This is an opposed petition for sanction by the Court under section 284 read with sections 285 to 287 of the Companies Ordinance for arrangement relating to merger of petitioner No,1 with petitioner No,2 in terms of Scheme of Arrangement (Annexure-K), as a consequence of merger the transferee Company will assume new name "Pfizer Pakistan Limited".
2. Petitioner No,1 is Pfizer Laboratories Ltd. An unlisted public Company (hereinafter referred to as PLL), whereas petitioner No,2 is Parke Davis Company Ltd. a listed Public Company (hereinafter referred to as PD).
3. In order to appreciate the objections to the merger put forth by the minority members of PLL and PD, who objected to the scheme moved by the petitioners and ventilated before me by the learned
(sic) it will be necessary to glance through relevant background facts.
Petitioner No,1 was incorporated as Dumex Limited in the year 1954. Its Dumex Limited name was changed to Pfizer Laboratories by certificate issued on 8th September, 1961. The authorized share capital of PLL is 1,200,000,000 divided into 120,000,000 ordinary shares of Rs,10 each. The paid-up share capital is Rs,726,169,910 divided into 72,616,991 ordinary shares of Rs,10 each. The object of the business undertaken by PLL and its powers are set forth in its Memorandum and Articles of Association (Annexure -B'). Its current assets amounted to Rs,420,520,000 as on 31-12-2000, whereas its current liability amounted as on the said date to Rs,507,193,000. Whereas petitioner No,2 was incorporated in the year 1960 and was converted into a Public Company in the year 1983.
Its shares are quoted at Karachi and Lahore Stock Exchanges. The authorized capital of PD is Rs,40,000,000 divided into 4,000,000 ordinary shares of Rs,10 each with paid-up share capital in Rs,19,584,000 divided into 19,58,400 ordinary shares of Rs,10 each. The objects of the business undertaken by PD and its powers related thereto are set forth in Memorandum and Articles of Association (Annexure-C). The current assets of PD amounted to Rs,605,806,000 as on 31st December, 2000, whereas its current liability amounted as on said date to Rs,181,058,000 (Annexure-D).
4. The Board of Directors of PLL and PD are detailed in para.9 with common Chief Executive and Secretary namely M. Riazuddin Ansari and Abdul Majeed respectively. PLL is a subsidiary of Pfizer Corporation Panama, which holds 98.79% of the total share holding of PLL, is a subsidiary of Pfizer Inc. USA, whereas petitioner No,2 is a subsidiary of Parke Davis & Co., U.S.A., which holds 75.59% of total share holdings of PD and Parke Davis & Co. Is subsidiary of Warner-Lambert Company. As a consequence of acquisition by Pfizer Inc. Of Warner Lambert Company, Parke Davis & Co., USA, became a subsidiary of Pfizer Inc., PLL carries on business of manufacturing and dealing with pharmaceutical and medical mostly prescription drugs while PD carries on business of manufacturing of pharmaceutical and medical products but mostly over the counter (OTC) drugs.
5. The principal features of the scheme of amalgamation have been stated as follows:--
(a) The current separate manufacturing plants of PLL and PD shall be operated and managed as one larger unit which will result in production of different products being able to be more efficiently planned and undertaken.
(b) The maintenance of separate manufacturing operations, selling, purchasing, marketing, legal, administrative, secretarial and other departments and staff results in duplication of administrative expenses and higher overheads. The consolidated operations in the amalgamated entity would result in eliminating such duplication and would result in a reduction of administrative and overhead expenses besides increasing efficiency on account of unified control.
(c) In view of the competitive environment in the pharmaceutical industry in Pakistan the amalgamation of the business and assets of PLL and PD shall reduce losses and also improve efficiency. Since the manufacturing processes at both plants are similar, integration of both operations by combining them as one legal entity would not only facilitate in overcoming current bottlenecks in the process, but also result in other direct and indirect advantages such as inter alia:--
(i) Benefit of economies of scale due to larger scope of production, procurement, warehousing, marketing administration and financial activities.
(ii) Reorganization of the manufacturing plants will provide added preparatory and back-end support to the main operation of the companies.
(iii) Ease in inter-plant movement of machines, staff and material.
(iv) Integrated banking and financing arrangements would result in efficient cash flows and substantial savings.
(v) Utilization of surplus plant/machines and capacities at each plant as and when required,
(vi) Quality control criteria and equipment can be combined to bring the production of both plants in uniformity and to increase product quality.
6. In view of substantial benefits of the merger of the PLL with PD the Board of Directors of both petitioners commissioned an independent valuation of the Companies in order to seek to ascertain the swa p ratio of the shares of PLL and PD. Such independent valuation of the petitioners was undertaken by KPMG, the world renowned chartered accountants, through their Pakistani Associates Taseer Hadi Khalid & Co. Pursuant to such valuation KPMG determined the swap ratio of the shares of PLL and PD to be 264:1. On the basis of such valuation the draft scheme of arrangement was prepared and presented for the approval of both the petitioners on 7th May, 2001. Pursuant to the resolution of the Board of Directors of the petitioners summoned an extraordinary General Meeting on 29th May, 2001, notices were issued and were published in newapers,
7. Petitioner also made representations to the Karachi Stock Exchange and Securities and Exchange Commission of Pakistan. Petitioners also approached their respective creditors for amalgamation who have endorsed their no objection.
8. In the extraordinary general meeting of PLL held on 29th May, 2001, the Scheme of Arrangement was thoroughly discussed for amalgamation through transfer to and vesting in PD of the whole of the undertaking and business of PLL together with all the assets, property, rights, liabilities and obligations of every description of PLL against allotment of fully paid ordinary shares of PD in lieu of the shares of PLL held by them and to dissolve PLL without winding up. The shareholders holding 99.88% share of PLL approved the scheme of arrangement, whereas the shareholders of PD unanimously approved the scheme of Arrangement (Annexure-K).
9. By the approval of the Scheme of Arrangement, all contracts, agreements, trusts, leases, conveyances, grants and instruments of transfer entered into by or subsisting in favour of PLL and the rights and obligations of PLL arising thereunder, shall stand transferred to and vested in PD and shall remain in full force and affect as if originally entered into by or granted in favour of PD instead of PLL. PD may enforce all rights and shall perform all obligations and discharge all liabilities arising thereunder accordingly. Similarly, upon the approval of the Scheme of Arrangement of the petitioners the debts, payables, claims against and other liabilities of PLL whether accrued or accruing or contingent and whether incurred solely or jointly with another or others including any inter-company payables or loans and other amounts owed to banks and financial institutions and other creditors by PLL shall be transferred to and vested in PD and shall be treated as debts, payables, claims against and other liabilities of PD as if originally incorrect by PD instead of PLL. PD shall pay and discharge all such debts, payables, claims and other liabilities accordingly.
10. In view of the above facts, orders have been sought in the following terms:--
(a) An order under section 284(2) of the Companies Ordinance, 1984 sanctioning the Scheme of Arrangement attached as Annexure-K hereto so as to make the said scheme of arrangement binding on the petitioners, their respective creditors and members,
(b) The following orders under section 287 of the Companies Ordinance:---
(i) An order under section 287(1) of the Companies Ordinance, 1984 for the transfer to and vesting in PD of the whole of the undertaking and business of PLL together with all of the assets, properties, rights, liabilities and obligations of every description of PLL more particularly described in the Scheme of Arrangement attached as Annexure-K hereto with effect from the Effective Date, as defined in the said Scheme of Arrangement.
(ii) An order under section .287(1)(a) of the Companies Ordinance, 1984 for the transfer to and vesting in PD of the assets of PLL including properties of all kinds whether movable or immovable tangible or intangible, stock in trade, inventory, rights in leases, leasehold properties, actionable claims, books, debts, advances, deposits, pre-payments and other receivables, loans made, investments, cash and bank balances, including without limitation to the generality of the foregoing all rights and interest of PLL existing in the property situated at Plot No,12, Industrial Area, West Wharf, Karachi by virtue of the Indenture of Lease dated 4th May, 1985, executed between the Truestees of the Port of Karachi and PLL.
(iii) An order under section 287(1)(a) of the Companies Ordinance, 1984 for the transfer to and vesting in PD of the rights, powers, authorities and privileges Of PLL (including registrations, licences, permissions and approvals under the Drugs Act, 1976), all other registrations, licences, permits, categories, entitlements, sanctions and permissions relating to trading, imports and exports or otherwise concerning the investment in or carrying on of any business by PLL.
(iv) An order under section 287(1)(b) of the Companies Ordinance, 1984 approving the issuance at par and allotment of 275,065 new ordinary shares of PD credited as fully paid-up shares to every registered holder of the shares of PLL on the completion. Date (as defined in the Scheme of Arrangement) on the basis of swa p ratio of 264:1, that is, for every 264 ordinary shares of Rs,10 each of PLL held by a registered shareholder of PLL (one) ordinary share of Rs,10 each of PD shall be issued in the name of such registered shareholder.
(v) An order under section 287(1)(b) of the Companies Ordinance, 1984 authorizing the Board of Directors of PD to consolidate all fractional shares of PD after the amalgamation with PLL, sell the same on the Stock Exchange and make' payment of the proportionate amounts of the sale consideration so received to the members entitled thereto.
(vi) An order under section 287(1)(c) of the Companies Ordinance, 1984 directing that all suits, appeals and other legal proceedings instituted by or against PLL and pending immediately before the Effective Date (as defined in the Scheme of Arrangement) to be treated as suits, appeals and legal proceedings by or against PD and may be continued prosecuted and enforced by or against PD accordingly.
(vii) An order under section 287(1)(d) of the Companies Ordinance, 1984 directing the dissolution, without winding up, of PLL on the date on which the ordinary shares of PD are allotted to the registered holders of the ordinary shares of PLL or on such later date as the Honourable Court may prescribe.
(viii) An order under section 287(1)(f) of the Companies .Ordinance, 1984 directing that all contracts, agreements, trust, leases, conveyances, grants and instruments of transfer entered into by or subsisting in favour of PLL upon being transferred to and vested in PD shall remain in full force and effect as if originally entered into by or granted in favour of PD instead of PLL, as the case may be, and that PD may enforce all rights and shall perform all obligations and discharge all liabilities arising thereunder accordingly.
(ix) An order under section 287(1)(f) of the Companies Ordinance, 1984 directing that with effect from Completion Date (as defined in the Scheme of Arrangement) the name of PD shall be changed to Pfizer Pakistan Limited."
11. The minority shareholder namely Zahid Hasnain of PLL, holding 126,232 shares has opposed the petition by filing counter-affidavit of his attorney/father, Azfar Hussain, in opposition of the scheme of amalgamation and arrangement between the petitioners by raising objections, inter alia, that the shareholders of PLL will receive one share at Rs,10 per value in PD in lieu of 264 shares of Rs,10 per value. This ratio of swa p means that a PLL shareholder is being offered 0.38 of 1% of the par value of his share in PLL in money terms. This means 3.85 paisa worth of share in PD for every Rs,10 invested in PLL. Thus, Zahid Hasnain will get only 478 shares worth Rs,4,780 in PD in exchange for 126,232 shares in PLL which he had acquired at a cost of Rs,1,577,900. The level of compensation works out for him at 3 paisa for every 10 rupee invested by him in the year 1995 and the consequence is that he has lost over 99.5% of its value since 1995. This amounts to demonetizing of PLL share of 39 minority shareholders of PLL 32 will get no shares under the proposed swap because their holding is not big enough to get 100 shares in PD which is minimum size for a marketable lot for trade on the Stock Exchange. These 32 shareholders are thus being fractionalized. Only 7 shareholders will receive shares in PD Zahid Hasnain will be entitled to 478 shares but will 400 shares and cash in lieu of fraction of 78 shares in PD in exchange for his 126,232 shares in PLL. This is because of incredulous valuation of the business undertaking of PLL made for the purpose of securing its merger with PD.
12. This catastrophic condition for minority shareholders of PLL has been created by its Board of Directors, which has not been working in the interest of all the shareholders since 1991 and the business of PLL during all these 10 years has been conducted at the costs of minority shareholders for the benefit of majority shareholders, which is Pfizer Panama, a foreign company that is a wholly subsidiary of Pfizer Inc., USA, which is the ultimate parent company of both PLL and PD. As a result, the value of the undertaking of PLL has suffered considerably. The valuation has not been done properly and the compensation that is being offered, is grossly inadequate.
13. A comparison of the performance of Pfizer Inc. Globally and PLL in Pakistan as reflected in annual report of Pfizer Inc. Has been reproduced as below:- "1990s was when Pfizer Inc. Was transformed to become the No,2 Drug Company in the World. Pfizer is a Crown Jewel among Companies. Pfizer is one of the most valuable companies in Earth. Pfizer has a stellar record of delivering shareholder value. Our shareholders have benefited tremendously from Pfizer's performance. Although 2000 was the worst year for stock since 1981, the Company ended the year with market capitalization of US $ 290 billion, representing a 44% increase over 1999.
Over the past 10 years, the stock split 4 times and our split adjusted stock price rose almost 1300%.
We will continue to gro @ 25% or more through 2002. Our best days lie ahead.
Accordingly to the new Chairman of Pfizer Inc. Dr. Mckinnell the 1990s has been the most crucial decade in the 151 years history of Pfizer.
