Author: Kotapothula Venkat Rao, Damodaram Sanjivayya National Law University
Introduction
The case of Hindustan Lever Employees Union v. Hindustan Lever Limited & Ors is a significant legal dispute in India that revolves around the amalgamation of two major companies i.e., Hindustan Lever Limited (HLL), a subsidiary of the London-based multinational Unilever, and Tata Oil Mills Company Limited (TOMCO), one of India’s oldest companies, established in 1917. The dispute originated from a scheme of amalgamation sanctioned by the Bombay High Court on March 3, 1994, under Sections 391 and 394 of the Companies Act, 1956. This scheme allowed TOMCO (the transferor company) to merge with HLL (the transferee company). The case reached the Supreme Court of India, with the judgment delivered on October 24, 1994, addressing contentious issues related to corporate mergers, employee rights, shareholder interests, and public policy.
Facts of the case:
Tata Oil Mills Company Limited (TOMCO) is a company that manufactures and sells products like soaps, detergents, toiletries and animal feeds. Hindustan Lever Limited is another company that also manufactures and sells similar products. The company underwent a restructuring process, which involved the merger of its wholly owned subsidiary, TOMCO, with itself. This merger was part of a strategic business decision to streamline operations.
The merger between HLL and TOMCO, which led to concerns from the employees’ unions and some shareholders. These parties believed that the merger violate statutory provisions under the Companies Act, 1956, and the Monopolies & Restrictive Trade Practices Act, 1969 (MRTP Act). They also claimed that the preferential allotment of shares (selling shares at a specific price to certain parties) was done at a price lower than the market value, which they argued it harmed employees and public interest. The unions and shareholders argued that the valuation of TOMCO’s shares was done unfairly, resulting in undervaluation.
They claimed that the merger either harmed public interest or was against the interests of TOMCO’s shareholders. They also argued that the employees’ interests were not properly protected in the process. The Bombay High Court considered the allegations and examined the process of the merger and share valuation. Section 391 of the Companies Act, 1956: This section deals compromises and arrangements and requires the scheme to be fair, lawful, and approved by the shareholders and creditors. The High Court found no violation, stating that the merger process was transparent, and majority of shareholders approved the scheme. Section 393 of the Companies Act, 1956 requires that all shareholders receive a detailed explanation of the scheme, including its terms, and impact of the scheme.
They claimed that the information provided was incomplete. The Bombay High Court found that the disclosures were clear, complete, and approved by the Company Registrar. Section 394 of the Companies Act, 1956: This section requires the court to ensure that a merger is not against public interest and adequately protects stakeholders, including employees and shareholders. The court concluded that the employees’ service conditions were protected under the scheme and there was no violation of public interest. Section 226(3) of the Companies Act, 1956: This section prohibits a company director from serving as an auditor to avoid conflicts of interest. The argued that the valuer, was a director of TOMCO, but the court held that he acted professionally and independently. The court found no evidence of fraud or bias in the valuation or the merger process. The court noted that the share exchange ratio for the merger was determined by a reputable accounting firm using standard valuation methods. The appellants challenge High Court decision in the Supreme Court.
Issues of the case:
whether the jurisdiction of Company Court is prevented from approving a merger (scheme of amalgamation) due to the MRTP Commission (which deals with monopolies and trade practices) already reviewing the same issues related to the merger?
Whether the proposed merger violates public policy due to foreign ownership and the control by Unilever over the merged entity?
Whether the merger adversely affects the interests of the employees of TOMCO and HLL?
Whether the merger involves any unlawful trade practices or violates the provisions of the Monopolies and Restrictive Trade Practices Act?
Whether the proposed allotment of 51% of shares to Unilever violates a restrictive trade practice under the MRTP Act?
Petitioner’s Arguments:
MRTP Act Compliance: The petitioner argued that since the MRTP Commission is already looking into the matter, the Company Court should hold off on approving the merger until the Commission makes its decision. The idea was to prevent the court’s decision from influencing or interfering with the Commission’s process.
The merger between Hindustan Lever Limited (HLL) and Tata Oil Mills Company (TOMCO) was claimed to possibly violate the Monopolies and Restrictive Trade Practices Act, 1969 (MRTP Act) because it could harm competition in the market. Specifically, it was feared that the merger might create a monopoly or lead to unfair trade practices that reduce competition.
Violation of Public Policy: The petitioner argued that giving Unilever preferential treatment by allotting it 51% of the shares in the merged company could lead to Unilever gaining control over the business. They claimed, would go against public policy and hurt the interests of consumers.
Employee Concerns: The petitioner argued that the merger would adversely affect employees, and they worried that the merger could lead to job cuts or a reduction in their benefits.
