ISSUE XI : Offer price in indirect takeovers – A concept clarified

Introduction

The Supreme Court of India (“SC”) recently pronounced its judgment in Daiichi Sankyo Company Limited Vs. Jayaram Chigurupati and Ors. While settling a dispute surrounding the offer price quoted by Daiichii Sankyo Co. Ltd. (“the Appellant”) in its public announcement for an indirect acquisition of shares in Zenotech Laboratories Ltd. (“Zenotech”), the SC provided clarity on the interpretation of the words “persons acting in concert” as embodied in the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997 (“the Takeover Code”). This bulletin examines the impact of the case in view of the interpretation accorded to the words “persons acting in concert” by the SC.

1. Brief facts

On October 03, 2007, Ranbaxy Laboratories Ltd. (“Ranbaxy”), entered into a Share Purchase and Share Subscription Agreement (“SPSSA”) with Zenotech and its promoter Mr. Jairam Chigurupati to purchase shares in Ranbaxy at the rate of Rs. 160 per equity share. The resultant acquisition triggered the 15% threshold calling for a public announcement under the Takeover Code. Accordingly Ranbaxy made a public announcement for acquisition of shares in Zenotech, quoting an offer price of Rs. 160 per share. The “open offer” closed on November 15, 2007 and Ranbaxy issued a post offer announcement on January 30, 2008, whereby, its post closing shareholding in Zenotech amounted to 46.85%.

Subsequently, on June 11, 2008 the Appellant entered into a SPSSA with Ranbaxy and promoters of Ranbaxy to acquire 30.91% of its paid-up capital. Once again, the requirement of a public announcement was triggered and the Appellant made a public announcement to the shareholders of Ranbaxy on June 16, 2008 to acquire 22.01% shares at an offer price of Rs. 737. Since the Appellant had acquired more than 50% shares in Ranbaxy on October 20, 2008, Ranbaxy became its subsidiary. As a consequence of this transaction, the Appellant also ended up acquiring indirect control of Ranbaxy’s 46.85% stake in Zenotech triggering the requirement of “public announcement” to Zenotech’s shareholders. Accordingly, on January 19, 2009 the Appellant made a public announcement to the shareholders of Zenotech offering Rs. 113.62 per share as the offer price. This price was based on the price of Zenotech’s shares as quoted on the stock exchange.

The promoters of Zenotech (“the Respondents”) filed a complaint with SEBI claiming that the offer price as offered by the Appellant should not have been less than Rs. 160 per share. While SEBI turned down this claim, it was upheld by the Security Appellate Tribunal (“SAT”) and against which the Appellant preferred an appeal before the SC.

2. Issue

The main issue considered in the appeal was whether the offer price of Rs. 113.62 made by the Appellant for acquisition of shares in Zenotech was fair and lawful.

3. Controversy surrounding the offer price

3.1 Regulations governing “offer price”: While examining the issue, the SC discussed the provisions contained in the Takeover Code that deal with “offer price” and the manner in which it must be determined.1 As per regulation 20, where an acquisition falls under regulations 10 and 11,2 the offer price must be determined in the manner prescribed under regulation 20 (4) and (5).3 Similarly, regulation 20 (12) deals specifically with indirect takeovers and provides in case of an indirect acquisition, the offer price must be determined with reference to (i) the date of the public announcement for the parent company and (ii) the date of the public announcement for acquisition of shares of the target company, whichever is higher. The offer price in an indirect takeover is also to be determined in accordance with regulation(s) 20 (4) and (5). In the present case, the SC observed, that the share price of Zenotech was to be determined on June 16, 2008 (the date of the public announcement of the parent company, Ranbaxy), and as on January 19, 2009 (date of the public announcement for Zenotech, the indirectly acquired company).

3.2 Determining the “offer price”: Regulation 20 (4) prescribes 3 ways for determining the offer price. As per the regulation, it must be the highest of: (a) the negotiated price under the agreement referred to in regulation 14 (1)4, (b) price paid by the acquirer or persons acting in concert with him for acquisition, if any, (including by way of allotment in a public or rights or preferential issue) during the 26 week period prior to the date of public announcement, whichever is higher, (c) the average of the weekly high and low of the closing prices of the shares of the target company as quoted on the stock exchange where the shares of the company are most frequently traded during the 26 weeks, or, the average of the daily high and low of the prices of the shares as quoted on such stock exchange where the shares of the company are most frequently traded during the two weeks preceding the date of public announcement, whichever is higher.

The first (a) relates to direct takeovers and not relevant. The controversy stemmed from the different methods, while the Appellant applied the method provided under sub- clause (c), the Respondents applied (b).

3.3 Contentions surrounding the “offer price”: The Appellant’s view was that sub- clause (b) had no applicability because the Appellant was not acting in concert with Ranbaxy to purchase shares in Zenotech. Therefore, the only provision that they could apply for determining the offer price was sub-clause (c). On the other hand, the contention raised by the Respondents was that the Appellant and Ranbaxy constituted “persons acting in concert” when they signed the SPSSA on June 11, 2008 and then on October 20, 2008 when Ranbaxy finally became a subsidiary of the Appellant. They argued that Ranbaxy had paid Rs. 160 per share for the shares in Zenotech in January 2008 which fell well within the 26 week period dating back to June 16, 2008 i.e., the date on which the Appellant made the public announcement for the shares in Ranbaxy. In light of the above, the Respondents were of the view that the Appellant should have applied regulation 20 (4)(b) to determine the offer price for the Zenotech shares which in turn should have been Rs. 160 and not Rs. 113.62.