Whereas Pfizer Inc. Prospered providing outstanding returns to its shareholders, PLL in Pakistan has languished providing zeros returns to its shareholders, PD in Pakistan has also been highly profitable during the last 10 years distributing dividends amounting to 1240% Rs,124 for each Rs,10 share.'
14. PLL was incorporated in the year 1954. Till 1995 they issued capital Rs,17.25 Million out of which capital subscribed in cash was Rs,2.95 Million and for consideration other than cash was Rs,3.95 Million. Apart from issuance of bonus share, the issue and paid-up capital and the capital structure remained unchanged for 40 years, It was very profitable company till 1990 and paid dividends on a regular basis besides issuance of bonus share. Dividends paid during 5 years period prior to 1991 amounted to Rs,21 per share and also PLL retained a large portion of its earnings that had accumulated to 169.4 Million by 1991 which was almost 10 times of its capital. During 1991 - 2000, equity per share has come down from 1988 per share in 1999 to Rs,075 in 2000. This is despite repeated increase in paid-up capital from 17.25 Million to Rs,726 Million (42 times paid-up capital of 1995) in 5 years all paid in cash. The PLL is the most capitalized pharmaceutical company in Pakistan. It has increased its capital through 5 rights Issue first in 1995 then in 19981999 and 2 in 2000. All this capital has been utilized to finance the operational losses of PLL. The quantum of loss of PLL in some years is staggering in the year 2000, 1999, 1994 and 1993, the losses amounted to 25%, 26% arm 23% of sales respectively and during last three years, PLL has lost more money than what it earned from its inception in Pakistan. The main reason given by the Board of Directors for these crises in the Government control over the drug price in Pakistan and low price of drug in the country. These reasons are illusory, Government has always controlled prices and all pharmaceutical companies in Pakistan such as PDCL, Glaxo, Abbots and AHP, all of whom have operated profitably and provided good returns for shareholders during 1991 - 2000 PLL was operating profitably in this regulatory environment till 1991. The low drug prices in Pakistan may be true as compared to the developed world but this is certainly not true when the prices of Pfizer products in Pakistan are compared with those of its sister concern in India. For instance, Norvasc called Aamologard in India is retailed at Rs,12 per tablet in Pakistan and Rs,5 per tablet in India.
Feldene called Dolonex DT in India is retailed at Rs,9.50 per tablet in Pakistan and Rs,3 per tablet in India. Similarly is the case with Vibramycin (Vibazine DT in India). This difference is due to fact that said Pfizer India has been allowed to be more flexible in market and pricing of its products and also because it procures its raw material at competitive prices. The total market of drug in Pakistan has grown at the rate of 15% annually. Sales of PLL from Rs,445 Million in 1991 to of Rs,700 Million in 2000 which represents an annual growth of 5% but the total market grew at 3 times this rate as reflected in Annexure-C. PLL has been importing raw material from Pfizer and its affiliates much more than any other pharmaceutical Company in Pakistan. During 1991-2000 the value of such imports amounted to 3 billion and this works out at over 51% of sales and in some years such as 1997 and 1999 this quantum was even higher at 94% and 85% of PLL total sales in those years, This trend has been on the increase and during the most recent period of five years, the value of such imports amounted to Rs,1.9 billion by 61% of total sales. PLL's reputation for being victim of excessive transfer pricing and having problems with the Tax Authorities as a result is well-known in the industry. PD which earned tax profit on 1.2 billion in the year 1991-2000 period paid Rs,407 Million as tax whereas PLL which incurred Rs,672 million as pre-tax loss paid around Rs,370 million. The major cause for this tax is the issue of "transfer pricing" of imports from Pfizer affiliates. PLL has paid excessive prices for the benefit of its affiliates and levied taxes. PLL has been paying excessive ,prices for its raw materials due to this sourcing resulting in losses to the operations of PLL. The situation becomes ironic inasmuch as PLL's shareholders have had no return on their investment in the last 10 years, their equity has been wiped out and on top of it they have had to borne tax on behalf of profits ascribed to Pfizer affiliates. The amount paid as tax of PLL works out at Rs,5 per share. The commercial nexus between the Pfizer Inc. And PLL appears to be one of the principal and agent and as such no consideration was given to the interest of other shareholders, However, the imports from Pfizer affiliates generated revenues of 3 billion for them during the 1991-2000 period of which Rs,1.9 billion was in the last 5 yeaRs, The valuation of PLL assets has not been correctly done. The swa p ratio of 264:1 has been arrived at on the basis of the net asset valuation method. The valuation conducted at the behest of PLL Boards has conflict of interest connotation. After the proposed merger of PLL and PD, the interest of Pfizer in PLL that amounted to 98.8% will get diluted to 78.5% in PD. This is because Pfizer owns 75.6% of PD already. The maximum loss to Pfizer, therefore, cannot be more than 20% whereas the minority shareholders stand to lose as much as 99.5% of their investment. Proper valuation of PLL is critical for the interests of minority shareholders much more than it is for the majority shareholders,
15. The valuation on the "net asset valuation" method is appropriate for Companies that are going for liquidation or winding-up and have no future prospects. Going concerns have to be valued on the basis of future expectations of profits. Pfizer must have expectations of future profits, otherwise, it would not be getting merged with PD, have the name of PD changed to Pfizer Pakistan and get itself listed on the stock exchange in the process. If the prospects were as dim as PLL's performance of the last 10 years indicates then it should have been making an application to the Court for winding-up.
16. Intangible assets have been completely ignored. No value has been assigned to Pfizer brand name, goodwill patents, trade marks, licences, its R&D capability, the number of products are in its research pipeline. The principal asset of PLL is knowledge and the know-how that the worldwide Pfizer Organization possesses but unfortunately the value of this most important asset is not shown in a balance-sheet.
17. Warner Lambert (W.L) parent company of PD, was acquired by Pfizer Inc., USA, for US $ 90 billion in 2000 when the net assets of W.L amounted to US $ 5 billion only and its annual sales amounted to US $ 13 billion. The amount paid for goodwill and intangibles etc. Of W.L thus comes to US $ 85 billion, i,e, 16 times of its net asset value and 6.5 times of its annual sales.
18. Pfizer Inc.. Itself has a marked capitalization of US $ ) 270 billion when its net asset figure is US $ 16 billion and its annual sales amounts to US $ 29 billion. The figure of goodwill comes to US $ 254 billion i,e, 16 times its net asset value and 8.6 times of its annual sales. PLL cannot be fairly valued without taking the intangible assets into consideration and also the value to the parent company of the sales to its subsidiary company. The difference in the valuation would be too great and not realistic as no going concern is valued without taking this most crucial asset into reckoning.
Noadjustment has been made for taxes paid and borne by PLL on behalf of its affiliates from its business with PLL. Neither has any adjustment made for the profits earned by the affiliates resulting in excessive cost of inputs to PLL. This means that the majority shareholder has derived benefits at the costs of the minority shareholders who are now being penalized further under the proposed scheme of merger.
19. The scheme of amalgamation between the two companies based on valuation without reference to goodwill and other intangible assets and also without making adjustment for factors such as the value of inter-company sales to Pfizer and profits that it has 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 will reduce the value of minority shareholder's investment to a meaningless figure. The discriminatory attitude is being adopted towards the existing minority shareholders of PLL. Pfizer Panama which is the majority shareholder and holds 98.8% share in PLL acquired shares from other minority shareholders at price much higher than what Zahid Hasnain and other minority shareholders in PLL are being offered under the proposed scheme of merger.
The PLL was under an obligation to have secured fair deal for all shareholders including the minority shareholders and should have approached the Court with clean hands to obtain its sanction. Instances are not lacking where multinational companies when confronted with the issue pertaining to the interest of minority shareholders dealt with the same honestly, justly and fairly.
Novartis, pharmaceutical company, which emerged from the merger of CIBA and Sandoz in Eruope, was listed as a new entity in Pakistan. They negotiated a price for the buy-back of shares with the largest minority shareholders and then offered the same price to the remaining shareholdeRs, Novartis had a almost 25% minority shareholdeRs, Book value per share was around Rs,10, the market price of the stock was Rs,30 and they offered to buy-back at Rs,68 per share Similarly, when Phillips decided to go private, it offered Rs,75 per share to the minority shareholders when the book value of their share was in the negative. There is no reason why a similar sort of arrangement could not have been made with PLL minority shareholders by Pfizer. Pfizer is a truly global enterprise with market capitalization at US $ 270 billion, which is 5 times the Gross National Product of Pakistan. The Board of Directors of PLL has been extremely unfair to the existing minority shareholders and the scheme of merger if sanctioned by the Court will indubitably result in formidable diminution of the pecuniary worth of their shares and will thus be greatly oppressive to them. The amalgamation is not legally permissible without adequate safeguard and protection for minority shareholders, Other minority shareholders of PLL, namely Dr. Habib Patel (22220), Muhammad Ali Khan (54400), Abbas Ali (36425), Noorullah Merchant (16500), Bilquees Patel (16500), Zaitoon Patel (16500), Yasmeen Patel (16500), Musheer Ahmed Pesh Imam (1500) and Nayyar Mushir Pesh Imam (1500), have also opposed the scheme by adopting the objections filed by Zahid Husnain (hereinafter referred to as minority shareholder of PLL).
20. The second group of objections are the shareholders of Parke Davis Ltd. Namely National Investment Trust Limited, (2) State Life Insurance Corporation of Pakistan, (3) Pak-Libya Holding Company (Pvt.) Ltd., and (4) Investment Corporation of Pakistan. The shareholding of the objectors in PD are in the following percentage:-- Percentage
(a) Objector No. 114.4%
(b) Objector No.23.8%
(c) Objector No.30.7%
(d) Objector No.40.1%
21. The objections raised by them, inter alia, are to the following effect:-- That the petition for amalgamation is not in accordance with law and it lacks transparency in the process leading up to the filing of the petition. Mr. M. Riazuddin Ansari is the Chief Executive of both the petitioners in violation of section 203 of the Ordinance. The business of the petitioners are in competition with each other. They are carrying on business of manufacturing and dealing in pharmaceutical and medical products.
(ii) PLL has been making heavy losses for several years, and has been actively involved in transfer pricing by purchasing raw material for its products from sources having beneficial interests at more than market prices, which in turn has contributed towards the heavy losses of PLL, which can be gauged from the fact that the PLL has been paying taxes despite making loss. Its amalgamation with Parke Davis, which is a highly profitable concern, will have disastrous consequences and, inter alia, it will lead to erosion of value of the minority shareholders such as the objectors, while the majority shareholders will continue to benefit due to transfer pricing.
(iii) The Scheme of Arrangement has already been approved by the members of both the petitioners vide their resolution passed in extraordinary general meeting of petitioners held on 29th May, 2001, which is in complete defiance of the provisions of sections 284 and 287 of the Ordinance and meeting for the approval of an amalgamation must be called by the Court and only a meeting called by the Court can approve the amalgamation. As such, the meetings allegedly held on 29-5-2001 were illegal and a nullity in absence of compliance with the requirement of the Ordinance or the Rules which govern such meeting, more particularly Rules 55-58, 59 and 60 in similar way Rules 953, 954, 955, 956 and 957 of Sindh Chief Court Rules (O.S.) providing procedure for such meeting.
(iv) The office of the Chief Executive of both the petitioners being vested in the same individual, both petitioners having a common Secretary and common Director of Finance leads to the conclusion that for all practical purposes the business of both the petitioners was in effect merged on Ist January, 2001 in violation of law, which has been shown as effective date.
(v) The determination of the swa p ratio of shares of PLL and PD to be 264:1, which is not fair and reasonable since factors necessary to be taken into account have not been considered. The swap ratio is based on the fact that both organizations are predominantly owned by one shareholder.
Such basis tantamounts to admission of the fact that interests of minority shareholders, such as the objectors have been ignored for the purpose of determining the swap ratio.
(vi) The method of evaluation adopted ignores the earning potential of the PD and loss making position of the PLL keeping in view an accepted fact that a pharmaceutical company derives its value from its products.
(vii) The method of accounting adopted is inappropriate and has been used to give an unfair and undue benefit to the majority shareholders, to the detriment of the minority shareholders of PDCL.
(viii) The Scheme of Arrangement vis-a-vis PD is unjust, unfair and unreasonable from the point of view of 'prudent men of business taking a commercial decision beneficial to its shareholders and it would be contrary to public interest and will result in impeding promotion of the pharmaceutical industry of Pakistan and obstructing the growth of the national economy and loss to the objectors or their investments, more particularly an adverse impact on objectors 1 and 2 which are public sector entities.
(ix) The scheme of arrangement is a manifestation of the majority shareholders of both the petitioners attempting to oppress the minority shareholdeRs, The amalgamation would result in objectors being coerced into accepting a scheme of arrangement, which prima facie mala fide and self-serving to the interests of the majority shareholders at the cost of the minority shareholdeRs,
22. The petitioners have made inadequate and inaccurate disclosures. They have concealed material facts, which an average shareholder would require to vote for or against the merger and to take appropriate legal steps to protect his interests e.g. The financial statement of PLL were not attached to the scheme of arrangement and despite written requests were not made available.
The Memorandum and Articles of Association of PD does not permit amalgamation as such PD could not have filed objections and cannot seek amalgamation with another Company. Beach Luxury Hotels (Pvt.) Ltd. Holding 7500 shares in PD have also opposed the petition by adopting the objections filed by minority group of PD.
