Voting Agreements and Takeover Regulations

Earlier this week,
SEBI issued an informal
guidance
based on a request
by the promoters of Cipla Limited on the implications of voting agreements under
the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
(the “Takeover Regulations”).
Background; Facts
The brief facts
are that Dr. Y.K. Hamied and his family members control a significant stake in
Cipla. Historically, all the family members had been exercising their voting
rights in respect of shares held by each of them and no proxies were executed
(except in one case). Going forward, the family is proposing to enter into an
agreement by which the voting rights in respect of shares held by the family
members will be exercised in the manner stipulated in the agreement.
Accordingly, the family would act as a single unit and exercise their voting
rights under the overall direction and supervision of Dr. Y.K. Hamied during
his lifetime, and after by Mr. M.K. Hamied after the demise of or upon the
incapacity of Dr. Y.K. Hamied to act. Thereafter, the family shall act as a
joint unit subject to the overall direction and supervision of the member of
the family who owns the highest number of shares. Apart from voting rights, the
agreement also provides for preemptive rights in case any member of the family
wishes to transfer shares.
Issue; Guidance
It is in this
context that Dr. Y.K. Hamied approach SEBI to seek its guidance on whether the
voting agreement as aforesaid would amount to the “acquisition” of shares or
voting rights under the Takeover Regulations and, if so, whether the
transaction would be exempt from the mandatory public offer requirements by
virtue of specific exemptions for inter se transfer of shares among family
members. It its guidance, SEBI answered both these issues in the affirmative.
SEBI found that
since the family members (and their investment entities) are already disclosed
as part of the promoter/ promoter group, they are “persons acting in concert”
for the purposes of the Takeover Regulations. The voting agreement which
confers decision making upon him “implies that Mr. Y.K. Hamied would be the
single largest holder of voting rights in the target company”. This would
normally trigger the mandatory open offer obligation. However, in this case
since the voting agreement is between family members, it would be exempt under
Reg. 10(1)(a)(iv) of the Takeover Regulations. Similarly, a change in family
member under whose directions the family will exercise voting rights would be
exempt if the requirements under Reg. 10 are satisfied.
Broader Implications
The implications
of SEBI’s informal guidance are that voting agreements will generally amount to
“acquisition” of voting rights and could potentially trigger mandatory offer requirements
if such acquisition crosses prescribed limits. Hence, this reiterates the position
that parties must be mindful of this while entering into voting agreements.
However, on the specific facts of the case, the exemption was invoked. Hence,
such arrangements between family members, promoter group or other parties who
are entitled to avail of exemptions can enter into these agreements without
fear of an open offer. However, they will have to make the necessary
disclosures to qualify for the exemptions.
The proposal by the
promoters of Cipla and SEBI’s informal guidance may set the tone for similar
arrangements in the future. First, these arrangements are useful in as much as
they clearly lay down succession planning in terms of control over the company.
This is important even from a corporate governance perspective and will provide
sufficient clarity to minority shareholders as well as to the future of the company.
Second, these arrangements would also act as effect takeover defences by
enabling the entire promoter group to act as a single block. Voting rights
coupled with preemptive provisions would ensure that a prospective acquirer of
the company cannot gradually acquire shares from individual family members so
as to dissipate the controlling block. Hence, this case may offer some lessons
for family controlled listed companies and their promoters.

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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