Bombay High Court

Hindustan Lever Employees Union vs Hindustan Lever Ltd. And

Others on 18 May, 1994
Equivalent citations: 1994 (4) BomCR 465, 1995 83 CompCas 1 Bom, (1995) ILLJ 1099 Bom
Author: V Mohta
Bench: D Trivedi, V Mohta
JUDGMENT V.A. Mohta, J.
1.

These are five appeals under section 391(7) of the Companies Act, 1956 ("the Act"), against a common
order dated March 3, 1994, made by the company court under section 391/394 of the Act sanctioning
the scheme of amalgamation of the Tata Oil Mills Company Limited (TOMCO) - the transferor with the
Hindustan Lever Limited (HLL) - the transferee.
Company Petition No. 332 of 1993 is by TOMCO and
Company Petition No. 333 of 1993 is by HLL - both for the similar relief of sanction. On these two
petitions the impugned order was passed. Since these appeals are against a common judgment they
have been heard together and are being disposed of by this judgment.

2. Appeal No. 244 of 1994 is by the Federation of Tata Oil Mills and Allied Companies' Employees' Unions in
Company Petition No. 332 of 1993, connected with Company Application No. 250 of 1993. Appeal No. 298 of
1994 is by Mr. Rabindra Hazari - a shareholder of TOMCO - in Company Petition No. 332 of 1993, connected
with Company Application No. 250 of 1993. Appeal No. 224 of 1994 is by the Hindustan Lever Employees'
Union in Company Petition No. 333 of 1993 connected with Company Application No. 251 of 1993. Appeal No.
301 is by theConsumer Action group and other similar organisations, in Company Petition No. 333 of 1993
connected with Company Application No. 251 of 1993 Appeal No. 331 of 1994 is by the Consumer Education
and Research Centre in Company Petition No. 333 of 1993 connected with Company Petition No. 251 of 1993.
3. Having heard learned counsel for the parties and respondent Mr. M. G. Jajoo in person at length we are
satisfied that no case for interference in appeal with the impugned order exists. Here are our reasons.
4. It is submitted by the appellants in the first four appeals and other objectors that the scheme is bad in law on
the following grounds.
(A) Violation of section 393(1)(a) of the Act in not making required disclosures in the explanatory statement.
(B) Valuation of share exchange ratio is grossly loaded in favour of HLL.
(C) Ignoring the effect of provisions of the Monopolies and Restrictive Trade Practices Act ("the MRTP Act").
(D) Interest of employees of both the companies is not adequately taken care of.
(E) Preferential allotment of shares at less than market price to UL which is not in public interest.

(F) Mala fides on account of existence of quid pro quo between UL and Tata Sons Ltd.
First, the basic facts and events in order of time. TOMCO is an older company having been incorporated in
1917, under the Indian Companies Act, 1913. It manufactures and markets products like soaps, detergents,
toiletries and animal feeds. HLL was incorporated approximately 16 years thereafter. It was first a private
company which was converted into public company in the year 1956. It also manufactures and markets similar
products. Both companies have their registered office at Bombay. TOMCO has more than 60,000 shareholders
with the following break up.
22 per cent. - Tata group.
41 per cent. - Financial Institutions (FI).
37 per cent. - General public.
HLL has nearly 1,30,000 shareholders with the following break up.
51 per cent. - Unilever PLC (UL) - a company incorporated under the English Companies Act, having its
registered office at London.
16 per cent. - FI.
33 per cent. - General public.
5. At the inception, UL - the parent company of HLL had 100 per cent. shareholding in HLL. TOMCO though
otherwise quite solvent financially, started incurring operative losses in the manufacturing and marketing
business. During 1991-92, it incurred losses to the range of Rs. 13 crores which for the next six months
increased to the level of over Rs. 16 crores. The board of director's of TOMCO in the changing Indian economic
scenario and severe competition in the field of consumer goods considered various alternatives for TOMCO
including its association with HLL which has been a more prosperous and larger company operating in the
same field of activities. Accordingly the board of directors of TOMCO put up proposals before the board of
directors of HLL. Both availed of the professional services of Mr. Y. H. Malegam - senior partner of S. B.
Billimoria and Company, chartered accountants, former president of the Institute of Chartered Accountants
and the director of the Reserve Bank of India, for the purposes of evaluating the share price of the two
companies in order to arrive at a fair share exchange ratio. On March 19, 1993, Mr. Malegam gave a 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.
6. The scheme, inter alia, provides for transfer and vesting in HLL of the undertaking and business of TOMCO
together with assets and liabilities excluding certain assets and/or licensee rights to use certain premises.
The salient features of the scheme are to be found in clauses 1.7(d), 4, 5, 11 and 13.

Clause 1.7(d) sets out the details of excluded properties in which TOMCO has no more than licensee rights.
Clause 4 provides for transfer of 5 assets (immovable property) to be transferred to companies nominated by
the Tata Sons Ltd. at fair market value as will be independently assessed.
Clause 5 provides that TOMCO shall (before or after the effective date) transfer to Tata Sons Ltd. or its
nominees certain investments/shares owned by TOMCO at the then prevailing market value and in the case of
unlisted shares at a value to be determined by Mr. Y. H. Malegam.
Clause 11 provides for transfer of employees of TOMCO to HLL on the basis that their service shall be deemed
to be continuous and the conditions of service after the transfer shall not be less favourable.
Clause 13 refers to preferential allotment of equity shares to UL of the face value of Rs. 10 each at the price of
Rs. 105 per share so as to ensure its post amalgamation shareholding level at 51 per cent. of the equity capital of
HLL.
It may be mentioned that (i) investments/shares specified in clause 5 have been realized and (ii) clause 4 has
been modified by the company court (a) by providing for transfer to companies nominated by the directors of
TOMCO in place of Tata Sons Ltd. and (b) by naming well reputed chartered accountants/Government valuers.
7. In Company Application No. 250 of 1993 filed by TOMCO the court passed an order on April 29, 1993,
directing to call the meetings of the debenture holders, creditors, ordinary shareholders and preference shareholders on June 29 and 30, 1993, naming the chairman of the meetings and calling upon him to submit the
report within 21 days after conclusion of the meeting. TOMCO filed the notices and explanatory statements
under section 393(1)(a) of the Act along with the 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. On June 21, 1993, a joint communication to shareholders of TOMCO
and HLL was also sent. Public notices of the meeting were also issued through the print media. The meeting of
the ordinary shareholders was held on June 29, 1993, and was attended by 1,294 members holding 85,85,009
ordinary shares and by 1,652 member holding 55,18,251 ordinary shares through proxies. In the said meeting
amendment was proposed to the effect that the exchange ratio should be of 5 : 15 shares in place of 2 : 15 shares
as envisaged in the scheme. 99.64 per cent of ordinary shareholders voted against amendment and 99.72 per
cent. voted in favour of the scheme as proposed. Debenture holders voted 99 per cent., secured creditors voted
100 per cent., unsecured creditors voted 84.30 per cent. and preference shareholders voted 100 per cent. in
favour of the scheme. The scheme as proposed was thus approved in all the five meetings by 99.72 per cent. of
equity shareholders in terms of value and 86.72 per cent. in terms of number.
8. In Company Application No. 251 of 1993, filed by HLL also similar direction for convening meetings of the
equity shareholders and creditors were issued by the court on April 29 for convening the meeting on June 30,
1993. Similar procedure was followed in this also. On June 30, 1993, shareholders of HLL at their extraordinary
general meeting approved by the requisite majority the proposed issue of shares to UL pursuant to section
81(1A) of the Act. The court-convened meeting of the equity share-holders was held on June 30, 1993, and the
meeting of the creditors was held on July 2, 1993, under the chairmanship of the chairman of HLL Mr. S. M.
Datta as directed by the court. The meeting of the equity share-holders was attended by 2,528 members
including proxies holding 9,58,27,477 equity shares. In all 13 amendments were made to the scheme but more

than 96 per cent. voted against the amendments. Three amendments related to allotment of shares in favour of
UL. Equity shareholders holding 99.97 per cent. shares voted 97.45 per cent. in favour of the scheme. Almost at
that high level of percentage even the creditors voted in favour of the scheme. The chairman of meetings filed
their reports within time and within seven days thereafter TOMCO filed Company Petition No. 332 of 1993, and
HLL filed Petition No. 333 of 1993, on or about July 26, 1993.
9. On August 2, 1993, judge's summons was taken out by Mr. M. G. Jajoo praying, inter alia, for a direction to A.
F. Ferguson and N. M. Raiji and Co., chartered accountants, to give their opinion on the valuation report of Mr.
Malegam. The regional director and the official liquidator were given notices of petitions. In pursuance thereof
the regional director submitted his report on December 9, 1993, and official liquidator submitted his report for
winding up without dissolution under section 394 of the Act. On January 6, 1994, Ferguson and Raiji by their
joint letter, with copy to Mr. Jajoo, confirmed the share exchange ratio determined by Mr. Malegam. On
January 10, 1994, Mr. Jajoo sought further particulars from them. On January 12, 1994, the company court
ordered the filing of affidavits latest by February 2, 1994. On February 2, 1994, Mr. Ravindra Hazari took out
judge's summons for particulars. On February 11, 1994, Ferguson and Raiji gave a reply to Mr. Jajoo. On March
3, 1994, the impugned order was passed approving the scheme subject to modifications in clause 4 as earlier
indicated. No one - not even TOMCO - has challenged the modification ordered by the court.

Sex bomb
10. By now legal principles guiding the approach of the court to such schemes of amalgamation are well
crystallized due to judicial pronouncements - Indian as well as foreign - made from time to time. Before
embarking upon the exercise of noting a few of them a look at the provisions of the Act and the Companies
(Court) Rules may be worthwhile.
Section 391 of the Act (which is corresponding to section 206 of the English Companies Act, 1948), makes the :
members and creditors of the company primarily the judge of the reasonableness and fairness of the scheme.
The court is obliged to order a meeting of the shareholders, creditors to consider the proposed scheme.
The approval has to be by the majority in number representing three-fourths in value of the members present
and voting. The approval by such large majority of the members/creditors is recognized by the Act to be prima
facie in their business interest.
Upon the court according sanction, the scheme becomes binding on all including those dissenting
members/creditors.
Section 394 (which is corresponding to section 208 of the English Act) provides that the scheme of
amalgamation may provide that the whole or any part of the undertaking, property and liability of any company

shall be transferred to another company in which case the court will pass consequential orders in relation to the
transfer of the undertaking to the transferee-company.
Section 394A of the Act provides that a notice of the application under section 391/394 should be given to the
Central Government and the court shall take into consideration the representation, if any, made by the
Government to consider public interest before passing any order.
Section 393(1)(a) as well as the Companies (Court) Rules requires notices to be given only to the creditors and
members of the company.
11. Palmer's Companies Act, twenty-third edition, (paras 79.13 to 79.16) states that the court has to be normally
satisfied on four grounds.
(i) Statutory provisions must have been complied with.
(ii) Class must have been clearly represented.
(iii) The arrangement must be such as a man of business would reasonably approve and
(iv) The arrangement must be compatible with legal provisions. An oft quoted passage in Buckley on
the Companies Acts, fourteenth edition, reads :
"In exercising its power of sanction the court will see, first that the provisions of the statute have been
complied with, second, that the class was fairly represented by those who attended the meeting and that the
statutory majority are acting bona fide and are not coercing the minority in order to promote interest
adverse to those of the class whom they purport to represent, and, thirdly, that the arrangement is such as an
intelligent and honest man, a member of the class concerned and acting in respect of his interest, might
reasonably approve.
The court does not sit merely to see that the majority are acting bona fide and thereupon to register the
decision of the meeting, but, at the same time, the court will be slow to differ from the meeting, unless either
the class has not been properly consulted, or the meeting has not considered the matter with a view to the
interest of the class which it is empowered to bind, or some blot is found in the scheme."
12. In the case of Navjivan Mills Co. Ltd., In re [1972] 42 Comp Cas 265, the Gujarat High Court has reiterated
the above principles and has further observed (headnote) :
"There are certain well recognised limitations on the court's power to sanction a scheme. The first limitation
is that the court would not sanction a scheme which would be invalid without the court's sanction even if
every creditor or member concerned agreed to it. In other words, the court has no power to sanction
something which the parties could not do by agreement. The second fetter on the court's power is that the
court cannot sanction an act being done if the law permits it only subject to conditions and the agreement
seeks to dispense with those conditions, such as where the scheme of compromise and arrangement also
includes within its ambit reduction in share capital in respect of which special procedure provided in the Act
and the Rules has not been carried out. The third fetter on the court's power is that the court would not
ordinarily sanction a scheme which includes something which can ordinarily be effected by resort to other

provisions of the Companies Act. Within the limitations set out above, the court will allow the companies the
greatest freedom in devising schemes to suit their requirements and will approve those schemes if they are
fair to all whose interests are affected."
13. It is not for the court to substitute its judgment for the collective wisdom of the shareholders/creditors of
the two companies, who by and large, are not rustic illiterates but are well informed men of the practical
commercial world. This is not to suggest that the court must act merely as a rubber stamp to sanction a scheme
approved by majority. It has a duty to scrutinize, but the scrutiny is not with the eye of an expert or the
exactness of an accountant as observed by the Gujarat High Court in Alembic Chemical Works Co. Ltd ., In re
[1988] 64 Comp Cas 186.
Even if the scheme is open to some criticism that is not enough. The obvious unfairness of the scheme must be
affirmatively shown as held by this court in the case of M. G. Investments and Industrial Co. Ltd. v. New
Shorrock Spg. and Mfg. Co. Ltd. [1972] 42 Comp Cas. 145.
All these cases clearly indicate that the collective judgment of the vast majority of persons finally affected by the
scheme has to be given greatest possible value. The Act, as by amended section 394A, provided for calling of
views of the Central Government on public interest consideration.

