Public offers in relation to acquisition of shares and takeover of public companies in India is governed by a self-contained code enshrined in the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (‘2011 Regulations’), that replaced the erstwhile SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (‘1997 Regulations’).
The legislative intent was best summarized by the Hon’ble Supreme Court in Nirma Industries Limited v. Securities and Exchange Board of India ((2013) 8 SCC 20), as a Code ‘‘(a) to ensure that the target company is aware of the substantial acquisition; (b) to ensure that in the process of the substantial acquisition or takeover, the security market is not distorted or manipulated; and (c) to ensure that the small investors are given an option to exit, that is, they are offered a choice to either offload their shares at a price as determined in accordance with the Takeover Code or to continue as shareholders under the new dispensation. In other words, the Takeover Code is meant to ensure fair and equal treatment of all shareholders in relation to substantial acquisition of shares and takeovers and that the process does not take place in a clandestine manner without protecting the interest of the shareholders.’’
Recent rulings on open offers by the Hon’ble Supreme Court have brought to fore the duties and obligations cast on both a potential acquirer and a target company. The rationale behind placing restrictions on certain actions that may be taken during the subsistence of an offer period is primarily to prevent the target company’s assets from being dealt with in a manner that may potentially be detrimental to existing shareholders, or have a bearing on their decision to participate in the open offer.
Commencement of Open Offer
The 2011 Regulations specify the events and thresholds limits that would trigger the requirement for a potential acquirer to make an open offer, except when exempted under the specific circumstances prescribed by the 2011 Regulations.
In Securities and Exchange Board of India v. Burren Energy India Limited (Civil Appeal No. 361 of 2007), the Hon’ble Supreme Court of India interpreted the nature of an ‘Memorandum of Understanding’ for the purposes of identifying the date of commencement of an offer period. Burren Energy India Limited (“Burren”), incorporated under the laws of England and Wales in 2004, was formed to acquire the entire share capital of Unocal Bharat Limited (“UBL”).
UBL held 26.01% of the issued share capital of Hindustan Oil Exploration Co. Ltd (“Target Company”). The shares of UBL had previously been acquired in 1996 by Unocal International Corporation (“UIC”). Burren, with an intention to acquire UBL, had entered into a Share Purchase Agreement with UIC on February 14, 2005 (“SPA”). By virtue of the SPA, Burren indirectly came to acquire 26.01% shareholding of the Target Company which were earlier held by UBL. As the proposed acquisition was in excess of the prescribed 15% limit under the Takeover Regulations, Burren made a public announcement for sale/purchase of shares of Target Company on February 15, 2005. However, on the date of execution of SPA (i.e. February 14, 2005), Burren proceeded to appoint two of its directors on the Board of the Target Company.
As per the Takeover Regulations applicable to the present case [i.e. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, as amended vide SEBI (Substantial Acquisition of Shares and Takeovers) (Second Amendment) Regulations, 2002], an acquirer was prohibited from making any appointment on the Board of Directors of the Target Company during the subsistence of the ‘offer period’. SEBI contended that the said appointments of the directors on the Board of the Target Company were made during the subsistence of the offer period, and therefore were in violation of the Takeover Regulations.
The interpretation of ‘Memorandum of Understanding’ was key to resolving this dispute, for it had direct bearing on identifying the commencement date for the purpose of computing the tenure of the offer period. The Takeover Regulations define an ‘offer period’ as the period between the date of signing of an MoU or making of a public announcement, as the case may be, and the date of completion of offer formalities. According to SAT, the term ‘Memorandum of Understanding’ referred only to those understandings between parties that fell short of a concluded agreement. Based on this literal interpretation of the term, SAT ruled that given the absence of an MoU between the concerned Parties, the date of public announcement would be the event that would trigger commencement of the offer period. Thus, as the appointments dated February 14, 2005 were made before the public announcement dated February 15, 2005, the directors’ appointments had not been made during the offer period.
Rejecting SAT’s narrow interpretation, the Hon’ble Supreme Court noted that the term ‘Memorandum of Understanding’ may also include a concluded agreement in appropriate situations. Even in cases where a concluded agreement is executed subsequently to an MoU, the ‘offer period’ would still be said to commence from the date of execution of such MoU. The Hon’ble Supreme Court concluded that if the offer period can be triggered by an understanding between the parties that is yet to fructify into a concluded agreement, there is no reason why such offer period could not commence from the date of a concluded agreement, in the absence of an MoU. Therefore, as the offer period was triggered on execution of SPA dated February 14, 2005, and the appointments dated February 14, 2005, had been made during the subsistence of the offer period, such appointments violated the embargo under Regulation 22(7).
Importantly, this ambiguity in the definition of an offer period under the Previous Takeover Regulations does not exist in the Current Regulations. The Current Regulations peg the commencement of the offer period to the date of entering into an agreement – whether formal or informal – to acquire shares/voting rights/control in a target company. Clearly, for the purposes of the Current Regulations, it is immaterial whether such agreement is merely informal or definitive/conclusive in nature leaving little room for imprecise computation of the triggering of an offer period.
