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TMI Blog2014 (8) TMI 1255X X X X Extracts X X X X X X X X Extracts X X X X ..... s of 20 entities, both individuals and others. 4. On 29th March, 2011 the appellants entered into two agreements with the Bangur group. In terms of the first agreement, a share purchase agreement, the appellants and the Bangur group agreed that the appellants would acquire the shares of the target company held by the Bangur group by purchasing 2,12,60,008 fully paid up equity shares of Rs. 10/- each forming 53.46 % of the share capital of the target company. The agreed price per share was Rs. 523/- and the aggregate amount payable to the Bangur group was about Rs. 1111.9 crores. 5. In addition to the price of Rs. 523/- per share, the appellants agreed to pay an exclusivity fee of Rs. 21.20 per share to the Bangur group, pursuant to an exclusivity agreement of 11th November, 2010 whereby the parties concluded that it would be in their mutual interest to maintain exclusive negotiations with one another during the period the appellants considered the proposed acquisition of shares of the target company. Consequently, the price agreed to be paid by the appellants to the Bangur group was Rs. 544.20 per fully paid up equity share having a face value of Rs. 10/-. 6. The second agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hant banker of the appellants was advised to incorporate certain points in the letter of offer. These are mentioned below. 12. SEBI informed the appellants through their merchant banker to revise the offer price to the public shareholders from Rs. 544.20 to Rs. 674.93. This figure was arrived at by adding to the original offer price of Rs. 554.20 a sum of Rs. 130.73 per share. The figure of Rs. 130.73 per share was arrived at on the basis that the non-compete fee paid to the Bangur group being about Rs. 277.95 crores would work out to Rs. 130.73 per share held by the Bangur group. The veiled insinuation was that the non-compete fee of Rs. 130.73 per share was in fact a part of the negotiated price per share payable by the appellants to the Bangur group. That being so, SEBI required that amount be added to the offer price of Rs. 544.20 per share to all public shareholders. 13. The reasons given by SEBI for adding the non-compete fee calculated on a per share basis to the offer price were as follows:- (1) Of the 20 promoter entities comprising the Bangur group, only 5 of them were eligible to get the non-compete fee. (2) Of the remaining 15 promoter entities, 2 individuals Yoge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause. Further, the two individuals (i.e. Mr. Yogesh Bangur and Ms. Surbhi Bangur) are getting the non-compete fee merely for being the relatives of the Mr. L.N. Bangur who is a director of the target company, which does not seem to be logical. iii. Further, the MB has failed to furnish sufficient justification as to why the aforesaid 15 members of the promoter group are getting the non-compete fees. iv. It has been submitted by the acquirer/Merchant Banker that the acquirer on the ground of prudence and good corporate practice has decided to pay the exclusivity fees (i.e. the fees paid to the promoter group sellers for not to solicit acquisition proposals from, or enter into any negotiations with, any party other than the acquirer in relation to the sale of shares held by them in target company) to all the public shareholders. The acquirer/Merchant Banker has failed to justify why the same logic has not been used while paying a different price per share (without the non-compete fee) to all the public shareholders." 15. Feeling aggrieved by the communication sent by SEBI to the merchant banker on 3rd August, 2011, the appellants preferred an appeal under Section 15-T of the S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Ltd. (MSUML) which was carrying on business as a composite textile mill and did not have the necessary knowledge or experience relating to the pulp and paper business and therefore was not capable of offering any competition to the target company. 19. On these findings, the Tribunal concluded that the non-compete agreement was a sham which resulted in depriving other shareholders of the target company of their rightful claim to get a just price for their shares. Consequently, the Tribunal dismissed the appeal preferred by the appellants. 20. The appellants, being aggrieved by the order passed by the Tribunal preferred an appeal in this Court under the provisions of Section 15-Z of the SEBI Act.4 Discussion 21. In our view, the Tribunal has made two fundamental errors. In the first place, the Tribunal committed a jurisdictional error by misunderstanding the scope of Regulation 20(8) of the Takeover Code.5 This Regulation provides that any payment made to persons other than the target company in respect of a non-compete agreement in excess of 25% of the offer price arrived at under sub-Regulation (4) or (5) or (6) shall be added to the offer price. A bare reading of Regulation 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Committee noted that there is a need to address the situation specially where the acquirer passes on a significantly large portion of the consideration to the outgoing promoter in the form of non-compete fee and only a token amount is shown as negotiated price for acquisition of shares under the agreement. The Committee felt that in such cases the offer price does not truly reflect the actual consideration paid and this could be used as a ploy for reducing the cost of acquisition through public offer. The Committee recommends that Any payment in respect of non-compete agreement in excess of 25 per cent of consideration paid to persons other than the target company shall be deemed to form part of the consideration paid for acquisition of shares and should be factored in for the purpose of reckoning offer price." 