Employees Matter too you know

14. It is true that rule 73 of the Companies (Court) Rules does not provide for giving notices of the meeting to
the employees. At one time the view was prevalent that employees have no say in the matter at all. But that view
seems to be incorrect and outdated.
Rule 80 contemplates public notice of hearing of sanction by the court and at the stage they can certainly put
forth their points of view and legitimate concerns. After all the employee has a large stake in the scheme but has
no role to play in the meetings since he is neither a "creditor" nor a "member" of a company in the legal sense
contemplated under the Act. But in the economic sociology the worker is certainly a valuable part of the
business and not an insignificant partner along with the capital and management. These factors coupled with
the question of his life must oblige the court to consider his points of view also in exercise of the power
under section 391/394. In River Steam Navigation Co. Ltd., In re [1967] 2 Comp LJ 106, the Calcutta High
Court has pithily summed up the issue thus :
"Normally, it is usual to provide by some such arrangement in the compromise or scheme as that the
transferee-company under the scheme of compromise or arrangement to absorb as many of the labour and
workers as can be consistent with the scheme. The obvious limitations so far as the labour or workers are
concerned are that a scheme of compromise or arrangement with creditors or members obviously means
difficulty for the company to carry on its normal business and therefore it cannot be possible to lay down as a
matter of law that such a scheme shall have no effect or repercussion or impact on the labour or the workers. At
the same time the court can and should examine the scheme in a way as not to cause any avoidable or
unnecessary hardship to the labour or the workers. Courts thus have to adopt a flexible and ambivalent attitude
in the matter-details depending upon the totality of the scheme. But the forum of the company court cannot be
allowed to be used to settle what essentially is an individual dispute which generally has to be left for
adjudication by the appropriate forums like Industrial/Labour Courts.

15.
Keeping the above basic principles in view we proceed to deal with the five grounds seriatim Ground (A) : Violation of section 391(1)(a) of the Act in not making required disclosure in the explanatory
statement.
16. The nature of disclosures required to be made by section 393(1)(a) in the explanatory statement is quite
different from the nature of disclosures required in the notice of the special general meeting of the company
under section 173 under which a statement setting out all material facts concerning each item of business
including in particular the nature of concern or interest, if any, therein of every director, managing agent, and
other specified office bearers have to be stated. Even under section 173 too rigid interpretations which would
hamper the conduct of the business cannot be adopted. After all the explanatory statement is a business
document intended to give a clear idea of the nature of business to be conducted and must be used in a
common sense business way. Minor insignificant matters do not render the proceedings null and void.
17. As contrasted with section 173, the provisions of section 391 are quite different, the necessity of disclosure
being quite different from the necessity of disclosure required under section 173. We reproduce for ready
reference section 393(1)(a).
"393. Information as to compromises or arrangements with creditors, and members. - (1) Where a meeting of
creditors or any class of creditors, or of members or any class of members, is called under section 391, (a) with every notice calling the meeting which is sent to a creditor or member, there shall be sent also a
statement setting forth the terms of the compromise, or arrangement and explaining its effect, and in
particular, stating any material interests of the directors, managing director, or manager of the company,
whether in their capacity as such or as members or creditors of the company or otherwise, and the effect on
those interests, of the compromise or arrangement, if, and in so far as, it is different from the effect on the like
interests of other persons; and."
18. An analysis of the above provisions would reveal that the statement is required to state clearly :
(i) the compromise or arrangement and its effect,
(ii) the manner in which the material interests, if any, of specified categories of persons in any capacity are
likely to be affected by the scheme, in case the effect is different from the effect on the like interest of nonspecified categories of persons.
The purpose of such disclosure is to enable the shareholders to make their objections because once they have
approved the scheme there is no chance of questioning its arithmetics subsequently. The question is thus not
purely theoretical and every non-disclosure cannot be fatal unless it is fraudulent and has prejudicially affected

the decision making process of the member as held by the Karnataka High Court in the case of Suri and Nair
Ltd. : Spraymetal (Pvt.) Ltd., In re [1983] 54 Comp Cas 868.
19. The alleged non-disclosures pertain to
(i) the correct financial position of TOMCO,
(ii) reasons behind the operating business losses,
(iii) the names of owners of the three properties mentioned in clause 1.7(d),
(iv) Mr. S. M. Datta, the chairman of HLL being responsible for the interest of UL in India. The grievance is
altruistic. We do not notice any non-disclosure about the correct financial position of TOMCO. No material is
suppressed. There is nothing conflicting. A company can be financially sound and yet may incur business
losses. This exactly was and is the position of TOMCO. There were and can be varieties of reasons behind
operating business losses, competition by more efficient and prosperous company being one of them. The
criticism that losses were manipulated only for the purposes of scheme has no foundation whatsoever. In the
properties mentioned in clause 1.7(d) TOMCO had a mere gratuitous permission for occupation which as held
by this court in the case of Associated Building Co. Ltd. v. Union of India (Writ Petition No. 270 of 1984,
decided on July 20, 1993), is not a right, power, authority or privilege, as contemplated under the Textile
Undertakings (Taking over of Management) Act, 1983. The said right is held to be neither transferable nor an
asset. It is pertinent to notice that these properties are not included in the balance-sheet of TOMCO. We fail to
see how Mr. Datta being responsible for the interest of UL in India constituted his "material interest" as
contemplated under section 393(1)(a). It is pertinent to notice that Mr. Datta being a representative of UL had
been disclosed in the meeting of the members before voting took place. The HLL Employees' Union even
otherwise knew this fact. No objection was raised when Mr. Datta was appointed as the chairman of the
meeting in pursuance of the order of the company judge dated April 29, 1993. Against the said judgment, an
appeal was filed and even therein no such objection was taken. It is a common ground that Mr. Datta did not
own any share of TOMCO or UL and this fact was disclosed in the explanatory statement.
20. The validity of the explanatory statement was raised before the Company Registrar in Company Application
No. 250 of 1993, inter alia, on the grounds of non-disclosure. The Company Registrar after going through all
the papers and objections settled the explanatory statement and approved the disclosures. The Central
Government in its report has also regarded the disclosure as sufficient. Many of the points were discussed in
the meeting and considered before voting. Sale of TOMCO was at the market price. Clause 4 has been amended
by the court. For all these reasons the question has only theoretical value. No fraud or prejudice is
demonstrated. In our view, therefore, there has been substantial compliance with the letter and spirit of the
provisions.
(B) : Valuation of share exchange ratio is grossly loaded in favour of HLL.
21. For arriving at the fair value of the share the valuer Mr. Malegam has adopted a combination of three wellknown methods.
(1) The net worth method,

(2) the market value method, and

(3) the earning method.
The valuation of shares is essentially a technical method requiring expertise. There can be genuine differences
of opinion about the correct value of shares of any given company. If there is more than one method of
valuation, the valuation cannot be exactly the same by adopting different methods. As held by this court in the
case of Primal Building Spg. and Wvg. Ltd. [1980] 50 Comp Cas 514 "unless the person who challenges the
valuation satisfies the court that the valuation is unfair, the court will not disturb the scheme of
amalgamation which has been approved by the shareholders of two companies, who are by and large, well
informed men of the commercial world." It is difficult to set aside the valuation of experts in the
absence of fraud or mala fide on the part of the experts as held by the Madras High Court in the case of
Coimbatore Cotton Mills Ltd. and Lakshmi Mills Co. Ltd., In re [1980] 50 Comp Cas 623. There are
various methods of arriving at a break up value but it is universally accepted that the quotation of a share on the
stock market provides a largely reliable index. Keeping the aforesaid principles in view, let us notice some
material facts on valuation.
22. The board of directors of both the companies availed of the professional services of Mr. Malegam, a person
with repute and position. He recommended the exchange ratio of 2 equity shares of HLL for every 15 ordinary
shares of TOMCO by his report dated March 19, 1994. The draft valuation report, the working of the scheme,
the share exchange ratio all were discussed in advance with TOMCO, HLL and financial institutions having 40
per cent. shareholding of TOMCO. The basis of the exchange ratio and the methodology applied were also
explained to the board of directors of both the companies at their separate meetings held on March 19, 1993, in
which Mr. Ramkrishnan, nominee of the Life Insurance Corporation on the board of TOMCO was also present.
The valuation report was kept open by TOMCO at its registered office for inspection by shareholders between
June 10, 1993, to June 29, 1993. In the court, convened meeting of the shareholders dated June 29, 1993, the
chairman of TOMCO had requested Mr. Malegam to clarify the queries raised by shareholders regarding
valuation. It was also explained that all the quoted investments proposed to be transferred were to be sold at
the market value and the unquoted investments were to be sold on the basis of their fair value. Amongst several
amendments proposed at the said meeting by some of the shareholders, one was for changing the share
exchange ratio to 5 : 15 in place of 2 : 15. The said amendment was rejected by 99.69 per cent. of equity
shareholders in terms of value and the main resolution was approved by 99.72 per cent. of equity shareholders
in terms of value and 86.72 per cent. in terms of number.
23. Review and confirmation of the valuation report prepared by Mr. Malegam was sought from two
independent renowned firms of chartered accountants, A. F. Ferguson and Co. and N. M. Raiji and Co. who by
their joint report dated September 2, 1993, confirmed the valuation. It may be mentioned that N. M. Raiji and
Co. happen to be the auditors of TOMCO and A. F. Ferguson and Co. happen to be the auditors of HLL.
24. The Regional Director, Department of Company Affairs, Bombay, was served with a notice under section
394 pursuant to the direction given by the company court on August 4, 1993. The Regional Director called for
detailed information on various issues including valuation. The information was supplied after which the
Regional Director had submitted the report dated December 9, 1993, in which there is not a whisper against the
valuation.

25. Mr. Jajoo, a shareholder in TOMCO, who personally argued this appeal in support of his objection to the
valuation had himself taken cut Judges Summons No. 593 of 1993, inter alia, praying for a direction to A. F.
Ferguson and Co. and Raiji and Co. to give their opinion on the valuation report. He had written a letter dated
December 18, 1993, jointly to the above auditors asking for certain information to which a reply dated January
6, 1994, was sent answering the queries raised by Mr. Jajoo. Mr. Jajoo sent another letter dated January 10,
1994, to those auditors, who confirmed their opinion but resisted repeated correspondence. Even as per Mr.
Jajoo the share exchange ratio comes to 6.098 : 4 : 68 and 4 : 08. Mr. Jajoo's study and findings clearly indicate
that there can always be differences in the figures arrived at by applying different methods. At least one ratio
arrived at by Mr. Jajoo goes very near the ratio arrived at by Mr. Malegam. For all these reasons there is
nothing objectionable about valuation specially when same measure is applied to shares of both companies to
fix the share exchange ratio.
(C) : Ignoring the effect of provisions of the Monopolies and Restrictive Trade Practice Act ("the MRTP Act")
26. It is submitted that the sanction should not be made effective till the Monopolies and Restrictive Trade
Practices Commission considers the matter and finally makes pronouncement on the subject. The submission is
not well founded. There is no such legal requirement. In the original Monopolies and Restrictive Trade
Practices Act, merger and amalgamation of certain undertakings was dealt with under section 23. No merger or
amalgamation could be sanctioned by the court until it had been approved by the Central Government which
had to take a decision in terms of its economic policy. The Central Government could, under section 20(6),
refer the question to the Monopolies and Restrictive Trade Practices Commission for its opinion which was not
binding on the Central Government in view of section 20(7).
27. As a result of the new economic policy nearly the whole of Chapter III including section 23 has been
repealed by the Amending Act, 1991. The only part of Chapter III which has remained issection 27 under which
an opinion in the matter of division of an undertaking can be taken on the aspect of public interest.
Under section 27, as amended, the Commission can even suo motu make enquiry, though the nature of its
jurisdiction is still advisory. Thus, the Commission has no part to play in the case of amalgamation . In this
background the controversy as to whether issuance of a company's own share amounts to "trade" or "trade
practice" as defined under section 2(s) and2(u) of the said Act need not detain us.
28. It is submitted that at least as a propriety this court should stay its hands till the Commission takes a
decision on the complaint made by the consumer forums, since the Commission has exclusive jurisdiction to
examine the matter from the view of monopolistic, restrictive and unfair trade practices. The point raised is
essentially relating to administrative law and under that law of requiring exhaustion of administrative remedies
where a claim is cognizable in the first instance by administrative agency alone. In such cases judicial
interference is withheld until the administrative process has run its course. We have indicated as to how the
Monopolies and Restrictive Trade Practices Commission has no role to play in the matter of amalgamation of
companies and hence the course suggested for suspension of proceedings cannot be adopted. That may not be
even in public interest. Matters like this cannot remain in a suspended state for no justifiable reason. Our
attention was invited to the following two American decisions. (1) United States v. Western Pacific Railroad
Company (352 US 59) and (2) General American Tank Car Corporation v. El Dorado Terminal Company (308
US 422). These cases pertain to the exclusive primary jurisdiction of the Inter-State Commerce Commission
under the Interstate Commerce Act for deciding tariff rates for railroad shipments by the United States. The
principles enunciated therein will have no application to the matter at hand.

