Public offer made under SEBI takeover regulations cannot be withdrawn. Mere Delay by SEBI, alienation of assets by Board no ground for withdrawal-Supreme Court
ABCAUS Case Law Citation:
1048 (2016) (11) SC
This appeal was preferred under Section 15 Z of the Securities and Exchange Board of India Act, 1992 against order passed by the Securities Appellate Tribunal, Mumbai (SAT) upholding the order of SEBI rejecting withdrawal of the public offer to acquire shares of a listed company in terms of public announcement (PA) under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (the Takeover Regulations).
Important Case Laws Cited:
Nirma Industries Limited vs. Securities and Exchange Board of India (2013) 8 SCC 20
Securities and Exchange Board of India vs. M/s. Akshya Infrastructure Pvt. Ltd (2014) 11 SCC 112
Brief Facts of the Case:
In late 2009, one person and a private limited company (the acquirers) along with another company being the person acting in concert (PAC) made PA in accordance with the takeover regulations.
As on the date of the PA, the acquirers and PAC collectively held 6.47% equity shares of the target company. The PA was voluntarily made by the acquirers and the PAC to acquire 25% equity shares of the target company from its equity shareholders at a price of Rs.101/- (the offer price) per equity share. At that time, market price of the target company shares was Rs.109/- per share.
The offer was for hostile takeover of the target company. The PA mentioned that the prime object of the offer was to acquire substantial shares/voting rights accompanied with the change and control of the management of the target company. The acquisition was in the nature of strategic investment for diversification and growth and to reap the benefit of corporate opportunities.
The draft letter of offer (DLO) was filed with SEBI in 2009. However, The appellants (the acquirers) in 2011 sought permission to withdraw the offer under Regulation 27(1)(d). The stand of the appellants in the said letter was that the SEBI had not taken any decision on the DLO in two years during which period the management of the target company had systematically siphoned off its coffers, depleted its valuable fixed assets and eroded its net worth substantially with the intention of making it a shell company. This has defeated the very object of the offer, without any fault on the part of the acquirers. Most valuable assets of the target company had been encumbered in violation of SEBI regulations and against the interest of minority shareholders and the acquirers. Since the date of PA, financial position of the target company had deteriorated substantially.
The SEBI in 2012 declined to permit withdrawal of the PA holding that as per Regulation 23(1), the target company was entitled to dispose of its assets with the approval of the shareholders even after the PA. It was held that the acquirers were not strangers to the target company. They had 6.47 per cent shares. Discovery of adverse effects pertaining to financial health subsequent to the PA could not be a ground to withdraw the PA. Doing so will jeopardize the interests of the shareholders. The takeover regulations laid down a self-contained code and withdrawal of public offer was not governed by principles of withdrawal of an offer under the Contract Act, 1872.
The view taken by the SEBI was affirmed by the SAT. It was held that the SEBI could take time in making inquiry on a complaint and thereafter could call for a revised letter of offer with or without re-scheduling the date of opening or closing the offer. However, it was observed that in the present case, SEBI was wholly unjustified in taking more than two years for offering its comments on the letter of offer submitted by the appellants. This, however, did not constitute a ground to permit withdrawal of the PA.
Contentions of the Appellant:
Main contention raised on behalf of the appellants was that there was no justification for long delay on the part of the SEBI in granting approval to the offer of the appellant and situation having changed to the prejudice of the appellant, the appellants are entitled to withdraw their offer. Since under the scheme of the regulations, the appellants could not withdraw the offer once made except in circumstances mentioned in Regulation 27, the regulation should be read as creating an obligation on the part of the SEBI to take speedy decision and if there was unexplained delay resulting in prejudice to the appellants-acquirers, the appellants are entitled to be absolved of the liability to honour the offer.