23. The petitioners have contested the objections raised by minority groups through rejoinder affidavits, additional affidavits and various documents were also filed. Reference to the contents of such affidavits and documents will be made while deciding the objections.
24. Before I deal with the aforesaid points for determination seriatim, it will be necessary to keep in view the limited scope of the jurisdiction of the Company Court which is called upon to sanction the Scheme of Amalgamation as per the provisions of sections 284 and 286 read with section 287 of the Ordinance. The scope of interference by the Company Court in sanctioning proceedings.
25. The relevant provisions of the Companies Ordinance, 1984 are found in Part IX dealing with Arbitration Arrangements and Reconstruction. In the present proceedings I will be concerned with sections 284 and 286 of the Ordinance, which read as follows:-- "284. Power to compromise with creditors and membeRs,- --(1) Where a compromise or arrangement is proposed between a company and its creditors or any class of them, or between the company and its members or any class of them, the Court may, on the application in a summary way of the company or of any creditor or member of the company, or, in the case a company being wound up, of the liquidator order a meeting of the creditors or class of creditors, or of the members of the company or class of members, as the case may be, to be called; and conducted in such manner as the Court directs.
(2) If a majority in number representing three fourth in value of the creditors or class of creditors, or members, as the case may be, present and voting either in person or, where proxies are allowed, by proxy at the meeting agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the Court be binding on all the creditors or the class of creditors or on all the members or class of members, as the case may be, and also on the company, or, in the case of a company in the course of being wound up, on the liquidator and contributories of the Company: Provided that no order sanctioning any compromise or arrangement shall be made by the Court unless the Court is satisfied that the company or any other person by whom an application has been made under subsection (1) has disclosed to the Court, by affidavit or otherwise, all material facts relating to the company, such as the latest financial position of the company the latest auditor's report on the accounts of the company, the pendency of any investigation proceedings in relation to the company and the like.
(3) An order made under subsection (2) shall have no effect Until a certified copy of the order has been filed with the Registrar within thirty days and a copy of every such order shall be annexed to every copy of the memorandum of the company issued after the order has been made and filed as aforesaid, or in the case of a company not having a memorandum to every copy so issued of the instrument constituting or defining the constitution of the company.
(4) If a company makes default in complying with subsection (3), the company and every officer of the company who is knowingly and wilfully in default shall be liable to a fine which may extend to five thousand rupees for each copy in respect of which default is made.
(5) The Court may, at any time after an application has been made to it under this section, stay the commencement or continuation of any suit or proceedings against the company on such terms as it thinks fit and proper until the application is finally disposed of.
(6) In this section the expression "Company" means any company liable to be wound up under this Ordinance and the expression "arrangement" includes a re-organization of the share capital of the company by the consolidation of shares of different classes or by the division of shares into shares of different classes or by both those methods, and for the purposes of this section unsecured creditors who may have filed suits or obtained decrees shall be deemed to be of the same class as other unsecured creditoRs,
286. Information as to compromise or arrangements with creditors and membeRs,---(1) Where a meeting of creditors Or any class of creditors, or of members or any class of members, is called under section 284--
(a) with every notice calling the meeting which is sent to a creditor or member, there shall be sent also a statement setting forth the terms of the compromise or arrangement and explaining its effect; and in particular, stating any material interest of the Directors including the Chief Executive of the company, whether in their capacity as such or as members or creditors of the company or otherwise, and the effect on those interests, of the compromise or arrangement if, and insofar as, it is different from the effect on the like interest of other persons; and
(b) in every notice calling the meeting which is given by advertisement, there shall be included either such a statement as aforesaid or -a notification of the place at which and the manner in which creditors or members entitled to attend the meeting may obtain copies of such a statement as aforesaid.
(2) Whether the compromise or arrangement, affects the rights of debenture-holders of the company, the said statement shall give the like information and explanation as respects the trustees of any deed for securing the issue of the debentures as it is require& to give as respects the Company's DirectoRs,
(3) Where a notice given by advertisement includes a notification that copies of a statement setting forth the terms of the compromise or arrangement proposed and explaining its effect can be obtained by creditors or members entitled to attend the meeting every creditor or member so entitled shall, on making an application in the manner indicated by the notice, be furnished by the Company, free of charge, with a copy of the statement.
(4) Where default is made in complying with any of the requirements of this section, the company, and every officer of the company who knowingly and wilfully is in default, shall be liable to fine which may extend to two thousand rupees; and for the purpose of this subsection any liquidator of the company shall be deemed to be an officer of the company: Provided that a person shall not be liable under this subsection if he shows that the default was due to the refusal of any other person, being a Director, including Chief Executive, or managing agent or trustee for debenture-holders, to supply. The necessary particulars as to his material interests.
(5) Every Director, including the Chief Executive or managing agent of the company and every trustees for debenture-holders of the company, shall give notice to the company of such matters relating to himself as may be necessary for the purpose of this section and on the request of the company shall provide such further information as may be necessary for the purposes of this section, and if he fails to do so within the time allowed by the company, he shall be liable to fine which may extend to one thousand rupees.
25. The aforesaid provisions of the Ordinance show that compromise or arrangement can be proposed between a company and its creditors or any class of them, or between a company and its members or any class of them. Such a compromise would also take in its sweep any scheme of amalgamation/merger of one company with another. When such a scheme is put forward by company for the sanction of the Court in the first instance the Court has to direct holding of meetings of creditors or class of creditors or members or class of members who are concerned with such a scheme and once the majority in number representing three fourth in value of creditors or class of creditors, or members or class of members, as the case may be, present or voting either in person or by proxy at such a meeting accord their approval to any compromise or arrangement thus put to vote, and once such compromise is sanctioned by the Court, it would be binding to all creditors or class of creditors, or members, as the case may be, which would also necessarily mean that even to dissenting creditors or class of creditors or dissenting members of class of members such sanctioned scheme would remain binding. Before sanctioning such a scheme even though approved by a majority of the concerned creditors or members, the court has to be satisfied that the Company or any other person moving such an application for sanction under subsection (2) of section 284 has disclosed all the relevant matters mentioned in the proviso to subsection (2) of that section. So far as the meetings of the creditors or members, or their respective classes for whom the Scheme is proposed are concerned, it is enjoined by section 286(i)(a) that the requisite information as contemplated by the said provision is also required to he placed for consideration of the concerned voters so that the parties concerned before whom the scheme is placed for voting can take an informed and objective decision whether to vote for the scheme or against it. On a conjoint reading of the relevant provisions of sections 284 and 286, it becomes at once clear that the Company Court which is called upon to sanction such a scheme has not merely to go by the ipse dixit of the majority of the shareholders of creditors of their respective classes who might have voted in favour of the scheme by requisite majority but Court has to consider the pros and cons of the scheme with a view to finding out whether the scheme is fair, just and reasonable and is not contrary to any provisions of law and it does not violate any public policy. This is implicit in the very concept of compromise or arrangement which is required to receive the imprimatur of a Court of law. No Court of law would ever countenance any scheme of compromise or arrangement arrived at between the parties and which might be supported by the requisite majority if the Court finds that it is an unconscionable or an illegal scheme or it is otherwise unfair or unjust to the class of shareholders or creditor for whom it is meant.
Consequently, it cannot be said that a Company Court before whom an application is moved for sanctioning such a scheme which might have got the requisite majority support of the creditor or members or any class of them for whom the scheme is mooted by the concerned company, has to act merely as a rubber stamp and must almost automatically put its seal of approval on such a scheme. It is true to say that the scheme gets sanctioned by the Court it would bind even the dissenting minority shareholders or creditoRs, Therefore, the fairness of the scheme qua them also has to be kept in view by the Company Court while putting its seal of approval on the concerned scheme placed for its sanction. The question of voidability of the scheme will have to be judged subject to the rider that a scheme sanctioned by majority will remain binding to a dissenting minority of creditors of members, as the case may be, even though they have not consented to such a scheme and to that extent absence of their consent will have no effect on the scheme. It can be postulated that even in case of such a scheme of Compromise and Arrangement put up for sanction of a Company Court it will have to be seen whether the proposed scheme is lawful and just and fair to the whole class of creditors or members including the dissenting minority to whom it is offered for approval and which has been approved by such class of persons with requisite majority vote.
26. Courts certainly would not act as a Court of appeal and sit in judgment over the informed view of the concerned parties to the compromise as the same would be in the realm of corporate and commercial wisdom of the concerned parties. The Court has neither the expertise nor the jurisdiction to dive deep into the commercial wisdom exercised by the creditors and members of the company who have ratified the Scheme by the requisite majority. I'he Company Courts jurisdiction to that extent is peripheral and supervisory and not appellate. The Court acts like an umpire who has to see that both the teams play their game according to the rules and do not overstep the limits. But subject to that how best the game is to be played is left to the players and not to the umpire.
27. The supervisory jurisdiction of the Company Court can also be culled out from the provisions of section 285 of the Companies Ordinance, which reads as follows:-- "285. Power of Court to enforce compromise and arrangements:---(1) Where the Court makes an order under section 284 sanctioning a compromise or an arrangement in respect of a company, it may, at the time of making such order or at any time thereafter, give such directions in regard to any matter or make such modifications in the compromise or arrangement as it may consider necessary for the proper working of the compromise or arrangement.
(2) If the Court is satisfied that a compromise or arrangement sanctioned under section 284 cannot be worked satisfactorily with or without modification, it, may, either of its own motion or on the application of the Registrar of any person interested in the affairs of the company, make an order winding up the company and such an order shall be deemed to be an order made under section 305.
(3) The provisions of this section shall, so far as may be, also apply to a company in respect of which an order has been made before the commencement of this Ordinance sanctioning a compromise or an arrangement.
28. This section deals with post-sanction supervision, but the said provisions itself clearly earmarks the field in which the sanction of the Court operates. It is obvious that the supervisor cannot ever be treated as the author or a policy maker. Consequently, the propriety and the merits of the compromise or arrangement have to be judged by the parties who as sui juris with their open eyes and fully informed about pros and cons of the Scheme arrived at their own reasoned judgment and agree to be bound by such compromise or arrangement. The Court cannot, therefore, undertake the exercise of scrutinizing the scheme placed for .Its sanction with a view to finding out whether a better scheme could have been adopted by the parties. This exercise remains only for the parties and is in the realm of commercial democracy permeating the activities of the concerned creditors and members of the Company who in their best commercial and economic interest by majority agree to give green signal to such a compromise or arrangement. The aforesaid statutory scheme which is clearly discernible from the relevant provisions of the Ordinance, as seen above, has been subjected to a series of decisions of different superior Courts of sub-continent as well as by the Courts in England which had also occasion to consider schemes under pari materia English Company Law.
29. I will briefly refer to the relevant decisions on the point but before doing so, I may also usefully refer to the observations found in the off-quoted passage on function of the Court in Bucklay on the Companies Act, 14th Edition. They are as follows:-- "In exercising its power of sanction the Court will see, first, that the provisions of the statute have been complied with, secondly, that the class was fairly represented by those who attended the meeting and that the statutory majority are acting bona fide and are not coercing the minority in order to promote interest adverse to those of the class whom they purport to represent and thirdly that the arrangement is such as an intelligent and honest man a member of the class concerned and acting in respect of this interest, might reasonably approve.
The Court does not sit merely to see that the majority are acting bona fide and thereupon to register the decision of the meeting, but at the same time, the Court will be slow to differ from the meeting, unless either the class has not been properly consulted, or the meeting has not considered the matter with a view to the interest of the class which it is empowered to bind, or some blot is found in the Scheme."
In case of R. Alabama, New Oreans Texas and Pacific Junction Railway Company (1891)] Chancery Division 213 the relevant observations regarding the power and jurisdiction of the Company Court which is called upon the sanction a scheme of arrangement of compromise between the company and its creditors or shareholders were made by Lindely, L.J as follows:-- "What the Court has to do is to see, first of all, that the provisions of that statute have been complied with; and, secondly, that the minority has been acting bona fide. The Court also has to see that the minority is not being overridden by a majority having interests of its own clashing with those of the minority whom they seek to coerce. Further than that, the Court has to look at the scheme and see whether it is one as to which persons acting honestly, and viewing the scheme laid before them in the interests of those whom they represent; take a view which can reasonably be taken by businessm en. The Court must look at the scheme, and see whether the Act has been complied with, whether the majority are acting bona fide, and whether they are coercing the minority in order to promote interests adverse to those of the class whom they purport to represent; and then see whether scheme is a reasonable one or whether there is any reasonable objection to it, or such an objection to it as that any reasonable man might say that he could not approve it."
' The view expressed in Hoare & Co. Ltd. (Re 1933 All ER Rep 105 Ch. D) and Bugle Press Ltd. Re 1961 Ch. 270) may be referred that the power of the Court is to be satisfied only whether the provisions of the Act have been complied with or that the class or classes were fully represented and the arrangement was such as a man of business would reasonably approve between two private companies may be correct and may normally be adhered to but when tile merger is with a subsidiary of a foreign company then economic interest of the country may have to be given precedence.
In Anglo-Continental Supply Co. Ltd. Re (1992) 2 Ch. 723 Ashbury, J., reiterated the very same propositions as follows:-- "Before giving its sanction to a scheme of arrangement the Court will see firstly that the provisions of the statute have been complied with; secondly that the class was fairly represented by those who attended the meeting and that the statutory majority are acting bona fide and are not coercing the minority in order to promote interests adverse to those of the class whom they purport to represent: and, thirdly that the arrangement is such as a man of business would reasonably approve."
