Thursday, October 8, 2009

Indirect Acquisitions and Determination of Open Offer Price

(The following post has been contributed by Avinash Balasubramaniam, who is an alumnus of the ILS Law College and a practising lawyer based in Chennai)

The Securities Appellate Tribunal (SAT) yesterday delivered its verdict in the Zenotech open offer case directing Daichi to offer Rs.160/share to the shareholders of Zenotech. So is Dr. Jayaram Chirugupati, the chief protagonist in the challenge, and the other shareholders of Zenotech shares richer by Rs. 47 per share? They will be if the reasoning of the SAT holds water if the battle is played out in the Supreme Court? Will the reasoning of SAT hold water? My humble opinion is it will not.

Before going any further, let us reflect upon the events leading up until the SAT order. The first act opens with Ranbaxy entering into a share purchase agreement on 3rd October, 2007 with the Promoter of Zenotech to acquire shares in Zenotech at Rs. 160 per shares and in that process triggering the open offer requirement mandated by the Takeover Code. This open offer opened on 24th December and closed on 15th January, 2008 and shareholders of Zenotech who tendered their shares in the open offer received Rs. 160 per share. Consequent to this process Ranbaxy came to hold 44.79% of Zenotech. Subsequently on 11th June, 2008 Daicho Sankyo entered into a share purchase & share subscription agreement with Ranbaxy and its promoters acquiring shares of Ranbaxy at Rs. 737 per share. The quantum acquired by Daichi triggered the requirement to make an open offer to the shareholders of Ranbaxy as also indirectly triggering the open offer to the shareholders of Zenotech. Accordingly Daichi made an open offer to shareholders of Ranbaxy to acquire shares at Rs. 737 per share and this open offer was consummated on 20th October, 2008.

The Zenotech public announcement was made on 19th January, 2009 and the offer was priced at Rs. 113.62. Shareholders of Zenotech felt they deserve Rs. 160 per share and therefore instituted multiple challenges to the open offer price at various adjudicatory forums (SEBI, the Madras High Court, CLB just to name a few) and the lawyers of Daichi were now working overtime to quell the challenge.

The challenge ultimately turned towards the interpretation of the provisions of the Takeover Code in calculating the open offer price, viz, Regulation 20(4) and Regulation 20(12). In terms of Regulation 20(4) the offer price must be the highest of the following:

- the negotiated price paid by the acquirer; (this clause being inapplicable to the facts of the case)

- price paid by the acquirer or persons acting in concert with him for acquisition, if any, during the twenty six week period prior to the date of public announcement; (emphasis supplied) (as we shall see the dispute eventually turned on the question whether Ranbaxy can be said to be a person acting in concert with Daichi and, if it was, Daichi would be required to offer Rs.160, the price which Ranbaxy paid for Zenotech shares)

- the higher of the 26 week average of the weekly high and low of the closing prices or the two week average of high and low prices preceding the date of public announcement.
Regulation 20(12), a provision specific to open offer triggered by indirect acquisition, as was the case with Zenotech, provided that the offer price for indirect acquisition or control must be determined with reference to the date of the public announcement for the parent company and the date of the public announcement for acquisition of shares of the target company, whichever is higher, in accordance with sub-regulation (4) or sub-regulation (5).

What Regulation 20(12) says is that in case of indirect acquisition, the exercise of calculating the offer price must be done twice, one with reference to the date of public announcement of the parent (Ranbaxy in this case) and the second time with reference to the date of public announcement for the target (Zenotech) and the offer price for the target will be the higher of the two. The open offer for Ranbaxy was made on 16th June, 2008 and the open offer for Zenotech was made on 19th January, 2009 (i.e. within three months from consummation of the acquisition of the parent, Ranbaxy, which was on 20th October, 2009). That means the first part of exercise should be as follows: (a) was there a negotiated price; (b) did any person acting in concert with Daichi acquire shares of Zenotech in the 26 week period prior to 16th June, 2008; (c) what is the highest of 26 week or 2 week high and low with reference from 16th June, 2008. The second part of the exercise would involve asking the same questions, but with reference to a different date, i.e., (a) did any person acting with concert with Daichi acquire shares of Zenotech in the 26 week period prior to 19th January, 2009; (b) what is the highest of the 26 week or 2 week high and low with reference from 19th January, 2009. From the facts it is not known if Ranbaxy acquired any shares of Zenotech in the 26 week period preceding 19th January, 2009 and we shall assume that Ranbaxy did not acquire any shares in this period and only acquired Zenotech shares until 28th January, 2008.

So from a plain reading of the provisions of the Takeover Code, the only way Daichi could be required to make an offer at Rs.160 per share (the price at which Ranbaxy acquired Zenotech shares in January, 2008) only if it can be said that in the 26 week period prior to 16th June, 2008 Ranbaxy was acting in concert with Daichi when it acquired shares of Zenotech, keeping with our assumption that there was no acquisition of Zenotech shares by Ranbaxy in the 26 week period prior to 15th January, 2009, the date of public announcement for the Zenotech open offer.

