Withdrawal of Open offer – lessons from Supreme Court/SAT/SEBI decisions

The stakes involved in such a case are large. For example there is a listed company whose market capitalisation is Rs. 1000 crore. The market price of its share is Rs. 100. An offerer believes that the shares are under priced and decides to acquire control and makes an open offer at Rs.150 per share. However, sometime later, for reasons such as new information coming to light, fresh developments or even change of mind, he wants to withdraw the open offer. However, the offer would have had consequences on the market. There may be persons who would have bought shares from the market at higher price. The Company would have faced restrictions in carrying out certain activities during the offer period under the Regulations. Further, withdrawal without regulation may make the whole process frivolous since offerers may make offers, disrupt the company and the market, perhaps profit from such disruption and then withdraw. Open offers thus may lose sanctity. At the same time, an absolute bar from withdrawal may result in heavy costs for the offerer even where there were genuine reasons for withdrawal. In the example, the offerer would have to pay about Rs. 390 crore to acquire the 26% from the shareholders. The offerer would thus be stuck with a huge lot of shares, whose value may have diluted for reasons beyond his control and perhaps not gain control of the company too.

Considering the huge stakes involved and also considering that this issue could often arise, the matter has been subject matter of serious litigation. The matter has twice reached the Supreme Court and litigated before the Securities Appellate Tribunal. Recently, once again, SEBI has passed an order (dated August 1, 2016 in respect of open offer for Jyoti Limited) which is under the latest SEBI (SAST) Regulations 2011 (“the Takeover Regulations”). Curiously, in each of these cases, the application to withdraw the open offer was rejected, but for differing reasons/facts. Study of these issues has importance for persons acquiring large stakes in companies to know whether and when they may be allowed to withdraw. They would carefully need to structure and prepare for their transactions since an inadvertent lapse may result into an irreversible open offer and huge losses. At the same time, the Regulations, which have been drafted in the interests of investors, are such that open offer is triggered off at a very early stage.

This issue is also relevant because the relevant provisions for withdrawal have been tweaked in the 2011 Takeover Regulations as compared to the 1997 Regulations. While these changes have not affected the outcome in each of these matters, they are relevant to future open offers.

Provisions of the Regulations for withdrawal of open offer Regulation 23(1) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, deals with withdrawal of open offer. Regulation 23(1) provides 3 specific reasons and one general/residuary one under which an open offer can be withdrawn. Amongst the specific reasons, the first permits withdrawal where statutory approvals required for the open offer/acquisitions have not been received, provided due disclosures were made. The second reason permits withdrawal where the offerer, a natural person, has died. The third sub-clause provides for a situation where the agreement to acquire shares contained a condition that the acquirer/offerer could not meet for reasons beyond his reasonable control and provided that conditions were disclosed in advance, and that lead to rescinding of the agreement, withdrawal of offer is allowed.

Finally, there is the general/residuary ground, which is also the ground under which litigation has arisen. SEBI has discretion to grant withdrawal pursuant to “such circumstances as in the opinion of the Board, merit withdrawal.”. The question is whether this means there has to be an impossibility, taking color from the previous three grounds, as contended by SEBI? Or whether withdrawal can be permitted on other grounds such as the offer becoming uneconomical or other reasons, as contended by offerers? On this aspect, the law under the 1997 Regulations, on which preceding decisions have been rendered, is the same as under the 2011 Regulations on which the latest decision of SEBI has been rendered.

Decisions of the Supreme Court
The Supreme Court has on two occasions to dealt with this issue. In Nirma Industries Limited vs. SEBI (2013] 121 SCL 149 (SC) (“Nirma”), the offerer, a lender company, had lent monies to certain promoter entities of a listed company against pledge of shares of such listed company. On default, it exercised the pledge and thus acquired the shares which in turn resulted in obligation to make an open offer. However, it was claimed that later investigation brought to light that the Promoters of such listed company had allegedly siphoned off huge amount of funds, there were undisclosed liabilities, etc. and, thus, the value of the shares suffered in value. Yet, the lender was now stuck with the open offer at a price being as per the formula under the Regulations. Obviously, this would result in huge losses to the lender. It approached SEBI seeking withdrawal. SEBI rejected such application. Finally, the issue came before the Supreme Court. The core issue was whether the power of SEBI to grant withdrawal under the residuary clause was wide. Thus, whether it could allow withdrawal under varying circumstances at its discretion? Or whether it had very narrow powers, limited, on principles of ejusdem generis, to the nature of circumstances under the first three clauses under which withdrawal was permitted? In essence, thus, the issue was, whether power of SEBI to grant withdrawal was only if the offer was impossible to be proceeded with? The Supreme Court considered the facts of the case and the nature, scheme and purpose of the Regulations and held that SEBI could grant withdrawal only if there was impossibility in proceeding with the open offer. In the case before it, the offerer could still go ahead with the open offer and it has not become impossible merely because of changed circumstances.

