Background and Facts
Last week, SEBI passed its order
in the Jet-Etihad case relating to whether the investment by Etihad Airways in
24% shares of Jet Airways (India) Limited and the terms thereof amount to
Etihad obtaining “control” in Jet so as to require Etihad to make a mandatory
open offer under the SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011 (the Takeover Regulations). After analyzing the investment
terms, SEBI concluded that no such “control” relationship was created, and
hence no mandatory open offer is necessary.
in the Jet-Etihad case relating to whether the investment by Etihad Airways in
24% shares of Jet Airways (India) Limited and the terms thereof amount to
Etihad obtaining “control” in Jet so as to require Etihad to make a mandatory
open offer under the SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011 (the Takeover Regulations). After analyzing the investment
terms, SEBI concluded that no such “control” relationship was created, and
hence no mandatory open offer is necessary.
The brief facts that gave rise to
the order are that Etihad entered into a set of agreements with Jet and its
promoters by which it acquired 24% shares in Jet through a new issue of shares
for USD 379 million. Apart from investment related matters, the agreements
dealt with commercial matters of cooperation between the two airline companies.
When the investment was under consideration by the Central Government, SEBI had
expressed its opinion to the Central Government that the investment did not
create a relationship of “control” for the purposes of the Takeover
Regulations. Subsequently, the deal was cleared by the Central Government (Foreign
Investment Promotion Board (FIPB)) as well as the Competition Commission of
India (CCI). The CCI, while clearing the transactions, made some observations
that indicated a possibility of “joint control” between Etihad and Jet’s
promoters, following which SEBI issued a show cause notice alleging possible acquisition
of joint control for the purposes of the Takeover Regulations. In this context,
SEBI heard the various parties and passed its order.
the order are that Etihad entered into a set of agreements with Jet and its
promoters by which it acquired 24% shares in Jet through a new issue of shares
for USD 379 million. Apart from investment related matters, the agreements
dealt with commercial matters of cooperation between the two airline companies.
When the investment was under consideration by the Central Government, SEBI had
expressed its opinion to the Central Government that the investment did not
create a relationship of “control” for the purposes of the Takeover
Regulations. Subsequently, the deal was cleared by the Central Government (Foreign
Investment Promotion Board (FIPB)) as well as the Competition Commission of
India (CCI). The CCI, while clearing the transactions, made some observations
that indicated a possibility of “joint control” between Etihad and Jet’s
promoters, following which SEBI issued a show cause notice alleging possible acquisition
of joint control for the purposes of the Takeover Regulations. In this context,
SEBI heard the various parties and passed its order.
Findings and Reasoning
In arriving at its conclusion, SEBI
was guided by the fact that the FIPB had already concluded that “effective
control” of Jet remained with the existing Indian promoters. This is
particularly important because the definition of “control” in the Guidelines
for Foreign Direct Investment (FDI) in the Civil Aviation Sector are in pari materia with the definition of
“control” in Regulation 2(1)(e) of the Takeover Regulations. However, SEBI
refused to be guided by the findings of the CCI on the ground that “one
regulatory agency may be guided by the findings of other regulatory agency on a
particular issue only if the two laws are pari
materia in their substance and are being applied on the same set of facts
and circumstances.” There are significant differences in the definition of
“control” under the Competition Act, 2002 and the Takeover Regulations, and
hence the latter needs to be independently examined to determine whether the
requirement for a mandatory open offer arises.
was guided by the fact that the FIPB had already concluded that “effective
control” of Jet remained with the existing Indian promoters. This is
particularly important because the definition of “control” in the Guidelines
for Foreign Direct Investment (FDI) in the Civil Aviation Sector are in pari materia with the definition of
“control” in Regulation 2(1)(e) of the Takeover Regulations. However, SEBI
refused to be guided by the findings of the CCI on the ground that “one
regulatory agency may be guided by the findings of other regulatory agency on a
particular issue only if the two laws are pari
materia in their substance and are being applied on the same set of facts
and circumstances.” There are significant differences in the definition of
“control” under the Competition Act, 2002 and the Takeover Regulations, and
hence the latter needs to be independently examined to determine whether the
requirement for a mandatory open offer arises.
