John Beaumont, C.J.
1. This is an appeal from a decision of Mr. Justice Chagla making an order on a petition under Section 153B of the Indian Companies Act, 1913, directing that the purchasing company should not be at liberty to acquire the shares of the minority shareholders in the transferor company. That section is a new section, and is in these terms :
153B(1). Where a scheme or contract involving the transfer of shares or any class of shares in a company (in this section referred to as ' the transferor company') to another company, whether a company within the meaning of this Act or not (in this section referred to as the 'transferee company'), has within four months after the making of the offer in that behalf by the transferee company been approved by the holders of not less than three-fourths in value of the shares affected, the transferee company may, at any time within two months after the expiration of the said four months, give notice in the prescribed manner to any dissenting share-holder that it desires to acquire his shares, and where such a notice is given the transferee company shall, unless on an application made by the dissenting share-holder within one month from the date on which the notice was given the Court thinks fit to order otherwise, be entitled and bound to acquire those shares on the terms on which under the scheme or contract the shares of the approving share-holders are to be transferred to the transferee company :
What the section does is to provide that where there is a contract or scheme for the acquisition by one company of shares in another company, which has been accepted by the statutory majority of shareholders in the latter company, in India three-fourths and in England, under a corresponding section, nine-tenths, the transferee company can acquire compulsorily the shares of the minority, unless the Court orders otherwise. But it is to be noticed that that is all the section does. It does not confer any right on the Court to consider the merits of the contract so far as concerns the majority of share-holders who have accepted it. In their case the matter is complete; the contract has gone through. The only question is whether the minority share-holders are to be left in possession of their shares, or whether they can be compelled to sell their shares on the same terms as those which the other shareholders have accepted. The section seems to be based on the view that prima facie the minority are acting unreasonably in refusing to come into line with the majority, and ought to be forced into line, unless the Court orders otherwise. The Court, as it seems to me, must consider whether the attitude of the minority was reasonable.
2. The only reported case on this section is one which came before Lord Maugham (then Mr. Justice Maugham) in England, Re Hoare and Company Limited (1933) 150 L.T. 374. The learned Judge in that case pointed out that the Legislature had not seen fit to indicate in any way the grounds on which the Court ought to order otherwise, and that prima facie the Court ought to assume that the majority of shareholders who have accepted the offer know their own business, and that the Court ought not lightly to differ from the view accepted by the majority of shareholders, so that the reasons for inducing the Court to order otherwise are reasons which must be supplied by the dissentients who take the step of making an application to the Court, and that the onus is on them of giving a reason why their shares should not be acquired by the transferee company. Mr. Justice Chagla in the Court below accepted that principle, and held that the burden was upon the dissentients to show why the Court should order otherwise. But I think the criticism which can be made upon his judgment is that he held that that burden was discharged too lightly. I will deal with that point presently.
3. For myself I accept the view that the burden is upon the dissentients to adduce reasons for thinking that the majority of shareholders were wrong. But if one accepts that principle, one must give some intelligent meaning to it. If the Court ought in the first instance to assume that the majority of shareholders understand their own business, and were right in accepting the offer, it follows that the Court should not take a different view merely because of criticisms advanced by the dissentients on the terms of the offer, and based on matters which were before the majority. As the Legislature has not done so, the Court ought not to limit the class of cases in which the Court should take action under Section 153B, but one is bound to consider in what type of case the Court would be justified in not, accepting the opinion of the majority of shareholders. I should say that instances of such cases would be where there has been misrepresentation which may have influenced the view of the majority of shareholders, or where there is the possibility of some unfair dealing for example, the directors of the transferor company having some ulterior motive in advising the shareholders to accept the offer; or the majority of shareholders having some interest conflicting with that of the minority, for instance, being interested in the transferee company, and, therefore, willing to accept a less value for their shares than they would have accepted if they had had no such interest. In cases of that sort the Court would certainly look critically at the opinion of the majority of shareholders; but nothing of that kind is suggested in this case. Another ground on which the Court might 'order otherwise', and that is the ground relied upon by the petitioners in this case, would be if it were proved that the acceptance of the offer was based on a wrong principle of valuing the company's assets, and that as a result of the adoption of that wrong principle the offer for the shares was substantially less than it ought to have been. But if one starts with the presumption that the majority of shareholders were right, it is no good, as it seems to me, allowing counsel for the dissenting shareholders to indulge in detailed criticisms of the valuation on which the offer was based or accepted, where all the facts on which those criticisms are founded were before the company when the majority of shareholders accepted the offer. We felt bound, therefore, to curtail somewhat Mr. Seervai's eloquent and able criticism of the experts' report.
