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Minority vs Cadbury

Published on Sat, Jul 26,2014 | 14:41, Updated at Mon, Jul 28 at 22:13Source : CNBC-TV18 |   Watch Video :

It is a case that embodies all that is good and bad about India's de-listing regime.  11 years after it de-listed, Cadbury India is still struggling to repurchase all of its shares. It finally found some closure in the Bombay High Court this week - but this may be a fragile peace!

For 5 years, they've held on for a higher exit price. 2 groups of investors who own a total 1899 shares - that's a mere 0.0063% of Cadbury's equity. For 5 years they've fought in the Bombay High Court for a valuation that exceeds the Rs 1340 suggested by Cadbury appointed valuers. In 2009 the Bombay High appointed EY as independent valuer - and it valued Cadbury India at Rs 1743 a share. That too was not good enough on account of wrong method said the shareholders. So the court ordered a change in method to DCF and the second valuation report priced a Cadbury share at Rs 2014.50. But that too was not good enough and the matter dragged on it till this week when the Bombay High Court's Justice Gautam Patel  said 'there is no valid or tenable objection to the scheme' and accepted the valuation of Rs 2014.50 per share, ending this long drawn saga…for now!

Samant Group                                  Churiwala Group
499 shares                                          1400 shares

- 0.0063% shareholding


Cadbury: 97.58%            Minority: 2.42%

- Cadbury proposed (selective) Reduction of Share Capital
- Bansi Mehta & Co, SSPA & Co Valuation = Rs 1340/ share


Cadbury Valuation
- Bansi Mehta & Co, SSPA & Co = Rs 1340/ share

Independent Valuation
- E&Y 1st Report: Rs 1743/ share
- E&Y 2nd Report: Rs 2014.50/ share

Minority Valuation
- J C Desai: Rs 1979 + CONTROL PREMIUM


‘…the only conclusion to be drawn is that there is no valid or tenable objection to the scheme. Given that the originally propounded valuation now stands eclipsed by the Court-ordered valuation, it is this valuation that will have to be taken into account. The valuation of Rs.2,014.50/- per fully paid up equity share arrived at by the Court-appointed valuer E&Y in its second (supplementary) report dated 29th July 2011 is accepted’

Bombay High Court
Justice Gautam Patel

In arriving at that conclusion Justice Patel relied on judicial precedent to say a court may decline sanction to a scheme valuation if the valuation is unfair or unreasonable, it is discriminatory or that it has not been approved by a sufficient majority. Since it found no such fault with the Cadbury scheme, it sanctioned the scheme and the valuation by EY; thereby bring to a close this 5 year drama. But is this decision fair to minority shareholders? Equally I could ask is it fair to companies? To answer those questions I have with me Anand Desai of DSK and JN Gupta of SES.


‘…before a Court can decline sanction to a scheme on account of a valuation, an objector to the scheme must first show that the valuation is ex-facie unreasonable…alternatively, that it is discriminatory; or that it has not been approved by a sufficient majority or, at a minimum, that a substantial number or percentage voted against it at an extraordinary general meeting. None of these are demonstrated in the present case’

Bombay High Court
Justice Gautam Patel

Doshi: On the legal precedents this case sets in arriving at this decision Justice Patel has relied on well established jurisprudence whether it is the Mafatlal case or the Sandvik case and thereby said that it is not the court's job to interfere in what has already been approved by majority shareholders, what seems to be fair and it is definitely not our job to say what valuation is right or wrong and hence he has arrived at this decision, what do you make of that?

Bombay HC: Justice Patel
Relies on SC decision in Miheer Mafatlal case & Bombay HC Division Bench decision in Sandvik Asia case

SC: Mafatlal Case
Court should consider whether scheme is fair, just & reasonable
But it should not sit in judgment over informed view & commercial wisdom of the concerned parties

Desai: What the judge was looking at was the fairness of the valuation. EY was appointed as an independent valuer on the condition that the report would be final. The first report was on the comparable method and that was challenged on the grounds that the comparison was not an appropriate comparison from a multiple point of view. The judge went into a DCF methodology at that time. EY made a second report. So the first report was Rs 1,700 or something, the second one is Rs 2,014.50 as you rightly pointed out and the judge felt the second one is appropriate one and the proceedings had to come to an end. You cannot have such proceedings going on indefinitely either.