In re: Lipton (Pakistan) Ltd. 1989 CLC 818, Haider Ali Pirzada, J. (as he then was) made statement of law that Courts normally be satisfied while sanctioning the scheme in respect of following matters:-- The Court should be satisfied that the resolution is passed by the statutory majority in value and in number in accordance with section 284(2) of the Ordinance at a meeting or meetings duly convened and held. The factor is jurisdictional in the matter of confirmation of the Scheme. The Court should not usurp the right of the members or creditors to decide whether they approved the scheme or not. Therefore, if a class whose interests are affected by a scheme does not assent to the scheme or approved it at a meeting convened in accordance with the provisions of section 284, the Court will have no jurisdiction to confirm the scheme, even if it considers that the class concerned is being fairly dealt with or that it would approve the scheme.
(ii) The Court should satisfy that those who took part in the meeting are fairly representative of the class and that the statutory meeting did not coerce the minority in order to promote the adverse interest of those of the class whom they purport to represent.
(iii) .................
(iv) There should not be any lack of good faith on the part of the majority.
In re: Sidhpur Mills Co. Ltd. AIR 1962 Gujarat 305 the learned Single Judge of Gujarat High Court has in appropriate manner laid down the requirements for the Court to decide the matter of merger in the following terms:-- "15. Therefore, in my judgment the correct approach to the present case is (i) to ascertain whether the statutory requirements have been complied with, and (ii) to determine whether the scheme as a whole has been arrived at by the majority bona fide and in the interest of the whole body of shareholders in whose interests the majority purported to act, and (iii) to see whether the scheme is such that a fair and reasonable shareholder will consider it to be for the benefit of the company and for himself. The scheme should not be scrutinized in the way a carping critic, a hair-splitting expert, a meticulous accountant or a fastidious counsel would do it, each trying to find out from this professional point of view what loopholes are present in the scheme, what technical mistakes have been committed. It must be tested from the point of view of an ordinary reasonable shareholder, acting in a business-like manner, taking within his comprehension and bearing in mind all the circumstances prevailing at the time when the meeting was called upon to consider the scheme in question. I am emphasizing the last point because an argument was made by Mr. Amin that certain circumstances or events which took place after the scheme had been considered should be taken into account. I do not wish to be understood to say that, in no case post facto circumstances of events cannot be taken into account, but, on the whole, I have come to the conclusion that, whilst, in some rare and exceptional cases the Court may take into the company or the shareholders, as a general rule, the circumstances which were in existence at the time when the scheme was formulated, deliberated upon and approved. If any other approach were to be made, then, in that case, there would be no sanctity about business contracts. In fact, such an approach may induce interested person to shape future events and circumstances in such a way as to convert a reasonable scheme into an unreasonable one."
Learned Single Judge of this Court adopted the above view in Brooke Bond Pakistan Ltd. v. Aslam Bin Ibrahim 1997 CLC 1873 and approved by Division Bench of this Court in Aslam Bin Ibrahim v.
Monopoly Control Authority PLD 1998 Karachi 295 with following observations:-- "While powers of the Court to approve or disapprove mergers are broad, they are neither unlimited nor arbitrary. Judicial pronouncements have highlighted some obvious constraints. At the outset, it is to be ascertained whether the necessary requirements of law have been satisfied. Thus, the Court has to see whether the resolution (s) have been passed by the requisite majority, taking into account the value as well as the number of the shareholding. Here it is to be ensured that the members participating in the meeting(s) and coming up with the resolution(s) were real representatives of the class to which they belonged. Equally, important is the determination that the majority, which came to register itself, acted bona fide and in the interests of the general body of shareholders and that the minority was neither coerced nor victimized. As to victimization, the Court is to cautiously address the question whether the merger is not calculated to neutralize and render toothless an effective minority, in contemplation of the various provisions of the Companies Ordinance, which expressly postulate a negative veto as also certain specific remedies, within the grasp of minimum percentage of minority shareholders and not of otheRs, Correspondingly, the Court should be satisfied that the scheme is not only fair but also reasonable from the point of view of a neutral observer. Everything apart, in all schemes and proposals of corporate mergers larger interests of the society, as secured by the Constitution and law have to be safeguarded."
In case of re: Mankam Investments Ltd. (1995) 4 Comp. L.J. 330 (Cal) learned Single Judge of Calcutta High Court addressed on the power and jurisdiction of the Company Court which is called upon to sanction a scheme of merger and amalgamation of companies as follows:-- "It is a matter for the shareholders to consider commercially whether amalgamation or merger is beneficial or not. The Court is really not concerned with the commercial decision of the shareholders until and unless the Court feels that the proposed merger is manifestly unfair or is other shareholdeRs, Whether the merged companies will be ultimately benefited or will be able to economize in the matter of expenses is a matter for the shareholders to consider. If three companies are amalgamated, certainly, there will be some economies in the matter of maintaining accounts, filing of returns and various other matteRs, However, the Court is really not concerned with the exact details of the matter and if the shareholders approved the scheme by the requisite majority then the Court only looks into the scheme as to find out that it is not manifstly unfair and/or is not intended to define or do injustice to the other shareholdeRs,"
I may also in this connection, refer the judgment in the case of Hindustan Lever Employees' Union v.
Hindustan Lever Ltd. 1995 Supp (1) SCC 499 : AIR 1994 SCW 4701 wherein the following pertinent observations in this connection were made in paras. 3 and 6 of the Report:-- But what was lost sight of was that the jurisdiction of the Court in sanctioning claim of merger is not to ascertain with mathematical accuracy if the determination satisfied the arithmetical test. A Company Court does not exercise an appellate jurisdiction...
Section 394 casts an obligation on the Court to be satisfied that the scheme for amalgamation or merger was not contrary to public interest. The basic principle of such satisfaction is none other than the broad and general principles inherent in any compromise or settlement entered between parties that it should not be unfair or contrary to public policy or unconscionable. In amalgamation of companies, the Courts have evolved, the principle prudent business management test or that the scheme should not be a device to evade law. But when the Court is concerned with a scheme of merger with a subsidiary of a foreign company then test is not only whether the scheme shall result in maximizing profits of employees was protected but it has to ensure that merger shall not result in impeding promotion of industry or shall obstruct growth of national economy. Liberalized economic policy is to achieve this goal. The merger, therefore, should not be contrary to this objective. "
30. In view of the settled legal position, the scope and ambit of the jurisdiction of the Company Court has clearly got earmarked. The following broad countours of such jurisdiction have emerged:-
(i) The sanctioning Court has to see to it that all K the requisite statutory procedure for supporting the requisite meetings as contemplated by section 284(1) have been held.
(ii) That the scheme put up for sanction of the Court is backed up by the requisite majority vote as required by section 284(2).
(iii) That the concerned meetings of the creditors or members or any class of them had the relevant material to enable the voters to arrive at an informed decision for approving the scheme in question. That the majority decision of the concerned class of voters is just and fair to the class as a whole so as to legitimately bind even the dissenting members of that class.
(iv) That all necessary material indicated by section 286(1)(a) is placed before the voters at the concerned meetings as contemplated by proviso to section 284(1).
(v) That all requisite material contemplated by the proviso to subsection (2) of section 284 of the Ordinance is placed before the Court by the concerned applicant seeking sanction for such a scheme and the Court gets satisfied about the same.
(vi) That the proposed scheme of compromise and arrangement is not found to be violative of any provision of law and is not contrary to public policy. For ascertaining the real purpose underlying the Scheme with a view to be satisfied on this aspect, the Court if necessary, can pierce the veil of apparent corporate purpose underlying the scheme and can judiciously X-ray the same.
(vii) That the Company Court has also to satisfy itself that members or class of members or creditors or class of creditors, as the case may be, were acting bona fide and in good faith and were not coercing the minority in order to promote any interest adverse to that of the latter comprising of the same class whom they purported to represent.
(viii) That the Court has to examine the scheme on its merits and is not bound to treat the scheme as a fait accompli. In doing so the Court would not be substituting its own judgment for the commercial judgment. Willingness on the part of majority in number representing 3/ 4th in value does not affect the jurisdiction of the Court to refuse sanction, though such fact would be a strong circumstance in favour of sanctioning the scheme by Court.
(ix) That the scheme as a whole is also found to be just, fair and reasonable from the point of view of prudent men of business taking a commercial decision beneficial to the class represented by them for whom the scheme is meant.
31. Once the aforesaid broad parameters about the requirement of a scheme for getting sanction of the Court are found to have been met, the Court will have no further jurisdiction to sit in appeal over the commercial wisdom of the majority of the class of persons who with their open eyes have given their approval of the scheme even if in the view of the Court there would be a better scheme for the company and its members or creditors for whom the s. Heme is framed. The Court cannot refuse to sanction such a scheme on that ground as it would otherwise amount to the Court exercising appellate jurisdiction over the scheme rather than its supervisory jurisdiction.
' In the light of the aforesaid settled legal position I will now proceed to deal with the main points canvassed before me.
32. I would like to address first the objections raised on behalf of the minority shareholders of PD to the scheme as objections are based on legal grounds and factual plane, i,e, lack of transparency, the method of evaluation adopted for determination of swap ration is inappropriate and has been used to give undue favour to majority shareholdeRs, Mr. Kazim Hasan, raised the following contentions:--
(i) That the meeting for the approval of amalgamation must be called by the Court, and only a meeting called under the direction of the Court, can approve amalgamation, as such meeting allegedly held on 29-5-2001 was nullity and cannot be the basis of sanction by the Court.
(ii) That the objectors firms is a separate class of members, as such separate meeting should have been held for approval of the scheme.
(iii) That the PD cannot seek amalgamation with another company. The Memorandum of Association of PD does not contain the power of amalgamation.
(iv) There has been a lack of transparency in the process leading to filing of the petition as Mr. M.
Riazuddin Ansari is Chief Executive of both the petitioners in violation of section 203 of the Companies Ordinance.
(v) The method of evaluation adopted for determination swap ratio of PLL with PD is inappropriate and has been used to give favour and undue benefit to the majority shareholders to the detriment of the minority shareholders of PD.
(vi) The scheme is unfair, oppressive for the reasons that valuation has been inappropriately done to give an unfair and undue benefit to majority shareholders and also suffers from non-disclosure of material facts.
33. Mr. Shahanshah Hussain, learned counsel for the objectors representing minority group in PLL has adopted the arguments, which are not in conflict with the interest of PLL Objectors and of contention raised on their behalf. I will address those grounds, later.
34. Adverting to the first contention, it has been contended by Mr. Kazim Hasan, learned counsel for the objectors that the meeting of members under the direction of this Court is mandatory in terms of section 284(1) read with Rule 55 of Companies (Court) Rules, 1997 and the same is the requirement of Rule 953 of Sindh Chief Court (O.S.) Rules as Court may give such direction as it thinks fit in respect of any of the following matters:--
(a) Fixing the time and place of meeting is to be held.
(b) Appointing the Chairman of the meeting and fixing the quorum.
(c) Mode of giving notice of the meeting by advertisement or by sending notice.
(d) The determination of the values of the members or creditors, as the case may be.
(e) Such other directions as the Court may consider necessary in the circumstances of the case.
Mr. Kazim Hasan has frankly pointed out that there is conflicting view regarding convening of the meeting envisaged under section 284(1) under the Court direction. He referred case of Mehmood Textile Mills v. Registrar, Joint Stock Companies (NLR 1993 U.C. Civil 49). In this case the scheme was approved in a meeting convened without obtaining the direction by the Court in terms of section 284(1) of the Companies Ordinance and the scheme was approved on the basis of affidavit, on observation that it is not necessary to call meeting of the creditors under section 284 of the Companies Ordinance. The proposed amalgamation has also been approved by the Board of Directors of both petitioners and also by their shareholders unanimously. Mr. Kazim Hasan pointed out that according to practice and procedure of this Court, the meetings were convened for approval of the scheme, under the direction of the Court under the provisions of section 284(1) read with Rule 953 of Sindh Chief Courts (O.S.) Rules. In this regard, he referred the cases of Amin Fabrics (1989 MLD 1861) and ACE Insurance Limited (2002 CLD 171). He also referred two decisions from Indian jurisdiction on statutory meeting under the Court direction:--
(i) Southern Automotive Corporation (Pvt.) Ltd., 1960 Vol. XXX Companies Cases 119, wherein Ramaswa my, J. Of Madras High Court expressed his opinion that the Court cannot dispense with the holding of extraordinary general meeting of the Company under section 391' of Companies Act, 1956 for the consideration of proposed scheme of amalgamation on the ground that the ordinary meeting has already been held and the shareholders have unanimously approved the proposal and, therefore, holding of extraordinary meeting would be superfluous or cause hardship, unnecessary expense and undue delay.
(ii) In Sakamari Steel & Alloys Ltd. (1981 Vol. 51 Company Cases 266) the learned Single Judge of Bombay High Court has highlighted the significance and import of the statutory meeting under section 391(1) as follows:-- "The Courts' role under section 391(1) is not less important than section 391(2). It is all the more necessary to exercise the essential nature of the scheme at the stage where it is launched even made necessary observations while giving direction so that all concern can take notice of the pit falls loopholes and defects of the scheme. There cannot be a casual or mechanical approach at the time of giving direction for convening a meeting under section 391(1). The role of the Court is equally useful, vital and pragmatic as under section 391(2) or section 392 in a scheme of compromise. The provision of section 391(1) is not a sign post but check post whereat it is the duty of the Court to examine the scheme for itself. The obligation is greater because such application is ex parte.