(D) : Interest of employees of both the companies is not adequately taken care of
29. The employees' unions have raised objections from the angle of the future of the employees of both the
companies - of course each in its own perspective.

The objections are raised by

(i)
(ii)

the appellants, the Federation of Tata Oil Mills and Allied Companies Employees' Unions,
the HLL Employees' Union of Sewri factory (HLEU), and

(iii)

the Hindustan Lever Employees' Federation (HLEF).

Clause 11 of the scheme deals with the subject of the transferor company's staff, workmen and employees. There
is no reference to the transferee-company's staff, workmen and employees, obviously because the merger
contemplated is of the transferor-company with the transferee-company. Whenever an undertaking is
transferred, either statutorily or by court's order to another employer, it is the usual formula to protect the
workers of the transferred undertaking by providing that service will be continuous and uninterrupted and
service conditions will not be prejudicially affected by reason of the transfer. Such provisions are made in the
scheme. Merger of the two companies into one very likely may necessitate adjustments in the service conditions
in certain areas but that is a matter for industrial adjudication by appropriate forums. The principal grievance
was about the absence of a clause to the effect that no retrenchment of workers of either companies will be
made by HLL in future only by reason of the amalgamation.
30. The learned Advocate-General, appearing for HLL, submitted that though no retrenchment was at all
contemplated, HLL has not done that before even though it had surplus labour force, HLL was poised for
growth after amalgamation and no such possibility exists in the near future, its freedom to act within laws after
merger if the occasion arises some time in posterity cannot be taken away. Such freedom exists even today and
must continue to remain in future. It seems to us that he is correct. Rightly has our attention been drawn to the
provisions of section 25N of the Industrial Disputes Act, 1947 ("the ID Act"), which would apply to the instant
case and which prevents retrenchment of workers without proper justification and permits it only on obtaining
the Government's approval.
No doubt HLL has surplus labour force since last 5 years but it has not retrenched workers and has offered a
voluntary retirement scheme giving cash benefits and at least 1,000 workers have availed of that scheme. HLL
has repeatedly stated in various proceedings that it will not retrench any workman, all workers will be given
jobs commensurate with their skill and status and we see no reason to doubt the bona fides of that stand.

In case HLL goes back on their stand, the workers are not remedyless. The company court in these proceedings
cannot act on mere speculations. At present there is no reason to doubt the correctness of its stand that merger
is bound to result into increasing prosperity of HLL which will bring about increased employment. It is HLEU's
own case that HLL is poised for big prosperity. It is of great importance and relevance to note in these
proceedings that merger had not been planned as a device to effect retrenchment.
31. It is contended that the type of guarantee given in the scheme to TOMCO workers is not given to HLL
workers. This objection is altruistic. Merger is of TOMCO, the transferor-company. Protection by scheme is
necessary only to its workers. In this context section 225FF of the Industrial Disputes Act may be noticed.
32. It is next contended that the scheme of amalgamation should be amended to ensure that the future
conditions of HLL employees are not less favourable to the conditions of TOMCO employees prevailing before
merger. HLEF has even made written suggestions pertaining to service conditions including withdrawal of
certain cases, parity of conditions, and protection from retrenchment. All these are typical industrial disputes
calling for industrial adjudication. In this connection, one cannot lose sight of section 9A of the Industrial
Disputes Act, under which no change in service conditions can be carried out without notice to the workmen.
33. All that remains to be considered is the grievance pertaining to ex-workers of TOMCO in the Calcutta
factory which has been closed and who have joined the Kalyani Soap Industries Ltd., Kalyani (WB) (Kalyani) on
the basis of assurances given by TOMCO recorded in the memorandum of settlement dated November 12, 1991.
Kalyani is jointly promoted by TOMCO and the Government of West Bengal. TOMCO has 24 per cent.
shareholding in Kalyani. The Calcutta factory was running up losses and was required to close. In that context,
settlement was reached with the workers who as a package deal contained in the settlement agreed for closure
and opted to be employees of Kalyani. Under that settlement service conditions of workers were protected while
they were in the service of Kalyani and plant and machinery at the Calcutta factory was to be dismantled and
installed and commissioned at Kalyani. The apprehension of those employees is that as a result of merger and
transfer of TOMCO properties to HLL, they would suffer adversely and may not be in a position to enforce
against HLL their rights protected under the settlement. The employees had filed a suit in the High Court at
Calcutta, being Suit No. 365 of 1993, restraining TOMCO from effecting merger with HLL in a manner by which
their rights will be adversely affected. An application for interim relief was made and in appeal arising out of
the order the Division Bench of the Calcutta High Court while passing under expressed the hope that, at the
time of sanctioning the scheme, the Bombay High Court will consider the settlement and give ample and
appropriate protection to those workers. It is pertinent to notice that the communication dated March 19, 1993,
by Mr. N. S. Sundar Rajan of TOMCO states that as per the understanding between the two companies the
merged company will retain TOMCO's investment in specified companies which includes Kalyani. Now, in the
whole background the demand of these workers is perfectly justified, but it appears that clauses 8 and 9 of the
scheme would take care of the settlement and it would not be possible for HLL to go behind the settlement
which is binding on them. Indeed this position is fairly not disputed by HLL. Ex abundanti cautela we record
that the settlement dated November 12, 1991, would be binding on HLL. This, in our judgment, should take care
of the grievance. No change in the scheme on that account is, therefore, necessary.

(E) : Preferential allotment of shares at less than market price of UL which is no in public interest
34. This by far is the most controversial and important issue. The shares are 29,847 in number and the breakup of the price of Rs. 125 is Rs. 10 towards capital and Rs. 95 towards premium. The market price at the
material date would be around Rs. 366. Certain basic facts relevant to the subject are these :
(i) HLL is a subsidiary company of UL which is the parent company. UL holds 51 per cent. of the issued,
subscribed and paid-up capital of HLL.
(ii) As a result of issuance of 28,67,314 equity shares to TOMCO shareholders under the scheme of
amalgamation the holding of UL in HLL becomes diluted to little less than 50 per cent.
(iii) The preference share allotment ensures post-amalgamation shareholding level of UL at 51 per cent.
(iv) The initial shareholding of UL was 100 per cent.
(v) UL has contributed in a variety of ways in the phenomenal growth and prosperity of HLL. This subsidiary
status has enabled HLL to get inter alia free of cost the benefits of research and development, technology,
know-how, marketing support - domestic as well as international - management systems, training facilities and
above all international brand names of UL such as Lux, Lux International, Lifebuoy, Pears, Dove, Surf, Sunlight
in soaps, Sunsilk in shampoo, and Close-up in tooth paste.
35. In the above background, there seems to be nothing objectionable in the preferential allotment of shares to
enable UL to maintain its old 51 per cent. shareholding in the new set up. The real controversy can be and is
about the price of Rs. 105 which is admittedly much below the market price at the material date.
36. The price of Rs. 105 has been worked out on the basis of the price earning multiple of 15 based on the last
published balance-sheet of HLL. This formula was considered fair and reasonable even by the financial
institutions having 16 per cent. shares, as is clear from their approval in the meeting of shareholders dated June
30, 1993. The common case is that the approval was on the basis of the policy of financial institutions then
adopted. It appears that this formula was in conformity with the discussions at the meeting held by the
Associated Chamber of Commerce and Industries (ASSOCHAM) on the subject of pricing of preferential
allotment of shares to Indian promotors and foreign collaborators. This is clear from the confidential
communication dated March 18, 1993, issued by the Secretary General of the ASSOCHAM to the members of
the managing committee, special invitees and promoter chambers. HLL's earning per share for the year end
December, 1990, was Rs. 7 per share. Applying the multiple of Rs. 15 the price of Rs. 105 was worked out. No
other formula was in the field when the meeting was convened for consideration of the scheme of
amalgamation including preferential allotment of shares to UL. The Industrial Credit and Investment
Corporation of India Ltd. (ICICI), a leading financial institution, also corroborated the price of Rs. 105 by its
report thus :

"We have verified that the fair value arrived at from the above is in line with the norms which have been
followed by investment institutions in the past for other similar cases."
37. The Government of India chose to follow a liberalisation policy and as a result the solitary control on the
price of shares, viz., sanction of the Controller of Capital Issues under the Capital Issues (Control) Act, 1947,
was abolished by the Government of India by repealing the said Act on May 29, 1992. Consequent on the repeal
of the said Act, the Government of India issued a Press Note No. 13, dated June 29, 1992. The following
paragraph from that press note is relevant.
"Following the issue of guidelines by SEBI on June 11 and 17, 1992, existing companies wishing to raise foreign
equity up to 51 per cent. can make issues at the price determined by the shareholders in a special resolution
under section 81(1A) of the Companies Act, 1956. This will apply mutatis mutandis to closely held companies."
38. Thus, under the new industrial policy, shareholders are required to determine the price of shares for
preferential allotment being made for raising foreign equity of 51 per cent. by passing a special resolution
under section 81(1A) of the Act. This was done by the extraordinary general meeting of HLL on June 30, 1993.
The above change in the new industrial policy was also confirmed by the answer to a question on the new
pricing formula framed to enable foreign companies to increase their equity shares put to the Hon'ble Prime
Minister in Rajya Sabha on December 16, 1992. The answer was :
After the Capital Issues (Control) Act, 1947 (May 29, 1992), was repealed and following the issue of guidelines
by the Securities and Exchange Board of India, existing companies wishing to raise equity holding can do so at
the price determined by the shareholders of the respective companies in a special resolution under section
81(1A) of the Companies Act. In view of this, the question of laying down any new pricing formula by the
Government does not arise.
39. Hence, as the law and the new industrial policy stand, the shareholders are completely free to determine the
price for allotment of shares by passing a special resolution under section 81(1A) of the Act.
40. It appears that the financial institutions have recently taken a new policy decision and modified their norms
for exercising their rights as a shareholder on the price for preferential allotment. The policy is to oppose
allotment at less than market price. This certainly is not only a permissible decision but a welcome decision.
But we fail to see how that subsequent policy decision can affect the exercise already undertaken on the basis of
policy then prevailing. After all, as observed in Navjivan's case [1972] 42 Comp Cas 265 (Guj) "the scheme has
to be tested bearing in mind all the circumstances prevailing at the time of the meetings called to consider the
scheme."
41. There are two depreciatory factors in shares allotted to UL. They seem to be self-imposed and are to the
effect that (i) the new equity shares to be allotted to UL are not transferable for a period of 7 years from the date
of allotment, and (ii) in the event of UL deciding to diversify those shares thereafter within 12 years it will in the
first instance offer the shares in favour of the members of HLL on a fair and equitable basis at a price worked
out by reference to the same formula of P/E multiple of 15 based on the latest audited accounts of the company
at the time of the sale. The objectors contend that the restrictions are merely illusory and are a virtue out of
necessity because UL would normally not be interested in transferring these shares. This controversy need not
detain us in view of what is held above.

42. The law does not cast any obligation to allot shares only at the premium or at the market value. The price
factor is left to the decision of the directors/shareholders of the company. In fact the legal position is that the
directors have the discretion to offer the shares to the existing shareholders even at par. There is no doubt that
the exercise has to be in good faith and the best interest of the company. The following passage from Palmer's
Company Law, 23rd edition (para 22.18), is relevant.
"The duty of the directors as to allotment of shares is that they are bound to act in good faith in the best interest
of the company. It is the discretion of the directors to offer the shares to the existing shareholders at par even
though the shares stand at a higher price in the market. There is no duty to the company to offer it at the
highest price."
43. It is pertinent to notice that the price of Rs. 105 has been offered by a majority of 99.97 per cent. in terms of
value. After all the members of the company are its owners and they know their business interest best.
44. The suggestion that the majority was influenced by the voting of UL to the extent of 51 per cent. does not
seem to be correct. Even if the persons and votes of UL are disregarded, the remaining shareholders had almost
unanimously okayed the preferential share allotment at the price of Rs. 105 per share. Not that the subject was
not discussed. Three amendments moved to the resolution of preferential allotment were rejected by members
by a 99.85 per cent. majority in terms of value. It is also pertinent to notice that no member of UL has objected
in the court to the scheme of amalgamation including the preferential allotment of shares. The objections have
come from workers some of whom may be shareholders. In the matter of price fixation the court is normally
guided by the business sense of the members unless it is established that the majority has acted mala fide or to
coerce a minority. In the instant case, the decision is nearly unanimous and in line with the prevailing
Government policy, norms suggested by the ASSOCHAM and policy adopted by financial institutions. The
company court does not sit in appeal over the price fixation. Strong reliance was placed by the objectors on the
decision of the Calcutta High Court in the case of Jadabpore Tea Co. Ltd. v. Bengal Dooars National Tea Co.
Ltd. [1984] 55 Comp Cas 160 in support of the point that court can interfere with price fixation. In that case, the
court quashed the resolution of price fixation under section 81(1)(a) of the Act on the basis that it was replete
with mala fides and hence was void for mismanagement. No such finding is warranted in this case and hence
the ratio of that decision will have no application.
45. It is contended that the court has ample discretion to modify the price and to increase it to the market price
in larger public interest, specially when the Government of India has expressed doubts about the correctness of
the decision of preferential allotment. Well settled principles enunciated in the matter of court's power to
interfere with schemes do not permit us to substitute our judgment on price, in place of near unanimous
judgment of the members of the company specially when the decision is not illegal. We close this chapter with
the following passage from Gower's Principles of Modern Company Law, fourth edition, 712/713.
"This dictum, that creditors or shareholders know best, is repeated in almost every case relating to every type of
reconstruction and it affords, of course, a perfect answer to any suggestion that the court should do more than
ensure that the formal requirements have been complied with. Unhappily it is based on the fundamentally false
assumption that a vote of a meeting necessarily represents the informed opinion of the majority of members of
the class concerned unprejudiced by any conflicting interests. The courts realise this and occasionally their
realisation finds expression, but all too often they have to renounce any attempt to form an independent
judgment in the face of the harsh fact that they are in scarcely a better position than the investor to pass an
informed judgment."

