JAWAD HASSAN, J.---This petition under sections 279 to 282 of the Companies Act, 2017 (the "Act") has been filed by authorized representative of the Petitioner No.2 for seeking/obtaining sanction of this Court to a Scheme of Arrangement for merger/amalgamation between AKT Sugar Mills (Private) Limited (the Petitioner No.1) ("Transferor Company") and JK Sugar Mills (Private) Limited (the Petitioner No.2) ("Transferee Company").
2. The short and precise facts are that the Petitioner No.1 is a private limited company with an authorized share capital of Rs.2,250,1000,000/- divided into 225,010,000 ordinary shares of Rs.10/- each while its paid up capital is Rs.2,25,0,000,500/- divided into 225,000,050 ordinary shares of Rs.10/- each. Similarly, the Petitioner No.2 is a private limited company with an authorized share capital of Rs.1,630,000,000/- divided into 163,000,000 ordinary shares of Rs.10/- each while its paid up capital is Rs. 1,620,100,000/- divided into 162,010,000 ordinary shares of Rs.10/- each.
3. Along with this petition, Scheme of Arrangement in terms of sections 279 to 282 of the Act between the Petitioner No.1 and the Petitioner No.2 and respective shareholders is also attached as Annex-A.
4. The principal object of the scheme is to merge/amalgamate the whole of undertaking and business of the Petitioner No.1 with the Petitioner No.2. The reorganized capital obtaining through amalgamation will be advantageous for shareholders/members, creditors as well as the employees of the Petitioners for the following reasons:-
(a) The major contribution to profitability will arise from economies of scale. Further reduction in operating costs is projected immediately upon merger.
(b) The business set up under as a single unit would be enlarged with a larger asset base, with more opportunities and options for employment of funds.
(c) The administrative costs incurred by the Petitioners will be considerably reduced as: i) only a single Board of Directors will be required to administer the merged/amalgamated entity; ii) subsequent to the merger/amalgamation, only one Annual General Meeting will be required to be held; iii) only one Registrar of shareholders and one set of books and records will be required to be maintained and one set of forms etc. will be filed with various government agencies; and iv) only one administrative office would be required for managing the affairs of the merged/amalgamated company.
(d) As a result of the said transfer, reorganization of capital and amalgamation, there will be considerable cost saving through streamlined procedures and reduction in overhead and working expenses. There will also be an increase in efficiency by reason of unified control. The consequent improvement in the operations shall ultimately ensure the benefit of the shareholders, employees, consumers and others generally.
(e) In the context of the aforesaid, the business of the Petitioners will be integrated so as to achieve an optimum level of utilization of their inherent potential. This would make the new entity market-competitive, more result orientated and, hence, more profitable.
(f) The said transfer of undertakings, amalgamation of capital will be to the advantage of shareholders, creditors and employees of the Petitioners for the following reasons:
(i) the reduced overhead costs and unified business is likely to result in enhanced revenues and lower costs, hence the prospects of higher profitability with its likely consequences of better dividends to shareholders shall also increase;
(ii) the pooling of the assets and resources will enhance the security available to the creditors; and
(iii) the enhanced commercial viability is likely to benefit the employees of Petitioners.
5. In order to highlight the calculation of swap ratio, the learned counsel referred to Annexure-F, the letter dated 01.06.2019 issued by Riaz Ahmad, Saqib Gohar & Co., Chartered Accountants, showing the net worth of the Petitioners Nos.1 and 2 and basis of swap ratio. He also pointed out the copies of the resolutions passed by the Board of Directors of the Petitioners Nos.1 and 2 whereby the schemes were sanctioned. In the closing moments, the learned counsel contended that basically the Scheme of Arrangement envisages the transfer to and vesting in the Petitioner No.2 of all the undertakings of the Petitioner No.1 together with all proprieties, assets, rights, liabilities and obligations of the Petitioner No. 1.
