# HINDUSTAN LEVER EMPLOYEES' UNION v. HINDUSTAN LEVER LIMITED AND ORS

- **Citation:** [1994] Supp. 4 S.C.R. 723
- **Court:** Supreme Court of India
- **Decided:** 1994-10-24
- **Bench:** A.M. Ahmadi, R.M. Sahai, S.C. Sen
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/hindustan-lever-employees-union-v-hindustan-lever-limited-and-ors-12605
- **Pages:** 48

## Headnote

Companies Act, 195~Sections 393 and 394-Amalgamation or merger
of two companies-Approval of-Jurisdiction of Court-Expression 'Public
interest'-Scope-Scheme for amalgamation between a subsidiary company C
of a multi-national and an Indian based company-Objective of national
economy-Exchange ratio-Method of determination of
By an order dated 3rd March, 1994, the Court u/s 391/394 of the
· Companies Act sanctioned the Scheme of Amalgamation of the Tata Oil
M_ills Company Limited (TOMCO) with the Hindustan Lever- Limited D
(HLL), a subsidiary of Uni Lever, a London based multi national company.
The Scheme provided for transfer and vesting in HLL of the undertaking
and business of TOMCO together with assets and abilities excluding
certain assets and/or litense right to use certain premises; transfer of
employees of TOMCO to HLL on the basis that their service shall be E
deemed to be continuous and the conditions of service after the transfer
shall not be less favourable; preferential allotment of equity shares to UL
of face value of Rs. 10 each at the price of Rs. 105 per s~are so as to ensure
Its post amalgamation shareholding level at 51 % of the equity capital of
HLL, etc. etc. The Scheme was approved by 99.72% of equity shareholders
In terms of values and 86.72% in terms of numbers.
F
Nominal shareholders of TOMCO, Federation of Employees Union
of both the TOMCO and HLL and Consumer Education and Research
Center filed five appeals u/s 391 (7) against the judgment and o.rder of the
High Court sanctioning the Scheme of Amalgamation. The appellants
alleged that the scheme should not be sanctioned for (i) statutory violation G
of Section 393 (l)(b) of the Act in not making required disclosures in the
explanatory statement; (ii) violation of share exchange ratio being grossly
loaded in favour of HLL; (iii) ignoring the effects of provisions of the
Monopolies and Restrictive Trade Practices Act; (iv) interest of employees
of both the companies was not adequately taken care of; (v) preferential H
723
724
SUPREME COURT REPORTS [1994] SUPP. 4 S.C.R.
A allotment of shares less than market price to Unilever which was not in
pnblic interest and. (vi) malafides on account of existences of quid pro quo
between Unil~ver and Tata Sons Ltd. All the five appeals were dismissed.
The High Court held that there was no violation of Section 391(1)(a) and
the claim that the disclosure in the explanatory statement were not as
B required was 'without basis as it was not established that the statement did
not disclose correct financial position of TOMCO; that the petitioner
failed to es~blisb any fraud or prejudice; that a well reputed valuer of a
renowned firm of chartered accountants and a Director of TOMCO deter·
mined the exchange ratio by combining all three well known methods,
namely, the net worth method, the market value method and the earning
C
method and lb• mere fact that the determination done by slightly different
method might have resultod in different conclusion would not justify
interference unless it was found to be unfair; that the approval to scheme
of merger should not be withheld till the complaint filed before Monopolies
& Restrictive Trade Practices Commission was finally decided; that interD est of emplqyees of the two companies was adequately taken care of as
service conditions of TOMCO, the transferor company, having been
protected it ,could not claim it to be prejudicial either because they were
not assured of same conditions of service as was operative in HLL or that ·
there was n~ similar provision protecting the interest of HLL employees
and the apprehension of the employees against probable retrenchment was
E rejected since such dispute if necessary could be raised in labour court
and that th~ preferential allotment of shares to UL on less than market
value was neither illegal nor violative of public interest. The High Court
having (oun!l that the price of Rs. 105 having been worked out on the basis
of price earning multip

## Text

_Characters 0–39,921 of 115,939. This is a partial read: ask again with offset=39921 for what follows._

HINDUSTAN LEVER EMPLOYEES' UNION
A
v.
HINDUSTAN LEVER LIMITED AND ORS.
OCTOBER 24, 1994
B
(A.M. AHMADI, CJ, R.M. SAHAI AND S.C. SEN, JJ.]
Companies Act, 195~Sections 393 and 394-Amalgamation or merger
of two companies-Approval of-Jurisdiction of Court-Expression 'Public
interest'-Scope-Scheme for amalgamation between a subsidiary company C
of a multi-national and an Indian based company-Objective of national
economy-Exchange ratio-Method of determination of
By an order dated 3rd March, 1994, the Court u/s 391/394 of the
· Companies Act sanctioned the Scheme of Amalgamation of the Tata Oil
M_ills Company Limited (TOMCO) with the Hindustan Lever- Limited D
(HLL), a subsidiary of Uni Lever, a London based multi national company.
