A question that comes up regularly in the context of an underlying secondary transaction that triggers an open offer is whether such a transaction can be closed on the stock exchange? This is due to reservations expressed by the Securities Exchange Board of India (SEBI) in relation to the interpretation of certain provisions of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover Regulations).
This has led to unintended consequences, which cast a doubt on the legality of the on-market closure of underlying share purchase transactions. The shadow of this doubt unfortunately extends to on-market closures even if the on-market closure follows the completion of the open-offer process. In this blog post1 we would like to clarify that the on-market closure of underlying transactions is not contrary to Takeover Regulations and the provisions of Takeover Regulations are not subject to multiple interpretations on this aspect.2
Takeover Regulations allow the acquirer to close the underlying triggering transaction after 21 working days of the issuance of the detailed public statement by fulfilling certain procedural requirements, rather than waiting till the closure of the open-offer process. As readers will be aware, one has the option to close a negotiated transaction either on-market or off-market. For a seller, the on-market route is more tax efficient and, hence, a preferred option for closing the underlying deal.
Regulation 22(1) of the Takeover Regulations prohibits an acquirer from closing the underlying transaction that has triggered an open offer until the expiry of the offer period. This prohibition applies irrespective of whether the transaction is proposed to be closed on- or off-market. The exceptions to this prohibition are provided in Regulations 22(2) and 22(2A) and are summarised below:
- Negotiated Deals: Irrespective of the mode used to close the underlying deal, Regulation 22(2) permits the acquirer to close the deal, after the expiry of 21 working days from the date of the detailed public statement, if the acquirer has made a cash deposit of the entire consideration payable to the public shareholders in the open offer in a regulatory escrow account.
- Primary Infusion and Non-negotiated deals: Regulation 22(2A), which was introduced in the Takeover Regulations in March 2013, permits the acquirer to acquire shares through preferential issue or through stock exchange settlement (other than through block deals / bulk deals) if the equity shares acquired are kept in a regulatory escrow and the acquirer doesn't exercise voting rights on such equity shares3.
Therefore, Regulation 22(2A), only applies to (i) preferential allotment of shares; and (ii) "market purchases" executed through anonymous screen-based trading systems. Negotiated transactions implemented through a share-purchase agreement, with identities of buyer and seller known to each other, are, therefore, excluded from the purview of this provision and would be covered solely by the permission to close the underlying deals under Regulation 22(2).
SEBI's views on draft letters of offer (that envisage an on-market closure of underlying deals) seem to suggest that all on-market closures of underlying deals are prohibited by Regulation 22(2A) and these observations ignore Regulation 22(2) as if Regulation 22(2A) overrides 22(2) or that 22(2) is redundant. However, these two provisions are unambiguous and completely independent provisions dealing with two separate categories of exceptions that were introduced at two different points in time under the Takeover Regulations. Regulation 22(2A) in its clear and unambiguous terms overrides Regulation 22(1) and not 22(2). Therefore, Regulation 22(2A) cannot be read in such a manner to create a possibility of two interpretations and deviate from the rule of literal interpretation of unambiguous provisions, attempting to block such on-market closures.
Conclusion and a Word of Caution
On-market or off-market closure of underlying deals both prior to the closure of an open offer and after is kosher. Separately, from a pure price-movement risk perspective, on-market closure prior to open-offer closure (rather than later) might work out better. To date, SEBI has not litigated on the issue discussed in this blog post, but has dealt with it as comments on the draft letters of offer. For those intermediaries and parties to the transaction who have a low regulatory litigation appetite, it is advisable to seek appropriate assessment of legal risks prior to execution of definitive documents envisaging on-market deal closures of such deals.
1 We have not dealt with the issue relating to those on-market trades that are done with the intention to manipulate the market. It is a settled proposition of law that synchronized on-market trades are not per se illegal.
2 Our firm has advised on transactions where the underlying deals have been closed on-market either prior to the completion of the open offer or after the completion of the open offer.
3 Shares can move to acquirer's account if acquirer deposits entire open offer consideration in a regulatory escrow within a prescribed period of time.
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.