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TMI Blog2010 (7) TMI 289X X X X Extracts X X X X X X X X Extracts X X X X ..... air and lawful or whether the offer price could not be less than rupees one hundred and sixty only (Rs. 160) per share? This is the question that falls for consideration in these two appeals. A correct answer to the question requires a proper construction and understanding of certain provision of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (the 'SEBI Takeover Regulations' or 'Takeover Code'). 2. The facts of the case are fairly simple and are admitted on all sides. The two appeals arise from almost identical facts but in this judgment we would be referring to the paper book of Civil Appeal No. 7148 of 2009. 3. On 3-10-2007 Ranbaxy Laboratories Limited (respondent No. 3), a company incorporated and registered under the Indian Companies Act, entered into a Share Purchase and Share Subscription Agreement jointly with Zenotech (respondent No. 4 and its promoter, Dr. Jairam Chigurupati (respondent No. 1 in Civil Appeal No. 7148). The agreement provided for Ranbaxy to purchase from Zenotech's promoters a large block of equity shares (78,78,906 in number), representing 27.35 per cent of the company's fully paid-up equity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne's case that the acquisition of Zenotech's shares and control by Ranbaxy was at the instance of Daiichi or it was in furtherance of some overt or covert understanding between the two. 5. On 11-6-2008 Daiichi (the appellant in these two appeals) entered into a Share Purchase and Share Subscription Agreement (the 'SPSSA') jointly with (i) Malvinder Singh and others, the promoters of Ranbaxy, and (ii) Ranbaxy Laboratories Ltd. under the agreement, Daiichi would acquire 30.91 per cent of the fully paid-up equity share capital of Ranbaxy by buying a sufficiently large block of shares from the company's promoters. In addition, Daiichi would subscribe to (i) shares, representing in the aggregate 11 per cent of the fully paid-up equity share capital of Ranbaxy, and (ii ) 2,38,34,333 share warrants, each warrant exercisable for one equity share of Ranbaxy. On the same day Ranbaxy informed the Stock Exchanges that in the meeting held on that date its Board of Directors had ratified the terms of the SPSSA and had decided to seek the approval of the company's shareholders for issuance of the shares and the warrants to Daiichi, on preferential basis, as stipulated in the SPSSA. In this lette ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade in the public announcement by Daiichi, N. Narayanan respondent No. 1 in Civil Appeal No. 7314 of 2009, who was holding 63,000 shares in Zenotech made a complaint to the Securities and Exchange Board of India (SEBI) (vide letters dated January 19, March 5, April 1, April 15, and May 7, 2009). He claimed that the offer price for Zenotech shares could not be less than rupees one hundred and sixty (Rs. 160) per share and requested the SEBI to direct Daiichi to revise the offer price accordingly and also to pay interest at the rate of 15 per cent for the delay in coming out with the public announcement. 7. Respondent No. 1 in Civil Appeal No. 7148 of 2009, Dr. Chigurupati who was the Director, founder and promoter of Zenotech and who along with his wife was holding 26 per cent equity shares in Zenotech made a similar complaint to SEBI through a detailed representation dated 27-1-2009. The SEBI after due consideration of the matter turned down the claim of the respondents (vide letter dated 18-6-2009 in the case of N. Narayanan's complaint and letter dated 22-6-2009 in the case of the complaint of Dr. Chigurupati). 8. Against the decision of the SEBI, Dr. Chigurupati and N. Narayan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iii) The average of the weekly high and low of the closing prices of shares of the Target Company on BSE during the 26 weeks period preceding the date of public announcement to shareholders of RLL. Rs. 113.62 (iv) The average of the daily high and low prices of the shares of the Target Company on BSE during the 2 week period preceding the date of public announcement to shareholders of RLL. Rs. 103.51 (v) Highest price paid by Acquirer for any acquisition (including by way of allotment in a public or rights or preferential issue) during the 26 weeks prior to the date of the P.A. N.A. (vi) The average of the weekly high and low of the closing prices of shares of target company on BSE during the 26 weeks period preceding the date of the P.A. Rs. 106.03 (vii) The average of the daily high and low prices of shares of target company on BSE during the 2 weeks period preceding the date of the P.A. Rs. 109.52" 10. Now is the time to take a look at the statutory provisions controlling and regulating such transactions and to see how far the steps taken by Daiichi/Ranbaxy were in conformity with the mandates of the law. The relevant provisions are to be found in the