Withdrawal of Voluntary Offer: Takeover Code

In a recent landmark order SEBI has held that that a voluntary offer once made under the takeover code can only be withdrawn under exceptional circumstances and a mere delay in the public offer coupled with fall in market price or devaluation of Earning Per Share (EPS) cannot be reasons to permit the withdrawal of a public offer. Although the ruling is based on the SAST Regulations 1997 (which now stands repealed by the SAST Regulations, 2011), the ruling still carries significance as the provision relating to withdrawal of offer is substantially the same in both the regulations. But before we discuss the ruling let me state the facts briefly.

Sometime in November, 2009 Mr. Promod Jain and Pranidhi Holdings Private Limited (acquirers) along with J.P. Financial Services Private Limited ( person acting in concert (PAC)) made a voluntary public announcement (not been triggered by any agreement) in accordance with regulation 10 and 12 read with regulation 14 of the SAST Regulations 1997 ("1997 regulations" or "old takeover code") to acquire 25% equity shares of the target company. As on the date of the public announcement, the acquirers and the PAC collectively held 6.47% equity shares of the target company. The controversy arose when the acquirers and the PAC requested SEBI for a permission to withdraw the open offer under regulation 27(1)(d) of the 1997 regulations in response to several complaints received against the target company and its promoters.

The factual ground(s) agitated by the acquirers for the withdrawal of the open offer was three fold. Firstly, it was contented that SEBI had unreasonably delayed in issuing observations to the draft letter of offer (DLO). Secondly, it was contended that the management/promoters of the target company had acted in a mala fide manner in the sense it had suppressed material facts, depleted valuable fixed assets of the company in gross violation of regulation 23 (1) (a) & (c) of the 1997 regulations and siphoned off funds by advancing fictitious advances and loans. Lastly, it was contended that the financial health of the target company had deteriorated in that the profitability of the target company had significantly declined from the profits in the periods just prior to making the public announcement resulting in negative EPS.

The legal submissions made by the acquirer in support of the above grounds were (a) the offer was voluntary and hence it did not give any vested right to shareholders as in the case of a triggered offer, (b) regulation 27 (1)(d) gives SEBI plenary discretion to allow withdraw of an open offer (c) the SAT ruling in the Nirma case has to be distinguished as it was based on a mandatory offer whereas in the present case the promoters had perpetrated the fraudulent activities after the public announcement was made (d) the public offer has to be governed by the provisions of the Indian Contract Act, 1872 and since the offer has not been accepted by the shareholders of the target company (no conclusion of the contract due to no acceptance) the offer can be withdrawn and (e) SAT has held in B.P. Amco Plc. and Castrol Limited v. SEBI and Luxottica Group SPA v. SEBI that when the offer does not materialize or in genuinely difficult situations the acquirer can withdraw the offer.

On the first aspect (a) SEBI held that a voluntary offer is governed by the same provisions as a mandatory offer i.e. regulation 10 and 12 of the SAST regulations 1997 and hence, once the public announcement is made there is no difference between the two. They are governed by the same principles which is inter alia incorporated in regulation 22(1) which states that "the public announcement of offer to acquire the shares of a target company shall be made only when the acquirer is able to implement the offer" and the withdrawal of the same has to be in accordance with regulation 27(1). on the second aspect (b) SEBI held that the phrase 'such circumstances' as incorporated in regulation 27(1)(d) has to be read ejusdem generis in that SEBI has the power to permit withdrawal of open offer when the circumstances are similar to that in regulation 27(1)(b) & 27(1)(c). This view is supported by the Nirma case wherein the SAT had held that regulation 27 (b) to (d) has to be construed strictly and the phrase "such circumstances" in clause (d) had to be construed ejusdem generis i.e. there has to be an element of impossibility in implementing the offer. SEBI relied on the Nirma case on the ground that the ruling was based on the interpretation and scope of regulation 27 and was not fact specific (this answers the third aspect (c)).

The novel fourth argument (d) also did not find favour with SEBI and rightly so, as SAST Regulations is a special law and all public offers such as the one in this case are to be governed by the SAST and not the Indian Contact Act. If the argument of the acquirer were to be accepted then it would lead to a peculiar situation wherein the acquirers would withdraw the public offer even when only some of the shareholders would have tendered their shares and others would have not. On the final aspect (e) SEBI distinguised the B.P.Amco and the Luxottica and rightly so on the ground that both the cases were based on regulation 27(1) as it stood prior to the amendment in 2002 and the public offer in those cases were made subject to the fulfillment of certain conditions which included statutory approvals.

On the factual aspect of SEBI held that several complaints had been received against the acquirers and the PAC and hence there was some delay in issuing the observations. Further, SEBI held that an acquirer who wishes to invest a substantial sum of money and acquire control of the target company ought to have exercised proper due diligence before making the public announcement. This was buttered by the fact that the acquirer and the PAC was not an outsider in the sense they were holding approximately 6% of the equity shares in the target company. On the basis of these factual and legal findings SEBI refused to grant permission to withdraw the offer.

Impact: This case demonstrates albeit indirectly one of the issues relating to hostile takeovers in India under the old takeover code. Although under the new takeover code the situation has not improved greatly, on the contrary it has made hostile takeovers nearly impossible. But based on the background of the new takeover code i.e. TRAC Report it is possible to argue that this was not the intended consequence. However ruling(s) such as the present one will create more difficulty to an already hostile climate for hostile takeovers!