(F) : Mala fides on account of existence of a quid pro quo between UL and Tata Sons Ltd.
46. Some of the objectors allege that the whole scheme is mala fide because it is based on a quid pro quo
between UL and Tata Sons Ltd. Tata Sons Ltd. managed to secure the transfer of valuable immovable
properties of TOMCO and other property rights in its favour and in consideration permitted preferential
allotment of shares at a very low price and in the whole exercise the shareholders have been made a scape-goat.
Now, allegations of mala fides are easy to make and difficult to substantiate. This general proposition applies
even in this case. There is no material to sustain this serious charge. Clause 1.7(d) refers to three properties
which TOMCO was using purely as a gratuitous licensee with no enforceable rights. Occupation was purely
permissive with no legal right to remain therein. The owners, who must be Tata group companies, could revoke
the permission at any time. The question is no more doubtful and is decided by this court in the case
of Associated Building Co. Ltd. v. Union of India (W. P. No. 270 of 1984 - July 20, 1993). The gratuitous
occupation permission has been held to be neither a right, power, authority or privilege which was transferable
nor an asset as discussed earlier. In one of the properties, viz., Bombay House, even the portions are undivided
and undemarcated and are used commonly by several companies of the Tata group. TOMCO has also never
considered these rights as assets, as will be clear from the balance-sheets. There is no difficulty in the owners of
those properties to get back possession if they so choose by merely revoking the licence specially when TOMCO
does not resist. The help of outside agencies like HLL or UL in the matter and/or going in such an unusual
round about way was not at all necessary.
47. Properties referred to in clause 4 were to be transferred at the market rate to be independently assessed.
Now independent assessment of the market price has been doubly secured by the court by entrusting the job of
determination of the market price with the named reputed and authorised valuers. There is no reason to doubt
their capacity and/or independence. Sale by open public auction or inviting tenders from the general public
may fetch more price due to competition, but the desire of the purchaser to retain some choice is not
unreasonable in the whole background. Suitable amendments have been made by the court in the scheme that
has been accepted by TOMCO.
48. On the price aspect we have said enough. No repetition is called for. This last point must also therefore fail.
49. There has been a settlement dated September 28, 1993, between the Consumer's Education and Research
Centre (CERC) and HLL for incorporating the following terms in the scheme of merger.
"1. HLL will have all the rights and powers conferred on it by the law in connection with
manufacture, sale and distribution of the products which form the subject-matter of this
arrangement.
2. HLL undertakes to :
(a) assure consumers of toilet soaps and detergents and consumer organisations that it will
not indulge in any trade practice or pursue any policies which have the effect of preventing,
restricting or lessening competition, which is prejudicial to consumer interest;
(b) continue to manufacture and promote sales of all major brands of soaps (accounting for
90 per cent. of turnover) formerly manufactured by TOMCO before the proposed merger, and
to the extent not less than percentage or value of market share before the merger.

Explanation. - In order to ensure that the aforementioned assurances are carried out, HLL
will not enter into any horizontal arrangement with manufacturers or vertical arrangement
with stockists, distributors or dealers, other than those currently in use, which has the effect
of producing adverse results prejudicial to consumers' interest.
3. In the event if HLL is unable to comply with any of the aforementioned assurances given in
1(a) and (b), HLL shall inform consumer organisations and consumers in general, through
various media, of the reasons for the same.
4. If any disputes arise with regard to any trade practice or policy adopted by HLL in this
regard, they shall be resolved by a committee consisting of two representatives of trade and
industry nominated by HLL and two representatives of consumers to be nominated by CERC,
preferably from among the consumer representatives on the Central Consumer Protection
Council and chairman to be appointed by mutual consent of the nominee, or in the absence of
such consent, by drawing of lots with respect to names recommended by four representatives
mentioned above. The decision of this committee of 5 arrived at unanimously or by majority
vote, shall be binding on HLL."
50. No one had prayed for modifying the scheme on that basis either before the learned single judge or before
us. We have already passed an order on CERC's Appeal No. . . . of 1994. CERC has prayed for incorporation of
terms in the scheme. HLL has no objection. It is futile to go into the question as to what caused this delay and
confusion. What is important is that the admitted position is that such modification was agreed upon. Under
the circumstances, modification in the scheme to that extent will be but proper.
51. All that remains is to make some obvious clarification/corrections in the impugned judgment/scheme as
prayed for by TOMCO to which there seems no objection. The last portion of para 5(d) of the judgment reads
thus :
"The board of directors of TOMCO shall themselves, before dissolution, have these properties valued by valuers
named hereinafter and thereafter, before dissolution, convey, transfer or lease them on long term basis on the
basis of such valuation."
52. There can be practical difficulty in having valuation and effecting transfer of the properties before
dissolution of the board of directors of TOMCO, inter alia, because of the provisions ofsection 269UD of the
Income-tax Act. But the nomination of valuers can certainly be made before that date and actual valuation and
transfer can take place after. Amended clause 4 of the scheme reads thus :
"The following assets owned by the transferor-company shall from time to time, as may be convenient to all
parties concerned be conveyed, transferred or leased on a long-term basis to companies nominated by the
directors of transferor-company before dissolution at valuations done by C. C. Choksey and Co., chartered
accountants, failing which 'Roshan Nanavati' who are Government valuers, failing which Budh Bhatti and
Associates, who are also Government valuers."
53. "There seems to be some unintended typing error. The words "before dissolution" instead of appearing after
the words "by the directors of transferor-company" and before the words "at valuations" should appear before

the words "by the directors of transferor-company" and after the words "to companies nominated". Judgment
and scheme clarified and amended accordingly.
54. Hence, the following order :
The scheme as ordered by the court is approved subject to the following modifications.
(a) Main part of amended clause 4 shall read as under :
"The following assets owned by the transferor-company shall, from time to time, as may be convenient to all
parties concerned be conveyed, transferred or leased on a long-term basis to companies nominated by the
directors of the transferor-company before dissolution at valuations done by C. C. Choksey and Co., chartered
accountants, failing which 'Roshan Nanavati' who are Government valuers, failing which Budh Bhatti and
Associates, who are also Government valuers."
(b) There shall be added clause 14(a) to the scheme which reads as under :
"1. HLL will have all the rights and powers conferred on it by the law in connection with manufacture, sale and
distribution of the products which form the subject-matter of this arrangement.
2. HLL undertakes to :
(a) assure consumers of toilet soaps and detergents and consumer organisations that it will not indulge in any
trade practice or pursue any policies which have the effect of preventing, restricting or lessening competition,
which is prejudicial to consumer interest;
(b) continue to manufacture and promote sales of all major brands of soaps (accounting for 90 per cent. of
turnover) formerly manufactured by TOMCO before the proposed merger, and to the extent not less than
percentage or value of market share before the merger.
Explanation. - In order to ensure that the aforementioned assurances are carried out, HLL will not enter into
any horizontal arrangement with manufacturers or vertical arrangement with stockists, distributors or dealers,
other than those currently in use, which has the effect of producing adverse results prejudicial to consumers'
interest.
3. In the event HLL is unable to comply with any of the aforementioned assurances given in 1(a) and (b), HLL
shall inform consumer organisations and consumers in general through various media, of the reasons for the
same.
4. If any disputes arise with regard to any trade practice or policy adopted by HLL in this regard, they shall be
resolved by a committee consisting of two representatives of trade and industry nominated by HLL and two
representatives of consumers to be nominated by CERC, preferably from among the consumer representatives
on the Central Consumer Protection Council and a chairman to be appointed by mutual consent of the
nominee, or in the absence of such consent, by drawing of lots with respect to names recommended by four
representatives mentioned above. The decision of this committee of 5 arrived at unanimously or by majority
vote, shall be binding on HLL."

55. To conclude, the appeals are disposed of in the above terms. No order as to costs.
56. Certified copy of the above order will be filed within 30 days of the date of sealing of the order with the
Registrar of Companies who will consolidate the file immediately thereafter.
57. Some appellants have prayed for continuation of the interim order of stay. The learned Advocate-General
appearing for HLL has made a statement that the scheme will not be given effect up to July 18, 1994. Hence, no
orders on oral prayer.
58. Needless to mention that drawn up order can proceed.

Supreme Court of India

Hindustan Lever Employees' Union vs Hindustan Lever Limited And
Ors on 24 October, 1994
Bench: A.M. Ahmadi, Cj, R.M. Sahai, S.C. Sen

CASE NO.:
Special Leave Petition (civil)

11006 of 1994

PETITIONER:
HINDUSTAN LEVER EMPLOYEES' UNION
RESPONDENT:
HINDUSTAN LEVER LIMITED AND ORS.
DATE OF JUDGMENT: 24/10/1994
BENCH:
A.M. AHMADI, CJ & R.M. SAHAI & S.C. SEN
JUDGMENT:
JUDGMENT 1994 SUPPL. (4) SCR 723 The Judgment of the Court was delivered by SAHAI, J, Merger under
the Companies Act, 1956 (in brief the Act,) of the two big companies- one, Hindustan Lever Limited (HLL), a
subsidiary 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 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 land 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 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 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(l)(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.
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 combining
three well known methods. namely, the net worth method, the market value method and the earning method.
The figure so arrived could not be shown to be vitiated by fraud and mala fide and 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 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 and that by the Commission under MRTP Act were entirely different. Nor did it find any merit in
the challenge that interest of employees of the two companies was not adequately taken care of. It was held that
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 no similar provision protecting the interest of HLL employees. The apprehension of the employees
against probable retrenchment as the employees of HLL were already surplus was rejected as of no substance
since such disputes if necessary could be raised in labour Court. On preferential allotment of shares to UL on
less than market value the Court held that HLL was holder of 51% share from before any allotment therefore
the allotment which placed them at par with same holding was neither illegal nor violative of public interest.
Same .grievances have been reiterated by the shareholders, the Employees Union and theConsumer Action
Group before this Court with fresh dressings and flourish. The sentinel nature of jurisdiction exercised by the
High Court in Company jurisdiction was emphasised with vehemence. It has urged that the High Court which is
expected to act as guardian in company matters failed to exercise its jurisdiction and was swayed by
considerations which were neither legal nor relevant. Attempt was made to show that the determination of
valuation was vitiated as the chartered accountant to whom the duty was entrusted did not perform its
functions objectively and in accordance with settled financial norms and practice and its action was vitiated as
he was one of the directors of the TOMCO. Comparative figures of the shares of the two companies thenmarket' value, their holding in the market etc. were placed to demonstrate that the calculation was vitiated.
But what was lost sight of that the jurisdiction of the Court in sanctioning a claim of merger is not to ascertain
with mathematical ac- curacy if the determination satisfied the arithmetical 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 not as better as it would have been if another method would
have been adopted. What is imperative is that such deter-mination 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 independent body. The High
Court appears to be correct in its approach that this test was satisfied as even though the Chartered Accountant
who performed this function was a director of TOMCO but he did so as a member of renowned firm of
chartered accountants. His determination was farther got checked and approved by two other independent
bodies at the instance of shareholders of TOMCO by the High Court and it has been found that the
determination did not suffer from any infirmity. The company court, therefore, did not commit any error in
refusing to interfere with it. May be as argued by the learned counsel for the petitioner that if some other
method would have been adopted probably the determination of valuation could have been a bit more in favour
of the shareholders. But since admittedly more than 95% of the shareholders who are the best judge of their
interest and are better conversant with 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. We do not think that the internal management, business activity or institutional
operation of public bodies can be subjected to inspection by the Court To do so, is incompetent and improper
and, therefore, out of bounds. Nevertheless, the broad parameters of fairness in administration, bona fides in
action and the fundamental roles of reasonable management of public business, if breached, will become jus-