Referring to the timeline provided in Regulation 22 and the provisions of Regulation 23, It was submitted that while normal ups and downs in the market may not be a ground to permit withdrawal of offer, unilateral action of the promoters resulting in transfer of assets could certainly be the ground to permit withdrawal of offer. If the assets are unduly transferred by the promoters after the PA, the acquirer was entitled to be relieved from the offer.
To summarise, the submissions of the appellants were:
(i) The SEBI failed to adhere to the timeline prescribed under the Takeover Code which rendered it impossible for the appellants to conclude their open offer. Adherence to timeline prescribed under Regulations 18(2), 22(2), (3) and (4) are critical under the Takeover Code, the Bhagwati Committee Report and the International Practice. The time is of essence in cases of hostile takeover.
(ii) The existing promoters should not be given an opportunity to administer a poison pill to defeat the offer of the potential acquirers. This principle is recognized under Regulation 23.
Questions framed for determination:
The Supreme Court formed the following two questions for determination:
(i) To what extent is the timeline laid down under the Takeover Regulations required to be adhered to and effect of delay by SEBI in the present case?
(ii) To what extent unilateral action of the target company in dealing with the property of the company after a hostile public offer is made furnish cause of action to the acquirers to withdraw the public offer and whether in the present case, decision not permitting withdrawal of public offer is justified?
Observations made by the Apex Court:
It was noted that the acquisition of controlling interest of a company could be friendly or hostile. In a friendly acquisition, management of the target company sells its controlling shares to the acquirer. Where management of the target company is unwilling to negotiate with an acquirer, the acquirer can directly approach the shareholders by making an open offer which is called Hostile takeover. A Hostile takeover helps to unlock the hidden value of the shares and puts pressure on the management to work efficiently. On the other hand, it has potential of unduly upsetting the normal functioning of a target company. It is well known that takeover attempt being unpleasant for the target company is normally met with defence strategies such as ‘Poison Pills’ (making takeover unviable for the acquirer by making the cost of acquisition unattractive), ‘Shark Repellents’ (measures to repel an unwanted takeover) sale of valuable assets, etc.
The Court observed that Justice P.N. Bhagwati Committee appointed in 1995 had made various recommendations including requirement of disclosure by the acquirers, procedure for public announcements, obligations of the acquirers and the target company which led to the adoption of the 1997 Takeover Regulations.
Case of Nirma Industries Limited
It was observed that in Nirma case, the acquirer after making PA sought withdrawal therefrom on the ground of embezzlement of funds by the target company. SEBI rejected the application with the observation that the acquirer ought to have used due diligence prior to making the public offer. Rejecting the plea that the embezzlement and siphoning off of funds by the target company could not have been found by third party even after exercising diligence, the Supreme Court held that under the scheme of the takeover code public offer once made could not be withdrawn so as to deprive the shareholders of their valuable right to have exit option and also to ensure that public announcement is not made by way of speculation.
Case of Akshya Infrastructure
In this case, the Apex Court had held that SEBI was not justified in causing delay in dealing with the issuance of its comments on a letter of offer as delay can lead to controversy as to whether the belated action was bona fide exercise of statutory power. However, delay by itself might not vitiate action of the SEBI. The SEBI has to be guided by the overall interest of the shareholders in dealing with the prayer for withdrawal from the public offer. The economic unviability is no ground to justify prayer for such withdrawal.
Delay on the part of SEBI
Mere upholding of finding of SAT on the aspect of delay by SEBI not enough to hold that the appellants were entitled to withdrawal of the public offer. The withdrawal has to be dealt with under Regulation 27. The general principle is that public offer once made cannot be withdrawn except in situations specified under the Regulation as laid down by the Supreme Court.
Unilateral action of the target company in dealing with the property of the company
Obligation of the board of directors under Regulation 23 against alienation of assets, issuance of unissued securities carrying voting rights or entering into material contracts is applicable only if approval of general body of shareholders is not obtained not otherwise. Under the takeover regulations there is no absolute bar for the target company to take decision about its assets, subject to compliance with statutory procedure and subject to the decision being otherwise valid.