Recent Decisions of SAT

(b) It appears that the Acquirer had acquired the shares of
the Listed Company from the existing Promoters at a certain price. However, a
significant amount was also paid to the erstwhile Promoters as ‘non-compete
fee’.

(c) The appellant was aggrieved by the fact that the
non-compete fee was not included in the open offer price and he claimed that the
existing Promoters who sold their shares effectively got a higher price than the
minority public shareholders. He prayed to SEBI to require the Offerer to
increase the open offer price by including the ‘non-compete’ component.

(d) Initially, SEBI agreed to the plea and gave appropriate
directions to the Offerer. However, on personal hearing and representation, SEBI
agreed that since the non-compete fee was not more than 25% of the open offer
price, it was covered by Regulation 20(4) read with Regulation 20(8) and hence
it need not be added to the open offer price. It needs to be noted that the
Regulations do permit a certain level of non-compete fee to be paid without the
same being required to be considered for computing the open offer price.

(e) The appellant appealed to SAT against the order of SEBI.

(f) Interestingly, SAT focussed on the issue of the bona
fides of the appellant rather than the merits of the case and finally concluded,
as discussed below, that mainly since the appellant had not come with clean
hands, relief could not be given. It must be emphasised though that prima
facie the order of SEBI of not including the non-compete fees did have merit
— the only point is that this aspect was not considered in order of SAT.

(g) However, this decision is important owing to the fact
that often so-called ‘arbitrageurs’ enter into a company just before or
immediately after an open offer. They believe that they would profit either from
the open offer, which they predict would be higher than their purchase price, or
that because of such open offer, the market price would otherwise rise. Millions
of dollars were made by such arbitrageurs (such as Ivan Boesky) in the US. The
problem is that the prediction of such arbitrageurs may go wrong and then they
try to use some means or the other to compensate themselves. It is seen in the
US that at times they ‘greenmail’ the Company or the Promoters by requiring them
to buy their shares or they may resort even to litigation to get the open offer
price increased. I hasten to clarify that I do not claim that this was so in the
present case. However, SAT had strong words and grounds for rejecting the claim
of the appellant.

(h) The SAT observed that “We are inclined to agree with him
(the Offerer’s counsel) and the reason for this is that we are not satisfied
with the bona fides of the appellant in filing the present appeal.” The
appellant had claimed that the Offerer was not offering a fair price to the
shareholders by not including the non-compete fee. However, the SAT
stated that it could not understand why the appellant bought the shares after
the open offer announcement was made. In other words, the appellant did not hold
shares as on the date of the announcement but acquired shares thereafter.

(i) The SAT also noted that not only did he acquire shares
after the announcement, but the appellant also actively traded in the shares of
the Company thereafter and even increased his final holding. The Hon’ble SAT
commented, “Obviously, the appellant had purchased the shares only to litigate
with the target company.”.

(j) Hence, SAT concluded, “We are satisfied that he has not
approached the Tribunal with clean hands and must fail on this short ground”.

(k) The SAT also noted that the appellant had unconditionally
offered his shares to the Offerer pursuant to the open offer, hence, he could
not thereafter claim a higher price. The SAT commented, “In view of this conduct
of the appellant, he is estopped from challenging the purchase made by the
acquirer nor can he claim a higher price. As already observed, if he was not
satisfied from the beginning as to the price offered by the acquirer, then why
did he offer his shares unconditionally. Having done so, he has to be non-suited
on this ground.”.

(l) Finally, the SAT dismissed the appeal, stating that it
had not gone into the merits of the appeal.

2.2 While the decision is interesting and brings into
light interesting aspects of Offerer, the following comments are respectfully
offered :

(1) The mere fact that a person has entered after the
announcement or that he may have traded in the shares after the announcement
should not be held against him. In the US, though there have been excesses, such
arbitrageurs have been found to perform an important function in
price-discovery. Often, other shareholders have got a better price because of
active interest taken by arbitrageurs. Whatever the case may be, the mere fact
that a person is an arbitrageur does not make him, per se, a person with
mala fide intentions and in any case such activities are not illegal and in fact
are, in principle, at par with speculators in general. Having said that, though,
it must also be noted that SAT recorded a finding that the appellant bought the
shares only to litigate.

(2) the mere fact that certain inconvenience may result if the higher price had to be offered to all shareholders, should not be a reason to reject the appeal. It was found that a large number of shareholders did not offer the shares pursuant to the open offer. Thus, there would be a dilemma as to whom the difference in price could be paid. That was another ground on which the appeal was rejected. However, it is respectfully submitted that this problem could have been solved in many ways. In any case, assuming for a moment that the claim for a higher price was justified, then it would have been the fault of the Offerer of not having offered the correct price. He could be made to give a revised offer and shareholders given a fresh chance to offer their shares.

