KARACHI, March 10: It is not necessary to make out a case for a company’s winding up in order to invoke the high court’s jurisdiction to order remedial measures to protect its minority shareholders from the oppression of its majority shareholders, the Sindh High Court company bench has held in a recent judgment.
The ruling came on a petition moved by Associated Biscuits International Limited (ABIL), which has 40 per cent shares in English Biscuits Manufacturers (Pvt) Limited (EBM). The EBM has 51 per cent shares in its subsidiary, Coronet Foods (Pvt) Limited (CFL). All but one of the seven EBM directors belong to two families and among themselves they also hold 49 per cent of the CFL shares. In fact, the EBM and the CFL have the same managing director and director.
The ABIL, the minority shareholder in the EBM, alleged that neither had it any representation on the EBM board of directors nor any managerial or executive influence on the company’s affairs since 1993. The EBM board of directors decided in August 1999 to acquire the remaining 49 per cent of the CFL “shares to achieve the objective of creating manufacturing and marketing synergies through horizontal integration of the two companies.” The acquisition of shares was to be funded through an increase in the paid-up capital of the EBM.
The ABIL agreed to the proposal in principle inasmuch as it would put an end to the conflict of interest arising from common directorships and shareholding of the two private companies operating in the same field. The only condition it imposed was that the valuation of the CFL shares to be acquired by the EBM should be made on a transparent basis. The EBM, however, proceeded to buy the shares at double the price (Rs20 for each 10-rupee share) as resolved by it.
A bitter controversy involving litigation ensued on the question of valuation of shares and other matters until the ABIL came up with a petition under section 290 of the Companies Ordinance alleging that its EBM shareholding had effectively been reduced from 40 to 13 per cent due to its failure to buy the CFL shares at 100 per cent premium. The shares falling to its lot had been bought by the EBM majority shareholders and directors at the inflated price to further enrich themselves.
The valuation, it alleged, had not been done transparently and the value of CFL shares had been doubly enhanced to benefit the EBM majority shareholders, who also had shares in the CFL. They were, in fact, buying their own shares at an exorbitant price to the detriment of the EBM’s minority. The ABIL also alleged other instances of oppression by majority shareholders in the EBM.
Justice Shabbir Ahmed, the SHC company judge, reversed the process of CFL shares’ acquisition and issuance of right shares of the EBM. He said the EBM directors had rendered themselves liable to attachment of their properties but the ends of justice could be met by imposing on them a fine Rs10,000 each. The valuation of the CFL shares should be done afresh through an independent auditor to be engaged at the EBM expense. On the basis of new valuation, the CFL shares should be bought by issuance of right shares and should be offered to the ABIL, the EBM minority shareholder. Only if the ABIL declined the new offer, should the shares be sold to other EBM shareholders. The SHC official assignee was asked to oversee new, transparent valuation by the new auditor.
The company judge observed in his order: “It is true that an isolated act may not necessarily and by itself support an inference that an act of commission or omission was mala fide or burdensome, harsh and wrongful. But a series of acts following one upon another, in a particular context, justifiably lead to the conclusion that they are part of the same transaction, which is aimed at oppression of people against whom they are directed. For instance, an isolated order passed by a judge will not support the inference that he is biased even if it is contrary to law. But a series of wrong or illegal orders to the prejudice of one party are generally accepted as a valid ground for a reasonable apprehension that the judge is biased and that the aggrieved party cannot expect justice from him.”