The Scheme provided for transfer and vesting in HLL of the undertaking
and business of TOMCO together with assets and abilities excluding
certain assets and/or litense right to use certain premises; transfer of
employees of TOMCO to HLL on the basis that their service shall be E
deemed to be continuous and the conditions of service after the transfer
shall not be less favourable; preferential allotment of equity shares to UL
of face value of Rs. 10 each at the price of Rs. 105 per s~are so as to ensure
Its post amalgamation shareholding level at 51 % of the equity capital of
HLL, etc. etc. The Scheme was approved by 99.72% of equity shareholders
In terms of values and 86.72% in terms of numbers.
F
Nominal shareholders of TOMCO, Federation of Employees Union
of both the TOMCO and HLL and Consumer Education and Research
Center filed five appeals u/s 391 (7) against the judgment and o.rder of the
High Court sanctioning the Scheme of Amalgamation. The appellants
alleged that the scheme should not be sanctioned for (i) statutory violation G
of Section 393 (l)(b) of the Act in not making required disclosures in the
explanatory statement; (ii) violation of share exchange ratio being grossly
loaded in favour of HLL; (iii) ignoring the effects of provisions of the
Monopolies and Restrictive Trade Practices Act; (iv) interest of employees
of both the companies was not adequately taken care of; (v) preferential H
723
724
SUPREME COURT REPORTS [1994] SUPP. 4 S.C.R.
A allotment of shares less than market price to Unilever which was not in
pnblic interest and. (vi) malafides on account of existences of quid pro quo
between Unil~ver and Tata Sons Ltd. All the five appeals were dismissed.
The High Court held that there was no violation of Section 391(1)(a) and
the claim that the disclosure in the explanatory statement were not as
B required was 'without basis as it was not established that the statement did
not disclose correct financial position of TOMCO; that the petitioner
failed to es~blisb any fraud or prejudice; that a well reputed valuer of a
renowned firm of chartered accountants and a Director of TOMCO deter·
mined the exchange ratio by combining all three well known methods,
namely, the net worth method, the market value method and the earning
C
method and lb• mere fact that the determination done by slightly different
method might have resultod in different conclusion would not justify
interference unless it was found to be unfair; that the approval to scheme
of merger should not be withheld till the complaint filed before Monopolies
& Restrictive Trade Practices Commission was finally decided; that interD est of emplqyees of the two companies was adequately taken care of as
service conditions of TOMCO, the transferor company, having been
protected it ,could not claim it to be prejudicial either because they were
not assured of same conditions of service as was operative in HLL or that ·
there was n~ similar provision protecting the interest of HLL employees
and the apprehension of the employees against probable retrenchment was
E rejected since such dispute if necessary could be raised in labour court
and that th~ preferential allotment of shares to UL on less than market
value was neither illegal nor violative of public interest. The High Court
having (oun!l that the price of Rs. 105 having been worked out on the basis
of price earning multiple of 15 based on the last published balance sheet
F of· HLL, held it was fair and reasonable. This petition bad been filed
against the Judgment of the High Court.
One of the shareholders of TOMCO questioned the justification of
the ratio of allotment of shares, 2 shares of HLL in exchange of 15 shares
of TOMCO, as entirely unsatisfactory and unfair to the TOMCO
G shareholders. It bad been contended that the Board of Directors of
TOMCO di'1 not explain the Scheme of Amalgamation in the explanatory
statement clrculated among the shareholders, in particular, bow the share
exchange r11tio was arrived at; that the shareholders were not told that the
joint valuet was none other than a Director of TOMCO and a Senior
H Partner of ,Mis S.B. Billimoria and Company; that the reasons for the
HINDUSTAN LEVER EMPLOYEES UNIONv. HINDUSTANLEVERLID. 725
Board accepting certain proposals to make preferential allotment of A
shares at Rs. 105 per share had not been properly explained; that the
valuation report was erroneous as a combination of different methods of
valuation was adopted which was against the law; that the preferential
allotment of shares to Unilever was part of the Scheme of Amalgamation
and the Board should have explained why Rs. 366 was being paid for every B
. HLL share by TOMCO, when Unilever was paying only Rs. 105 per HLL
share.
Dismissing the Appeals, this Court
· HELD: [Per Sen, I. for himself ond Venkatachaliah, Cl.]