4. The company in this case whose shares are in question is the Bombay Telephone Co., Ltd., which was carrying on the business of establishing and maintaining telephones and telephone exchanges in the Cities of Bombay, Karachi and Ahmedabad under licenses held from the Government of India under the Indian Telegraph Act, under which licenses the Government of India had the right to acquire the assets in the year 1943. The Government of India had given notice to exercise their option and on such exercises the assets which would be acquired were all lands, buildings, works, materials and plant of the licensees suitable to and used by the licensees for the purpose of the undertaking, and those assets would be acquired at the then value. It appears that in 1939 the Bombay Telephone Co. and also Telephone companies operating in Calcutta and Madras, with which we are not concerned were anxious to get the Government of India to take over the assets before the correct date in 1943, and a meeting of interested parties was held at Simla on August 26, 1939, at which certain principles were agreed to on which the assets of the Telephone companies were to be valued. Thereafter the Government of India appointed two valuers to value the assets of the Telephone companies, and those valuers made a report on April 15, 1940, to the Government of India. The original proposal, as I mentioned, was to acquire the assets of the Telephone companies, but after the report had been made to the Government of India, a suggestion was made that the Government of India, acting through a company called the Government Telephones Board, Ltd., (which is the transferee company) should acquire the shares of the Bombay Telephone Company, and with that object a reconciliation statement was prepared on April 1, 1941, adjusting the figures in the report of the experts down to April, 1941, and making them applicable to a purchase of shares instead of assets.
5. On March 1, 1941, an offer was made by the Government Telephones Board, Ltd., to acquire the shares of the Bombay Telephone Co. at the figure of Rs. 89-15-0 per share. A copy of that offer was sent to the shareholders by the Managing Director of the company with a covering letter on April 16, and subsequently a meeting of the shareholders was held at which a statement was made by the Managing Director which had previously been circulated. At that meeting, it was open to the shareholders to ask questions as to the manner in which the figure of Rs. 89-15-0 had been arrived at. Apparently the present petitioners did not ask any question. The offer was subsequently accepted by over ninety per cent of the shareholders in the Bombay Telephone Company. On October 10, 1941, notices were given under Section 153B by the Government Telephones Board, Ltd., to acquire the dissentients' shares at Rs. 89-15-0 per share, and it is not questioned that the terms of Section 153B have been complied with. On November 8, 1941, this petition was presented by the dissenting shareholders asking the Court to order otherwise. The petition went further than that, because it asked that the Government Telephones Board, Ltd., should be directed to pay to the petitioners Rs. 134 per share or such other sum as the Court thought reasonable. In my opinion, the powers of the Court under Section 153B are limited in the way which I have mentioned. It can direct that the transferee company is not to exercise the powers of compulsory purchase given by the section over the shares of the dissenting members; but, in my opinion, the Court has no power to direct the transferee company to pay the dissenting members something which they have not offered to pay. That would be making a contract for the parties which they have not made for themselves, and the section does not authorise that. Mr. Justice Chagla held that the shares of the petitioners ought not to be acquired on the terms accepted by the majority of shareholders, but that he could not direct the transferee company to acquire the shares of dissenting shareholders on any other terms.
6. After the petition first came before the Court, the learned Judge made an order for discovery against the Government Telephones Board, Ltd., directing the Board to give inspection of the valuation report made by the experts to the Government of India on which the offer of such Government was made. I must confess I think it very difficult to justify that order. The report of the experts was made to the Government of India who are not parties to this petition. The document was a confidential document. Even if it had been made to the purchasing company, it is a novelty to me that in cases where the Court is asked to approve a contract the Court can require the purchaser to disclose the basis on which his offer was made. The question is not whether the basis on which the offer was made was a correct basis, but whether the offer was one which ought to have been accepted. But the learned Judge having directed the disclosure of these documents, the dissenting shareholders through their advisers took every advantage of the opportunity given to them, and at the hearing they abandoned all the grounds on which they had relied in the petition, except one on which the learned Judge held against them. But they took a variety of other grounds which had been suggested to them by a perusal of this confidential report. The abandonment of most of the grounds on which the petition was based does not inspire confidence in the reasonableness of the petitioners in standing out against the majority.
