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MBA Law-Legal M&A-Group 3
MBA Law-Legal M&A-Group 3
GROUP PROJECT
GROUP 3
Zenotech objects the Offer Price before SEBI and SAT ........................................................ 10
Controversy surrounding the offer price (under 1997 Takeover Code) ............................. 12
CONCLUSION ...................................................................................................................... 16
Page 2 of 19
SETTING THE CONTEXT
Historical Introduction
In accordance with international jurisprudence, the Securities and Exchange Board of
India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (‘Takeover
Code’) regulate the direct and indirect acquisition of stakes in Indian listed companies
and ensure transparency in the company's operations.
The Takeover Code evolved from the SEBI Act, 1992, which expressly mandated SEBI
to regulate significant acquisitions of shares and takeovers through appropriate
measures. SEBI established a legal framework in this regard by enacting the takeover
regulations, 1994, which took effect on November 4, 1994. SEBI appointed a committee
to review the 1994 takeover regulations in November 1995, chaired by Justice P.N.
Bhagwati (the Bhagwati Committee). 2 On February 20, 1997, SEBI notified the
1 Additionally, the Takeover Code aims to ensure that the Indian securities market is fair,
equitable, and transparent.
2 The aforementioned committee issued its report in January 1997.
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Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (‘1997 Code’),
repealing the 1994 takeover regulations.
The 1997 Code was amended on a periodic basis to reflect market developments,
regulatory and judicial rulings, as well as evolving global practises. In 2001, a
reconstituted committee chaired by Justice P.N. Bhagwati conducted a review of the
1997 Code. In May 2002, the reconstituted Bhagwati committee submitted its report.3
SEBI overhauled India's takeover regime and rewrote the rules governing public
M&A with the introduction of the Takeover Code. In comparison to the 1997 Code,
the Takeover Code establishes a significantly more straightforward, precise, and
3 Additional amendments to the 1997 Code were made based on the same.
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unambiguous regulatory framework. While the 1997 Code's fundamental premises
have been retained in the Takeover Code, TRAC has also examined international best
practises, jurisprudence established by courts and tribunals over the years, and the
market's changing needs in order to propose a new set of takeover regulations. SEBI
adopted the majority of the TRAC's recommendations and attempted to strike a
balance between the interests of various stakeholders, including acquirers,
shareholders, and the target company. While the overarching philosophy of
protecting public shareholders' interests in takeover situations remains intact, other
critical changes have been made.
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INDIRECT ACQUISITIONS AS PER THE TAKEOVER CODE
Globally, shareholdings, ownerships, and the rights that come with them are critical
and important assets. In today's competitive environment, corporate growth is not
only organic but also inorganic, which has resulted in a considerable increase in
M&A activity among listed and unlisted organisations. In response to this growing
tendency in M&A activity, regulators have created restrictions that safeguard not
only majority shareholders' rights, but also those of public shareholders and
minority shareholders. The protection of public and minority shareholders' interests
is a critical corporate governance issue that takes on added significance in the case of
publicly traded enterprises. Acquisitions are classified into two categories under the
Takeover Code: direct and indirect acquisitions:
Indirect Acquisition: Acquisition of shares or voting rights in, or control of, any
company or other entity that would enable the acquirer or PAC with him to exercise
or direct the exercise of such percentage of voting rights in, or control over, a target
company that would entail the obligation to make an open offer.
Indirect Acquisition means the acquisition of shares or voting rights in, or control over,
any company or other entity that would enable the acquirer or PAC working with him
to exercise or direct the exercise of such percentage of voting rights in, or control over,
a target company that would trigger the obligation to make an open offer.
The concept of Indirect Acquisition was introduced in the 1997 regulations as per the
recommendations of the Bhagwati Committee through an explanation in the then
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prevailing regulations, which restricted the trigger for being covered as an indirect
acquisition of a target company only through its listed or unlisted Holding Company.
In its 2010 report, the TRAC advised that any indirect acquisitions that resulted in the
potential to exercise voting rights in excess of the target company's existing voting
rights or control over the target company trigger an obligatory open offer.
Additionally, the TRAC recommended that where the target company comprised a
‘predominant part of the business’ of the organisation being purchased, such an indirect
acquisition be treated as a direct acquisition for all purposes under the proposed
revised takeover standards.5
2. Indirect Acquisition
If the 80% threshold test as indicated above is not met, the acquisition is treated as an
indirect acquisition under the Takeover Code and certain distinct provisions relating
to indirect acquisitions shall apply.
