' This petition has been moved under sections 284 to 288 of the Companies Ordinance, 1984 (the "Ordinance") by three companies namely, Kohinoor Raiwind Mills Ltd. ("KRM"), Kohinoor Gujjar Khan Mills Ltd. ("KGM") and Kohinoor Textile Mills Ltd. ("KTM"). The three petitioner-companies seek sanction of the Court to a scheme of arrangement, which has been approved by their shareholders in general meetings.
2. The proposed scheme of arrangement envisages the merger of the three petitioner-companies through transfer and vesting in KTM of the entire undertakings of KRM and KGM. As a result of such merger KRM and KTM will stand dissolved without winding-up. KTM as the surviving company will be required, as a result of the merger, to allot its shares to the shareholders of KRM and KGM in lieu of the shares held by them in the said two companies. The number of shares to be allotted by KTM will bear a ratio (the "swa p ratio") to the shares, which are held respectively, by the shareholders of KRM and KGM. As in any scheme proposing a merger, the swap ratio constitutes a crucial element of such scheme. If the swa p ratio is fair, it will ensure that the shareholders of the companies involved in the merger retain the value of their investments, post merger.
3. Paragraph 8 of the proposed scheme gives the basis for calculating the swap ratio. Since it is the most material term of the scheme and the point of contention in this case, it is, to the extent relevant, reproduced as under:--- "8. KTML shall issue at par and allot to the individual members of KRM 'X' fully paid-up ordinary share of the par value of Rupees 10 each and to the individual members of KGM fully paid-up ordinary share of the par value of Rupees 10 each in the capital of KTM for every one fully paid-up share of the par value of Rupees 10 each held by them in the respective capital of KRM and KGM, as on a day to be fixed by the Board of Directors of KTM following the transfer date. The value of 'X' and will be determined by Riaz Ahmad & Company, Chartered Accountants on the basis of ratio resulting from the average of the under mentioned two figures for the three companies:
(a) Break-up value of the share as per audited accounts for the year ended 30th September, 2001.
(b) Average of weekly quotation of the share on the Karachi Stock Exchange from 1st October, 2000 to 30th September, 2001."
4. Objections have been filed in Court against the proposed scheme of arrangement, on the ground that the scheme is unfair and prejudicial to the shareholders of KRM. In this order I propose to consider these objections, which primarily assail the methodology of determining the swap ratio and the basis of determining the break-up values of the shares of KRM and KTM respectively. These objections have been received from a shareholder of KRM namely Asian Securities Ltd., and from the Securities and Exchange Commission of Pakistan ("SECP").
5. It was contended on behalf of SECP and not seriously disputed by learned counsel for the petitioners, that ordinarily the fair value of shares of listed companies is dependent on three factors. These are the break-up value, the dividend earning capacity and in the case of listed companies such as the petitioners, the market value, of shares.
6. Learned counsel for SECP argued that unless there was a compelling justification for acting otherwise, valuation of shares for the purpose of merger should take into account all three factors.
To substantiate his assertion, he referred to various texts including Dr. J.C. Verma's treatise on Corporate Mergers, Amalgamations and Takeovers (3rd Edition). He also drew the attention of the Court to the methodology adopted for determining fair value of shares in a number of mergers, which had received the approval of the Courts in Pakistan including the following: ' ICI Pakistan Limited/ICI Chemicals Ltd./Paintex Limited.
' Lipton Pakistan Limited/Lever Brothers Pakistan Limited.
' Reckitt & Colman Pakistan Limited/Reckitt Pharamaceuticals Pakistan Private Limited.
' Lever 1>rothers Pakistan Limited/Brooke Bond Pakistan Limited.
' Cyanamid Pakistan Limited/Wyeth Laboratories Pakistan Limited.
' Glaxo Laboratories Pakistan Limited/Wellcome Pakistan Limited.
' Pakistan Industrial Promotors Private Limited/ Ambrosia International Private Limited/Mehran International Private Limited.
' Lever Brothers Pakistan Limited/Pakistan Industrial Promotors Private Limited.
