(1) A recent decision of the Supreme Court throws light on
important issues relating to the SEBI Takeover Regulations. Some core concepts
of the Regulations such as ‘persons acting in concert’ and ‘persons deemed to be
acting in concert’ are interpreted. It is important to note the reliance placed
by the Supreme Court on the reports of Expert Committees for interpretation. The
decision is in the case of Daiichi Sankyo Company Limited v. Jayaram
Chigurupati & Others, C.A. No. 7148 of 2009, dated July 8, 2010.
(2) Of course, the real issue that was in dispute before the
Court, though interesting, has application in rare cases. It concerns a
situation where a listed company was acquired by another listed company and the
latter company, within a short time, got itself acquired by another company. The
question before the Court related to the pricing for the open offer of the
shares of the first company and the interpretation of the legal provisions
applicable to such a situation. Such quick and sequential takeovers do not
happen often and hence that part of the decision may have limited application.
But the other aspects have wider importance.
(3) Let us then broadly understand the facts, the relevant
provision of law and the issue, and then know what the Supreme Court held.
(4) The facts are quite simple. Ranbaxy Laboratories Limited
(‘Ranbaxy’), a listed company, agreed to acquire a significant stake in Zenotech
Laboratories Limited (‘Zenotech’), another listed company paying a price of
Rs.160 per share. As required under the Regulations, it made an open offer @
Rs.160 which was also the price as per the formula under the Regulations.
However, within six months, the Promoters of Ranbaxy agreed to sell more than
15% shares in Ranbaxy to Daiichi @ Rs.114 (rounded off) per share. Eventually,
Daiichi got more than 51% stake in Ranbaxy, thereby making Ranbaxy its
subsidiary. Daiichi thereby acquired indirectly more than 15% stake in Zenotech.
Hence, as required by law, Daiichi made an open offer for shares of Zenotech at
a price Rs.114. Shareholders of Zenotech, including its erstwhile Promoters,
complained to SEBI that the open offer should have been @ Rs.160 and not Rs.114.
As will be seen later on, particularly after considering the decision of the
Securities Appellate Tribunal (‘SAT’), the point at issue was that since the law
deems holding-subsidiary companies to be deemed to be acting in concert with
each other and since the law requires that price paid by a person acting in
concert to be taken into account, the open offer should be Rs.160 as paid by
Ranbaxy.
(5) The law relating to open offer pricing of such ‘indirect’
acquisitions, i.e., acquisition of shares of a listed company which in
turn controls another listed company, is as follows.
(6) Shredded of irrelevant complexities, it can be said that
when a listed company acquires another listed company indirectly, then it has to
make an open offer for the shares of the company in which such indirect
acquisition has been made. For the purposes of pricing of the open offer, the
law requires that, inter alia, the price paid by the acquirer or any
persons acting in concert with it during the preceding 26 weeks has to be taken
account of and if such price is higher, then such higher price shall be the open
offer price.
(7) In the present case, Daiichi acquired Ranbaxy. However,
it was during the preceding six months to this that Ranbaxy had acquired the
shares of Zenotech @ Rs.160. The law deems a holding and its subsidiary to be
acting in concert with each other. The issue thus was that since Daiichi and
Ranbaxy were deemed to be acting in concert and since Ranbaxy had acquired
shares of Zenotech @ Rs.160 during the preceding six months, whether such higher
price of Rs.160 should be the open offer price by Daiichi ?
(8) SEBI rejected the complaint by the shareholders of
Zenotech that such higher price should have been the open offer price. Such
shareholders appealed to the SAT, who held that the open offer should have been
at Rs.160. It held, in essence, that one has to consider the situation on the
date with reference to which the price formula of preceding 26 weeks was to be
applied. As on this date, Ranbaxy was a subsidiary of Daiichi. Thus, they were
deemed to be acting in concert. Since the law requires that acquisition by
persons acting in concert be taken into account, the SAT held that the higher
price of Rs.160 paid by Ranbaxy should be the open offer price.
(9) The matter reached the Supreme Court. The Supreme Court
considered, inter alia, the history of the provisions and numerous
provisions not just relating to indirect acquisitions, but even related and
incidental provisions.
(10) It held that, firstly, the persons acting in concert
have to actually come together to acquire the shares of a target company. There
has to be an agreement (or understanding, etc.) to acquire shares and such
shares should be of the target company.
(11) Further, the provisions deeming certain connected
persons (such as holding-subsidiary companies in this case) as persons acting in
concert does only that — i.e., it deems that they are acting in concert.
It does not deem that they have been acting in concert for acquiring shares of a
listed company and this would have to be established. Importantly, even the
provision that deems certain related persons as acting in concert has a
clarification that this deeming provision is subject to the contrary being
established.
(12) The Court gave its understanding of the term ‘person
acting in concert’ as follows :
“. . . . the concept of ‘person acting in concert’ under
Regulation 2(e)(1) is based on a target company on the one side, and on the
other side two or more persons coming together with the shared common objective
or purpose of substantial acquisition of shares, etc. of the target company.
