Dr.
Mrs. Renuka Datla Vs. Solvay Pharmaceutical B.V. & Ors [2003] Insc 544 (30 October 2003)
S. Rajendra
Babu, P. Venkatarama Reddi & Arun Kumar
Special Leave Petition (civil) 18041-18042 of 2000
WITH INTERLOCUTORY
APPLICATION NO.2/2002 With Interlocutory application Nos. 3 & 4/2002 P. Venkatarama
Reddi, J.
The
dispute is between the shareholders of two pharmaceutical companies which
figure as respondents herein. Suits were filed by the petitioners, who are the
wife and husband, in the City
Civil Court, Hyderabad impleading the Companies and the
third respondent by name Shri D. Vasant Kumar, the subject matter of the suits
broadly being the transfer of shareholdings. The suit O.S.No. 551 of 2000 was
filed by the petitioner in S.L.P.No. 18035/2000.
Along
with the suit the petitioner-plaintiff applied for an interim injunction
restraining the defendants-respondents 1 and 3 (Solvay Pharmaceutical B.V. and Shri
D. Vasant Kumar) from transferring/exchanging their shareholdings in defendant
Companies 2 & 4 pending disposal of the suit. The other two Suits of
similar nature were filed by the petitioner in S.L.P.Nos. 18041 & 18042 of
2000 and interim injunction was sought for. The I.A. filed in O.S.No. 551 of
2000 under Order 39 Rules 1 & 2 was dismissed by the learned trial Judge
while vacating the ex-parte injunction granted earlier.
However,
the ad interim injunction granted in the suits filed by the petitioner in SLPs
18041 & 18042/2000 remained in force.
Aggrieved
parties filed three appeals in the High Court under Order 43 Rule 1 C.P.C. The
appeal filed by the petitioner in the first S.L.P. against the refusal of
injunction was dismissed by the High Court and the other two appeals filed by
the aggrieved defendants were allowed and the ad interim injunction in both the
cases was vacated. Against this common order of the High Court, the present S.L.Ps.
were filed by the plaintiffs namely, Mrs. Renuka Datla and Dr. Vijay Kumar Datla.
On the initiative taken by this Court while hearing the S.L.Ps., the parties
settled the disputes and the terms of mutual settlement were reduced to writing
and they were signed by all the parties. This Court passed the following order
on 15th July, 2002 to give effect to the settlement.
"Counsel
for the parties state that the dispute between them has been settled. A copy of
the terms of mutual settlement signed by the parties has been filed in Court
and initialed by the Court Master. Terms of settlement are recorded. The terms
contemplate valuation to be done of the intrinsic worth of the two companies
and the value of 4.91% shares in the said two companies held by the
petitioners. Valuation has to be completed within a period of four weeks. The
terms of mutual settlement shall form part of this order.
Copy
of the order be sent to Shri Y.M. Malegam, Chartered Accountant, M/s. S.B. Billimoria
& Co., Mumbai-400 038." According to the terms of settlement, M/s. Solvay
Pharmaceuticals (R1) and Mr. Vasant Kumar (R3) have agreed to purchase 4.91%
shares held by the petitioners in the two companies namely Duphar Pharma India
Ltd. (DPIL renamed as Solvay Pharma India Ltd.) and Duphar Interfran Ltd.
(DIL), the petitioners having agreed to sell the said shares. Shri Y.H. Malegam,
Chartered Accountant, Mumbai had to evaluate the intrinsic worth of both the
Companies— DPIL and DIL as going concerns and the value of the said 4.91%
shares held by the petitioners in those two Companies "by applying the
standard and generally accepted method of valuation". Shri Malegam should
give opportunity to the respective parties to make their submissions. The
valuation of Shri Malegam shall be regarded as final and binding on all the
parties to the settlement. The relevant date for valuation was fixed as 31st March, 2001. The payment for shares shall be
made within two weeks of the submission of the valuation report and the
statutory approvals thereof failing which the respondents shall pay interest at
the rate of 15% p.a. simultaneously with receipt of the total consideration for
4.91% shares, the petitioner shall effect the transfer of shares. The
respondent Shri Vasant Kumar shall withdraw the Suits filed in the City Civil
Court, Hyderabad; likewise, the petitioners shall withdraw the Suits filed by
them in the City Civil Court and also the appeals in this Court—C.A.Nos.
8316-8321 of 2001 as well as the application filed by Smt. Renuka Datla under
Section 399(4) of the Companies Act before the Central Government. It was
agreed that the S.L.P. shall be kept pending for passing the final orders in
terms of the settlement.
