Background
The
Supreme Court earlier this month issued its decision on the takeover
offer by Nirma Industries Limited to the shareholders of Shree Rama Multi Tech
Limited (SRMTL). The court concurred with the view of the Securities Appellate
Tribunal (SAT) and the Securities and Exchange Board of India (SEBI) in
disallowing the withdrawal of the offer by Nirma.
Supreme Court earlier this month issued its decision on the takeover
offer by Nirma Industries Limited to the shareholders of Shree Rama Multi Tech
Limited (SRMTL). The court concurred with the view of the Securities Appellate
Tribunal (SAT) and the Securities and Exchange Board of India (SEBI) in
disallowing the withdrawal of the offer by Nirma.
In a column
appearing on CNBC’s The Firm – Corporate Law in India, Shishir Vayttaden sets
out the facts and issues of the case in detail and also offers a critique of
the judgment. Here I propose to summarise the key facts, deal with the overall
policy issue at hand and also suggest a possible way out for acquirers desirous
of retaining some flexibility to withdraw from the offer in case of unforeseen
circumstances.
appearing on CNBC’s The Firm – Corporate Law in India, Shishir Vayttaden sets
out the facts and issues of the case in detail and also offers a critique of
the judgment. Here I propose to summarise the key facts, deal with the overall
policy issue at hand and also suggest a possible way out for acquirers desirous
of retaining some flexibility to withdraw from the offer in case of unforeseen
circumstances.
Nirma
triggered the mandatory open offer obligations under the previous version of
the SEBI Takeover Regulations of 1997 when it enforced a pledge of shares
offered by the promoters of SRMTL. Since Nirma’s acquisition of shares exceeded
the then prescribed threshold of 15%, it triggered an offer. During the course
of the offer, certain revelations were made regarding the financial situation
of the target company that became the subject of a financial fraud that
significantly reduced the company’s share value. According to Nirma, these
facts were not known to it during due diligence conducted prior to the offer.
It therefore approached SEBI to withdraw the offer.
triggered the mandatory open offer obligations under the previous version of
the SEBI Takeover Regulations of 1997 when it enforced a pledge of shares
offered by the promoters of SRMTL. Since Nirma’s acquisition of shares exceeded
the then prescribed threshold of 15%, it triggered an offer. During the course
of the offer, certain revelations were made regarding the financial situation
of the target company that became the subject of a financial fraud that
significantly reduced the company’s share value. According to Nirma, these
facts were not known to it during due diligence conducted prior to the offer.
It therefore approached SEBI to withdraw the offer.
As
SEBI and SAT (on appeal) refused to permit a withdrawal, Nirma approached the
Supreme Court. The Supreme Court largely relied upon an interpretation of Reg.
27 of the Takeover Regulations, 1997 to come to the conclusion that the
withdrawal was not permissible. Shishir has dealt with the reasoning of the
court in detail in his column, and also pointed to some of the weaknesses of
that approach.
SEBI and SAT (on appeal) refused to permit a withdrawal, Nirma approached the
Supreme Court. The Supreme Court largely relied upon an interpretation of Reg.
27 of the Takeover Regulations, 1997 to come to the conclusion that the
withdrawal was not permissible. Shishir has dealt with the reasoning of the
court in detail in his column, and also pointed to some of the weaknesses of
that approach.
Policy
Analysis
Analysis
From a
policy standpoint, withdrawal of mandatory offers creates a conflicting
situation. On the one hand, takeover regulation considers mandatory offers as
sacrosanct as they are intended to offer equality of treatment and exit
opportunities for minority shareholders when there is a change in control of
the target. In other words, minority shareholders must be allowed to exit on
same terms as those who have sold shares to the new acquirer who has obtained
control over the target. This is the reason why withdrawals are treated with
great circumspection by SEBI.
policy standpoint, withdrawal of mandatory offers creates a conflicting
situation. On the one hand, takeover regulation considers mandatory offers as
sacrosanct as they are intended to offer equality of treatment and exit
opportunities for minority shareholders when there is a change in control of
the target. In other words, minority shareholders must be allowed to exit on
same terms as those who have sold shares to the new acquirer who has obtained
control over the target. This is the reason why withdrawals are treated with
great circumspection by SEBI.
At the
same time, there are situations where a withdrawal must be permitted because
the circumstances that triggered the offer or the basis on which the offer was
made may no longer exist. Such situations could be varied in nature. The first is
impossibility, for example due to the death of an acquirer who is an
individual. The second could be circumstances beyond the control of the
acquirer, such as a drastic adverse change in the financial condition of the
target, similar to the case of SRMTL. Thirdly, there could be situations where
the acquirer is unable to perform its obligations under the offer on account of
its own circumstances, e.g. inability to complete the offer due to lack of
sufficient funds to discharge the consideration to shareholders tendering in
the offer. While the first situation clearly makes a case for withdrawal, the
third does not merit a withdrawal as that would affect the sanctity of a
mandatory offer. It is the second situation, present in this case, which is
somewhat tricky as it essentially involves a question of whether or not the
acquirer ought to bear the risk of a change in the target’s financial
condition. While the Supreme Court’s approach has been to place that risk on
the acquirer, Shishir’s critique makes a strong case the other way.