c
1.1 The overwhelming majority of the shareholders had approved the
scheme at the meeting called for this purpose and had approved the exchange ratio. A proposal for amendment of the exchange ratio 'Y"" also·
rejected by the overwhelming majority of 99% shareholders. There was no
reason to presume that the shareholders did not know what they were doing. D
If the market price of the shares of the two companies as _on 17.7.1993 was
compared, the exchange ratio of2:15 was very fair. [748-D, 750·FJ
1.2 In .case of amalgamation a combination of all or some of the
methods of valuation may be adopted for the piirpose of flXation of the E
exchange ratio of the shares of the two companies. For arriving at the
proper exchange ratio, the usual rule Is that shares of the going concern
must be taken at quoted market Value. The joint valuer adopted a com·
blnation of three well-accepted methods, the field method, the asset value
method and the market value method. After considering all the factors, the
valuer recommended an exchange ratio of 2 equity shares of HLL for every F
15 ordinary shares ofTOMCO. The method adopted was explained to the
Board of Directors. The financial Institution;. who held 41 % of th~ shares
or TOM CO, did not find any fault in the method ofvaluation of the shares:
~-~
The teSt or fairness -of this valuation is not whether the offer is fail- to a
particular shareholder. When the overwhelming majority of the
shareholders had approved of the valuation, the Court should not interfere G
with such valuatio'!. HLL. had no difficulty In accepting the share excliange
ratio fJXed by the joint valuer even though he was a Director of TOM CO.
If there was any _bias, it should ruive been in favo~r of TOMCO and not .
again~t TOMCO. This .exchange ratio was endorsed by two other eminent
firms of Chartered Accountants and also by ICICI. There was no violation H
'
'
.
-
- .
-.
726
SUPREME COURT REPORTS (1994] SUPP. 4 S.C.R.
A
of Section 2i6 (3) of the Companies Act ·when both the companies going
to be amalgamated; had choosen a Director of TOMCO to ftx the share
exchange ratio. (750-H, 751-A, 752-D-E, 753-C-H)
Commission of Wealth Tax v.Mahadeolalan, (86) ITR 621, relied on;
B
Commissioner of Gift Tax, Bombay v. Smt. Kusumben D. Mahad,,.,ia,
(122) ITR 38, distinguished.
Weinberg and Blank, Tiike-Overs and Mergers, referred to •.
, In the facts of this case, considering the overwhelming manner In
C which the share holders, the creditors, the debentnre holders, the financial
Institutions, who had 41% shares in TOMCO, had supported the Scheme
and had not complained abont any lack of notice or lack of understanding
of what the Scheme was about, it will not be right to hold that the
explanatory statement was not proper or was lacking In material par- ·
D ticulars. (757-BJ
E
F
G
Jitendra R. Sukhadia v. Alembic Chemical Works Co. Ltd., (1987) 3
Company Law Journal 141, relied on. .
, ·, 2. Section 393(1) (a) requires particulars to be given of any materia
Interest of some persons connected with the company, including the directors and management director. The Interest that is contemplated In Section 393 (1) (a) Is interest material for consideration of the scheme by the
shareholders. It had not been shown that the joint valuer had any Interest .
In the scheme. U he had any shares In TOMCO, then his Interest would
be like that of any shareholders. His specialized services were utilized for
the. purpose of arriving al a fair exchange ratio. Both TOMCO and HLL
reposed faith In his professional skilL Non- diSclosure of the fact that he
was a Director of the Company, had been appointed Valuer, will not
- detract from the Scheme In any way. This will also not to suppression of
any material Interest of a Director In the Scheme. (757-D-EJ
· Unilever, a foreign Company, held 51% of shares of HLL. The
scheme envisaged that Unilever will continue.to hold 51% of the share; of
HLL even af!er amalgamation. It was decided to make preferential allotment of shares lo Unilever al a price of RS.105 per share; for the purpose
of maintaining shareholding of 51% even after amalgamation. For this
H ·purpose, two conditions were Imposed: (1) Unilever shall not be able to
'
HINDUSTANLEVEREMPLOYEESUNIONv. HINDUSTANLEVERLTD.
727
sell the shares allotted to them on preferential basis for a period of 7 A
years, (2) In case Unilever decides to sell these shares after the expiry of
7,years but before 12 years after the date of preferential allotment, they
· shall sell the shares to the Indian shareholders of Unilever at a price of
15 times earning per share calculated on the basis of the last andited
balance sheet. These two conditions were important depreciatory factors
in the preferential allotment of shares to Unilever. The shares issued to
Unilever would be franked by restrictive covenants. These shares could not
be compared to the other shares of HLL which could be freely traded in
the market. (754-B-E]
B
2.2. The shareholder has no interest in the assets of the company C
while the company is in exisience. It is only at the stage of liquidation of
the company that the shareholders become interested in the assets of the
company. The share of any member in a company is movable property and
transferable in the manner provided by the Articles of the company. This ·
is provided by Section 82 of the Companies Act. The definition of 'goods' D
in the Sale of Goods Act, 1930 specifically includes stocks and shares. A
share represents a bundle a> rights which includes, inter alia, the rights (i)
to elect directors; (ii) to voie on resolutions of meetings of the company;
(iii) to enjoy the profits of the company, if and when dividends is declared
and distributed; and (iv) to share in the surplus, if any, on liquidation. In
any event, whether Unilever was paying the proper price for the share or E
not, was a question which was pending before the Bombay High Court in
a separate proceeding. This question could not be pursued in this proceeding any further. (754-F-G, 756-A]
Bacha F. Gujdar v. C./. T., AIR (1955) SC 74, relied on.
