Saturday, August 9, 2014

SAT on Withdrawal of a Takeover Offer

Once an acquirer makes an open offer under the SEBI Takeover Regulations, it has to meet a high standard (somewhat similar to frustration) before it is allowed to withdraw such an offer. This principle has been laid down by the Supreme Court in two cases, i.e. Nirma Industries/ Shree Rama Multi Tech and Akshya Infrastructure/ MARG, which we have previously discussed on this Blog. Readers may refer to a discussion in those posts regarding the conflicting interests involved in open offers and the rationale for either permitting or disallowing a withdrawal of an open offer.

A similar question came up before the Securities Appellate Tribunal (SAT), which announced its decision earlier this week in Pramod Jain/ GTL. The case involved a voluntary offer that was hostile in nature. Essentially, the acquirer launched the offer as its effort to enter into a development arrangement with the target was rebuffed. The case of the acquirer (referred to as the appellants) is set out by the SAT as follows:

5.         Case of appellants, in nutshell is that, their request for withdrawal from public offer deserved to be allowed basically on two grounds. Firstly, it is contended that delay of more than two  years in approving the draft letter of offer has frustrated the public offer, because, when regulation 18(2) provides for 21 days to approve the draft of the letter of offer, SEBI could not have taken more than two years to approve the draft letter of offer and during the period of two years, GTL has become a sick company. Secondly, during the pendency of public offer, promoters/management of GTL have encumbered the most valuable asset (Vile-Parle property) in gross violation of regulation 23 and have also siphoned of funds of GTL thereby frustrating the object with which public offer was made and making it impossible for appellants to acquire shares of virtually a dead company.

Additional facts reveal that the acquirer had initiated legal action against the promoters/ management before the Company Law Board for oppression and mismanagement as well as a civil action.

By a majority decision, the SAT refused to accept the contention of the acquirer to withdraw the offer and ordered it to complete the offer. The majority felt constrained by the two Supreme Court decisions which not only provided a narrow interpretation to regulation 27 of the SEBI Takeover Regulations relating to withdrawal of open offers, but also that delay on the part of SEBI in approving the offer document was in and of itself insufficient to constitute a ground for withdrawal of the offer. In that sense, the decision of SAT merely reiterates prevailing legal position.

While the sanctity of a takeover offer is understandable, it leaves no room for withdrawal by an acquirer even if the change of circumstances are beyond its control, including due to delay on the part of the regulator. What makes this decision important is a dissent by one of the members of SAT who takes these aspects into account, including questionable conduct on the part of the target and its management. The dissenting opinion also provides the benefit of doubt to the acquirer as regarding delays at the hands of SEBI:

The purpose of stating above is to make it clear to every player in matter of dealing with open offer; is that legislature, while making these regulations, made it clear that every player has to play its part with due solemnness, promptness, efficiency and dedication so that public offers go through within timelines and nobody acts callously and without meeting timelines. It may also be mentioned that legislature / regulations for Takeover have been set-up in such a manner that everyone concerned has to do everything expected of him, within timelines, so that open offer goes through its course, set out in regulations. This understanding of adhering to timelines is most important, if public offers have to succeed.

In content of legislative framework, the role of SEBI in present appeal needs to be considered. …

Admittedly, the SAT was hamstrung due to the binding view of the Supreme Court in earlier cases, but the divided opinion in the GTL case demostrates the difficulties of delays in approval of takeover offer documents by SEBI. This is yet another case in recent times where this issue has come up. Delays would certainly cause inefficiencies in the takeover process, and it has become necessary for SEBI to address the issue of timelines in an open offer on an urgent basis.

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