In so examining, SEBI considered
two broad issues: (i) whether Etihad and the existing promoters and persons
acting in concert (PACs) due to the possible “joint control” over Jet; and (ii)
whether the rights conferred upon Etihad under the transactions documents
confer “joint control” over Jet. SEBI answered both in the negative.
two broad issues: (i) whether Etihad and the existing promoters and persons
acting in concert (PACs) due to the possible “joint control” over Jet; and (ii)
whether the rights conferred upon Etihad under the transactions documents
confer “joint control” over Jet. SEBI answered both in the negative.
As to the PACs issue, it was found
that there was no common objective or community of interest to acquire control
over the company. While there was some cooperation under the arrangements, they
were between Jet and Etihad and not with the promoters. Hence, the target
company itself cannot be considered a PAC.
that there was no common objective or community of interest to acquire control
over the company. While there was some cooperation under the arrangements, they
were between Jet and Etihad and not with the promoters. Hence, the target
company itself cannot be considered a PAC.
As to the issue of “control”, it
was found that Etihad has the right to nominate only 2 out of 12 directors.
Moreover, the governance procedures indicate that material recommendations will
be subject to the approval of both parties with the powers and supremacy of the
board of Jet being unaffected. Crucially, Etihad does not have any affirmative
or veto rights, quorum rights, casting vote or pre-emptive and tag along rights
(regarding the transfer of shares).
was found that Etihad has the right to nominate only 2 out of 12 directors.
Moreover, the governance procedures indicate that material recommendations will
be subject to the approval of both parties with the powers and supremacy of the
board of Jet being unaffected. Crucially, Etihad does not have any affirmative
or veto rights, quorum rights, casting vote or pre-emptive and tag along rights
(regarding the transfer of shares).
Based on all of these reasons, SEBI
concluded that Etihad is not in “control” or “joint control” of Jet for the
purposes of the Takeover Regulations and hence is not obligated to make an open
offer to the shareholders of Jet.
concluded that Etihad is not in “control” or “joint control” of Jet for the
purposes of the Takeover Regulations and hence is not obligated to make an open
offer to the shareholders of Jet.
Analysis
SEBI’s decision and reasoning were
largely based on the specific facts of the case, which did not require it to
delve deeply into the jurisprudence governing the issue of “control” under the
Takeover Regulations. The issue of “control” has been the subject matter of
controversy ever since the decision
of the Securities Appellate Tribunal in the Subhkam case, although that
decision was subsequently set at naught by the
Supreme Court where the matter was settled. That uncertainty does not seem
to have dissipated given that SEBI did not have to go deeply into that question
in the Jet case. Unlike in the Subhkam case where the question of whether
affirmative or veto rights amount to “control” was directly in consideration,
the facts of the Jet case were more straightforward given that Etihad had
agreed to amend the terms of the arrangements to reduce the management or control-type
rights in order to steer clear of the controversy surrounding “control”. In
other words, the more direct facts of the Jet case made the decision somewhat
more straightforward.
largely based on the specific facts of the case, which did not require it to
delve deeply into the jurisprudence governing the issue of “control” under the
Takeover Regulations. The issue of “control” has been the subject matter of
controversy ever since the decision
of the Securities Appellate Tribunal in the Subhkam case, although that
decision was subsequently set at naught by the
Supreme Court where the matter was settled. That uncertainty does not seem
to have dissipated given that SEBI did not have to go deeply into that question
in the Jet case. Unlike in the Subhkam case where the question of whether
affirmative or veto rights amount to “control” was directly in consideration,
the facts of the Jet case were more straightforward given that Etihad had
agreed to amend the terms of the arrangements to reduce the management or control-type
rights in order to steer clear of the controversy surrounding “control”. In
other words, the more direct facts of the Jet case made the decision somewhat
more straightforward.
