KARACHI, June 26: The Sindh High Court on Wednesday did not approve the merger plan of the two American multi-national pharmaceutical companies in Pakistan — Pfizer Laboratories Ltd. and Parke Davis Limited — and spelt out guidelines for protecting the interests of all the shareholders.
The landmark judgment authored by Justice Shabbir Ahmed was announced by Justice Wahid Bux Brohi in which legal issues pertaining to merger, transfer-pricing, interpretation of the Companies Ordinance, etc., have been addressed in an elaborate manner.
This was a petition for sanction by the court under Section 284 read with Section 285 to 287 of the Companies Ordinance for arrangement relating to merger of Pfizer Laboratories Ltd. and Parke Davis Company Ltd to form “Pfizer Pakistan limited”.
While disposing of the petition Justice Shabbir Ahmed held that “the scheme of amalgamation approved by the board of directors of the petitioners on the basis of valuation report of the auditors is deficient on account of valuation having been done keeping the interest of the majority shareholders in mind.
“The PLL has not been taken by the auditors as an ‘on-going concern’, whereby tangible assets, such as patent and trade mark and intangible assets (goodwill) have not been considered for the valuation of its assets, therefore, the same cannot be termed to be just, fair and reasonable and thus the scheme being oppressive to the interest of the minority shareholders cannot be approved.
“This would amount to excluding the minority from a company without a reasonable offer to buy their share or to make some other fair arrangement with them. What has been termed as unfair prejudice to shareholder. Therefore, the approval of the scheme is declined.”
Justice Ahmed directed the petitioners that the “exercise of valuation be conducted afresh through an independent auditor, who should evaluate the petitioners as an on-going concern and for the purpose of valuation the factors such as tangible and intangible assets and every factor that concern the valuation be taken into consideration”.
His direction to the petitioners was that “on the basis of fresh valuation by independent auditors, the majority share-holders of PLL to purchase the share from minority share-holders who are willing to part with their share on reasonable price.”
Justice Ahmed held that the scheme “be put to the members in the extra-ordinary general body meeting for their approval to be convened under court directions”.
Barrister Qazi Faez Isa represented the petitioners whereas Kazim Hasan and Shahanshah Hussain, advocates, appeared for the objectors, the minority shareholders.
The petitioners had claimed that the merger would result in more efficient and competitive production owing to benefit of economies of scale due to larger scope of production, procurement, warehousing, marketing, administration and financial activities, etc.
In view of substantial benefits of the merger of the PLL with PDL, the board of directors of both petitioners commissioned valuation of the companies to ascertain the swap ratio of the shares of PLL and PD. On the basis of such valuation, the draft scheme of arrangement was prepared and presented for the approval of both the petitioners on May 7, 2001.
Pursuant to the resolution of the board of directors of the petitioners summoned an extraordinary general meeting on May 29 2001. In the meeting approval was sought for the merger.
The minority share-holder, namely Zahid Hasnain of PLL, holding 126,232 shares had opposed the petition by filing counter affidavit of his attorney/father, Azfar Hasnain, in opposition of the scheme of amalgamation and arrangement between the petitioners.
It was his contention that this would amount to demonetising of PLL share of 39 minority share holders of PLL, 32 would get no shares under the proposed swap because their holding was not big enough to get 100 share in PD, which was minimum size for a marketable lot for trade on the stock exchange.
It was argued that the scheme of amalgamation between the two companies was based on valuation without reference to goodwill and other intangible assets and also without making adjustments for factors, such as value of inter-company sales to Pfizer and profits that it had generated for the parent company at the cost of the minority shareholders, the taxes borne by PLL on behalf of the parent and affiliated companies would reduce the value of minority shareholder’s investment to a meaningless figure.
On the other hand, Qazi Faez Isa, counsel for the petitioners urged that holding of extra-ordinary meeting of share-holders for approval of the scheme was not necessary under the court direction that could be done by the company without intervention of the court and to support his contention referred to various case laws.
It was also contended by him that it was not mandatory provisions in terms of Section 284(1) for direction by the court for convening such a meeting.