Secu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii)a company with any of its directors, or any person entrusted with the management of the funds of the company; (iii)directors of companies referred to in sub-clause (i) of clause (2) and their associates; (iv)mutual fund with sponsor or trustee or asset management company; (v)foreign institutional investors with sub-account(s); (vi)merchant bankers with their client(s) as acquirer; (vii)portfolio managers with their client(s) as acquirer; (viii)venture capital funds with sponsors; (ix)banks with financial advisers, stock brokers of the acquirer, or any company which is a holding company, subsidiary or relative of the acquirer : Provided that sub-clause (ix) shall not apply to a bank whose sole relationship with the acquirer or with any company, which is a holding company or a subsidiary of the acquirer or with a relative of the acquirer, is by way of providing normal commercial banking services or such activities in connection with the offer such as confirming availability of funds, handling acceptances and other registration work; (x)any investment company with any person who has an interest as director, fund manager, trustee, or as a shareholder having not less than 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accordance with the provisions of law, fifteen per cent or more but less than fifty five per cent of the shares or voting rights in a company. At the end of regulation 11 there is an Explanation that applies both to regulations 10 and 11. The Explanation is relevant for our purpose and it reads as follows : "Explanation.-For the purposes of regulation 10 and regulation 11, acquisition shall mean and include,- (a)direct acquisition in a listed company to which the regulations apply; (b)indirect acquisition by virtue of acquisition of companies, whether listed or unlisted, whether in India or abroad." 19. Regulation 10, as seen above makes it obligatory for an "acquirer" acquiring fifteen per cent or more of shares or voting rights in a listed company to make a public announcement to acquire shares of that company. Regulation 14 prescribes the time-limit within which the public announcement stipulated in regulation 10 is to be made. Regulation 14 along with its marginal heading reads as follows : "14. Timing of the public announcement of offer.-(1) The public announcement referred to in regulation 10 or regulation 11 shall be made by the merchant banker not later than four work ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and indirectly in case of the latter. The period of time within which Daiichi was required to make the public announcement in respect of the two target companies (the former directly and the latter indirectly) were prescribed in sub-regulation (1) (not later than four working days of entering into an agreement for acquisition of shares or voting rights) and sub-regulation (4) (within three months of consummation of such acquisition or change in control . . . .) respectively of regulation 14. 21. It needs to be stated here that sub-regulation (4) was inserted in regulation 14 by the Second Amendment Regulation, 2002 with effect from 9-9-2002 and before that date regulation 14 ended at sub-regulation (3). This means that before 9-9-2002 the Takeover Code in regulation 14(1), allowed only four days time for making the public announcement as required under regulation 10 for both direct and indirect acquisitions. In other words, in case the direct acquisition of a company would lead to the indirect acquisition of another target company the acquirer would be obliged to make the public announcements for both the target companies (direct and indirect) not later than four working days of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the future plans are set out, the public announce-ment shall also set out how the acquirers propose to implement such future plans : Provided further that the acquirer shall not sell, dispose of or otherwise encumber any substantial asset of the target company except with the prior approval of the shareholders;" 23. Then comes regulation 20 which deals with the "offer price" and is very important for our purpose. Insofar as relevant for the present it is reproduced below : "20. Offer price.