Corporate Law-I SEBI Case Study: 2010

Varun Vaish (2008-74)

SEBI Pro-Corporate Institutional Investor

2010 was probably the year in which SEBI most vociferously exhibited its pro- corporate investor stand. It tried to enhance Corporate Investor confidence in the Indian capital markets via favourable regulatory environment.

India hopes to retain a GDP growth of 7 per cent in the face of global recession.

Inarticulate Common Premise put forward through the Case Study: 2010

After 2008-The year of the U.S. Sub-Prime Mortgage crises, believed by many to be the triggering point of the global financial meltdown, SEBI, the Securities Appellate Tribunal (SAT)- to whom decisions of the SEBI are appealed to and the Supreme Court (The forum of Second appeal from the SAT) have all played an increasingly activist role in consciously promulgating through their decisions, orders and judgement an Institutional investorfriendly environment.

Premise furthered through 2 Landmark decisions in 2010

SAT- Subhkam Ventures (I) (P.) Ltd. v. SEBI[1] Supreme Court- Daiichi Sankyo Co. Ltd. vs. Jayaram Chigurupati Co. Ltd.[2] [1] [2010] 99 SCL 159 (SAT - Mum.) [2] (2010) [157 Comp Case 380 (SC)]

Why these decisions are important?

Both these decisions deal with interpretations of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 commonly understood as the SEBI Takeover Code of 1997.

Why Important? (Contd.)

These decision have created a market scenario conducive to Foreign Institutional Investors and Corporate acquirers looking to increase strategic interests in target companies.

These decision have enabled FIIs and Corporate acquirers to effect market consolidation without wanting to acquire complete control and
without triggering compulsory offer requirements under as per the SEBI Takeover Code, 1997.

SEBI Takeover Code, 1997

The SEBI Takeover Code, 1997 was enacted to ensure that the process of substantial acquisition of shares is not only fair but also equitable to all parties concerned in the process, i.e both Majority and Minority Shareholders of the target Co. Outline a transparent and orderly framework for substantial acquisition of shares of companies listed on the stock exchanges by any person - a corporate entity or otherwise. Open Tender Offer Provision- ?

Open Tender Offer

The reason for the requirement for an open tender offer after the acquisition of a certain percentage of shares was that it such a provision will prevent the clandestine acquisition of shares at high prices from selected shareholders leaving the bulk of the shareholders high and dry. The open tender offer gives shareholders time to think and decide without being worried that the acquirer may not buy the shares of late comers.

Subhkam Ventures (I) (P.) Ltd. v. SEBI

[2010] 99 SCL 159 (SAT - Mum.)
Factual Background Subhkam Ventures India Private Limited (Acquirer) had acquired more than 15% in MSK Projects (India) Ltd., (Target) triggering the requirement of making a public offer (an offer to acquire at least 20% more of public shareholding) under Regulation 10 of the Takeover Code, 1997.

Does Subhkam also Control MSK?

Subhkam Ventures Acquires 15% MSK projects Open tender offer for 30% more Held 35% of MSK Share Capital

MSK Projects

Regulation 12- Change in control

The requirement of making an open offer under the Takeover Code is triggered not only 1) On the acquisition of shareholding beyond prescribed thresholds but also 2) pursuant to any acquisition or change in control (regardless of acquisition of any shares).

1st is straightforward, but 2nd is controversial in light of the broad and inclusive definition of control. [Regulation 2(1)(c) of the Takeover Code]

Regulation 2(1)(c) of the Takeover CodeControl

include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.

Controversial- SEBI Order

The Acquirer continued to emphasize that the acquisition would not lead to a change in control under Regulation 12.

SEBI directed that the offer document be revised to reflect that the open offer was being made under Regulation 10 as well as Regulation 12 (change in control).

SAT Decision- Interpreted Control

SAT said that Control meant Positive Control and not Negative Control. Control when you can make the target company do something, not when you restrict the target company from doing something. If an acquirer were to control the management or policy decisions of a company, he would be in control. However, power by which an acquirer can only prevent a company from doing what the latter wants to do is by itself not control. In short control means effective control.

SAT examined the types of specific rights provided to Subhkam under its Share purchase agreement

Firstly, Subhkam was entitled to nominate one director on the board of the target company. SAT held that a single nominee on a board of ten members constitutes a microscopic minority, and that the purpose of such nomination is only for informational rights. Secondly, this director was given a supermajority right under which the affirmative vote of Subhkams Director on the board is required for the company to carry out any matter amongst a list of 22 items. These include certain fundamental corporate matters such as amendment to the AoA, change in share capital, amalgamation, winding up, etc., and also certain matters pertaining to the business such as approval of the business plan, sale of property, appointment of key officials, capital expenditure, etc.