Justice Shabbir Ahmed was of the view that provisions of Section 284(1) were not sign-post but check-post whereas it was duty of the court to examine the scheme for itself. The obligation was greater because such an application was ex parte and it was not practically possible to give notice to the numerous members of the company.
Therefore, neither post-facto approval for such meeting was desirable. Particularly when the allegation was of non-disclosure of material facts nor statutory duty enjoins upon the court can be dispensed with.
Mr. Qazi Faez Isa contended that the objectors were also equity share-holders and so far as other equity share-holders were concerned, they constituted same class as the objectors. Therefore, there was no inter se conflict between the rest of the equity share-holders representing 78.59 per cent of the voting strength which approved the scheme and the objectors representing about 18 per cent votes, consequently there was no question of holding a separate meeting so far as the objectors are concerned.
Shahanshah Hussain, counsel for the objector (PLL), had at the very outset offered that the minority share-holders were ready to sell their shares on fresh valuation to the majority shareholders i.e. Pfizer Corporation. This offer was also repeated during the argument. The offer was accepted on behalf of the majority share-holders but under the court direction and with some conditions attached firstly that both groups of objectors may sell their shares for which PD Group has declined to such an offer.
Shahenshah Hussain maintained that the swap ratio as proposed was the accumulative effect of wrong courses adopted by company in siphoning the profits through “transfer pricing” putting the minority in a disadvantageous position.
He had contended that it would put the parent company in a advantageous position with further burdening them by payment of presumptive tax and adoption of net asset value, method for valuation of assets by ignoring PLL as an “on-going concern” by auditors.
Mr. Hussain had argued that the valuation itself suffered from basic definition problem. It did not take an account of material factors that effect the valuation for the minority share-holders. The petitioners had ignored the concept of on- going concern and had not considered all the assets of PLL, which is ongoing concern.
Shahanshah Hussain had also maintained that this plea was supported by the report compiled by the Ministry of Health, in 1999 titled “Transfer Pricing” in import of pharmaceutical raw material.
Mr. Hussain had highlighted the difference of price of material purchased by PLL from Parent company and their market price to show the excessive price paid to parent company.
He had contended that the accumulated loss shown in the report was Rs680 million, which was only due to “Transfer Pricing” i.e. excessive cost of its raw material import. He also pointed out that there was a gradual increase in the value of import at the cost of minority shareholders.
It was also contended that on the basis of the amount paid to the parent company due to “transfer pricing, the tax had been paid by PLL under the presumptive tax scheme at the cost of the minority shareholders on behalf of parent company i.e. majority share-holders.
He maintained that this factorhad not been considered by the auditors, who were not independent but the petitioners’ own chartered accountant.
Mr. Qazi Faez Isa, on the other hand, had contended that PLL was obliged to purchase the material from the parent company for maintaining the standard of medicine and due to patent use by the PLL.
Mr. Shahanshah Hussain had further contended that PLL had not been taken as an “on-going” concern for the purpose of valuation.
The intangible assets, such as, good-will and other assets of PLL, such as, patent, trade mark and licenses had not been accounted by the auditor though value of business prowess and know-how were largely made up by the value of business intangible assets “Intellectual property”.
Justice Shabbir Ahmed observed that in this case the valuation had been done keeping in view the interest of the majority share-holders which was reflective from the statement of the auditor reproduced above.
With regard to the contention that court’s jurisdiction was not appellate jurisdiction simultaneously, Justice Ahmed observed that “the court cannot shirk its responsibility from examining the scheme of merger and was not bound to treat the scheme as a fait accompli, but in doing so the court would not be substituting its own judgment.
“The approval to scheme of arrangement approved by the majority of the shareholders specified in Sec. 284 of the Companies Ordinance is subject to a court review. The court has power to decline the approval even where such schemes have been approved by the requisite majority if it is not just fair and reasonable. It is for this reason sub-section (2) of Section 284 of the Ordinance stipulates that a proposed scheme will have effect only sanctioned by the court, ” he held.