TMI Blog2010 (7) TMI 289X X X X Extracts X X X X X X X X Extracts X X X X ..... . Joshi, Pratap Venugopal, Ms. Surekha Raman, Dileep Poolakkot, Somasekhar Sundareasan, Ananya Kumar, Ankur Saigal, Ms. Bina Gupta, Gaurav Singh, Ms. Tripti Ray, J.N. Bhushan, John Mathew and S. Dutta for the Appearing Parties. JUDGMENT Aftab Alam, J. - Whether the offer of rupees one hundred thirteen and paise sixty two only (Rs. 113.62) per share made by the appellant. M/s Daiichi Sankyo Company Ltd. in its public announcement dated 19-1-2009 for acquisition of the shares of Zenotech Laboratories Ltd. was fair 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. 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch s capital it actually received shares comprising only 2.2 per cent of the expanded share capital of the company and further that on completion of all transactions Ranbaxy s shareholding in Zenotech stood at 46.85 per cent of the latter s share capital. It may be stated here that even after the sale in terms of the agreement the promoters (Dr. Chigurupati and his family) retained a large portion of their shareholding in Zenotech. 4. It needs to be stated here that up to this stage Daiichi was nowhere on the scene. It is no one 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... int for reckoning the period during which the "acquirer", Daiichi must make the public announcement (open offer) to the shareholders of Zenotech. Daiichi duly made the public announcement in regard to Zenotech on 19-1-2009. In the public announcement, Daiichi offered rupees one hundred thirteen and paise sixty two (Rs. 113.62) for each share of Zenotech. The offer price was based on the price of the Zenotech shares quoted on the stock exchange. 6. In regard to the offer price of rupees one hundred thirteen and paise sixty two (Rs. 113.62) made 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 Appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as follows: "1.9 The shares of the Target Company are frequently traded on the BSE within the meaning of regulation 20(5) of the Regulations. The offer price of Rs. 113.62 per equity share is justified in terms of regulation 20(4) of the Regulations as it is the higher of the following:" ( i ) The negotiated price under the SPSSA# N.A. ( ii ) 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 public announcement to shareholders of RLL. N.A. ( 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 prefer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncert comprises, (1)persons who, for a common objective or purpose of substantial acquisition of shares or voting rights or gaining control over the target company, pursuant to an agreement or understanding (formal or informal), directly or indirectly co-operate by acquiring or agreeing to acquire shares or voting rights in the target company or control over the target company. (2)Without prejudice to the generality of this definition, the following persons will be deemed to be persons acting in concert with other persons in the same category, unless the contrary is established : ( i )a company, its holding company, or subsidiary or such company or company under the same management either individually or together with each other; ( 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares of that company in accordance with the provisions of the Takeover Regulations. Regulation 10, along with its marginal heading, reads as follows : "10. Acquisition of fifteen per cent or more of the shares or voting rights of any company. No acquirer shall acquire shares or voting rights which (taken together with shares or voting rights, if any, held by him or by persons acting in concert with him), entitle such acquirer to exercise fifteen per cent or more of the voting rights in a company, unless such acquirer makes a public announcement to acquire shares of such company in accordance with the regulations." 18. Regulation 11 has the marginal heading, "Consolidation of holdings" and it lays down the obligations of an "acquirer" who, together with persons acting in concert with him, has acquired, in 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 regul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll be made within four working days of acquisition of such depository receipts. (3) The public announcement referred to in regulation 12 shall be made by the merchant banker not later than four working days after any such change or changes are decided to be made as would result in the acquisition of control over the target company by the acquirer. (4) In case of indirect acquisition or change in control, a public announcement shall be made by the acquirer within three months of consummation of such acquisition or change in control or restructuring of the parent or the company holding shares of or control over the target company in India." [Emphasis supplied] 20. It is noted above that on the date Daiichi entered into the SPSSA with Ranbaxy, it became the "acquirer" both in relation to Ranbaxy and Zenotech, directly in case of the former 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... months of consummation of restructuring or arrangement by parent or holding company." Sub-regulation (4) thus got inserted in regulation 14 in pursuance of the recommendation of the second Bhagwati Committee s report. The introduction of sub-regulation (4) in regulation 14 led to further consequential additions/amendments in the Takeover Regulation that we shall see presently. 