' Al-Faysal Investment Bank Limited/Faysal Bank Limited.
' While calculating the fair value of the shares of the aforesaid companies for the purpose of their respective schemes of merger the three factors referred to above have been taken into account, and have been factored into the calculation of the swap ratio.
7. On the other hand learned counsel for the petitioners stated that schemes of merger had been sanctioned by the Court where the swap ratio was not based on all three factors.
8. It is, however, not necessary for me while deciding the present petitions, to consider the methodology adopted in any of the above-referred schemes because even learned counsel for the petitioners and Mr. Masood a representative of the financial advisor of the petitioners, who is present in Court, could not deny that all three factors are, as a general rule, relevant for determining the fair value of shares for the purpose of determining a swap ratio. At the same time it would be fair to say that a general rule cannot, by definition, be made applicable to all schemes of merger. Special circumstances may justify on exception being made to the general rule.
9. It was argued by learned counsel for the petitioners that the methodology proposed for determining the value of shares was essentially a business decision based on the best judgment of the directors of the companies involved in the merger. On this basis, it was contended the Court should not substitute its own judgment in place of the considered business decision taken by the respective boards of directors of the petitioner-companies, which decision had been approved by overwhelming majorities of their shareholders in general meetings of the three companies separately held, to consider the proposed merger.
10. I have no hesitation whatsoever in agreeing as a general rule, with the legal proposition advanced by learned counsel for the petitioners. It is for the respective directors of the petitioner- companies to propose, and for their shareholders to approve the proposed scheme of merger.
However, the aforesaid general rule is subject to certain important caveats. The Court is not a by- stander obliged to grant its approval to all schemes of arrangement approved by the special majority of shareholders specified in section 284 of the Ordinance. If that were so it would be pointless to give to the Court a power to review the proposed scheme and to decline approval even where such scheme has been approved by the requisite majority. It is for this reason subsection (2) of section 284 of the Ordinance stipulates that a proposed scheme will have effect only if sanctioned by the Court. The Registrar under the Ordinance has also been given a statutory right of D being heard. Section 288 of the Ordinance mandates consideration of any representation made by the Registrar before an order is passed by the Court in relation to a proposed scheme of arrangement.
11. It is by now well-settled, that where a majority of shareholders has voted in a manner which is coercive or oppressive to the minority or where the majority shareholders of a company have not voted in the interest of the shareholders as a class, the Court will not approve a proposed scheme, even though approved by the requisite three-fourth majority.
12. The Courts in Pakistan as well as in foreign jurisdictions in which provisions similar to sections 284 to 288 of the Ordinance exist, have considered the scope of the jurisdiction vested in the Court in sanctioning or rejecting any proposed scheme of arrangement. In the case titled Aslam Bin Ibrahim v. Monopoly Control Authority PLD 1998 Karachi 295 a learned Division Bench of the Sindh High Court examined the extent and scope of the aforesaid jurisdiction. After considering a host of judgments pronounced on the question by the Courts of various jurisdictions including Courts in England and India, the learned Bench has set out the criteria to be employed by the Court to guide the exercise of its jurisdiction. The rules formulated by the learned Bench, I note, have received universal acceptance in both Pakistani and foreign jurisdictions.
13. It has been held in the aforesaid precedent that among other things, the Court must ensure that the members participating in the meetings called to consider a proposed scheme of arrangement, are the real representatives of the class to which they belong. Equally important is the determination that the majority which approved the scheme of arrangement .Acted bona fide and in the interest of the general body of shareholders and that the minorities were neither coerced nor victimized. It was also held that the Court while considering the scheme of arrangement and before according its sanction to it, should be satisfied that the scheme is not only fair but is also reasonable from the point of view of an objective observer.
14. These accepted rules to which there can be no possible objection, will have to be applied to any scheme of arrangement, which comes before a Court for its approval. Wherever the Court reaches the conclusion that a scheme is unfair or unconscionable, and to which material objections have been raised by any shareholder either in a general meeting or before the Court, it will become a duty of the Court not to approve the scheme. The fact that the objecting shareholder constitutes a small minority in proportion to the majority, will be wholly irrelevant in such circumstances.
