[Supreme Waskar & Sumit Agrawal are lawyers from Suvan Law Advisors. Views are personal.]
The Securities and Exchange Board of India (“SEBI”) in its recent informal guidance dated October 30, 2017 in the matter of Linde India Limited (“LIL”) has held that ‘review of merger process’ by ‘competent authorities’ will not exempt the proposed merger from the obligation to make an open offer under regulation 10(1)(d)(iii) of the the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“SAST Regulations”).
Linde AG, a German entity (“Linde Hold Co”), the ultimate holding company of LIL, is proposing to enter into a business combination arrangement (“BCA”) with Praxair Inc (“Praxair”), an American company, in the following manner:
1. A newly incorporated holding company, incorporated under the laws of Ireland (“New Hold Co”), will acquire Linde Hold Co by means of voluntary takeover offer pursuant to the German Securities Acquisition and Takeover Act. The takeover offer will be reviewed by the Federal Financial Supervisory Authority (“BaFin”);
2. By way of a reverse triangular merger under the laws of state of Delaware, a wholly owned indirect subsidiary of New Hold Co shall be merged with Praxair, following approval by the shareholders of Praxair. Further, Praxair will make appropriate disclosures under Delaware law and applicable U.S. federal securities laws with the U.S. Securities and Exchange Commission (“SEC”). The SEC will review the disclosures and may issue one or more rounds of comments, to which the parties will be required to respond.
The applicants in their application to SEBI for informal guidance have claimed that the applicable legal process in the jurisdictions of Linde Hold Co, New Hold Co and Praxair with respect to the proposed BCA does not require the approval or order of a court, tribunal or competent authority.
Indian Securities Laws Regime
Regulation 10(1)(d) of the SAST Regulations deals with the exemption from open offer in case of acquisition pursuant to a scheme of arrangement, including a merger. Further regulation 10(1)(d)(iii) of the SAST Regulations does not provide blanket exemption from open offer to all the merger schemes; in order to qualify for such exemption, the scheme of merger has to satisfy certain criteria or conditions prescribed therein.
Provisions of regulation 10(1)(d)(iii) of the SAST Regulations have been extracted below for reference:
10(d) acquisition pursuant to a scheme,—
(i) made under section 18 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) or any statutory modification or re-enactment thereto;
(ii) of arrangement involving the target company as a transferor company or as a transferee company, or reconstruction of the target company, including amalgamation, merger or demerger, pursuant to an order of a court [or a tribunal]10 or a competent authority under any law or regulation, Indian or foreign; or
(iii) of arrangement not directly involving the target company as a transferor company or as a transferee company, or reconstruction not involving the target company’s undertaking, including amalgamation, merger or demerger, pursuant to an order of a court or a tribunal or a competent authority under any law or regulation, Indian or foreign, subject to,—
(A) the component of cash and cash equivalents in the consideration paid being less than twenty-five per cent of the consideration paid under the scheme; and
(B) where after implementation of the scheme of arrangement, persons directly or indirectly holding at least thirty-three per cent of the voting rights in the combined entity are the same as the persons who held the entire voting rights before the implementation of the scheme.
In accordance with regulation 10(1)(d)(iii) of the SAST Regulations, one of the criteria in order to qualify for exemption is that such scheme of merger shall have been effected pursuant to the approval or an order of court, tribunal or competent authority under any law or regulation, whether in India or in a foreign country.
SEBI has taken a literal statutory interpretation of the provisions of regulation 10(1)(d)(iii) of the SAST Regulations and stated that, since there is no approval or order of a court, tribunal or competent authority under any law or regulation, in India or in foreign country, the proposed ‘indirect acquisition’ of LIL pursuant to BCA shall not qualify for exemption under regulation 10(1)(d)(iii) of the SAST Regulations.
The exemption from an open offer under SAST Regulations in case of a scheme of arrangement or like transaction is expected to have a very high threshold. As a regulatory body, SEBI exercises discretionary jurisdiction and such an exercise should be considered judiciously as it operates as a precedent and a policy pronouncement of sorts.
