Reconstruction/Amalgamation by sale of shares [Section 395]

Sale of shares is the simplest form of amalgamation. It involves take-over without following
the court procedure under section 391 and 394. Shares are sold and registered in the name
of the purchasing company or on its behalf. The selling shareholders receive either
compensation or shares in the acquiring company. In case certain shareholders dissent,
section 395 contains provisions for the compulsory acquisition by the transferee company of
shares of the dissenting minority. The shares may be acquired on the same terms on which
the shares of the approving shareholders are to be transferred to it. This will prevent the
minority shareholders from demanding too high a price for their shares.

Section 395 lays down as follows:

1. Where the transferee company has offered to acquire the shares or any class of
shares of the transferor company, the scheme or contract embodying such offer has
to be approved by the shareholders concerned within four months. The approval
must be given by the holders of not less than 9/10ths in value of the shares whose
transfer is involved. In computing 9/10th value of shares, the shares already held by
the transferee-company or its nominee or subsidiary are excluded.

2. If the offer is approved, the transferee company may, at any time within two months
of the expiry of the said four months, give a notice to the dissenting shareholders
that it desires to acquire their shares. The transferee company is entitled and bound
to acquire the shares of dissenting shareholders were approved unless on the
application of the dissenting shareholders within one month of such notice, the
court orders otherwise.

3. If the transferee-company already holds in the transferor-company shares of the

class whose transfer is involved, to a value more than 1/10 th of the total value of all
shares of that class in that company, then the above provisions will not apply and
the transferee-company cannot acquire the shares of the dissenting members.
However it may still acquire the shares of the dissenting members. However, it may
still acquire the shares if:

(a) It offers the same terms to all the shareholders of the same class, and
(b) The shareholders who approve of the scheme, besides holding not less than
9/10ths in value of the shares other than those already held by the transferee-
company by itself or through nominees, are also not less than 3/4ths in number
of the holders of those shares.
4. Where the transferee-company or its nominee or subsidiary already holds in the
transferor-company at least 9/10th in value of shares of the class agreed to be
transferred in pursuance of the scheme, then the transferee-company must give
 notice of the fact ot the remaining dissenting shareholders of the transferor-
company within one month of the date of transfer already made. On receipt of such
notice, the dissenting shareholders may, within three months, require the
transferee-company to acquire their shares. Then the transferee-company will be
entitled and bound to acquire such shares on the same terms as that of the
approving shareholders or on such other terms as may be agreed or as ordered by
the Court, on the application of the Tranferee-company or the shareholder.
5. Where notice has been given by the transferee-company to the dissenting
shareholder expressing its desire to acquire their shares and the court has not made
an order on the application of the dissenting shareholders modifying the scheme of
transfer, then the transferee-company must send a copy of the notice to the
transferor-company on the expiry of one month of the date of the notice, together
with an instrument of transfer executed by the transferee-company itself through
any of its persons and the deal also completed by the transferee-company in the
instrument. This time period of one month shall also run I n a case where a court
reference was made by the dissenting shareholder and the court disposed of the
petition onlyafter the notice was given, then from the date the petition was disposed
of. The transferee-company must also pay or transfer to the transferor-company
the amount or consideration representing the price of the shares which it is entitled
to acquire under the section i.e. section 395. Thereupon, the transferor-company
shall register the transferee-company as the holder of those shares and inform the
dissenting shareholder of the fact within one month of registration. The transferor-
company will also deposit the amount so received in a separate bank account to be
held in trust for the holders of shares in respect of which such amount has been
received.

Disclosure of information- As per sub-section (4A) of section 395 the following

provisions are to apply in relation to every offer or a scheme or contract involving
the transfer of shares or any class of shares in the transferor-company to the
transferee-company:
(a) every such offer or every circular containing such offer, or every
recommendation by the directors, of the transferor-company to its shareholders
to accept such offer, must be accompanied b such information as may be
prescribed by the central govt.
(b) Every such offer must contain a statement by or on behalf of the transferee-
company disclosing the steps it has taken to ensure that necessary cash will be
available.
(c) Every circular containing or recommending acceptance of such offer must be
presented to the Registrar for registration, and no such circular can be issued
until it is so registered.
(d) The registrar may refuse to register any such circular which does not contain the
prescribed information as per clause (a) above, or which sets out such
information in a manner likely to give a false impression.
(e) An appeal may be made to the court against an order of the Registrar refusing
to register such circular.

Any person responsible for issue of a circular containing an offer involving transfer of
shares under a scheme or contract without getting the same registered shall be
punishable with fine up to rupees five thousand.