In a recent order,
SEBI refused permission for the withdrawal of a voluntary takeover offer by an
acquirer. The details of the case involving an offer by Mr. Pramod Jain and
Pranidhi Holdings Private Limited for shares in Golden Tobacco Limited are
discussed at the Indian
Legal Space Blog, as are reasons for SEBI’s decision.
SEBI refused permission for the withdrawal of a voluntary takeover offer by an
acquirer. The details of the case involving an offer by Mr. Pramod Jain and
Pranidhi Holdings Private Limited for shares in Golden Tobacco Limited are
discussed at the Indian
Legal Space Blog, as are reasons for SEBI’s decision.
The following are some of the takeaways from SEBI’s
order:
order:
1. SEBI would permit withdrawal of an offer under the
Takeover Regulations only in exceptional circumstances. That, in turn,
reinforces the sanctity of a takeover offer. Once made, the offer must be taken
to fruition by the acquirer. It does not matter whether the offer has been
triggered mandatorily due to the acquirer’s acquisitions of stock beyond
prescribed thresholds or even if it is merely a voluntary offer. This imposes a
significant onus on acquirers to possess the required certainty to be able to
complete the offer;
Takeover Regulations only in exceptional circumstances. That, in turn,
reinforces the sanctity of a takeover offer. Once made, the offer must be taken
to fruition by the acquirer. It does not matter whether the offer has been
triggered mandatorily due to the acquirer’s acquisitions of stock beyond
prescribed thresholds or even if it is merely a voluntary offer. This imposes a
significant onus on acquirers to possess the required certainty to be able to
complete the offer;
2. SEBI has provided a narrow interpretation to the withdrawal
provisions under Reg. 27 of the erstwhile Takeover Regulations of 1997. In other
words, although an offer and acceptance thereof are contractual matters, they
are a specialized type of contract governed by the provisions of the Takeover
Regulations, and cannot be subject to unilateral withdrawal rights of offerors.
provisions under Reg. 27 of the erstwhile Takeover Regulations of 1997. In other
words, although an offer and acceptance thereof are contractual matters, they
are a specialized type of contract governed by the provisions of the Takeover
Regulations, and cannot be subject to unilateral withdrawal rights of offerors.
3. One of the grounds for withdrawal raised by the acquirer
pertained to mismanagement of the target company by its management when the
offer was pending, some of which also allegedly violated Reg. 23 of the 1997
Regulations which requires the target not to take certain actions without the
approval of its shareholders. This also resulted in a significant drop in value
of the target, compared to the time when the offer was launched. However, this
ground by itself was found by SEBI to be insufficient to permit a withdrawal of
the offer. Instead, SEBI’s approach suggests that these are matters of caution
to be exercised by the acquirer by way of deeper due diligence before launching
the offer. Such a stance by SEBI seems to impose greater obligation on
acquirers to perform more extensive due diligence on the target (which is not
always straightforward when the target is uncooperative, such as in a hostile
situation), and any dispute regarding the business condition or value of the
target cannot give the acquirer a right to walk away from the offer.
Nevertheless, SEBI did note the possibility of a breach of the Takeover
Regulations on the part of the target and its management, which would require further
investigation.
pertained to mismanagement of the target company by its management when the
offer was pending, some of which also allegedly violated Reg. 23 of the 1997
Regulations which requires the target not to take certain actions without the
approval of its shareholders. This also resulted in a significant drop in value
of the target, compared to the time when the offer was launched. However, this
ground by itself was found by SEBI to be insufficient to permit a withdrawal of
the offer. Instead, SEBI’s approach suggests that these are matters of caution
to be exercised by the acquirer by way of deeper due diligence before launching
the offer. Such a stance by SEBI seems to impose greater obligation on
acquirers to perform more extensive due diligence on the target (which is not
always straightforward when the target is uncooperative, such as in a hostile
situation), and any dispute regarding the business condition or value of the
target cannot give the acquirer a right to walk away from the offer.
Nevertheless, SEBI did note the possibility of a breach of the Takeover
Regulations on the part of the target and its management, which would require further
investigation.
Although SEBI’s order buttresses the position
set out previously by the Securities Appellate Tribunal in the Nirma Industries Limited case (2008)
which limits the scope of the acquirer’s withdrawal rights, its result goes
further in applying the same principles to a voluntary offer as well. As far as
possible wrongful conduct of the target is concerned, that is a risk which the
acquirer will have to absorb as it is required nevertheless to proceed with the
offer so as to protect the interest of the public shareholders.