[The following
post is contributed by Yogesh
Chande, who is a Consultant with Economic Laws Practice,
Advocates & Solicitors. Views of the author are personal]
post is contributed by Yogesh
Chande, who is a Consultant with Economic Laws Practice,
Advocates & Solicitors. Views of the author are personal]
In
an interesting order
passed on February 20, 2014, the whole time member of the Securities and
Exchange Board of India (SEBI) has refused the withdrawal of an open offer made
by the acquirers under the erstwhile SEBI (Substantial Acquisition of Shares
and Takeovers) Regulations, 1997 (Regulations).
an interesting order
passed on February 20, 2014, the whole time member of the Securities and
Exchange Board of India (SEBI) has refused the withdrawal of an open offer made
by the acquirers under the erstwhile SEBI (Substantial Acquisition of Shares
and Takeovers) Regulations, 1997 (Regulations).
A few facts worth mentioning:
1. The target company is listed and is in
the business of stock broking registered with SEBI, and member of OTCEI and
Bhuvaneshvar Stock Exchange.
the business of stock broking registered with SEBI, and member of OTCEI and
Bhuvaneshvar Stock Exchange.
2. The acquirer [PRPL] entered into a
business transfer agreement (BTA) with the target company,
wherein the target company agreed to issue shares representing around 80% of
its expanded capital to the acquirer, for acquiring the apparel and accessories
business under the brand names “Weekender”, “Weekender
Kids” and “Toon world” and certain brands of Walt Disney and Warner
Bros, from the acquirer.
business transfer agreement (BTA) with the target company,
wherein the target company agreed to issue shares representing around 80% of
its expanded capital to the acquirer, for acquiring the apparel and accessories
business under the brand names “Weekender”, “Weekender
Kids” and “Toon world” and certain brands of Walt Disney and Warner
Bros, from the acquirer.
Comment: At
this juncture, it should be noted that, being a stock broker and member of the
recognised stock exchanges, the target company was prohibited and disqualified
from engaging in the proposed business [acquisition of the apparel and
accessories business] in terms of the requirements of Securities Contracts
(Regulation) Rules, 1957. The target company, upon realising this much later
after the open offer, sought cancellation of the registration as a stock broker
on 17 October 2012.
this juncture, it should be noted that, being a stock broker and member of the
recognised stock exchanges, the target company was prohibited and disqualified
from engaging in the proposed business [acquisition of the apparel and
accessories business] in terms of the requirements of Securities Contracts
(Regulation) Rules, 1957. The target company, upon realising this much later
after the open offer, sought cancellation of the registration as a stock broker
on 17 October 2012.
3. Additionally, two other acquirers
acquired around 6% of the expanded capital of the target company from the
promoters in the market.
acquired around 6% of the expanded capital of the target company from the
promoters in the market.
4. There were two persons acting in
concert [holding around 2%] with the aforesaid acquirers.
concert [holding around 2%] with the aforesaid acquirers.
5. The aforesaid acquisition of around 88%
triggered an open offer and the open offer was accordingly made on 20 February
2011.
triggered an open offer and the open offer was accordingly made on 20 February
2011.
6. In the meanwhile, SEBI was intimated
that, on 8 October 2012 the Hon’ble High Court of Karnataka, had passed an
order for winding up of PRPL, the lead acquirer and the executant party to the
BTA.
that, on 8 October 2012 the Hon’ble High Court of Karnataka, had passed an
order for winding up of PRPL, the lead acquirer and the executant party to the
BTA.
7. In relation to the aforesaid
development [winding up], upon various interaction between SEBI and the
merchant banker, SEBI, vide letter dated 25 January 2013, informed the Merchant
Banker that the acquirers and the persons acting in concert (PACs) are jointly
and severally liable to complete the open offer. In light thereof,
notwithstanding any unforeseen circumstances affecting any one of the
acquirers, the rest of the acquirers and the PACs are required to proceed with
the open offer within the prescribed time lines. Accordingly, SEBI advised the
Merchant Banker to take necessary steps to immediately proceed with the open
offer and submit the revised letter of offer latest by 31 January 2013, failing
which, they shall be liable for action in terms of the provisions of the
Regulations and the SEBI Act, 1992.