7. Mr. Justice Chagla considered that what he had got to do was to consider whether the report of the experts was based on correct principles. Technically that was not the point at all. The report on which the transferee company acted in making the offer was irrelevant. What was really relevant were the reasons, which induced the majority of shareholders to accept the offer, and on which they did accept the offer. But that point is not perhaps more than of technical interest, because the Bombay Telephone Co., Ltd., although it had not actually seen the report of the experts, were apparently informed of the figure at which the experts had valued the assets as in March 1940. The Telephone Company had itself by its own officers made a valuation of its assets at the end of 1939, which came to rupees two lacs less than the value accepted by the Government of India, and accordingly the company, not unnaturally, took the Government's valuation, and they thereupon prepared their own reconciliation statement so as to adjust the difference in the Government figures of March, 1940, when the valuation was made, and March, 1941, when the offer was made, and also so as to adopt the figures to the purchase of shares instead of assets. On a purchase of assets certain assets would be excluded, because not used for or suitable to the telephone undertaking, but if the shares were to be purchased, it would be necessary to include the value of all the assets. In the result the figures of the Telephone Company and of the Government of India practically agreed.
8. Mr. Justice Chagla came to the conclusion that the report of the experts on which the offer was based, and some of the materials on which the valuers had acted and the company had based their acceptance of the offer, were wrong ; in particular he considered that the value of the assets in March 1941, when the offer was made, ought not to have been assumed to be the same as in March, 1940, when the assets were valued; and, it is true that the figures were assumed to be the same, though, of course, there was an adjustment in the matter of depreciation and so on between 1940 and 1941. The learned Judge considered that that error vitiated the offer. He thought also that there was an exclusion from the valuation of the value of leasehold lands apart from buildings, and he thought that there were other errors in the basis of the offer. I do not doubt that any expert could point out a number of possible errors in any valuation, on whatever principle based, of an undertaking like that of the Bombay Telephone Co., Ltd., but, in my opinion, it is quite irrelevant to point out that the valuation on which the purchasing company's offer was made was wrong, unless the petitioners go on to show that as a result of the alleged errors the offer was seriously below the figure at which it ought to have been accepted, and there is no evidence whatever of that. There is no evidence that in point of fact the assets had risen in value between March, 1940, and March, 1941, nor that the leasehold lands, which were held at substantial rents, had any value attached to them. Whether, if there had been evidence of that nature, it would have affected our decision, it is not necessary to consider.
9. The learned Judge summed up at the end of his judgment the position in the following words :
The petitioners have clearly established that the Board has adopted a wrong basis in valuing assets by taking the costs of reproduction of March, 1940, when it should have taken the costs of March, 1941. Even with regard to the costs of reproduction of March, 1940, it has acted on a wrong basis with regard to land and properties and underground cables. Further it has not valued certain obsolete instruments at all although they have become its property. These facts are offset by the advantages that accrued to the shareholders by the offer made by the Board. Firstly, they are receiving net profits for the years 1941 and 1942 without any deduction for discount; secondly, they are being saved costs of inventory, valuation and liquidation ; and, thirdly, they are obtaining certain advantages by reason of the fact that they are getting the benefit of the provisions of Section 25(4) of the Indian Income-tax Act, 1922, and of the rates of income-tax and super-tax in force in August, 1939. I am not in a position to judge whether the advantages are greater than the prejudice caused to the shareholders by the wrong basis adopted by the Board. It is quite possible that the Board might have been able to satisfy me that the difference, if a correct basis had been adopted, would have been negligible or not substantial.
With all respect to the learned Judge, I think on that conclusion he ought to have dismissed the petition, because he had already held that the burden was upon the petitioners to show why the offer accepted by the majority should not be forced upon the minority. That burden was not discharged merely by showing that the offer was based on an erroneous valuation of assets. An offer based on no valuation at all, based for instance on stock exchange dealings in the shares, might have been a very good offer. In my opinion, the petitioners have failed to discharge the burden which was upon them.
