NCLT Kolkata Bench dismisses 3rd Attempt by Phillips NV to gain at the expense of Indian minority shareholders

2024-11-21 05:30:09 Legal / Law

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In 1957, Philips India went public & in 2004 it delisted from the Indian bourses. Currently, Philips India was attempting squeeze out of minority shareholders for the third time, who hold
approximately 3.87% of the company. Ironically, the company claimed that this move will unlock value for minority investors, but the offer is seen by minorities as a forced exit at unjust valuation. It stated in its petition to NCLT – “Over the years, the Company has been receiving multiple and regular requests through calls, emails and other recognized modes of communication from shareholders to buy-out their shareholding in the Company, since they do not have any other mechanism to monetize their shareholding in the Company, in a fair and transparent manner”. It is sad to note that none of the Independent Directors on the Board of Philips India or the even the global Parent have taken an objection to this misleading contention.

~83% of minority votes were cast against their proposal but strangely rules in India allow the majority shareholder, i.e Philips, to push through the same using its majority status – clearly not a move seen by minority as unlocking value. Hopefully the government & MCA take note of this
anomaly that the entity forcing a squeeze out – provides the forecast for a valuation to fulfil their objectives and is allowed to vote in favour of the same as well. Thankfully, NCLT Calcutta today ruled in favour of the minority shareholders dismissing the attempt to forcibly squeeze out minority shareholders.

Philips India doubled down on its efforts to squeeze out minority as its previous attempt to squeeze out minority shareholders in 2018 was opposed by the minority investors & was abruptly withdrawn as the management realized that they were staring at potential loss in court of law.

Back in 2018 & at present, minority shareholders have contested the buyback in courts citing Philips' history of undervaluing their shares & poor corporate governance. It is understood that the company used unethical means like appointing management consultant to coax individual
shareholders to give up their shareholdings and collect positive proxies/votes for the EGM & splitting single folio into multiple folios for arranging fraudulent proxies.

The biggest concern for minority shareholders was the valuation being offered for their squeeze out which values the Indian entity at Rs. 5,260 Crs. In 2018, the valuation being oƯ ered to minorities was even lower at Rs. 3,220 crs. To put it in context the valuation offered in 2018 would effectively value the Indian entity at less than 4.3-4.9x FY2023 reported Earnings Per Share. If the company was yet listed on the Indian stock exchange, the market value would be multiple times the current price being oƯ ered to minorities, as is the case for any MNCs in India which are richly valued. The CA Institute, SEBI and Income Tax Department should all wake up and question the valuers of why and how they are adopting different approaches to suit their end clients rather than follow a consistent practice.

The desperation to squeeze out minority had become strong as minorities had rejected the earlier attempts to give an unfair exit to the Phillips NV in its subsidiary - Preethi Kitchen appliances.

Eventually, the Indian subsidiary went against the spirit of the law & the will of minority through indirect means to give an exit to Phillips NV – to achieve the same result as a proposal that was rejected in the first place by minorities.

The current move to squeeze out minority was designed with an attempt to ensure that minority shareholders do not get in the way of Phillips NV in matters of related party transactions – which by law required approval of majority of the minority shareholders only. Since Phillips unfair proposals have rejected in the past, a squeeze out of minority shareholders, will set their path clear of any such proposals in the future. To bull doze minorities – they have skipped dividend as well in FY 2024 – must be a unique case for any multinational operating in India. They stated in the FY 2024 Directors Report – “Due to the modest financial performance and volatility in the industry and to ensure efficient management of operations going forward, the Board of Directors are not recommending any dividends to be distributed.”

It must be noted that they had a net profit of Rs. 257.50 crs in FY 2024 which was almost the same as the previous year” . The Company paid a total of Rs. 157.90 crs to related parties for services during the year, Rs. 90.2 crs as reimbursement for sales & purchases. Importantly the total value of purchases and sales to related parties during the year was Rs. 3,993.50 crs against their revenue of Rs. 6000 crs. No wonder they want minorities out of the way. One wonders if the Philips Independent Directors find the renumeration they receive commensurate with the reputational risk of supporting such moves against minorities.

The timing of the squeeze out comes at a time when Philips NV is doubling down on its India investment as seen from the recent commentary by the global CEO, Roy Jakobs. “India is a
growth market, both in terms of the need for healthcare where we can provide better services, consumer opportunity, and the resources we get from here in order to serve the global audience. It is an important part of our ecosystem. We give a disproportionate amount of our investments to India and see that grow in the coming years. We look forward to investing here,”

“India plays a crucial role in the Philips ecosystem. It would be difficult for Philips to operate effectively without India. The country provides crucial capabilities, competencies, and services, including backend support, innovations, and technologies used globally. Additionally, India contributes hugely through manufacturing products that are exported worldwide, making a significant impact on Philips’ global operations and purpose.”

The stand taken by the Company in the Courts in India is directly opposite of what the CEO has stated about prospects of the India business, while justifying a depressed valuation oƯ er to minority shareholders. While Phillips NV talks highly of corporate best practices but as seen from their actions listed above their intent is exact opposite. It is expected that a company of this repute will be a benchmark for corporate governance & provide fair exit to minority shareholders rather than following unjust business principles.

Given Philips NV’s stature and governance standards, it seems to be a case of the Parent sleeping at the wheel while the Indian entity and its professionals try to enrich the parent at the expense of minority shareholders. Hopefully the Board of the Parent Company wakes up, takes notice of the developments and in keeping with its global governance standards either lets minority shareholders continue as shareholders or offers them a fair valuation without wasting further efforts and resources on another attempt or appealing against the current order at the NCLAT.