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TMI Blog2016 (11) TMI 297X X X X Extracts X X X X X X X X Extracts X X X X ..... urt. The general principle is that public offer once made cannot be withdrawn. Exception to the rule is the specified situations under the Regulation as laid down by this Court in above decisions particularly in Nirma Industries Limited (2013 (5) TMI 629 - SUPREME COURT OF INDIA). In the present case, though SEBI was not justified in causing delay in giving its comments on public offer, this by itself is not enough to justify withdrawal from public offer so long as the case does not fall under Regulation 27. First question is answered accordingly. To what extent unilateral action of the target company in dealing with the property of the company after a hostile public offer is made furnish cause of action to the acquirers to withdraw the public offer and whether in the present case, decision not permitting withdrawal of public offer is justified? - Held that:- In the present case, the SEBI as well as the SAT have concurrently held that public offer is capable of being carried out and has not become impossible. The assets are available with the target company. Finding has also been recorded about the circumstances preceding the public offer and the conduct of the acquirer which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Private Limited (the merchant banker) in accordance with regulations 10 and 12 read with regulation 14. As on the date of the PA, the acquirers and PAC collectively held 11, 39, 002 equity shares (6.47%) of the target company. The PA was voluntarily made by the acquirers and the PAC to acquire 44, 02, 201 equity shares (25%) of the target company from its equity shareholders at a price of ₹ 101/- (the offer price) per equity share. At that time, market price of the target company shares was ₹ 109/- per share. Networth of the target company as on 31st March, 2009 was ₹ 42.44 crores. Net current assets were ₹ 134.4 crores and gross sales were ₹ 173.68 crores. The offer was for hostile takeover of the target company. The PA mentioned that the prime object of the offer was to acquire substantial shares/voting rights accompanied with the change and control of the management of the target company. The acquisition was in the nature of strategic investment for diversification and growth and to reap the benefit of corporate opportunities. The draft letter of offer also mentioned that the PAC had advanced loan against shares of the target company and on account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e target company had deteriorated substantially. ORDER OF SEBI 6. The SEBI vide order dated 13th April, 2012 declined to permit withdrawal of the PA but observed that alleged violation of Regulation 23 by the target company shall be investigated. It was held that as per Regulation 23(1), the target company was entitled to dispose of its assets with the approval of the shareholders even after the PA. Correspondence which the SEBI had with the acquirers was referred to, with a view to explain the delay in deciding the DLO. It was observed that the SEBI had informed the merchant banker of the appellants on 3rd February, 2010 that it was not competent to administer the authenticity of the process of Resolution in the General Body Meeting (GBM) dated 18th January, 2010. The merchant banker vide letter dated 5th May, 2010 informed the SEBI that the acquirers had reached a settlement with the target company and withdrawn their petition before the Company Law Board (CLB) against the Resolution dated 18th January, 2010. SEBI had also advised the merchant banker that it had not been provided any material in support of the allegation of violation of Regulation 23 by the target company i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned by principles of withdrawal of an offer under the Contract Act, 1872. ORDER OF SAT 7. The above view has been affirmed by the SAT in its impugned order (by majority). As regards the timeline stipulated in Regulation 18, it was observed that under the second proviso thereto, the SEBI could take time in making inquiry on a complaint and thereafter could call for a revised letter of offer with or without re-scheduling the date of opening or closing the offer. However, it was observed that in the present case, SEBI was wholly unjustified in taking more than two years for offering its comments on the letter of offer submitted by the appellants. This, however, did not constitute a ground to permit withdrawal of the PA. As regards the contention that the public offer was frustrated and became impossible of implementation on account of encumbering of the most valuable property of the target company in violation of Regulation 23 and other steps of the promoters making the target company a shell company, it was observed that the target company had taken decision to develop its Vile Parle property even before the PA. Appellant No.1 had given his offer for joint development of the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lation 23 of SAST Regulations, 1997. It was also alleged in the Company Petition that the promoters of GTL have been mismanaging the affairs of the company and have siphoned of huge amounts from the company, as a result whereof, there has been deep decline in the performance and profitability of the company. Appellants had also sought an order restraining GTL from holding EGM which was scheduled to be held on January 18, 2010. 16. Company Law Board in its order dated January 19, 2010, recorded statement made by counsel for GTL that in the EGM held on January 18, 2010 requisite resolutions have been passed in relation to development of Vile-Parle property and in implementation of the said resolution third party rights have been created. By that order Company Law Board directed that during the pendency of Company Petition No. 3 of 2010 GTL shall not act upon resolution dated January 18, 2010 any further. From aforesaid order passed by Company Law Board it is clear that in view of resolution passed in the EGM held on January 18, 2010, violation of regulation 23 committed by GTL in relation to development of Vile-Parle property stood rectified. Dispute, if any in relation to pass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed and has become impossible of performance cannot be accepted, because, both grounds based on which appellants had sought withdrawal of public offer, were in fact settled by appellants on the basis of oral assurance given by promoters of GTL and further, for the alleged breach of oral assurance, appellants have filed