ORDER
P.N. Shinghal, J.
1. These two petitions have been filed under Sections 391 and 394 of the Companies Act (I of 1956), and as they relate to a scheme for the amalgamation of the two companies, they are being dealt with together. The Cotton Agents (Rajasthan) Limited, hereinafter called the 'transferor company', and Shree Vijay Luxmi Trading Company Limited, hereinafter called the 'transferee company' were both private companies at the time of their registration. They however became public companies by virtue of Section 43A of the Companies Act. Both the companies have a share capital of Rs. 5,000/- each, with shares of Rupees 100/- each. In the case of the transferor company, the shares have been paid to the extent of Rs. 50/- each, so that its subscribed capital is Rs. 2 1/2 lakhs. The shares of the transferee company have been fully paid up and its subscribed capital ic therefore Rs. 5 lakhs. The articles of association of both the companies prohibit an invitation to the publicto subscribe to any shares or debentures or debenture stocks of the companies and the v also prohibit the transfer of the shares to a person who is not a member so long as any member or any person selected bv the directors, as one who should be admitted to the membership of the company, is willing to purchase them. There is of course no such prohibition for the transfer of shares by a member to his family. Both the compa-nies have been carrying on their business, and their balance-sheets have been placed on the record. It also appears that the nature of the business of the two companies is not dissimilar. It has been urged in this court that both the com-panits deal in shares and securities and they are mainly financiers and investors.
2. As has been stated, both the companies have prayed for their amalgamation under a scheme of amalgamation (Ex. 2). Under it, all the properties, rights and powers of the transferor company are to be transferred to and vest in the transferee company. So also, all the liabilities and duties of the transferor company are to be transferred to the transferee company. The scheme provides further that the transferee company shall allot to every member or nominee or nominees of every member of the transferoi company who shall require it so to do, 2 fully paid up equity shares of Rs 100/- each for every 3 equity shares of Rs 100/- each paid up to Rs. 50/- per share held by him. The shares so allotted are to rank pari passu with the existing equity shares of the transferee company. While presenting this scheme of amalgamation, the petitioners have made it clear that there are no debenture holders of the two companies and that there arc no creditors of the transferor company it has also been stated that there are a few creditors of the transferee company but they have no objection to the scheme of amalgamation. Lists of shareholders of the two companies have been filed There are only 6 shareholders of the transferor company, while there are 8 shareholders of the transferee company.
3. On the presentation of the petitions, this court made a detailed order for the holding of meetings of the members of the two companies directing. inter alia, that notices of the meetings shall be given personalty to all shareholders and advertised in the newspapers. Notices were also ordered to be given to the Registrar of Companies and the Central Government The chairman of the meetings has made his reports. It appears that 5 out of 6 shareholders of the transferoi company representing 4,200 shares, of the value of Rs. 2,10,000/-, attended the meeting. Four shareholders representing 850 shares of the value of Rs. 85,000/- attended the meeting of the transferee company. Both the meetings havo unanimously approved the scheme of amalgamation. On receipt of the chair-man's report, the petition was ordered to be advertised for hearing in this court and notices were also given to the Official Liquidator and the Central Government. No objection has been filed by any shareholder or creditor. It may also be mentioned that the Official Liquidator has. on scrutiny of the books and papers of the company, made a report under the second proviso to Sub-section (1) of Section 394 that the affairs of the transferor company have not been conducted in a manner prejudicial to the interest of its members or the public.
4. The Central Government however made a representation on August 30, 1967 to the effect that the scheme for the allotment of the shares in the transferee company was unduly favourable to the members of the transferor company because the fair price of a share of the transferor company was Rs. 25/- per share of the face value of Rs. 100/- paid up to the extent of Rs. 50/- while it was Rs 60/- in the case of a fully paid up share of the transferee company of the face value of Rs. 100/-. It has therefore been represented that the proper rate of exchange should be 5 shares of the transferee company for 12 shares of the transferor company.