-(1) The offer to acquire shares under regulation 10, 11 or 12 shall be made at a price not lower than the price determined as per sub-regulations (4) and (5). (2) The offer price shall be payable- (a)in cash; (b)by issue, exchange and/transfer of shares (other than preference shares) of acquirer company, if the person seeking to acquire the shares is a listed body corporate; or (c)by issue, exchange and, or transfer of secured instruments of acquirer company with a minimum 'A' grade rating from a credit rating agency registered with the Board; (d)a combination of clause (a), (b) or (c ) : Provided that where the payment has been made in cash to any class of shareholders for acquiring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Public Sector Undertaking, as quoted on the stock exchange where its shares are most frequently traded, shall be the date preceding the date when the Central Government or the State Government opens the financial bid. (5) Where the shares of the target company are infrequently traded, the offer price shall be determined by the acquirer and the merchant banker taking into account the following factors : (a)the negotiated price under the agreement referred to in sub-regulation (1) of regulation 14; (b)the highest price paid by the acquirer or persons acting in concert with him for acquisitions, if any, including by way of allotment in a public or rights or preferential issue during the twenty-six week period prior to the date of public announcement; (c)other parameters including return on net worth, book value of the shares of the target company, earning per share, price earning multiple vis-a-vis the industry average : Provided that where considered necessary, the Board may require valuation of such infrequently traded shares by an independent merchant banker (other than the manager to the offer) or an independent chartered accountant of minimum ten years' standing or a pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to other provisions of this regulation. (iv)Where the offer is subject to a minimum level of acceptance, the acquirer may, subject to the other provisions of this regulation, indicate a lower price for the minimum acceptance up to twenty per cent should be the offer not receive full acceptance. (12) The offer price for indirect acquisition or control shall be determined with reference to the date of the public announcement for the parent company and the date of the public announcement for acquisition of shares of the target company, whichever is higher, in accordance with sub-regulation (4) or sub-regulation (5)." 24. In order to clearly understand the ways in which the offer price is to be determined in the case of an indirect takeover of a company, as in the present case, it would be useful to examine regulation 20 from the rear end, that is to say starting from sub-regulation (12). This may sound a little strange but it is because sub-regulation (12) was introduced in the Takeover Code later, along with and as a consequence of insertion of sub-regulation (4) of regulation 14 to deal specifically with the offer pricing of the shares of a target company the acquisition of which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed unchanged and did not undergo any amendments following the introduction of sub-regulation (4) in regulation 14 and sub-regulation (12) in regulation 20. This is to say that the provisions of sub-regulations (4) and (5) apply both to cases of direct and indirect takeover; they were not designed only for cases of indirect takeover. 26. Sub-regulation (5) of regulation 20 lays down the method for determining the offer price for a company the shares of which are infrequently traded. That is not the case with Zenotech; hence, we may leave out sub-regulation (5). This takes us to sub-regulation (4) of regulation 20. Sub-regulation (4) prescribes three ways for determining the share price with the stipulation that the highest among them would be the offer price. Clause (a) of sub-regulation (4) refers to the negotiated price under the agreement. This would clearly apply to a case of direct takeover and shall have no application to a case of indirect takeover like the present one. Clause (b) is based on the price paid by the acquirer or persons acting in concert with him for acquisition of shares of the target company within the period of twenty six weeks prior the date of the public a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mined. Thus, according to the respondents, clause (b) of regulation 20(4) was clearly attracted and the price (Rs. 160) under that clause being higher than the price (Rs. 113.62) worked out in terms clause (c) that alone could form the offer price in the public announcement. 29. The Securities Appellate Tribunal accepted the respondents' contention observing and holding as follows : "It is Daiichi's own case, as is clear from the public announcement made to the shareholders of the target company, that Ranbaxy became its subsidiary on October 20, 2008 when the acquisition of Ranbaxy got completed. Being a subsidiary, Ranbaxy shall be deemed to be acting in concert with Daiichi with effect from that date as per regulation 2(1)(e)(2)( i) of the Takeover Code. According to this regulation, "person acting in concert" comprises a company, its holding company or subsidiary unless the contrary is established. There is no question of the contrary being established in the instant case because Daiichi itself had made it known in the public announcement to the shareholders of the target company that Ranbaxy had become its subsidiary on October 20, 2008. It is, thus, clear that on January 19, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e SEBI submitted that the judgment