India: No Back-Out Allowed Once A Public Offer Is Made!

Introduction

Under the Securities Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 19971 ("Takeover Code"), if an acquirer proposes to acquire 15% or more of the voting rights in a target company, it is required to make an open offer. Under the open offer, the acquirer must make a public announcement to the shareholders of the target company to acquire at least 20% of the voting capital of the company. This gives an opportunity to the shareholders to exercise a choice to either off-load their shares at a price as determined in accordance with the Takeover Code or to continue as shareholders. However, the question is, if a public offer, once made, can it be allowed to be withdrawn? Going by the view of the Supreme Court of India ("SC") in Nirma Industries Ltd. and Anr vs Securities & Exchange Board of India, decided on May 09, 2013, it appears that it cannot be withdrawn.

This newsletter examines the SC's judgment, the legislative intent to make a public offer mandatory and why an application for withdrawal of a public offer (once made), be treated with great circumspection.

1. The Dispute

The history of the case goes back to March 2002 when three group companies of Shree Ram Multi Tech Limited ("SRMTL", alternatively referred to as "Target") issued secured optionally fully convertible premium notes ("Notes") to Nirma Industries ("Nirma") by way of share subscription agreements as collateral against certain sum borrowed by the Target from Nirma. The three group companies pledged equity shares of the Target in favour of Nirma to secure redemption of the Notes in accordance with the share subscription agreements, failing which Nirma could invoke the pledge and acquire the pledged shares. Pursuant to the contractual arrangements, the Target's three issuing companies were asked to redeem the Notes within thirty days which did not happen in time. Therefore, the pledge was invoked in July 2005. As the pledged shares constituted 24.25% shareholding of SRMTL, Regulation 10 of the Takeover Code got triggered. As per Regulation 10, no acquirer can acquire shares which entitle it to exercise 15% or more of the voting rights in a company unless it makes a public announcement to acquire shares in accordance with the Takeover Code. Accordingly, Nirma made a public announcement in July 2005 to acquire up to 20% shares of the existing shareholders of SRMTL and, in accordance with Regulation 18 of the Takeover Code, drafted an offer letter and submitted it before SEBI in August 2005.

Meanwhile, the internal audit reports of SRMTL for the quarter July-September, 2005 came in the public domain and major financial fraud committed by its promoters came to light. Thereafter, SRMTL's share value reduced significantly. Pursuant to this development, in May 2006, Nirma moved an application before SEBI to seek exemption from the operation of Regulation 10 and sought permission to withdraw the public announcement made in July 2005. Alternatively, they requested SEBI to allow them to re-fix the offer price for the shares of SRMTL on the basis of the then current market price of its shares. Nirma contended that even by conducting due diligence, these internal issues relating to poor financial situation of the target would have been impossible to find out.

Both SEBI and Securities Appellate Tribunal ("SAT") issued unfavorable orders against Nirma and did not accede to its request to withdraw the offer or change the offer price. Nirma then moved an appeal before the SC.

2. Key contentions and SC's View

2.1 Application of Regulation 27(1)

In the SC, Nirma took recourse under Regulation 27(1) of the Takeover Code according to which no public offer, once made shall be withdrawn except where (a) the statutory approval(s) required have been refused; (b) the sole acquirer, being a natural person, has died; and (c) such circumstances as in the opinion of SEBI merit withdrawal.2 Their first major contention was that as SRMTL's share value had reduced significantly subsequent to public offer, the case can fall under Regulation 27(1)(d) of the Takeover Code. Against this argument, SRMTL argued that the Takeover Code is a special law to regulate "substantial acquisition of shares and takeovers" in a target company and lays down a self contained code for an open offer. They further argued that the object of the Takeover Code would be frustrated if a liberal meaning is assigned to the words "such circumstances" and so if Nirma is allowed to wriggle out of the public offer on the premise of discovery of adverse facts relating to financial health of SRMTL, the interest of its investors would be seriously jeopardized.

One point which SC had to decide here was whether SEBI has the authority to grant any exemption from the requirement of making a public offer in case of "such circumstances as in the opinion of SEBI merits withdrawal" under Regulation 27(1(d) of the Takeover Code.

The SC adopted the view that Regulation 27(1) of the Takeover Code states the general rule in negative terms. It provides that no public offer, once made, shall be withdrawn subject to three exceptions (stated hereinabove) which have to be construed very strictly. The exceptions cannot be construed in such a manner that would destroy the general rule that no public offer shall be permitted to be withdrawn after the public announcement has been made. Dealing with the three exceptions, the SC held: (a) Regarding statutory approval(s)- This would apply where a public offer has to be withdrawn in case of legal impossibility when the statutory approval required has been refused ; (b) Regarding the sole acquirer- This would apply where the sole acquirer being a natural person, has died. Clearly, both the exemptions under (a) and (b) are within the same genus of impossibility and therefore regarding clause (c) i.e, "such circumstances as in the opinion of SEBI merits withdrawal", an exception to the general rule would have to be naturally construed in terms of the other two exemptions. This exception would be restricted to a situation which would make it impossible for the acquirer to perform the public offer. Only SEBI has been accorded with the discretion to decide the same.