Suit in the Bombay City Civil Court and obtained stay of development of Vile-Parle property and that stay is admitted operating till date. 23. Strong reliance was placed by counsel for appellants on decision of SEBI dated February 14, 2014 wherein penalty of ₹ 1 crore has been levied against the promoters of GTL interalia for violating regulation 23 of SAST Regulations, 1997. No doubt that entering into an MOU by GTL with Sheth Developers on November 26, 2009 without obtaining approval of general body of shareholders was in violation of regulation 23 of SAST Regulations, 1997. However, admittedly on January 18, 2010 the general body of shareholders has authorized GTL to enter into Joint Development Agreement is in respect of Vile-Parle property. In view of approval granted by the general body of shareholders on January 18, 2010, grievance of appellants tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of the SEBI to take speedy decision and if there was unexplained delay resulting in prejudice to the appellants-acquirers, the appellants are entitled to be absolved of the liability to honour the offer. GTL had become a BIFR company on account of siphoning off funds by the promoters. It was submitted that in absence of obligation to approve the offer within reasonable time, the promoters could take steps to siphon the funds or dispose of the assets which could prejudice the interests of the acquirer. Thus, it could not be held that the acquirer was indefinitely bound by the offer. Reference was also made to the timeline provided in Regulation 22 and the provisions of Regulation 23. It was submitted that while normal ups and downs in the market may not be a ground to permit withdrawal of offer, unilateral action of the promoters resulting in transfer of assets could certainly be the ground to permit withdrawal of offer. The object of binding an acquirer to the offer is to protect the interest of the shareholders but this was required to be balanced with the interest of the acquirer. If the assets are unduly transferred by the promoters after the PA, the acquirer was entitled t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e SEBI to keep the open offer in abeyance till action was taken against the promoters. This justifies the prayer of the appellants to withdraw the open offer. 12. Shri C.A. Sundaram, learned senior counsel for the appellants submitted that all the members of the SAT (majority as well as minority) have held the delay by SEBI to be unjustified but still, on erroneous interpretation, right of the appellants to withdraw the public offer has not been upheld. Reference was made to the complaint about transfer of valuable property of the Company which was un-encumbered at the time of PA. The funds raised from the transaction have been siphoned off. One of the key promoters was arrested by the Economic Offences Wing of the Police and remained in jail for one and a half years. Chargesheet was filed against him. The financial ratio of the target company reflects manner in which financial position quickly deteriorated after the PA. The petition filed by the acquirers before the Company Law Board was withdrawn on the assurance of the promoters that the assets will not be encumbered without the public auction. Thereafter, the matter was pending in the civil suit. Thus, there was a breach of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany continued to own the Vile Parle property worth ₹ 2000 crores. 16. Shri Datar submitted that more than 43 complaints/letters were received which were to be dealt with by SEBI. In such circumstances, it could not be held that there was undue delay on the part of the SEBI in dealing with the DLO. 17. It was submitted that the appellants ought to have exercised due diligence before making the PA. The appellants were not strangers and had 6.47% shares. They had advanced loan of ₹ 8.5 crores and acquired shares worth ₹ 66.33 lakhs before the PA. They were aware of the FIR and alleged acts of mismanagement they had resorted to public offer out of frustration against the decision of the target company developing the Vile Parle property with Sheth Developers. They settled the matter before the Company Law Board with the target company and also approached the civil court for alleged breach of settlement and obtained stay of development of the Vile Parle property. In these circumstances, the plea of frustration could not be allowed to be raised by the appellants. The PA could not be allowed to be withdrawn merely on the ground that the acquirers find it not to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ept in mind the following principles : i. Equality of treatment and opportunity to all shareholders. ii. Protection of interests of shareholders. iii. Fair and truthful disclosure of all material information by the acquirer in all public announcements and offer documents. iv. No information to be furnished by the acquirer and other parties to an offer exclusively to any one group of shareholders. v. Availability of sufficient time to shareholders for making informed decisions. vi. An offer to be announced only after most careful and responsible consideration. vii. The acquirer and all other intermediaries professionally involved in the offer, to exercise highest standards of care and accuracy in preparing offer documents. viii. Recognition by all persons connected with the process of substantial acquisition of shares that there are bound to be limitations on their freedom of action and on the manner in which the pursuit of their interests can be carried out during the offer period. ix. All parties to an offer to refrain from creating a false market in securities of the target company. x. No action to be taken by the target ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erchant banker and the acquirer shall carry out such changes before the letter of offer is despatched to the shareholders : [Provided further that if the disclosures in the draft letter of offer are inadequate or the Board has received any complaint or has initiated any enquiry or investigation in respect of the public offer, the Board may call for revised letter of offer with or without rescheduling the date of opening or closing of the offer and may offer its comments to the revised letter of offer within seven working days of filing of such revised letter of offer. (3) The acquirer shall, while filing the draft letter of offer with the Board under sub-regulation (1), pay a fee as mentioned in the following table, by bankers cheque or demand draft drawn in favour of the Securities and Exchange Board of India . General Objections of the acquirer. 