15. In the present case, the objections to the proposed scheme- of merger have been made by or on behalf of the small shareholders of KRM (the "objecting shareholders"). Asian Securities Ltd., which is one of the objecting shareholders owns 272,000 shares of KRM. As noted above, it has filed independent objections to the proposed scheme. However, a number of objecting shareholders have written to the SECP expressing their reservations in relation to the scheme. They have also pointed out specifically how their interests would be prejudicially affected if the scheme is approved. Asian Securities Ltd. Has substantiated its objections through easily understandable calculations. The SECP has itself analyzed the scheme in the light of the audited financials of the three petitioner-companies while filing objections to the proposed scheme. These objections reflect the apprehensions of the small shareholders of KRM who, it is important to note, do not hold shares in KGM or KTM. The significance of this fact has been discussed in a later part of this order.
' At this point it is necessary to note that the majority shareholders do not require the Court to safeguard their interest because no scheme can be approved without their concurrence. Even a substantial minority controlling more than 25% of the issued capital of a company does not need the Court to protect its rights. Furthermore, considering that in the case of listed companies such as the three petitioners, not all members participate in general meetings, even smaller but substantial minorities holding less than 25% of the paid-up capital of a company can successfully block a proposed scheme of arrangement which does not meet their approval. These substantial minorities can, through exercise of their voting rights, thwart a proposed scheme without the intervention of the Court. Their right to do so is set out in section 284 of the Ordinance, which requires a scheme to be approved by a majority in number representing three-fourths in value of the members present and voting at a general meting. It is only after a proposed scheme has received the support of the said special majority that it can be considered by the Court for approval.
17. From the aforesaid provisions it is clear that section 284 of the Ordinance which requires the sanction of the Court to any scheme of arrangement is meant for the protection of the rights of powerless small minorities who can be outvoted at general meetings and cannot, therefore, adequately safeguard their interests on the strength of their voting rights alone. It is, therefore, open to these minorities to show to the Court that the proposed scheme of arrangement is unfair, unreasonable and prejudicial to their interests, or to the interests of the shareholders generally.
18. In the context of the scheme of merger being considered in the present case, I would at this stage like to consider an aspect of it which, in my opinion, has relevance. The objecting shareholders invested in shares of KRM only. They have no existing interest in KGM or KTM. The proposed scheme, as noted above, envisages dissolution of KRM. The necessary consequence of such dissolution is that these objecting shareholders will (after the merger) no longer own the shares acquired by them. In effect, they will compulsorily be divested of their shareholding in KRM if the proposed scheme is sanctioned. Instead, against their will and without their free consent, they will be allotted shares in KTM.
19. It is no doubt true that section 284 of the Ordinance envisages that a scheme of arrangement may be sanctioned by the Court and such scheme being binding on all shareholders, may override the freedom of a shareholder to hold and dispose of his shares. However, since the right of a person to acquire, hold or dispose of property is constitutionally guaranteed (subject to law) as a fundamental right, it is incumbent upon the Court to ensure that the provisions of section 284 are not abused by the directors or majority shareholders or are used by them in a manner which unfairly or unreasonably deprives the minority of its right to property. These circumstances, in my view, cast a special duty on the Court to scrutinize
20. the proposed scheme to safeguard the constitutionally guaranteed right to property vesting in the objecting shareholders.
21. It is in the backdrop of the above considerations that the specific objections of SECP, which also reflect the objections of Asian Securities Ltd., to the proposed scheme of merger need to be examined, SECP has expressed its considered opinion (for the reasons set out in its objections and discussed below) that the proposed merger is against the interests of the shareholders of KRM as a class because the swa p ratio has been calculated unfairly to the disadvantage of the shareholders of KRM. According to the objections filed in Court, the shares of KRM have been unreasonably and unfairly undervalued. SECP has pointed out that KRM is a highly profitable company with high earnings per share. It has declared dividends in the range of 47.5% to 50% during the preceding three financial years. On the other hand, KGM is stated to be on the defaulters' list of the Karachi Stock Exchange, while KTM has not declared any dividend in the last financial year. Even in the previous two years it declared a dividend at the rate of 10% only.