6. The Additional Registrar of Companies, Companies Registration Office, Lahore in response to the main petition filed report and parawise comments on behalf of Securities and Exchange Commission of Pakistan
(SECP) wherein it was observed that (i) as per subsection (2) of section 279 of the Act, it is required that a majority in number representing three-forth in value of the members of the Petitioners, present and voting either in person or, where proxies are allowed, by proxy at the meeting, agree to the Scheme of Arrangement. Further observed (ii) that the Petitioners may be directed to solicit no objection certificate ("NOC") from their secured creditors and submit the same in this Court to its satisfaction. It was next observed (iii) that principal object of the scheme is to merge/amalgamate the whole of undertaking and business of Petitioner No.1 with and into Petitioner No.2. In consideration, Petitioner No.2 shall allot its 2.81 ordinary shares to the shareholders of Petitioner No.1 for every 01 ordinary share held by them in Petitioner No. 1. The swap ratio of 2.81:1 is verified by Messrs Riaz Ahmad, Saqib, Gohar Co. Chartered Accountants based on break up values of Petitioners calculated on net assets as of 31.03.2019. However, it is observed that in the said calculation of net assets swap ratio thereon, the Sponsor's Loan of Rs.500,000,000 (as disclosed in note 5 of the audited accounts of Petitioner No.2 for the period ended 31.03.2019 as unsecured, contractual, interest free loan given by a director to meet ongoing capex requirements of Petitioner No.2) has been excluded from the amount of Total Equity of Petitioner No.2.
7. In response, learned counsel for the Petitioners stated that a loan obtained cannot be treated as an asset or advantage for the enduring benefit of the business of the assessee. Further stated that a loan is a liability and has to be repaid and it is erroneous to consider a liability as an asset or an advantage. He further referred to paragraph No.7 Chairpersons' Report where the Company Secretary explained the basis for determination of swap ratio calculated by external auditor Messrs Riaz Ahmad, Saqib, Gohar & Co. Chartered Accountants and based on this, in lieu of 1 ordinary share of AKT Sugar Mills (Pvt.) Limited (Petitioner No.1) there shall be allotted 2.81 shares of JK Sugar Mills (Pvt.) Limited (Petitioner No.2).
8. After filing of the petition, this Court vide order dated 12.07.2019 directed that notices be issued in national dailies namely "Dawn" and "Business Recorder" for the purpose of informing general public about the scheme proposing merger of the Petitioners and inviting objections to the scheme from members and creditors of the Petitioners as well as from any person having interest in the affairs of the Petitioners. In addition, notices were also directed to be issued to the Securities and Exchange Commission of Pakistan, the Competition Commission of Pakistan and to the creditors of the Petitioner companies as per list of creditors attached with the petition.
9. The said order also directed that Extra-Ordinary General Meetings of the Petitioners' company be convened for presenting the , proposed scheme to their shareholders for sanctioning of the same or otherwise. Messrs Zain Sikandar and Suba Sadiq Watto, Advocates were appointed as Chairmen to supervise extraordinary general meeting of the shareholders of the Petitioners company with directions to file their report on the proceedings of aforesaid meeting.
10. In compliance with the aforesaid order by the Court, public notices issued in Dailies "Business Recorder" and "Dunya" on 17.07.2019 were issued respectively; copies whereof are available on record.
11. The Petitioners have placed on record No Objection Certificate ("NOCs) issued by the secured creditors of the Petitioners and by the Competition Commission of Pakistan.
12. The Chairpersons of the general meeting of the Petitioners submitted their report on 03.09.2019 which is duly supported by the relevant record. According to the report, the Extraordinary General Meeting of the Petitioners was convened at their registered offices on 23.08.2019. Notices of the meeting were issued by the Petitioners company to their shareholders as well as by publication in the Dailies "Dawn" and "Business Recorder" on 26.07.2019. The copies of the dispatched notices and names of the shareholders as well as the notices published in the aforementioned newspapers are mentioned in and attached to the Chairpersons' report.
The attendance sheet of shareholders of the Petitioners have also been placed on record which show the participation of 100% of voting of shareholders of the Petitioner No.1 and the Petitioner No.2. The approved Scheme of Merger is annexed as "Annex-A-2" with the report of Chairpersons.
13. I would like to preview and foretaste the recital of the Scheme of Arrangements which for the ease of reference reproduced as under:-
3. Scheme of Arrangement 3.1 Objects The principal object of the Scheme is to effect a merger between JKSM and AKTS through the transfer to and vesting in JKSM of the AKTS Undertaking in consideration whereof inter alia, fully paid ordinary shares of JKSM shall be allotted to the AKTS shareholders as per Swap Ratio, subject to the terms of the Schema and the dissolution of AKTS without winding up.
