Once a takeover offer is made, it is generally treated as sacrosanct. It is extremely difficult for acquirers to withdraw from the offer. This position has been clarified in a number of decisions of courts and appellate tribunals, including the Supreme Court. We have previously discussed the cases of Nirma Industries v. Securities and Exchange Board of India (2013) and SEBI v. Akshya Infrastructure Pvt. Ltd. (2014), both decided by the Supreme Court, as well as Pramod Jain v. Securities and Exchange Board of India (2014) that was decided by the Securities Appellate Tribunal (SAT). I do not propose to discuss the facts and reasoning in those cases, as they are set out in detail in the earlier posts. In any event, in all of these cases, SEBI’s refusal to permit a withdrawal of the takeover offer was upheld. All of these cases were decided under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997 (the “1997 Regulations”).
More immediately, a question arises as to whether position changes in any significant way under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (the “2011 Regulations”). Is there likely to be a better chance for acquirers to withdraw offers once made? In a paper last year, I had offered some predictions:
The position under the 2011 [Regulations] has altered only marginally. A new ground has been added whereby the acquirer can withdraw an offer if a condition that has been included in the agreement that triggers the offer is not met for reasons beyond the reasonable. While this enhances the ability of acquirers to design conditions (such as the MAC clause) in a mandatory offer, the result is that both the offer as well as the private arrangement (that triggered the offer) would fail if the condition were not satisfied. Hence, while some leeway has been provided for mandatory offers, the benefit will not be available to voluntary offers that would be subject to the strict regime outlined by the Supreme Court.
The question and these predictions were tested in a SEBI order issued earlier this week in the Matter of Open Offer of Jyoti Limited. In what appears to be a hostile takeover offer of sorts, on June 22, 2015 two acquirers made an offer to the shareholders of Jyoti Limited (the target company) to acquire 75% shares of the company. The target company then raised objections on account incorrect statements made by the acquirers in the letter of offer, and stating that the company was the subject matter of a reference to the Board for Industrial and Financial Reconstruction (BIFR) under the Sick Industrial Companies (Special Provisions) Act, 1985. The target company then approached the BIFR and obtained an order maintaining status quo regarding the control of the company, which effectively put paid to the takeover offer made by the acquirers. The BIFR’s order was upheld by the appellate authority.
In these circumstances, and given their entanglement with the lengthy process before the BIFR, the acquirers approached SEBI with a request to withdraw the offer. The legal question before SEBI was: “Whether the Open Offer made by the Acquirers can be allowed to be withdrawn in accordance with Regulation 23(1) of the Takeover Regulations, 2011?” SEBI then went on to interpret regulation 23(1) in the light of the Supreme Court decisions mentioned above. In a nutshell, sub-regulations (a),(b) and (c) of regulation 23(1) provide for specific circumstances under which the offer can be withdrawn, and sub-regulation (d) is broader and is attracted in “such circumstances as in the opinion of [SEBI], merit withdrawal”. The key issue was whether those decisions that were decided under the 1997 Regulations held good under the 2011 Regulations. SEBI answered categorically in the affirmative. Its key observations are as follows:
4.5.6 As stated in the preceding paragraph 4.5.2, the provisions of Regulation 23(1) of the Takeover Regulations, 2011, are similar to the provisions of Regulation 27(1) of the Takeover Regulations, 1997. Consequently, the ratio laid down by the Hon’ble Supreme Court in the matters of Nirma Industries Limited and Another vs. SEBI and SEBI v. Akshya Infrastructure Private Limited with respect to Regulations 27(1) of the Takeover Regulations, 1997, are squarely applicable to the provisions of Regulation 23(1) of the Takeover Regulations, 2011.
4.5.7 Placing reliance on the observations of the Supreme Court in the aforementioned matters, I find that an Open Offer once made under the Takeover Regulations, 2011, can only be withdrawn under the provisions of Regulations 23(1)(a), (b), (c) and (d) of such Regulations. Further, since withdrawal of the Open Offer in the instant proceedings only attracts the provisions of Regulation 23(1)(d) of the Takeover Regulations, 2011, the phrase ‘such circumstances’ under the said Regulation has to be read in accordance with the conditions stipulated in Regulations 23(1)(a), (b) and (c) of the Takeover Regulations, 2011.
Hence, the jurisprudence laid down under the 1997 Regulations continues to apply to the 2011 Regulations, which do not permit much greater leeway for acquirers to withdraw the offer.
An additional factor relevant in SEBI’s order relates to the interplay between the Takeover Regulations and the BIFR process under SICA. Given that the BIFR’s order stalling the takeover was only an interim one, which could possibly be lifted in the future, the completion of the offer was not an impossibility. Further, by asking the acquirers to approach the BIFR for their final decision, SEBI effectively lobbed the ball back onto BIFR’s court.