Generally, in a takeover or other form of transaction involving mergers and acquisitions (M&A), there could be broadly two types of disputes. The first type arises if the companies involved have failed to comply with the requisite procedures for undertaking the transaction, which ultimately adversely affects the interests of the shareholders. This would give rise to a cause for the shareholders to complain either to the court or to the regulator. The second is one where the price of the transaction is subject to challenge, whereby shareholders of a company believe they have been short-changed. The touchstone in the first category is “procedural fairness” and in the second category “substantive fairness”.
Where M&A transactions are challenged, the general approach of the courts and regulators is to intervene where there is a case for procedural unfairness, but they are much more hesitant to intervene in cases involving price, because that is not only a matter left to the shareholders to decide from a commercial perspective, but courts and regulators do not bear any expertise when it comes to matters of valuation.
A limited question relating to the price at which a takeover offer was made came for consideration before the Securities Appellate Tribunal (SAT) in Tenneco Inc v. Securities and Exchange Board of India (decided 7 November 2019). The narrow facts relating to the price are that the acquirer, Tenneco, made an open offer for the target company, Federal Mogul Goetz (India) Ltd, to acquire the remaining 25.02% shares in that company. The takeover offer was made at Rs. 400 per share. This price was higher than that recommended by two valuers appointed by the acquirer. One of the valuers came up with the price of Rs. 372.10 and the other Rs. 397.66. Such a valuation became necessary because the shares of the target company were not frequently traded; regulation 8(2)(b) of the SEBI (Substantial Acquisition and Takeovers) Regulations, 2011 provided that in such a scenario the price must be determined by taking into account various valuation parameters, including “book value, comparable trading multiples, and such other parameters as are customary for the valuation of shares of such companies”.
Exercising the power that it possesses under regulation 8(16) of the Takeover Regulations, the Securities and Exchange Board of India (SEBI) appointed a third valuer to consider the price. Such valuer came up with a much higher price of Rs. 600 per share. Hence, SEBI directed the acquirer to make the offer at a revised price of Rs. 608.46, keeping in mind the provisions of the Takeover Regulations. Unsurprisingly, the acquirer was unhappy with SEBI’s decision, and it preferred an appeal before the SAT. In a curious turn of events, some shareholders of the target company were unhappy as well with the regulator’s decision, and they demanded a much higher price, keeping in mind valuation of comparable companies.
After hearing the parties, the SAT refused to intervene in SEBI’s order regarding the pricing, and dismissed the appeals of both the acquirer as well as certain discontented shareholders. In doing so, the SAT concluded that “the valuation of shares of a company is not a precise science. The conclusion arrived by expert valuer would be subjective and depend upon individual exercise. In these circumstances, there cannot be any indisputable single value.” In doing so, the SAT relied upon the High Court decisions in G.L. Sultania v SEBI as well as Cadbury India Ltd (2015) 125 CLA 77 (discussed on this Blog), where it was clearly answered that valuation is not a precise science, and that the assignment of weightages for various methods of valuation would depend upon the precise facts and circumstances of each case. Given the circumstances, the SAT found no defects in the approach of SEBI, and affirmed the value that the regulator found to be appropriate, based on the valuer it appointed.
As evident from this decision, questions of valuation are not only tricky because they are inherently subjective in nature, but courts and regulators are hesitant in intervening in matters of valuation, largely because this is a matter left for expert determination. The only way by which such matters can be addressed is to introduce a greater sense of objectivity through more detailed valuation guidelines. While several efforts have been made in this direction over the years, the much needed certainty is still elusive.