When an application is made for compromise or arrangement, which includes merger, it is for the court to call a meeting of shareholders and creditors.
Excited commentators pleased as punch with the stroke play of the batsman on the crease often exclaim that one cannot set a field for every shot. Likewise, the lawmakers cannot possibly think of all the contingencies while making the law on a subject. One such contingency that has not been foreseen by the lawmakers is cancellation of meetings duly convened. And the issue is not entirely academic.
On July 6, 2006, McDowell and Co. Ltd had informed the Bombay Stock Exchange that it would not be going through with the general meeting scheduled to be held on July 13 as it had abandoned the idea of merger of two overseas companies with it, the agenda for the meeting.
While the Companies Act, 1956 is silent on the issue whether a meeting once convened can be cancelled, no light is shed either on this issue by the Model Articles of Association made by it vide Table A. The standard Listing Agreement too has not foreseen this contingency and does not, therefore, make any reference to it. In the event, it would be instructive to know what the company's own Articles of Association has to say on the issue.
Legality of cancellation
A company is not obliged to toe the official line and is free to break away from Table A so long as the self-regulatory measure is not in conflict with any express provision of the Companies Act or with the company's own Memorandum of Association.
If the company's Articles do permit such cancellation, the debate as to the legality or otherwise of the cancellation should be over in no time because such a clause in its Articles does not violate any express provisions of the Companies Act and hopefully does not go against the company's own Memorandum either.
The company says the High Court of Karnataka, where the merger petition was resting, had allowed the withdrawal of one of the merger schemes. And the other merger scheme, according to the company, has not been filed with the High Court having jurisdiction in the matter. Since the High Court has been taken into confidence and it apparently found nothing mala fide in such withdrawal, perhaps McDowell will emerge unscathed but it and others faced with similar situations in future would do well to heed the advice of Justice Satish Chandra of the Allahabad High Court in Rajpal Singh vs State of UP (1968 Comp LJ 22).
The judge observed that while the board which has the power to convene a meeting must be assumed to be having the power to cancel it too for bona fide and proper reasons, the more proper course would be for the board not to arrogate to itself such power, but to hold the convened meeting and then have the matter decided thereat.
A costly formality?
A hardnosed businessman may think such a formality to be futile and costly. But those who wear corporate democracy on their sleeves should do much more than just mouthing platitudes. The shareholders deserve an explanation as to what prompted the board to have second thoughts on its original proposal.
Under Section 391, when an application is made for compromise or arrangement which includes merger, it is for the court to call a meeting of shareholders and creditors.
In this case, since the court was told as an afterthought that the company was no longer interested in going through with the merger proposal and the court had acceded to this, there was no scope for calling the meeting of shareholders by the court. But there was nothing to prevent the company itself from calling a meeting of shareholders if only to take them into confidence as to why the proposed merger was given up.
(The author is a Delhi-based chartered accountant.)