Thursday, May 8, 2014

Supreme Court on the Sanctity of a Takeover Offer

Background and Facts

Last month, the Supreme Court had the occasion in SEBI v. Akshya Infrastructure Pvt. Ltd. to consider the narrow question of the whether “an open offer voluntarily made through a Public Announcement for purchase of shares of the target company can be permitted to be withdrawn at a time when the voluntary open offer has become uneconomical to be performed”, which it answered in the negative.

The brief facts of the case are that Akshya Infrastructure, which is part of the promoter group of MARG Limited (the target company), made certain acquisitions of further shares in the target between 2006 and 2011 that caused it to breach the creeping acquisition limits under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (the Takeover Regulations). Subsequently, on October 20, 2011,[1] Akshya made a voluntary open offer under Reg. 11 of the Takeover Regulations at a price of Rs. 91 per share, which represented a 10% premium over the prescribed floor price. Upon making the public announcement, Akshya filed the draft public offer document with SEBI for its comments. There was an exchange of correspondence that ensued between SEBI and Akshya that primarily related to Akshya’s prior trigger of the mandatory offer requirements due to its breach of the creeping acquisition limits. Due to this, there had been a delay of 13 months in SEBI’s clearance of the offer documents. After comments were conveyed by SEBI on November 30, 2012, Akshya challenged them before the Securities Appellate Tribunal (SAT), including on the ground that the delay in SEBI’s response rendered the offer unviable and academic. By its order, the SAT allowed Akshya’s appeal and allowed it to withdraw the open offer and the escrow amount deposited in support thereof.

It is against the decision of the SAT that SEBI preferred an appeal to the Supreme Court. On appeal, the Supreme Court reversed the order of the SAT and disallowed Akshya from withdrawing its open offer, thereby once again upholding the sanctity of an open offer made under the Takeover Regulation.[2]

Issues and Ruling

In arriving at its conclusion, the Supreme Court considered several issues pertaining the Takeover Regulations, with the key among them discussed below:

Voluntary vs. Mandatory Offer

Akshya contended that Reg. 27 of the Takeover Regulations that deals with withdrawal of a takeover offer (and which was subjected to a restrictive interpretation of by the Supreme Court in the Nirma Case as discussed here) applies only to mandatory offers and not to voluntary offers. The Supreme Court did not accept this contention because it amounts to “reconstructing” the said provision, which refers to “public offer” without expressly restricting it to mandatory offers. In that sense, there “can be no distinction between a triggered public offer and a voluntary public offer”.

Applicablity of Nirma Industries

Akshya also raised the argument that Nirma Industries is inapplicable to the present case (also due to the nature of the offer as discussed above), and also that the decision of the Supreme Court in that case itself requires reconsideration. However, the Supreme Court refused to accept the argument and relied extensively on the ruling in Nirma Industries to interpret Reg. 27 again in a restricted manner so as to limit the circumstances in which with an open offer, once made, can be withdrawn. The court did not find that the present case fit within the circumstances that deserved permission for a withdrawal.

Delay in SEBI’s Response

Akshya’s main plank of argument was that the delay in the open offer (that in the end made it uneconomical) was caused by SEBI, and hence SEBI cannot enforce the offer obligations. The Supreme Court adopted a rather balanced approach in dealing with the delay argument. While it came down heavily on SEBI for the cause of the delay, it was found that such delay by itself was insufficient as a justification to allow Akshya to withdraw the offer, and that the delay “will not result in nullifying the action taken by SEBI, even though belated”.

Analysis

The decision of the Supreme Court is significant in as much as it reiterates the sanctity of a takeover offer, and considerably limits the circumstances when an offeror can renege on its obligations. By refusing to deviate from its previous ruling in Nirma Industries, it has introduced clarity and certainty on the matter. This recognises the fact that open offers are made for the benefit of the shareholders of the target, and hence they must be pursued to their logical conclusion without any hindrances.

From a takeover structuring perspective, however, it considerably enhances the risk to the offeror. Hence, the offeror must be committed to the offer, and must be convinced as to the commercial viability of the offer and be prepared to accept the risk of intervening events, changes in business, in the economic environment and other factors, unless they are elevated to the extent recognised in Reg. 27 of the Takeover Regulations (and Reg. 23 of the present version of the Takeover Regulations of 2011). This imposes a significant onus on offerors. At is does not matter whether the offer is voluntary or mandatory – both stand on the same footing. It is not as if the voluntary nature of the offer will provide any leeway to the offer. Once the offer is made, the offeror effectively reaches a point of no return.

While the delay on the part of SEBI was not permitted to be used by the offeror in this case as an excuse to withdraw the offer, the Supreme Court’s observations on delays in the regulatory oversight of takeovers are relevant and seem to make a larger point:

It is a matter of record that the comments were not offered for 13 months. Such kind of delay is wholly inexcusable and needs to be avoided. It can lead to avoidable controversy with regard to whether such belated action is bona fide exercise of statutory power by SEBI. By adopting such a lackadaisical, if not callous attitude, the very object for which the regulations have been framed is diluted, if not frustrated. It must be remembered that SEBI is the watchdog of the Securities Market. It is the guardian of the interest of the shareholders. It is the protective shield against unscrupulous practices in the Securities Market. Therefore, SEBI like any other body, which is established as a watchdog, ought not to act in a lackadaisical manner in the performance of its duties. The time frame stipulated by the Act and the Takeover Regulations for performing certain functions is required to be maintained to establish the transparency in the functioning of SEBI.

As these observations of the Supreme Court reemphasize, time is of the essence in takeovers. Nevertheless, there have been several instances whereby takeover offers have opened several months after the draft offer document has been filed with SEBI, often due to disagreements between the offeror and the regulator. In the process, it is the offeree shareholders who suffer. It is with this in mind that regulators in other jurisdictions such as the UK and Singapore (with the Takeover Panel and the Securities Industry Council (SIC) respectively) follow a more informal approach towards takeover regulation whereby the regulators adopt a more practical attitude to ensure efficiency and timely progress of the takeover offer. Similarly, it would augur well for takeover offers in India to be completed within a tight timeframe from their announcement, without any delays, particularly from the regulatory standpoint. 


[1] Note that the offer was made immediately prior to the effectiveness of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, and hence the previous SEBI Takeover Regulations 1997 apply to the facts of this case.
[2] The Supreme Court adopted a similar approach last year in Nirma Industries Limited v. SEBI.

2 comments:

vswami said...

impromptu
On the first blush, in one's perspective, the opposing stance taken by the disputants, so also the ruling of the SC is most likely, or worthwhile, to be reconsidered having regard to a very well established rule /legal principle underlying the whole episode. To be precise, a couple of rudimentary points that call for an upright objective view are these: -
1. Does not any offer , unless and until accepted, continue to remain so; so that it is open and within the right of the offeror to withdraw it unilaterally before acted upon. accepted?
2. Should not the stated age-old rule/ principle of contract law be considered applicable to any transaction, regardless of whether or not that happens to be a transaction to which any other regulation, even having a statutory force, of a later origin applies ?
Over to the law experts for a serious deliberation if the points raised deserve it, to the end of a righteous resolution.

vswami said...

Added:
Should not , in any view,- even granting but not necessarily conceding that there is a 'sanctity' or special 'risk' to be attached, the inordinate delay on the part of SEBI in clearing the proposal constitute a strong ground for a contra opinion, favorable to the offer-or?