A minority squeeze-out is when the majority shareholders use a capital reduction to buy out the minority shareholders, usually against their will. The NCLT scrutinises these transactions closely, because they involve a conflict between the majority's right to restructure and the minority's right to fair treatment.
How the squeeze-out works
The company passes a special resolution to reduce its capital by extinguishing the minority shares. The minority shareholders are paid a price determined by a valuation. The reduction is then filed with the NCLT for approval. If the NCLT approves, the minority shares are cancelled and the minority shareholders receive the payment.
The NCLT's fairness test
The NCLT does not automatically approve a squeeze-out. It examines:
- Whether the valuation is fair and based on a recognised method
- Whether the minority shareholders were given a proper opportunity to object
- Whether the majority has acted in good faith
- Whether the reduction is in the interest of the company as a whole
The NCLT can reject the reduction, modify the price, or require further valuation.
The valuation challenge
The most common challenge is the valuation. The majority may use a valuation method that undervalues the shares. The minority may argue for a different method, such as discounted cash flow, net asset value or market price. The NCLT will usually require an independent valuer and may appoint its own valuer if the parties disagree.
The minority's rights
The minority shareholders have the right to object to the NCLT application. They can file their objections, participate in the hearing, and challenge the valuation. They can also challenge the NCLT order before the NCLAT and, ultimately, the Supreme Court.
The practical points
A squeeze-out is a high-risk transaction. The majority should obtain a robust valuation, give the minority a fair opportunity to be heard, and document the commercial rationale. The minority should obtain its own valuation and participate actively in the NCLT proceedings. The NCLT's fairness test is the main protection for the minority.
Call to Action: We advise companies and minority shareholders on squeeze-out transactions, valuation and NCLT proceedings. For a squeeze-out review, contact office@anujdesaiassociates.com, Ph No. 9619456656, Website https://anujdesaiassociates.com, LinkedIn linkedin.com/in/ca-anuj-desai-122547230.