22. More specifically, it has been stated on behalf of SECP that the value of the shares of the petitioner-companies and, as a consequence, the swap ratio has been calculated only on the basis of the average market price and break-up value of the shares of the said companies. The third relevant factor i,e, dividend earning capacity, has not been taken into account and no explanation has been given for this omission. The earning capacity of a share is undeniably one of the relevant factors in calculating the fair value of a share. This much, as noted earlier, was even acknowledged by learned counsel for the petitioners.
23. It was also not disputed by learned counsel for the petitioners that in view of the high rates of divided declared by KRM as compared to the dividends paid on the shares of KGM and KTM, if the earning capacity of shares had been taken into account in determining fair value, the valuation of the shares of KRM would have been substantially higher and as a consequence the swap ratio would have changed to the advantage of the shareholders of KRM.
24. It is in these circumstances, learned counsel for the petitioners was asked to explain why the directors ignored the earning capacity of the shares of the petitioner-companies while calculating the fair value of such shares. He was not able to offer any satisfactory explanation for this omission.
His stand, as noted above, was that the directors of the three companies were free to decide in any manner they thought fit, the methodology for determining the value of shares and for calculating the swa p ratio based on such value.
24. I have also gone through the reply filed by the petitioners to the objections raised by SECP. The reply does not even remotely suggest a reason for not taking into account the earning capacity of shares in arriving at the basis of the proposed valuation of shares. What can be gathered from the arguments of learned counsel for the petitioners and from the reply submitted on their behalf, to SECP's objections, is that the directors of the petitioner--companies claim an absolute and unfettered discretion to propose the methodology for determining the value of shares, and consequently the swa p ratio. This claim, to put it mildly, is quite extraordinary as it flies in the face of all accepted norms of fairness and is also contrary to the settled law on the subject discussed above, which restricts their choice.
25. The directors of a company which propose a scheme of arrangement cannot act arbitrarily.
Although they may have discretion in selecting one out of various suitable courses of action, which may come before them for consideration, they have no discretion to choose a course of action which is not in the interest of the shareholders.
26. The failure of the directors of the petitioner-companies to take into account an important factor for valuing shares, in the context of the present case, constitutes a material omission. Had the directors deliberated on the matter and had they given reasons for excluding the earning capacity of shares as a factor in the valuation, it would have been possible for the Court to examine the reasons and to defer to the opinion of the directors if the reasons given by them reflected fairness and a genuine concern for the interests of shareholders. The failure of the directors to consider the earning capacity of shares, without any justifiable cause leads to the inescapable conclusion that they have, while formulating and proposing the scheme, failed to safeguard the interests of the shareholders of KRM. As a consequence, the shareholders of KRM, as a class will be prejudicially affected if the proposed scheme is approved.
27. There is another material objection raised by SECP to the proposed scheme. The respective break-up values of the shares of the three petitioner-companies according to SECP, have not been arrived at by applying a uniform standard of valuation. The break-up value of the shares, as per terms of paragraph 8 of the proposed scheme, reproduced above, is one of the two relevant factors, prescribed for determining the value of shares. Since the swap ratio is calculated on the basis of the respective values of the shares of the petitioner-companies, it follows that the swap ratio will only be fair if the same criteria are used uniformly in the case of each company to arrive at the value of their shares.
28. In the present case, it has been demonstrated before me that the value of the shares of KRM has been arrived at 'on a basis which is materially different from the method whereby the shares of KTM have been valued. To illustrate this point a comparison of one item from the audited accounts of KRM with the corresponding item in the audited accounts of KTM, will suffice. Both KRM and KTM have made investments in the shares of Maple Leaf Cement Factory Ltd. ("MLCF") which investments have been duly reflected in their audited accounts. As such the value of these investments has been factored into the break-up value of the shares of KRM and KTM respectively.
