Thursday, May 7, 2015

Voting Agreements and Takeover Regulations

Earlier this week, SEBI issued an informal guidance based on a request by the promoters of Cipla Limited on the implications of voting agreements under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (the “Takeover Regulations”).

Background; Facts

The brief facts are that Dr. Y.K. Hamied and his family members control a significant stake in Cipla. Historically, all the family members had been exercising their voting rights in respect of shares held by each of them and no proxies were executed (except in one case). Going forward, the family is proposing to enter into an agreement by which the voting rights in respect of shares held by the family members will be exercised in the manner stipulated in the agreement. Accordingly, the family would act as a single unit and exercise their voting rights under the overall direction and supervision of Dr. Y.K. Hamied during his lifetime, and after by Mr. M.K. Hamied after the demise of or upon the incapacity of Dr. Y.K. Hamied to act. Thereafter, the family shall act as a joint unit subject to the overall direction and supervision of the member of the family who owns the highest number of shares. Apart from voting rights, the agreement also provides for preemptive rights in case any member of the family wishes to transfer shares.

Issue; Guidance

It is in this context that Dr. Y.K. Hamied approach SEBI to seek its guidance on whether the voting agreement as aforesaid would amount to the “acquisition” of shares or voting rights under the Takeover Regulations and, if so, whether the transaction would be exempt from the mandatory public offer requirements by virtue of specific exemptions for inter se transfer of shares among family members. It its guidance, SEBI answered both these issues in the affirmative.

SEBI found that since the family members (and their investment entities) are already disclosed as part of the promoter/ promoter group, they are “persons acting in concert” for the purposes of the Takeover Regulations. The voting agreement which confers decision making upon him “implies that Mr. Y.K. Hamied would be the single largest holder of voting rights in the target company”. This would normally trigger the mandatory open offer obligation. However, in this case since the voting agreement is between family members, it would be exempt under Reg. 10(1)(a)(iv) of the Takeover Regulations. Similarly, a change in family member under whose directions the family will exercise voting rights would be exempt if the requirements under Reg. 10 are satisfied.

Broader Implications

The implications of SEBI’s informal guidance are that voting agreements will generally amount to “acquisition” of voting rights and could potentially trigger mandatory offer requirements if such acquisition crosses prescribed limits. Hence, this reiterates the position that parties must be mindful of this while entering into voting agreements. However, on the specific facts of the case, the exemption was invoked. Hence, such arrangements between family members, promoter group or other parties who are entitled to avail of exemptions can enter into these agreements without fear of an open offer. However, they will have to make the necessary disclosures to qualify for the exemptions.

The proposal by the promoters of Cipla and SEBI’s informal guidance may set the tone for similar arrangements in the future. First, these arrangements are useful in as much as they clearly lay down succession planning in terms of control over the company. This is important even from a corporate governance perspective and will provide sufficient clarity to minority shareholders as well as to the future of the company. Second, these arrangements would also act as effect takeover defences by enabling the entire promoter group to act as a single block. Voting rights coupled with preemptive provisions would ensure that a prospective acquirer of the company cannot gradually acquire shares from individual family members so as to dissipate the controlling block. Hence, this case may offer some lessons for family controlled listed companies and their promoters.

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