of the Appellate Tribunal coming under appeal was based on a complete misinterpretation of the expression "person acting in concert" as defined in regulation 2( e) of the Takeover Regulations. Taking a position even more forthright than the appellant, the learned Attorney General contended that the Daiichi and Ranbaxy never came within the definition of "person acting in concert". He submitted that the Appellate Tribunal erred in assuming that "being a subsidiary, Ranbaxy shall be deemed to be acting in concert with Daiichi as per regulation 2(e )(2)(i ) of the Takeover Code". The Appellate Tribunal also missed the true import of the words "unless the contrary is established" at the conclusion of regulation 2(e)(2). The Attorney General submitted that the deeming provision under regulation 2(e)(2) needs to be read and understood in context and as part of the whole definition of "person acting in concert". He submitted that there may be two companies, one being the subsidiary of the other and yet no occasion may arise where they can be said to comprise "persons acting in concert" within the meaning of the Takeover Code. He submitted that the defini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... announcement acting in concert with the acquirer. This is exactly the basis of the Appellate Tribunal's judgment and if that is accepted the conclusion arrived at by the Tribunal simply follows. Ranbaxy was a person acting in concert with Daiichi on 19-1-2008, the date of the public announcement made by the latter for the Zenotech shares. Ranbaxy had purchased Zenotech shares during the period January 16 to 28, 2008 that fell within the twenty six weeks period from 16-6-2008, the date of the public announcement made by Daiichi for Ranbaxy shares. Hence, attracting regulation 20(4)(b). 36. Mr. Divan made additional submissions in support of the view taken by the Appellate Tribunal upholding the respondents' claim. He submitted that regulation 2(1)(e)(1) expressly contemplates a situation where the parties agree to acquire shares or voting rights in the future. Hence, an agreement was sufficient to comprise "persons acting in concert" and no actual acquisition was necessary. He further pointed out that the definition of "persons acting in concert" in regulation 2(1)(e)(1) applies not only to acquisition of shares but also extends to voting rights. Hence, even an agreement between tw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns. Mr. Divan submitted that if the submission of the appellant and the SEBI are accepted than the result would be as follows : (1)Since there is no fresh acquisition and C has only entered into an agreement with the financial institution for the acquisition of shares, the three persons are not yet in concert. (2)Since the earlier purchases were made before A, B or C came together as "persons acting in concert" their earlier acquisitions (4 per cent + 4 per cent + 4.5 per cent) cannot be aggregated with the proposed fresh acquisition of 5 per cent by them after having entered into the agreement. Consequently, regulation 10 of the Takeover Code would not come into play and there would be no requirement to make a public announcement. 39. He contended that such a simple ploy would defeat the whole object and purpose of the Takeover Code. We shall presently consider the illustration given by Mr. Divan and the validity of the inferences drawn by him on that basis. 40. From the rival contentions it is clear that the real controversy among the parties is about the applicability of regulation 20(4)(b) to determine the offer price for Zenotech shares in the public announcement made by D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... persons acting in concert" must be in existence for the applicability of regulation 20(4)(b) of the Takeover Code. For this, we must first understand what is the true meaning of "persons acting in concert" as defined in regulation 2(e). 43. To begin with, the concept of "person acting in concert" under regulation 2(e)(1) is based on a target company on the one side, and on the other side two or more persons coming together with the shared common objective or purpose of substantial acquisition of shares etc. of the target company. Unless there is a target company, substantial acquisition of whose shares etc. is the common objective or purpose of two or more persons coming together there can be no "persons acting in concert". For, de hors the target company the idea of "persons acting in concert" is as irrelevant as a cheat with no one as victim of his deception. Two or more persons may join hands together with the shared common objective or purpose of any kind but so long as the common object and purpose is not of substantial acquisition of shares of a target company they would not comprise "persons acting in concert". 