The principal legal issue that
received SEBI attention was the fact that where there are several definitions
of “control” in different legislation or regulations, they must be applied by
other regulators carefully. They can be given regard by other regulators only
if the respective definitions are in pari
materia. If not, the purpose and objectives of the different regulations
must be considered when being adopted by other regulators. Hence, SEBI showed
regard to the definition of “control” under the FDI policy which was in pari materia with the Takeover
Regulations, but not the definition in the Competition Act which carried
material differences.
received SEBI attention was the fact that where there are several definitions
of “control” in different legislation or regulations, they must be applied by
other regulators carefully. They can be given regard by other regulators only
if the respective definitions are in pari
materia. If not, the purpose and objectives of the different regulations
must be considered when being adopted by other regulators. Hence, SEBI showed
regard to the definition of “control” under the FDI policy which was in pari materia with the Takeover
Regulations, but not the definition in the Competition Act which carried
material differences.
Finally,
this case also raises the broader question about whether it is possible for an
acquirer to stay below the shareholding threshold for mandatory open offers
(e.g. 25%) and deprive the minority shareholders of any exit through such
offers. Under the scheme of the Takeover Regulations, that depends upon the
rights conferred upon such acquirer under contract. If those rights elevate the
position of the acquirer to one of “control”, an open offer becomes necessary,
but not otherwise. Hence, one of the lessons from this case is for acquirers in
such circumstances to structure their rights and position in the target
carefully so as to steer clear of any involvement in the management and policy
decisions of the target. While that would be determined on a case-by-case
basis, the avoidance of some of the rights such as affirmative rights (veto)
and quorum provisions may have helped resolved this case in a manner that is
favourable to the acquirer.
this case also raises the broader question about whether it is possible for an
acquirer to stay below the shareholding threshold for mandatory open offers
(e.g. 25%) and deprive the minority shareholders of any exit through such
offers. Under the scheme of the Takeover Regulations, that depends upon the
rights conferred upon such acquirer under contract. If those rights elevate the
position of the acquirer to one of “control”, an open offer becomes necessary,
but not otherwise. Hence, one of the lessons from this case is for acquirers in
such circumstances to structure their rights and position in the target
carefully so as to steer clear of any involvement in the management and policy
decisions of the target. While that would be determined on a case-by-case
basis, the avoidance of some of the rights such as affirmative rights (veto)
and quorum provisions may have helped resolved this case in a manner that is
favourable to the acquirer.
Business Reality: The initial Commercial Cooperation Agreement (CCA) indicated the intentions of the acquirer to control the target as clearly as daylight. For instance few of the clauses in the earlier agreement meant that:
– The areas of cooperation listed in the agreement were not subject to the approval of the Target
– Restrictions on Target entering into specified global frequent flyer programs
– Acquirer had the right to recommend suitable candidates for senior management positions
– Revenue Management function was to be managed by Acquirer
– Acquirer held the right to take lead in negotiations on aircraft and engine purchases
– Acquirer had prepared a detailed Governance Procedure to be adopted by Target
After the amendments sought by the regulator the Acquirer had a change of heart and chose to play second fiddle to the Target!
Plugging Loopholes
1. The CCI was confronted with a new corporate maneuver. A smaller inter-connected transaction preceding the acquisition was consummated and remained undisclosed. The transaction related to the sale of certain landing/take-off slots of Jet at the London Heathrow Airport to Etihad. The CCI apprehended that the transactions in fact camouflaged a financial implication that indicated circumventing the regulatory threshold on the sly. To plug this loophole, the CCI amended its Combination Regulations. The test whether a transaction should be subjected to pre-merger scrutiny was modified to focus on “substantive business rationale” or the “economic linkages”
2. The definition of control was modified to reflect the actual effect of influencing the decisions rather than just number of directors.
Full article "Acquisition Redefined" at indiabusinessmatters.wordpress.com