Unless there is a target company, substantial acquisition of whose shares, etc.
is the common objective or purpose of two or more persons coming together, there
can be no “persons acting in concert“. For, de hors the target
company the idea of ‘persons acting in concert’ is as irrelevant as a cheat with
no one as victim of his deception. Two or more persons may join hands together
with the shared common objective or purpose of any kind, but so long as the
common object and purpose is not of substantial acquisition of shares of a
target company, they would not comprise ‘persons acting in concert’.” (emphasis
supplied)
(13) The other condition it laid down for the term persons
acting in concert to apply in the context of the Regulations is, in the Court’s
words :
“The other limb of the concept requires two or more persons joining together with the shared common objective and purpose of substantial acquisition of shares, etc. of a certain target company. There can be no ‘persons acting in concert’ unless there is a shared common objective or purpose between two or more persons of substantial acquisition of shares, etc. of the target company. For, de hors the element of the shared common objective or purpose, the idea of ‘person acting in concert’ is as meaningless as criminal conspiracy without any agreement to commit a criminal offence. The idea of ‘persons acting in concert’ is not about a fortuitous relationship coming into existence by accident or chance. The relationship can come into being only by design, by meeting of minds between two or more persons leading to the shared common objective or purpose of acquisition of substantial acquisition of shares, etc. of the target company. It is another matter that the common objective or purpose may be in pursuance of an agreement or an understanding, formal or informal; the acquisition of shares, etc. may be direct or indirect or the persons acting in concert may cooperate in actual acquisition of shares, etc. or they may agree to cooperate in such acquisition. Nonetheless, the element of the shared common objective or purpose is the sine qua non for the relationship of “persons acting in concert” to come into being.”
(14) Thus, it noted that “. . . . mere fact that two companies are in the relationship of a holding company and a subsidiary company, without anything else, is not sufficient to comprise ‘persons acting in concert’. . . . . There may be hundreds of instances of a company having a subsidiary company, but to dub them as ‘persons acting in concert’ would be quite ridiculous unless another company is identified as the target company and either the holding company or the subsidiary make some positive move or show some definite inclination for substantial acquisition of shares, etc. of the target company.”
(15) In the light of this explanation of the terms ‘persons acting in concert’ and ‘persons deemed to be acting in concert’ that the words ‘unless the contrary is established’ are to be understood.
(16) The Supreme Court finally reversed the view of the SAT that the deeming fiction could apply retrospectively and thus, if a person was deemed to be acting in concert on a later date, such connection would apply to an earlier date too. It held, “…..the deeming fiction under sub-regulation (2) can only operate prospectively and not retrospectively. That is to say the deeming provision would give rise to the presumption, as explained above, only from the date two or more persons come together in one of the specified relationships and not from any earlier date. Thus, in the case in hand, the deeming provision under sub-regulation (2) would give rise to the presumption that Daiichi and Ranbaxy were ‘persons acting in concert’, provided of course the other conditions as explained above were also satisfied, only from October 20, 2008, the date on which Ranbaxy became a subsidiary of Daiichi and not before that. Hence, the purchase of Zenotech shares by Ranbaxy in January 2008 cannot be said to be by a ‘person acting in concert’ with Daiichi.”
(17) The Supreme Court thus held that the Daiichi and Ranbaxy were not acting in concert when the shares of Zenotech were acquired by Ranbaxy. The latter development of the holding-subsidiary position cannot alter, factually or in law, the earlier unconnected position. The provision relating to determination of price did not apply retrospectively so as to change the status as on the date of acquisition. Thus, the price paid by Ranbaxy on a date when there was no relation with Daiichi was not to be applied for the open offer by Daiichi of Zenotech.
(18) Importantly, the Supreme Court relied considerably on the background of these provisions as put forth in the Bhagwati Committee Report to understand the rationale of this provision as well as for its interpretation generally. The Court also recommended that delegated legislations such as the Takeover Regulations should have the ‘objects and purposes’ clause that Acts have.
The following is what the Court said:
“Before parting with the records of the case we would like to say that in arriving at the correct meaning of the provisions of the Takeover Code specially regulation 14(4) and 20(12), we were greatly helped by the reports of the two Committees headed by Justice Bhagwati. We mention the fact especially because as per the legislative practice in this country, unlike an Act, a regulation or any amendments introduced in it are not preceded by the “Object and Purpose” clause. The absence of the object and purpose in the regulation or the later amendments introduced in it only adds to the difficulties of the Court in properly construing the provisions of regulations dealing with complex issues. The Court, so to say, has to work in complete darkness without so much as a glimpse into the mind of the maker of the regulation. In this case, it was quite apparent that the 1997 Takeover Code and the later amendments introduced in it were intended to give effect to the recommendations of the two Committees headed by Justice Bhagwati. We were, thus, in a position to refer to the relevant portions of the two reports that provided us with the raison d’etre for the amendment(s) or the introduction of a new provision and thus helped us in understanding the correct import of certain provisions. But this is not the case with many other regulations framed under different Acts. Regulations are brought in and later subjected to amendments without being preceded by any reports of any expert committees. Now that we have more and more of the regulatory regime where highly important and complex and specialised spheres of human activity are governed by regulatory mechanisms framed under delegated legislation, it is high time to change the old practice and to add at the beginning the ‘object and purpose’ clause to the delegated legislations as in the case of the primary legislations.”
(19) In conclusion, the decision is welcome as it clarifies and gives the final word on important concepts in Takeover Regulations. The considerable reliance of the Court on the Expert Committee Reports, albeit in the absence of ‘objects and purpose’ clause, increases the value of such reports generally for the student in securities laws. Of course, the irony is that this only increases the complexity of the law for such students. Now, they will have to read and know the recorded history of such law, in addition to the very voluminous bare text of the Act, Regulations, etc.
(20) P.S.: As this article goes to press, SEBI has released the report on revising the Takeover Regulations and has recommended changes in, inter alia, the subject matter of this article. More on this in the next issue.
