setting aside the Securities Appellate Tribunal (SAT) decision [and order
of SEBI] on payment of “non-compete” fee under the erstwhile SEBI (Substantial
Acquisition of Shares and Takeovers) Regulations, 1997 (SEBI Takeover Regulations)
the appellants (IP Holding Asia Singapore and others) entered into a share
purchase agreement with Bangur Group [20 entities] to acquire 53.46% of the
share capital of the target company viz: Andhra Pradesh Paper Mills Limited
for a price of INR 523 per share aggregating INR 1,111.9 Crore.
parties also entered into an exclusivity agreement to maintain exclusive
negotiations with one another during stipulated period. Exclusivity fee for
such an agreement was INR 21.20 per share.
enter into a “non-compete and business waiver” agreement, in terms of which the
appellants agreed to pay an amount of about INR 277.95 Crore to Bangur Group
for refraining from competing with the business of the target company either on
their own behalf or through their affiliates for a period of three years.
accordingly made an open offer to the public shareholders of the target company
representing 21.54% of
the voting capital at a price of INR 544.20 [INR 523 + INR 21.20] in accordance
with the provisions of the SEBI Takeover Regulations.
draft letter of offer (DLOF) with SEBI and after various
correspondence between them, SEBI while issuing its comments/observations on
the DLOF directed that, the offer price be increased to INR 674.93 per share,
inclusive of the non-compete fee being paid to Bangur Group.
was as follows
the non-compete fee was in fact a part of the negotiated price per share
payable by the appellants to Bangur Group and hence should be added to the
offer price to the public shareholders.
promoter entities comprising Bangur Group, only five were eligible to receive
the non-compete fee.
two individuals were not eligible to receive the non-compete fee, since they
did not have any experience or expertise in the area of operation of the target
company and hence not capable of offering any competition to the appellants.
According to SEBI, the payment was made merely because they were shareholders.
entities were also not eligible to receive non-compete fee because they did not
even have in their object clause, the business of pulp and paper manufacturing.
fee was being paid to Bangur Group and also to the public shareholders, even
the non-compete fee should be paid to the public shareholders.
merchant banker was unable to give sufficient justification for payment of
submissions made in the appeal, SAT while dismissing the appeal held that, the
non-compete fee was directly linked to the shareholding of the promoter
entities and had nothing to do with the possibility of the being in competition
with the target company. In this regard, SAT also made reference to three
promoter entities of Bangur Group, one of which was a religious &
charitable trust, another being in the business of printing and publishing
books and the other in the business of textile mill.
non-compete fee was a sham and resulted in depriving the public shareholders of
their rightful claim to get a just price of their shares.
orders passed by SEBI and SAT, Supreme Court considered the facts and held as
fee is less than 25% of the offer price, the jurisdiction of SEBI would be
exercisable only in an extremely rare case and only if SEBI was in a position
to ex facie conclude that the transaction involving the takeover was not bona
fide. Ordinarily, when there is a gap of 25% between the consideration paid to
the selling promoters and non-compete fee, SEBI ought not to conduct an
Bhagwati Committee, while being fully aware of the possibility of a misuse of
the non-compete fees, nevertheless recommended an elbow room of 25% of the
consideration which would not be included for the purpose of arriving at the
delve further into the matter, if it appears that the difference between the
offer price and non-compete fee is less than 25% but is nevertheless a disguise
or a camouflage to reducing the cost of acquisition. According to the Supreme
Court, no such conclusion is apparent, nor was it canvassed or pointed out from
the share purchase agreement and the non-compete agreement.
of the appellants that is more important, while deciding to pay non-compete fee
to the selling promoters.
re-enter the business and pose threat to the target company under the control
of new promoter.
acquirer to the selling shareholders towards non-compete was always a vexed
one. The tolerance limit of 25% on non-compete fee was brought in as a measure
of curbing the practice where the acquirer passes on a significantly large
portion of the consideration to the outgoing promoter in the form of
non-compete fee and only a token amount is shown as negotiated price for
acquisition of shares under the agreement. Under the present SEBI Takeover
Regulations, 2011, after
much debate and discussion by Achuthan Committee, any form inclusive of all
ancillary and collateral agreements forms part of the negotiated price and the
same is now considered as one of the parameters for fixing the offer price, if
such price is higher than other prescribed parameters.
interest of all investors and can question the payment of a non-compete fee or
for that matter, even has the ability to intervene and question the merits of
the decision taken by the parties involved in a transaction, following are some
of the key takeaways from the Supreme Court ruling:
should be respected, unless there are good reasons not to do so;
room to commercial entities for entering into a business transaction and host
of considerations go into business relations; and
the basis of hindsight, but must be left to the commercial wisdom of the
players on the field.
trading of pulp and paper
non-compete agreement in excess of 25% of the offer price was required to be
added to the offer price and not otherwise.