5. The learned counsel for the petitioners filed a representation on November 8, 1967. challenging the computaion of the value of the shares by the Central Government and praying that it may be asked to disclose the basis of its calculation. On a further notice from the Court the Central Government has made an additional representation on January 22. 1968, pointing out the reasons for its representation that the method of calculation adopted by the petitioners was not correct and giving the basis on which the Government had suggested the exchange ratio of the shares of the two companies in its earlier representation. It may be mentioned that the Central Government has further pointed out that even according to the break-up value method of computation adopted by the petitioner-companies, a sum of Rs, 50,670/ has to be deducted from the value of the assets of the transferor company since the value of its quoted investments has gone down by that amount. The Registrar of Companies appearing on behalf of the Central Government has cited Re The Electric Power Act and Amendments Thereto : Re West Canadian Hydro Electric Co. Ltd. (1950) 3 DLR 321 for the observation at page 357 that under the English and Canadianlaw, the proper method of valuing a com-mercial enterprise is upon a commercial basis, which could require, among other things, a consideration of its demonstrated and prospective ability to make profits, to which should be added any special value the property has to the owner.
6. The learned counsel for the petitioners has admitted that the deduction of Rs. 50,670/- proposed by the Central Government is justified because of a fall in the value of the quoted investments of the transferor company, but otherwise there is no agreement between the learned counsel for the petitioners and the Registrar of Companies appearing on behalf of the Central Government. It is not in dispute, however, that the deduction of Rs. 50,670/- will not materially alter the share for share value worked out by the petitioners.
7. In order to appreciate the controversy, it may be mentioned that while the petitioner companies have adopted the break-up value of the shares as the basis for determining the exchange ratio of the shares and nave based their calculation on the balance-sheet for the period ended December 31, 1965, as also the average of the balance sheets of the preceding three years, the Central Gov-ernment has suggested that such a method of calculation is not proper or satisfactory because the buyers or sellers in the open market, are more directly influenced by the apparent earning power of the shares than by calculation with reference to the net assets of a company. It has therefore been proposed that while the value of the assets of the companies may be regarded as generally relevant, such value should not be made the sole or paramount basis of calculation and that the earning power of the companies and the degree of safety of their capital assets should also be taken into consideration. On this basis, after deducting the amount of Rs. 50,670/- referred to above, the Central Government has stated that while Rs. 25/- would be the fair value 'jf a share of the transferor company, Rs. Rs. 60/- would be the fair value of a share of the transferee company. Details of the calculation have been shown in Annexure 'A' filed with the additional representation of the Central Government. As has been stated, the petitioners have relied on the balance-sheets for the purpose of determining the net worth of each share. It has further been pointed out that while almost all the funds of the transferor company have been invested in quoted shares and that investment is more safe and sound, the investment of the funds of the transferee company is in un-quoted shares which yield no dividends or in money-lending transactions which are not equally safe. It has also been pointed out that the low yieldon the investments of the transferor company is due to recession which is a temporary phase and that the suggestion of the Central Government for valuation of the shares on the basis of their earning power will not be suitable.
8. Jt would thus appear that the dispute before me is regarding the method of valuation of the shares of two companies, and the only question for decision is whether I should withhold my sanction to the scheme of amalgamation on the ground that the proposed valuation is unfair.
9. While providing for the requirement regarding the court's sanction in respect of a scheme of amalgamation referred to in Sections 391 and 394 of the Companies Act, the Legislature has not thought it necessary to indicate the grounds on which the court should give or withhold the sanction. It cannot however be doubted or disputed that in such a case the method of valuation should be the one most calculated to place a fair value on the shares. For the same reason it is also necessary that a common yard-stick should be adopted for the valuation of the shares of the two companies or, in other words, that the same factors should be taken into account in assessing the two sets of shares.