The discussion below shows the material difference in the valuation of MLCF shares in the accounts of the two companies and the consequential effect thereof on the swap ratio.
29. In note 2.8 to the audited accounts of KRM, it has been declared that the investments of KRM in listed shares which include MLCF shares, are stated at the lower of cost and market value. The market value of such investment is Rs,40.222 million, which is substantially less than the cost of such investment. While dealing with the same item in the accounts of KTM, note 2.6 states that the investment of KTM in the shares of MLCF has been stated at cost. Furthermore, mark-up and the cost of acquisition of the said shares in MLCF have also been capitalized and shown as a part of the investment. As a result the value of the aforesaid investment, as it appears in the audited accounts, is shown as Rs,514,081,000 whereas the market value of the said investment is Rs,85.920 million only. The net result of the difference in the aforesaid methods on the values of the shares of KRM and KTM respectively, is that the value of the shares of KRM has been substantially diminished as a result of the diminution in the value of its investment in MLCF. On the other hand, the value of KTM's investment in MLCF is exaggerated because the cost of such investment is Rs,428.161 million more than the market value of Rs,85.920 million. This difference in calculating the value of shares has a direct bearing on the swa p ratio which adversely affects the interests of the objecting shareholders.
30. Learned counsel for the petitioner-companies acknowledged that the accounting policy and treatment applied to the valuation of investments made by KRM and KTM respectively, were different. He also could not deny the fact that if the break-up value of the shares of KRM had been determined on the basis of the acquisition cost of its investment in MLCF, as had been done in the case of KTM, the value of the shares of KRM for the purpose of the swap ratio would have been substantially higher than the value now placed on the said shares. Correspondingly if the investment of KTM in MLCF shares had been valued on the lower of market price or cost as in the case of KRM, the value of the shares of KTM for the purpose of the swap ratio would have been much less than the value, which has now been determined. In both events the swap ratio would have changed to the advantage of the shareholders of KRM.
31. Faced with the uncontrovertible evidence of unfairness established from the audited accounts of KRM and KTM, learned counsel for the petitioners argued that in the case of both KRM and KTM their respective accounting policies were consistent with the policies adhered to in the previous years. This circumstance is not of any help to the petitioners because the different method of valuing the investments of KRM and KTM in the shares of MLCF has resulted in gross unfairness to the shareholders of KRM as a class. There is no denying this fact. This circumstance by itself renders the proposed scheme unconscionable.
32. As a consequence of the aforesaid unequal and inherently unfair difference in accounting policies, the shareholders of KRM are to receive 2.326 shares of KTM for every one share of KRM owned by them. If, however, the investment of KTM in MLCF is valued on the basis of market price as has been done in the case of KRM, the shareholders of KRM would be entitled to receive 3.409 shares of KTM for every share held by them in KRM. Even if none of the other objections of SECP is taken into account, this factor alone translates into a loss of approximately 35% to the shareholders of KRM if the scheme is sanctioned. These figures are based on calculations made by SECP.
Learned counsel for the petitioners did quibble about the calculations but could not deny that the difference in valuing the investments of KRM and KTM in the shares of MLCF was disadvantageous to the objecting shareholders.
33. Faced with this situation, learned counsel for the petitioners argued that the swap ratio was a technical matter, which should be left by the Court to the directors and shareholders of the companies. To support this submission, he referred to the case titled Dewan Salman Fibre Ltd., Islamabad v. Dhan Fibres Ltd., Rawalpindi PLD 2001 Lah. 230 and the case titled Brooke Bond (Pakistan) Limited and another v. Aslam Bin Ibrahim and another (1997 CLC 1873).
34. In the cited precedents it has been observed that a scheme of arrangement should not be scrutinized in the way a carping critic, a hair splitting expert, a meticulous accountant or a fastidious counsel would do, each trying to find out from his professional point of view the loopholes which may have crept into the scheme. I am in respectful agreement with the aforesaid observations, I, however, find that the same are wholly inapplicable in the circumstances of the present case, where even a layman without any accounting or legal expertise can see the obvious inequity of the proposed scheme of arrangement and its unfairness to the shareholders of KRM as a class.
