[Subham Kumar Agarwal is an upcoming fourth-year student at the West Bengal National University of Juridical Sciences]
India’s public takeover regime is largely frontloaded with the Securities and Exchange Board of India (“SEBI”) imposing significant ex-ante discipline on the players. Yet where an acquirer holding significantly high shares in a company, usually following a takeover, attempts to acquire the remaining shares after delisting the target company or otherwise, the legal architecture surrounding such an acquisition, commonly known as a squeeze-out, is thin.
Indian companies usually opt for any of the following three routes for squeeze outs: first, section 235 of the Companies Act, 2013 (the “Act”) provides for a compulsory squeeze out of the remaining shareholders where an offer has been accepted by 90% of the shareholders to whom it is made. It is the only legal route that provides for a compulsory squeeze out. Nevertheless, this option is rarely put to practice because achieving 90% majority from a dispersed float is not feasible.
Second, companies can pursue a scheme of arrangement under section 230 of the Act. Any scheme under the said provision requires the imprimatur of the National Company Law Tribunal (“NCLT”) after being approved by a majority in number representing 75% in value of each class of shareholders present and voting, in separate meetings for each class. The minority, unless they form a separate class of shareholders, have little say in the terms of the scheme. Rule 3(5) of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, mandates a valuation based on a registered valuer’s report. Several parameters such as book value of shares, highest price offered in the past 12 months and earnings per share, among others, have been specified. Aggrieved minority shareholders are empowered to make an application to the NCLT under section 230(12) of the Act.
Third, and the most common among the three, is a selective capital reduction under section 66 of the Act which only requires a special resolution. This route is completely controller-driven. The Supreme Court has recognised selective capital reduction as a legitimate tool under section 66 in Pannalal Bhansali v. Bharti Telecom Limited (2026).
Within the second and third structures, minority protection is effectively compromised. Under capital reduction, section 66 does not mandate a valuation report, consequently allowing room for a controller-commissioned valuation report alongside no statutory protection against a discount for lack of marketability (“DLOM”). Although a scheme of arrangement under the second route fares better as it requires a statutorily mandated and independent valuation, it suffers its own downsides. The parameters of valuation fail to account for the future value of the company and do not prohibit DLOM.
Under both these mechanisms, the controllers can time the squeeze out when the value of the company is low or before significant financial growth as they enjoy informational upper hand. Even though recourse to NCLT is recognised, the consistent jurisprudence flowing from the judgment in Hindustan Lever Employees’ Union v. Hindustan Lever Ltd.limiting the role of the tribunals in adjudicating upon valuation reports acts as an impediment. Moreover, documented instances such as in Bharti Telecom highlight that following the delisting, public shareholders can be forced to accept a price that is materially lower without any principled rationale behind divergence.
This is more than just a theoretical grievance. It has a significant impact on deal economics and market confidence. There is no objective mechanism to arrive at a fair price in a squeeze-out that protects the interests of the minorities. The controllers are incentivised to offer lower value at delisting since a failed reverse book building (RBB) exercise can be remedied through a scheme under section 230 of the Act or capital reduction under section 66 of the Act, both at a lower value. The controllers have no incentive to arrive at credible valuations when a compromised valuation report passes judicial scrutiny. Paradoxically, disagreement over share value also affects the controllers by stalling the process making takeovers costly. It can potentially ensure that value reducing transactions do not go smoothly, but this also means that value creating transactions get stalled. In light of the same, the next section explores the Delaware model of “statutory fair value appraisal” and “entire fairness” standard.
The Delaware Model
Delaware corporate law addresses squeeze-outs through two mechanisms. The first of the two is known as the “statutory fair value appraisal” remedy. The Delaware Supreme Court in Weinberger v. UOP, Inc. (1983) fundamentally clarified the remedy. It held that dissenting shareholders in a controller cash-out are entitled to a “fair value” of shares determined by the courts and calculated using any generally accepted technique, including market multiples, discounted cash flow analysis and comparable transaction premia. The court also rejected the use of minority discounts in calculation of “fair value” in controller transactions. However, this mechanism provides a “price-only” remedy. The dissenting shareholders can approach the court to determine a “fair value” only and not to stall or halt the transaction.
The second mechanism to regulate fair dealing in controller cash-out or squeeze-out transactions under the Delaware corporate law is the fiduciary duty oversight under the “entire fairness” standard. The Delaware Supreme Court in Kahn v. Lynch Communication Systems, recognising the inherent coercion that forms a part of every controller cash-out, ruled that a formal shareholder approval is not genuine when the minority has little to no say in it and also harbours under the threat of controller punishment during normal course of business. In such scenarios where the minority challenges the transaction, the courts are empowered to undertake a review on both fair dealing and fair pricing fronts. The court in its later judgment of Kahn v. M&F Worldwide Corp (“MFW”), reduced the tenor of “entire fairness” standard by carving out an exception such that when the controller, from the outset, conditions the squeeze-out on an empowered independent committee and an informed majority-of-minority vote, the “entire fairness” standard will not be applied and the court will limit its review.