10. There are, of course, considerations which may have influenced the share-holders other than those considered by the learned Judge. It is possible that some of the shareholders may have taken into consideration the state of things existing in Bombay in 1941 owing to the war situation, of the existence of which we can take judicial notice. At that time the German armies, which had so far carried all before them in Europe, were, in the opinion of many persons, contemplating an invasion of what is called the Middle East, whether by one route or another, and might very probably reach India. There was also a possibility of Japanese invasion. It must have been present to the minds of some shareholders at any rate that by 1943 it was possible that Western India would be the meeting ground of the German and Japanese armies, in which case the shares of the Bombay Telephone Company would be worth very little. How far such considerations influenced the shareholders it is impossible to say, but we cannot ignore matters of that sort. It must be borne in mind too that all the facts on which the report of the experts was based were before the company ; indeed the materials on which the experts proceeded were provided by the company. The experts themselves noticed that they had difficulty in arriving at the true value of the assets, because there was no inventory, and they had to proceed on original costs, making additions for improvements, and subtraction for depreciation. It is quite possible that the valuation may be in certain respects open to criticism, but all the grounds of criticism were before the shareholders, when the majority accepted the offer, and I can see no reason why we should conclude that the majority was wrong.
11. On those grounds the appeal must be allowed, and the petition dismissed. Cross-objections dismissed.
12. The question for consideration in this appeal relates to the construction of Section 153B of the Indian Companies Act which is recited in extenso in the judgment of the learned Chief Justice. The terms of that section, in my opinion, clearly show that unless the dissenting shareholders obtained an order preventing the transferee company from getting their shares, as a matter of right, the transferee company would be entitled and bound to receive the shares at the price which the company had offered to the requisite majority of the shareholders. The wording of the section clearly shows that if neither side led evidence after a petition was filed, the petition must fail and the petitioners will not get any relief. It is therefore clear that the burden of proof for obtaining the order is wholly on the dissenting shareholders who make the application. That view is accepted by Chagla J., and is supported by the judgment of Maugham J. in Re Hoare and Company Limited (1933) 150 L.T. 374. The Legislature has not chosen to define the grounds on which the Court should give relief to the petitioners, viz. the dissenting shareholders, and I do not propose to do so myself. It however appears to be commonsense to start with the position that if the prescribed majority have accepted the offer of the purchasing company it should be treated as a reasonable and fair offer. That view also is fully supported by the judgment of Maugham J. in Re Hoare & Co, Ltd. Therefore starting the discussion of the matter on those lines, the question is whether the petitioners have established that the offer made by the purchasing company and accepted by the requisite majority was not a fair and reasonable one so as to justify the Court in making an order in their favour. I must point out that in this case there is no grievance that there was misrepresentation to any individual shareholder. The argument is in respect of all shareholders generally. I can visualise cases where individual dissenting shareholders may be able to succeed in obtaining an order against their individual holding being acquired. Apart from general grounds of misrepresentations, or majority of shareholders being interested in the purchasing company, or the directors being themselves interested in the new company, or getting some advantage for themselves apart from their character as shareholders, there may be cases where individual dissenting shareholders having obtained information establish that the offer was not fair. There may also be cases where on facts being established by evidence led by the petitioners the Court comes to the conclusion that certain assets were grossly undervalued or that certain assets, proved by evidence to be valuable, were omitted to be taken into consideration altogether and the result was that the offer made by the purchasing company was at a gross undervalue. The Court's jurisdiction to intervene in such cases is obvious on the wording of the section. I do not think it is only limited to cases of misrepresentation and fraud.