F
3. A merger or amalgamation is not now snbject to the prior approval of the Central Government. Bnt, if the working of the company is
found to be prejndicial to public interest or bas led to the adoption in
monopolistic or restrictive trade practice, the Central Government may,
after being satisfied as to the requirement of the s_ection of division of the G
undertaking, act according to· law. (761-G]
As a result of the amalgamation, if it is found that the working of
the Company is being conducted in a way which brings it within the
mischief of the MRTP Act, it would be open to the authority under the
MRTP Act to go iuto it and decide the controversy as it thinks fit. (762-B] H
730
· SUPREMECOURTREPORTS (1994)SUPP.4S.C.R.
A · no( as better as it would ha~e been if another method would have been
adopted. What is Imperative is that ·such determination should not have
been contrary to law and that it was not unfair for the shareholders of the
company which was being merged. The Court's obligation is to be satisfied
that valuation \vas in accordance with .law and it was carried out by an
B independent b.ody. Even though the Chartered Accountant who performed
· this function was a director of TOMCO but he did so as a member of
. renowned firm or chartered accountants. His determination was further
·got checkfd and approved by two other independent bodies at the instance
of shareholders of TOM CO by the High Court and it had been found that
the determination did not suffer from any infirmity. The company.Court,
C therefore, did not commit any error in refusing to interfere _with it. May
be that if some other method would have been adopted probably the
determination of valuation could have been bit ·more In favour of the
shareholders. But since admittedly more than 95% of the .shareholders who
were the best judge of their interest. and were better conversant with
D market trend agreed to the valuation determined It could not be interfered
by courts as, 'certainly, it Is not part of the judicial process to examine
entrepreneurial activities to ferret out flaws. The court Is least equipped
for such oversights. Nor, indeed, Is it a function of the judges in our
constitutional scheme. The internal management, business activity or in-
. stitutional operation of public bodies cannot be subjected to inspection by
E · the Court. To do so; Is incompetent and improper and, therefore, out of
hounds. Nevertheless, the broad parameters. of fairness In administration,
bona /ides in action and the fundamental rules of reasonable management
of public business, if breached, will become jnsticiable. (734-H, 735-A-G)
.
- ·---
--
.
--
-
-~c. _·Fertilizer Corporation Kamgar Union (Regd) v. Union of India, (1981)
F
2 SCR 52, relied on. .
·
G
Buckley on Companies Act 4th Ed.; Palmer on Company Law, 23rd
Ed., referred to.
. ....
· 2. A scheme of amalgamation cannot be faulted on apprehension and
speculation as to what. might possibly happen In future. The present Is
certain and taken care of by Clauses 11.1, 2 and 3 of the scheme. And
unfriendly throwing out being amply protected· by taking recourse to
labour Court no unfairness arises apparent or Inherent. Nor the claim
H that merger shall result In, •syiiergies' can render the scheme bad. Im-
HINDUSTANLEVEREMPLOYEESUNIONv. HINDUSTANLEVERLTD. 725
Board accepting certain proposals to make preferential allotment of A
shares at Rs. 105 per share bad not been properly explained; that the
valuation report was erroneous as a combination of different methods of
valuation was adopted which was against the law; that the preferential
allotment of shares to Unilever was part of the Scheme of Amalgamation
and the Board should have explained why Rs. 366 was being paid for every B
HLL share by TOMCO, when Unilever was paying only Rs. 105 per HLL
share.
Dismissing the Appeals, this Court
HELD: [Per Sen, J. for himself and Venkatacltaliah, CJ.}
c
1.1 The overwhelming majority of the shareholders had approved the
scheme at the meeting called for this purpose and bad approved the exchange ratio. A proposal for amendment of the exchange ratio was also·
rejected by the overwhelming majority of 99% shareholders. There was no
reason to presume that the shareholders did not know what they were doing. D
If the market price of the shares of the two companies as on 17 .7 .1993 was
compared, the exchange ratio of 2:15 was very fair. [748-D, 750-F]
1.2 In .case of amalgamation a combination of all or some of the
methods of valuation may be adopted for the purpose of fixation of the E
exchange ratio of the shares of the two companies. For arriving at the
proper-exchange ratio, the usual rule is that shares of the going concern
must be taken at quoted market value. The joint valuer adopted a combination of three well-accepted methods, the field method, the asset value
method and the market value method. After considering all the factors, the
valuer recommended an exchange ratio of 2 equity shares of HLL. for every F
15 ordinary shares of TOMCO. The method adopted was explained to the
Board of Directors. The financial institutions who held 41% of the shares
ofTOMCO, did not find any fanlt in the method ofvaluation of the shares.
The test of fairness of this valuation is not whether the offer is fair to a
particular shareholder. When the overwhelming majority of the G
shareholders bad approved of the valuation, the Court should not interfere
with such valuation. HLL bad no difficulty in accepting the share exchange
ratio fixed by the joint valuer even though be was a Director of TOMCO.
If there was any .bias, it should have been in favour of TOMCO and not
against TOMCO. This exchange ratio was endorsed by two other eminent
firms of Chartered Accountants and also by ICICI. There was no violation H
726
SUPREME COURT REPORTS [1994] SUPP. 4 S.C.R.