35. The cases of Dewan Salman Fibre Ltd. And Brooke Bond (Pakistan) Limited in fact expressly mandate that a Court while considering a proposed scheme of arrangement must test it from the point of view of an ordinary and reasonable shareholder acting in a business-like manner. The ratio of the two cited cases is that the sanction of the Court should be withheld if it is shown that the proposed scheme of arrangement is unfair or unreasonable.
36. In the case of Aslam Bin Ibrahim v. Monopoly Control Authority referred to above, the learned Bench did advert to an objection raised by the appellant. Aslam Bin Ibrahim to the swap ratio proposed in the scheme under consideration of the Court. From a discussion by the Court on the said objection, it is clear that the fairness of the swap ratio is a legitimate concern of the Court while considering a scheme of merger. It is only because the appellant in the precedent case had failed to demonstrate to the Court through evidence that the swap ratio was unfair, that the said objection did not prevail with the Court. It follows that if the objector had in fact been able to show to the Court that the swa p ratio was unconscionable, the Court would have been persuaded to withhold its sanction to the proposed scheme. In the present case, the discussion above in relation to the swa p ratio, amply demonstrates that the objections raised by the objecting shareholders are well-founded as the same are substantiated by the audited financial statements of the three petitioner-companies, which have been placed on record.
37. Learned counsel for the petitioners also referred to In re: Vijaya Durga Cotton Trading Ltd. (1980 Company Cases 785) and the case titled Jitendra R. Sukhadia v. Alembic Chemical Works Company Ltd. (1988 Company Cases 206) to support his case. The first-referred case was cited by him with the object of showing that difference in the methodology of valuing the assets of two merging companies should not result in the refusal of the Court to sanction a proposed scheme. I have gone through the cited case and note that it is wholly distinguishable on facts. The shareholders of the two companies who were called upon to approve the scheme of merger of the two companies in the said case unanimously approved the scheme of merger. It was only the Company Law Board which had objected to the scheme on the ground that the valuation of the shares of the merging companies had not been done on a consistent basis. The auditors who had proposed the methodology of valuation had submitted a report detailing the reasons justifying the difference in the methodology of valuing the assets of the two companies. The Court after considering the report of the auditors found that there was good reason for the difference in valuing the assets of the two companies. Furthermore, it was noted by the Court that since the shareholders of the two companies had approved the proposed scheme of merger without dissent, it was not for the Company Law Board to raise objections to the scheme.
38. In the present case, as noted above, the objecting shareholders have opposed the scheme of merger for valid reasons documented by the audited accounts of the petitioner-companies.
Furthermore, there is no justification forthcoming from the financial advisors, the directors or the auditors of the petitioner-companies to explain the difference in methodology for arriving at the break-up value of the shares of KRM and KTM respectively, nor is there any explanation for excluding the dividend earning capacity of the petitioner-companies from the valuation of their shares. In the circumstances, the case of Vijaya Durga Cotton Trading Ltd. Does not advance the cause of the petitioners.
39. The case of Jitendra R. Sukhadia, referred to above also does not help the petitioners. The swap ratio in the said case was based on all three factors viz. Break-up value, earning capacity and market value. The Court concluded that the valuation of shares and the swap ratio were reasonable. For reasons noted above, the scheme in the present case, clearly does not meet the criteria of fairness and reasonableness.
40. When the lack of fairness of the swap ratio was demonstrated in Court, learned counsel for the petitioners submitted that the petitioners would be willing to value the investment of KTM in MLCF on the basis of market price as had been done in the case of KRM. This, however, cannot be allowed to at this stage. It is obvious on the basis of the above-noted facts, that the scheme as proposed was clearly flawed and worked seriously to the disadvantage of the objecting shareholders. It is not necessary for me, in these proceedings, to decide that the application of different standards of valuation of shares in the case of KRM and KTM respectively was deliberate or was a result of oversight. The net effect of such difference is that the proposed scheme on the face of the record is unconscionable as it is grossly unfair to the objecting shareholders.