13. In the petition the petitioners set up various grounds on which, according to them, they should obtain the order contemplated by Section 153B. It is not disputed that when the matter proceeded seriously before Chagla J., except the valuation in respect of the magneto plant, all other grounds put forward in the petition were abandoned or not pressed. This is material in view of what their Lordships of the Privy Council have stated in Lala Hem Chand v. Lala Peary Lal (1942) L.R. 69 IndAp 137. Their Lordships there observed that it is an irregular procedure to allow parties to adduce evidence on points not raised in the pleadings or issues without amending the pleadings and raising the necessary issues. The importance of those observations will be apparent when one proceeds to deal with the points urged in the arguments before us and which were advanced before Chagla J. also. In this case no ground of fraud or misrepresentation is urged. After obtaining an order for discovery from Chagla J. the petitioners came to know of the different valuation reports made by the purchasing company and the Bombay Telephone Co. The petitioners had not made any inquiries before filing the petition in respect of the valuation reports or the facts on which the Chairman of the company strongly recommended the shareholders to accept the offer. If that had been done, what is now urged by the petitioners may have been accepted or rejected by the other shareholders, who, as matters stand, have accepted the offer and whose shares have been taken over by the purchasing company. In the trial Court the reports submitted to the Government by the purchasing company's experts were strongly criticised. In my opinion that is a wrong method of approach altogether. The offer made by the purchasing company was certainly made on the basis of what their experts reported to them. The fairness or otherwise of the offer has to be judged by what value is put by the sellers on their own concern and assets. The Telephone Company's valuation is a part of the record. Substantially there is no difference in the result of the two valuation reports. In fact, the figures show that the Government valuation was higher by about two lacs of rupees than the valuation made by the Telephone Company. Having obtained inspection of these documents the petitioners urged that on several new grounds there was under-valuation and pleaded that the Court should make an order in their favour. None of those grounds was in the original petition, except the ground in respect of the valuation of the magneto plant. The petition was not amended with the result that when the matter came before Chagla J. for final disposal about four months after the documents were disclosed the appellants were not informed of the grounds on which it was intended to be contended that the offer made to the shareholders was not fair and reasonable. No particulars were furnished and it was not indicated before the trial began that grounds, other than those mentioned in the petition, were going to be relied upon. I believe that at the commencement of the trial, while opening the case, the petitioners' counsel must have intimated the lines on which he proposed to attack the reasonableness or fairness of the offer. That however as observed by their Lordships of the Privy Council is not a proper thing to do. In proceeding with the petition the petitioners exhibited certain documents which were disclosed and of which they had taken inspection. Barring that no evidence was led at all on either side. The question before the Court, as I have stated in the beginning, is whether the dissenting shareholders are entitled to obtain from the Court an order preventing the purchasing company from obtaining their shares, which can only be made on the ground that the offer was not fair and reasonable.
14. As regards the valuations made by the purchasing company and the Telephone Company it was agreed that it was not possible to make an inventory and value the assets on those lines. It was considered reasonable to take the books of the company and ascertain the value of the assets from the books. It appears also that there were meetings between the representatives of the company and the purchasing company to fix the lines on which valuations should be made. In the petition it is not suggested that there was anything wrong with the agreed lines on which the valuation proceeded. In the course of argument before the lower Court or here it was not contended that in reaching those agreements there was any improper motive or conduct on the part of the Telephone Company or the purchasing company. The agreed lines must therefore be considered fair and reasonable to commence the valuation. It is only in respect of the valuation made on those agreed lines that the discussion should be limited. In the course of his argument Mr. Seervai has not challenged the agreed lines of valuation.
15. The principal grounds urged are, firstly, that the valuation should be as of the date on which the shares were to be taken up. It was contended that the valuation reports were of March, 1940, and as the offer was made in April, 1941, the offer was unfair. Two defects are visible in this argument. In the first place the valuation reports are, as stated therein, based on what was found to be pre-war values and to that were added different percentages on the footing of post-war values. The Chairman's speech at the meeting clearly indicated that the offer was based on what was considered to be fair for the company, Government, Directors, the Oriental Telephone and Electric Co. Ltd., (who hold a large lot of shares) and the Bombay Telephone Co. as nearly as possible as if the Government exercised their option to purchase it in 1943. If the factor of war was not taken into consideration, I do not think it could have been seriously contended that a valuation made in 1940 after an elaborate investigation would be an unfair basis to proceed upon in 1941. The reports show that post-war values were adjusted and taken into consideration. Therefore the fact of rise in values owing to war was noticed and incorporated in the reports. It must always be a matter of conjecture in 1940-41 what would be the values in 1943. The war may continue beyond 1943 and the values may go up or down; the war may come to an end in 1941 and the values in 1943 may again go up or down as compared with the valuation made and on which the parties were proceeding to adjust their rights. Therefore, in my opinion, it is improper to contend that 'the then value' fixed on the face of it is such that the Court should consider that the petitioners had established one principal factor in their favour. If the petitioners wanted to contend that the valuation in 1941 would have been different, there was nothing more easy for them than to lead evidence and show it. In, that case there might have been a rejoinder on the part of the company that in respect of certain other items the prices in 1941 were lower. As I have pointed out this line of inquiry is not likely to result in anything definite or tangible on the evidence on record.