A
of Section 226 (3) of the Companies Act when both the companies going
to be amalgamated, had choosen a Director of TOMCO to fix the share
exchange ratio. (750-H, 751-A, 752-D-E, 753-C-H]
Commission of Wealth Tax v. Mahadeo !a/an, (86) ITR 621, relied on.
B
Commissioner of Gift Tax, Bombay v. Smt. Kusumben D. Mahadevia,
(122) ITR 38, distingnished.
Weinberg and Blank, Take-Overs and Mergers, referred to.
In the facts of this case, considering the overwhelming manner in
C which the share holders, the creditors, the debentnre holders, the financial
institutions, who had 41% shares in TOMCO, had snpported the Scheme
and had not complained about any lack of notice or lack of understanding
of what the Scheme was about, it will not be right to hold that the
explanatory statement was not proper or was lacking in material parD ticulars. (757-B]
Jitendra //.. Sukhadia v. Alembic Chemical Works Co. Ltd., (1987) 3
Company Law Journal 141, relied on.
2. Section 393(1) (a) requires particulars to be given of any materia
E interest of some persons connected with the company, including the directors and management director. The intel'l'st that is contemplated in Section 393 (1) (a) is interest material for consideration of the scheme by the
shareholders. It had not been shown that the joint valuer had any interest
in the scheme. If be bad any shares in TOMCO, then his interest would
be like that of any shareholders. His specialized services were utilized for
F
the purpose of arriving at a fair exchange ratio. Both TOMCO and HLL
reposed faith in his professional skill. Non- disclosure of the fact that he
was a Director of the Company, had been appointed Valuer, will not
detract from the Scheme in any way. This will also not to suppression of
any material interest of a Director In the Scheme. (757-D-E]
G
Unilever, a foreign Company, held 51 % of shares of HLL. The
scheme envisaged that Unilever will continue to hold 51 % of the shares of
HLL even after amalgamation. It was decided to make preferential allotment of shares to Unilever at a price of Rs. 105 per share, for the purpose
of maintaining shareholding of 51 % even after amalgamation. For this
H purpose, two conditions were imposed: (1) Unilever shall not be able to
HINDUSTANLEVEREMPLOYEESUNIONv. HINDUSTANLEVERLTD. 727
sell the shares allotted to them on preferential basis for a period of 7 A
years, (2) In case Unilever decides to sell these shares after the expiry of
7, years bot before 12 years after the date of preferential allotment, they
shall sell the shares to the Indian shareholders of Unilever at a price of
15 times earning per share calculated on the basis of the last audited
balance sheet. These two conditions were important depreciatory factors
in the preferential allotment of shares to Unilever. The shares issued to
Unilever would be franked by restrictive covenants. These shares could not
be compared to the other shares of HLL which could be freely traded in
the market. (754-B-E]
B
2.2. The shareholder has no interest in the assets of the company C
while the company is in existence. It is only at the stage of liquidation of
the company that the shareholders become interested in the assets of the
company. The share of any member in a company is movable property and
transferable in the manner provided by the Articles of the company. This ·
is provided by Section 82 of the Companies Act. The definition of 'goods'
in the Sale of Goods Act, 1930 specifically includes stocks and shares. A D
share represents a bundle qJ rights which includes, inter a/ia, the rights (i)
to elect directors; (ii) to vOte on resolutions of meetings of the company;
(iii) to enjoy the profits of the company, if and when dividends is declared
and distributM; and (iv) to share in the surplus, if any, on liquidation. In
any event, whether Unilever was paying the proper price for the share or E
not, was a question which was pending before the Bombay High Court in
a separate proceeding. This question could not be pursued in this proceeding any further. (754-F-G, 756-A]
Bacha F. Gujdar v. C./. T., AIR (1955) SC 74, relied on.
F
3. A merger or amalgamation is not now subject to the prior approval of the Central Government. But, if the working of the company Is
found to be prejudicial to public interest or has led to the adoption in
monopolistic or restrictive trade practice, the Central Government may,
after being satisfied as to the requirement of the s_ection of division of the G
undertaking, act according to·law. (761-G)
As a result of the amalgamation, if it is found that the working of
the Company is being conducted in a way which brings it within the
mischief of the MRTP Act, it would be open to the authority under the
MRTP Act to go into it and decide the controversy as it thinks fit. (762-B] H
728
SUPREME COURT REPORTS [1994) SUPP. 4 S.C.R.
A
What has been expressly authorized by the statute cannot be struck
B
c
down as being agllinst the public policy. A foreign company under the new
economic policy of the Government has been allowed to acquire controlling
share of any Indian company. This has been done by express amendment
of the Foreign E~change Regulation Act. (762-F]
Merely bec~use a foreign shareholder acquires 51 % shares in an
Indian company,· it cannot be said that this is against public interest or
public policy. Section 11 of Foreign Exchange Regulation Act, 1973 which
had empowered the Reserve Bank to put restriction on transfer of any
asset in India to" person resident outside India or a person intending to
become resident ~utside India, has now been repealed w.e.f. 8.1.1993 by the
Amending Act 29 of 1993. The entire object is to allow the non resident to
do business in India and to deal with assets in India with greater freedom.