Mr. Malegam
submitted his valuation report with his covering letter dated 28.9.2002. After
assessing the intrinsic worth of the two Companies as going concerns, the value
of 4.91% shares was arrived at at Rs.8.24 crores.
A
brief reference to the salient features of valuation may be appropriate.
The Valuer
considered three methods of valuation.
(1)
Asset based
(2)
Earning based
(3)
Market based.
While
working out the earning based valuation, the value on the basis of
capitalization of past earnings was adopted. The discounted cash flow method
which is the commonly used methodology for future earnings based valuation was
eschewed from consideration. The reasons given by the valuer are;
(1) No
independent (third party) projections have been provided;
(2)
Both parties have provided projections which differ substantially as
illustrated in Tables 1.1 and 1.2.
The
basic principle and method of evaluation has been stated thus:
"The
intrinsic value of the share would be based on the asset and earnings based value
with appropriate weightages given to the two methods.
Since
the value of a company/business would be more influenced by its earnings value
a higher weightage is given to the earnings value as compared to its asset
value. The asset value is considered as an integral part of the intrinsic value
as it has a persuasive impact. Thus, I have considered the following weightages
for determing the intrinsic value * Asset based value 1/3rd weightage *
Earnings based value 2/3rd weightage The market (for listed company—its market
price) based value indicates the value ascribed by the buyer/seller of the
share at a given point in time.
This
is influenced by ? the floating stock and the supply and demand, which gets
reflected in the volume and price of market transactions ? market perceptions
related to — the overall market — the industry — the company The recommended
value is the higher of the intrinsic value or the market based value. Though
rationally speaking, the recommended value should be the intrinsic value, it
may be possible that the market based value at a given point of time is higher
than the intrinsic value, which is indicative of a bullish phase / perception
of the market and/or industry and/or the company.
Therefore,
to take into account this practical reality, I have suggested the higher of the
two.
The
intrinsic worth of the two Companies and the value of 4.91% shares in the two
Companies are set out at Para 7.3.1. As already stated, the value
of 4.91% shares has been worked out as 8.24 crores.
It was
made clear that the above value has been determined on the basis that 4.91%
shareholding carries no special rights. In this context, the Valuer has
referred to the claim of the petitioners that the value of 4.91% holding should
be higher than the value derived by applying the percentage to the intrinsic
worth of the Companies. In other words, the contention of the petitioners was
that the shares are to be valued on the basis that 4.91% forms part of the
combined holding of 25% of the Indian promoters' shareholding. The respective
contentions in this regard have been analysed by the Valuer as follows:—
"If the shares are to be valued on the basis of a holding of 4.91%, then
this holding does not give any special advantage to the holder or in this case
even to the purchaser since the respondents collectively hold in the two
companies 60.5% of the share capital of each company. On that consideration,
the value of the shares can only be 4.91% of the intrinsic worth of the two
companies.
On the
other hand, if the shares are to be valued on the basis that the 4.91% forms
part of the combined holding of 25% and therefore carries special rights, then
there has to be a premium attached to the value of the shares. Accordingly, the
value of the 4.91% shareholding would be the value determined by taking 4.91%
of the intrinsic worth of the two companies and adding thereto a control
premium." The Valuer concluded that he was not competent to decide upon
this controversial legal issue and therefore, the valuation was done without
adding the element of control premium.
Another
aspect debated before the Valuer was whether the value of the 'Vertin' and 'Colospa'
brands which are the original research products of the foreign promoter, should
be considered in the valuation of the 4.91% shares in DIL. It was contended by
the petitioners that DIL was legally entitled to carry on its business in 'Vertin'
and 'Colospa' along with other brands. The rights over these two brands were
transferred to Dupen Laboratories Private Ltd. and such transfer, according to
the petitioner, was in breach of contractual obligations under the Trademark
License Agreement dated 15.7.1975 etc. The Valuer, after referring to the
contentions, observed thus:
"…The
brands VERTIN and COLOSPA have been purchased by Solvay Pharmaceuticals BV from
Dupen Laboratories Private Limited. As such, these are not the assets of DIL.
DIL also has no investment in Dupen Laboratories Private Limited. Whatever may
be the claims of the petitioners in this matter against the respondents, this
is not a matter which should affect the valuation of the shares of DIL."