development [winding up], upon various interaction between SEBI and the
merchant banker, SEBI, vide letter dated 25 January 2013, informed the Merchant
Banker that the acquirers and the persons acting in concert (PACs) are jointly
and severally liable to complete the open offer. In light thereof,
notwithstanding any unforeseen circumstances affecting any one of the
acquirers, the rest of the acquirers and the PACs are required to proceed with
the open offer within the prescribed time lines. Accordingly, SEBI advised the
Merchant Banker to take necessary steps to immediately proceed with the open
offer and submit the revised letter of offer latest by 31 January 2013, failing
which, they shall be liable for action in terms of the provisions of the
Regulations and the SEBI Act, 1992.
Issuance of Show Cause Notice by SEBI
Since,
the acquirers and the PACs did not take any steps to proceed with the open
offer despite clear advice of SEBI, SEBI issued a combined Show Cause Notice to
all the acquirers and PACs (Noticees) calling upon them to
show cause as to why suitable directions under sections 11 and 11B of the SEBI
Act, regulations 44 and 45 of the Regulations, read with regulations 32 and 35
of the Takeover Regulations, 2011 should not be issued.
the acquirers and the PACs did not take any steps to proceed with the open
offer despite clear advice of SEBI, SEBI issued a combined Show Cause Notice to
all the acquirers and PACs (Noticees) calling upon them to
show cause as to why suitable directions under sections 11 and 11B of the SEBI
Act, regulations 44 and 45 of the Regulations, read with regulations 32 and 35
of the Takeover Regulations, 2011 should not be issued.
Following were
the arguments for not making an open offer and in favour of withdrawing the
open offer
the arguments for not making an open offer and in favour of withdrawing the
open offer
1. All the property and effects of PRPL
are deemed to vest with the Court and, thereafter, with the Official Liquidator
appointed in respect of PRPL. The powers of the existing directors of PRPL
ceased and all powers pertaining to the affairs of the PRPL shall be exercised
by the Official Liquidator. PRPL was incapable of performing its obligations
under the BTA entered into with the target company.
are deemed to vest with the Court and, thereafter, with the Official Liquidator
appointed in respect of PRPL. The powers of the existing directors of PRPL
ceased and all powers pertaining to the affairs of the PRPL shall be exercised
by the Official Liquidator. PRPL was incapable of performing its obligations
under the BTA entered into with the target company.
2. The winding up order has adversely
affected the ability of the acquirers and PACs to comply with the open offer.
affected the ability of the acquirers and PACs to comply with the open offer.
3. The current financial position of the
other two acquirers had deteriorated, and hence they were not in a position to
complete the open offer.
other two acquirers had deteriorated, and hence they were not in a position to
complete the open offer.
4. The aforesaid brand names have not been
transferred due to the liquidation of PRPL, the target company has been
deprived of the benefit which it was to derive out of the said BTA. This in
turn has materially altered the transaction and has taken away the incentive of
acquiring further shares in the target company.
transferred due to the liquidation of PRPL, the target company has been
deprived of the benefit which it was to derive out of the said BTA. This in
turn has materially altered the transaction and has taken away the incentive of
acquiring further shares in the target company.
5. There is no value in investing in the
target company by acquiring its shares as the same had practically become a shell
company without any worthwhile business or future business plans.
target company by acquiring its shares as the same had practically become a shell
company without any worthwhile business or future business plans.
Comment: The
target company had become a shell company, because it was not able to acquire
the business of the acquirer as per the BTA, and it had also made a request for
surrendering its existing business prior to the acquisition i.e. registration
as a stock broker.
target company had become a shell company, because it was not able to acquire
the business of the acquirer as per the BTA, and it had also made a request for
surrendering its existing business prior to the acquisition i.e. registration
as a stock broker.
6. Because of the declining market
conditions, the financial condition of the other two acquirers deteriorated
substantially and the financial incapacity to purchase the shares of the target
company, albeit they were confident of performing their financial obligations
under the open offer, at the time of making the public announcement.
conditions, the financial condition of the other two acquirers deteriorated
substantially and the financial incapacity to purchase the shares of the target
company, albeit they were confident of performing their financial obligations
under the open offer, at the time of making the public announcement.