5An objective criteria was devised in this regard in order to ascertain what constitutes a
"predominant part of the business."
Page 7 of 19
DAIICHI-RANBAXY-ZENOTECH DEAL
Thus, Ranbaxy was legally required to make a public announcement regarding the
acquisition of shares in the company from ordinary shareholders, as the shareholding
exceeded 15%. It sought to acquire from shareholders equity shares in Zenotech
constituting 20% of its expanded share capital at a quoted offer price of Rs. 160.00 per
equity share in the public announcement. On November 8, 2007, Ranbaxy and
Zenotech completed the share purchase transaction, and Zenotech's shareholders
approved the preferential allotment on November 23, 2007. On November 23, 2007,
Zenotech preferentially allotted 54,89,536 fully paid-up shares to Ranbaxy.6
Page 8 of 19
Daiichi Sankyo acquires controlling stake Ranbaxy
Later, on June 11, 2008, Daiichi entered into a SPSSA with:
(i) Malvinder Singh and others, Ranbaxy's promoters, and
(ii) Ranbaxy Laboratories Ltd.
Additionally, Daiichi would subscribe for shares equal to 11% of Ranbaxy's fully paid-
up equity share capital and 2,38,34,333 share warrants. On the same day, Ranbaxy
informed the stock exchanges that because Ranbaxy held 46.85 percent of Zenotech's
equity shares, the SPSSA has also “triggered an 'Open Offer' to be made by Daiichi to the
public shareholders of 'Zenotech' to acquire a minimum of 20 percent of the Equity Shares of
'Zenotech' at a price to be determined under the SEBI Regulations”
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announcement to Zenotech shareholders offering a price of Rs. 113.62 per Zenotech
share.
Resultantly, Zenotech's promoters filed separate appeals with the Security Appellate
Tribunal (SAT) against the SEBI's decision. The SAT upheld the Zenotech's promoters’
claim and reversed the SEBI's decision, ordering Daiichi to make a Rs. 160 per share
offer to Zenotech shareholders.9
8 SEBI after due consideration of the matter turned down the claim of the respondents (vide
letter dated June 18, 2009 in the case of N. Narayanan's complaint and letter dated June 22,
2009 in the case of the complaint of Dr. Chigurupati)
9 Order of SAT dated 07.10.2009 in Appeal Nos. 137/138 of 2009
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While resolving a dispute over the offer price quoted by Daiichi in its public
announcement for an indirect acquisition of Zenotech Laboratories Ltd, the Hon'ble
Supreme Court clarified the meaning of the term 'persons acting in concert' as used in
the 1997 Takeover Code.10
10 Civil Appeals No. 7148 and 7314 of 2009 decided on. 08.07.2010
Page 11 of 19
ISSUE BEFORE THE SUPREME COURT
The offer price in an indirect takeover must also be calculated in compliance with the
1997 Takeover Code's Regulations 20(4) and (5). The Supreme Court noted in this case
that the Zenotech share price was to be established on June 16, 200814, and January 19,
200915.
11 Regulation 20 of 1997 Takeover Code lays down the manner in which the offer price is to
be determined under various circumstances.
12 Regulations 10 and 11 prescribe thresholds (in percentage) of shareholding. When the
acquirer exceeds these thresholds by acquiring shares or voting rights in the target, it is
required to make a public announcement.
13 Regulations 10 and 11 prescribe thresholds (in percentage) of shareholding. When the
acquirer exceeds these thresholds by acquiring shares or voting rights in the target, it is
required to make a public announcement.
14 The date of the public announcement of the parent company, Ranbaxy.
15 The date of the public announcement for Zenotech, the indirectly acquired company.
Page 12 of 19
• the price paid by the acquirer or persons acting in concert with the acquirer for
acquisition, if any, (including through allotment in a public or rights or preferential
issue) during the 26-week period preceding the date of public announcement; or
• the average of the weekly high and low of the target company's shares' closing prices as
quoted on the stock exchange, if the target company's shares are quoted on the stock
exchange.
The first point is irrelevant because it applies to direct takeovers. The issue in this case
stems from the fact that Daiichi Sankyo used the third technique, whereas Zenotech's
promoters used the second.