Court Should Await MRTP Decision: The petitioner argued that the court should wait for the MRTP Commission’s decision on whether the merger could create a monopoly. Since the Commission has the authority to examine these issues, the court should not move forward until the Commission has made its ruling, as it might impose conditions or restrictions on the merger.
Respondent’s Arguments:
Jurisdiction of the MRTP Commission: The respondent argued that the MRTP Commission’s prior approval was no longer required for the merger, following the amendment of the MRTP Act in 1991, which deleted Section 23. The prior approval of the MRTP Commission was no longer mandatory, and the Company Court had full authority to sanction the merger. The respondents pointed out that Section 23 of the MRTP Act, which previously required the MRTP Commission’s approval for mergers, was repealed in 1991, hence there was no need to wait for the MRTP Commission’s decision.
Economic and Business Benefits: The respondents contended that the amalgamation was a strategic business decision to save TOMCO, a company facing severe financial difficulties. The merger would prevent TOMCO from becoming a sick company and ensure its survival, which was in the best interest of the company, its employees, and shareholders. The respondents argued that the merger wouldn’t harm the economy because the government wanted to encourage foreign investment. The government had liberalized for foreign companies to acquire controlling stakes in Indian companies.
Public Policy: The respondents argued that merger was not against public policy. They stated that the Foreign Exchange Regulation Act (FERA) of 1973 had been changed in 1993 to allow foreign companies, like Unilever, to own more than 40% of shares in Indian companies. The Foreign Exchange Regulation Act (FERA), which previously restricted foreign ownership to 40%, was amended in 1993 to remove this limitation. The respondents pointed out that this change in the law facilitated foreign companies’ participation in the Indian economy.
Employee Protection: The argued that after merger it would keep the terms of employment the same, including job benefits and continuity of service. There was no plan to cut jobs or reduce employee benefits, they stated concerns regarding job security were hypothetical.
Market Competition: The respondents argued that there was no proof the merger would lead to a monopoly or harm competition. They claimed that the increase in market share was just a natural outcome of the merger and didn’t break any laws, as it didn’t eliminate competition or harm consumers. They also pointed out that the market remained competitive overall, and that the merger was crucial for TOMCO’s survival, as the company was in serious financial trouble.
Lack of Mala Fides: The respondents argued that there was no mala fide intention behind the merger. They explained that the assets involved were valued fairly, based on market prices, by a reputable accounting firm. The firm used established valuation methods to ensure that the valuation was accurate and transparent.
Judgement:
The Court dismissed the appeals, stating that the MRTP Commission’s approval was no longer needed after the 1991 amendment to the MRTP Act. It found the merger to be good for TOMCO and in line with public policy. Employee concerns were addressed, and the share allocation to Unilever was legally allowed.
Abstract:
The case Hindustan Lever Employees Union v. Hindustan Lever Limited involves the merger of Hindustan Lever Limited (HLL) and Tata Oil Mills Company Limited (TOMCO), sanctioned by the Bombay High Court in 1994. Concerns were raised by employees’ unions and shareholders about statutory violations, unfair share valuation, and potential negative impacts on competition and employees. The Supreme Court addressed issues related to corporate mergers, employee rights, public policy, and foreign ownership. Ultimately, the court upheld the merger, stating it was lawful, beneficial for stakeholders, and compliant with the Companies Act, 1956 and the MRTP Act.
Case Laws:
Miheer H. Mafatlal Vs. Mafatlal Industries Ltd. AIR 1997 SC 506, (1997) 1 SCC 579
This case laid down principles for sanctioning schemes of amalgamation under Sections 391-394 of the Companies Act, 1956. The Supreme Court in Hindustan Lever drew on similar reasoning, emphasizing that courts should not act as appellate authorities over commercial wisdom unless there’s a clear violation of law or public interest. The Bombay High Court’s approach in Mafatlal focusing on procedural fairness, shareholder approval, and statutory compliance was echoed in approving the HLL-TOMCO merger.
Conclusion
The Supreme Court in Hindustan Lever Employees’ Union v. Hindustan Lever Limited & Ors. (1994) upheld the HLL-TOMCO merger, finding it lawful under the Companies Act, 1956, and compliant with the amended MRTP Act. The court dismissed concerns over employee rights, share valuation, and public policy, affirming the merger’s economic benefits and procedural fairness, reinforcing corporate restructuring principles in India’s liberalized economy.
FAQS
1. How might this ruling affect the future corporate mergers?
Ans: It paved the way for employee’s protection, shareholder transparency, public policy and foreign ownership and judicial oversight.
2. What are some long-term impacts on employees after a merger?
Ans: There are various impacts which can be acted positively and negatively on employees after a merger and overall the long term impacts depends on how well the merging companies handle integration, communication and support throughout the transition period of a takeover or merger.