44. The other limb of the concept requires two or more persons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hin the meaning of regulation 2(e)(1) of the Takeover Code. 46. We may now proceed to the deeming provision as contained in sub-clause (2) of regulation 2(e). Here, it would be better to restate the obvious that the deeming provision cannot do away either with the target company or the common objective or purpose of substantial acquisition of shares etc. of the target company shared by two or more persons because to do so would be destructive of the very idea of "persons acting in concert" as defined, in sub-clause (1) of regulation 2(e ). We, therefore, see no merit in the submission, as urged at one stage, on behalf of the respondents that sub-regulation (2) of regulation 2(e) containing the deeming clause should be seen as a 'stand alone' provision, independent of sub-regulation (1) of regulation 2(e). The deeming provision under sub-regulation (2) operates only within the larger framework of sub-regulation (1) of regulation 2(e). 47. Then what does the deeming provision do? The deeming provision simply says that in case of nine specified kinds of relationships, in each category, the person paired with the other would be deemed to be acting in concert with him/it. What it mean ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmal), directly or indirectly co-operate by acquiring or agreeing to acquire shares or voting rights in the target company or to acquire control over the target company. The word "comprises" in regulation 2(1)(e) is significant. It applies to regulation 2(1)(e)(2) as much as to regulation 2(1)(e)(1). A fortiori, a person deemed to be acting in concert with others is also a person acting in concert. In other words, persons who are deemed to be acting in concert must have the intention or the aim of acquisition of shares of a target company. It is the conduct of the parties that determines their identity. Whether a person is or is not acting in concert with the acquirer would depend upon the facts of each case. In order to hold that a person is acting in concert with the acquirer or with another person it must be established that the two share the common intention of acquisition of shares of some target company. For example, there is no hard and fast rule that every Foreign Institutional Investor (FII) would share with the sub-account(s) the common objective of acquiring substantial stakes or control in some target company. Whether in a given case an FII and his sub-account(s) have a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... announcement for the secondary and indirectly targeted company by insertion of sub-regulation (4) in regulation 14. Sub-regulation (12) of regulation 20 obliges the acquirer to work out the best value for the shares of the indirectly targeted company as obtaining on the date of the public announcement for the parent target company as well as on the date of the public announcement for the concerned indirectly targeted company and then to offer the shareholders the better of the two values. This is for the simple reason that the extension allowed for making the public announcement for the indirectly targeted company should not cause any prejudice to its shareholders. Sub-regulation (12) does not in any way affect sub-regulation (4) which remains unamended and it certainly does not alter the meaning of "persons acting in concert" as used in that sub-section. 52. We are clearly of the view that for the application of regulation 20(4)(b) it is not relevant or material that the acquirer and the other person, who had acquired the shares of the target company on an earlier date, should be acting in concert at the time of the public announcement for the target company. What is material is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not even a remotely possible view of the matter. 57. Before parting with the records of the case we would like to say that, in arriving at the correct meaning of the provisions of the Takeover Code specially regulations 14(4) and 20(12) we were greatly helped by the reports of the two Committees headed by Justice Bhagwati. We mention the fact especially because as per the legislative practice in this country, unlike an Act, a regulation or any amendments introduced in it are not preceded by the "Object and Purpose" clause. The absence of the object and purpose in the regulation or the later amendments introduced in it only adds to the difficulties of the court in properly construing the provisions of regulations dealing with complex issues. The court, so to say, has to work in complete darkness without so much as a glimpse into the mind of the maker of the regulation. In this case, it was quite apparent that the 1997 Takeover Code and the later amendments introduced in it were intended to give effect to the recommendations of the two Committees headed by Justice Bhagwati. We were, thus, in a position to refer to the relevant portions of the two reports that provided us with the ra ..... X X X X Extracts X X X X X X X X Extracts X X X X
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