Merely because $1 % of the shares of the HLL is being given to a foreign
company, the Sc~eme cannot be said to be against public interest. The
D Foreign Exchange Regulation Act has been amended specilically to encourage foreign participation in business in India. The bar to having more
than 40% shares in an Indian Company by a non-resident has been lifted.
The Amending 4ct 29 of 1973 is not under challenge. In order to give
greater freedom to the companies for doing business in India, the MRTP
Act has been amended. Prior approval of Government of India is not
E necessary for amalgamation of companies any more. In fact, it is in public
interest that TOMCO with its 60,000 shareholders and also a very large
work-force did n~t deteriorate into a sick company. (763-C-G)
F
G
4. 'Public interest' which is to be taken into account as an element
against approval of amalgamation would not include a mere future possibility of merger resulting in a situation where the interest of the consumer might be ~dversely effected. If, however, in future the working of the
Company turns out to be against the interest of the consumers or the
employees, suitable corrective steps may be taken by appropriate
authorities in accordance with law. (763-H, 764-A-B)
Merely bec~use the scheme envisaged allotment of 51 % equity shares
to Unilever, the !\cheme could not be held to be against public interest.
[764-C)
FeTtiliur Corporation Kamgar Union v. Union of India, (1981] 2 SCR
H 52, relied on.
,
HINDUSIANLEVEREMPLOYEESUNJONv. HINDUSIANLEVERLTD.
729
The scheme had fully safeguarded the interest of the employees by A
providing that the terms and conditions of their service will be continuous
and uninterrupted service and their service conditions will not be prejudicially affected by reason of the Scheme. The grievance made, however, was
that there was no job security of the workers, after the amalgamation of
the two Companies. There was no assurance on behalf of the TOM CO that B
the workers will never be retrenched. In fact, the performance of TOMCO
over the last three years was alarming for the workers. It could not be said
that after the amalgamation they will be in a worse position than they were
before the amalgamation. [764-D-F]
The TOMCO employees will continue to remain on the same terms C
and conditions as before. It could not be said that a prejudice had been
caused to HLL employees. They will still be getting what they were getting
earlier. TOMCO employees who were working under better terms and
conditions, will continue to enjoy their old service conditions nuder the
new management. [765-A-B]
5. The Court will decline to sanction a scheme of merger, if any tax
fraud or any other illegality is involved. But that was not the case here. A
company, on its own, grow up to capture a large share of the market. But
unless it is shown there is some illegality or fraud involved in the sch<me,
D
the Court cannot decline to sanction a scheme of amalgamation. In the E
last two years, TOMCO had sold its investments and other properties. If
\ this proposal of amalgamation was not sanctioned, the consequence for
TOMCO might be very serious. The shareholders, the employees, the
creditors would all suffer. [765-G, 766-A]
The scheme bad been sanctioned almost unanimously by the
shareholders, debenture holders, secure creditors, unsecured creditors
and preference shareholders of both the Companies. There must exist very
strong reason for withholding sanction to such a scheme. (766-B]
Per (SAHA!, J) (Concurring)
1. The jurisdiction of the Court in sanctioning a claim of merger is
not to ascertain with mathematical accuracy if the determination satisfied
F
G
the arithmatical test. A company court does not exercise an appellate
jurisdiction. It exercises a jurisdiction founded on fairness. It is not
required to interfere only because the figure arrived at by the valuer was H
730
SUPREME COURT REPORTS (1994] SUPP. 4 S.C.R.
A
not as better a~ it would have been if another method would have been
adopted. What is imperative is that such determination should not have
been contrary to law and that it was not unfair for the shareholders of the
company which was being merged. The Court's obligation is to be satisfied
that valuation was in accordance with law and it was carried out by an
B independent body. Even though the Chartered Accountant who performed
this function was a director of TOMCO but he did so as a member of
renowned firm pf chartered accountants. His determination was further
got checked an~ approved by two other independent bodies at the instance
of shareholders of TOMCO by the High Court and it had been found that
the determination did not snlier from any infirmity. The company Court,
C therefore, did iiot commit any error in refusing to interfere with it. May
be that if some other method would have been adopted probably the
determination of valuation could have been bit more in favour of the
shareholders. BUt since admittedly more than 95% of the shareholders who
were the best judge of their interest and were better conversant with
D market trend a~ed to the valuation determined it could not be interfered
by courts as, 'certainly, it is not part of the judicial process to examine
entrepreneurial activities to ferret out flaws. The court is least equipped
for snch oversights. Nor, indeed, is it a function of the judges in our
constitutional scheme. The internal management, business activity or in·
stitutional operation of public bodies cannot be subjected to inspection by
E · the Court. To l(o so, is incompetent and improper and, therefore, out of
bounds. Nevertlieless, the broad parameters offairness in administration,
bona fides in action and the fundamental roles of reasonable management
of public business, if breached, will become justiciable. (734-H, 735-A-G]
F
G
Fertilizer C01poration Kamgar Union (Regd) v. Union of India, (1981]
2 SCR 52, relied on.
Buckley qn Companies Act 4th Ed.; Palmer on Company Law, 23rd
Ed., referred to.