3) However, it must be noted that, though the SAT did not go into the merits of the case and that is whether the non-compete consideration should have been added to the open offer price, prima facie, Regulation 20(8) does permit payment of non-compete consideration up to 25% of the open offer price. SEBI apparently concluded that this limit was not exceeded. Hence, though the SAT did not go into the merits and correctness of this fact, perhaps this was not needed.

3. Then there are two other decisions worth noting for the strong words used by the Hon’ble SAT on the attitude of SEBI causing injustice to the parties concerned. The SAT awarded hefty costs. The decisions are:

3.1 Delay in listing of additional shares issued allegedly on account of acts and omissions of SEBI and the stock exchange – Palco Metals Limited v. (1) The Ahmedabad Stock Exchange -r Limited and (2) SEBI (Appeal No.4 of 2007, decision dated 16th April 2008)

a) The facts are interesting and not uncommon and in essence reflect the endless to and fro pass-ing of the file relating to the listing of the shares of the Company that were allotted to certain shareholders.

While the facts are complicated, it can be stated that essentially, the issue was the huge delay by the stock exchange and SEBI in listing certain shares allotted by the Company. The listing of the Company was suspended in 1993 on account of non payment of listing fees. However, the listing was restored in 1997 and immediately thereafter, the Company made a preferential allotment of shares.

m) The listing of such shares allotted remained pending on account of certain to-and-fro claims and passing of the file between SEBI and the stock exchange. Claims made for not listing the shares were found to be vague and baseless by SAT,because non-compliance was alleged without specifying any particular provision.

n) SAT made certain strong remarks against SEBI and the stock exchange; some of the observations are reproduced:

“The Board and the exchange should realise the loss suffered by the shareholders of the company who have been deprived of the opportunity to trade their shares in the market. This is not the way to protect their interests.”

……….

Before concluding, we may mention that the exchange has not put in appearance despite service and we have had no assistance from its side. The Board, as usual, has taken the stand that the issue is between the appellant and the concerned stock exchange, though earlier it had not permitted the exchange to allow list-ing.”

o) The SAT finally ordered that the shares should be granted listing within 2 weeks of its order. It also awarded costs of Rs.1lakh to be shared equally by SEBI and the stock exchange.

5. Is the Managing Director a whole-time director? ! – Vyas Securities Pvt. Ltd. and Another v. SEBI, (Appeal No. 165 of 2007, decision dated 3rd April 2008)

p) This decision is less on the facts or the law and more .on the peculiar and allegedly arbitrary attitude of SEBI. In fact, the Hon’ble SAT begins its decision with the words, “This case is yet another instance of how arbitrary the Securities and Exchange Board of India could be when it comes to dealing with the market intermediaries. We say so because the facts of the case speak for themselves.”.

q) The facts are not very complicated. Essentially, the appellant was a broking company that was converted to a corporate entity from a non-corporate individual broking entity. The issue was whether the corporate entity would get continuity in terms of payment of fees to SEBI. SEBI had permitted such continuity on corporatisation on, inter alia, the condition that the erstwhile broker-individual should act as the whole-time director of the converted corporate entity for 3 years.

r) As per the decision, SEBI apparently claimed that such individual was only the Chairman and Managing Director and not the whole-time Director! ! Thus, the exemption should not be given and the corporate entity should be made to pay fees that the broker-individual had effectively already paid. Of course, there were certain alleged discrepancies that were put forth as grounds for rejection of such claim (such as discrepancies regarding date/time of meetings which SEBI felt pointed towards ma-nipulation of documents), but this contention was found to be very unreasonable by SAT.

s) SAT resolved the other discrepancies relating to dates and genuineness of the documents by other documents and legal reasoning. It also noted that SEBI itself had granted exemption in similar cases.

t) On the issue whether legally and in facts, the director was also the Whole-time Director of the Company, the SAT observed as follows:

“Now when we look at the proceedings as recorded, it is not in dispute that Pradyuman was appointed the Managing Director and Chairman of the company by two separate resolutions in the Board meeting held on 31-7-1998. As a managing director he cannot but be a whole-time director of the company.

The term Managing Director has been defined in S. 2(26) of the Companies Act and it means a Director who by virtue of an agreement with the company or of a resolution passed by the company by its Board of Directors or by virtue of its memorandum of Articles of Association is entrusted with substantial powers of management which would not otherwise be exercisable by him. There was no other claim set up by any other person to the managing directorship of the company and we see no reason for the Deputy General Manager to have doubted that fact. In view of this, she should have accepted the claim of the company.

u) Allowing the appeal with costs, the Hon’ble SAT concluded as follows:

“For the reasons recorded above and while expressing our displeasure in regard to the manner in which the Deputy General Manager has conducted the proceedings, we allow the appeal and set aside the impugned order. The appellants will have their costs which are assessed at Rs.50,000.”