16. The petitioners' contention, which appears to have appealed to the learned trial Judge, was that once they established that a wrong basis was accepted for valuation or that an item was omitted, they had discharged the burden of proof. In my opinion, that is not correct. The petitioners have started to prove that the offer made was not fair and reasonable. That conclusion could be arrived at, not merely by proving the adoption of a wrong basis in respect of a particular item, but by a further proof that by adopting that wrong basis in respect of that particular item the valuation was materially low so as to affect the reasonableness of the offer. In valuing concerns of this type, where the assets are admittedly worth over two crores of rupees, a difference in value of a few thousands or even a lac or two on one item can hardly justify the Court in interfering, because another expert might urge that on another item there was an over-valuation. I am not concerned here with the question of shifting of the burden of proof in matters of this kind when petitioners have proved that certain items in fact were undervalued, because in this case I do not find that the petitioners have established by evidence that in respect of any particular item there was gross undervaluation. Unless that is established, I do not see how the purchasing company can be called upon to enter on their defence. The same observations apply in respect of the argument urged by the petitioners in respect of the valuation of underground cables. It was argued that because Mr. Sur's note at the foot of the report stated that there was a rise of sixty to eighty per cent the valuation should be on the footing of an eighty per cent. rise. I may point out again that this is only one note on one valuation. There are other valuers who have made their report and who have adopted a sixty per cent increase in the reconciliation statements, having regard to this individual note of Mr. Sur. I am unable to accept the contention that unless an eighty per cent increase was included in the price there was a gross undervaluation and the petitioners were entitled to an order. It was strongly contended that in respect of the lands and buildings there was a wrong method of valuation and the leasehold interest of the telephone company in the telephone exchange building was completely overlooked, I may point out again that the difficulty of the petitioners is the same here as in the other case. They have not shown that by adopting what they contend to be a correct basis a different value would have been reached. There are no materials on record to show what was the value of the leasehold interest in the land of the telephone exchange building. There is no material even to show the area covered by the same. As I have pointed out, if there was some small amount omitted in valuing the assets, it is not proper for the Court on that ground alone to hold that the offer was unfair and unreasonable.
17. This criticism of the reports has to be borne in mind along with what the purchasing company had paid. It is clear that the purchasing company paid in advance two and a half years' profits which are shown to be about Rs. 36,00,000. If the concern was being acquired as in 1943, the shareholders would get the profits of these two and a half years, but against that will have to be set off depreciation in the value of the assets, liability of the company to increased rates of taxation, and the prospect of more capital being called in. It should be noticed that at the date of this discussion there were already outstanding debentures of Rs. 75,00,000. All these factors must have been considered by the shareholders. In my opinion no ground has been established to conclude that the offer was not fair or reasonable so as to justify the Court's interference in favour of the petitioners. That being the test as the result of a reading of Section 153B, the petition must fail. The learned Judge, as stated towards the close of his judgment, himself felt difficulty in coming to a definite conclusion and has summarised the various grounds which were of advantage to the shareholders against what he thought were the disadvantages. Even after a sympathetic consideration of the contentions of the petitioners the learned Judge could not come to a conclusion that the balance was definitely in favour of the petitioners. Unless such a conclusion was clearly and unequivocally reached, I do not think the Court's interference would be justified. The result is that the petition fails and the appeal must be allowed.
18. With regard to costs, we see no reason, generally speaking, why in a petition under Section 153B costs should not follow the event in the normal course. But we take into consideration the fact that this is the first case under the section, and that in the only reported case in Re Hoare and Company, Limited (supra) petitioners' costs were allowed. In this case the petitioners undoubtedly asked more than they could possibly have obtained on a petition under Section 153B, and they made the Telephone Company parties and asked for an order of discovery against them. Normally I think the transferor company, that is to say the company the shares of which are in question, has no interest whatever in a matter with which the Court has to deal under Section 153B. But having regard to the fact that this was the first case and the petitioners did succeed in persuading Mr. Justice Chagla that they were right, we make no order as to costs throughout. But this must not be regarded as the normal order in cases under Section 153B.