2014 (8) TMI 1255 - SC - SEBI

Appellants liability to pay a non-compete fee to the public shareholders of the target company as to be paid to the outgoing promoters of the target company which is being taken over by the appellants - scope of Regulation 20(8) of the Takeover Code - HELD THAT - It is nobody s case that the valuation of the shares by the appellants was detrimental to the interests of the shareholders except to the extent that the shareholders in the public offer were denied the benefit of the non-compete fee paid to the Bangur group. There is no allegation that the valuation of the shares was not in conformity with Regulation 20(5) of the Takeover Code. Splitting the non-compete agreement between the appellants and 5 members of the Bangur group on the one hand and 15 members of the Bangur group on the other - There is absolutely no indication given in the non-compete agreement that it is severable or that there was any intention to split it into two or more distinct parts. The absurdity resulting in splitting-up the non-compete agreement can be better appreciated from a hypothetical example. What if the Tribunal had partially agreed with the appellants and held that the non-compete agreement was valid in respect of say ten or twelve of the promoter entities instead of five. This could happen if the genuineness of the non-compete agreement is examined in relation to each promoter entity as has been done by SEBI. Does it not therefore mean that the non-compete agreement has to be split in twenty ways to decide whether it is genuine or sham in respect of five or ten or twelve of the promoter entities. Can this be said to be a reasonable construction of the non-compete agreement? - We are afraid that this surely cannot be the correct way of reading the non-compete agreement and that is why we are of the view that the Tribunal committed a fundamental flaw in holding only a part of the non-compete agreement as a sham. Tribunal should have either held the entire non-compete agreement as a sham or it ought to have held the entire non-compete agreement as a genuine agreement. The question of a half-way house simply does not arise. Two events that have occurred since the non-compete agreement was entered into on 29th March 2011. Firstly the non-compete period of three years has expired in a sense rendering this exercise academic. Secondly the Takeover Code has been repealed with effect from 23rd October 2011 and substituted by the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011. The new Takeover Code does away with the concept of a separate non-compete fee the amount being included in the offer price in terms of Regulation 8 thereof. We are of the view that the appeal deserves to be allowed and accordingly it is allowed. The directions and orders passed by SEBI and the Securities Appellate Tribunal are set aside.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal question in this judgment was whether the appellants were required to pay a non-compete fee to the public shareholders of the target company, similar to the fee paid to the outgoing promoters, the Bangur group, during the takeover of Andhra Pradesh Paper Mills Ltd.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Obligation to Pay Non-Compete Fee to Public Shareholders

Relevant Legal Framework and Precedents: The case involved the interpretation of Regulation 20(8) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, which addresses the addition of non-compete fees to the offer price if it exceeds 25% of the offer price. The Tribunal relied on previous orders to assert jurisdiction over the non-compete fee issue.

Court's Interpretation and Reasoning: The Supreme Court found that the Tribunal erred in its jurisdiction by misunderstanding Regulation 20(8). The regulation only triggers jurisdiction if the non-compete fee exceeds 25% of the offer price, which was not the case here. The Court emphasized the need to allow commercial entities flexibility in their transactions unless there is clear evidence of non-bona fide actions.

Key Evidence and Findings: The non-compete fee was less than 25% of the offer price. The appellants had entered into agreements with the Bangur group, including a non-compete agreement, which SEBI and the Tribunal scrutinized, questioning the eligibility of certain individuals for the non-compete fee.

Application of Law to Facts: The Court applied Regulation 20(8) and concluded that SEBI's jurisdiction was not triggered as the non-compete fee did not exceed the stipulated percentage. The appellants' perception of a competitive threat from certain individuals was deemed reasonable.

Treatment of Competing Arguments: SEBI argued that the non-compete fee was a disguised control premium. The Court rejected this, emphasizing the appellants' commercial judgment and the lack of evidence for SEBI's claim.

Conclusions: The Court concluded that the appellants were not obligated to pay a non-compete fee to public shareholders and that SEBI's intervention was unwarranted.

Issue 2: Validity of Non-Compete Agreement

Relevant Legal Framework and Precedents: The Tribunal questioned the validity of the non-compete agreement, asserting it was a sham to deprive shareholders of a fair price. The Court referenced the Takeover Code and its amendments, highlighting the regulatory framework for non-compete fees.

Court's Interpretation and Reasoning: The Supreme Court criticized the Tribunal's partial invalidation of the non-compete agreement. It argued that the agreement should be considered as a whole, either entirely valid or invalid, not selectively.

Key Evidence and Findings: The Tribunal had split the agreement's validity among different promoter entities, which the Court found unreasonable.

Application of Law to Facts: The Court held that the non-compete agreement was genuine and not a sham, as there was no evidence to suggest otherwise.

Treatment of Competing Arguments: SEBI's argument that the agreement was a sham was rejected due to lack of evidence and unreasonable splitting of the agreement's validity.

Conclusions: The Court upheld the validity of the entire non-compete agreement, dismissing the Tribunal's partial invalidation.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning: "The jurisdiction of SEBI would be exercisable only in an extremely rare case and only if SEBI was in a position to ex facie conclude that the transaction involving the takeover of the target company was not bona fide."

Core Principles Established: The judgment emphasized the importance of respecting commercial decisions unless there is clear evidence of non-bona fide actions. It also highlighted the need for regulatory authorities to exercise jurisdiction only when explicitly warranted by regulations.

Final Determinations on Each Issue: The Supreme Court allowed the appeal, setting aside the orders of SEBI and the Securities Appellate Tribunal. It concluded that the appellants were not required to pay a non-compete fee to public shareholders and upheld the validity of the non-compete agreement.