2. A scheme of amalgamation cannot be faulted on apprehension and
speculation as: to what might possibly happen in future. The present is
certain and taken care of by Clauses 11.1, 2 and 3 of the scheme. And
unfriendly throwing out being amply protected by taking recourse to
Labour Court no unfairness arises apparent or inherent. Nor the claim
H that merger s'1all result In, 'synergies' can render the scheme bad. Im·
,
HINDUSfANLEVER EMPLOYEES UNIONv. HINDUSfAN LEVER LTD.
731
proved technology and scientific method results in better employment A
prospects. Anxiety should be to protect workers and not to obstruct
development and growth. May be that advanced technology may reduce the
manpower but so long those who are working are protected they are not
entitled to hinder in modernization or merger under misapprehension that
future employment of same number of worker may stand curtailed. The B
wage differential arising between employees of two companies could not
result in making the merger as unfair since the service conditions of
TOMCO workers have been protected they couldnot claim that unless they
were paid the same emoluments as is being paid by Hindustan Lever the
merger was unjust. When more than 95% of the shareholders had agreed
to the valuation determined by the chartered accountant all procedure C
irregularities that the workers, shareholders were not permitted to attend
the meeting or that material facts were concealed from them, could not
vitiate the determination. [736-F·H, 737-A-B)
3.1. Indian Law enjoys a duty on the court to examine objectively and D
carefully if the merger was not violative of public interest. What would be
public interest is a· dynamic concept Which keeps on changing. It is an
expression of wide amplitude. Its perspective may change when merger is
of two Indian companies. But when it is with subsidiary of foreign company
the consideration may be entirely different. It Is not the interest of
shareholders or the employees only but the interest of society which may E
have to be examined and a scheme valid and good may yet be bad if it is
against public interest. [737-D, Fl
3.2 Section 394 casts an obligation ·on the court to be satisfied that
the scheme for amalgamation or merger was not contrary to public Inter· F
est. The basic principle of such satisfaction is none other than the broad
and general principles inherent in any compromise or settlement entered
between parties that it should not be unfair or contrary to public policy
or unconscionable. In amalgamation of companies, the courts have
evolved, the principle of, prudent 'business management test' or that the G
scheme should not be a device to evade law. But when the Court is
concerned with a scheme of merger with a subsidiary of a foreign company
then the test is not only whether the scheme shall result In maximizing
profits of the shareholders or whether the interest of employees was
protected but it has to ensure that merger shall not result in impeding
promotion of industry or shall obstruct growth of national economy. H
732
SUPREME COURT REPORTS [1994] SUPP. 4 S.C.R.
A
Liberalized ~conomic policy is to achieve this goal. The merger, therefore,
should not be contrary to this objective. (737-H, 738-A-B]
The jutisdiction of the court in this regard is comprehensive.
Custine Re Hoare, (1933) AER Ch. 103; Bugle Press UC, (1961)
B
Chancery Di)'ision 270, relied on.
3.3 The legislature itself has amended Foreign Exchange Regulation
Act, 1973 by ~ct 29 of 1993, the Monopolies and Restrictive Trade Practices
Act, 1969 anll Companies Act, 1956 by Act of 58 of 1991. The Scheme of
C amalgamation did not run counter to any legislative provision or policy of
the Govern111ent. The claim that the assets were being transferred for a
very meager sum by itself would not render the agreement bad or against
public policy. Once the FERA was amended and assets of the Indian
company co'lld be transferred to foreign company then the amalgamation
could not be withheld when the shareholders themselves did not raise any
D objection nor was it raised by financial institutions or statutory bodies.
(740-F, 741-G, 742-C]
4. Transfer of share to a foreign company on nnder valuation is a
matter of concern. The transfer of shares by one company to another
company is J!rimarily to be determined by the shareholders and, therefore,
E if the 99% are of the view that the valuation of the shares was reasonable
and fair then the conrt should be slow to interfere with it. But a shareholder
may not be i11terested in the ultimate effect of allotting shares to a multinational on a low price valuation, but the court certainly is. That the
valuation was low-priced was found even by the High Court. Therefore, it
F
was not op*n to the respondents to argue that the valuation of Rs. 105
having been accepted by majority of almost all the shareholders, no public
interest was involved in it. No further need be said as allotment of shares
to UL at Rs. lOS was not approved by the Reserve Bank oflndia. It bas been
challenged before the High Court and was pending adjndication. [742-D-G)
G
CIVII.,APPELLATE JURISDICTION: Special Leave Petition (C)
No. 11006 of 1994 etc. etc.