Cumulatively, the Delaware frameworks envision a clean structure balancing minority interest alongside incentivising the controllers or acquirers to adhere to a credible process, avoid minority backlash and bypass judicial scrutiny. They bolster institutional faith and ensure that price is not a barrier to squeeze-outs and minority exit especially after delisting. The MFW safe harbour allows acquirers to reduce litigation risks by investing in ex-ante governance. Additionally, “entire fairness” standards provide a doctrinal standing and promote valuation discipline even when no cases are filed.
The Appraisal Remedy in India
This post does not propose to copy-paste the Delaware model into the Indian corporate space. It proposes to transplant a framework tailored to Indian corporate needs which would rationalise squeeze-outs in a manner that balances the interests of minority shareholders with that of acquirers. In that regard, it proposes to incorporate only the “fair value” determination model into the Indian law. The second model, i.e., “entire fairness” standard which reviews both fair dealing and fair pricing, is not workable in the Indian corporate regime because it would be in sharp contradiction to the long established “commercial wisdom” doctrine. Moreover, the minority shareholders have been provided with several remedies to counter unfair dealing by acquirers. This post proposes the incorporation of the aforementioned proposal in the Indian corporate regime through either of the following two design choices:
First, a transaction-specific trigger: under this design, a “fair value” determination by NCLT occurs in all cases where, after a takeover, the acquirer attempts to squeeze out the residual shareholders. The acquirer can choose any of the three methods of squeeze-out; however, value determination happens only through court appraisal. The NCLT carries out a holistic value determination through recognised techniques, free of discounts and taking into account, among other things, the future value of the company and value offered at the time of delisting. The burden would then lie upon the acquirers to challenge the valuation by proving specific value diminishing factors. The trigger is specific and raises a remedy precisely when acquirer control and opportunism are high.
Second, a dissenter-protection design: under this design, what changes is the trigger. The NCLT will not determine the “fair value” in all cases of squeeze out and for all shareholders. It will be obligated to determine only where the shareholders are not satisfied with the valuation offered by the acquirers and consequently raise a plea before the NCLT. Such value determination will take place only for the dissenting shareholders and shall be binding on them. The dissenting shareholders must raise their plea before the NCLT within a stipulated time period and deposit their shares in a demat escrow. This framework will eliminate frivolous litigation in value-creating transactions, as the valuation determined by the NCLT, which is binding, may be less than that offered by the acquirers (in case there is a premium). However, this framework should have a safe harbour provision similar to the Delaware model. If the acquirers can demonstrate that (a) the valuation was determined by an independent valuer taking into account the future value of the company and free of discounts, and (b) that the valuation received majority-of-minority vote, the court should not engage in “fair value” determination by itself.
The most obvious objection to the aforementioned model is further clogging of the NCLT and delayed exits. While the objection is only fair, it can be easily remedied. The law must prescribe a minimum shareholding (say, 0.5% of the issued share capital) to be eligible to raise a plea, the tribunal must impose costs on litigants when the value arrived at by the tribunal is within or less than the value range offered by the acquirer and stipulate strict NCLT timelines. Moreover, the requirement of depositing the shares in a demat escrow account filters out litigants seeking leverage lacking any genuine plea.
Another plausible objection to the proposed model is that the NCLT lacks commercial sophistication to undertake a comprehensive value determination. Nevertheless, such an understanding is arguably misplaced. Valuation disputes in squeeze-outs are already being litigated as seen in the Philips and Bharti Telecom episodes. The NCLT already handles valuation intensive mergers, demergers and oppression matters. Thus, the question is not whether NCLT can deal with such disputes or not; it is already engaged in this field. The question is: what doctrines should guide the NCLT in dealing with these matters? This post precisely answers this question by invoking the comparator in the form of Delaware law.
Conclusion
The proposed, carefully tailored, value determination model in squeeze-out is not just doctrinal but also practically tested. It addresses structural problems associated with the law governing acquirer-dominated minority squeeze-outs and adds credibility to the process both from the acquirer and the residual shareholders’ perspective. Credibility ensures that the squeeze-out process sees less litigation and is business friendly. By tying valuation to an external, NCLT determined process, the framework largely dilutes acquirer’s ability to orchestrate the timing of the squeeze-out. The safe harbour provides a genuine incentive to the acquirer to follow the due process providing fair value to the minorities. The proposal is, therefore, practical rather than punitive. At its core, it makes the takeover market work better for every stakeholder. The doctrinal anchor adds teeth to the Indian courts and tribunals.
– Subham Kumar Agarwal