[The following post is contributed by Yogesh Chande, Associate Partner, Economic Laws Practice. Views are
personal]
personal]
The Supreme Court passed an order
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)
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)
Background and Facts
1. On 29 March 2011,
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[1]
for a price of INR 523 per share aggregating INR 1,111.9 Crore.
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[1]
for a price of INR 523 per share aggregating INR 1,111.9 Crore.
2. Additionally, the
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.
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.
3. The parties also
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.
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.
4. The appellants
accordingly made an open offer to the public shareholders of the target company
representing 21.54%[2] 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[3].
accordingly made an open offer to the public shareholders of the target company
representing 21.54%[2] 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[3].
5. Upon filing the
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,[4]
inclusive of the non-compete fee being paid to Bangur Group.
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,[4]
inclusive of the non-compete fee being paid to Bangur Group.
SEBI’s reasoning for adding the non-compete fee to the offer price
was as follows
was as follows
6. According to SEBI,
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.
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.
7. Of the twenty
promoter entities comprising Bangur Group, only five were eligible to receive
the non-compete fee.
promoter entities comprising Bangur Group, only five were eligible to receive
the non-compete fee.
8. Of the remaining fifteen,
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.
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.
9. The remaining thirteen
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.
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.
10. Since the exclusivity
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.
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.
11. Above all, the
merchant banker was unable to give sufficient justification for payment of
non-compete fee.
merchant banker was unable to give sufficient justification for payment of
non-compete fee.
Appeal to SAT and decision of SAT
12. After reviewing the
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.
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.
13. SAT held that
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.
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.
Appeal to Supreme Court and decision of Supreme Court
While allowing the appeal and setting aside the directions and
orders passed by SEBI and SAT, Supreme Court considered the facts and held as
follows:
orders passed by SEBI and SAT, Supreme Court considered the facts and held as
follows:
14. If the non-compete
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
inquiry.
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
inquiry.
15. The reconvened
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
offer price.
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
offer price.
16. SEBI can certainly
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.
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.
17. It is the perception
of the appellants that is more important, while deciding to pay non-compete fee
to the selling promoters.
of the appellants that is more important, while deciding to pay non-compete fee
to the selling promoters.
Conclusion
Non-compete fee is paid to the selling promoters so that they do not
re-enter the business and pose threat to the target company under the control
of new promoter.
re-enter the business and pose threat to the target company under the control
of new promoter.
Under the erstwhile SEBI Takeover Regulations, payment by an
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,[5] 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.
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,[5] 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.
Although SEBI is mandated to protect the
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:
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:
(a) commercial decisions of the parties
should be respected, unless there are good reasons not to do so;
should be respected, unless there are good reasons not to do so;
(b) it is imperative to give sufficient elbow
room to commercial entities for entering into a business transaction and host
of considerations go into business relations; and
room to commercial entities for entering into a business transaction and host
of considerations go into business relations; and
(c) threat perception cannot be decided on
the basis of hindsight, but must be left to the commercial wisdom of the
players on the field.
the basis of hindsight, but must be left to the commercial wisdom of the
players on the field.
– Yogesh Chande
[1] In the business of manufacturing, sale and
trading of pulp and paper
trading of pulp and paper
[2] 75% minus 53.46%
[3] Regulation 20(8) – Any payment made towards
non-compete agreement in excess of 25% of the offer price was required to be
added to the offer price and not otherwise.
non-compete agreement in excess of 25% of the offer price was required to be
added to the offer price and not otherwise.
[4] INR 277.95 Crore works out to INR 130.73
per share
per share
[5] Regulation 8(7)