From the Judgment and Order dated 18.5.94 of the Bombay High
Court in AplJeal No. 224 of 1994.
H
S.K Dhoiakia, Rajeev Dhawan and Ms. Indra Jaisingh, Sanjay
I
•
HINDUSTA-1\ILEVER EMPLOYEES UNION'· HINDUSTAN LEVER LID. [SAHAI,J.J 733
Singhvi, B.M. Singhvi, Brij Bhushan, Arvind Minocha, Ms. Veena Minocha, A
Ms. Aparna Vishwanathan, V.S. Chauhan, R. Santhana Krishnan, Gopal
Singh, Sanjay Parikh and Ms. Aparna Bhat for the Petitioner.
Ashok H. Desai, T.R. Andhyarujina, H.A. Desai, Ashish Wad, Ms.
Tamali Wad, Mrs. J. Wad, Ravinder Narain, Aditya Narain, Mohit Kapoor,
Rajan Narain, D.N. Mishra and Rajeev Kumar Singh for the Respondents. B
P.H. Parekh for the Intervenor.
The Judgment of the Court was delivered by
R.M. SAHAI, J. Merger under the Companies Act, 1956 (in brief 'the C
Act,) of the two big companies-one, Hindustan Lever Limited {HLL), a
snbsidiary of Uni Lever (UL), London based multi national company, and
other Tata Oil Mills Company Ltd. (In brief 'TOMCO') the first Indian
company found in 1917 and public since 1957 which has been found by the
High Court to be still 'not financially insolvent or sick company' was D
unsuccessfully challenged in the High Court by few rather nominal
shareholders of TOMCO, Federation of Employees Union of both the
TOMCO and HLL, Consumer Action Group and Consumer Education
and Research Centre. The attack varied from statutory violation, procedural irregularities of provision of the Act to ignoring effect of the
provisions of Monopolies & Restrictive Trade Practices Act, 1969 under
E
valuation of Shares, its preferential allotment on less than the market price
to the multi national, failure to protect the interest of employees of both
the companies and above all being violative of public interest. The High
Court was not satisfied that either the merger was against public interest
or that the valuation of the shares was prejudicial to the interest of the F
shareholders of TOMCO or that the interest of the employees. was not
adequately protected. It was held that there was no violation of Section
391{1){a) of the Act and the claim that the disclosures in the explanatory
statement were not as required was without basis as it was not established
that the statement did not disclose correct financial position of TOMCO. G
Nor there was anything to show that the material was not disclosed. The
Court held that the petitioner failed to establish any fraud or prejudice.
On valuation of share for exchange ratio the Court found that a well
reputed valuer of a renowned firm of chartered accountants and a director
of TOMCO determined the rate by comhining three well known methods,
namely, the net worth method, the market value method and the earning H
734
SUPREME COURT REPORTS (1994] SUPP. 4 S.C.R.
A method. The figure so arrived could not be shown to be vitiated by fraud
and mala fide aod the mere fact that the determination done by slightly
different method might have result in different conclusion would not justify
interference unless it was found to be unfair. And in that the petitioner
failed miserably. The High Court did not agree that the approval to scheme
B of merger should be withheld till the complaint filed before Monopolies &
Restrictive Trade Practices Commission was not finally decided as the
jurisdiction exercised by the High Court under the Act aod that by the
Commission under MR TP Act were entirely different. Nor did it find aoy
merit in the challenge that interest of employees of the two companies was
not adequately taken cate of. It was held that service conditions of
C TOMCO, the traosferor compaoy, having been protected it could not claim
it to be prejudicial either because they were not assured of same conditions
of service as was operative in HLL or that there was no similar provision
protecting the interest of HLL employees. The apprehension of the
employ~es against probable retrenchment as the employees of HLL were
D
already surplus was rejected as of no substaoce since such disputes if
necessary could be raised in labour Court. On preferential allotment of
shares lo UL on less thao market value the Court held that HLL was
holder of 51 % share from before aoy allotment therefore the allotment
which placed them at par with same holding was neither illegal nor violative
of public interest.
,E
Same grievaoces have been reiterated by the shareholders, the
Employees Union aod the Consumer Action Group before this Court with
fresh dressings aod flourish. The sentinel nature of jurisdiction exercised
by the High Court in Company jurisdiction was emphasised with
F veheme11ce. It has urged that the High Court which is expected to act as
guardian in compaoy matters failed to exercise its jurisdiction aod was
swayed by considerations which were neither legal nor relevaot. Attempt
was made to show that the determination of valuation was vitiated as the
chartered accountaot to whom the duty was entrusted did not perform its
function• objectively aod in accordaoce with settled finaocial norms aod
G practice aod its action was vitiated as he was one of the directors of the
TOMCO'. Comparative figures of the shares of the two companies their
market value, their holding in the market etc. were placed to demonstrate
that the calculation was vitiated.
H
But what was lost sight of that the jurisdiction of the Court in
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HINDUSTAN LEVER EMPLOYEES UNION'· HINDUSTAN LEVER LTD.