10. Valuation of shares in an amalgamation or share for share take-over is made on a consideration of some or all of a number of relevant factors. Thus, the stock exchange prices of the shares of the two companies, the dividends paid on the shares, the relevant growth prospects of the companies, the ratio of distributable earnings to dividends paitf during the year, the values of the ne(sic) assets of the two companies etc. are factors on which the valuation is often rested. The answer to the question whe-ther some or all of these factors can be applied in the case of a given scheme of amalgamation, depends on the circumstances of each case. For instance, the usual and the convenient factor of the stock exchange prices of the shares of the companies may not be available for consideration in a case like the present, as it is admitted that the shares of the two petitioner-companies are not, and have not been quoted at the stock exchange. The other difficulty is that, as has been mentioned while almost the whole of the investment of the transferor company is in quoted shares of which the stock exchange prices are available, the transferee company has no such assets as it has been functioning mainly as a financier to private parties. It is true that the transferee company has shown a better yield, but its earning capacity may not be a safe criterion of the valuation of its shares because there is always an element of risk in the case of advances to private parties. The transferor company is not exposed to such a risk and its investment is therefore more safe, though less profitable. As regards the relative growth prospects of the two companies, nothing has been stated by the petitioners or the Central Government, and it seems that this factor cannot also be availed of in the present csse.
11. It would thus appear that quite a few of the usual factors for assessing the relative values of the shares of the companies are not helpful for settling the present controversy. There is also a great deal of dispute regarding the ratio of distributable earnings to dividends paid during the prior years, and the weight to be attached to the value of the net assets. But I feel that it is not really necessary for me to take any serious notice of the controversy for I am inclined to think that even if it is assumed that the valuation proposed in the scheme is open to criticism, that by itself will not necessarily justify the conclusion that I should withhold my sanction in the circumstances of the present case on the ground that the valuation is unfair. The reason is that in such cases it is for the objector to show why the court should exercise its discretion to reject the scheme; and this is quite a heavy onus. Such a view was taken bv Maugham, J., in Re Hoare and Co. Ltd., (1933) All ER 105 and it has been approved and followed in several other cases While rejecting the argument regarding 'expropriation', the learned Judge made the following well-known observations on the question of the fairness of the scheme for the transfer of shares. --
'The other conclusion I draw is this, that again prima facie the court ought to regard the scheme as a fair one inasmuch as it seem? to me impossible to suppose that the court, in the absence of very strong grounds, is to be entitled to set up its own view of the fairness of the scheme in opposition to so very large a majority of the shareholders who are concerned. Accordingly, without expressing a final opinion on the matter, because there may be special circumstances in special cases, I am unable to see that I have any right to order otherwise in such a case as I have before me, unless it is affirmatively established that, notwithstanding the views of a very large majority of shareholders, the scheme is unfair,'
This view was followed in Re. Evertite Locknuts (1938) Ltd., 1945-1 All ER 401, and it was also accepted by Somervell, L. J. in the other well-known case of Re Press Caps, Ltd.. 1949-1 All ER 1013, where the criterion of Maugham J., was accepted and followed for there was nothing to doubt the bona fides of the recommendation of the directors. Again in In re Sussex Brick Co. Ltd.. (1961) 1 Ch 289n, the view of Maugham J., was quoted at length and followed by Vaisey, J. If I may say so with all humility, these decisions are based on a sound reasoning and I have no hesitation in following them myself.
12. When therefore it appears that inspite of a personal notice to all the share-holders, and a general notice to all con-cerned, the scheme of amalgamation hasbeen unanimously approved by the meetings of the two companies, and no objection at all has been filed by any of theshareholders or creditors, the court shouldregard the scheme and the valuation ofshares proposed in it as fair to all concerned. It is also a fact that no allega-tion nf fraud or undue influence has beenmade and there is no reason to doubt thebona fides of the recommendation made bythe two companies. So also, there is noallegation that the books of account of thecompanies are unreliable, or that different or discriminating methods of valuation have been adopted in respect of theshares of the two companies. To add toall this is the fact that both the com-panies practically function under arestricted membership and have a verylimited number of shareholders. In sucha closely knit membership, the membershave opportunities to know all about theaffairs of their respective companies andit is a matter of much significance thateven then they have not challenged thevaluation of the shares proposed in thescheme and have, on the other hand, approved it. I have therefore no reason tothink that the valuation is unfair. iNfact it appears to me good enough in allthe circumstances, and I have no hesitation in according my sanction to it. Aformal order may be drawn up in theprescribed form and a certified copyhereof filed with the Registrar of Companies within fourteen days. There willbe no order as to the costs.