SAT went on to hold that on 20th October, 2008 Ranbaxy became the subsidiary of Daichi and therefore by virtue of Regulation 2(1)(e)(2)(i) was ‘deemed’ to be a person acting in concert with Daichi on 19th January, 2009. So far so good. However, SAT held that since with reference to 19th January, 2009 Ranbaxy is a deemed to be a person acting in concert, this is good enough to conclude that it was acting in concert when acquiring Zenotech shares in January 2008 (which is in fact 52 weeks prior to Daichi’s public announcement to acquire Zenotech shares).

The rationale of the ‘persons of acting in concert’ concept is obviously to prevent group of persons (with a common intention) to sidestep the mandatory open offer requirement by the simple stratagem of individually acquiring shares of the target lesser than the threshold triggering mandatory open offer but their collective acquisition breaches the threshold. What is important is whether at the time of acquisition of the shares they can be said to be persons acting in concert. The Supreme Court in Technip SA vs SMS Holdings Private Limited & Others (2005) 125 CompCas 545(SC) referring to report of Bhagwati Committee report held that “to be acting in concert with an acquirer, persons must fulfill certain 'bright line' tests. They must have commonality of objectives and a community of interest and their act of acquiring the shares or voting rights in company must serve this common objective. The commonality of objective should be established between the acquirer and a shareholder in order to trigger off Regulations 10, 11 and 12”.

The question which SAT should have considered (which it never fully did) was whether at January, 2008 there was in fact this common intention between Ranbaxy and Daichi. It is quite possible that Daichi came knocking at the offices of Malvinder Singh and Shivender Singh only in say March 2008. Can Ranbaxy then be said to be acting in concert with Daichi? To prove that persons are in fact acting in concert is admittedly difficult, but can that justify SAT not answering the relevant question? Can the acquisition of shares in the target be anterior in time to the common intention? The SAT order suggests that this is possible. In other words, the SAT order permits the operation of acquisitions by persons “acting in concert” on a retrospective basis. It does not matter when the parties began acting in concert, but their shareholding acquired prior to that will be taken into account for purposes of determining price under Regulation 20. While the “acting in concert” principle requires two elements: (i) common objective or purpose, and (ii) the act of acquisition of shares or control, the SAT order in Zenotech’s case implicitly seems to recognise that each of these elements can be satisfied at different points in time. Whether that is consistent with the objects and purpose of the Takeover Code is a matter that does not seems to receive adequate support.

So are the shareholders of Zenotech richer by Rs 47 per share? Perhaps not yet.

- Avinash Balasubramaniam


Lawman said...

Dear Avinash,

Many thanks for your post. It was a very interesting read!

If SAT order is made into a rule, it would undemine the whole rationale behind the 'person acting in concert' concept, and take it into an unintended trajectory altogether.

Surely one cannot be deemed to be a person acting in concert with someone he was not associated with at the relevant time (i.e. when the transactio/acquisition happened).

Keep up the good work, Avinash!

Warm Regards,

Avinash Balasubramaniam said...

@ Lawman:

Thank you for your feedback. Will the SAT order become a rule? I shall hazard to predict that it will be set aside by the Supreme Court, assuming ofcourse the matter is agitated there.

For now, we really cannot say for sure whether there was or wasn't any concert between Ranbaxy and Daichi with respect of Ranbaxy's acquisition of Zenotech Shares because SAT did not examine the matter. It assumed what ought have been established.

rob4world said...

hi all, it was really a gud post.! i have a query. Mr. Avinash, you said "anterior in time",! how much anterior, just 26 weaks prior to announcement. keeping in the mind the objective of the regultion, can't we say that the both parts of the definition of "PAC" are independent. and for second part there is no need to prove common object!

(I am facing the problem of indirect aquisition, where there is gap of just fifteen days between the date of acquisition and the date of the Public announcement to sh. holders of indirectly acquired company! with no other fact, dont you think its wise to keep in mind the interest of the shareholders.?)

sridhar said...

Hi Avinash

It is an interesting interpretation of an experienced lawyer. Unfortunately what most of seem to miss is the purpose behind framing such norms i.e. the intent. According to Barons business directory acting in concert refers to two or more investors working together to achieve the same investment goal-for example, all buying stock in a company they want to take over. What one needs to specifically understand here is that there is no mention about the timeline when the two or more were acting concert. This effectively means that the timeline is not critical and the goal or the end result is critical in the interpretation. Applying this meaning to the present context, you would be able to see that Ranbaxy has acted in concert and this has resulted in Daiichi’s acquisition of Zenotech.