Companies Act Case Law Dr. Mrs. Renuka Datla Vs Solvay Pharmaceutical B.V. & Ors

Special Leave Petition (civil) 18035 of 2000
Special Leave Petition (civil) 18041-18042 of 2000

Dr. Mrs. Renuka Datla

Solvay Pharmaceutical B.V. & Ors.

DATE OF JUDGMENT: 30/10/2003


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
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
“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
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
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
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
The petitioners have relied on the decision of this Court
in Commissioner of Gift Tax, Bombay Vs. Smt. Kusumben D.
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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