Cadbury India case law

Re: Cadbury India Limited

Facts of the case

Cadbury convened an extraordinary general meeting (EGM) on 16th November, 2009, in accordance with section 100 of the Act, and a special resolution was passed by majority approving, buyback of shares and reduction of capital.

  • Cadbury had obtained two valuation reports, by M/s Bansi S. Mehta & Co. and M/s SSPA & Co. which returned a value of INR 1,340 per share (Original Valuation Price).
  • However few small minority shareholders took exception to the Original Valuation Price, the Court directed for a fresh valuation to be done by an independent firm as Cadbury sought Court’s sanction to settle dispute with minority shareholders.
  • The independent firm first returned a value of INR 1,743 per share using the Comparable Companies Method (CCM), based on unaudited accounts up to July 2009. This report was later ordered to be updated to also factor in Discounted Cash Flow Method (DCF) method of valuation for the shares. The revised value returned was INR 2,014.50 per share (Revised Valuation Price), based on the unaudited accounts of September 2009 and with equal weightage given to DCF and CCM methods of valuation.
  • The Court finally approved the resolution on the basis of revised Valuation Report.

Minority shareholders’ contentions and the Court’s view on Valuation

  • Terminal growth rate has been estimated at 6% while sales and profits are growing by 20% and 40%, respectively. A conservative terminal growth rate is probably more accurate indication of a projection.
  • Income tax rate has been considered at a flat 33.99%. The submission is that since Cadbury India “enjoys various tax benefits, its profits are being taxed at the rate lower than 20% over the past few years. A flat tax rate in a projection might, in fact, provide a very realistic and fairer value than something that is presently at a lower marginal rate.
  • The second E & Y report was based on unaudited financial statements as on 30th September 2009. No fair valuation can ever be made on basis of unaudited accounts. There is neither logic nor material to support this. E & Y applied the weighted average P/E multiples on Cadbury India’s consolidated Profit after Tax (PAT) for the year ending 31st March 2009. If, for instance, the PAT is unavailable for a given date for one of those companies, a valuer would be justified in falling back on the last available PAT figures.
  • E & Y adoption of Cadbury growth rate @ 6%, though its Comparable’s growth rate is 11% particularly Nestle. This however is untenable as product mix, divisions, process, market etc are issues that differentiate Companies. Evidently Nestle operates in much broader spectrum of markets & products than Cadbury.

Two E & Y Reports and their Valuation Methods

Discounted Cash Flow Analysis; to estimate value of investment using future FCF projections then discounted using the WACC.

  • The ‘Multiples’ methods. A CCM is essentially a snapshot at a given point in time. It will not easily capture business expansions, evolutions and changes; it is by definition static.
  • The first report makes it clear that E & Y did not take into account any premium, although the minority shareholders demanded this.
  • The first E & Y report lists various available valuation methods. It says that the DCF method was not used. Nor were any of the others, except the CCM method, and this was assigned a 100% weightage. The tabulation to the report highlights the comparison between Cadbury India and other companies.
  • Before a Court can decline sanction to a scheme on account of a valuation, an objector to the scheme must first show that the valuation is ex-facie unreasonable. To upset a Valuation, a wrong approach must be demonstrated clearly.
  • Is a fair and reasonable value being offered to the minority shareholders?
  • Valuation is not an exact science. It is always and only an estimation.
  • It is impossible to say which of several available valuation models are “best” or most appropriate. In a given case, the CCM method may be more accurate; in another, the DCF model. There are yet others. No valuation is to be disregarded merely because it has used one or the other of various methods. It must be shown that the chosen method of valuation is such as has resulted in an artificially depressed or contrived valuation well below what a fair-minded person may consider reasonable.