Scope of SEBI Takeover regulations- Takeover code does not apply to overseas transactions towards friendly or peaceful takeovers( Bharats Mergers Amalgamations & Takeovers by J.C. Verma, 5th edition). An example of this could be takeover of sesa Goa by Mitsui(Economic Times, dated 4-2-1997)
With the advent of globalization and integration of world economy there was no getting away from the phenomena of mergers and acquisitions. M&A and takeovers are engines of corporate growth. The corporate world exists within the competition and by the competition which, paradoxically, gives rise, on the one hand, to threats and cross-fire, trade rivalry and collision, antagonism and impugnation resulting into sickness and closure of corporate enterprises and on the other hand, business enterprises flourish and expand with co-operation and concert, collusion and combination federation and confederation in esprit de corpe . Enterprises in a bid to acquire monopoly position or substantial market power often go for these measures either through merger or acquisition or takeovers. It is submitted that although most of the M&A are beneficial and provide impetus to the overall growth of the concerned industry and also is good for the consumers but there could be cases where such takeovers can have adverse and various undesirable effects. To tackle the undesirable effect of such M&A and like easing out of minority shareholders and others, SEBI came out with a code to regulate the takeovers of listed companies whereas takeover of unlisted companies continues to be governed by Companies Act,1956.
What is a “Takeover”
Takeover as such is not defined anywhere in the SEBI( Substantial acquisition of shares & takeovers) regulations, 1997 . But the term is rather simple in its connotation and refers to a situation where an acquirer gets control or management of a target company by acquiring substantial quantity of shares or voting rights in the said target company . Such control over the target company, if obtained after acquiring certain percentage of shares as provided in the regulations of the code leads to the requirement of making a mandatory public offer on the part of buyer to buy at least additional 20% of shares from the public. To determine whether the acquisition of shares amounts to “substantial quantity of shares” it is necessary to understand as to what is meant by this term.
What is “Substantial quantity of shares or voting rights”
Substantial quantity of shares acquires different meaning depending on the purpose for which it is used. For the purpose of disclosures there is different threshold limit which is not relevant for the present discussion. Regulation 10,11,12 deal with cases where a buyer has to make an offer to buy certain minimum percentage of shares from the public in the event of acquiring shares beyond the threshold limit as provided in the said regulations. Regulation 10 provides that any acquirer intending to acquire more than 15% of voting rights or shares can acquire only if he makes a public offer to buy at least 20% of additional shares from the shareholders through an open offer. Regulation 11 provides creeping acquisition for a person holding more than 15% of shares but less than 55% can consolidate their holding up to 5% in any financial year ending 31st March. But any acquisition beyond 5% shall trigger off the code and lead to the requirement of making the public offer. But it is not always that on crossing the threshold as provided in these regulations that the code gets necessarily triggered off as the code also provides for certain exemption as listed in regulation 3. The exception on which I shall be focusing is the one provided in regulation 3(1)j(II). The reason for this would be that it is this regulation which as would be shown later has not been applied consistently and different interpretations have been given in cases having similar fact situation . Other exemptions provided under the said regulation are as follows:
1) allotment to underwriter pursuant to any underwriting agreement;
2) acquisition of shares in ordinary course of business by;
3) Regd. Stock brokers on behalf of clients;
4) Regd. Market makers;
5) Public financial institutions on their own account;
6) banks & FIs as pledges;
7) Acquisition of shares by way of transmission on succession or by inheritance;
8) acquisition of shares by Govt. companies;
9) acquisition pursuant to a scheme framed under section 18 of SICA 1985;
10) of arrangement/ restructuring including amalgamation or merger or de-merger under any law or Regulation Indian or Foreign;
11) Acquisition of shares in companies whose shares are not listed;
12) However, if by virtue of acquisition of shares of unlisted company, the acquirer acquires shares or voting rights (over the limits specified) in the listed company, acquirer is required to make an open offer in accordance with the Regulations.
What is regulation 3(1)j(II)?
Regulation 3(1)j(II) lays down one of the cases where an acquirer could be exempted from making a public announcement to buy additional shares. It provides that an acquirer who acquires the shares of a company beyond the threshold limit pursuant to a scheme of arrangement or reconstruction then he shall be exempted from making any further offer to buy additional shares from the public shareholders. Such reconstruction shall include amalgamation or merger or demerger under any law or regulation, whether Indian or foreign. It is this exemption which has been a subject of a deluge of litigation and the position is still not clear as to when any company entering in to a merger or acquisition could avail this exemption and when not. In the following paragraphs I shall try to highlight this issue through various case laws and point out the inconsistency in the stand of SEBI and SAT as regards the application of the exemption provided in regulation 3(1)j(II) of SEBI(Substantial acquisition of shares & takeover) regulation 1997.
