(2) Even a simple takeover can create complications for an
intelligent and well-informed investor if he speculates. The issue gets further
complicated if takeover of Company C by B is quickly followed by takeover of B
by A.
(3) A recent decision of the Securities Appellate Tribunal
deals with just some of such complications and should present interesting
reading. The issue essentially related to what offer price should be given to
public shareholders under the mandatory open offer required under the Takeover
Regulations. The interesting aspect was that the company taken over itself
controlled another listed company (that was itself recently taken over). You can
picture the situation that a big fish eats a small fish and before the small
fish is even digested by the big fish, a bigger fish comes and eats the big
fish !
(4) Since the law requires that if a company is taken over
indirectly, then open offer is required for the indirectly acquired company
also. The question was what would be the price that should be offered for such
indirectly acquired company’s public shareholders. The case considers the
complexities that arise in such takeovers and how the law would be
expectedly found to be partially inadequate. The case also offers insights how
the Appellate Authority tries to find a meaningful solution to the issue,
filling in gaps through a ‘purposive’ approach to interpretation of the law. The
issue also is whether the Securities Appellate Tribunal, with due respect, took
an approach that gave benefits to public shareholders, but that was not
justified by the letter and perhaps even the spirit of the law.
(5) Let us go into the facts of this interesting case. The
decision is in the case of Dr. Jayaram Chigurupati v. SEBI and Others,
(Appeal No. 137 of 2009). The 3 companies involved were Zenotech Laboratories
Limited (‘Zenotech’), Ranbaxy Laboratories Limited (‘Ranbaxy’) and Daiichi
Sankyo Company (‘Daiichi’).
(6) Zenotech was the small fish in our analogy and was taken
over by Ranbaxy in the first instance. Ranbaxy made the required open offer to
the shareholders of Zenotech. Thereafter, Zenotech became a subsidiary of
Ranbaxy. Within a few months of the open offer by Ranbaxy — Ranbaxy itself was
taken over by Daiichi and thereafter became a subsidiary of Daiichi. It needs to
be noted that both Zenotech and Ranbaxy are listed companies.
(7) To recap the law, the Takeover Regulations require that
if a listed company is taken over, an open offer is required to be made to the
public shareholders of the listed company. The objective is that when an
acquirer buys shares typically from the Promoters of a Company, he should offer
to buy out at least some of the public shareholders too. The minimum percentage
for which the public offer has to be made is 20% of the equity capital. The
important other relevant factor crucial to the present case is the price at
which such an open offer has to be made. The offer price is determined by a
formula that takes into account the price paid for the initial acquisition, the
average of the prices for the preceding specified period, the price paid by the
acquirer or persons acting in concert with him in the preceding specified period
and so on.
(8) The Takeover Regulations require that if there is an
‘indirect’ takeover, the open offer would be required not only to the public
shareholders of the company taken over, but also of the company indirectly taken
over. The subsidiary company of the company taken over is a classic example of a
company indirectly taken over. In the context of our above example, Ranbaxy was
the company directly taken over by Daiichi and Zenotech was the company
indirectly taken over since Zenotech was a subsidiary of Daiichi.
(9) Thus, Daiichi would have to make an open offer not only
to the shareholders of Ranbaxy, but also to the shareholders of Zenotech. The
open offer to Ranbaxy’s shareholders did not offer any complication and was not
also in dispute here. Complications arose for the open offer of Zenotech and at
what price should the open offer be made to their public shareholders.
(10) A brief digression is required here to explain why the
law in relation to such indirect acquisition is a bit complicated and why it has
certain artificial parameters. Earlier, the differences in reality that may
arise between direct and indirect takeovers were not realised and hence the law
was not much different. However, experience made the lawmakers realise that
indirect takeovers had to be treated differently. It was seen that often
indirect takeovers were proposed but could not be completed because certain
approvals were not eventually received. This was particularly so in case of
cross-border acquisitions and where the parent company abroad was acquired.
Approvals of competition authorities and others made the completion of the
takeover uncertain and at least there was a significant delay involved. If an
open offer is required to be made for a takeover that finally does not happen,
then the shares so acquired would be an undue cost to the acquirer. For these
and other reasons, the law in India was amended and it was provided, in essence,
that in case of indirect takeovers, the open offer would have to be made within
3 months completion and consummation of the takeover of the first company.
However, to be fair to the public shareholders, the price to be offered to them
would be the higher of the prices calculated with reference to the original date
of the takeover of the first company and the date when the open offer is
triggered after the completion of the takeover of the first company.
(a) Thus, the complicated formula would have to be applied
with reference to both such dates.