35. On the other hand Mr. Qazi Faez Isa, learned counsel for the petitioners urged that holding of extraordinary meeting of shareholders for approval of the scheme is not necessary under the Court direction that can be done by the Company without intervention of the Court and to support his contention has referred Mehmood Textile Mills v. Registrar, Joint Stock Company (NLR 1993 U.C. Civil 49) referred by Mr. Kazim Hasan, learned counsel for the objectoRs, Mr. Qazi Faez Isa has also contended that it is not mandatory provisions in terms of section 284(1) for direction by the Court for convening such meeting and to support his contention has referred ICI Pakistan Ltd. v. Crescent Investment Bank Ltd. (1999 CLC 1037) wherein the objection was taken by the Joint Registrar of the Companies that the petitioner No,1 may be directed to hold separate meeting of the TFC holders (creditors) so as to seek their agreement to the proposed scheme of arrangement. The request of Registrar was not acceded on the ground that all the creditors have given their no objection to the scheme. It was held that it is not mandatory requirement of section 284(2) of the Ordinance. The case of Mehmood Textile Mills (supra) was referred wherein objection that meetings of the creditors were not held under the Court direction as required under the provisions of section 284 of the Ordinance was overruled by holding, inter alia, that it is not necessary to call a meeting of the creditors as provided in section 284. Mr. Qazi Faez Isa also referred the cases wherein the meeting was convened without obtaining the direction from the Court (1) Southern Gas Ltd.: In re (1989 CLC 1323), (ii) Pakistan Beverage Ltd.: In re (unreported). In former case, the merger was of two Government undertakings pursuant to the Government decision and directive wherein no such plea was raised nor involved. In later case, the meeting of shareholders to approve the scheme was convened without obtaining the direction from the Court under section 284(1 of the Ordinance.
The learned Judge granted the petition on the ground that provisions of section 284(2) has been complied with. Effect of non-compliance of section 284(1), rule 55 of the Company (Court) Rules and Rule 953 of Sindh Chief Court (O.S.) Rules were not examined though case of Amin Fabrics (supra) was referred.
Mr. Isa also contended that non-compliance is curable as no prejudice has been caused to the objectors and in this regard the case of Elite D. Silva v. Dilawar Hussain (1993 CLC 361), Oil Gas Development Corporation v. Clough Engineering Ltd. (1990 MLD 254) and Salahuddin v. Syed Manzoor Ali Shah (1997 SCMR 414) were referred in above cases effect of non-compliance of rule 3 of Order 43 was considered, and it was held that the object of serving notice on the respondents, under Order 43, rule 3, C.P.C. Before filing of the appeal was fully met as the respondents were represented by counsel at the time of hearing and the appeal was admitted for full hearing after appearance put in on behalf of the respondents.
Mr. Isa also maintained that the term "may" used in section 284(1) involves choice and the word "shall" involves order and referred case of Muhammad Sadiq v. University of Sindh (PLD 1996 SC 182) to contend that Court direction is not mandatory for convening an extraordinary meeting.
36. The expressions used in section 284(1) are that "the Court may on the application", in summary way of the company or of any creditor or member of the Company or in case of company "order a meeting" of members of the Company "to be called, held and conducted in such a manner as the Court directs," (Emphasis supplied). No doubt, such power is discretionary, it is not mandatory for the Court to give direction to convene meeting as contemplated under section 284(1) the application can be dismissed at the initial stage, if the Court thinks for any reason to dismiss the application for directions. It is also true that on application such direction is to be made ex parte but hearing of the application ex parte does not mean that the Court has not to apply its mind or be prima facie satisfied about the merit of the application. The language of section 284(1) is manifestly clear about the discretion rest with the Court in granting application but surely the Court will not pass an order unless it is satisfied that it is a fit case to do so. Rule 55 of the Companies (Court) Rules, 1997 and Rule 954 of Sindh Chief Court (O.S.) Rules point out that the directions are to be given in respect of fixation of time, place of the meeting, appointment of Chairman, fixation of quorum, the mode of giving notice of meeting, determination of value of members or creditors and such other directions as the Court may consider necessary in the circumstances. The objects of such directions are only to safeguard the interest of the shareholdeRs, The importance of the convening of the extraordinary general meeting cannot be easily overlooked. The primary organization through which the company functions is the meeting of the shareholdeRs, It is by using their power at meetings that shareholders exercise control over directoRs, The resolution of the majority, voting at the general meeting, binds the company and its membeRs, The shareholders have to act in accordance with the provisions of the Companies Ordinance as also the memorandum and articles of the company, insofar as the provisions therein are not inconsistent with the Ordinance. It must be remembered that the shareholder is not a creditor of the company nor a debenture holder thereof. His rights can only be exercised in accordance with the Ordinance. There may be occasions where the majority acts in a manner oppressive to the rights of the minority shareholders or of any particular shareholder. In such cases the Ordinance has made provision for protecting the rights of the minority or the individual shareholder. The principle upon which this is done is that the shareholders have a fiduciary responsibility to act not in the interests of a majority only but in the interests of the shareholders as a whole. Where this position is abused there is a fraud on the minority, as the term is understood in law, and there need not be necessarily fraud or deceit in the ordinary sense.
Indian Company Law Committee had recorded the object of convening the meeting under the Court direction by stating:- "The nature of a shareholder's control over the affairs of a company has been the subject of much comment in recent discussions on the subject of company law reform both in this country and elsewhere. As the Cohent Committee observed: The illusory nature of the control theoretically exercised by shareholders over directors has been accentuated by the dispersion of capital among an increasing number of small shareholders who pay little attention to their investments so long as satisfactory dividends are forthcoming, who lack sufficient time, money, and experience to make full use of their rights as occasion arises and who are, in many cases, too numerous and too widely dispersed to be able to organize themselves."
The Million Commission in South Africa expressed itself, in almost similar terms when it stated:-- "The assumption underlying existing legislation is that shareholders are able to take an active interest in the company's affairs and will always be able to use their voting power to the company's advantage. The assumption may have been justified in earlier days when the capital of the companies was largely in the hands of persons who knew enough about the business of the company to maintain an effective check on the activities of the directors they elected and were able to attend meetings to enforce their views. It is certainly not justified today when the shareholders in public companies are distributed over wide areas, and it is impossible that they can ever be gathered together in one place for attendance at company meetings."
(TR Srinivasa Aiyangar's Companies Administration (1958): Gore-Brown's Handbook of Joint Stocks Companies 41st Edition).
In addition to the factors mentioned above some recent developments in corporate finance e.g. The growth of investment trust companies, have further tended to widen the gap between the ultimate investor and those in charge of the management of his investments, while circumstances in this country have imposed a special handicap on them. The comparative low standard of business knowledge and experience of the average investor, the absence of any well informed and reliable financial press, and long distances which make it difficult for investors to combine for the exercise of their rights, have rendered them particularly ineffective.
There are only two ways in which the Company Law can partially redress the balance in favour of shareholders---first by the fullest possible disclosure of the facts relating to the promotion, formation and working of Joint Stock Companies; and secondly, by enactment of such suitable provisions for the holding and conduct of company meetings as will enable active and competent shareholders to take. An effective part in the business transacted in them.
When a Scheme under section 284 of the Ordinance is sponsored, at the very outset it must come before the Court as the Court has supervision over it at the earliest stage. When it is proposed, the Court can prima facie examine it while granting direction under section 284(1) for convening meeting (s) and the scheme cannot finally go through unless sanctioned under section 284(2).
Such supervision cannot be exercised by the Court, unless the scheme is placed before the Court for its direction under section 284(1) for the presentation of the scheme to the members or the creditors, as the case may be, for their approval in a meeting convened under its direction.
Therefore, I am of the view that .The provisions of section 284(1) is not sign-post but check-post whereat it is duty of the Court to examine the scheme for itself. The obligation is greater because such application is ex parte and it is not practically to give notice to the numerous members of the Company. Therefore, neither post facto approval for such meeting is desirable more particularly when the allegation is of non-disclosure of material facts nor statutory duty enjoins upon the Court can be dispensed with. Accordingly, I uphold the first objection which is fatal to the arrangement.
But in view of the careful arguments put forth by both sides, I will consider other objections, which are material.
37. It was next contended by Mr. Kazim Hasan that the meeting of the majority shareholders represented by objectors was required to be convened on the basis of objectors Group representing a separate class (minority) of equity shareholdeRs,
38. Mr. Qazi Faez Isa contended that the objectors are also equity shareholders and so far as other equity shareholders are concerned, they constitute same class as the objectors, therefore, there was no inter se conflict between the rest of the equity shareholders representing 78.59% of the voting strength which approved the scheme and the objectors representing about 18% votes consequently, there was no question of holding separate meeting so far as the objectors are concerned. Even otherwise such separate meeting would not have made any impact on the voting patron projected by the equity shareholders approving the said scheme by overwhelming majority.
He also contended that there is no provision for separate meeting of the class of members as there is conscience omission of the word "class members" in subsection (2) of section 284 of the Ordinance.
It is necessary for, at least, one class meeting to be held in order to give the Court jurisdiction for the purpose of scheme. Care must be taken in considering for what purpose of the scheme, constitute a class. If meetings of proper class have not been held the Court may not sanction the scheme. The Court has to classify members that their respective interests are taken care of. The term "class" has been the subject-matter of the judicial interpretation in number of cases. In Sovereign Life Insurance Company v. Dodd (189) QB 573), "class" was interpreted by Bowen L.J. It was stated that:-- "It seems plain that we must give such a meaning to the term 'class' as will prevent the section being so worked as to result in confiscation and injustice and that it must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest."
Speaking very generally in order to constitute a "class", members belonging to the class must form a homogenous group with commonality of interest.
So far as this point is concerned, the relevant provisions of the Companies Ordinance to which I have made a reference .Earlier indicate that the Court has to order under section 284(1) a meeting of creditors or class of creditors, or members or class of members to whom the scheme of compromise or arrangement is offered by the Company. The members of the company are shareholdeRs, Part VI of Companies Ordinance deals with share capital and debentures. Section 89 provides that the shares or every interest of any member in Company shall be movable property, transferable in the manner provided by the Articles of the Company. As per section 90 of the Ordinance, the share capital of company limited by shares form after commencement of the Ordinance or after such commencement, shall be of one kind only ordinary share capital, which may be sub-divided into different classes, the right as between various classes of ordinary shares, if any, as to profits, votes and other benefit shall be strictly proportionate to the paid-up value of share. So far as the Articles of Association of PD are concerned, they also contemplate one class of shareholders namely equity share. No separate class of equity shareholders is contemplated either by the Ordinance or by the Articles of Association of PD. The objectors are admittedly an equity shareholder. Therefore, they would fall within the same class of equity shareholders whose meeting was convened by the Company though without leave of the Company Court. However it was vehemently contended by the learned counsel for the objectors that they form a separate class being minority equity shareholders, who have separate right, therefore, separate meeting had to be convened as they represent a class within a class of equity shareholdeRs, It is difficult to *agree with this contention, even though the Companies Ordinance and Articles of Association provide for such class within the class of equity shareholdeRs, It may be contended by group of shareholders that because of their separate and equity interest the other equity shareholders with whom they form wider class a separate meeting of such separately interested shareholders should have been convened. It is not the case of the objectors that their interest as equity shareholders in PD is any way conflicting with the general interest with the interest of equity shareholders as class.
Consequently, it cannot be urged with any emphasis that general body of equity shareholders acting as class will consider the question of approval of likely to take decision which would adversely affect the commercial interest of the objectors as equity shareholdeRs, It is also kept in view that the objectors would have urged the same justification for convening separate meeting representing for them and their share group dissented equity shareholders, if it was their case that the scheme of compromise and arrangement as offered to them and their group was in any way different from the scheme of compromise and arrangement offered to other equity shareholders, who also belong to the same class in wider sense of the term. On express language of section 284(1) it becomes clear that where a compromise or X the arrangement is proposed between the company, its members or any class then meeting of all such members or class of members has to be convened. This clearly presupposes that if the scheme of arrangement or compromise is offered to the members as a class and no separate scheme is offered to any sub-class members which has separate interest and a separate scheme to consider no question of holding separate meeting of such sub-class would at all survive. Consequently, when one of the same scheme is offered to the entire class of equity share for their consideration and without commercial interest of the objectors so far as scheme is concerned is common with other equity shareholders it would have a common cause that they either to accept or to reject the scheme from the commercial point of view. Consequently, there was no occasion that convening separate class meeting of the minority equity shareholders representing objectors and their group has tried to suggest. It is also to be kept in view that it is not case of the objectors that any different terms of compromise were offered to persons holding equity shares. In fact, the entire proposal of the scheme of arrangement was one affecting equally and in like manner of the interest of equity shareholders of PD. In this connection it is profitable to refer what The learned Author Palmar in his Treatise on Company Law, 24th Editions has to say:-- "The Court does not itself consider at this point what classes of creditors or members should be made parties to the scheme. This is for the company to decide, in accordance with what the scheme purports to achieve the application. For an order for meetings is a preliminary step, the applicant taking the risk that the classes which are fixed by the Judge, usually on the applicant's request, are sufficient for the ultimate purpose of the section, the risk being that if in the result, and we emphasize the words in the result, they reveal inadequacies, the scheme will not be approved.