22. Regulation 16 deals with the "Contents of the public announcement of offer and clause ( ix ) provides as follows : "( ix )the object and purpose of the acquisition of the shares and future plans, if any, of the acquirer for the target company, including disclosures whether the acquirer proposes to dispose of or otherwise encumber any assets of the target company in the succeeding two years except in the ordinary course of business of the target company : Provided that where 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;" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the closing prices of the shares of the target company as quoted on the stock exchange where the shares of the company are most frequently traded during the twenty-six weeks or the average of the daily high and low of the prices of the shares as quoted on the stock exchange where the shares of the company are most frequently traded during the two weeks preceding the date of public announcement, whichever is higher : Provided that the requirement of average of the daily high and low of the closing prices of the shares as quoted on the stock exchange where the shares of the company are most frequently traded during the two weeks preceding the date of public announcement, shall not be applicable in case of disinvestment of a Public Sector Undertaking. Explanation. In case of disinvestment of a Public Sector Undertaking, the relevant date for the calculation of the average of the weekly prices of the shares of 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ( i )The highest price under clause ( b ) or the average price under clause ( c ) of sub-regulation (4) may be adjusted for quotations, if any, on cum-rights or cum-bonus or cum-dividend basis during the said period. ( ii )Where the public announcement of offer is pursuant to acquisition by way of firm allotment in a public issue or preferential allotment, the average price under clause ( c ) of sub-regulation (4) shall be calculated with reference to twenty-six week period preceding the date of the board resolution which authorised the firm allotment or preferential allotment. ( iii )Where the shareholders have been provided with an option to accept payment either in cash or by way of exchange of security, the pricing for the cash offer could be different from that of a share exchange offer or offer for exchange with secured instruments provided that the disclosures in the letter of offer contains suitable justification for such differential pricing and the pricing is subject 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 fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the acquisition of the primary target, would be determined with reference to two dates, one when the public offer was made in regard to the "Parent company" (that is, the company, the acquisition of which resulted in the takeover of the secondary target company) and the other when the public offer is made for the secondary target company and the higher of the two will be taken as the offer price. In terms of sub-regulation (12) of regulation 20, therefore, the share price of Zenotech was required to be determined as on June 16, 2008 (the date of the public announcement for Ranbaxy, the parent company) and as on January 19, 2009 (the date of the public announcement for Zenotech, the indirectly target company). Regulation 20(12) tell us the dates with reference to which the offer price is to be determined but it does not tell us how the offer price is to be determined. For that it refers us back to sub-regulations (4) and (5). It needs to be stated here that sub-regulations (4) and (5) remained 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the respondents, the provisions of regulation 20(4)( b ) are fully applicable to the case and the appellants were completely wrong in disregarding it. The respondents contend that Daiichi and Ranbaxy came together as "persons acting in concert" on 11-6-2008 when the SPSSA was signed between the two companies or, in any event, on 20-10-2008 when Ranbaxy finally became a subsidiary of Daiichi. They continued in that relationship on 19-1-2009 when Daiichi made the public announcement for the shares of Zenotech. Further, Ranbaxy had paid rupees one hundred and sixty (Rs. 160) per share for the Zenotech shares in January 2009 which falls within the period of twenty six weeks looking back from 16-6-2008, the date on which Daiichi had made the public announcement for Ranbaxy shares. In terms of regulation 20(12) the date of the public announcement for the parent company (16-6-2008) is one of two relevant dates with reference to which the offer price for acquisition of the shares of the target company (Zenotech) is to be determined. 