22. (1) The public announcement of an offer to acquire the shares of the target company shall be made only when the acquirer is able to implement the offer. (2) Within 14 days of the public announcement of the offer, the acquirer shall send a copy of the draft letter of offer to the target company at its r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the regulations. 22. In Nirma Industries Limited (Supra), the acquirer after making PA sought withdrawal therefrom on the ground of embezzlement of funds by the target company. SEBI rejected the application with the observation that the acquirer ought to have used due diligence prior to making the public offer. Rejecting the plea that the embezzlement and siphoning off of funds by the target company could not have been found by third party even after exercising diligence, this Court held under the scheme of the takeover code public offer once made could not be withdrawn so as to deprive the shareholders of their valuable right to have exit option and also to ensure that public announcement is not made by way of speculation. The scheme of takeover code was held to be as follows: 59. A conspectus of the aforesaid Regulations would show that the scheme of the Takeover Code is: (a) to ensure that the target company is aware of the substantial acquisition; (b) to ensure that in the process of the substantial acquisition or takeover, the security market is not distorted or manipulated; and (c) to ensure that the small investors are given an option to exit, that is, they ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such circumstances in clause (d) would also be restricted to a situation which would make it impossible for the acquirer to perform the public offer. The discretion has been left to the Board by the legislature realising that it is impossible to anticipate all the circumstances that may arise making it impossible to complete a public offer. Therefore, certain amount of discretion has been left with the Board to determine as to whether the circumstances fall within the realm of impossibility as visualised under clauses (b) and (c). In the present case, we are not satisfied that circumstances are such which would make it impossible for the acquirer to perform the public offer. The possibility that the acquirer would end-up making losses instead of generating a huge profit would not bring the situation within the realm of impossibility. 70. Mr. Venugopal, in our opinion, has rightly submitted that the Takeover Regulations, which is a special law to regulate substantial acquisition of shares and takeovers in a target company lays down a self-contained code for open offer; and also that interest of investors in the present case required that they should be given an exit route ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vance. 24. As regards the effect of delay on the part of SEBI, it was observed: 94. A perusal of the aforesaid Regulation clearly shows that the acquirer is required to file the draft letter of offer containing disclosures as specified by the Board within a period of 14 days from the date of public announcement. Thereafter, letter of offer has to be dispatched to the shareholders not earlier than 21 days from its submission to the Board. Within 21 days, the Board is required to specify changes if any, that ought to be made in the letter of offer. The merchant banker and the acquirer have then to carry out such changes before the letter of offer is dispatched to the shareholders. But there is no obligation to do so. Under the second proviso, the Board may call for revised letter of offer in case it finds that the disclosures in the draft letter of offer are inadequate or the Board has received any complaint or has initiated any enquiry or investigation in respect of the public offer. It is important to notice that in the first proviso the Board does not have any obligation to specify any change in the draft letter of offer within a period of 21 days. In the present case, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed is diluted, if not frustrated. It must be remembered that SEBI is the watchdog of the securities market. It is the guardian of the interest of the shareholders. It is the protective shield against unscrupulous practices in the securities market. Therefore, SEBI like any other body, which is established as a watchdog, ought not to act in a lackadaisical manner in the performance of its duties. The time-frame stipulated by the Act and the Takeover Regulations for performing certain functions is required to be maintained to establish the transparency in the functioning of SEBI. 31. Having said this, we are afraid such delay is of no assistance to the respondent. It will not result in nullifying the action taken by SEBI, even though belated. Ultimately, SEBI is charged with the duty of ensuring that every public offer made is bona fide for the benefit of the shareholders as well as acquirers. In the present case, SEBI has found that permitting the respondent to withdraw the public offer would be detrimental to the overall interest of the shareholders. The only reason put forward by the respondent for withdrawal of the offer is that it is no longer economically viable to contin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect of delay by SEBI is not enough to hold that the appellants are entitled to withdrawal of the public offer. The withdrawal has to be dealt with under Regulation 27, as held by this Court. The general principle is that public offer once made cannot be withdrawn. Exception to the rule is the specified situations under the Regulation as laid down by this Court in above decisions particularly in Nirma Industries Limited (Supra) (2013) 8 SCC 20 para 67 . In the present case, though SEBI was not justified in causing delay in giving its comments on public offer, this by itself is not enough to justify withdrawal from public offer so long as the case does not fall under Regulation 27. First question is answered accordingly. Re. Question (ii) 27. As already observed above, under the scheme of the regulations public offer has to be made after due diligence (Regulation 22). Obligation of the board of directors under Regulation 23 against alienation of assets, issuance of unissued securities carrying voting rights or entering into material contracts is applicable only if approval of general body of shareholders is not obtained. We are not dealing with validity of imposition of fine on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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