So that is an independent report. The judge has asked for it, he got it, he has abided by it and passed an order. So in a sense the general body meeting that was held way back in 2009 it sanctioned the scheme at Rs 1,340 to be precise based on two valuations of that time. Obviously they were not considered to be appropriate by the judge. So the minority has got much more based on the independent valuation the second time around.

Doshi: Would you say this is a victory for the minority shareholders?

Gupta: It is very difficult to say a victory or failure. In one way it proves one point that while the law is there, as you have rightly said that the two precedents, we have not touched and we said it is okay but the third angle has come where a possibility has arisen that the valuation report which was thought to be good or correct has proven not to be acceptable to the judicial system itself and that opens a can of worms for future cases. Also because, today what is happening, all the valuation reports which are given for mergers and acquisitions have been taken and if you see all the things two valuers give a report, the fairness opinion was given by a merchant banker and audit committee and all three of them do the same thing in one day or maybe four hours time as if they have been given an option only to give a tick box.

So in future probably what will be happen is that people would be challenging the valuation report although the judge has tried to plug this possibility by saying that look we are not the expert, we cannot tell you what is the right valuation, but this opens a can of worms for future.

Justice Patel
‘Valuation is not an exact science. Far from it. It is always and only an estimation, a best-judgment assessment’

Justice Patel
‘It is not possible for a Court to go into the exercise of carrying out a valuation itself. That, as the Supreme Court said in Miheer H. Mafatlal, is not the Court’s remit. Courts do not have the expertise, the time or the means to do this’

Doshi: It also bring into the focus that the valuation of Rs 1,340 that was put on the table by Cadbury by the independent valuers of that time when the scheme was first mooted and which was found not to be good enough by a small group of minority shareholders. I say small because in that meeting of shareholders the judge has pointed out that 7,51,120 non-promoter shares were represented at that meeting and only 12,784 shares voted against that scheme. Even the majority of the minority was okay with that valuation of Rs 1,340 on the basis of which this selective reduction of capital scheme was mooted and yet when you see the final valuation that has been granted to all of these shareholders - all 7 lakh etc- It is going to be Rs 2,014.50. What is the message that this sends out that if you agitate you might just end up with a better valuation even if the judge is saying in his 80 page order that valuation is an imperfect art and it is not the court’s business to decide whether one valuation is good enough or not. But he has sat in judgment. The court the Bombay High Court and subsequent judges have sat in judgment and said okay you are not happy with Rs 1,340; fine we will try and get you another valuation- that is sitting and judgment even while you are saying while we are not going to sit in judgment.


Cadbury proposed (selective) Reduction of Share Capital
- 751129 non-promoter shares represented at the meeting
- 12784 non-promoter shares voted against the proposal

Desai: In a sense that is true, because if the majority, as you rightly said in the meeting, has accepted a certain value and the valuation method is not totally wrong or there is no fraud etc as the judge has observed…(Interrupted byAnchor)
Doshi: And has been laid out in Mafatlal and all of that.

Desai: They should not then be a second chance. In this case, they were given not only a second chance but also a third chance and the price went up from Rs 1,340-Rs 1,743-Rs 2,000.

Doshi: Yes.

Desai: The fact that the majority shareholders voted for it at the meeting at Rs 1,340 are also benefiting can put things rest in one sense. The other reality is that, what was the basis the valuation that the judge found was wrong, which the shareholders had approved. Earlier buyback had also taken place on base of certain valuations- were those also flawed is the question that somebody could ask.


2002: Open Offers  @ Rs 500/ share
2003: Cadbury de-listed
2002-2003: Exit Offer @ Rs 500/ share
2006: Buyback 1 @ Rs 750/ share
2007: Buyback 2 @ Rs 815/ share
2009: Buyback 3 @ Rs 1030/ share

Doshi: So you are saying if the valuation method that was used to arrive at Rs 1,340 was not good enough and that was the basis of the agitation of this minority group and that method was then subsequently revised when EY did the first report on CCM and the second report which is CCM and DCF, then the same valuation methods may have been used for the buybacks in the open offers even prior to this scheme of reduction and somebody could raise the question were they all good enough, except that they go back, so far back in time that maybe nobody is going to waste their time.

