The concept of negative consent contemplates a request being made by the recipient of the document to reply only in case of any discrepancy or non-agreement with the contents of the document. It implies that if the recipient is in agreement with the subject matter or the contents of the document, there is no need for him/her to respond. This is done majorly to reduce the number of incoming responses to a proposal, since the stakeholders are expected to respond only in the event that they do not agree to the proposal under reference.
A negative consent, in relation to a Special Resolution or an Ordinary Resolution, refers to the consent sought by a company whereby a resolution is deemed to be approved, and be binding on all of the shareholders, in accordance with its terms, in case the shareholders do not respond to the resolution. This would be despite the fact that they would not have given their explicit consent to the resolution. This may not reflect the true intent of the shareholders.
The concept of negative consent is most commonly used when a company opts to reduce its capital by buying back its own shares/ stocks. The buyback offer letter often mentions that if the company does not receive any written intimation from the shareholders, with respect to rejection of the proposed buyback offer, within the stipulated time, the offer would be deemed to have been accepted by the shareholders. The company often considers such negative consent as an agreement by shareholders. However, given that a shareholder might not have responded for a number of reasons, the silence of shareholders does not, strictly speaking, tantamount to their consent.
In many cases in India, the seeking of negative consent has been questioned, especially during buyback offers. In the case of Securities and Exchange Board of India vs Sterlite Industries (India) Ltd. (2003 113 CompCas 273 Bom, 2003 45 SCL 475 Bom), the learned counsel appearing for SEBI and the Central Government stated that the Scheme, and particularly Clauses 4.1 and 4.8 thereof, treated the silence of the shareholders as an acceptance of the offer. They argued that unless there was a positive assent of a shareholder to transfer his shares, no transfer can be treated as valid.
Clauses 4.1 and 4.8 of the agreement read as follows:
4.1 The company shall, on a date fixed by the Board following the Record Date, purchase not more than 2,79,96.278 equity shares (representing approximately 50% of its issued, subscribed and paid up equity share capital) from the shareholders, excluding the equity shares of those shareholders from whom the company receives a written intimation within the stipulated period of their intention to continue holding the equity shares.
4.8 Upon discharge of the consideration as provided in Clause 4.6, the equity shares purchased in pursuance of Clause 14.1 shall be deemed to be transferred in the company’s name, without any act or deed by the shareholders, including, but not limited to, surrendering of share certificates with transfer form, and/or sending appropriate instructions to the Depository participants. On the date of purchase fixed under Clause 5.1 below, the share certificates relating to the equity shares purchased by the Company shall be rendered invalid.
The learned Judge dismissed the appeal. He stated that since the shareholders and the Central Government approved the buyback scheme, the silence of shareholders, at this belated stage, should be considered as their consent.
Similarly, in the case of Gujarat Ambuja Exports Ltd. (2004 118 CompCas 265 Guj, 2004 52 SCL 399 Guj), the Additional Central Government Standing Counsel appearing on behalf of the Central Government referred to a letter that contained certain observations of the Central Government. The letter stated that “The option in Form A given to shareholders, who are eligible shareholders, is that they have to sign and send the form if they wish to continue as shareholders.
Those who do not exercise the option to continue as shareholders would, in effect, be treated as having opted to receive payment against the cancellation of shares.” He added that “This involves negative option and is against the interest of small shareholders, and as such, the above matter may be brought to the notice of the Hon’ble Court at the time of hearing”.
As per the observation of the Central Government, the negative option contained in the Scheme was against the interest of small shareholders. The learned counsel argued that under the Contract Act, silence could not be regarded as consent, and that unless there was assent with express consent from the shareholders, one could not assume that the shareholder is agreeable to the Scheme of buyback. The learned counsel further submitted that it was likely that some of the shareholders might not have received the notice of the meeting and therefore, sanction of the Scheme, without approval of the shareholders, and compulsorily purchasing their shares, would not be appropriate.
The learned Judge in this case stated that “The scheme provides for those shareholders who do not want to continue as shareholders to remain silent and thereby exercise their option to sell the shares and that thereupon the company would pay the amount. It is this scheme which is approved by the shareholders and shareholders have agreed to this method in the first place by way of passing the resolution at the meetings”. He was of the opinion that the shareholders had agreed to the aforesaid method by approving the scheme. The concept of negative consent was upheld.
In yet another case, Ritu Bhargava vs Godrej Industries Ltd & Ors, revision petitions had been filed in National Consumer Disputes Redressal. The company had exercised its right to buy-back Ritu Bhargava’s (Complainant) shares, since the Complainant did not exercise any option to retain the shares. It remitted an amount of INR 810/- twice to the Complainant through account payee cheques. However, the Complainant returned the cheques both times. The Complainant stated that she neither received the alleged buyback offer, nor did she exercise any option for buyback. She further said that unilateral purchase of shares was illegal and amounted to compulsory acquisition.
The learned counsel for the Complainant stated that the option form, stated to have been sent by the company, had never been received by her, and hence, there was no question of her having sent any intimation about retaining the shares. The Complainant had pleaded that it was a contractual relationship between her and the company, and she could not be compelled to sell her shares unless she wanted to do so. Learned counsel also referred to the observations of the State Commission that there was no evidence of actual delivery of the letter to the Complainant from the company. The learned counsel further stated that it was obligatory for the company to send the letter of offer by registered post, but this was not done.
The learned Judge stated that “when the Scheme has been duly approved at the level of Hon’ble High Court and the Hon’ble Apex Court, the right of the Company to take action according to the provisions of the Scheme cannot be challenged in the present revision petition. It is held, therefore, that the Company was well within their rights to proceed in accordance with the Scheme duly approved”.
The learned Judge stated that as claimed by the company, they had filed the Affidavit with relevant extract, evidencing proof of mailing of options form to the Complainant, contradicting the stance of the Complainant not receiving the option form. Thus, the learned Judge was of the opinion that the company had taken action in accordance with the provisions of the Scheme, as duly approved by the shareholders, and relief could not be granted to the Complainant.
A negative concept is not a good approach in a country where shareholder awareness is not to the desired extent. Firstly, shareholders, in some cases might not receive the relevant communication. Secondly, they might be under the impression that by responding they would be assenting to the proposal, and would therefore not respond. Thirdly, there could be situations where shareholders are not able to provide written confirmation. Fourthly, the timelines involved might not be adequate for shareholders to obtain appropriate advice. The Board of Directors should examine whether in the given circumstances, negative consent is an option that should be persisted with. The Board also has a responsibility to advise the general body of shareholders regarding such resolutions, and their implications. Schemes that routinely provide for negative consent should be discouraged and it should be made incumbent on the company concerned to take steps to obtain an affirmative response. Treating the absence of response by the shareholder as an agreement of the shareholders to any proposal or resolution or offer by the company is not correct. This goes against the spirit of shareholder democracy. Such resolutions should generally be discouraged, and a better way should be found to reach out to shareholders.