same time, there are situations where a withdrawal must be permitted because
the circumstances that triggered the offer or the basis on which the offer was
made may no longer exist. Such situations could be varied in nature. The first is
impossibility, for example due to the death of an acquirer who is an
individual. The second could be circumstances beyond the control of the
acquirer, such as a drastic adverse change in the financial condition of the
target, similar to the case of SRMTL. Thirdly, there could be situations where
the acquirer is unable to perform its obligations under the offer on account of
its own circumstances, e.g. inability to complete the offer due to lack of
sufficient funds to discharge the consideration to shareholders tendering in
the offer. While the first situation clearly makes a case for withdrawal, the
third does not merit a withdrawal as that would affect the sanctity of a
mandatory offer. It is the second situation, present in this case, which is
somewhat tricky as it essentially involves a question of whether or not the
acquirer ought to bear the risk of a change in the target’s financial
condition. While the Supreme Court’s approach has been to place that risk on
the acquirer, Shishir’s critique makes a strong case the other way.
Although
the acquirer’s actions are in good faith and deserve some sympathy, a
withdrawal of a mandatory offer could result in an incongruous situation unless
the underlying transaction that triggered the offer is also unwound. This is
because the promoters would have realised the full value on their shares and
exited the company leaving the minority shareholders high and dry.
the acquirer’s actions are in good faith and deserve some sympathy, a
withdrawal of a mandatory offer could result in an incongruous situation unless
the underlying transaction that triggered the offer is also unwound. This is
because the promoters would have realised the full value on their shares and
exited the company leaving the minority shareholders high and dry.
Way
Forward
Forward
Fortunately,
this incongruity has been addressed to some extent in the current version of the
Takeover Regulations of 2011, which will likely provide greater leeway to
acquirers to structure their transactions such that they are able to avoid any
eventuality of the type that arose in the SRMTL case. A new ground has been
inserted in the form of Reg. 23(1)(c) of the 2011 Regulations where one of the
circumstances where an offer may be withdrawn is as follows:
this incongruity has been addressed to some extent in the current version of the
Takeover Regulations of 2011, which will likely provide greater leeway to
acquirers to structure their transactions such that they are able to avoid any
eventuality of the type that arose in the SRMTL case. A new ground has been
inserted in the form of Reg. 23(1)(c) of the 2011 Regulations where one of the
circumstances where an offer may be withdrawn is as follows:
(c) any
condition stipulated in the agreement for acquisition attracting the obligation
to make the open offer is not met for reasons outside the reasonable control of
the acquirer, and such agreement is rescinded, subject to such conditions
having been specifically disclosed in the detailed public statement and the
letter of offer; …
condition stipulated in the agreement for acquisition attracting the obligation
to make the open offer is not met for reasons outside the reasonable control of
the acquirer, and such agreement is rescinded, subject to such conditions
having been specifically disclosed in the detailed public statement and the
letter of offer; …
Hence,
it is now possible to include a condition in the acquisition agreement that could
provide for a “material adverse change” (MAC) clause. In the event that the MAC
clause is attracted, the acquisition agreement need not be completed by the
acquirer, and that can be a ground for withdrawal of the offer. This scheme of
things is also consistent with the policy arguments discussed above. In such a
situation, both the acquisition that triggered the offer as well as the offer
itself would fail making it an “all-or-none” deal. Since there is no change in
control, the principle of equality of treatment is not affected, and minority
interests are untouched by this.
it is now possible to include a condition in the acquisition agreement that could
provide for a “material adverse change” (MAC) clause. In the event that the MAC
clause is attracted, the acquisition agreement need not be completed by the
acquirer, and that can be a ground for withdrawal of the offer. This scheme of
things is also consistent with the policy arguments discussed above. In such a
situation, both the acquisition that triggered the offer as well as the offer
itself would fail making it an “all-or-none” deal. Since there is no change in
control, the principle of equality of treatment is not affected, and minority
interests are untouched by this.
One of
the lessons from the Supreme Court decision would be for transaction planners
to structure the acquisition agreement and the open offer documents (public
announcement and letter of offer) such that they protect the acquirer appropriate
through MAC clauses and other similar conditional arrangements.
the lessons from the Supreme Court decision would be for transaction planners
to structure the acquisition agreement and the open offer documents (public
announcement and letter of offer) such that they protect the acquirer appropriate
through MAC clauses and other similar conditional arrangements.
In structuring these
arrangements, the key is to note that withdrawal will be permissible only if
the circumstances giving rise to the inability of the acquirer to complete the
offer is outside its control. Moreover, to take a cue from other jurisdictions
such as the UK and Singapore, such circumstances should also be objectively
determined and not by way of subjective determination by the acquirer. Furthermore,
in similar circumstances, regulators in other jurisdictions have also paid heed
to the sanctity of an offer and hence allowed a withdrawal for failure of a MAC
clause only if the event is material in the sense that it strikes at the heart
of the transactions, almost akin to a frustration of a contract (see UK
Takeover Panel Statement 2001/15 involving an offer by WPP Group plc for
Tempus Group plc following the events surrounding the September 11, 2001 attacks
in the US). However, this standard has been subsequently diluted somewhat,
although it remains fairly high.