If, e.g. Rights of ordinary shareholders are to be altered, but those of preference share are not touched, a meeting of ordinary shareholders will be necessary but not of preference shareholdeRs, If there are different groups within a class the interests of which are different from the rest of the class, or which are to be treated differently under the scheme, such groups must be treated as separate classes for the purpose of the scheme.
Moreover, when the company has decided what classes are necessary parties to the scheme, it may happen that one class will consist of a small number of persons who will all be willing to be bound by the scheme. In that case it is not the practice to hold a meeting of that class, but to make the class a party to the scheme and to obtain the consent of all its members to be bound. It is however, necessary for at least one class meeting to be held in order to give the Court jurisdiction under the section."
In re Hellenic & General Trust Ltd. (1975) 3 All ER 382), the facts were that:-- "A company which carried on business as an investment trust applied for the sanction of the Court to a scheme of arrangement under section 206 of the Companies Act, 1948 relating to the ordinary shares of the company. Those shares were held as to 53.01 per cent. By another company (MIT) which was a wholly owned subsidiary of a bank (Hambros) and as to 13.95 per cent. By the National Bank of Greece SA (NBG). By the proposed arrangement the ordinary shares of the company were to be cancelled and new ordinary shares were to be issued to Hambros. With the result that the company would become a wholly owned subsidiary of Hambros. The former shareholders of the company were to be compensated in cash for the loss of their shares. At the meeting of all the ordinary shareholders summoned by the Court, 91 per cent. Of the shareholders by value attending and voting MIT voted in favour of the arrangement and NBC voted against it."
Templeman, J. Said that MIT was to be treated as having a community of interest with Hambros as purchaseRs, Accordingly they were to be regarded as being in the purchasers 'camp rather than the vendors' and as such had an interest which was different from that of the remaining shareholdeRs, It followed that MIT formed a separate class from the other ordinary shareholders for the purpose of the class meeting under section 206. Accordingly, the class meeting, having consisted of two classes of shareholders, had not been properly constituted.
Here I may refer that similar view was expressed by lea ned Single Judge of Lahore High Court in Hunza Te ile Mills in re: (PLD 1977 Lahore. 10) that a cla sification had to be made keeping in view the parties to the dispute which is required to be settled and that the int rest of shareholders who want the company to pur hase the shares of other shareholders except the selves cannot be similar to the interest of the sha eholders whose rights are intended to be purchased, par icularly when the latter category is not agreeable to divest of their share of the company, thus, treated separate class of members whose shares were intended to be purchased by the company at the behest of other shareholdeRs, (Separate class meetings of vendor and vendee).
In Sovereign Life Assurance Co. v. Dodd (1892) Q.B. 573 it was held that the shareholders of life insurance policy which have matured form distinct class from the holders of policies which have not matured. In re: United Provident Assurance Company Ltd. (1990) 2Ch. 447) it was held that where a company had issued shares, some of which were fully paid and others partially paid but unpaid balance had been paid in advance of the class. The shareholders firm were distinct class and single meeting could not be held for holders of full paid shares and holders of partially paid shares, who had paid-up balance of their capital in advance of call. This case is distinguishable with the instant case as in the present case all the equity shareholders are fully paid- p.
It is, therefore, obvious that unless separate and differ not scheme of compromise is offered to sub-class or class of creditors or shareholders there were equally circu scribed or call no separate meeting of such subclass f the main class of members or creditors required to be convened.
Minheer H. Mafat Lal v. Mafat Lal Industries Ltd. IR 1997 SC 506. On the facts of the instant case the o Sectors have not been able to make out a case for holdin: separate meeting of dissenting minority equity share olders represented by them. Therefore, the contention of objectors is not sustainable.
39. Adverting to third contention, it was maintained by Mr. Kazim Hasan that PD cannot seek amalgamation with another Company i,e, PLL for the reason that Memorandum of Association of PD does not contain power of amalgamation and to support his contention Mr. Kazim Hassan, learned counsel for the objectors has referred the case of Oceanic Steam Navigation Co. In re: (1939) IX Vol. Company Cases 229), wherein it was opined that the facts that the Memorandum of Association of Company limited did not contain any power to dispose of the undertaking and that section 153 of the Companies Act, 1929 does not authorize the arrangement to be made or to be sanctioned by the Court if that arrangement would involve transaction outside the Court the power of the Company as defined in the Memorandum of Association and to support his contention Mr. Kazim Hasan pointed out that the Memorandum of Association of PD lacks such power by referring clause 12 of the Memorandum of Association and stated that said clause gives power to acquire and undertake whole or any part of the business, property, liability of any person or company, carrying on any business, which the company is authorised to carry on, or possess of any property s citable for the purpose of this Company, will not authorise the PD for the merger of the Company with PLL.
40. Conversely, Mr. Qazi Faez Isa, learned counsel for the petitioner contended that under the Companies Ordinance, the Court by exercising its statutory power can permit merger in spite of such provisions being not available in the Memorandum and Articles of Association and to support his contention has referred the judgment in re: Company Act, 1930 (Associated Services Limited case) (PLD 1984 Karachi 225), wherein the learned Single Judge of this Court held that the requirement of section 287 of English Act or section 153(2) of earlier Companies Act are supreme and cannot be controlled by memorandum and such objection was overruled.
41. There is no dispute that section 284 of the Companies Ordinance confers power to the Company Judge for sanctioning any compromise or arrangement. No doubt provision for amalgamation is absent from the Memorandum of Association of PD, it will not affect the statutory power of the Court. Section 6 of the Companies Ordinance overrides the provisions of Memorandum and Articles of Association. Section 6 reads as follows:-- "6. Ordinance to override Memorandum, Articles, etc..---Save as otherwise expressly provided herein--
(a) the provisions of this Ordinance which come into force by virtue of a notification under subsection (3) of section 1 shall have effect notwithstanding anything contained in the Memorandum of Articles of a company, or in any contract or agreement executed by it, or in any resolution passed by the company in general meeting or by its directors, whether the same be registered, executed or passed, as the case may be, before or after the coming into force of the said provisions; and
(b) any provision contained in the Memorandum, Articles, agreement or resolution aforesaid shall, to the extent to which it is repugnant to the aforesaid provisions of this Ordinance, become or be void, as the case may be."
I may also refer the judgment rendered by Division Bench of Calcutta High Court in the matter of E.I.T.A. India Limited and others AIR 1997 Cal. 208 that the power to amalgamate is statutory power and this power may be exercised notwithstanding the fact that the Memorandum and Articles of Association of particular company may not contain express power to amalgamate with any company. Similar view was expressed by learned Single Judge of Lahore High Court in Dewan Salman Fibre v. Dhan Fibre PLD 2001 Lahore 230. In view of legal position the argument of Mr. Kazim Hasan is not well founded. The power of amalgamation is statutory power which can be exercised notwithstanding the fact that Memorandum and Articles of Association of the company may not contain express power to amalgamate with any other company. Thus the contention is overruled.
42. Adverting to fourth contention Mr. Kazim Hasan learned counsel for the Objectors contended that there has been lack of transparency in the process leading to the filing of the petition as Mr. Riazuddin Ansari is Chief Executive of both petitioners in violation of section 203 of the Companies Ordinance and contends that the Chief Executive of a public Company shall not directly or indirectly engage in any business, which is of the same nature, and directly competing with the business carried out by the Company of which he is Chief Executive. To contend such plea, Mr. Kazim Hasan contended that he cannot be the Chief Executive of both Companies, as both Companies are engaged in the same business. The section 203 of the Ordinance says:-- "203. Chief Executive not to engage in business competing with company's business.---(1) A Chief Executive of a public company shall .Not directly or indirectly engage in any business which is of the same nature as and directly competes with the business carried on by the company of which he is the Chief Executive or by a subsidiary of such company.
Explanation.---A business shall be deemed to be carried on indirectly by the Chief Executive if the same is carried on by his spouse or any of his parents, children, brothers or sisteRs,
(2) Every person who is appointed as Chief Executive of a public Company shall forthwith on such appointment disclose to the company in writing the nature of such business and his interest therein.
43. The perusal of the provisions of section 203 reveals that the Chief Executive of a public Company shall not directly or indirectly engage in any business which is of the same nature and directly compete with the business carried on by the Company of which he is Chief Executive or by subsidiary of such Company. The explanation to subsection (1) clarifies the position that a business shall be deemed to be carried on indirectly by the Chief Executive if the same is carried on by his spouse or any of his parent, children, brothers and sisteRs, The explanation to the section is enacted by the Legislature with purpose to explain what otherwise would be doubtful or ambiguous. To the extent, it explains a stipulated situation, its function is definitive inasmuch as it clarifies or defines the legal position in a supposed state of facts. The following cases can be referred for reference:--
(1) Bhola Nath Aggarwal and another v. Empire of India Life Assurance Co. Ltd. AIR 1948 Lahore 56;
(2) Messrs Rahmania Trading Co. v. Messrs Eagle Star Insurance Company Ltd. PLD 1960 SC 202, and
(3) Messrs Brady & Co. (Pakistan) Ltd. v. Messrs Sayed Saigol Industries Ltd. 1981 SCMR 494.
Therefore, in my view, Mr. Riazuddin Ansari being the Chief Executive of both petitioners it cannot be said that he directly or indirectly is engaged in the business of pharmaceutical. He is representing the Companies. No material has been placed to suggest remotely that Mr. Riazuddin is engaged in the same business personally or through persons mentioned in the explanation to the section. The interest must be personal. No provision has been referred to me either from the Ordinance or from memorandum, which bars the company, to appoint a person as its Chief Executive, who is holding the same position in another company. Therefore, in my view the objection is not tenable.
44. Reverting to the contention that the evaluation method adopted for determination of swap ratio of PLL with PD is inappropriate and has been used to give undue benefit to the majority shareholders and to the detriment of minority shareholdeRs, There is no controversy regarding evaluation of assets of PD except PLL which has been objected by both the objectors by taking objections diagonally opposite to each other.
The pre-merger and post-merger position of share holding of members in PD including the objectors can be glanced from the following table:-- Sr.No,Particulars No, of share% of HoldingRemarks
1. Parke Davis & Co. 1,480,300 75.79% Parent Co.
2. Spencer & Co.
(Pak).4,600 0.23% PD Objectors
3. National Bank of Pak.2,82,270 14.41% do---
4. Pak Libya Holding Co.14,000 0.71% do---
5. Beach Luxury Hotel.7,500 0.38% do---
6. State Life Insurance.75,000 3.83% do---
7. Other Minority shareholders.94,730 4.84% Minority Total shareholding before merger.1,958,400 100.00% {{TABLE}} Sr.No,Particulars No, of share% of HoldingRemarks
1. Parke Davis & Co. 1,752,024 75.79% Parent Co.
2. Spencer & Co.
(Pak).4,600 0.23% PD Objectors
3. National Bank of Pak.2,82,270 14.41% do---
4. Pak Libya Holding Co.14,000 0.71% do---
5. Beach Luxury Hotel.7,500 0.38% do---
6. State Life Insurance.75,000 3.83% do---
7. Other Minority shareholders.94,730 4.84% Minority Total shareholding before merger.1,958,400 100.00% Elaborating his contention Mr. Kazim Hasan contended that the factory of the PLL is on lease for 25 years w,e,f, 22-2-1982 and has completed 20 years, thus remain (5) five years and the land has been valued as if PLL is the owner of the same.
The second objection taken is with regard to the tax contingency of Rs,34 million which has not been shown against PLL while evaluating the PLL by the auditors on the ground that Pfizer Corporation has agreed to indemnify PLL for a potential tax liability that may arise. He contended that the indemnity was not before the Auditors nor the same was placed during the meeting nor it has been filed with the petition. Therefore, the amount of Rs,34 Million has not been shown as tax contingency of PLL though such tax contingency amount has been shown against the PD. The auditors have misconducted and the report has not been prepared keeping in view the interest of all shareholdeRs,
45. Mr. Qazi Faez Isa, learned counsel for the petitioners has met this objection by contending that the auditors Iqbal have taken notice of the valuation report of Messrs Nanjee & Co. Wherein the land has been assessed on the basis of rental value of remainder period of lease. To support his contention, he has referred the valuation report of Messrs lqbal Nanjee & Co. As Annexure-A through a statement dated 6-1-2001, which has been based by the auditors for valuation of the land and building of PLL in the following table in respect of valuation of assets of PLL:-- Net book value at 30 Nov. 2000Valuation at 30 Nov.2000Surplus on valuation (Rupees in 000)
Building on leasehold land (including leasehold interest in land.20,359 48,772 28,413 Plant and machinery 87,945 117,964 30,019 Furniture, fixture and of fice equipment7,248 7,248 Vehicles 3,310 8,525 5,215 Computer equipment 3,391 681 2,710 Plant and machinery held for disposal4,392 4,610 218 Messrs Iqbal Nanjee & Co. Have assessed the value of land on the basis of lease agreement in the following terms:- "Annual rent as per present lease agreement for 16090 sq. metres.Rs.820,590 Annual rent as per current (i.e. Rs.241,19 X 16090) Rs.3,880,747 Annual differential Rs.3,060157 Total Annual differential for six years: Rs.18,360,942 75% of the above Rs.13,770,706 SAY Rs.13,770,000 The summarized valuation figures of the assets of PLI., by Iqbal Nanjee & Co. With particular reference to the land, 'building, plants, machinery, furniture, fixture and office equipments, vehicles, computers and I.T. Equipments is reflected from following statement:- Sr.No,Description Present/market value (Rs,)
1. Land Rs,13,770,000
2. Building Rs,35,002,000
3. Plant and Machinery Rs,48,772,000 3.1 Manufacturing Rs,43,879,629 3.2 Utilities Rs,68,717,654 3.3 Quality control Rs, 7,410,717 Rs, 120,008,000
4. Furniture fixture and office equipmentRs,7,248,000
5. Vehicles Rs,8,525.000
6. Computers and I.T. equipment Rs,680,537 Total Rs,185,233,537 According to the valuations report of Iqbal Nanjee Co. Land and building, have been separately valued at 13,770,000 and Rs,35,002,000 respectively, total comes to Rs,48,772,000 and the same valuation has been reflected by the auditors i,e, Rs,48,772,000 of building on leasehold land (including leasehold interest in the land). Therefore, the contention of Mr. Kazim Hasan that the land has been grossly over-valued is not tenable.