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 pric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng in concert" would be relevant for determining the offer price for Zenotech shares in terms of regulation 20(4)( b ) read with regulation 20(12). Ranbaxy indeed became a subsidiary of Daiichi from October 20, 2009 but it did not acquire any share of Zenotech after that date or, even before that, after entering into the SPSSA with Daiichi on June 11, 2008. Any acquisition of Zenotech shares made by Ranbaxy earlier at a time when it was not a "person acting in concert" with Daiichi was of no consequence and the price paid by Ranbaxy for Zenotech shares at that time would certainly not attract sub-regulation ( b ) of regulation 20(4) of the Takeover Regulations. 31. Mr. Ashok Desai, senior counsel appearing on behalf of Ranbaxy fully supported the appellant s case. 32. The SEBI, though itself not in appeal against the judgment of the Appellate Tribunal and only impleaded as respondent in the two appeals, strongly defended its stand in rejecting the complaints made by the respondents before it. The learned Attorney General appearing for the SEBI submitted that the judgment of the Appellate Tribunal coming under appeal was based on a complete misinterpretation of the expressio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " in terms of regulation 2( e )(1) from the date of the SPSSA itself even without taking the aid of the deeming provision in regulation 2( e )(2). Mr. Sundaram further submitted that the period from January 16 to 28, 2008 fell well within twenty six weeks from 11-6-2008 and hence, the price paid by Ranbaxy for acquisition of Zenotech shares in January 2008 must be taken into reckoning for determining the offer price in the public offer made for its shares by Daiichi. 34. The submission, which Mr. Sundaram called his alternate submission, does not need much discussion to be rejected. This is for the simple reason that regulation 20(4)( b ) uses the words ". . . . during the twenty six week period prior to the date of public announcement, . . . ". It does not say "prior to date on which the acquirer and the purchaser came into the relationship of persons acting in concert". 35. The main argument of Mr. Sundaram, however, was that the expression persons acting in concert used in regulation 20(4)( b ) refers to a person who is in praesenti , that is, at the time of the public announcement acting in concert with the acquirer. This is exactly the basis of the Appellate Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he stock exchange), on different dates at different prices. The purchase by each of them (A: 4 per cent, B: 4 per cent and C: 4.5 per cent) being below 5 per cent, the threshold for disclosure, none of them is obliged to make any disclosure of their acquisitions. Further, since the purchases were not by persons acting in concert, the acquisitions cannot be aggregated and there would be no obligation on any one to make an open offer for the shares of company X. Later on, all the three persons come together. They agree to pool the benefits of their shares with one another and to takeover company X, and they further agree that they would vote together going forward. C, having the largest stake, is nominated as the lead investor and all three enter into a shareholders agreement on how to acquire more shares and make a public announcement under the takeover regulation. Following the agreement between them, C enters into an agreement with a financial institution to acquire another 5 per cent block of shares of the company X at a price much lower than the price paid by A or B for their earlier acquisitions. Mr. Divan submitted that if the submission of the appellant and the SEBI are acce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by Daiichi for Zenotech shares, sub-regulation ( b ) of regulation 20(4) would be attracted regardless of the fact that the two were not in that relationship on the dates of purchase of Zenotech shares by Ranbaxy. 41. On behalf of the respondents much argument was made to show that even before Ranbaxy became a subsidiary of Daiichi the two were covered by the definition of "persons acting in concert" on signing the SPSSA. Whether Ranbaxy became a persons acting in concert with Daiichi on signing the SPSSA or on becoming its subsidiary is one aspect of the matter but if the basis on which the Appellate Tribunal has proceeded is correct then it hardly matters if Ranbaxy was acting in concert with Daiichi on signing the SPSSA or on becoming its subsidiary, as long as it was in that relationship with Daiichi when Daiichi made the public announcement for Zenotech shares. 