Wednesday, March 5, 2014

Withdrawal of a Takeover Offer

[The following post is contributed by Yogesh Chande, who is a Consultant with Economic Laws Practice, Advocates & Solicitors. Views of the author are personal]

In an interesting order passed on February 20, 2014, the whole time member of the Securities and Exchange Board of India (SEBI) has refused the withdrawal of an open offer made by the acquirers under the erstwhile SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (Regulations).

A few facts worth mentioning:

1.         The target company is listed and is in the business of stock broking registered with SEBI, and member of OTCEI and Bhuvaneshvar Stock Exchange.

2.         The acquirer [PRPL] entered into a business transfer agreement (BTA) with the target company, wherein the target company agreed to issue shares representing around 80% of its expanded capital to the acquirer, for acquiring the apparel and accessories business under the brand names "Weekender", "Weekender Kids" and "Toon world" and certain brands of Walt Disney and Warner Bros, from the acquirer.

Comment: At this juncture, it should be noted that, being a stock broker and member of the recognised stock exchanges, the target company was prohibited and disqualified from engaging in the proposed business [acquisition of the apparel and accessories business] in terms of the requirements of Securities Contracts (Regulation) Rules, 1957. The target company, upon realising this much later after the open offer, sought cancellation of the registration as a stock broker on 17 October 2012.

3.         Additionally, two other acquirers acquired around 6% of the expanded capital of the target company from the promoters in the market.

4.         There were two persons acting in concert [holding around 2%] with the aforesaid acquirers.

5.         The aforesaid acquisition of around 88% triggered an open offer and the open offer was accordingly made on 20 February 2011.

6.         In the meanwhile, SEBI was intimated that, on 8 October 2012 the Hon'ble High Court of Karnataka, had passed an order for winding up of PRPL, the lead acquirer and the executant party to the BTA.

7.         In relation to the aforesaid development [winding up], upon various interaction between SEBI and the merchant banker, SEBI, vide letter dated 25 January 2013, informed the Merchant Banker that the acquirers and the persons acting in concert (PACs) are jointly and severally liable to complete the open offer. In light thereof, notwithstanding any unforeseen circumstances affecting any one of the acquirers, the rest of the acquirers and the PACs are required to proceed with the open offer within the prescribed time lines. Accordingly, SEBI advised the Merchant Banker to take necessary steps to immediately proceed with the open offer and submit the revised letter of offer latest by 31 January 2013, failing which, they shall be liable for action in terms of the provisions of the Regulations and the SEBI Act, 1992.

Issuance of Show Cause Notice by SEBI

Since, the acquirers and the PACs did not take any steps to proceed with the open offer despite clear advice of SEBI, SEBI issued a combined Show Cause Notice to all the acquirers and PACs (Noticees) calling upon them to show cause as to why suitable directions under sections 11 and 11B of the SEBI Act, regulations 44 and 45 of the Regulations, read with regulations 32 and 35 of the Takeover Regulations, 2011 should not be issued.

Following were the arguments for not making an open offer and in favour of withdrawing the open offer

1.         All the property and effects of PRPL are deemed to vest with the Court and, thereafter, with the Official Liquidator appointed in respect of PRPL. The powers of the existing directors of PRPL ceased and all powers pertaining to the affairs of the PRPL shall be exercised by the Official Liquidator. PRPL was incapable of performing its obligations under the BTA entered into with the target company.

2.         The winding up order has adversely affected the ability of the acquirers and PACs to comply with the open offer.

3.         The current financial position of the other two acquirers had deteriorated, and hence they were not in a position to complete the open offer.

4.         The aforesaid brand names have not been transferred due to the liquidation of PRPL, the target company has been deprived of the benefit which it was to derive out of the said BTA. This in turn has materially altered the transaction and has taken away the incentive of acquiring further shares in the target company.

5.         There is no value in investing in the target company by acquiring its shares as the same had practically become a shell company without any worthwhile business or future business plans.

Comment: The target company had become a shell company, because it was not able to acquire the business of the acquirer as per the BTA, and it had also made a request for surrendering its existing business prior to the acquisition i.e. registration as a stock broker.
6.         Because of the declining market conditions, the financial condition of the other two acquirers deteriorated substantially and the financial incapacity to purchase the shares of the target company, albeit they were confident of performing their financial obligations under the open offer, at the time of making the public announcement.

7.         Compulsion to make an open offer, will be detrimental to their financial stability thereby affecting their ability to manage the affairs of the target company post acquisition which will consequently affect the shareholders of the target company.

8.         Under regulation 23(1)(c) of the Takeover Regulations, 2011, an open offer can be withdrawn if any condition stipulated in the agreement for acquisition attracting the obligation is not met for reasons outside the control of the acquirer and such agreement has been rescinded, subject to such conditions having been disclosed in the detailed public statement. Although the regulation has been inserted in the [new] Takeover Regulations, 2011, the same is very relevant in the present case as the whole purpose of acquisition has been defeated.

9.         PRPL cannot take part in the open offer, as it cannot transfer the assets to the target company for the reason that its assets are now in possession of the Official Liquidator pursuant to the winding up order.

10.       There were certain issues surrounding due diligence in relation to the proposed acquisition resulting in non-compliance with certain securities laws, which have also been dealt by SEBI in detail in the order.

SEBI’s direction to complete the open offer along with interest

After granting an opportunity of being heard and after hearing all concerned, SEBI directed the Noticees to complete the open offer and also directed them to pay alongwith the consideration amount, interest at the rate of 10% per annum from 8 May 2011 to the date of payment of consideration, to the shareholders who were holding shares in the target company as on the date of trigger i.e. 4 February 2011 and whose shares have been accepted in the open offer, after adjustment of dividend paid, if any to them by the target company.


Ordinarily, once an open offer is made, its inexorable conclusion ought to be the completion of the open offer. One of the lessons from this order of SEBI decision, would be for transaction advisors to structure the acquisition agreement and the open offer documents (public announcement, detailed public statement and letter of offer) such that, they protect the acquirer appropriately through material adverse change (MAC) clauses and other similar conditional arrangements, and if possible, to also envisage an eventuality or a contingency, of the nature mentioned above, which could possibly enable the acquirer to withdraw an open offer.

- Yogesh Chande 


Ashwij Ramaiah said...

As per this judgment and the Subhiksha judgment, is it safe to conclude that in India although there is not legal jurisprudence on MAC clauses, the courts are generally reluctant to allow a party to walk away from a transaction on the basis of materially adverse changes which were unanticipated while drawing up the contract?

Anonymous said...