Case of Glaxo Smithkline Plc
Facts of this case were as follows:
Glaxo Smithkline Plc a company incorporated in England (Acquirer), made an application to the Securities and Exchange Board of India (SEBI) vide application dated 5th June 2000 to seek an exemption from the SEBI under Regulations 3 & 4 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 [SEBI (SAST) Regulations] from having to make a public offer under Chapter III in respect of following four Indian listed companies;
a) Glaxo India Ltd (GIL)
b) Burrough Wellcome (India) Ltd (BWIL)
c) Smithkline Beecham Consumer Health Care Ltd (SBCHL)
d) Smithkline Beecham Pharmaceuticals (India) Ltd. (SBPIL)
GIL and BWIL are subsidiaries of Glaxo Wellcome plc (GW, a company registered in England). SBCHL was a subsidiary of Horlicks Limited (HL, a company registered in England) which is in turn a subsidiary of Smithkline Beecham plc (SB, a company registered in England). SBPIL was a subsidiary of Eskaylab Limited (EL, incorporated in England). EL is in turn a wholly owned subsidiary of SB.
The boards of GW and SB had unanimously agreed to a merger to form a new group called Glaxo Smithkline (GSK). To implement the proposed acquisition the procedure to be followed is called Scheme of Arrangement. Under the Scheme of Arrangement GW and SB would become wholly owned subsidiaries of GSK. GSK shares will be issued by GSK to the former shareholders of GW and SB in ratio 58.75% and 41.25% of the issued share capital of GSK respectively. The Acquirer submitted that the Scheme of Arrangement clearly falls within Regulation 3 (1) (j) (ii) of the said Regulations, the obligation to make a public offer does not apply to reconstruction including amalgamation or merger or de-merger. The acquirer also submitted that all the elements of Regulation 3 (1) (j) (ii) viz. Scheme of Arrangement and merger under a recognised law (in this case English Law) are clearly met and accordingly there is no obligation to make a public offer as a consequence of the merger of GW and SB.
It was observed that there was global restructuring resulting in forming of a holding company i.e. GSK as per the scheme. It appeared that by the said scheme it is not intended to bring about change of control over the target companies in India. The indirect acquisition of the joint controlling interest of the Target Companies in India is purely an incidental fallout to the global restructuring arrangements and does not change the shareholding pattern of the Target companies. The immediate holding company of the Target Company will continue to remain the same. It is important to take note of the ground on which exemption was granted as it would be shown later that in similar cases the board did not grant any exemption even though the ground explained was similar.
EATON corporation case
Facts of the case were that, Eaton Corporation, the Appellant herein, was a company incorporated and existing under the laws of the State of Ohio, in the United States of America. Eaton Industries Inc, also incorporated in Ohio, was its wholly owned subsidiary. It was stated that the said Eaton Industries Inc, in pursuance to an Agreement and Plan of Merger, merged with another company namely Aeroquip Vickers Inc. Aeroquip Vickers Inc. is also incorporated under the laws of the State of Ohio. Aeroquip Vickers Inc in turn had a wholly owned subsidiary by the name Aeroquip Corporation, incorporated and existing under the laws of the State of Michigan in the United States of America. The said Aeroquip Corporation has a fully owned subsidiary by the name Vickers Inc. Said Vickers Inc incorporated under the laws of the State of
Delaware in the United States of America holds 51% in the share capital of its subsidiary namely Vickers System International Ltd (VSIL), which is a public company incorporated in India, under the Companies Act, 1956. It was reported that the Appellant’s direct subsidiary Eaton Industries Inc. merged with Aeroquip-Vickers Inc with effect from 9.4.1999. As a result Aeroquip Vickers Inc. continued to exist as the surviving company and became a wholly owned subsidiary of the Appellant. On the Appellant becoming the holding company of Aeroquip Vickers Inc., name of its subsidiaries underwent change – the name of Aeroquip Corporation changed to Eaton Aeroquip Inc, Vickers Inc changed to Eaton Hydraulics. In this scenario, the Respondent felt that control over VSIL has changed attracting the provisions of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations (the 1997 Regulations) and accordingly embarked. on an inquiry to find out the extent of compliance with the requirements of the same by the concerned parties. In this case,. SAT Tribunal held that provisions of regulation 3(1)(j)(ii) Would also apply to cases of merger according to a foreign law. It observed that
It is thus clear that the merger has the approval of the laws of the State of Ohio. There is no doubt that as a result of change in the ownership of VSIL’s ultimate holding company, the control over VSIL has also changed. Even if there is no direct acquisition of shares in VSIL by the Appellant, in the light of the change in control of the said VSIL effected by way of acquisition of Aeroquip Vickers Inc by the Appellant as a result of the merger referred to above, it cannot be said that the Appellant had not acquired control over VSIL. The acquisition was indirect. But regulation 12 read with regulation 2 (b) takes care of direct and indirect acquisition .