ticiable.' Fertiliser Corporation Kamgar Union (Regd.), Sindri & Ors. v. Union of India & Ors., [1981] 2 S.C.R,
52. See Buckley on Companies Act, 14th Ed. P.473& 474 & Palmer on Company Law, 23rd Ed. para 79.16.
Nor is there much merit in the claim of the employees that their interest had not been adequately protected.
The scheme of amalgamation provides that all the staff, workmen or other employees in the service of the
transferor company (TOMCO) immediately preceding the effective date shall become the staff, workmen and
employees of the transferor company. Clause 11.1 provides that their services shall be deemed to have been
continuing and not have been interrupted- Clauses 11.2 and 11.3 protect the interest by providing that the terms
and conditions of such employees shall not be less favourable and all benefits such as PF etc. shall stand
transferred to the HLL. The grievance of the employees that no safeguard has been provided for Hindustan
Lever Employees Union appears to be off the mark as it is the interest of the employees of TOMCO which had to
be protected. Even the: submission that merger will create unemployment or that it may result in many
employees of the TOMCO being rendered surplus does not carry much weight as these are matters which can be
taken care of by the Labour Court if the contingency arises. The learned counsel for the petitioner time and
again took strong exception to the observation made by the High Court that any dispute about retrench-ment
etc. could be. adjudicated by the Labour Court. He vehemently submitted that the availability of remedy after
retrenchment should not have coloured the vision of the court to adjudicate upon the reasonableness of the
scheme. The submission overlooks the primary duties and functions of a company court in matters of merger.
When the court found that service conditions of the merged company shall not be to their prejudice it was fully
justified in rejecting the claim of employees as it was neither unfair nor unreasonable. Further the Court in its
anxiety to be fair to the employees recorded the statement of the learned Advocate General who appeared for
HLL that no employee of HLL has been rendered surplus and in such contingency the company has resorted to
friendly handshake by either giving lump sum or pension. 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 that merger shall result in, 'synergies'
can render the scheme bad. Improved technology and scientific method results in better employment prospects.
Anxiety should be to protect workers and not a 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 modernisation or merger under misapprehension that future employment of same number of workers
may stand curtailed., The wage differential arising between employees of two com-panies cannot result in
making the merger as unfair since the service conditions of TOMCO workers having been protected they cannot
claim that unless they are paid the same emoluments as is being paid by Hindus-tan Lever the merger was
unjust. Various subsidiary submissions that the workers, shareholders were not permitted to attend the
meeting or that material facts were concealed from them, does not appear to be correct as when more than 95%
of the shareholders have agreed to the valuation determined by the chartered accountant all these procedural
irregularities cannot vitiate the determinations.
What requires, however, a thoughtful consideration is whether the company court has applied its mind to the
public interest involved in the merger. In this regard tie Indian law is a departure from the English law and it
enjoins a duty on the court to examine objectively and carefully if the merger was not violative of public
interest. No such provision exists in the English law. What would be public interest cannot be put in a straight
jacket. It is a dynamic concept which keeps on changing. It has been explained in Black's Law Dictionary as,
'something' in which the public, the community at large, has some pecuniary interest, or some interest by which
their legal rights or liabilities are affected. It does not mean anything so narrow as mere curiosity, whereas the
interest of the particular locality which may be affected by the letters in question, interest shared by the citizens

generally in affairs of local, State or national Government.' It is an expression of wide amplitude. It may have
different connotation and un-derstanding when used in service law and yet a different meaning in criminal law
than civil law and its shade may be entirely different in Company Law. Its perspective may change: when
merger is of two Indian companies. But when it is with subsidiary of foreign company the con-sideration may
be entirely different. It is not the interest of shareholders or the employees only but the interest of society which
may have to be examined. And a scheme valid and good may yet be bad if it is against public interest.
Section 394 casts an obligation on the court to be satisfied that the scheme for amalgamation or merger was not
contrary to public interest. The basic principle of such satisfaction is none other than the broad arid general
principles inherent in any compromise or settlement entered be- tween parties that it should not be unfair of
contrary to public policy or unconscionable. In amalgamation of companies, the courts have evolved, the
principle of, 'prudent business management test' or that the 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 maximising 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. Liberalised economic policy is to achieve this goal. The merger,
therefore, should not be contrary to this objective. Reliance on English decision for Custina Re Haare, 1933
AER Ch. 105 and Bugle Press LIC, 1961 Chancery Division 270 that the power of the court is to be satisfied only
whether the provisions of the Act have been complied with or that the class or classes were fully represented
and the arrangement was such as a man of business would reasonably approve between two private companies
may be correct and may normally be adhered to but when the merger is with a subsidiary of a foreign company
then economic interest of the country may have to be given precedence. The jurisdiction of the court in this
regard is comprehensive.
In this case it was specifically claimed that the agreement was con-trary to public interest. It was supported by
relying on the terms of agreement wherein it is mentioned that immoveable assets of TOMCO, except those
which are specifically excluded, shall stand, transferred to HLL. It was urged that even though the valuation of
such assets was nearly Rs. 800 crores it was being transferred for Rs. 30 crores only. Another objection
violating public interest, according to the learned counsel, was that as a result of merger the share holding of
UL from 51% was reduced to approximately 49%, but it was being brought on par by transferring 29,84,43,437
equity shares by preferential allotment by reducing the price of shares with the result that the multi-national
shall have enormous advantages which is not conducive to the society. The learned counsel submitted that
there were only two renowned competing companies who were manufacturing soap and detergent. With the
merger of TOMCO with HLL there would be no competition and it would result in creating virtual monopoly in
favour of HLL which could result not only in deterioration of quality, but in escalation of price. The learned
counsel pointed out that even though HLL was a subsidiary of UL and claims to have the benefit of technical
know-how etc., yet the quality of soaps produced by TOMCO was much better as compared to HLL.
In reply it was urged that the maintenance of 51% of paid-up equity share of UL was distinctively advantageous
to HLL because the UL has become a source of major strength of HLL and has been responsible in several ways
for its phenomenal growth and prosperity, This status, it was urged, enable HLL to have from UL free of cost
the benefits of Research and Development technology, know how, marketing support, both domes-tic and
international including brand names, managements systems, train-ing facilities and other resources in normal
course of business. It was further urged that as a result of HLL being a subsidiary of UL, HLL is able to utilise
international brand names of UL, such as soaps under the brand names Lux, Lux International, Lifebuoy,
Pears, Dove, Surf, Sunlight, etc, It was urged that the price of Rs. 105 per share comprising of Rs. 10 towards

the capital and Rs. 95 towards premium for preferential allotment to UL was worked out on the basis of norms
jointly evolved by Apex Chambers of Commerce and industry operating at the national level, such as
ASSOGHAM with Public Financial Institutions which own substantial shareholding in the publicly quoted
companies, including HLL. It was further stated that the company had taken advice from the Merchant Banking
Division of Industrial Credit & Investment Corporation of India Limited with regard to fair price for the
proposed preferential allotment to UL. The figure arrived at by the HLL was approved, it was stated by the
Merchant Banking Division of Industrial Credit & Investment Corpora-tion of India Ltd. It was pointed out that
not only the figure was found to be fair and reasonable by the authorities, but it was ensured further that UL
will not transfer the shares for a minimum period of 7 years from the date of allotment and in the event of UL
desiring to sell these shares at any time after seven years, but within 12 years from the date of the allotment,
they would offer do so at the first instance in favour of other members of the company in fair and suitable
manner at a price worked out by reference to price earning multiple of 15 as per the last published accounts of
the company available at the time of such disposal. It was also urged that the price of Rs. 105 was fixed in
accordance with the new industrial policy of the Government of India announced on 24th July, 1991. The
learned counsel urged that in pursuance Of this policy, on 29th May, 1992 the Government of India repealed
the Capital Issues Control Act, 1947 by Ordinance No, 9 of 1992 with the result that there was no control on the
issues of shares. The determination, it was claimed, was in accordance with the guidelines issued by the SEBI
on 11th and 17th June, 1992 which required existing companies wishing to raise foreign equity upto 51% by
taking a decision of the shareholders in a special resolution under Section 81(1)(A) of the Act. The learned
counsel submitted that even though subsequently the State Bank of India has altered its policy, but that would
not affect the determination or valuation done earlier as it was in accordance with the then existing guidelines
and was approved by nearly 99% of the shareholders of the company. The learned counsel urged that in these
circumstances, the High Court having found that the price of Rs. 105 having been worked out on the basis of
price earning multiple of 1.5 based on the last published balance sheet of HLL, it was fair and reasonable and it
was not liable to interference by this Court. Reliance was placed on Needle Industries (India) Ltd. & Ors. v.
Needle Industries Newey (India) Holding Ltd. & Ors., [1981] 3 SCC 333, where this Court approved the
principle laid down by Lord Davey in Hilder v. Dexter, (1902) AC 474 at 480 that there was no law which
obliged a company to issue its share at par because they were saleable at a premium in the Market. It was
vehemently argued that since it were the shareholders who were primarily concerned with the company's
finances and they have decided almost unanimously to allot the share to the parent company at the price of Rs.
105, it cannot be urged that the members of the HLL were not acting in the interest of the company as a whole.
Each of these challenges claimed to be violative of public interest have to be examined in the prevailing
atmosphere which opted for liberalisation of the Government policies to promote economic growth of the
country. What is remarkable is that the Legislature itself has amendedForeign Exchange Regulation Act, 1973
by Act 29 of 1993 ('FERA' for short), the Monopolies and Restrictive Trade Practices Act, 1969 and Companies
Act, 1956 by Act of 58 of 1991, The amendment in MRTP Act was effected as :
"The basic philosophy behind the MRTP Act was never to inhibit industrial growth in any manner but to ensure
that such growth is channelised for the public good and is not instrumental in per-petuating concentration of
economic power to the common detriment. With the growing complexity of industrial structure and the need
for achieving economies of scale for ensuring higher productivity and competitive advantage in the
international market, the thrust of the industrial policy has shifted to controlling and regulating the
monopolistic, restrictive and unfair trade practices rather than making it necessary for certain undertakings to
obtain prior approval of the Central Government for expansion, establishment of new undertakings, merger,
amalgamation, take over and appointment of Directors. It has been the experience of the Govern-ment that pre-

entry restriction under the MRTP Act on the investment decision of the corporate sector has outlived its utility
and has become a hindrance to the speedy implementation of industrial projects", In pursuance of this
objective, Sections 20 to 26 were repealed. Section 23 of it which empowered the Commission to examine the
scheme of amalgamation or merger is no more on the statute book. The argument of the Petitioners that the
Commission being court of primary jurisdiction the Company Court should have stayed its hands and awaited
the decision of the Commission does not appear after amendment to be sound. Effect of the merger resulting in
monopoly is already pending before the Commission. Therefore, no further comment is called for.
In FERA there was a restriction on holding of assets by non-residents under Section 11 of the Act.Section
29 prohibited a company which was not incorporated in India or in which the non-resident interest was more
than 40% from estabushing in India a branch, office or any part of the undertaking without permission from
the Reserve Bank of India. Section 31 prohibited any company in which non-resident Indian had more than
40% share from acquiring or holding any immovable property in India. By Act 29 of 1993 Section 11 has been
repealed and Sections 29 and31 have been amended and there is no restriction now on a non-resident company
holding in excess of 40% share. In Companies Act, Section 108-A to 108-I have been added.
The scheme of amalgamation does not run counter to any legislative: provision of policy of the Government.
The claim of the Petitioners that the transfer for a paltry sum of Rs.30 crores was, mala fide as it was quid pro
quo arrangement between UL and Tata Sons Limited by which the immovable assets of TOMCO were virtually
given to Tata Sons Limited and in lieu of UL has been allotted 2984347 equity shares of the face value of Rs. 10
each at the price of Rs. 100 per share so as to ensure that the share of UL which stood diluted continued to
remain at 51% was not found to have any merit as the valuation was determined by renowned and authorised
valuers. It was held that sale by open public auction or inviting tenders from general public may have fetched
more price due to competition, but that could not result in vitiating the determination of the valuation. The
amalgamation cannot be faulted for this reason.
Even assuming that the assets are being transferred for a very meager sum but that by itself would not render
the agreement bad or against public policy. Once the FERA was amended and assets of the Indian company
could be transferred to foreign company then the amalgamation cannot be withheld when the shareholders
themselves did not raise any objection nor was it raised by financial institutions or statutory bodies. The
challenge, therefore, founded on transfer of assets at lower price cannot be upheld as violative of public interest.
Transfer of share to a foreign company on under valuation is of course a matter of concern. It is true that the
transfer of shares by one company to another company is primarily to be determined by the shareholders and,
therefore, if the 99% are of the view that the valuation of the shares was reasonable and fair then the court
should be slow to interfere with it. But what is necessary to be emphasised is that a shareholder may not be
interested in the ultimate effect of allotting shares to a multinational on a low price valuation, but the court
certainly is. For instance, if the value of the share which has been determined at Rs. 105 for allotment to HLL is
hypothetically determined, say at Rs. 210, then the result would be that the UL will have to pay more in lieu of
getting the shares and that could definitely bring more foreign exchange to the national stream. It is just one
illustration to demonstrate that how low pricing of the valuation of share effects the public interest. That the
valuation was low-priced was found even by the High Court. Therefore, it is not open to the respondents to
argue that the valuation of Rs, 105 having been accepted by majority of almost all the shareholders, no public
interest is involved in it. No further need be said as allotment of shares to UL at Rs. 105 is not approved by the
Reserve Bank of India. It was been challenged before the High Court and is pending adjudication.