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During subsistence of Open Offer
Understanding the nature of an ‘Memorandum of Understanding’ also has bearing on identifying transactions undertaken by a target company during the subsistence of an offer period, that may fall foul of the embargo under the Takeover Regulations. In Sanjay Dalmia and Others v. Securities and Exchange Board of India (Appeal Nos. 102 and 101 of 2014), the Securities Appellate Tribunal, Mumbai, interpreted the scope of an ‘Memorandum of Understanding’ for the purposes of identifying impugned actions of a target company.
In this case, on November 12, 2009, Pramod Jain and two others made a public announcement under the Takeover Regulations, 1997, disclosing their intention to acquire 25% stake of the target company, and accordingly filed a draft letter of offer on November 26, 2009, seeking approval of SEBI for such acquisition. On December 21, 2009, the Board of Directors of the target company passed a resolution to develop a company-owned property situated in Mumbai (‘‘Mumbai Property’’) subject to approval of shareholders. On the same date, a notice was addressed to the shareholders convening an Extraordinary General Meeting to seek their approval on the same.
However, in the intervening period, the target company had entered into an MoU dated December 26, 2009, with Sheth Developers and Suraksha Realty Ltd. ("Developer") for joint development of a company-owned property situated in Mumbai (‘‘Mumbai Property’’) for a consideration of INR 542 Crore. After execution of this MoU, on January 18, 2010, the shareholders gave their consent to the company and authorized execution of the Joint Development Agreement in respect of the Mumbai Property.
Clearly, the public offer made by Mr. Pramod Jain and others was subsisting as on the date of execution of the MoU by the Company. As per Regulation 23(1) of the Takeover Regulations applicable to the present case [i.e. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997], during the subsistence of the offer period, the Board of Directors of a target company is expressly prohibited from selling, transferring, encumbering or otherwise disposing of the assets of the target company as well as expressly prohibited from entering into any agreement for the same, without first obtaining prior approval of the general body of shareholders. Thus, before taking as well as before attempting to take such actions during the subsistence of the offer period, it is mandatory for the Board of Directors of a target company to seek prior approval of the general body of shareholders.
The target Company defended its actions by disputing the nature of the MoU dated December 26, 2009. According to the target Company, the MoU was not a binding contract between the parties, did not seek to create any encumbrance or rights over the company’s assets in favour of the Developer, and therefore was not legally enforceable. On the other hand, SEBI contended that the MoU dated December 26, 2009 was in gross violation of the embargo under the Takeover Regulations. The intent of the Company to enter into legally enforceable obligations over its assets with a third party could be ascertained from terms of the MoU.
For instance, the target company had received part payment of consideration equivalent to INR 35 Crore from the Developer on execution of the MoU. Further, title deeds of the concerned property were required to be kept by the Company in an escrow, within 48 hours of execution of the MoU, which title deeds would be released only upon execution of the Joint Development Agreement between the parties. Additionally, the MoU also envisioned a remedy in favour of the Developers (refund of partial consideration along with 18% interest) in the event of the target company’s shareholders rejecting the joint development proposal.
The SAT held that the Board had indeed sought to encumber the Mumbai Property during the subsistence of the offer period, and had attempted to do so by bypassing the general body of shareholders. Thus, transactions requiring prior shareholder approval necessitate a broad interpretation of the term ‘agreement’. To contend that the term ‘agreement’ used in Regulation 23 would not apply to transactions labelled or perhaps cloaked as MoUs, would amount to defeating the very object of the provision.
Conclusion of Open Offer
Once made, an open offer made by an acquirer may only be withdrawn by it on the limited grounds specified under the 2011 Regulations – namely, if statutory approvals for open offer or for effecting acquisitions attracting the obligation to make an open offer is refused; on death of the acquirer (being a natural person); or if conditions stipulated in the agreement for acquisition attracting the obligation to make an open offer are not met for reasons beyond the control of the acquirer.
In Pramod Jain v. Securities and Exchange Board of India (Civil Appeal No. 9103 of 2014), the Hon’ble Supreme Court examined the issue of an acquirer’s right of withdrawing from a public offer. In this case, the Apex Court held that in the absence of circumstances that prejudice the acquirer to the extent of rendering the carrying out of the public offer impossible, discovery of mala fide actions or adverse decisions taken by a target company after announcement of a public offer per se would not justify automatic withdrawal of a public offer by an acquirer, especially since an acquirer has recourse to other remedies at appropriate fora against any such mala fide/illegal actions of a target company.
Thus, in the general scheme of the 2011 Regulations as well as numerous decisions of the Apex Court on this issue, public offers once made may not be withdrawn by an acquirer – circumstances under which an acquirer may withdraw its offer are construed strictly. As the Regulations mandate an acquirer to first undertake a due diligence exercise of the target company before filing a draft letter of offer, a potential acquirer is assumed to have undertaken a thorough assessment of the target company’s financial health and the feasibility of implementing the proposed acquisition. [The author is an Associate in Corporate Practice, Lakshmikumaran & Sridharan (UK) LLP, London]