The petitioners have objected to the valuation by filing IA Nos. 2, 3 and 4 of
2002 wherein a prayer has been made to submit a supplementary valuation report
after adding 'control premium' to 4.91% shares and by adopting the DCF method
of valuation and including therein the value of Vertin and Colopsa brands. In
other words, the main objections are :
1.
That the control premium has not been added;
2. the
value of the brands Vertin and Colopsa, which according to the petitioners
continued to be the property of DIL, has not been included;
3. discounted
cash flow method has not been adopted though it is a generally accepted method,
even according to the Valuer.
The
learned senior counsel appearing for the petitioners relying on the decisions
in Dean vs. Prince & Ors. [1954 (1) All ER 749] and Burgess vs. Purchase
& Sons [1983 (2) All ER 4] has contended that notwithstanding the finality
attached to the decision of the Valuer, the Court can intervene if the
valuation was made on a fundamentally erroneous basis or a patent mistake has
been committed by the Valuer. Even accepting this principle, we are unable to
hold that the valuation is vitiated by a demonstrably wrong approach or a
fundamental error going to the root of the valuation.
The
first and foremost contention has focused itself on the non addition of control
premium. It is the contention of the petitioners that 4.91 per cent
shareholding which the respondents Mr. Vasant Kumar and another have agreed to
purchase is part of the promoters' shareholding of 25% and they consciously
avoided buying the other shares which were acquired by the petitioners from the
market. Certain special rights and privileges were attached to these promoters'
shareholding and, therefore, the intrinsic worth of the shares should have been
assessed by adding the control premium. As already noticed, the Valuer has
adverted to the respective contentions in this regard and indicated the
implications of treating or not treating 4.91 per cent shares as part of the
combined shareholding of the promoters. The Valuer rightly refrained from going
into this contentious issue. However, the Court has to necessarily address
itself to this issue canvassed before us. In answering this question, the terms
of settlement must be kept uppermost in the mind. It may be that the respondent
Shri Vasant Kumar agreed to purchase only 4.91 per cent shares of the
petitioners on account of these shares forming part of the promoters'
shareholding and in that sense they may have some additional value. But, the
Court has to go by the terms of settlement which is the last word on the
subject. The terms do not, either in express terms or by necessary implication,
contemplate the valuation by determining the intrinsic worth of 4.91% shares,
having due regard to their special or distinctive characteristics. The terms of
the settlement, as already noticed, contemplate the valuation of the intrinsic
worth of the two companies—DIL and DPIL as going concerns and the value of 4.91
per cent shareholding by the petitioners has to be worked out on that basis. As
rightly contended by the learned senior counsel for the respondents, if the
parties wanted a special treatment to be given to these shares and a control
premium or the like has to be added, it should have been specifically and
expressly mentioned in the terms of settlement. Such an important aspect would
not have been omitted while framing the terms of settlement if the parties had
agreed to the valuation on that basis. What has not been said in the terms of
settlement in specific and clear terms cannot be superimposed by the Court
while interpreting the terms of settlement. The language employed in the terms
of settlement which we presume would have been drafted after obtaining expert
legal advice does not even necessarily imply that special weightage in the form
of 'control premium' has to be given to these 4.91 per cent shares. If the
petitioners had insisted on the incorporation of such a provision, it could
very well be that the other party or parties would not have agreed to such
stipulation. The Court cannot, therefore, give any direction in regard to
control premium.
The
next objection is directed against the non-inclusion of Vertin and Colopsa
brands while valuing the intrinsic worth of the company DIL. In our view, the
learned Valuer has given relevant reasons for non-inclusion of the said brand
of drugs which stood transferred to Solvay Pharmaceuticals BV from Dupen
Laboratories Pvt. Ltd. They are not the existing assets of DIL. In fact, the
petitioners have put in issue in one of the suits filed by them the legality of
transfer and sought for a declaration that DIL continues to be the proprietor
of the two brands. The petitioners have agreed to withdraw various suits. In
any case, the petitioners cannot be permitted to thwart the terms of the
settlement by inviting the Valuer or this Court to go into the extraneous issue
as regards the validity of the transfer or incidental matters. The assets as
per the relevant records have to be taken into account by the Valuer and that
has been done. We, therefore, find no apparent error in excluding those brands.
The
other objection is about DCF method of valuation which the Valuer has described
as a commonly accepted method in adopting 'future earning based valuation'.