47. So far the contention of Mr. Kazim Hasan regarding the indemnity is concerned, the Indemnity Letter dated 8-12-2000 issued in favour of PL on behalf of Pfizer Corporation USA has been produced during the argument which reads as follows:-- "December 8, 2000 Pfizer Corporation 235 East 42nd Street New York NY 10017-5755 Cable PFIZERSUB Pfizer Laboratories Limited 12 Dockyard Road, West Wharf, Karachi, Pakistan.
Dear sirs, INDEMNITY In consideration of you agreeing to use all available means of seeking to legally avoid the payment of such potential tax liability as is not reflected on your balance-sheet as at 30th November, 2000 but considered to be contingent liability (Potential Tax Liability) we Pfizer Corporation of Panama do hereby unconditionally and irrevocably agree that upon your demand we or one of our affiliates will indemnify you and hold you harmless against the Potential Tax liability which you may be required to settle consequent upon the final determination of such amount, on the termination of the legal proceedings in respect thereof.
We agree that our liability under this indemnity shall be discharged by payment of the amounts certified by your auditors as being due and payable in terms hereof.
Yours sincerely, (Sd.) For Pfizer Corporation."
Mr. Kazim Hasan has tried to attack the indemnity, on the ground that it is not clear under what law indemnity has been issued and who ha,s issued and the law applicable and in what manner the indemnity is to be enforced.
48. Section 124 of the Contract Act defines the contract of indemnity "a contract by which one party promises to save the other from loss caused to him by the conduct of promisor himself or by the conduct of any other person". The difference between the contract of indemnity and contract of guarantee has been pointed out by Courts as follows:-- For contract of guarantee or suretyship, there must be a tripartite agreement between the creditor, the principal debtor and the surety. In case of contract of indemnity it is not necessary for the indemnifier to act at the request of the debtor whereas in the case of contract of guarantee or surety it is necessary that the surety or guarantee should give the guarantee at the request of the debtor. In the former case it is direct agreement between the two parties thereto, whereas, in the latter, there are three parties, the creditor, the debtor and surety who undertake at the request of the debtor to answer the default of the debtor.
Muhammad Ali Chagla, learned Judge of Bombay High Court in Gujanan Moreshwar v. Moreshwar Madan AIR 1942 Bombay 302 has explained the contract of indemnity as follows:-- "Section 124 deals only with one particular kind of indemnity which arises from the promise made by the indemnifier was to save indemnified from the loss caused to him by the conduct of the indemnifier himself or by the conduct of any other person."
50. Mr. Qazi Faez Isa, learned counsel for the petitioners, argued that on the same line and maintained that the contract of indemnity contemplates only promises and promisor and referred the case of Habib Bank Ltd. v. Waheed Textile Mills PLD 1989 Kar. 371; (2) Bank of New India Ltd. v.
Govinda Prabhu AIR 1964 Kerala 267; (3) Parbhoot Chand v. Abdul Rehman PLD 1960 Dacca 983.
51. On examination of the letter of Indemnity executed by Pfizer Corporation in favour of Pfizer Laboratory one finds that by the letter of indemnity Pfizer Corporation indemnifier has promised to save Pfizer Laboratories Ltd., indemnified from the potential tax liability. The amount of such liability is in the sum of Rs,34 millions which has not been reflected in the balance-sheet dated 30-11-2000.
Therefore, the indemnity provided by Pfizer Corporation fulfils the legal requirement. So far objection of Mr. Kazim Hasan regarding the mode and manner of enforcement of Indemnity, there would have no hitch in enforcement of indemnity against the foreigners who has the investment and financial interest in Pakistan. Therefore, the contention of Mr. Kazim Hasan is not sustainable on that account.
52. Mr. Kazim Hasan also contended that the valuation report has been prepared to favour the majority shareholders and not keeping in view the interest of whole shareholders and the report was not disclosed to the minority shareholders and to contend this plea he pointed out significant statement made by the auditors in the valuation report as follows:-- "Valuation of two Companies and the valuation needed."---However, in view of the fact that both organizations are predominantly owned by one shareholder, the following methods were considered appropriate for the valuation for the purpose of arriving at the swap ratio for the purpose of merger."
He further pointed out from the report at the same page whereby circulation of report was restricted to the management of the two companies, "this report is intended for the use only by the management of Parke Davis & Company Limited and Pfizer Laboratory Ltd. Hence the circulation of this report should accordingly be restricted to the management of Parke Davis & Company Ltd.
And Pfizer Laboratory Limited and report should not be distributed or circulated to any other person/entity without our written consent".
On the basis of above statement of auditors, Mr. Kazim Hasan contended that the report was prepared keeping in view the interest of majority shareholders, thus the report cannot be taken as independent valuation report prepared keeping in view the interest of all the shareholdeRs, Its non- disclosure to the member is also malicious. Thus same cannot be reasonable and fair.
Mr. Qazi Faez Isa, learned counsel for the petitioners to repudiate the contentions by contending that one of the objectors is Director of PD and has not raised such objection during the Board of Directors meeting and that they cannot be raised objection at the subsequent stage.
Be that as it may, if the report is unfair and unreasonable then it cannot be taken to be fair and reasonable, nor the estoppel can be pleaded against all objectors.
53. Mr. Shahanshah Hussain, learned counsel for the objector at the very outset offered that the minority shareholders are 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 shareholders 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 offer. Various proposals put forth on behalf of objector of PLL could not be materialized due to lack of consensus on price.
54. Reverting to the contentions raised on behalf of minority shareholders of PLL through Mr. Shahanshah Hussain in respect of swap ratio of PLL and PD i,e, 264:1. It has been contended that it is very unfair and unreasonable to them as per the proposed scheme 264 equity shares of PLL are to be exchanged for one equity share of PD. It has to be kept in view before formulating the proposed scheme of compromise, the expert opinion was obtained by the petitioners-Company from the Chartered Accountant Firm claimed by the petitioners to be world renowned known as "KPMG" through their Pakistani Associates Messrs Taseer Hadi Khalid Company a firm of Chartered Accountants, who considered all the relevant aspects and suggested the aforesaid ratio keeping in view the valuation of shares of the respective companies. I must state that the valuation of shares is technical and complex problem which can be appropriately left to the consideration of expert in view of accountancy, unless the auditors have left something which should have been taken or vice versa a round for rejection by Court.
Company law mentions four factors which are to be kept in mind in evaluating the shares:--
(i) Capital cover.
(ii) Yield
(iii) Earning capacity, and
(iv) Marketability.
For arriving at the fair value, three well-known methods are applied:--
(1) The manageable profit basis method (the earning per share method).
(2) The net worth method or the break value method and
(3) The market value method.
The auditors after considering various recognized method of valuation for the purpose of merger and also after noticing the characteristic of both companies, evaluated the shares by applying book value of net assets, affair value of net assets and market price; as follows:-- Valuation method Value per share at 31 Dec.2001 PD PLL Book value of net assets288.08 0.63 Fair value of net assets.360.99 1.37 Market price 359.04 N/A The auditors recommended the valuation of petitioners on fair value on net assets basis for swap ratio I share of PD to 264 shares of PLL. The question is what method should be adopted for arriving at a proper swa p ratio. The usual rule is that shares of the going concern must be taken on fair value of share.
55. The problem of valuation of similar companies has been dealt with by Weinberg and Blank in the Book Takeovers and mergers in which it has been stated that some or all of the following factors will have to be taken into account:--
(1) The Stock Exchange prices of the shares of the two companies before the commencement of negotiations or the announcement of the bid.
(2) The dividends presently paid on the shares of the two companies. It is often difficult to induce a shareholder, particularly an institution, to agree to a merger or a share for share bid if it involves a reduction in his individual income.
(3) The relative growth prospects of the two companies.
(4) The cover (ratio of after tax earnings to dividends paid during the year) for the present dividends of the two companies. The fact that the dividend of one company is better covered than that of the other is a factor which will have to be compensated for at least to some extent.
(5) In the case of equity shares, the relative gearing of the shares of the two companies. The gearing of an ordinary share is the ratio of borrowing to the equity capital.
(6) The values of the net assets of the two companies. Where the -transaction is a thorough going merger, this may be more of a talking point than a matter of substance, since what is relevant is the relative values of the two undertakings as going concerns.
(7) The voting strength in the merged enterprise of the shareholders of the two companies.
(8) The past history of the prices of the shares of the two companies.
56. Mr. Shahanshah Hussain, learned counsel contended that the incorrect valuation affects the minority shareholders more than the majority shareholders as they are losers and to elaborate his contention he maintained that Pfizer has 76.4% interest in PD and 98% interest in PLL. Maximum theoretical loss in enforcement cannot go below its interest in PD, which means that PLL is going to PD at no cost and will lose 22% of its investment in PLL whereas the minority shareholders will lose all.
Mr. Shahanshah Hussain pointed out that the post merger position of shareholdings of the objectors of PLL minority Group on the basis of proposed swap ratio of 264 of PLL to (1) share in PD can be visualized from the following table, which will put them to unimaginable disadvantageous position effecting their proprietary rights adversely: - Objectors/ Shareholders Share in PLL expected shares in PD 1.Zahid Hussain 126,232 478.15 2.Habib Patel 22,220 84.166 3.Muhammad Ali Khan 54,400 206.06 4.Abbas Ali 36,425 137.97 5.Noorullah Merchant 16,500 62.5 6.Bilqees Patel 16.500 62.5 7.Zaitoon Patel 16,500 62.5 8.Musheer Ahmed Pesh Imam 1,500 5.68 9.Nayyar ' Mushir Pesh Imam1,500 5.68 Mr. Shahanshah Hussain maintained that the swap ratio as proposed is the accumulative effect of wrong courses adopted by Company in siphoning the profits through "Transfer pricing" putting the minority in disadvantageous position and parent company in 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 "ongoing concern" by auditoRs, The phrase "net asset value" can be defined", a mathematical figure representing the total value of assets of the corporation less the prior claim and liability. Theoretically liquidating value to which shareholders would be entitled upon the company going out of business.
' He elaborated that Zahid Hasnain will get only 478 'shares worth Rs,4,780 in PD in exchange of 126,232 shares in PLL, which he had acquired at the cost of Rs,1,577,900. Compensation worked out at 3 paisa for every 10 rupees invested by him and consequence thereof he has to lose over 99.5 per cent. Of its value. He also pointed out that on the basis of aforesaid swap ratio out of 37 minority shareholders of PLL 32 will not get any share as their shareholding is not big enough to get 100 share in PD which is sometime shown in marketable lot on the stock exchange. Zahid Hasnain is entitled to 478 shares in PD and will get 400 shares and cash in lieu of fraction of 78 shares in PD in exchange of his 126,232 share in PLL. This is because of the incredulous valuation of the business undertaking by PLL made for the purpose of securing its merger with PD, which is the result of erroneous valuation on net asset value in respect of an ongoing concern (PLL). He also contended that "net asset value" method is applied to companies under liquidation.
Mr. Shahanshah Hussain enforcing his arguments contended that the valuation itself suffers from basic definition problem. It does not take account of material factors that affect the valuation for the minority shareholdeRs, They have ignored the concept of ongoing concern and has not considered all the assets of PLL, which is ongoing concern. He contended that PLL is purchasing raw material from the parent company Pfizer Inc. For their Drugs i,e, Norvasc, Vibramycin, Feldene, Diflucanete at exorbitant price. It cannot be said an "arm's length transaction" and is prejudicial to the interest of minority shareholdeRs, Mr. Shahanshah Hussain also maintained that this plea is supported by the report complied by Ministry of Health, Government ,of Pakistan in 1999 titled "Transfer Pricing" in import of pharmaceutical raw material. This fact has been brought through rejoinder filed on behalf of the Objector of PD Group in para. 34, which is known as "Transfer Pricing" and cannot be taken as Arm's Length Transaction and referred the definition of Arm's Length from the Words and Phrases, Permanent Edition, West Publishing Co. Volume V, which defines "transaction between a parent corporation and a wholly owned subsidiary are not at arm's length.
' According to Black's Law Dictionary the term "arm length transaction" "said of a transaction negotiated by unrelated parties, each acting in his or her own self-interest; the basis for a fair market value determination. Commonly applied in areas of taxation when there are dealings between related corporation e.g. Parent and subsidiary. Ineeto, Inc. v. Highgins, D.C. N.Y., 21 E. Supp.