3.4 The controversy finally rested upon the applicability of regulation 20 (4)(b) for determining the offer price quoted by the Appellant. Regulation 20 (4)(b) provides for a situation wherein the acquirer or persons acting in concert with the acquirer pays a price for acquisition of shares in the target company. It was in this context that the SC examined the interpretation of the words “persons acting in concert” as well as, the stage at which persons may be said to be acting in concert for the purposes of the applicability of regulation 20 (4)(b).

4. SC’s interpretation of “persons acting in concert”

4.1 One of the observations made by the SC in this context was that, the concept of “persons acting in concert” (as defined under regulation 2 (e)(1)5 of the Takeover Code) was based on the premise that on one side there is a target company and on the other side there are two or more persons who come together with the common objective or purpose of substantial acquisition of shares in the target company. Therefore, unless there is a target company, whose shares are to be acquired by two or more persons coming together for that very purpose, there can be no “persons acting in concert”. Similarly, the SC also observed that there can be no “persons acting in concert” unless there is a shared and common objective to acquire substantial shares in the target company. Such a relationship can only come about by a meeting of the minds pursuant to an agreement or understanding, formal or informal.

The SC concluded that the contention that by virtue of executing the SPSSA Ranbaxy became a person acting in concert with the Appellant could not be accepted. Since the basic precondition of a “common objective” to acquire substantial shares in Zenotech was absent. If the Appellant and Ranbaxy had indeed entered in to the SPSSA with the common objective of acquiring bulk of the shares in Zenotech, then they would have qualified as “persons acting in concert”. However, this was not the case.

4.2 The SC also considered regulation 2 (e)(2)6of the Takeover Code and observed that this sub-regulation could not seen as a stand alone provision independent of sub-regulation (1). This meant that while sub-regulation (2) was a deeming regulation, it was a deeming provision that merely provided 9 specific relationships in which the persons paired the other would be deemed to be acting in concert with the other. This implied that in such cases, if one of the persons made or agreed to make a substantial acquisition of shares, etc in a target company it would be presumed that he was acting in pursuance of a common objective or purpose shared with the other person in the pair. The two would in such case be deemed to be “persons acting in concert”. The presumption of a common objective would remain constant. Thus, the SC observed that regulation 2 (e)(2) must be read in conjunction with regulation 2 (e)(1). Therefore, even under this sub-regulation, persons deemed to be acting in concert must have the intention to acquire a substantial shareholding in the target company.

Further, the SC also clarified that the deeming provision as embodied in sub- regulation 2 of regulation 2 (e) could only operate prospectively and not retrospectively. Thus, the SC held that in the present case, the deeming provision would give rise to the presumption that the Appellant and Ranbaxy were “persons acting in concert” provided the condition laid down in sub-regulation (1) was also satisfied post October 20, 2008 i.e., the date on which Ranbaxy became a subsidiary of the Appellant. Therefore, it cannot be said that the purchase of shares in Zenotech by Ranbaxy in January 2008 was in concert with the Appellant.

4.3 Regarding the timing of when a person is said to be acting in concert with the other, in the context of the applicability of regulation 20 (4)(b), the SC held that it was not relevant that the acquirer and the other person who had acquired shares in the target company on an earlier date should be acting in concert at the time of the public announcement for the target company. What was important was that the other person was acting in concert with the acquirer at the time of purchase of shares of the target company.

5. The findings of the SC

In light of the above discussion, the SC held that as far as Zenotech was concerned, Ranbaxy was not acting in concert with the Appellant neither from the date on which it entered in to an SPSSA with the Appellant, nor from the date on which Ranbaxy finally became a subsidiary of the Appellant. Thus, the acquisition of shares by Ranbaxy in Zenotech in January 2008 did not fall within the scope of regulation 20 (4)(b). Hence, the offer price quoted by the Appellant to the shareholders of Zenotech was correctly worked out. The SC ordered the judgment pronounced by SAT to be set aside.

Conclusion

With this judgment, the SC clarified the position of what constitutes “persons acting in concert” in the context of the Takeover Code. Whether it is a direct acquisition or an indirect acquisition, whether it is pursuant to an agreement or an understanding, two essential preconditions must be satisfied to amount to constitute “persons acting in concert”, namely, (a) the existence of a target company, and (b) a common objective and purpose of acquiring substantial shares in the target company. Further, the point of time in a transaction when an acquirer may be said to be acting in concert with two or more persons is when shares of the target company are purchased and not when the acquirer makes the public announcement.

Authored by:
Tanya Mehta

1 Regulation 20 of the Takeover Code lays down the manner in which the offer price is to be determined under various circumstances.

2 Regulations 10 and 11 of the Takeover Code prescribe thresholds (in percentage) of shareholding. When the acquirer exceeds these thresholds by acquiring shares or voting rights in the target company, he is required to make a public announcement.

3 Regulation 20 (4) of the Takeover Code provides 3 ways for determination of the offer price (discussed above) and regulation 20 (5) lays down the method used for determining the offer price in case of a company whose shares are infrequently traded and therefore not relevant in this particular case.

4 An agreement for acquisition of shares or voting rights or deciding to acquire shares or voting rights exceeding the thresholds prescribed under regulation(s) 10 and 11.

5 “Persons acting in concert” comprise of persons who, for a common objective or purpose of substantial acquisition of shares or voting rights or gaining control over the target company, pursuant to an agreement or understanding (formal or informal), directly or indirectly co-operate by acquiring or agreeing to acquire shares or voting rights in the target company or control over the target company.

6 This is the deeming provision which provides for 9 specific kinds of relationships wherein the persons shown as related will be deemed to constitute “persons acting in concert”.

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