer was conducive to that goal.

1
(1994) 81 Comp Cas 754 (Bom)
RULE

Section 394(1) of the Companies Act, 1956 imposes a duty upon the Court to ensure that the
subjects in sub-clauses (i) to (v) which are necessary to secure the amalgamation are carried
out under its supervision. The first Proviso the clause (1) imposes a duty upon to the Court to
ensure that a compromise or arrangement shall be sanctioned by it, only if “the affairs of the
company have not been conducted in a manner prejudicial to the interests of its members or to
public interest.”
The corresponding provision in the Companies Act, 2013 can be found in Section 241 which
states that Any member of a company who complains that the affairs of the company have been
or are being conducted in a manner prejudicial to public interest or in a manner prejudicial or
oppressive to him or any other member or members or in a manner prejudicial to the interests
of the company may apply to the Tribunal to seek the appropriate relief.
An unfair share exchange rate would be prejudicial to the interests of the members of the
company and therefore, the Court has a duty to ensure that the exchange ratio is fair and
reasonable.
This rule has been established in a number of landmark judgements. In the case of M.G.
Investment & Industrial Co. Ltd. v. New Shorrock Spinning & Manufacturing Co. Ltd2, an
objection was raised that shareholders of the transferor company were to get two shares in the
transferee company for every five shares and that this ratio was not reasonable. However, the
Court overruled this objection. Two chartered accountant firms had stated that they had
examined the accounts, annual reports and financial position of the two companies. They had
come to the conclusion that the 5:2 ratio was fair and reasonable.
The fact that the Scheme of Amalgamation had been widely advertised and had been
unanimously approved by the meetings of the shareholders of the two companies and no
objections had been raised by the shareholders or the creditors is also indicative of the fact that
the share exchange ratio.3

2
(1912) 42 Comp Cas 145. (Bom)
3
Tata Oil Mills Co., Re, (1994) 81 Comp Cas 754 (Bom)
APPLICATION

In the present case, the question is that what method should be used to determine the value of
the shares so that they may be considered to be fair and reasonable. In the case of Commissioner
of Wealth Tax v. Mahadeo Jalan,4 it was held that the usual rule was that the shares in question
were to be taken at the market value. It was the contention of the appellants that two or more
methods of valuation could not be combined to calculate the share exchange ratio.
In this case, Mr. Malegam adopted a combination of three well-accepted methods to arrive at
the fair value of the shares. The methods are:

 the yield method

 the asset value method
 the market value method.

After considering all the relevant factors, the valuer recommended in exchange ratio of 2 equity
shares of HLL for every 15 ordinary shares of TOMCO.
The Court referred to the book "TAKEOVERS AND MERGERS" by Weinberg and Blank, in
which it has been stated that some of all of the following factors will have to be taken into
account in determining the final share exchange ratio:
1. The Stock Exchange prices of the shares of the two companies before the
commencement of negotiations or the announcement of the bid.
2. The dividends presently paid on the shares of the two companies. It is often difficult to
induce a shareholder, particularly an institution, to agree to a merger or a share-for-
share bid if it involves a reduction in his dividend income.
3. The relative growth prospects of the two companies.
4. The cover (ratio of after-tax earnings to dividends paid during the year) for the present
dividends of the two companies. The fact that the dividend of one company is better
covered than that of the other is a factor which will have to be compensated for at least
to some extent.
5. In the case of equity shares, the relative gearing of the shares of the two companies.
The 'gearing' of an ordinary share is the ratio of borrowings to the equity capital.

4
MANU/SC/0305/1972
 6. The values of the net assets of the two companies. Where the transaction is a thorough-
going merger, this may be mere of a talking-point-than a matter of substance, since
what is relevant is the relative values of the two undertakings as going concerns,
7. The voting strength in the merged enterprise of the shareholders of the two companies.
8. The past history of the prices of the shares of the two companies.

In the opinion of the Court, the abovementioned authority made it perfectly clear that a number
of methods could be applied to arrive at a fair share exchange ratio and that Mr. Malegam had
used three well-known methods to come to his conclusion.
Also, being dissatisfied with the valuation made by Mr. Malegam, the appellants had insisted
for independent valuation. Two independent valuers - A.F. Ferguson and N.M. Raiji & Co. -
had valued the shares and come to the conclusion that exchange ratio of 15:2 was correctly
determined by Mr. Malegam.

Furthermore, apart from the appellants who constitute a very tiny percentage of the
shareholders of both the companies, the Scheme of Amalgamation was ratified by the vast
majority of the shareholders.

The facts clearly state that the Directors of both the companies had fulfilled their obligations
under section 393(1) (a) of the Act and all the relevant information was concisely
communicated to the shareholders.

The issue of the undervaluation of the TOMCO shares has been raised in the shareholder’s
meetings as well, however, almost all of the shareholders, creditors, and debenture holders had
voted against such amendments. Also, 41% of TOMCO’s capital was held by Financial
Institutions and they did not find any inconsistency with the valuation.

CONCLUSION

It is evident from the preceding discussion that the Supreme Court held that the valuation of
the shares and the share exchange ratio calculated by Mr. Malegam was fair and reasonable. It
had been calculated with well-known methods and the use of such methods was justified.

Consequently, the Court could not uphold the contention of the appellants that the exchange
ratio was in the favour of HLL.