42. We now proceed to examine the question whether Daiichi and Ranbaxy came together in the relationship of "persons acting in concert" as claimed by the respondents and connected with it the larger question as to the stage when the relationship of "persons acting in concert" must be in existence for the appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed common objective or purpose is the sin qua non for the relationship of "persons acting in concert" to come into being. 45. The submission made on behalf of the respondents that on signing the SPSSA Ranbaxy became a person acting in concert with Daiichi overlooks this basic pre-condition and ingredient of the relationship. The consequential takeover of Zenotech and its acknowledgement are not same thing as the shared common objective or purpose of substantial acquisition of shares or voting rights or gaining control over Zenotech. As stated above, the relationship of "persons acting in concert" is not a fortuitous relationship. It can come into being only by design. Hence, unless it is shown that Daiichi and Ranbaxy entered into the SPSSA for the common objective or purpose of substantial acquisition of shares or voting rights or control over Zenotech they cannot be said to have come in the relationship of "persons acting in concert". This is not even the case of the respondents. The inevitable conclusion, therefore, is that on signing the SPSSA Daiichi and Ranbaxy did not come within the relationship of persons acting in concert within the meaning of regulation 2( e )(1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or show some definite inclination for substantial acquisition of shares etc. of the target company. 48. It needs further to be noted that the presumption created by virtue of the deeming provision is expressly left open to rebuttal as indicated by the concluding words "unless the contrary is established" occurring in sub-regulation (2). It is important to point this out here because the Appellate Tribunal has clearly misunderstood the nature and scope of the provision of rebuttal in observing as follows : "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." Regulation 2(1)( e )(2) defines "person acting in concert". It is a deeming provision. It has to be read in conjunction with regulation 2(1)( e )(1) which states that person acting in concert comprises of persons who in furtherance of a common objective or purpose of substantial acquisition of shares or voting rights or gaining control over the target company, pursuant to an agreement or understanding (formal or informal), direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... became a subsidiary of Daiichi and not before that. Hence, the purchase of Zenotech shares by Ranbaxy in January 2008 cannot be said to be by a "person acting in concert" with Daiichi. 50. In light of the discussion made above, we are of the view, that the Appellate Tribunal was in error in proceeding on the basis that the material date for Ranbaxy and Daiichi to be acting in concert was the date of the public announcement for the Zenotech shares. The Tribunal observed : "It is, thus, clear that on January 19, 2009, the material date on which the offer price for indirect acquisition is being worked out, Ranbaxy, being a subsidiary, was acting in concert with the Daiichi and that it (Ranbaxy) had paid Rs. 160 per share to the shareholders of the target company during January 16 and January 28, 2008 when it acquired their shares under the Ranbaxy-Zenotech deal which period falls within twenty-six weeks prior to June 16, 2008." 51. The Appellate Tribunal s error is the result of mixing up the provisions of sub-regulations (12) and (4) of regulation 20. As explained earlier sub-regulation (12) came to be introduced in regulation 20 as a consequence of extension of time for ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Takeover Code. 55. In light of the discussion made above the inevitable conclusions are that insofar as Zenotech is concerned Ranbaxy was not acting in concert with Daiichi either from the date of the SPSSA or even after becoming a subsidiary of Daiichi and the acquisition of Zenotech shares by Ranbaxy in the month of January 2008 did not come within the ambit of regulation 20(4)( b ). The offer price in the public announcement for Zenotech shares made by the appellant was correctly worked out. It follows that the judgment of the Appellate Tribunal is unsustainable and it has to be set aside. 56. It was submitted on behalf of the respondents that the Takeover Code was meant to safeguard and protect the interests of the shareholders. Therefore, in case there were two possible views of the matter the court should lean in favour of the one supporting the shareholders. The Attorney General strongly refuted the submission that the Takeover Code was intended solely to protect the shareholders interests. We, however, need not go into that question because in light of the above discussion, we find that the controversy is completely free from any confusion and the view canvasse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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