SAT on Withdrawal of a Takeover Offer

Once an acquirer
makes an open offer under the SEBI Takeover Regulations, it has to meet a high
standard (somewhat similar to frustration) before it is allowed to withdraw
such an offer. This principle has been laid down by the Supreme Court in two
cases, i.e. Nirma
Industries/ Shree Rama Multi Tech
and Akshya
Infrastructure/ MARG
, which we have previously discussed on this Blog. Readers
may refer to a discussion in those posts regarding the conflicting interests
involved in open offers and the rationale for either permitting or disallowing
a withdrawal of an open offer.
A similar question
came up before the Securities Appellate Tribunal (SAT), which announced its
decision earlier this week in Pramod
Jain/ GTL
. The case involved a voluntary offer that was hostile in nature.
Essentially, the acquirer launched the offer as its effort to enter into a
development arrangement with the target was rebuffed. The case of the acquirer
(referred to as the appellants) is set out by the SAT as follows:
5.         Case of appellants, in nutshell is that,
their request for withdrawal from public offer deserved to be allowed basically
on two grounds. Firstly, it is contended that delay of more than two  years in approving the draft letter of offer
has frustrated the public offer, because, when regulation 18(2) provides for 21
days to approve the draft of the letter of offer, SEBI could not have taken
more than two years to approve the draft letter of offer and during the period
of two years, GTL has become a sick company. Secondly, during the pendency of public
offer, promoters/management of GTL have encumbered the most valuable asset
(Vile-Parle property) in gross violation of regulation 23 and have also
siphoned of funds of GTL thereby frustrating the object with which public offer
was made and making it impossible for appellants to acquire shares of virtually
a dead company.
Additional facts
reveal that the acquirer had initiated legal action against the promoters/
management before the Company Law Board for oppression and mismanagement as
well as a civil action.
By a majority
decision, the SAT refused to accept the contention of the acquirer to withdraw
the offer and ordered it to complete the offer. The majority felt constrained
by the two Supreme Court decisions which not only provided a narrow interpretation
to regulation 27 of the SEBI Takeover Regulations relating to withdrawal of
open offers, but also that delay on the part of SEBI in approving the offer
document was in and of itself insufficient to constitute a ground for
withdrawal of the offer. In that sense, the decision of SAT merely reiterates
prevailing legal position.
While the sanctity
of a takeover offer is understandable, it leaves no room for withdrawal by an
acquirer even if the change of circumstances are beyond its control, including
due to delay on the part of the regulator. What makes this decision important
is a dissent by one of the members of SAT who takes these aspects into account,
including questionable conduct on the part of the target and its management. The
dissenting opinion also provides the benefit of doubt to the acquirer as
regarding delays at the hands of SEBI:
purpose of stating above is to make it clear to every player in matter of
dealing with open offer; is that legislature, while making these regulations,
made it clear that every player has to play its part with due solemnness,
promptness, efficiency and dedication so that public offers go through within
timelines and nobody acts callously and without meeting timelines. It may also
be mentioned that legislature / regulations for Takeover have been set-up in
such a manner that everyone concerned has to do everything expected of him,
within timelines, so that open offer goes through its course, set out in regulations.
This understanding of adhering to timelines is most important, if public offers
have to succeed.
content of legislative framework, the role of SEBI in present appeal needs to
be considered. …

Admittedly, the
SAT was hamstrung due to the binding view of the Supreme Court in earlier
cases, but the divided opinion in the GTL case demostrates the difficulties of
delays in approval of takeover offer documents by SEBI. This is yet another
case in recent times where this issue has come up. Delays would certainly cause
inefficiencies in the takeover process, and it has become necessary for SEBI to
address the issue of timelines in an open offer on an urgent basis.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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