Monday, November 30, 2015

Supreme Court on Takeover Offer Price

Under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations (both under the current version of 2011 and previous version of 1997), takeover offers are required to be made at a minimum offer price that is based on the historical market price over a specified period of time and also on other acquisitions made by the acquirer of persons acting in concert (PACs) during a similar period. The question of what types of previous or contemporaneous acquisitions by the acquirer or PACs must be considered came up for determination of the Supreme Court in A.R. Dahiya v. SEBI (judgment dated 26 November 2015 by Vikramjit Sen, J).

The facts of the case are that a Mr. Garg entered into a collaboration with the Haryana State Industrial Development Corporation Limited (HSIDC) to establish a venture in the form of Polo Hotels Ltd., being the target company. Under the terms of the venture, in certain circumstances Garg had an obligation to buy back the shares of HSIDC. In due course, Garg decided to sell his 28.09% shareholding in the target company to Mr. Dahiya (the appellant) at a price of Rs. 8.50 per share. This arrangement was approved by HSIDC, due to which Dahiya was to assume Garg’s obligation to buy back HSIDC as and when the obligation is triggered. Since the acquisition of 28.09% attracted the mandatory offer requirements of the 1997 Takeover Regulations, Dahiya made a public announcement of offer at a price of Rs. 8.75 per share and submitted the draft letter of offer with SEBI. Based on a complaint made to SEBI, it was found that certain PACs of Dahiya had bought shares belonging to HSIDC as part of the buyback obligation, although those transactions were entered into at a much higher price of Rs. 23.75 per share. The essential legal question therefore was whether the offer price payable by Dahiya must be Rs. 8.75 at which the offer was made, or at the higher price of Rs. 23.75 being the price at which Dahiya’s PACs acquired shares from HSIDC.

In deciding this legal question based on an interpretation of the 1997 Takeover Regulations, the Supreme Court was concerned with two issues. First, the transaction involving the purchase of shares by Dahiya’s group from HSIDC was admittedly a transaction that was exempt from the mandatory offer requirements as Reg. 3(i) of the 1997 Takeover Regulations exempted “transfer of shares from state level financial institutions … to co-promoter(s) of the company pursuant to an agreement between such financial institution and such co-promoters”. Counsel representing Dahiya argued that since the transaction was an exempt one, it should not be considered for purpose of determining the price of the offer made by Dahiya. However, this argument was not accepted by the Court on the ground that the exemption operated only to the extent that the acquirer does not have to make a mandatory offer, but an exempted transaction must still be taken into account for the purpose of determination of the minimum offer price. The Court noted:

As required under Regulation 10, the Appellant did make a public announcement, but did not disclose its buy-back transaction with HSIDC. The Appellant has vainly and incorrectly attempted to justify his act of non-disclosure by stating that the transaction with HSIDC was protected by Regulation 3, which placed it beyond the ambit of Regulation 10, 11 and 12. In our view, Regulation 3 only protects a transaction between a co- promoter and a State financial institution to the extent that, as a consequence of such transaction a public announcement will not be required to be made as provided under Regulations 10, 11 and 12. However, it does not imply that the said transaction is to be protected from the rigours of other Regulations provided for under the Act. Thus, the transaction between the Appellant and HSIDC will have to be subject to Regulations 16 and 20, and the rate at which the Appellant bought back the shares from HSIDC had to be disclosed in the public announcement.

Second, Dahiya’s counsel argued that the transaction between his PACs and HSIDC fell through due to financial difficulties on the part of the acquirers. Moreover, the purchase price for the acquisition of shares from HSIDC was to be paid in installments, and that the unpaid amounts were represented by post-dated cheques issued by the acquirers in favour of HSIDC. The acquirers dishonoured those post-dated cheques. It was therefore argued that owing to the non-completion of the transaction, the price thereof ought not to be considered for the purposes of the offer made by Dahiya. The Supreme Court rejected this argument as well. The reasons stated were as follows:

In our view, the post-dated cheques amounted to a promise to pay and that promise would be fulfilled on the date mentioned on the cheque. Thus, this promise to pay amounted to a sale of shares/equity. The subsequent dishonouring of the post-dated cheque would have no bearing on the case. At the time of making the public announcement the Appellant had bought back the shares of HSIDC by making payment via the said post-dated cheques. Further, as the buy-back was in pursuance of an agreement, there was consensus ad idem. …

… Under Regulation 2 Clause (1) Sub-clause (a)- ‘acquisition’ means directly or indirectly acquiring or agreeing to acquire shares or voting rights in, or control over, a Target Company. This definition clarifies that an acquisition takes place the moment the acquirer decides or agrees to acquire, irrespective of the time when the transfer stands completed in all respects. The definition explicates that the actual transfer need not be contemporaneous with the intended transfer and can be in futuro.

Hence, even the existence of an agreement between the acquirer (and PACs) and any other party during the subsistence of an offer would be considered towards the offer price, whether or not that agreement was indeed performance. What is relevant is the agreement and not only an actual sale and purchase of shares.

Although the Supreme Court’s decision in this case was based on technical grounds and an interpretation of the 1997 Takeover Regulations, it adds to the case law that favours the sanctity of offer. In other words, once an acquirer makes an offer, the law ensures that the offeree shareholders become entitled to the “equal treatment” principle, of which the minimum-pricing requirement is but one manifestation.

The position seems to be clearer under the 2011 Takeover Regulations, which support the position arrived at by the Supreme Court. Reg. 8(2)(c) states that the offer price should take into account “the highest price paid or payable for any acquisition, whether by the acquirer or by any person acting in concert with him, during the twenty- six weeks immediately preceding the date of the public announcement”. The use of the expression “payable” suggests that even an agreement of the present type entered into by an acquirer or PAC has to be taken into account for minimum pricing, and not merely when the agreement is fructified into an actual acquisition. Moreover, the expression “acquisition” includes an agreement to acquire under the 2011 Takeover Regulations (Reg 2(1)(b)). Hence, the reasoning of the Supreme Court would apply with greater force under the Takeover Regulations as they currently stand.

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