Desai: Last one was in 2009.

Doshi: Yes 2009 was the last buyback - 3 buybacks took place and the last buyback was in 2009.

Desai: Which was just before the scheme got sanctioned by the shareholders.      

Doshi: So you are saying this could be grounds for somebody who participated in the buyback to say well who knew if the buyback valuation was flawed or not.

Desai: Could be.

Gupta: As I told you, it opens a can of worms. There are two issues - one is you are saying that the majority had approved, now you have to see in India most of the shareholders have no idea of what is the right valuation, who has valued and we are talking about the period where shareholders were not very active. Today with the shareholders read actively. Probably this case is going to set a future guidance that people will not be voting like this. Secondly valuation as I have always maintained is a farce.

Doshi: My point is not to get into a long debate about valuation. We all agree it is an imperfect art or science or whatever you want to call it; the judge says so himself. Many other judges of this court and other courts have said so when it comes to schemes and yet this court took a decision to go with one valuation over another which was an enhanced valuation over the original valuation which in fact got the approval of the majority of the minority - what precedent does that set is all I am interested in because that will determine how future such actions take place.

Desai: Having independent valuer is not unknown in the legal system. So if a challenge is made and the judge thinks there is merit to the challenge in a court, what he can do is to appoint an independent valuer because the court has to give finality, it is the duty cast upon the court to sanction a scheme. This court's duties therefore are limited in the sense as the court has written in the judgments earlier of Mafatlal and they cannot set an appeal in that sense. They can't review the whole; that is not their job. Like I said therefore if they feel an independent valtuaion makes sense, they could take that- accept it or reject it.

Doshi: But rejecting a valuation from what I understand, and correct me, based on jurisprudence you reject a valuation if you think it is unfair or the process is being vitiated in some fashion. By choosing Rs 2,014.50 over Rs 1,340 are you saying that the earlier valuation was not good enough?

Desai: It would seem so. Had it not been so, the judge would have accepted it.

Gupta: That is the million dollar question. The question is very clear that is this judgment saying that the valuation of Rs 1,340 was wrong or this is the right valuation or because it is higher, we are accepting it.

Doshi: It is not clear if these two or three groups of minority shareholders- the Samant group, the Churiwala group and the Gidwani group- are likely to appeal this or not. There seems to be indications that they may choose to do so on principle. They represent less than 2,000 shares of Cadbury. If they were to appeal it do they have good grounds?

Desai: Difficult to answer but yes, in my opinion no.

Gupta: No.

Doshi: Why is that?

Desai: The judge has given good reasons for having done what he has done.

Doshi: But if Rs 2,014.50 is better than Rs 1,340, then something could be better than Rs 2,014.50. So who draws a line, where?

Gupta: The judge has very clearly drawn a line that look, you such a small minority cannot keep on blackmailing.

Doshi: If two other groups of minority shareholders within this seven lakh shares say these three groups agitated, they managed to get the price to move from Rs 1,340 to Rs 2,014.50, if we agitate further and go to a division bench do you think that they could stand a chance?

Desai: I don't think they have any right now.

Doshi: You are saying very slim grounds for appeal?

Desai: In this matter, yes, in my opinion.

Doshi: And simply because what they have run out of luck now?

Desai: Not out of luck. The judge has done what he could do.

Doshi: They could push it to two more valuations but any more here onwards will see one reasonable. I am just trying to establish what this means.

Desai: Even two was a push.

Doshi: That is the point that I was making. Final question, would you say this is a victory for minority shareholders because they have managed to get the price to go from Rs 1,340 to Rs 2,014.50 or would you say that given they didn't really get the price they wanted which was Rs 2,500 and more than that it is a victory for Cadbury?

Desai: Well, Rs 2,000 is better than Rs 1,300.

Doshi: It is, but is less than Rs 2,500 plus control premium which is what the minority wanted?

Desai: But still, by agitating they got something more.

Gupta: It is a victory for both, Cadbury saved Rs 500, they got Rs 600.50 more.


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