Tuesday, April 24, 2012

SEBI Reinforces the Sanctity of a Takeover Offer

In a recent order, SEBI refused permission for the withdrawal of a voluntary takeover offer by an acquirer. The details of the case involving an offer by Mr. Pramod Jain and Pranidhi Holdings Private Limited for shares in Golden Tobacco Limited are discussed at the Indian Legal Space Blog, as are reasons for SEBI’s decision.
The following are some of the takeaways from SEBI’s order:
1. SEBI would permit withdrawal of an offer under the Takeover Regulations only in exceptional circumstances. That, in turn, reinforces the sanctity of a takeover offer. Once made, the offer must be taken to fruition by the acquirer. It does not matter whether the offer has been triggered mandatorily due to the acquirer’s acquisitions of stock beyond prescribed thresholds or even if it is merely a voluntary offer. This imposes a significant onus on acquirers to possess the required certainty to be able to complete the offer;
2. SEBI has provided a narrow interpretation to the withdrawal provisions under Reg. 27 of the erstwhile Takeover Regulations of 1997. In other words, although an offer and acceptance thereof are contractual matters, they are a specialized type of contract governed by the provisions of the Takeover Regulations, and cannot be subject to unilateral withdrawal rights of offerors.
3. One of the grounds for withdrawal raised by the acquirer pertained to mismanagement of the target company by its management when the offer was pending, some of which also allegedly violated Reg. 23 of the 1997 Regulations which requires the target not to take certain actions without the approval of its shareholders. This also resulted in a significant drop in value of the target, compared to the time when the offer was launched. However, this ground by itself was found by SEBI to be insufficient to permit a withdrawal of the offer. Instead, SEBI’s approach suggests that these are matters of caution to be exercised by the acquirer by way of deeper due diligence before launching the offer. Such a stance by SEBI seems to impose greater obligation on acquirers to perform more extensive due diligence on the target (which is not always straightforward when the target is uncooperative, such as in a hostile situation), and any dispute regarding the business condition or value of the target cannot give the acquirer a right to walk away from the offer. Nevertheless, SEBI did note the possibility of a breach of the Takeover Regulations on the part of the target and its management, which would require further investigation.
Although SEBI’s order buttresses the position set out previously by the Securities Appellate Tribunal in the Nirma Industries Limited case (2008) which limits the scope of the acquirer’s withdrawal rights, its result goes further in applying the same principles to a voluntary offer as well. As far as possible wrongful conduct of the target is concerned, that is a risk which the acquirer will have to absorb as it is required nevertheless to proceed with the offer so as to protect the interest of the public shareholders.


Anonymous said...

I think there is a curious point reg. ejusdem generis here. Before the amendment of Reg 27(d), it contained three specific clauses and one general clause. There was no common genus in the three clauses, and so EJ was arguably not applicable, permiting an expansive reading of 27(d)(4). Post amendment, 27(d)(1) was ommited, now the remaining two clauses have a common `impossibility' thread, and as per the WTM, now EJ can be invoked to limit the scope of 27(d)(1). This sounds a bit difficult to accept. Can the deletion of 27(d)(1) have the unintended conseq of limiting the scope of 27(d)(4)?

Any thoughts?

-Mangseh Patwardhan

ishita luthra said...

Regulation 27 (1) of take over regulation, 1997
No public offer, once made, shall be withdrawn except under the following circumstances
(a) {*}The withdrawal is consequent upon any competitive bid (omitted by amendment in 2002)
(b) The statutory approval (s) required to have been refused
(c) The sole acquirer, being a natural person, has died
(d) Such circumstances as in the opinion of the Board Merit Withdrawal.
Question of concern is regulation 27(1) (d) of takeover code, 1997
The interpretation given to the above regulation of 27(1)(d) by SAT, in the case of Nirma Industries Vs Sebi [2009] 90 SCL 23 (SAT) by applying the doctrine of ejusdem generis to hold that clause (d) only applies to circumstances similar to those contemplated in clause (b) and (c).
If we are saying that being a residuary clause, clause (d) being a general clause need to be interpreted with (b) and (c) as per doctrine of ejusdem generis.
The interpretation give by SAT is not a correct interpretation as there is no change in the clause (d) since the enactment of regulation, it can be assume that legislative intention behind (d) is also same. And therefore the omission/ amendment of clause (a) could not affect the interpretation of clause (d).
The doctrine of ejusdem generis is used only if there is need to showcase the legislative intent. But if we apply the doctrine of nirma case, than clause (d) must be applied to clause (a) as well. Giving it a restrictive meaning would be against the legislative intention of the provision. But as there is no requirement of ejusdem generis, the plain and ordinary meaning should be given to the entire above clause and with context to clause (d) the discretion should be in the hand of board to allow the acquirer to withdraw the open offer.

Anonymous said...

Post a Comment
I am now thinking of the next logical step. Will the Open offer open at all ? Or The Acquirer will keep on delaying it under one pretext or the other. They will only gain as much as the delay. There is no cost to them, no funds blocked. In the Escrow they have just given 10 lacs shares of Techno Electric which is their promoter holding. With the kindly of poor implementation by SEBI of Regulation 44(i), The Acquirer may get away with a bonus for the delay. SEBI may allow payment of interest only those Shareholders who were continuously holding the shares before the date of announcement of The Open Offer and whose shares are accepted. This will virtually deny interest to the vast majority of investors.
CA Arun Goenka

Anonymous said...

In a voluntary (or a hostile) offer, it is not possible to do a "due diligence", except to the extent that, the acquirer has to rely on the information which is available in the public domain. Target company is not obliged to co-operate with the acquirer.

Nirma was a trigerred offer and not a voluntary offer.