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Details pertaining to Acquisition of a private limited company


26-Sep-2023 (In Corporate Law)
We are a small private limited company engaged in food processing. We haven't started production yet as we are in the advanced stages of commissioning of the plant. One of the leaders in the food processing industry wants to acquire 51% of our company and we would retain 49% of the company. If this happens, a. if the company goes for expansion would the directors of the private company have to fund the expansion or can we refuse to fund and request for a term loan instead? b. Can the parent company issues shares to try to dilute our holding of 41%? c. Are there any other issues we need to watch out for if this deal goes forward?
Answers (3)

Answer #1
834 votes
From the above circumstances of acquisition of 51% shares of your company, you are given a status of a minority shareholder. As per section 235 of the Companies Act, 2013, all the shareholders not holding less than 10% shall be given an audience or be heard before any major decision making about the company. Hence, in case you desire a term loan instead of the funds then you can put forth the same.

If the Private Company issues shares to dilute your share holding then you can find recourse under section 241, 242 of the Companies Act, 2013 for oppression, mismanagement of the Company before the National Company Law Tribunal (NCLT) where the NCLT has full powers to give a Stay Order on the affairs of the company and put a full brake on the oppressive acts of the majority shareholders.

Answer #2
504 votes
Dear client,

This is regarding your above query. Please find my preliminary response to your query posted on LawRato.

a. if the company goes for expansion would the directors of the private company have to fund the expansion or can we refuse to fund and request for a term loan instead? 

Response: At the outset, it is pertinent to clarify that the funding of any expansion is carried out either through equity shares, preference shares or debt or loan instruments which may vary based on the requirement such as: (i) in case of preference shares- convertible cumulative preference shares, (ii) in case of debt or loans- convertible debentures or non-convertible debentures, loans (including term loan), commercial papers etc.

Directors are not bound to fund the company either by equity or debt, however, they are also not prohibited to fund provided that the necessary approvals are taken in the board meeting and extra-general meeting of the members. The directors may reject to infuse fund in the company, however, the investors expects that the promoter should infuse amounts based on the circumstances.

Alternatively, you may also propose to raise the loan: (i) from relative(s) of a director then the same should be procured in accordance with the Companies (Acceptance of Deposits) Rules and Articles of Association of the company, any (ii) financial institution, in this case the board of directors shall require to pass special resolution in accordance with Section 180 (c) of the Companies Act, 2013 (“CA”) if the borrowed money (the proposed amount and already borrowed amount) exceeds aggregate of its paid-up share capital and free reserves, apart from temporary loans obtained from the company‘s bankers in the ordinary course of business.

You may also propose to raise the fund through private placement offer which are one of the effective methods prevalent in start-up companies.

b. Can the parent company issue shares to try to dilute our holding of 41%?

Response: For this query, I assume that you have shareholding or you will be offered shareholding in the parent company.

It may dilute the holding depending on your shareholding in the parent company. However, it is pertinent to note that the shareholders are entitled of right-issue in accordance with the Section 62 of the Companies which means that if you have shareholding in the parent company and it issues shares then it shall be first offered to all existing members; if you reject the offer then your shareholding will dilute.

c. Are there any other issues we need to watch out for if this deal goes forward?


Response: Yes, please ensure that following key items are well negotiated in the shareholders’ agreement which will be effective once the investor purchases your shares under Share Purchase Agreement or subscriber new shares through the Share Subscription Agreement:

(i) Board composition- numbers of board members which will represent you;
(ii) Right to transfer the shares- what are the conditions table for transferring of shares by you. Whether such conditions include Right of First Refusal, Drag Along Rights and Tag Along Rights etc.
(iii) Voting rights- the voting rights of the investors should be in proportion to the shareholding in the company and must not usurp the voting rights of the promoters.
(iv) Lock in-period- whether investors has put any lock-in-period for promoters not to sell the shares in the company;
(v) Non-compete and non-solicitation clause;
(vi) Liquidation preference-what are the terms proposed for liquidation preference such as 1X or 2X with participator or non-participator conditions;
(vii) Personal liability;
(viii) Exit opportunity
(ix) Information Rights;
(x) Affirmative voting rights- the matters which cannot be passed in board meeting or members’ meeting without the investor’s consent.

We do all documentation such as Share Purchase Agreement, Shareholders' Agreement, and Disclosure Schedule etc. for the investee company side.

Should you need any further clarification please feel free to contact us.
Answer #3
753 votes
I would need more facts to give a complete legal opinion - however if the controlling company acquires 51% of the company, they would have the decision-making power and can independently choose to go for expansion and decide on the operations. If you want to retain control, a term loan would be appropriate.

Disclaimer: The above query and its response is NOT a legal opinion in any way whatsoever as this is based on the information shared by the person posting the query at lawrato.com and has been responded by one of the Divorce Lawyers at lawrato.com to address the specific facts and details.

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