(11) An interesting parameter provided for in this formula is
that if at any time during the preceding twenty-six weeks, the acquirer or any
person acting in concert with him had acquired shares at a higher price, then
such higher price would have to be offered to the public shareholders. The logic
is not far to see — the law intends to ensure that the highest of the prices
recently paid by the acquirer or persons acting in concert should be paid to the
public shareholders.
12. Now once again let us apply the above law to the facts of the present case and see the interesting twist. To recollect, Daiichi acquired Ranbaxy whose subsidiary was Zenotech. Thus, Daiichi had to make an open offer also to the shareholders of Zenotech within three months of completion of acquisition of Ranbaxy, Daiichi or persons acting in concert with it (except for the interesting twist discussed later) had not acquired any shares of Zenotech in the preceding twenty-six weeks. Thus, Daiichi made an open offer at Rs.114 (rounded off here for simplic-ity), since that was the price determined as per the various parameters.
13. However, the question and interesting twist to the whole issue was this. Ranbaxy had become a subsidiary of Daiichi after the acquisition. At the time when the open offer was being made by Daiichi to shareholders of Zenotech, Ranbaxy was thus a subsidiary of Daiichi. By definition, a subsidiary company is deemed to be a person acting in concert with the holding company unless it is established otherwise. Thus, Ranbaxy was a person acting in concert with Daiichi.
14. Ranbaxy had obviously acquired shares of Zenotech when it took it over and as part of open offer. However, only after such takeover of Zenotech that Ranbaxy was itself taken over by and became subsidiary of Daiichi. Since the preceding twenty-six week period was to be considered, and since Zenotech was taken over by Ranbaxy during this period, obviously Ranbaxy had acquired shares of Zenotech during this period under the first open offer. The question was that whether the price paid by Ranbaxy during this period was to be taken into account.
15. The stakes were large. Ranbaxy had paid a price of Rs.160 and thus instead of the Rs.114 to be paid, Rs.160 would be required to be paid.
16. The aggrieved parties petitioned to SEBI who rejected the claim of increase of the offer price to Rs.160 (interestingly, the erstwhile Promoters of Zenotech holding 26% shares were themselves the primary petitioners). The petitioners went in appeal to the Securities Appellate Tribunal (‘SAT’).
17. The SAT held that since Ranbaxy was a sub-sidiary of Daiichi, it was deemed to be acting in concert with Daiichi. No claims were made to refute this legal presumption. The SAT held that since this was the case, the acquisitions made by Ranbaxy during the prescribed period would also have to be taken into account. Since Ranbaxy had paid Rs. 160 to acquire shares of Zenotech during this period, this higher price would have to be the open offer price. Thus, though the open offer price otherwise determined taking also the current price was Rs.114, the price to be actually offered was held to be Rs.160.
18. Now, one may be tempted to say that if the small and public shareholder is benefitted, it is a good thing. The question, however, is also of justice. Incidentally, it was the erstwhile Promoters of Zenotech who held 26% that would be the major beneficiaries. (A side bar here – normally the Promoters of the target company cannot participate in an open offer and it is restricted to public shareholders only. However, since Zenotech was already taken over, the erstwhile Promoters, though holding 26%, became public shareholders and thus eligible for the open offer). Further, it is possible that eventually Daiichi may also have to pay interest on Rs.160 (for the grace period granted under law, SAT has held though that no interest would be payable).
19. With great respect, I submit that the decision is not correct in law.
20. Let us first look at the intention of the law. The intention, as I read the law, is that if an acquirer buys shares that triggers an open offer, the highest recent price’ paid by him should be considered and not merely the price at which the lot of shares that resulted in attraction of the open offer were acquired. For this purpose, since it often happens that many entities of the acquirer group acquire shares, the price paid by such persons acting in concert are also considered. However, it is strange that a person who was never a person acting in concert to start with at the time of the original acquisition, is now deemed to be acting in concert. When Ranbaxy bought shares of Zenotech it had nothing to do with Daiichi. To say that Ranbaxy was acting in concert with Daiichi in view of an event that happened later on and apply this to an earlier date is strange.
21. The words used are ‘acting’ in concert and this is in the present tense. Quite apparently, as on the date of original acquisition Ranbaxy was not ‘acting’ in concert with Daiichi.
22. The concept of deemed person acting in concert is an artificial concept and it is a well-settled principle of law that such artificial and deeming provisions should be construed strictly.
23. I do not know whether the SAT deliberately took a view to favour the small shareholders and of course there are no words to that effect though SAT does say that it has taken a ‘purposive’ interpretation of the law. I respectfully submit that on a plain and literal reading as well as reading in terms of the object of the law, the conclusion is, with great respect, not justified in law.
24. As I write this article, there are reports that Daiichi may go in appeal to the Supreme Court and it would be interesting to consider what the Su-preme Court has to say in the matter.