This involves "discounting the net free cash flow of a business at an
appropriate discount rate". We have already adverted to the reasons given
by the Valuer for not adopting this method of valuation. Those reasons cannot
be said to be irrelevant. It is contended that if the data and projections
furnished by the parties is not reliable the Valuer should have secured the
relevant data from independent sources or could have called for further
particulars. We find no merit in this argument. The DCF method is adopted while
resorting to valuation based on future earnings. It is not the case of the
petitioners that the future earning based valuation is the only reliable method
of 'earnings based valuation'. Moreover, the petitioners have not placed any
facts and figures to show that such method of valuation would result in a
definite increase in the share value going by independent projections. When
there are vast discrepancies between the projection given by the parties and
independent projections have not been provided, the Valuer has chosen the best
possible method of evaluation by capitalizing the past earnings. In doing so,
the future maintainable profits based on past performance is also an element
that has gone into the calculation. No prejudice whatsoever is shown to have
been caused to the petitioners by the earnings based valuation.
The
petitioners have relied on the decision of this Court Mahadevia [(1980) 2 SCC
238]. After referring to Mahadeo Jalan's case [(1973) 3 SCC 157] wherein
certain principles regarding valuation of shares were laid down, it was
observed thus:
"It
is clear from this decision that where the shares in a public limited company
are quoted on the stock exchange and there are dealings in them, the price
prevailing on the valuation date would represent the value of the shares. But
where the shares in a public limited company are not quoted on the stock
exchange or the shares are in a private limited company the proper method of
valuation to be adopted would be the profit-earning method. This method may be
applied by taking the dividends as reflecting the profit-earning capacity of
the company on reasonable commercial basis but if it is found that the
dividends do not correctly reflect the profit- earning capacity because only a
small proportion of the profits is distributed by way of dividends and a large
amount of profits is systematically accumulated in the form of reserves, the
dividend method of valuation may be rejected and the valuation may be made by
reference to the profits. The profit-earning method takes into account the
profits which the company has been making and should be capable of making and
the valuation, according to this method is based on the average maintainable
profits." We do not think that the valuation in the instant case runs
counter to the principles laid down therein. As seen from Enclosures 6.1 and
6.2 to the valuation report, the Valuer had arrived at market based valuation
in addition to the other modes of valuation and observed that the recommended
value is the higher of the intrinsic value or the marked based value. Thus, the
petitioners had the benefit of higher valuation. The first principle laid down
in the above decision has been kept in view. Moreover, the profit earning
method which has been referred to in the above decisions in the context of
valuation of shares of a private limited Company has also been applied, though
future earnings based valuation has not been done in the absence of reliable
figures. As observed by us earlier, the profit earning capacity of the Company
has not been excluded from consideration. Thus, the Valuer's mode of valuation
does not in anyway infringe the principles laid down in the said decisions to
the extant they are applicable.
In
final analysis, we are of the view that the Valuer approached the question of
valuation having due regard to the terms of settlement and applying the
standard methods of valuation. The valuation has been considered from all
appropriate angles. No case has been made out that any irrelevant material has
been taken into account or relevant material has been eschewed from
consideration by the Valuer. The plea that the valuation is vitiated by
fundamental errors cannot but be rejected.
In the
result IA Nos. 2 to 4/2002 are liable to be rejected. However, there is one
direction concerning the interest which we consider it appropriate to give in
the given facts and circumstances of the case. Though the grant of interest, as
prayed for by the petitioners, from 31.05.2002—the stipulated date of
submission of valuation report is not called for, we feel that the ends of
justice would be adequately met if the respondents concerned are directed to
pay the interest at the rate of 9 per cent on 8.24 crores, which is the value
of shares fixed by the Valuer, for a period of 12 months. True, the petitioners
contested the valuation and thereby delayed the implementation of settlement.
However,
having regard to the bona fide nature of the dispute and the fact that the
respondents have retained the money otherwise payable to the petitioners during
this period of 12 months and could have profitably utilized the same, we have
given this direction taking an overall view.
In the
result IAs 2,3 and 4 of 2002 are dismissed subject to the above direction as to
payment of interest.
The
SLP(c) Nos. 18035, 18041-18042 of 2002 shall stand disposed of in terms of the
settlement on record coupled with the direction to pay the sum of Rs. 8.24 crores
representing the value of 4.91% shares together with interest @ 9 per cent for
a period of 12 months within a period of four weeks from today subject to the
receipt of share transfer forms and the fulfillment of other formalities by the
petitioners. The suits which have given rise to these SLPs, and other suits and
proceedings mentioned in the Memorandum of settlement shall stand dismissed as
withdrawn. Accordingly, the SLPs are disposed of. No order as to costs.
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