Offer Period under SEBI Takeover Regulations commencement date is from the date of concluded share purchase agreement-SC

Offer Period under SEBI Takeover Regulations commencement date is from the date of concluded share purchase agreement for violation u/s 22(7)-Supreme Court

Offer Period under SEBI Takeover Regulations

ABCAUS Case Law Citation:
ABCAUS 1071 (2016) (12) SC

The Grievance:
In the present case, SEBI had challenged order of the Securities Appellate Tribunal reversing the order of the Adjudicating Officer which held the respondents as guilty of contravening the provisions of Regulation 22(7) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

Brief Facts of the Case:
A company (Company A) was incorporated under the laws of England and Wales with its registered office in London was formed to acquire the entire of the equity share capital of another company (Company B). The company B was incorporated in Mauritius and its shares were subsequently acquired by one another International Corporation (Company C). The company C was incorporated in California in USA.

The company B did not carry out any business activity but, at the relevant time, held more than 15% issued share capital of Hindustan Oil Exploration Co. Ltd. ( the target company).

On 14th February, 2005, the company A entered into a share purchase agreement with the company C to acquire the entire equity share capital of company B. This agreement was entered into in England and by virtue thereof all the shares of company B were registered in the name of company. On account of this company A came to hold more than 15% of the share capital in the target company which attracted the SEBI Takeover Regulations as above.

In terms of the said Regulations, it became obligatory on the part of company A to make a public announcement.  Such public announcement in the form of a public offer for sale/purchase of 20% of the shares of the target company at a determined price of Rs.92.41 per fully paid up equity share was made on 15th February, 2005 by company A with company B acting as a person acting in concert.   

However, a day before the public offer, i.e.; on 14th February, 2005 on date of execution of the share purchase agreement, the company A appointed two of its Directors on the board of the company B and on the same date company B, which was a person acting in concert with company A, appointed the same persons on the board of directors of the target company.

This, according to SEBI, amounted violation of Regulation 22(7) of the Regulations inasmuch as the said appointment was made during the offer period which had commenced on and from 14th February, 2005 i.e. date of execution of the share purchase agreement.

The Tribunal took the view that under Regulation 2(1)(f) of the Takeover Regulations, ‘offer period’ is clearly defined as the period of time between the date of entering into Memorandum of Understanding or the public announcement, as the case may be, and the date of completion of offer formalities. The Tribunal opined that the definition of ‘offer period’ has to be literally interpreted. According to the Tribunal, the expression ‘Memorandum of Understanding’ falls short of a concluded contract. As there was no MoU between the parties it was the date of public announcement that would trigger of the commencement of the ‘offer period’.

As the appointment of the Directors in the target company was made a day before the public announcement, the Tribunal was of the view that there was no violation.

Observations made by the Supreme Court:
The Hon’ble Court was not convinced with the contentions advanced by the respondents and opined that the embargo under Section 22(7) is both on the acquirer and a person acting in concert. The expression ‘person acting in concert’ includes a corporate entity and also its directors and associates.

The Court observed that as per the definition of ‘offer period’ contained in Regulation 2(1)(f), a concluded agreement is not contemplated to be the starting point of the offer period. But such a consequence must naturally follow once the offer period commences from the date of entering into a Memorandum of Understanding which, in most cases would reflect an agreement in principle falling short of a binding contract. In the words of the Court,

“If the offer period can be triggered of by an understanding that is yet to fructify into an agreement, we do not see how the same can be said not to have commenced/started from the date of a concluded agreement i.e. share purchase agreement as in the present case”

The order of the Tribunal was set aside and that of the Adjudicating Officer was restored with direction to deposit the penalty of Rs. 25 lakhs imposed on each of the respondents.

Offer Period under SEBI Takeover Regulations

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