Even though I have agreed with Brother Sen, J. that the appeals and petitions are liable to be dismissed, but I
have added a few words to highlight the expansive power of the court in public interest while approving the
scheme for amalgamation between a subsidiary company of a multi-national and an Indian company in the
liberalised economic policy.
SEN. J. A Scheme of Amalgamation of two Companies - Tata Oil Mills Company Limited and Hindustan Lever
Limited - is the subject matter of dispute in this case.
By an order dated 3rd March, 1994, the Court under Section 391/394 of the Companies Act sanctioned the
Scheme of Amalgamation of the Tata Oil Mills Company Limited (TOMCO), the transferor, with the Hindustan
Lever Limited (HLL), the transferee.
Aggrieved by the said Judgment and order dated 3.3.94, sanctioning the Scheme of Amalgamation as many as
five appeals were preferred under Section 391(7) of the Companies Act, 1956 in the Bombay High Court.
Appeal No. 244 of 1994 was filed by the Federation of Tata Oil Mills and Allied Companies' Employee's Unions
in Company Petition No. 332 of 1993 connected with Company Application No. 250 of 1993. Appeal No. 298 of
1994 was filed by Mr. Rabindra Hazari a shareholder of TOMCO in Company Petition No. 332 of 1993
connected with Company Application No. 250 of 1993. Appeal No. 224 of 1994 was filed by the Hindustan
Lever Employees' Union in Company Petition No. 333 of 1993 connected with Company Application No. 251 of
1993. Appeal No. 301 was filed by Consumer Action Group and other similar Organisations, in Company
Petition No, 333 of 1993 connected With Company Application No. 251 of 1993. Appeal No. 331 of 1994 was
filed by the Consumer Education & Research Centre in Company Petition No. 333 of 1993 connected with
Company Petition No. 251 of 1993.
The Appeal Court dismissed all the five appeals. The appellants have now come before this Court against the
judgment of the Appeal Court dated -18th May, 1994.
According to the appellants, the scheme should not be sanctioned for the following reasons :
(A) Violation of Section 393(1) (a) of the Act in not making required disclosures in the explanatory statement.
(B) Valuation of share exchange ratio is grossly loaded in favour of HLL.
(C) Ignoring the effect of provisions of the Monopolies and Restrictive Trade Practices Act (the MRTP Act).
(D) Interest of employees of both the Companies was not adequately taken care of.
(E) Preferential allotment of shares less than market price to Unilever which is not in public interest.
(F) Mala fides on account of existence of quid pro quo between Unilever and Tata Sons Ltd.
TOMCO manufactures and sells products like soaps, detergents, toiletries and animal feeds. HLL also
manufactures and sells similar products. Both the Companies have their registered office at Bombay. TOMCO
has more than 60,000 shareholders with the following break-up:

22%

Tata

Group

41 %

Financial institutions (FI)

37%

General Public

HLL has nearly 1,30,000 shareholders with the following break-up:

51% : Unilever PLC (UL) - a Company incorporated under the English Companies Act, having its registered
office at London.

16%

FI

33%

General Public

Originally, Unilever - the parent Company of HLL - had 100% shareholding in HLL.
The declined in the business of TOMCO began in 1990-91. During 1991-92, TOMCO incurred loss of Rs. 13
crores. In the next six months the loss increased to over Rs. 16 crores. The Board of Directors of TOMCO
considered various alternatives for TOMCO including its association with HLL which was a more prosperous
and a larger Company operating in the same field of activities. Accordingly, the Board of Directors of TOMCO
put up a proposal before the Board of Directors of HLL. Both availed of [he 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. On 19th March, 1993, Mr.
Malegam gave 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.
The Scheme, inter alia, provides for transfer and vesting in HLL of the Undertaking and business of TOMCO
together with assets and liabilities excluding certain assets and/or licence rights to use certain premises. Salient
features of the Scheme are to be found in Clauses l,7(d), 4, 5, 11 and 13. Clause 1.7(d) sets out the details of
excluded properties in which TOMCO has no more than licensees rights. Clause 4 provides for transfer of 5
assets (immovable property) to be transferred to companies nominated by Tata Sons Ltd. at fair market value
as will be independently assessed. Clause 5 provides that TOMCO shall (before or after the effective date)
transfer to Tata Sons Ltd. or its nominee certain invest-ments/shares owned by TOMCO at the then prevailing
market value and in the case of Unlisted shares at a value to be determined by Mr. Y.H. Malegam. Clause 11
provides for transfer of employees of TOMCO to HLL on the basis that their service shall be deemed to be
continuous and the conditions of service after the transfer shall not be less favourable. Clause 13 refers to
preferential allotment of equity shares to UL of face value of Rs. 10 each at the price of Rs. 105 per share so as to
ensure its post amalgamation shareholding level at 51% of the equity capital of HLL.
It may be mentioned that (i) investments/shares specified in Clause 5 have been realized and (ii) Clause 4 has
been modified by the Company Court (a) by providing for transfer to Companies nominated by the Directors of

TOMCO in place of Tata Sons Ltd. and (b) by naming well reputed Chartered Accountants/Government
Valuers.
In Company Application No. 250 of 1993 filed by TOMCO the Court passed an order of 29th April, 1993
directing to call the meetings of the debenture holders, creditors, ordinary shareholders arid preference
shareholders on 29th and 30th June, 1993, naming the Chairman of the meetings and calling upon him to
submit the report within 21 days after conclusion of the meeting, TOMCO filed the Notices and explanatory
statements under Section 393(l) (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(l)
(a) and a proxy form were sent to concerned members as required by law On 21st June, 1993 a joint
communication to shareholders of TOMCO and HLL was also sent. Public notices of the meetings were also
issued through the print media. The meeting of the ordinary shareholders was held on 29th June, 1993 and was
attended by 1,294 members holding 85,85,009 ordinary shares and by 1,652 members holding 55,18,251
ordinary shares through proxies. In the said meeting amendment was proposed to the effect that the exchange
ratio should be 5:15 shares in place of 2:15 shares as envisaged in the Scheme. 99.64% of ordinary shareholders
voted against amendment and 99.72% voted in favour of the Scheme as proposed. Debenture holders voted
99%, secured creditors voted 100%, unsecured creditors voted 84.30% and preference shareholders voted
100% in favour of the Scheme. The Scheme as proposed was thus approved in all the five meetings by 99.72% of
equity shareholders in terms of values and 86.72% in terms of number.
In Company Application No. 251 of 1993 filed by HLL also similar direction for convening meeting of the equity
shareholders and creditors were issued by the Court on 29th April for convening the meeting on 30th June,
1993. Similar procedure was followed in this also. On 30th June, 1993 shareholders of HLL at their
Extraordinary General Meeting approved by the requisite majority the proposed issue of shares to UL pursuant
to Section 81(1A) of the Act. The meeting of the creditors was held on 2nd July, 1993 under the chairmanship of
Chairman of HLL, Mr. S.M. Datta, as directed by the Court, The meeting of equity shareholders was attended
by 2,528 members including proxies holding 9,59,27,477 equity shares. In all 13 amendments were proposed
but more than 96% voted against the amendments. The creditors also voted for the Scheme.
On 2nd August, 1993 Judges summons was taken out by Mr. M.C. Jajoo, praying inter alia for direction to M/s.
A,F, Ferguson and M/s. N.M. Raiji & Go., Chartered Accountants, to give their opinion on the valuation report
of Mr. Malegatn. The Regional Director and the Official Liquidator were given notices of the petitions. In
pursuance thereof the Regional Director submitted his report on 9th December, 1993 and Official liquidator
submitted his report for winding up without dissolution under Section 394 of the Act. On 6th January, 1994
M/s. Ferguson and M/s. N.M. Raiji by their joint letter with copy to Mr. Jajoo confirmed that the share
exchange ratio determined by Mr. Malegam was proper.
The facts stated above were noted in the judgment under appeal and are not in dispute. But a large number of
legal issues have been raised in this Courts questioning the Scheme of Amalgamation.
Mr. Dholakia, learned Counsel appearing for Mr. Jajoo, one of the shareholders of TOMCO, has questioned the
justification of the ratio of allotment .of shares, 2 shares of HLL in exchange of 15 shares of TOMCO. According
to Mr. Dholakia, this ratio is entirely unsatisfactory and unfair to the TOMCO shareholders. It has been

contended that he Board of Directors of TOMCO did not explain the; Scheme of Amalgamation in the
explanatory statement circulated among the shareholders. In particular, how the share exchange ratio - 15
TOMCO shares to 2 HLL shares - was arrived at, was not stated in the explanatory statement. Instead of
circulating the valuation reports, TOMCO informed the shareholders that the reports were available for
inspection at the registered office of the Com-pany between 11.00 A.M. to 1.00 P.M. on 14 working days. The
shareholders were not told that the joint valuer was none other than Mr. Malegam, a Senior Partner of M/s.
S.B. Billimoria and Company, and also a Director of TOMCO. Mr. Malegam could not be appointed auditor of
TOMCO under Section 226(3) of the Companies Act, 1956. In that view of the matter, Mr. Malegam should not
have been appointed Valuer under the Indian Companies Act, 1956.
It was next contended that the reasons for the Board accepting certain proposals to make preferential allotment
of shares at Rs. 105 per share has not been properly explained. ICICI had given a valuation report stating that
this report was only on the basis of the material supplied by HLL and not on the basis of any independent
verification. It is also significant that Mr, Malegam was a Director of ICICI. It was also con-tended that the
valuation report was erroneous. A combination of different methods of valuation was adopted, which was
clearly against the law laid down by the Supreme Court in the case of Commissioner of Gift Tax, Bombay v. Smt.
Kuswnben Mahadevia, 122 ITR 38. If the valuation was done by the net asset method, the exchange ratio
should have been 1:2 in favour of TOMCO. Moreover, market value of the shares of the two Companies was
taken at a point of time when the price of TOMCO shares was the lowest for a period of 27 months. Lastly, it
was contended that the preferential allotment of shares to Unilever was part of the Scheme of Amalgamation.
The Board should have explained why Rs. 366 was being paid for every HLL share by TOMCO, when Unilever
was paying only Rs. 105 per HLL share.
We are unable to uphold any of the above contentions raised by Mr. Dholakia, The overwhelming majority of
the shareholders had approved the Scheme at the meeting called for this purpose and had approved the
exchange ratio. In fact, a proposal for amendment of the exchange ratio was also rejected by the overwhelming
majority of 99% shareholders. There is no reason to presume that the shareholders did not know what they
were doing.
Being dissatisfied with the valuation made by Mr. Malegam, Mr. Jajoo had insisted for independent valuation
and that was done. Two independent valuers -A.F. Ferguson and N.M. Raiji & Co. - had valued the shares and
came to the conclusion that exchange ratio of 15:2 was correctly determined by Mr. Malegam.
Faced with this situation, Mr. Dholakia sought to produce a valuation report made by another valuer, G. Rai &
Co., Chartered Accountants. According to this report, book value of equity share of TOMCO as on 31. 3.1992
based on audited and printed balance sheet of the Company was Rs.
57. 58 per share; whereas book value of equity share of HLL as on 31.12.1992 based on its audited and printed
balance sheet was only Rs. 28.84 per share. This, according to Mr. Dholakia, demonstrated the absurdity of the
valuation that had been made of the shares of the two Com- panies The exchange ratio was obviously unfair to
the shareholders of TOMCO. This report is produced before this Court for the first time.
There was no dispute as to what should be the book value of TOMCO shares as on 31.3,93, The following share
charts of the two Companies were enclosed with the circular letter dated June 21, 1993 addressed to the
shareholders of TOMCO and HLL by the Chairmen of two companies :

HINDUSTAN LEVER LTD.

EQUITY SHARE DATA

The Market Price as on 17.6.1993 was Rs, 375
As at

31:12..92

31.12.91

31.12.90

Face Value (Rs)

10.00

10.00

10.00

Book Value per Share (Rs.)

23.80

20.75

27.36

Dividend (%)

42.00

38.50%

42.00%

Earning per share (Rs.)