3.2 The AKTS Undertaking and its Transfer to and Vesting in JKSM JKSM and AKTS shall be amalgamated by transfer to and vesting in JKSM of the AKTS Undertaking, as subsisting immediately preceding the Completion Date, and, accordingly, the entire AKTS Undertaking, as subsisting immediately preceding the Completion Date, without further act or deed, matter or thing, process or procedure, shall be transferred to and vested in JKSM as a going concern on the Completion Date.
The merger contemplated under the Scheme of Arrangement would have significant benefits for the Petitioners' companies and their respective stakeholders, which are stipulated in the scheme of arrangement.
14. Pursuant to order dated 12.07.2019, reports along with the resolutions passed in the meetings under section 279(2) of the Act have been submitted. For the ease of reference, the nucleus of resolution is reproduced as under:- "RESOLVED THAT the Scheme of Arrangement for amalgamation/merger dated July 01, 2019 (the "Scheme") between AKT Sugar Mills (Private) Limited and its members, and JK Sugar Mills (Private) Limited and its members, considered by this meeting and initialed by the Chairpersons of this meeting for purpose of identification, be and is hereby approved, adopted and agreed".
15. As a result, the observation by the SECP relating to section 279(2) of the Act is concerned, it is evident from perusal of Chairpersons' report that 100% of the shareholders of the AKT Sugar Mills (Pvt.) Limited were present at the extraordinary general meeting who voted, unanimously consented and approved proposed Scheme of Arrangement for merger/amalgamation of AKT Sugar Mills (Pvt.) Limited with and into JK Sugar Mills (Pvt.) Limited.
16. Another observation of SECP with regard to soliciting NOCs from the secured creditors stands cured as all the secured creditors have given their NOCs to the mentioned Scheme. The Competition Commission of Pakistan has also issued its NOC on 19.06.2019.
17. As far as observation/comment about the Scheme regarding calculation of net assets swap ratio and exclusion of Sponsor's Loan of Rs.500,000,000 from the amount of Total Equity of Petitioner No.2, is concerned, it evinces from perusal of Chairperson's Report that members in extraordinary general meeting were invited to raise any objection qua the basis of swap ratio in the Scheme of Arrangement which, after discussion, was unanimously passed by the members in terms of section 279(2) of the Act. Furthermore, determination of swap ratio was calculated by external auditor Messrs Riaz Ahmad Saqib Gohar & Co. Chartered Accountants which is appended with Chairperson's Report (Annex-D, Pages 58 and 59). It has been held in "Dewar Salman Fiber v.
Dhan Fibers Limited" (PLD 2001 Lahore 230) that where required majority of the members of both of the company has approved the resolution of merger of both the companies the sanction for merger could not be withheld unless it was shown that same was unfair, unreasonable or against the national interest. It was further observed that the shareholders were best judges of their interest and were better informed with the market trends than the Court, which was least equipped in evaluating such trends. It has been held in the case of "Gadoon Textile Mills Limited and 2 others" (2015 CLD 2010) that determination of the consideration, including the commercial aspect of the merger along with manner of the swap ratio, is primarily and subsequently the prerogative of the members of the respective companies. It was further held that the financial or any other advantage or disadvantage in a corresponding ratio are divided but not in a manner which could deprive any of the shareholders as the proposed scheme is based on the principle that each shareholder would get its respective share in terms of percentage that is in collective business.
18. In the present case, all the shareholders of the transferee company have unanimously approved the scheme of amalgamation and, therefore, have approved the exchange ratio. Since the scheme of amalgamation and consequently the exchange ratio has been approved unanimously, there is no reason why their business decision should be interfered with and the Court should therefore proceed on the basis that the ratio of exchange as approved by the shareholders o1 the transferor company is the fair ratio of exchange. Further, in absence of any challenge from the shareholders of the transferor company, who are primarily and exclusively to question the ratio of exchange of shares, the exchange ratio has to be considered as fair and reasonable.
19. In view of the forgoing reasons, there remains no impediment to grant and sanction of the Scheme of Merger of Petitioner No.1 company into Petitioner No.2. Accordingly, this petition is allowed and the Scheme attached at Annex-A-2 with the report of Chairpersons Messrs Zain Sakander and Suba Sadiq Watto, Advocates is hereby sanctioned in terms thereof.