418. The standard under which unrelated parties, each acting in his or her own best interest, would carry out a particular transaction. For example, if a corporation sells property to its sole shareholder for $ 10,000 in testing whether $ 10,000 is an "arm's length" price it must be ascertained for how much the corporation could have sold the property to a disinterested third party in a marginal transaction.
57.Mr. Shahanshah Hussain 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; through following table: Drug Raw material Price per kg. paid to Pfizer by PLLPrice at which from other sources Norvasc Amlodpine BesylateUS $ 30,000 US $ 500 Bulk Chemical-UK US $ 200 Korpran India US$ 500 Reddy Singapore US $ 600 FAKO Turkey.
VibramycinDoxycycline US $ 700 US $ 60 Incam Switzerland US $ 51 Jiagti China US $ 26 Sinochem China.
Feldene Piroxcam US $ 7,500 US $ 50 Medx Switzerland US $ 70 Calao Italy US $ 41 China Chemical Diflucan Fluconazole US $ 29,880 US $ 7,130 Scher--ing Germany.
He contended that the accumulated loss shown in the report is Rs,680 million, which is only due to "Transfer Pricing" i,e, excessive cost of its raw material import. He also pointed out the gradual increase in the value of the import at the cost of minority shareholdeRs, He maintained that though the reason for loss has been shown as control of drugs price by the Government which has been disputed by him. It has also been contended that on the basis of the amount paid to the parent company due to "transfer pricing the tax has been paid by PLL under the presumptive tax scheme at the cost of the minority shareholders on behalf of parent company i,e, majority shareholdeRs, He maintained that this factor has not been considered by the Auditors, who were not independent but the petitioner's own Chartered Accountant, which is confirmed from the Director's report Annexure-C to the affidavit of Afsar Hussain containing the statement regarding merger with Parke Davis and appointment of Messrs Taseer Hadi Khalid & Co. As valuators, whereby the Board of Directors considered the expedient manner of fully utilizing the benefits on account of Pfizer Laboratories Ltd. And Parke Davis being associated companies and resolved that the two Companies should be merged and appointed Messrs Taseer Hadi Khalid & Company to undertake the valuation of the Company as at 31st December, 2000. They also noticed that a similar exercise is being undertaken for the valuation of Parke Davis. On the basis of such valuation, the swap ratio of the shares of the two companies to be determined. After the valuation process is completed, a scheme of amalgamation was to be prepared for presentation to the Board for their consideration".
Mr. Shahanshah Hussain also disputed that the valuation was done by the KPMG as maintained by petitioners and contended that Messrs Taseer Hadi Khalid, Chartered Accountant may be affiliated with of KPMG a reflection from the share Valuation Report Annexure-G. Thus he contended that even the valuation was not got done by independent valuator but by their own Chartered Accountant. He also referred the following statement from the report to content that the report has been prepared keeping in view the interest of the majority shareholder and not the interest of whole shareholdeRs, Thus, it cannot be an independent report. The statement reads as follows:-- "However, due to facts that both the organizations are predominantly owned by one shareholder, following methods were considered appropriate for valuation for the purpose of arriving at swap ratio for the purpose of merger."
58. Mr. Qazi Faez Isa, on the other hand, has contended that PLL is obliged to purchase the material from the parents Company for two reasons, firstly, to maintain the standard of medicine and secondly due to patent use by the PLL and Mr. Isa also tried to demonstrate the pricing of Norvasc as cheaper with similar drug of other leading. Competitor in value of per day dosage basic from the following table. It may be noticed that at present I am concerned with the interest of the shareholders and not patients and particularly with reference to the transfer pricing, therefore, it hardly advances case of the petitioners in any way.
Product Manufacturer Strength Pack SizeMRP Rs, Price/Tab Cap Rs,Usual daily dose Daily treatment cost Rs, Benitec MSD 10mg 20 179,32 8.97 10-20mg once daily8.97 Tenopmin ICI 100mg 14 130.50 9.32 100mg once daily9.32 Norvasc Pfizer 5mg 20 238.50 11.92 5mg once daily 11,92 Adalatoc Bayer 30mg 20 261.96 13.10 30mg once daily 12.10 Capoten BMS 4mg 20 133.30 5.57 25mg twice daily 13.33 Monopril Searle 240mg 10 67.81 6.78 20mg twice daily 13.36 Moropril BMS 10mg 30 320.32 16.00 20mg once daily 16.00 Concor Merck 10mg 14 237.46 16.96 10mg once daily 16.96 Renitec MSD 20mg 20 351.12 17,56 10-20mg once daily17.56 Zestril ICI 20mg 14 288.30 20.59 20mg once daily 20.59 Hebesser Highnoon 60mg 100 688.10 6.88 60mg three times20.64 Diovan Novartis 80mg 28 1045.00 37.32 50mg once daily 37.32 Cozaar MSD 50mg 20 993.60 49.68 50mg once daily 49.68 Antihypertensive Drugs with sales than Rs,20 million per year. Source: IMS QIV, 2001.
Usual daily dose based on manufacturer's information.
Mr. Qazi Faez Isa also tried to contend that if any company indulges in "Transfer Pricing" it is duty of the Government to check. He also pointed out that the matter is sub judice before the Authority concerned. No doubt, a deal between the subsidiary and parent company cannot be an "arm's length transaction", commonly known in taxation area "transfer pricing". No doubt, it is duty of the authority but if that factor gives benefit to the majority and affects the interest of the minority the same can be considered a factor, by the Court while sanctioning the scheme of merger, if it is the valuation prejudicial to the interest of minority.
59. Mr. Shahanshah Hussain further contended that PLL has not been taken as "ongoing" concern for the purpose of valuation. The intangible assets, such as, goodwill and other assets of PLL, such as, patent, trade mark and licences have not been accounted by the auditor though value of business prowess and know-how are largely made up by the value of business intangible assets "Intellectual property". He pointed out the mode in determining the value of corporate stock for the purpose of consolidation "amalgamation" by referring Corpus Juris Secundum, Volume XIX that in determining value of corporate stock for purposes of consolidation, earnings, general economic conditions, and every fact which has tendency to indicate value should be considered. In determining fair value of stock, assets of corporation will be deemed to include every kind of property and value whether reality or personality tangible or intangible including goodwill as going concern.
60. Mr. Qazi Faez Isa, on the other hand contended that the "goodwill" is not assessable. He further contended that ordinarily the fair value of share of companies is dependent on three factoRs, These are the break-up value, the dividend earning capacity and market value of share and he drew my attention to the method adopted for determining fair value of shares in number of cases pertaining to merger, which had received approval of the Courts in Pakistan including the following:-- In re: Lipton Pakistan Ltd. 1989 CLC 818; Atlas Autos Ltd. v. Registrar, Joint Stock Companies 1991 CLC 523; Lever Brothers (Pakistan) Ltd. 1997 CLC 1837; Aslam Bin Abrahim, Advocate v. Monopoly Control Authority PLD 1998 Karachi 295; I.C.I. Pakistan v. Crescent Investment Bank 1999 CLC 1037. While calculating fair value of the shares in the aforesaid cases for the purpose of their respective scheme of merger one of the three factors have been taken into account.
Mr. Qazi Faez Isa also brought to my notice the case of Commissioner of Gift Tax v. Kusumben D.
Mahadevia (1980) 2SCC 238; 1980 SCC (Tax) 239, in connection with the valuation of shares of a going concern under the provisions of Indian Wealth Tax and Gift Tax Act and the rule framed thereunder. Under those provisions, at the material time, valuation had to be done on the basis of the price which in the opinion of the Assessing Officer, the share would fetch if sold in open market.
This view was not adopted by larger Bench Supreme Court of India in Hindustan Lever Employees'
Union v. Hindustan. Lever Ltd. And others 1995 Suppl. 1 SCC 499, a case of merger.
61. Mr. Qazi Faez Isa further pointed that Denning, L.J. In Dean v. Prince and others, Vol. 1 All India Law Report 479 rejected the concept of valuation of business on the basis of "ongoing concern". In the aforesaid case Harman, J. Held that the Auditors were wrong in making the valuation on the basis of Company being wound up and rejected the report on the ground that the auditors failed to consider the following factors:--
(1) Right to control the company.
(2) Valuation of the business as going concern.
(3) Valuation of the assets of the business.
(4) Valuation on a break-up basis.
(5) The special purchaser.
In appeal the valuation report was maintained and one of the factors namely concept of "ongoing concern" was addressed as follows:-- "The Judge seems to have thought that the auditor should have valued the business as a going concern. I do not think the auditor was bound to do any such thing. The business was a losing concern which had no goodwill, and it is fairly obvious that, as soon as MRs, Dean had sold the one hundred and forty shares to the other two directors, as she was bound to do she would in all probability call in the moneys that she was not likely to press for the moneys because that would be killing the goose that laid the `eggs' but he wrong about this because as soon as she sold the shares, she would have got rid of the goose and there was no reason why she should not press for the moneys. She was an executrix and the company's position was none too good. It had only pound 2000 in the bank to meet a demand for pound 2,200. In these circumstances, the auditor was of opinion that there was a strong probability of the company having to be wound up and he rejected the going concern basis. For myself, I should have thought he was clearly right, but, at any rate, no one can say that his opinion was wrong."
62. I have reproduced the reasons for rejection of valuation of business as ongoing concern in detail only to distinguish the present case. The auditors were of the opinion that there was strong probability of the company having been wound up and ignored the business as "on going concern". In the present case PLL is an "ongoing concern". It is nobody case that there is no probability of PLL being wound up. On the contrary it is being merged, therefore, the rejection of concept of ongoing concern basis for valuation in Dean (supra) cannot be applied in the present case. There is no dispute about PLL's "goodwill" "Pfizer" and the same is being retained by transferee Company after the merger by naming it Pfizer Pakistan Limited. Apart from "goodwill" the patent and trade mark (intellectual property) owned by PLL are tangible assets. The same have not been considered by the auditors and reasons for non-consideration that it cannot be valued is not sustainable. Here I may refer the opinion expressed by Denning, L.J. In Dean v. Prince (1954) Vol. Chancellary Division -749 (case referred to by Mr. Qazi Faez Isa). Denning L.J. Observed as follows:- - "Evaluation could be impeached, not only for fraud but also for mistake or miscarriage of justice e.g. If the expert made an arithmetical error or took something into account which he ought not to have taken into account or vice versa, or interpreted the agreement wrongly, or proceeded on some erroneous principle; even if the Court could not point to actual error, nevertheless, if the figure itself was so extravagantly large or so inadequately small that the only conclusion was that the expert must have made some error, the Court would interfere, but on the facts, bearing in mind particularly the precarious nature of the 'company' tenure of its premises, it could not be said that the auditor had erred and, therefore, his valuation ought not to be disturbed."
In the instant case the valuation has been done keeping in view the interest of the majority shareholders which is reflective from the statement of the auditor reproduced above. The circulation of the report has been restricted to the management and PD and PLL a case of non- disclosure.
Thirdly the auditors have failed to assess the PLL on the basis of "ongoing concern" and ignored the valuable assets such as patent and trade mark and also ignored the intangible assets (goodwill Pfizer) which has affected the valuation of PLL and ultimately affected the swap ratio which has not been considered. Therefore, I am of the view that the swap ratio calculated by the auditors at 264 shares PLL to I share PD on the basis of valuation report, which is deficient as pointed out above as such the swa p ratio adopted in the scheme it cannot be termed to be fair and reasonable. It is obvious on the basis of above noted facts that the scheme as proposed is clearly flowed and worked seriously to the disadvantage of the objectoRs,
63. Mr. Shahanshah Hussain has raised the question of exorbitant increase in paid-up capital though 5 Right issues, whereby Pfizer increased its stake in PLL by transfer back parts of the profit earned through Pfizer sale, which really belong to PLL. I am of the view that it need no discussion in view of the order that I intend to pass.
64 I am conscious of the jurisdiction of the Court that such jurisdiction is not appellate jurisdiction simultaneously the Court cannot shirk its responsibility from examining the scheme of merger and is not bound to treat the scheme as a fait accompli, but in doing so the Court would not be substituting its own judgment for commercial judgment. The approval to scheme of arrangement approved by the majority of the shareholders specified in section 284 of the Companies Ordinance is subject to 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 subsection (2) of section 284 of the Ordinance stipulates that a proposed scheme will have effect only sanctioned by the Court.
The scheme of amalgamation approved by the Board of Directors of the petitioners on the basis of valuation report of the auditors which 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 "ongoing 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. The petition is disposed of with the directions to the petitioners in the following terms:--
(1) The exercise of valuation be conducted afresh through an independent auditor, who should evaluate the petitioners as ongoing concern and for the purpose of valuation the factors such as tangible and intangible assets and every factor that concern that valuation be taken into consideration.
(2) On the basis of fresh valuation, by independent auditors, the majority shareholders of PLL to purchase the share from minority shareholders who are willing to part with their share on reasonable price, and
(3) The scheme be put to the members in the extraordinary general body meeting for their approval to be convened under Court directions.
The petition is accordingly disposed of on the above terms with listed applications, however, with no order as to costs.
I am indebted to the learned counsel for their able and exhaustive arguments and also appreciate their manner, in presenting their case, in a clear and lucid form.