The Court thus concluded that “Therefore, the term such circumstances in clause (d) would also be restricted to situation which would make it impossible for the acquirer to perform the public offer. The discretion has been left to the Board”. Merely because the offerer may suffer losses does not make the offer impossible to make or to be proceeded with. In the words of the Hon’ble Supreme Court, “The possibility that the acquirer would end-up making loses instead of generating a huge profit would not bring the situation within the realm of impossibility.” Thus, the plea of the lender/offerer was rejected.

The Supreme Court had soon thereafter again to deal with a similar matter. In SEBI vs. Akshya Infrastructure (P.) Ltd. (126 SCL 125 (SC)(2014))(“Akshya”) too, the question was whether, if the open offer becomes uneconomical owing to changed circumstances (curiously, this was allegedly owing to huge delay by SEBI in approving the open offer document), should it be allowed to be withdrawn? The Court followed Nirma and observed that:-

“This impossibility envisioned under the aforesaid regulation would not include a contingency where voluntary open offer once made can be permitted to be withdrawn on the ground that it has now become economically unviable.”.

The Court also explained the rationale of this conclusion as follows:

“Accepting such a submission, would give a field day to unscrupulous elements in the securities market to make Public Announcement for acquiring shares in the Target Company, knowing perfectly well that they can pull out when the prices of the shares have been inflated, due to the public offer.”

Decision of SAT
A similar issue was agitated in case of an open offer for shares of Golden Tobacco Limited (“GTL”) (in Pramod Jain vs. SEBI [2014] 48 taxmann.com 226 (SAT – Mumbai)). Here too, an open offer was made to acquire shares at a certain point of time. However, during the intervening time (which again included a huge delay allegedly caused by time taken by SEBI in approving the offer document), the offerer alleged that owing to acts by the Promoters of GTL, the shares of the Company lost hugely in value. The offerer thus sought to withdraw the open offer. Following and applying Nirma and Akshaya, the SAT, in a majority decision, refused to allow the offer to be withdrawn since there was no impossibility in proceeding with the offer.

Decision in case of open offer for shares of Jyoti Limited. In this latest case, SEBI had occasion to consider a peculiar case though with underlying similar issues. The offerer had made an open offer to acquire 75% of the shares and thus control of the listed company at a price of Rs. 63 per share. However, it came to light that the Company was a sick industrial company, having lost its net worth. The BIFR ordered status quo on operations/controlling stake and change in control of the Company was prohibited in the interim. Appeal of the offerer against such order of BIFR was dismissed by the Appellate Authority for Industrial and Financial Reconstruction. The question was whether, since the open offer could not be proceeded with, this was a fit case for permitting withdrawal of open offer. SEBI noted that the BIFR had not prohibited the open offer, but had merely given a stay to it, pending final decision. It was thus possible for the offerer to proceed with the open offer post such decision. In other words, the pre-condition of impossibility did not exist. Hence, applying Nirma and Akshaya, SEBI rejected the application of the offerer to withdraw the open offer.

Conclusion
It would be a rare case, thus, that an open offer would be allowed to be withdrawn. The offerer will have to demonstrate that either one of the three specific circumstances as laid down in Regulation 23(1) existed or there should be some other impossibility in proceeding with an open offer. If something happens in between, even if caused by SEBI’s delay or actions by the Company/its Promoters, or other unavoidable circumstances, so long as it is possible to proceed with the open offer, SEBI will not allow withdrawal. As explained earlier, the Regulations have sensitive triggers for the open offer to arise and once a trigger is set off, it is more or less irreversible. The offerer would thus have to proceed warily and with adequate planning to ensure that (i) either the open offer does not arise (ii) if it does arise, he is prepared to proceed through it till completion, whatever arises in between. Apart from difficulties in negotiated takeovers, this can make hostile open offers near-infeasible. Even in negotiated cases, often owing to delayed processing by SEBI, disputes in the interim with the Company/Promoters, changed circumstances, etc. could create problems. Nevertheless, there is an underlying sensible principle involved here. Offerers should not be given a broad leeway that offers can be made and withdrawn at their discretion. This would, inter alia, play havoc with markets and harm interests of investors.