26. From this it is quite clear that ordinarily when there is a gap of 25% between the consideration paid to the outgoing promoters and the non-compete fee, SEBI ought not to conduct any inquiry. However, this cannot be treated an absolute proposition and we are quite willing to say that if it appears ex facie, without any searching questions being asked or any intricat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... petition to the target company. 32. But what is more important is the perception of the appellants. On these facts, the appellants perceived a threat from these individuals to their business activities. It is not the case of SEBI that the threat perception was irrational - it may arguably be unfounded or minimal but is certainly not beyond the imagination of a reasonable person. The threat perception cannot be decided on the basis of the hindsight of SEBI (unless the perception is found to be perverse) but must be left to the commercial wisdom of the players on the field. 33. In support of its contention that the threat perception from Yogesh Bangur and Ms. Surbhi Bangur was entirely imaginary, it was (negatively) submitted that Ms. Sheetal Bangur was a director in the target company and was actually involved in its day to day activities, and yet a non-compete fee was not paid to her. Was it because she was not a shareholder in the target holder (as suggested) or was it because she really posed no competitive threat? Or, was there some other valid reason? 34. At this stage, it is necessary to appreciate the shareholding pattern of the Bangur group in the target company. 35. Of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purposes of the present case, it is not necessary for us to go into the question whether SEBI could have supported its view by adding reasons at the appellate stage. This is because it is quite clear from the protracted correspondence between SEBI and the merchant banker of the appellants, that the relevant facts were taken into consideration by SEBI when it issued the letter dated 3rd August, 2011. If the facts justify denial of direct payment of non-compete fee to Ms. Sheetal Bangur, no amount of arguments in law can replace the facts at an appellate stage or before us. 39. The facts suggest that there could be a plausible reason for the appellants not paying any non-compete fee to Ms. Sheetal Bangur. This may be relatable to her not being a shareholder in the target company. Even if we could, we do not think it appropriate to substitute our view for that of the regulator or permit a new dimension to be added to the case in an appeal only on the basis of oral arguments, without any analysis of facts. Under these circumstances, we are of the view that nothing much turns on the non-payment of non-compete fee directly to Ms. Sheetal Bangur. All that need be said on this sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect of the other contracting parties. 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. 43. 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. The Tribunal should have either ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal shall lie to the Securities Appellate Tribunal from an order made- (a) by the Board on and after the commencement of the Securities Laws (Second Amendment) Act, 1999; (b) by an adjudicating officer, with the consent of the parties. (3) Every appeal under sub-section (1) shall be filed within a period of forty-five days from the date on which a copy of the order made by the Board or the Adjudicating Officer, as the case may be, is received by him and it shall be in such form and be accompanied by such fee as may be prescribed: Provided that the Securities Appellate Tribunal may entertain an appeal after the expiry of the said period of forty-five days if it is satisfied that there was sufficient cause for not filing it within that period. (4) On receipt of an appeal under sub-section (1), the Securities Appellate Tribunal may, after giving the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit, confirming, modifying or setting aside the order appealed against. (5) The Securities Appellate Tribunal shall send a copy of every order made by it to the Board, the parties to the appeal and to the Adjudicating Officer concerned. (6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titution. Explanation.- (i) For the purpose of sub-regulation (5), shares shall be deemed to be infrequently traded if on the stock exchange, the annualised trading turnover in that share during the preceding six calendar months prior to the month in which the public announcement is made is less than five per cent (by number of shares) of the listed shares. For this purpose, the weighted average number of shares listed during the said six months period may be taken. (ii) In case of disinvestment of a Public Sector Undertaking, the shares of such an undertaking shall be deemed to be infrequently traded, if on the stock exchange, the annualised trading turnover in the shares during the preceding six calendar months prior to the month, in which the Central Government or the State Government as the case may be opens the financial bid, is less than five per cent (by the number of shares) of the listed shares. For this purpose, the weighted average number of shares listed during the six months period may be taken. (iii) In case of shares which have been listed within six months preceding the public announcement, the trading turnover may be annualised with reference to the actual numb ..... X X X X Extracts X X X X X X X X Extracts X X X X
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