2.2 Nirma never intended to "take-over"

Nirma's second most crucial contention was that its primary objective was to secure its loan and never to take over the management of SRMTL. In light of this premise, the Takeover Code should be interpreted liberally. However, the SC found merit in SRMTL's contention, according to which, acquisition of shares by banks and financial institutions (acting as pledgee in the normal course of business) is exempt from the provisions of the Takeover Code. This is because in such cases banks do not acquire shares with the intention of taking over the target, but to facilitate their business operations. Such a case has to be distinguished from the situation where an acquirer acquires shares of a target to gain control over its affairs.

3. Treat withdrawal with circumspection

In this case, the SC had observed that the fact that the market price of the Target is far below the offer price cannot be a reason for seeking withdrawal of the offer. Nirma had made an informed business decision which, unfortunately for them, instead of generating profits, was likely to cause losses. As a result, by pulling out, it would place a burden on the other shareholders. The Takeover Code is meant to ensure fair and equal treatment of all shareholders in relation to substantial acquisition of shares and such process should not take place in a clandestine manner, without protecting the interests of the shareholders. SC added that, for the sake of orderly development of the securities market, public offers once made ought not to be allowed to be withdrawn on the ground of fall in share price of the Target which is, essentially, a business misfortune or a financial decision of the acquirer having gone wrong. If on ground of fall in prices, public offer is allowed to be withdrawn, it could lead to frivolous offers being made and withdrawn. This would adversely affect the interests of the shareholders of any target and the integrity of the securities market. Such an outcome would be wholly contrary to the intent and purpose of the Takeover Code.

Finally, the SC upheld the view of SAT and SEBI and rejected Nirma's appeal for withdrawal of its open offer to acquire equity shares of SRMTL. SC observed that once the Takeover Code is triggered, the acquirer cannot be allowed to wriggle out of its obligations under the Takeover Code to prejudice "the public shareholders of their valuable right to have an exit option under the code".

4. The implications for acquirers

SC has clarified that if an acquirer has made an offer for takeover of a target company, then it cannot go back on it. The larger interest is that of the minority shareholders (who have been given an opportunity to exit) and not the acquirer, whose business sense says that the offer once made should either be cancelled or modified! Thus, although the Takeover Code permits withdrawal of offer, refuge under clause 27(1)(d) is not going to be easily procurable. Therefore, offer must be made, once the prospective acquirer is sure of the same.

Acquirer should be diligent to conduct due diligence to know the red flags and whether hurdles, if any, can be removed by the target company before the takeover actually happens. Cleanup of the non-compliance or irregularities, if possible, should be a pre-condition before giving go ahead to the takeover. The bottom line is that the acquirer should not proceed unless the prejudicial issues are settled. It is settled law that in case an open offer is made, permission to withdraw will only be granted if the acquirer's case is genuine and minority's interests are not jeopardized. The underlying intent is to enable minority shareholders to exit on same terms as those who have sold shares to the acquirer with control over the target company. At the same time, there may be situations where SEBI may permit withdrawal owing to the situations where the primary basis on which the offer was made has become frustrated.

5. Position under the new Takeover Code

The Takeover Code of 1997 was revised in 2011 (the Securities Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011) and a new ground has been inserted in the form of Regulation 23(1) (c) which states that an offer may be withdrawn if:

(i) any condition stipulated in the agreement for acquisition attracting the obligation to make the open offer is not met for reasons outside the reasonable control of the acquirer; and

(ii) such agreement is rescinded, subject to such conditions having been specifically disclosed in the detailed public statement and the letter of offer.

Thus, assuming that the Takeover Code of 2011 was applicable to Nirma's case and the public offer had stated that Nirma will have a right to withdraw in case the market witnessed a decrease in the price of the shares (at any stage after the public offer is made) owing to default on behalf of SMPTL, it is possible SEBI may have granted permission for withdrawal.

Conclusion

The 2011 Takeover Code appears to have given an opportunity to avert any situation which may render the exercise of takeover futile and prejudice the business interest of the acquirers even before the takeover is completed. However, there is not enough body of judge made law to support this proposition. So far, Nirma's case will still apply and acquirers will have to retain the sanctity of their open offers.

Footnotes

1. By way of notification dated September 23, 2011, the Securities Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 were notified which replaced the Securities Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. In the present case, the dispute arose when Securities Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 were applicable.

2. Regulation 27 (1)(d) of Takeover Code of 1997.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.