7.03

5.73

6.29

*On enlarged capital after the issue of bonus shares in the ratio of 1:2.
THE TATA OIL MILLS COMPANY LTD.
EQUITY SHARE DATA The Market price as on 17.6.1993 was Rs. 52.50 As at 31.3.93 31.3.92 31.3.91 Face Value
(Rs.) 10.00 10.00 10.00 Book Value per Share (Rs.) 29.75 29.45 : 36.17 Dividend (%) - 12.50% 20:00% Earning
per share (Rs.) 0.30 0.50 5.19 The Profit & Loss Accounts of the two Companies for the last three years were
also annexed. It appears that TOMCO made profit of Rs. 5.64 crores in 1990-91. It came down to Rs. 1,13 crores
in 1991-92 and ultimately to Rs, 0.65 crores in 1992-93; whereas HLL's profit in 1990 was Rs. 58.74 crores and
it went up to Rs. 98.48 crores in 1992, The Market price of TOMCO share truly reflected the bleak outlook of
the Company. It has been stated that in the financial year 1992-93 TOMCO had shown a gross profit of Rs.
27.18 crores only after taking credit of Rs. 36.69 crores on sale of investments and Rs, 18.04 crores on aetouttt
of refund of Excise Duty pertaining to prior periods. In fact, in the Directors' Report of the year 1992-93, it was
stated that the Company had suffered severe set back resulting in operating loss. The position got worse in the
year 1993-94. The Company suffered operating loss in the region of Rs. 16 crores and had to sell not only
investments, but also fixed assets of the Company.
In the background of these facts, it cannot be said that the market price as on 17.6.93 did not reflect the true
picture of the value of the Company's shares. If the market price of the shares of the two Companies as on
17.6.93 is compared, the quoted price of HLL was Rs. 375 per share; whereas the quoted price of TOMCO was
Rs. 52.50 per share. The earning per TOMCO share had come down from Rs. 5.19 on 31.3.91 to Rs. 0.50 on
31.3.92 and Rs.0.30 On 31.3.93. As against this, dividend paid on HLL shares was 42% in the years ending on
31.12.90 38.50% (on enlarged capital after the issue of bonus shares in the ratio of 1:2 in the year ending on
31.12.91 and 42.00% again in the year ending on 31.12.92. It is true that book value per share of TOMCO was
higher than that of HLL. But, even without any bonus issue, the book value of TOMCO shares had come down
from Rs. 36.17 per share on 31.3.91 to Rs. 29.75 per share on 31.3.1993.

What ernerges from all these figures is that on the market price basis as On 17.6.93 (the last price available
before the circular letter dated 21.6.93 issued to the shareholders of the two Companies) the exchange ratio of
2:15 was very fair. If the yield method is adopted, the ratio would be astronomically high in favour of HLL. But,
if the book value is taken per share, then TOMCO shares would be of higher value than HLL shares.
The question is what method should be adopted for arriving at a proper exchange ratio. The usual rule is that
shares of the going concern must be taken at quoted market value. This principle was also recognised by this
Court in the case of Commissioner of Wealth Tax v. Mahadeo John, 86 ITR
621. 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: (I) the yield method; (II) tie asset value method; and (III) 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.
Mr. Dholakia has contended that a combination of two methods of valuation was condemned by this Court in
the case of Commissioner of Gift Tax, Bombay v. Smt. Kusumben D. Mahadevia, 122 ITR 38. The valuation of
the shares done by Mr. Malegam was clearly erroneous and contrary to the principles laid down by this Court in
that case.
The observations made by this Court in Smt. Kusumben D. Mahadevia's case were in connection with the
valuation of shares of a going concern under the provisions of Wealth Tax and Gift tax Acts and the rules
framed thereunder. Under those two Acts, at the material time, valuation had to be done on the basis of the
price which, in the opinion of the assessing officer, the shares would fetch if sold in the open market.
Both Section 6 of the Gift Tax Act and Section 7 of the Wealth Tax Act had adopted the same principle of
valuation. If that method of valuation is adopted, then the exchange ratio fixed in this case cannot be described
as unfair to the Company' s shareholders in any way. If profits earning method had been adopted, the ratio
would have been very much worse for TOMCO shareholders.
This problem of valuation in the case of amalgamation of two Com-panies has been dealt with by Weinberg and
Blank in the book TAKE-OVERS AND MERGERS", 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 an-nouncement of the bid.
(2) The dividends presently paid on the shares of the two com-panies. 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 bf borrowings to the equity capital.
(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- pointhon 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.
It will, therefore, appear that 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 exchange ratio of the shares of the two companies. It is to be
noted that even in such a situation, the book value method has been described as 'more of talking-point than a
matter of substance'.
Mr. Malegam adopted the combination of three well-known methods of valuation of shares to arrive at the
exchange ratio of the two Companies. In fact, the, method adopted was explained to the Board of Directors by a
letter dated 19th March, 1993 written by S.B. Bellimoria & Co. : "For the above purpose we have considered the 'yield value', the 'asset value' and the 'market value' of the
shares of the two companies and have given appropriate weightages to each of the above values. Both
companies are in similar businesses. Therefore a uniform basis of capitalisation of profits has been adopted in
determining the 'yield value'. However, while HL has shown a consistent growth in its profitability, TOMCO's
performance has been more erratic. It has made substantial operating losses in the year ended 31st March, 1992
and in the six months ended 30th September, 1992 for which unaudited figures have been published and its
losses during the six months ending 31st March, 1993 are expected to be even larger. Moreover its profits
during the years ended 31st March, 1990 and 3lst March, 1991 have been significantly due to exports to the
former USSR which exports have now dried up. Taking all these factors into account, for working out the' yield
value' of the TOMCO share we have assumed a figure of future maintainable profits based on its operating
results for the years 1981-82 to 1988-89."
It is also to be noted that the financial institutions who held 41% of the shares of TOMCO, did not find any fault
in the method of valuation of the shares.
Mr. Ashok Desai, appearing on behalf of TOMCO, has 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 dif- ference 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. Mr. Jajoo 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.
It is also difficult to follow the argument that Mr. Malegam's report is not acceptable to the TOMCO
shareholders, because he was a Director of TOMCO, HLL had no difficulty in accepting the share exchange ratio

fixed by Mr. Malegam, even though he 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. We are unable to uphold the contention that there was any
impropriety in the valuation of the shares. The argument based on Section 226(3) of the Companies Act is
misleading, An officer or an employee of the company may not be appointed as an auditor. An auditor must be
independent of the Board of Directors of the company. He is expected to play the role of a watch-dog on behalf
of the shareholders of the company. But, in this case the two Companies are going to be amalgamated, both the
Companies have chosen Mr. Malegam, Director of TOMCO to fix tie share exchange ratio. If HLL agreed to
accept Mr. Malegam as the Valuer and there was no objection from TOMCO, we fail to see how TOMCO
shareholders have been prejudiced.
On the question of valuation on shares, another issue has been raised. It was argued that 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 purpose, two conditions were imposed :
(1) Unilever shall not be able to sell the shares allotted to them on preferential basis for a period of 7 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 15 times
earning per share calculated on the basis of the last audited balance sheet.
It was contended by Mr. Andhyarujina, and in our opinion rightly, that these two conditions are important
depreciatory factors in the preferential allotment of shares to Unilever. The shares issued to Unilever would be
franked by restrictive covenants. These shares cannot be com-pared to the other shares of HLL which could be
freely traded in the market.
It was contended by Mr. Dholakia that a foreign company was being given a large interest in the assets of
TOMCO at a gross undervalue. We are unable to uphold this argument. The shareholder has no interest in the
assets of the company While the company is an existence. It is only at the stage of liquidation of the company
that the shareholders become inter-ested 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 share represents a bundle of rights which include, inter alia, the rights (i) to elect directors;
(ii) to vote on resolutions at 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 the case
of Bacha F. Guzdar v. C.I.T., AIR (1955) SG 74, the position of a shareholder was explained thus :
"There is nothing in the Indian Law to warrant the assumption that a shareholder who buys shares, buys any
interest in the property of the company which is juristic person entirely distinct from the shareholders. The true
position of a shareholder is that on buying shares he becomes entitled to participate in the profits of the
company in which he holds the shares, if and when the company declares, subject to the Article of Association,
that the profits or any portion there of should be distributed by way of dividends among the shareholders. He
has undoubtedly a further right to participate in the assets of the company which would be left over after
winding up."

In any event, whether Unilever was paying the proper price for the shares Or not, is a question which is now
before the Bombay High Court in a separate proceeding Hindustan Lever Ltd. & Ors. v. Reserve Bank of India &
Ors., Writ petition No, 1666 of 1994.
It appears that the Reserve Bank of India has not granted approval to the proposal of alloting 29,84,347 equity
shares of Rs. 10 fully paid up at a premium of Rs. 95 per share. According to the guidelines set by the Reserve
Bank of India, a premium of Rs. 346 will have to be paid per share In a writ application before the Bombay
High Court, HLL has prayed for, inter alia, following orders:
(i) Petitioner No 1 shall allot 29,84,347 equity shares of Rs. 10 each fully paid up at a premium of Rs. 95 per
share to Unilever and appropriate an amount of Rs. 28,35,12,965 ac-cordingly.
(ii) The difference between Rs. 346 being the premium per share as per the revised guidelines and Rs. 95 being
the premium per share approved by the shareholders and the approved Scheme of Amalgamation shall be kept
in separate 'Share Premium Suspense Account' by the Company till the final disposal of the Writ Petition.
(iii) The said Share Premium Suspense Account will be dealt with in accordance with the final judgment of the
Court in the Writ Petition.
Since the entire question is now pending before the Bombay High Court in another independent proceeding,
questioning the price indicated by the Reserve Bank of India, this question cannot be pursued in this
proceeding any further.
The next point urged by Mr. Dholakia is that proper disclosure of all material facts was not made in the
explanatory statement, accompanying the proposal to: amalgamate TOMCO with HLL. Their shareholders were
not given full particulars on the basis of which they could act.
Section 393(l)(a) reads as under :
"(1) Where a meeting of creditors or any class of creditors, or of members, or any class of members, is called
under section 391 (a) With every notice calling the meeting which is sent to a creditor member there shall be sent also a statement
setting forth the terms of the compromise or arrangement and ex-plaining its effect; and in particular, stating
any material interests of the directors, managing director, managing agent, secretaries and treasurers or
manager of the company, whether in their capacity as such or as member or creditors of the company or
otherwise, and the effect on those interests, of the compromise or arrangement, if, and in so far as, it is
different, from the effect on the like interests of other per-sons; and...."
The grievance voiced by Mr, Jajoo is not shared be more than 99% of the shareholders. An explanatory
statement had been sent on the basis of which Mr. Jajoo had taken inspection of all relevant documents.
Notice must be taken of the fact that even after these points were raised in the meeting, the overwhelming
majority of shareholders voters for the Scheme. That the explanatory statement was approved by the Registrar,
is.it self a relevant factor.

A similar question came up for consideration before a Division Bench of Gujarat High Court in the case of
jitendra R. Sukhadia v. Aletnbic Chemical Works Co, Ltd., (1987) 3 Company Law Journal 141. That was also a
case of amalgamation; In that case, it was held that the exchange ratio of the shares of the two companies,
which were being amalgamated, had to be stated alongwith the notice of the meeting. However, this ex-change
ratio was worked out, however, was not required to be stated in the statement contemplated under Section
393(l)(a).
In the facts of this case, considering the overwhelming manner in which the shareholders, the creditors, the
debenture holders, the financial institutions, who had 41% shares in TOMCO, have supported the Scheme and
have not complained about any lack of notice or lack of understanding of what the Scheme was about, we are of
the view, it will not be right to hold that the explanatory statement was not proper or was lacking in material
particulars.
There is another aspect of this case. Should the fact that Mr. Malegam was a Director of a Company have been
disclosed? Section 393 (l)(a) requires particulars to be given of any material interests of some persons
connected with the company, including the directors and managing director. The interest that is contemplated
in Section 393(l)(a) is interest material for consideration of the scheme by the shareholders. It has not been
shown that Mr. Malegam had any interest in the scheme. If he had any shares in TOMCO, then his interest
would be like that of any other shareholder. His: specialised services were utilised for the purpose of arriving at
a fair exchange ratio. Both TOMCO and HLL reposed faith in his professional skill. We are of the view that nondisclosure of the fact that Mr. Malegam, a Director of the Company, had been appointed Valuer, will not detract
from the Scheme in any way. This will also not amount to suppression of any material interest of a Director in
the Scheme.
The next question relates to the provisions of Monopolies and Restrictive Trade Practices Act (MRTP Act). An
argument has been made that the MRTP Commission is seized of the matter and until the MRTP Commission
decides, it will be proper to sanction the Scheme.
Ms. Indira Jaising, appearing on behalf of Consumer Action Group, has argued that the Monopolies and
Restrictive Trade Practices Act, 1969 is a special enactment. The question of merger of HLL and TOMCO has to
be considered in the background of the provisions of the said Act, Since this very issue is under consideration
by the MRTP Commission, the Court exercising company jurisdiction Should hot pass any order Which may
prejudice the proceedings before the MRTP Commission. Alternatively, it has been argued that assuming that
the jurisdiction of the Company Court is not barred but it is parallel, then as a matter of propriety the Company
Court should await the decision of the MRTP Commission with regard to the issues involved. The allegation
before the MRTP Commission is that the proposed merger was in violation of the provisions of MRTP Act. The
decisive questions whether the issues arising before the MRTP Commission are the same as are now before this
Court.
It was further argued that even if the proposed amalgamation is sanctioned by this Court, it must be made
subject to the final outcome of the proceedings pending before the MRTP Commission. The MRTP Commission gravely erred in rejecting the application for interim order under Section 12A of the MRTP Act. It was
submitted that the Commission has erred in refusing to pass an interim order on the ground that any interim
order passed will take away the jurisdiction of the Company Court. The Commission has jurisdiction, even after
deletion of Section 23, to inquire into monopolies and restrictive trade practices. The Commission has over-

