Sunday, November 10, 2013

SAT on Acquisitions by Persons Acting in Concert

Background

In a recent decision, the Securities Appellate Tribunal (SAT) ruled on the acquisition of shares by a person acting in concert (PAC) with other shareholders, and whether an increase in the individual shareholding of that person beyond 15% triggered a mandatory open offer requirement under the erstwhile SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (the 1997 Regulations) while the group as a whole held shares beyond that percentage. Although the decision is under the previous version of the Regulations, it provides some guidance regarding acquisitions by PAC and also as to the relevance of the concept under the current version of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (the 2011 Regulations).

Facts

In 2011, certain promoters of Pitti Laminations Limited (the Target Company) made a mandatory open offer to the shareholders due to an increase in their shareholding as a result of which the offer requirement was triggered. After filing the draft letter of offer with SEBI, on December 17, 2012, the acquirers received comments from SEBI on the draft letter of offer. One of the principal comments was that SEBI found that in 2006-2007 one of the promoters, Mr. Akshay S. Pitti, who individually held less than 15% shares in the Target Company, increased his shareholding to more than that threshold without making a mandatory open offer. Under the 1997 Regulations, the threshold for triggering a mandatory open offer was 15% of shares with voting rights. Although his individual limit of 15% was breached, it is not in dispute that Mr. Akshay Pitti was acting in concert with other promoters of the Target Company and they collectively held more than 15% prior to the concerned acquisitions. The relevant promoters challenged SEBI’s responses by filing an appeal before the SAT.

Issues

Two primary issues arose for consideration before the SAT. The first issue was procedural in nature, i.e. whether an appeal can be filed against observations made by SEBI in response to an offer document. The second covered the substantive issue of whether an individual holding less than 15% shares with voting rights in the Target Company would trigger the mandatory open offer requirement even though such person along with the PAC collectively already held more than 15% shares.

Rulings

On the procedural issue, SEBI’s contention was that the comments on the draft letter of offer (which were appealed against) were only advisory in nature and not mandatory. However, this argument was not accepted by the SAT, as there was precedent to suggest that these directions issued by SEBI under reg. 18(2) of the 1997 Regulations were capable of being challenged before the SAT. The comments were held to be mandatory in nature and not merely advisory in nature.

On the substantive issue, the SAT considered the language of reg. 10 of the 1997 Regulations on whether the trigger of the threshold by an individual member of a group would attract the mandatory open offer obligation. The SAT considered the definitions of “acquirer” and “persons acting in concert” and came to the following conclusions:

23. Therefore, it is evident that the framers of the Takeover Regulation, 1997 intended to bring out a clear distinction between individual acquiring of shares on one hand and shares acquired by persons acting in concert on the other. The benchmark of 15% would, thus, apply to an individual when the individual is acquiring shares/voting rights on his behalf alone. Similarly, when we attempt to determine whether or not the said limit has been crossed, shareholdings of all members of the group of persons acting in concert would have to be reckoned as a whole. Any other interpretation which would serve to dilute the distinction between an individual acquirer and a group of “persons acting in concert” as an acquirer. It would, indeed, make the concept of “persons acting in concert” nugatory, which could never have been the intention of the law makers. …

26. We, therefore, reiterate that for determining the crossing of threshold limit of 15% prescribed by the erstwhile Regulation 10 of the SAST Regulations, 1997, it is the collective holding of the entire group/concert which would be the benchmark for determining the increase in shareholding and not Appellant No. 3’s (Mr. Akshay S. Pitti) shareholding as an individual. Once an individual becomes part of the group acting in concert with the intention of acquiring shares, it loses its identity as an individual and takes on the identity of the group as a whole. As per scheme of law as envisaged in the erstwhile SAST Regulations, 1997 an individual is no longer regarded as a separate entity of the group as he becomes an integral part of the entire unit as one cohesive structure. This is the only logical inference since it is not disputed by the Respondent that all the Appellants had been acting in concert with each other by agreeing to pool their holdings together in respect of the target company in a common basket as per law and hence in our considered opinion all the Appellants have acted as a unit/group and not in their individual capacity at least for the limited purpose of the acquisition of shares/voting rights in question. It is also not denied by the Respondents that the shareholding of all the Appellants taken together had been far more than 15% and they had been in control of the affairs of the company, along with Mr. Sharad Pitti, since its inception in 1983.

In arriving at this conclusion, the SAT considered the collective (group) nature of acquirers in computing the thresholds for triggering a mandatory offer.

Analysis

The SAT’s decision puts at rest certain interpretation issues that arose in the context of the 1997 Regulations.

On the procedural front, it recognises the rights of aggrieved parties to prefer an appeal when faced with adverse comments from SEBI on draft documents submitted to SEBI. In other words, adverse comments from SEBI will give rise to a cause of action for preferring an appeal. This seems consistent with certain previous instances where appeals have been heard by the SAT against comments on offer documents, although this specific issue was never raised as a matter for consideration before the SAT (for example, the Subhkam case relating to the definition of “control”). In some cases, parties have rather preferred to alter their contractual structures and offer documents to meet with SEBI’s comments even though they initially resisted them on legal grounds (for example, some cases where SEBI had required acquirers to delete put and call options in acquisition documents when they were considered unenforceable).

On the substantive front, the SAT order reemphasises the concept of a group, i.e. acquirers together with persons acting in concert, for the purposes of determining the acquisition thresholds. However, on this issue, it appears that the SAT decision would be confined to the provisions of the 1997 Regulations, as the position has been altered in the 2011 Regulations. The SAT decision helpfully alludes, albeit by way of obiter dicta, to the possible outcome of a similar case under the 2011 Regulations:

33. Lastly, it is worthwhile to note that the SAST Regulations, 1997 have since been replaced by SAST Regulations, 2011 with some significant changes. An analysis of relevant and corresponding provisions i.e., Regulations 3(1), 3(2) and 3(3) of SAST Regulations, 2003 shows that Regulation 3(3) specifically provides that acquisition of shares by any person within the meaning of sub-regulations 3(1) and 3(2) would be attracting the obligation to make an open offer for acquiring shares of the target company irrespective of its aggregate shareholding with persons acting in concert if the shareholding of such an individual person exceeds the threshold limit prescribed by regulation 10. It is pertinent to note that such a specific and unambiguous provision, making an individual liable to make a public offer in case the individual shareholding increases during the course of the acquisition even while acting in concert with other persons, is conspicuously missing in the SAST Regulations, 1997. Further, the limit of 15% has since been increased to 25% by regulation 3(1) in SAST Regulations, 2003. …

2 comments:

Anonymous said...

Interesting... Would that then mean that each member of a group of PACs can acquire upto 5% of the target in any given financial year?

Anonymous said...

No. Regulation 3(3) is clear and the shareholding of the PAC will be clubbed with the shareholding of the acquirer for the purposes of regulation 3(1) and 3(2).

Kind regards,