SAT Decision

SAT found that these matters did not cover the day-to-day operation of the company.
Its logic seemed to be premised on the fact that a veto right is only a negative right and does not allow the investor to carry out these actions on its own. Hence requirements of Regulation 12 would not be attracted.

Implications of the decision

Financial investors (FIs) such as private equity and venture capital investors typically seek various protective provisions in the investment documents executed with the investee company.

Among the most sought after protections is the right to veto certain actions that the company proposes to take.
Until SATs recent order, there has been much ambiguity as to whether such veto rights constitute control under the Takeover Code.

Implications of the decision

The order thus brings much relief to financial investors who have been uneasy about seeking such rights in listed companies for fear of triggering the Control requirement to make an open offer. The judgment emboldens the financial investors position by a long stretch as it has permitted a great number of supermajority rights that can be included without being in control.

Daiichi Sankyo Company Limited Vs. Jayaram Chigurupati and Ors

(2010) [157 Comp Case 380 (SC)]
Factual Background:

On October 03, 2007, Ranbanxy entered into a Share Purchase and Share Subscription Agreement (SPSSA) with Zenotech, to purchase 15% shares in Ranbaxy at the rate of Rs. 160 per equity share. After the requirement of an open tender offer- Ranbaxy held 46.85% of Zenotech Subsequently, on June 11, 2008 the Daiichi Sankyo entered into a Share purchase agreement with Ranbaxy to acquire 30.91% of its paid-up capital. After the requirement of an open tender offer- Daiichi Sankya held 53% of Ranbaxy. Hence Ranbaxy became a subsidiary of Daiichi Sankyo and Daiichi Sankyo acquired indirect control over Zenotech as well.

Daichii Sankyo Daichii Sankyo acquires 53% of Ranbaxy

What price should Daichii pay for the open ofer of Zenotech Shares?

113 Rs. 160 Rs. Per Share

Ranbaxy Ranbaxy acquired 46.85% of Zenotech

Per Share

Zenotech Hence Daichii acquires control over Zenotech

Determining the offer price

Regulation 12 Control requirement triggered.

Open

tender

offer

As per regulation 20, where an acquisition falls under regulations 10 or 12, the offer price must be determined in the manner prescribed under regulation 20 (4) and (5). Regulation 20 (4) prescribes 3 ways for determining the offer price. As per the regulation, it must be the highest of:

Determining the offer price

(a) the negotiated price under the agreement referred to in regulation 14 (1), (b) price paid by the acquirer or persons acting in concert with him for any acquisition, during the 26 week period prior to the date of public announcement, whichever is higher, (160 Rs.) (c) the average of the weekly high and low of the closing prices of the shares of the target company as quoted on the stock exchange. (113 Rs.) The first (a) relates to direct takeovers and not relevant. The controversy stemmed from the different methods, while the Appellant applied the method provided under subclause (c), the Respondents applied (b).

Contention around offer price

The Appellants view was that subclause (b) had no applicability because the Appellant was not acting in concert with Ranbaxy to purchase shares in Zenotech. Therefore, the only provision that they could apply for determining the offer price was sub-clause (c). On the other hand, the contention raised by the Respondents was that the Appellant and Ranbaxy constituted persons acting in concert on October 20, 2008 when Ranbaxy finally became a subsidiary of the Appellant.

Contention around offer price

They argued that Ranbaxy had paid Rs. 160 per share for the shares in Zenotech in January 2008 which fell well within the 26 week period dating back to June 16, 2008. Hence the Appellant should have applied regulation 20 (4)(b) to determine the offer price for the Zenotech shares which in turn should have been Rs. 160 and not Rs. 113.62.

Contention around offer price

The controversy finally rested upon the applicability of regulation 20 (4)(b) for determining the offer price quoted by the Appellant.
It was in this context that the SC examined the interpretation of the words persons acting in concert

SC Decision

The Supreme Court held that the mere fact that two companies are in the relationship of a holding company and a subsidiary company, without anything else, is not sufficient to comprise "persons acting in concert" under regulation 2(1)(e)(1) of the SEBI Takeover Code, 1997.

It held that the basic precondition of a common objective to acquire substantial shares in Zenotech was absent.

Shared common objective or purpose is sine qua non for relationship of person acting in concert to come into being. Where one Company acquired shares of target Company, and subsequently second Company acquired Shares of first Company, and no such common objective was shown to be existing between the two Companies, they could not be said to be persons acting in concert and alleged to have indirectly taken over the target company.

Implication of the decision

In this case, the Supreme Court required the acquiring company to pay a lesser price per share by liberally interpreting the words Person Acting in Concert in the Takeover Code to mean requiring a specific concerted common intention to acquire the shares in the target and not just accidental acquisition upon the acquiring of the holding company. The obvious pro-acquisition stand is clear in this Judgment. The need for proving corporate intention in the form of a common objective is easier to articulated in a judgment than being a practical possibility evidenced in documents.