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Updated: Feb 9

by Utsarga Dash *


Freeze-out or Squeeze-out ensues once the majority shareholders decide to oust the minority shareholders from a public company. Here, the majority shareholders acquire the shares of the minority shareholders, effectively freezing them out of the company. Even though the benefits of concentration of ownership and simplification of capital structure are indispensable, the protection of minority shareholders is imperative.
Once the majority shareholders decide to expel the minority shareholders from a company, its impact on corporate governance becomes palpable. Corporate Governance (CG) is responsible for protecting the rights of all the shareholders, including the rights of minority shareholders. It is through the effective implementation of CG mechanisms that the whims of the majority can be curtailed.
This article analyses the prevalent legal framework for a freeze-out merger in India and the protection available to the dissenting minority shareholders. Further this article reasons how proper CG practices can mitigate the misery of minority shareholders.


The Companies Act 2013 (The Act) incorporates comprehensive frameworks regulating Mergers and Acquisitions (M&A) including freeze-out mergers. Section 236 of the act states that the shareholders should have at least a 90% majority to freeze out the remaining minority. Further, the acquirer is obligated to notify the company about its intention to acquire the shares of the remaining shareholders, if it becomes the registered shareholder for at least 90% of the issued share capital of the company as a result of a merger, share exchange, security conversion or a similar transaction.
Section 235 of the act recognises that the shares of the dissenting minority can be compulsorily acquired by the transferee company. However, the transferee company needs to issue a notice showing its intention to acquire the shares of the dissenting minority shareholders within two months from the expiry of the four months’ time limit where it gains the approval of 90% of the shareholders. Here, shareholders are considered as minority if the value of their shares is not more than 10% of the value of the impacted shares. The transferee company becomes entitled to acquire the shares of the minority, provided that the National Company Law Tribunal (NCLT) does not object to the same. However, in AIG (Mauritius) LLC v. Tata Tele Ventures, it was held that the 90% requirement shall comprise of “different and distinct persons”.
A company can also freeze-out the minority by following a capital reduction method as embedded in Section 66 of the Act. In this method the company buys back its shares from the selected shareholders and cancels them, effectively eliminating certain shareholders. Section 61(1)(b) of the act and Rule 71 of NCLT Rules 2016 provide for a freeze-out merger using the reverse stock split method. This method is used in a scenario where the stock prices are decreasing and the company needs to prevent a delisting.
Further, the Companies (Compromise, Arrangements and Amalgamations) Amendment Rules 2020 states that members of a company holding a three-fourth majority need to make an application for arrangement for the purpose of takeover under Section 230 of the Companies Act 2013 if they wish to acquire any part of the remaining shares.


Foss v. Harbottle (Harbottle Case) is credited to have introduced the concept of majority rule in corporations. It was held that minority shareholders lacked a legal standing to bring in a suit on behalf of the company, rather a company itself can only sue for a wrong committed against it. Freeze-out mergers, where the controlling shareholders remove the minority shareholders from a company, are the most palpable display of the will of the majority shareholders where they forcibly prevent minority shareholders from their property. Thus, the law needs to strike a balance between the interest of the majority and the rights of a minority.
Most of the protection provided to minority shareholders in the Companies Act 2013 revolve around the issues of oppression and mismanagement. However, the act has fewer safeguards for minority shareholders in M&A transactions. As per Section 235 of the Act, the sole remedy available to the dissenting minority shareholders is to approach the NCLT within one month of receiving the notice from the transferee company. However, if NCLT does not pass an order to the contrary, the transferee company becomes entitled to purchase the minority shares as per the terms specified in the notice.
Section 236 of the act also provides the minority shareholders with an opportunity to make an offer for the sale of their shares to the majority shareholder at a price determined under this section.
Often, there arose a conflict in determining the price at which these shares were to be purchased. In the well-known In Re: Cadbury India Ltd. Case, the court established parameters that need to be followed for a freeze-out merger to happen without prejudice and on fair terms. This includes, inter alia, fair and reasonable terms, not undermining the public interest, and avoiding discrimination against any particular class of shareholders.
Thus, Rule 27 of Companies (Compromise, Arrangements and Amalgamation) Rules, 2016 (Amalgamation Rules) deals with methods for determining a fair price that is to be paid to the minority shareholders whose shares are being compulsorily acquired. In the case of listed companies, the fair price is determined by the Board of Directors (BOD) following the manner prescribed by Security and Exchange Board of India (SEBI) under the relevant regulations framed by it, as may be applicable and the valuation report submitted by the registered valuer justifying the reason for such valuation. However, for determination of a fair price in the case of unlisted public companies and private companies, the directors have to look into the highest price offered by the acquirer in the last twelve months and the valuation report of a registered valuer. The registered valuer needs to consider specific parameters for the determination of fair value such as, earning per share, return on net worth, the book value of shares and price earning multiple in comparison with the industry average.


In India Clause 49 of the SEBI Listing Agreement elaborates on the various corporate governance measures that are mandatory for listed companies. It prescribes the presence and composition of the Board of Directors in the company. It also includes the formation of statutory committees like the Audit Committee, and Nomination and Remuneration Committee.
Appointment of Independent Directors (ID) is a critical stride in protecting the vulnerable minority shareholders in a freeze-out merger. Section 149(6) of the act elaborates on the appointment criteria for Independent Directors. This ensures that a person with relevant technical knowledge and having a fair judgement is appointed as an Independent Director. The Independent Director cannot be related to any promoter(s) and management of the company or possess any significant monetary interest in the corporation for their independent functioning. Owing to this independent stature, the Independent Directors can assess the fairness of the terms and conditions of the freeze-out merger. This includes reviewing the valuation of shares and their impact on minority shareholders.
Further, an Independent Director can continuously oversee the merger process and ensure utmost fairness and transparency. The statutes also empower the Independent Directors to vote in the board meetings. Thus, they can vote on proposals related to freezing-out mergers, taking into consideration the interest of minority shareholders.
An Independent Director can also be appointed as a small shareholder director. At least 10% of the total number of such shareholders or 1000 small shareholders, whichever is lower, can give the notice to appoint a small shareholder director to represent their interest at a company’s board meeting. This gives the much-needed board representation to small shareholders who might feel powerless in a situation of a freeze-out merger.
For example, the Independent Directors of Dell Inc. played a key role in ensuring fair price for its minority shareholders when the company was being delisted.
Transparency is one of the most notable features of Corporate Governance. Proper Transparency and disclosure practices can help minority shareholders make informed decisions to protect themselves in a freeze-out merger. This involves having proper access to the company’s financial statements, board reports, and other committees such as audit committee reports. Effective transparency and disclosure practices can supplement in the price determination process mentioned in Rule 27 of Companies (Compromise, Arrangements and Amalgamation) Rules, 2016. Further, Rule 26 of the amalgamation rules states that the onus is on the transferee company to give notice regarding all material information to the dissenting shareholders.


Minority shareholders’ protection has always remained at the forefront of the freeze-out merger debate. Though, there exist certain protections to minority shareholders, their implementation is largely dependent on effective corporate governance. Independent directors can not only help to assess the terms of the merger but also assume an active role in the decision making process. Similarly, enhanced transparency and disclosure practices can help the company to comply with statutory requirements and provide necessary information to minority shareholders, allowing informed decision making. Thus, when winter comes for minority shareholders in the form of freeze-out mergers, it shall be corporate governance that will act as a shield.

*Utsarga Dash is a student at KIIT School of Law at the time of

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