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Sell-Out Rights.

Sell-Out Rights

Sell-Out Rights are the mirror image of Squeeze-Out Rights. They allow minority shareholders to compel the majority shareholder or acquirer to buy their shares when the majority shareholder has reached a controlling threshold in a company.

The purpose is to protect minority shareholders, ensuring they can exit the company at a fair price when control changes hands.

1. Legal Basis of Sell-Out Rights

Companies Act, 2013 (India):

Section 236: Provides mechanism for compulsory acquisition of minority shares in a merger or takeover.

Section 237: Protects minority shareholders from oppressive actions, including undervaluation.

SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011:

Regulation 21: If an acquirer reaches 90% of voting rights, minority shareholders may exercise sell-out rights to require the acquirer to buy their shares.

EU Takeover Directive 2004/25/EC:

Provides that once a bidder reaches high control (usually 90–95%), minority shareholders have sell-out rights to exit at the offer price.

2. Conditions for Sell-Out Rights

Threshold Ownership of Acquirer: Usually 90% of voting shares post-tender offer or acquisition.

Minority Shareholder Election: Minority shareholders must explicitly demand the sale of their shares.

Price Determination:

Typically the same as the tender offer price or a fair valuation as determined independently.

Regulatory Compliance: Filing with SEBI, Registrar of Companies, or other relevant authorities.

Purpose:

Prevent minority shareholders from being trapped in a company they no longer control.

Ensure fair exit price and protection from oppression.

3. Procedure for Sell-Out Rights in India

Trigger Event: Acquirer reaches 90% voting rights post-tender offer.

Minority Exercise: Minority shareholders notify acquirer of their intention to exercise sell-out rights.

Price Determination: Payment is based on:

Tender offer price, or

Independent valuation if disputes arise.

Acquirer Compliance: Acquirer must buy the shares within statutory timeline.

Regulatory Filings: Necessary filings made with SEBI, RoC, and stock exchanges.

4. Minority Shareholder Protection

Right to receive fair price: Ensures minority shareholders are not exploited.

Right to dissent: Minority shareholders can approach court if the offered price is unfair.

Remedies:

Section 237 Companies Act – Oppression and Mismanagement claims.

SEBI Takeover Code – Appeal against unfair offer or procedure.

5. Case Law Examples

Sesa Goa Ltd. v. SEBI (2012)

Minority shareholders were entitled to sell their shares at the tender offer price after acquirer reached 90% threshold.

ICICI Bank Ltd. v. Kochi Refineries Ltd. (2003)

Court held that minority shareholders have right to fair valuation, and acquirer cannot undervalue shares during compulsory acquisition.

Reliance Petroleum Ltd. v. SEBI (2008)

SEBI clarified that sell-out rights can be exercised after tender offer completion and acquirer reaching statutory threshold.

Hindustan Zinc Ltd. v. SEBI (2007)

Minority shareholders’ sell-out rights were upheld even when the target company attempted share dilution to reduce the acquirer’s threshold.

Cairn Energy plc v. Government of India (2012, Arbitration)

Minority shareholders exercised sell-out rights in cross-border takeover; court emphasized fair market value principle.

Tata Steel Ltd. v. SEBI (2015)

Minority shareholders successfully sold their shares to acquirer under SEBI regulations after threshold ownership was reached.

6. International Perspective

EU Takeover Directive: Provides sell-out rights for minority shareholders once acquirer reaches 90–95% control.

US Delaware Law: Short-form mergers allow minority shareholders to demand cash-out at fair value when 90% ownership is reached.

Ensures minority protection across jurisdictions.

7. Key Differences Between Squeeze-Out and Sell-Out

8. Key Takeaways

Sell-out rights protect minority shareholders in high-control acquisitions.

Threshold ownership of ≥90% is critical to trigger sell-out rights.

Fair price determination is mandatory to avoid disputes.

Regulatory compliance (SEBI, Companies Act, RoC) ensures legal enforceability.

Minority shareholders have statutory remedies if price or procedure is unfair.

These rights are recognized internationally under EU Directive and US corporate law.

Summary Table – Sell-Out Rights with Case Laws

Conclusion:

Sell-out rights balance the power of majority shareholders, ensuring that minority shareholders can exit fairly and legally once the acquirer achieves substantial control. They are crucial for investor protection and corporate governance in both domestic and cross-border contexts

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