looked the fact that the allegations made by the aggrieved parties before it, were not based on 'assumption' but
on hard facts.
Our attention was invited to the Directive Principles of State Policy in Part-IV of the Constitution and it was
urged that the economic system should not be operated in a way that results in the concentration of wealth and
means of production to the common detriment. In particular, it was emphasised that issuance of preferential
shares at a very favourable price to Unilever will come within the definition of Section 2(e) and will amount to
restrictive trade practice.
This argument of Ms. Jaising was supported by Dr. Dhavan, appear-ing on behalf of the Federation of Tata Oil
Mills and Allied Companies Employees Union. It was argued that the Scheme will attract anti-merger
jurisdiction of the MRTP Commission straightway. The two big Companies in the same field of consumer
articles are merging to ensure that there was no inter se competition. Under the MRTP Act, injunction can be
granted under Section 12A during an enquiry even where the impugned trade practice was likely to affect
prejudicially the public interest or the interest of the consumers generally. The Commission may, for preventing
such a situation from developing, restrain the undertaking involved from carrying or any monopolistic or
restrictive unfair trade practice until the enquiry is concluded. It was argued that judgment under appeal has
seyerery curtailed the jurisdiction of the MRTP Commission. Lastly, it was contended that preferential
allotment of a large number of shares to Unilever at a throw away price is apart of the Scheme of Amalgamation
and it wifl result in Unilever's acquisition of 51% shares in the enlarged Company and thereby Unilever will be
able to control the market more effectively.
In order to appreciate this argument, it is necessary to refer to the various provisions of the Monopolies and
Restrictive Trade Practices Act, 1969 This Act in consonance with the new economic policy of the Govern-ment
has undergone drastic amendment with effect From 27.9.91. The relevant provisions for the purpose of this case
are as under :
"2, In this Act, unless the context otherwise requires,---------- --------------- -----------(o) "restrictive trade practice" means a trade practice which has, or may have, the effect of preventing,
distorting or restricting competition in any manner and in particular
(i) which tends to obstruct the flow of capital or resources into the stream of production, or
(ii) which tends to bring about manipulation of prices, or conditions of delivery or to affect the flow of supplies
in the market relating to goods or services in such manner as to impose on the consumers unjustified costs or
restrictions;
(s) "trade" means any trade, business, industry profession or occupation, relating to the production, supply,
distribution or control of goods and includes the provision of any services;
........... .......... .........
(u) "trade practice" means any practice relating to the carrying on of any trade, and includes -

(i) anything done by any person which controls or affects the price charged by, or the method of trading ofs an)
trader or any class of traders;
(ii) a single or isolated action of any person in relation to any trade;"
Section 10 empowers the Commission to enquire into any restrictive trade practice or any monopolistic trade
practice. Section 12A empowers the Commission to issue temporary injunction, if it is proved that 'any
undertaking or any person is carrying on, or is about to carry on, any monopolistic or any restrictive, or unfair,
trade practice and such monopolistic or restrictive, or unfair, trade practice is likely to affect prejudicially the
public interest or the interest of any trader, class of traders of traders generally or of any consumer or
consumers generally". Chapter III of MRTP Act dealt with concentration of economic power. Part-A of this
Chapter (Sections 20 to 2(5 and also Section 28) was deleted by the MRTP Act, 1991 with effect from 27.9.91.
Part III-A (Sections 30A and 30G) which dealt with restriction on acquisition and transfer of shares by certain
body corporates was also deleted from the said date; Section 23specifically dealt with merger, amalgamation
and take over was to the following effect "23. Merger, amalgamation arid take over. - (1) Notwithstanding
anything contained elsewhere in this Act or in any other law for the time being in force.(a) no scheme Of merger or amalgamation of two or more undertakings, to which this Part applies with any
other under-taking;
(b) no scheme of merger or amalgamation of two or mote undertakings which would have the effect of bringing
into existence an undertaking to which clause (a) or clause (b) of section 20would apply;
shall be sanctioned by any Court or be recognised for any purpose or be given effect to unless the scheme for
such merger or amalgamation has been approved by the Central Government under this section."
The intention behind deletion of Section 23 is obvious : the require-ment of prior approval of the Central
Government before sanctioning a scheme of merger or amalgamation has been done away with. The effect of
the deletion of this section cannot be nullified by giving an unnatural and artificial interpretation of the words
of the statute.
It is being argued that even though Section 23 has been deleted, their are other provisions in the Act under
which it is necessary to have prior sanction of the Central Government or MRTP Commission before a Scheme
of Amalgamation or merger can be sanctioned. If this argument is to be accepted, then in the first place it has to
be held that the provisions of Section 23 were wholly unnecessary and otiose, because even otherwise sanction
or clearance of the Central Government was a condition prece-dent for effecting a scheme of amalgamation or
merger. Such a construction must be avoided. The enquiry must be as to what was the mischief which was
sought to be cured by the Legislature by the amendment. By deleting Section 23, the Legislature removed the
requirement of prior approval of the Central Government to a scheme of merger before the Court could
sanction it.
Section 27A and section 27B are the only sanctions in Chapter III of the Act which have been retained by the
Legislature. Section 27 deals with division of undertaking and enables the Commission in the circumstances
specified in that section, to pass an order for the division of any trade or undertaking or inter-connected
undertaking, into such number of under- takings as the circumstances of the case may justify. Section
27A empowers the Central Government to protect severance of inter-connection between undertakings. Section

27B lays down the manner in which any order passed under Section 27 or Section 27A shall be carried out; The
provisions as to restriction on the acquisition and transfer of shares by certain bodies corporate (Section
28 toSection 30G) have been entirely deleted. The intention of the Legislature is clear. 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 section or
division of the undertaking, act according to law.
We are unable to uphold the contention of Ms. Jaising that MRTP Commission erred in law in not passing an
order of injunction under Section 12A of the Act, restraining the implementation of the Scheme of
Amalgamation. We are of the view that it was not necessary to obtain any prior approval from the Central
Government or the MRTP Commission before the Scheme could be sanctioned by the Court. This requirement
has been specifically deleted from the statute.
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, Mr. Andhya. Ujina has argued that the concept of
applicability of monopolistic trade practice under Chapter TV or restrictive trade practice or Unfair trade
practice under Chapter V, necessitates that there must be a 'trade' as defined .under Section 2(a) and 'trade
practice' as defined Under Section 2(u). He has further contended that a company when it allots shares is not
trading shares. Further underSection 77 of the Companies Act, a company cannot buy its own shares.
Therefore, there can no question of a company trading in its own shares or unlawful trade practice at this stage.
This controversy has got another aspect which has been highlighted by Dr. Dhavan and Mr.. R.K. Jain. It has
been argued that a very large company is coming int.: existence which will have substantial share of the market.
A foreign company will have controlling interest in HLL after amalgamation. This is against public policy. In
my judgment, what has been expressly authorised by the statute cannot be struck down as being against 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
Exchange Regulation ActUnder Section 29 of the Foreign Exchange Regulation Act (as it stood originally), a perstui resident outside
India or a company (other than banking companies) which was not incorporated in India or in which the nonresident interest was more 40%, could not carry on business in India Or establish in India a branch office or
other place of business. Nor could such a person or company acquire the whole or any part of any undertaking
in India of any company carrying on any trade, commerce or industry or purchase the shares in India of any
such company. The object of Section, 29, inter alia was to ensure that a company (other than banking company)
in which the non-resident interest was more than 40% must reduce in to a level not exceeding 40% [ Needle
Industries (India) Ltd, and Others, v. Needle Industries Newey (India) Holdings Ltd. and others , AIR (1981) SC
1298). But, now this restriction of 40% has been removed by an amend-ment by the Act 29 of 1993. A company
in which non-resident interest is more than 40% can carry on business without having to obtain permission
from the Reserve Bank of India. The underlying idea of this liberalisation is clear. Non-resident persons were
being invited to inves in India and/or in Indian companies. If any non-resident invests in Indian company, it is
but natural that dividends payable by an Indian company will be enjoyed by the non-resident. All other rights
that a shareholder enjoys by virtue of the shareholding will be enjoyed by the non-resident. Merely because a

foreign shareholder acquires 51% shares in an Indian company it cannot be said that this is against public
interest or public policy.
In this connection it should also be noticed that Section 11 of Foreign Exchange Regulations Act, 1973 which
had empowered the Reserve Bank to put restrictions on transfer of any asset in India to a person resident
outside India or a person intending to become resident outside India, has now been repealed with effect from
8.1.1993 by the Amending Act 29 of 1993. Here again the intention of the legislature is quite clear. The entire
object is to allow the non-residents to do business in India and to deal with assets in India with greater
freedom.
In view of all these, it is difficult for us to uphold the contention that the Scheme of Amalgamation is against
public interest. Merely because 51% of the shares of HLL is being given to a foreign company, the Scheme
cannot be said to be against public interest. The Foreign Exchange Regulation Act has been amended
specifically to encourage foreign participation in business in India. The bar to haying more than 40% shares in
an Indian Company by a non-resident has been hefted. The Amending Act 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 a 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 does not
deteriorate into a sick company.
Nor do we think that 'public interest' which is to be taken into account as an element against approval of
amalgamation would include a mere future possibility of merger resulting in a situation where the interests of
the consumer might be adversely effected. If, however, in future the working of the Company turns out to be
against the interest of the con-sumers or the employees, suitable corrective steps may be taken by appropriate
authorities in accordance with law. As has been said in the case of Fertilizer Corporation Kamgar Union v.
Union of India, [1981] 2 SCR 52 at page 77 :"...........it is. not a part of the judicial process to examine
entrepreneurial activities to forret out flows. The Court is least equipped for such oversights. Nor, indeed, it is
the function of the judges in our constitutional scheme." Now merely because the scheme envisages allot-ment
of 51% equity shares to Unilever, the scheme cannot be held to be against public interest.
Next it was argued on behalf of the employees of TOMCO that the Scheme win adversely affect them This
argument is not understandable. The Scheme has fully safeguarded the interest of the employees by 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, is that
there is no job security of the workers, after the amalgamation of the two Companies. It has been argued that
there should have been a clause in the Scheme ensuring that no retrenchment will be effected after the
amalgamation of the two Companies. There was no assurance on behalf of the TOMCO that the workers will
never be retrenched. In fact, the performance of TOMCO over the last three years was alarming for the workers.
It cannot be said that after the amalgamation they will be in a worse position than they Were before the
amalgamation.
We do not find that the amalgamation has caused any prejudice to the workers of TOMCO. The stand of the
employees of HLL is equally incomprehensible. It has been stated that if the TOMCO employees con-tinue to
enjoy the terms and conditions of their service as before, then two classes of employees will come into
existence, Terms and conditions of HLL employees were much worse than that of TOMCO employees. If there

are two sets of terms and conditions under the same company, then a case of discrimination will arise against
the HLL employees.
We do not find any substance in this contention. The TOMCO employees will continue to remain on the same
terms and conditions as before. Because of this arrangement, it cannot be said that a prejudice has 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 under the new
management.
Fear has been expressed both by TOMCO employees as well as HLL employees that the results of the
amalgamation would necessitate stream-lining of the operations of the enlarged Company and the workers will
be prejudiced by it.
No one can envisage what will happen in the long run. But on this hypothetical question, the Scheme cannot be
rejected. As of now, it has not been shown how the workers are prejudiced by the Scheme.
Lastly, there was a vague allegation of mala fide, because of some trade arrangement between Unilever and Tata
Sons Limited. It appears that three properties belonging to Tata Sons Limited. were being used by TOMCO as
licensee with no enforceable rights. Occupation was purely permissive. TOMCO never considered these
properties or rights relating to these properties as their assets. They were never shown in the balance sheet of
the Company. Tata Sons could get back possession of these properties by revoking the licence. It was not
necessary for Tata Sons to obtain the help of HLL or Unilever for getting back the possession. Under the
Scheme, the properties are to be transferred at market rate, which has to be independently assessed. The
determination of the market price has been entrusted by the Court to a reputed valuer. There is no reason to
doubt their competence. No case of mala fide has been established.
An argument was also made that as a result of the amalgamation, a large share of the market will be captured
by the HLL. But there is nothing unlawful for illegal about this. The Court will decline to sanction a scheme of
merger, if any tax fraud or any other illegality is involved. But this is not the case here. A company may, 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 scheme, the Court cannot decline to sanction a scheme of amalgamation. It has to be borne in
mind that this proposal of amalgamation arose out of a sharp decline in the business of TOMCO. Dr. Dhavan
has argued that TOMCO is not yet a sick Company. That may be right, but TOMCO at this fate will become a
sick Company, unless something can be done to improve its performance. In the last two years, it has sold its
investments and other properties. If this proposal of amalgamation is not sanctioned, the consequence for
TOMCO may be very serious. The shareholders, the employees, the creditors will all suffer. The argument that
the Company has large assets is realty meaningless. Very many cotton mills and jute mills in India have become
sick and are on the verge of liquidation, even though they have large assets. The Scheme has been sanctioned
almost unanimously by the shareholders, debenture holders, secured creditors, unsecured creditors and
preference shareholders of both the Companies. There must exist very strong reasons for withholding sanction
to such a scheme. Withholding of sanction may turn out to be disastrous for 60,000 shareholders of TOMCO
and also a large number of its In view of the aforesaid, the Appeals are dismissed. The Special Leave Petitions
are also dismissed. There will be no order as to costs.
ORDER In view of the separate but concurring judgments, the appeals said petitions are dismissed. But the
parties are left to bear their own costs.