Granting exemption to the appellant, tribunal observed that: From the fact evidencing merger of Eaton Industries with Aeroquip Vickers Inc. under the laws of the State of Ohio and as a result Aeroquip Vickers Inc becoming the subsidiary of the Appellant, it is clear that the instant case is covered under the automatic exemption available under regulation 3 (1) (j) (ii). Since the case is exempted from complying with the requirement of regulation12, issuance of the impugned order asking the Appellant to comply with the requirements of regulation 12 cannot hold good. Once an acquisition falls under any one of the automatic exemption categories provided under the regulation, the Respondent cannot knock off that exemption. An exemption provided by the law cannot be taken away simply by an administrative order, like the one impugned in the appeal. Since the order is issued beyond the authority of the Respondent, it fails.
Hence, it can be seen that the tribunal granted exemption in this case even though there was no direct acquisition by the appellant but as the change in control was only incidental fallout of the global restructuring hence it was held to come under the said regulation
Here again the exemption was granted even though there was a change in the control of the target company. It was held that the said regulation applied even to the cases where the control effectively passed. So, the conclusion which could be drawn from these cases is that whenever there is a global restructuring or merger taking place, whether in India or any foreign country which effects the change in control of any listed company in India then the same shall be exempted under regulation 3(1)(j)(ii). But the position has been obscured by SAT in further decisions especially in the case Luxottica group Vs. SEBI.
Bosch and Lomb USA and Luxottica executed an agreement providing for Luxottica to purchase Bosch and Lomb eyewear business. Bosch and Lomb had an Indian subsidiary. Execution of the agreement would have meant management control of the Indian business would have changed hands, mandating a public announcement. The facts as is evident were very similar to two cases discussed above in the sense that here again it was a case of an international restructuring effecting a change in control of a company listed in India. But the Securities appellate tribunal surprisingly did not grant exemption and asked the company to make a mandatory public offer.
There have also been cases where in similar fact situation although an exemption has been granted but a conditional subject to the passing of a special resolution by the shareholders of the target company. In the case of KenTec Inc. entered in to a reconstruction and restructuring agreement with jenoptic AG, through its subsidiary, for the acquisition of its entire shareholding in Krone AG which held 51% of krone Communication Ltd which was the target company. The exemption was first rejected but on submissions by Krone AG the panel exemption subjecting it to the ratification by the existing shareholders . What is pertinent to see and point out is that the grounds on which this conditional exemption was granted were almost similar to the ones on which an absolute exemption was granted in the case of Eaton corporation and Glaxosmithkline . The facts as laid down above were also similar. Hence it was expected that the stand taken should also have been consistent and an unconditional exemption should have been granted. Also in the case of Weigh-Tronix LLC, USA again where the facts were very similar to the cases discussed above and a conditional exemption was granted. The board while granting the exemption held that as the acquisition of the target company is only an incidental fallout of the global transaction and hence should be given exemption subject to shareholders passing a resolution approving the change in control.
It shall be pertinent to point out here that although the facts of the cases have been similar, i.e a global restructuring effecting an acquisition of the Indian companies or causing the change in control of an Indian company but the stand of SEBI has not been consistent which has caused a lot of confusion as regards the position of law on this point. Time and again the board or SAT even though citing the same reason for granting the relief but the relief granted has differed from rejection to conditional exemption to complete exemption from making a public offer. This stand of SAT has totally obscured the position of law on this point. Which merger shall be exempted from making a public offer and which not has become a matter of great speculation and the market players are confused as regards the stand on this point so that they can plan the future course of action.