7. Compulsion to make an open offer, will
be detrimental to their financial stability thereby affecting their ability to
manage the affairs of the target company post acquisition which will
consequently affect the shareholders of the target company.
be detrimental to their financial stability thereby affecting their ability to
manage the affairs of the target company post acquisition which will
consequently affect the shareholders of the target company.
8. Under regulation 23(1)(c) of the
Takeover Regulations, 2011, an open offer can be withdrawn if any condition
stipulated in the agreement for acquisition attracting the obligation is not
met for reasons outside the control of the acquirer and such agreement has been
rescinded, subject to such conditions having been disclosed in the detailed
public statement. Although the regulation has been inserted in the [new]
Takeover Regulations, 2011, the same is very relevant in the present case as
the whole purpose of acquisition has been defeated.
Takeover Regulations, 2011, an open offer can be withdrawn if any condition
stipulated in the agreement for acquisition attracting the obligation is not
met for reasons outside the control of the acquirer and such agreement has been
rescinded, subject to such conditions having been disclosed in the detailed
public statement. Although the regulation has been inserted in the [new]
Takeover Regulations, 2011, the same is very relevant in the present case as
the whole purpose of acquisition has been defeated.
9. PRPL cannot take part in the open
offer, as it cannot transfer the assets to the target company for the reason
that its assets are now in possession of the Official Liquidator pursuant to
the winding up order.
offer, as it cannot transfer the assets to the target company for the reason
that its assets are now in possession of the Official Liquidator pursuant to
the winding up order.
10. There were certain issues surrounding due
diligence in relation to the proposed acquisition resulting in non-compliance
with certain securities laws, which have also been dealt by SEBI in detail in
the order.
diligence in relation to the proposed acquisition resulting in non-compliance
with certain securities laws, which have also been dealt by SEBI in detail in
the order.
SEBI’s direction to complete the open offer along
with interest
with interest
After
granting an opportunity of being heard and after hearing all concerned, SEBI
directed the Noticees to complete the open offer and also directed them to pay alongwith
the consideration amount, interest at the rate of 10% per annum from 8 May 2011
to the date of payment of consideration, to the shareholders who were holding
shares in the target company as on the date of trigger i.e. 4 February 2011 and
whose shares have been accepted in the open offer, after adjustment of dividend
paid, if any to them by the target company.
granting an opportunity of being heard and after hearing all concerned, SEBI
directed the Noticees to complete the open offer and also directed them to pay alongwith
the consideration amount, interest at the rate of 10% per annum from 8 May 2011
to the date of payment of consideration, to the shareholders who were holding
shares in the target company as on the date of trigger i.e. 4 February 2011 and
whose shares have been accepted in the open offer, after adjustment of dividend
paid, if any to them by the target company.
Comment
Ordinarily, once
an open offer is made, its inexorable conclusion ought to be the completion of
the open offer. One of the lessons from this order of SEBI decision, would be
for transaction advisors to structure the acquisition agreement and the open
offer documents (public announcement, detailed public statement and letter of
offer) such that, they protect the acquirer appropriately through material
adverse change (MAC) clauses and other similar conditional arrangements, and if
possible, to also envisage an eventuality or a contingency, of the nature
mentioned above, which could possibly enable the acquirer to withdraw an open
offer.
an open offer is made, its inexorable conclusion ought to be the completion of
the open offer. One of the lessons from this order of SEBI decision, would be
for transaction advisors to structure the acquisition agreement and the open
offer documents (public announcement, detailed public statement and letter of
offer) such that, they protect the acquirer appropriately through material
adverse change (MAC) clauses and other similar conditional arrangements, and if
possible, to also envisage an eventuality or a contingency, of the nature
mentioned above, which could possibly enable the acquirer to withdraw an open
offer.
– Yogesh Chande
As per this judgment and the Subhiksha judgment, is it safe to conclude that in India although there is not legal jurisprudence on MAC clauses, the courts are generally reluctant to allow a party to walk away from a transaction on the basis of materially adverse changes which were unanticipated while drawing up the contract?
yes