Though not obvious, there is another suggestion implicit in SEBI’s Informal Guidance. Section 45 of the Indian Evidence Act, 1872, stipulates that the opinion of experts, on a point of foreign law, is admissible as evidence. Though there has not been a judicial precedent where SEBI or the Securities Appellate Tribunal (“SAT”) has considered the admissibility of expert opinion on foreign law in indirect acquisitions or takeover cases from the angle of the Evidence Act, the Bombay High Court recently in a different context in the matter of Dhirajlal Alias Dhirubhai Babaria v. Navinbhai C. Dave (Suit No. 536 of 2011, Order dated 29 August, 2017), held that an expert in foreign law would be entitled to express an opinion as to what the law is, but not apply that law to the facts before the Court.
In the Informal Guidance at hand, though SEBI does not delve into this aspect, the SAT in the past seems, at least on one occasion, to have offered more credence to an approval issued by a Government Official such as the Secretary of the State in a foreign jurisdiction, as approval of a competent authority under any foreign law or regulation, warranting exemption from public offer. Under the earlier SAST Regulations of 1997, in the case of Eaton Corporation v. Chairman, Securities & Exchange Board of India,  33 SCL 326 the SAT disagreed with SEBI where SEBI had denied automatic exemption from an open offer stating that there would be no automatic exemption in the case of change in control of an Indian listed company as the result of a merger effected oversees, according the laws of the foreign jurisdiction. The SAT held, at variance with SEBI, that once the Secretary of the State, State of Ohio had issued a certificate and stated that the said merger is in accordance with the provisions of the laws of the State of Ohio, thereby entitling such acquisition under one of the automatic exemption categories, SEBI cannot deny that exemption.
A similar legal argument was advanced recently before Supreme Court in the matter of SEBI v. PAN Asia Advisors Limited  134 SCL 311 (SC). In this case, PAN Asia as a lead manager and Arun Pancharia (AP) as managing director of PAN Asia were alleged by SEBI to have misled investors in India that global depository receipts (“GDRs”) had been subscribed to by foreign investors when in fact GDRs were subscribed to by AP through its connected entities. Before SAT, from where an appeal was filed to Supreme Court later, an argument was advanced that “SEBI has ignored the opinion of the solicitors of the relevant Countries and has failed to prove that the said transactions were in fact illegal as per the applicable Foreign Law.” Though SAT did not find merit in the above argument, the judgement did not elaborate the legal reasoning to this effect. However, in appeal, Supreme Court held as below:
“….. the Courts in India cannot even be persuaded to rely upon any such opinion as opinion may differ from person to person depending upon the law which one may feel validly applies. In any event, the opinion rendered in the said document only pertains to the transactions contemplated by the documents placed before the said firm which related to the loan agreement and other connected documents. The opinion was that the documents and the performance of the transactions contemplated by the said documents were in accordance with the applicable Austrian laws and do not constitute any violation of any law or regulations of general application in Austria. There can be no conflict with the said opinion if in the consideration of the said law firm, the documents were in conformity with the laws of Austria within whose jurisdiction, the documents came to be executed and to be operated upon. In fact the action of SEBI initiated against the respondents is not on the footing that any of the documents are contrary to the laws of Austria. The initiation of proceedings by SEBI as against the respondents are entirely on a different footing which was solely based on the alleged violation of the Indian laws vis., the SEBI Act read along with the SCR Act, 1956 the provisions of 2000 Regulations and the 1993 Scheme as well as 2003 Regulations. In fact in that opinion itself it is stated that the said opinion was not to be taken to imply that any provision of the document would necessarily be capable of enforcement or be enforced in all circumstances in accordance with its terms and that it should be understood that the law firm which gave the opinion should be understood to have not been responsible for investigating or confirming the accuracy of the facts including statements of foreign law or the reasonableness of any statements or opinion contained in any of the documents. Therefore, the said document is of no use to support the stand of the respondents.”
Therefore, it seems that an expert opinion on compliance with foreign law may not be a sole and conclusive evidence for determining the threshold for exemption from a takeover offer. To SEBI, these expert opinions may not be sufficient to lay down a new route for exempting open offer.
According to SEBI, it seems that obligation to make an open offer or to provide exit opportunity to public shareholders in India cannot be side-stepped by execution of arrangements in the foreign jurisdiction not requiring approval of competent authorities. Therefore, SEBI has held that non-requirement of approval by competent authorities for arrangements/mergers in a foreign jurisdiction will not exempt one from the obligation to make an open offer ipso facto.
– Supreme Waskar & Sumit Agrawal