41. At this point, I would like to refer to the importance of the fact adverted to above that the objecting shareholders do not own shares in KGM or KTM. From the constitution of the respective boards of directors of the three petitioner-companies and from the composition of their respective shareholdings it is evident that the three petitioner-companies are managed directly or indirectly by the same controlling group. This group as such, has direct or indirect interests in each of the petitioner-companies. As a consequence, the swap ratio has a lesser relevance for this group as compared to the importance it has for the objecting shareholders. If in relative terms, the value of the shares of KRM is less than the fair value, the corresponding relative value of the shares of KTM as reflected in the swa p ratio would be higher. As a consequence, while the controlling group may loose out in their capacity as shareholders of KRM, they will get a countervailing benefit in their capacity as stakeholders in KTM. This situation does not hold true for the objecting shareholders, who will suffer loss as a result of their shares being valued at less than fair value, but will not benefit from any compensating gain on the other side of the swap because they do not own shares or have any other interest in KTM.
42. From the available record it is only possible to draw the aforesaid conclusion in general terms.
This is so because in the statement under section 160(1)(b) of the Ordinance issued alongwith the statutory notices to shareholders, the petitioner-companies have not set out the material facts necessary for making a more definite determination in this regard. The insufficiency or adequacy of the statement issued under section 16(1)(b) of the Ordinance by the petitioner-companies and the implication thereof has been separately discussed below.
43. Learned counsel for the petitioner finally, argued that the objecting shareholders constituted an insignificant minority which held less than two per cent. Of the issued and paid-up capital of KRM.
He, therefore, contended, such a sma ll minority should not be allowed to frustrate the proposed scheme. This argument, in my opinion, is not relevant. Two per cent. Of the shareholding in KRM may be insignificant in terms of the voting rights exercisable at a general meeting of KRM. Seen, however, from the perspective of the objecting shareholders, the amount of their investment in KRM might constitute a substantial proportion of their total assets and investment. Even if this were not so, they would be entitled to raise objections to the proposed scheme as they have done, on the ground that the scheme is unconscionable.
44. Learned counsel appearing for SECP made another submission which I need to comment on.
He argued that the proposed scheme should not be sanctioned because the petitioner- companies, in the notices issued to shareholders and in their respective statements under section 160(1)(b) of the Ordinance, had not disclosed all material facts concerning the scheme and in particular had not specified the interest, whether direct or indirect, of every director of the petitioner-companies in the proposed scheme. On this basis it was contended the meetings of the petitioner-companies were not validly held, and as a consequence any resolution passed at such meetings ought to be set aside.
45. From the circumstances narrated above, it does appear that the directors of the petitioner- companies or at least some of them have subsisting interests in all three petitioner-companies.
The directors of KRM holding shares in KTM in particular, ought to have disclosed the extent of their shareholdings or any indirect interest in KTM to the shareholders of KRM through the statement under section 160(1)(b) of the Ordinance. This has not been done. The statement merely says that the directors of KRM may be deemed to be interested to the extent of their shareholdings in the companies in which they are directors. No particulars at all have been given of their interest in the companies including KGM and KTM of which they are directors.
46. It is also important to note that while the audited accounts of KRM have been furnished to its shareholders, there is nothing in the statement under section 160(1)(b) to alert them to the fact that the valuation of the shares of KRM has been made on a basis which is materially disadvantageous to them when compared to the basis of valuing the shares of KTM for the purpose of calculating the swa p ratio. There are other material facts also which have not been disclosed in the aforesaid statement.
47. It is, however, not necessary for me to examine the deficiencies in the said statement because, for the reasons already discussed above, the proposed scheme of merger, is not being sanctioned.
The SECP, however, should consider the advisability of issuing instructions for guidance of companies to ensure that shareholders attending general body meetings with the object of considering special business receive full disclosure of facts necessary for making informed decisions. The SECP may also consider issuing guidelines for determining the fair value of shares by companies.
48. The result of the foregoing discussion is that the scheme of arrangement proposed by the petitioner companies is not approved.