Contentions surrounding the offer price
According to Daiichi Sankyo, the second method was inapplicable because it was not
acting in concert with Ranbaxy to acquire Zenotech shares. As a result, the third
technique was the sole provision that could be used to determine the offer price. On
the other hand, Zenotech's promoters said that Daiichii Sankyo and Ranbaxy were
'persons acting in concert' when they signed the agreement on June 11, 2008, and then
again on October 20, 2008, when Ranbaxy became a subsidiary of Daiichii Sankyo.
They contended that Ranbaxy paid Rs. 160 per share for Zenotech shares in January
2008, well within the 26-week period beginning June 16, 2008 (i.e., the date on which
Daiichii Sankyo made the public announcement for the shares in Ranbaxy). In light of
this, Zenotech's promoters believed Daiichi Sankyo should have used Regulation
20(4)(b) to establish the offer price for Zenotech shares, which should have been Rs.
160, not Rs. 113.62.
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Supreme Court's interpretation of ‘persons acting in concert’
The court noted in this context that the concept of "persons acting in concert" is
predicated on the premise that on one side, there is a target, and on the other, there
are two or more entities that come together with the common objective or purpose of
acquiring large shares in the target. Thus, unless there is a target whose shares are to
be acquired by two or more entities acting in concert, no persons can act in concert.
Similarly, the court noted that no parties can act in concert unless they share a common
purpose of acquiring significant interests in the target. Such a relationship can exist
only as a result of a meeting of minds pursuant to a formal or informal agreement or
understanding.
The court held that Ranbaxy's argument that by signing the agreement, it became a
person acting in concert with Daiichi Sankyo could not be recognised, because the
essential precondition of a 'shared aim' to acquire large interests in Zenotech was
missing. If Daiichi Sankyo and Ranbaxy entered into the deal with the express purpose
of purchasing the majority of Zenotech's shares, they would qualify as people acting
in concert. This, however, was not the case.
Additionally, the court considered Regulation 2(e)(2), noting that this sub-regulation
cannot be viewed as a stand-alone rule (1). This meant that, while sub-regulation (2)
was a deeming rule, it was a deeming provision that specified nine particular
instances in which one organisation would be deemed to be acting in concert with
another. This meant that in such instances, if one of the parties made or agreed to
make a significant acquisition of shares in a target, it would be believed to be acting
in furtherance of a shared objective or purpose with the other entity in the pair. In this
case, the two would be considered "persons acting in concert" The underlying notion
of a common goal would remain constant. As a result, the court stated that Regulation
2(e)(2) must be read in connection with Regulation 2(e)(1) (1). Thus, even under this
sub-regulation, persons found to be acting in concert must intend to acquire a
significant stake in the target.
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Additionally, the court highlighted that the deeming rule included in Regulation
2(e)(2) is prospective in nature and cannot be applied retroactively. Thus, the court
determined that in this case, the deeming rule would establish a presumption that
Daiichi Sankyo and Ranbaxy acted in concert, assuming that the criterion set forth in
sub-regulation (1) was likewise satisfied post-October 20, 2008. (ie, the date on which
Ranbaxy became a subsidiary of Daiichii Sankyo). As a result, it cannot be stated that
Ranbaxy's acquisition of Zenotech shares in January 2008 was in coordination with
Daiichi Sankyo.
Concerning the timing of when a person is said to be acting in concert with another,
the court determined that it was irrelevant that the acquirer and the entity that
purchased shares in the target earlier should be acting in concert at the time of the
target's public statement. What was critical was that the other corporation acted in
cooperation with the acquirer throughout the target's share purchase.
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CONCLUSION
The Court clarified the terms of the 1997 Takeover Code relating to PACs in this
judgement. To this aim, the Court relied heavily on the 1997 Justice P. N. Bhagwati
Committee Report and the 2002 Reconvened Committee on Takeover Code Report in
analysing the Takeover Code's provisions.
Recognizing the guidance and assistance provided by these committee reports, the
Court emphasised the importance of the 'object and purpose' clause in statutory
interpretation. Additionally, the Court maintained that, as with Acts, it is necessary to
include a 'object and purpose' clause in subordinate legislation such as Regulations to
ensure that their interpretation by the Court is effective, simple, and consistent with
the intention of their passage. In this regard, the Court has urged a shift in legislative
strategy toward the inclusion of an 'object and purpose' phrase in all delegated
legislation, taking into account the fact that subordinate legislation regulates
extremely complex and specialised domains of activity.
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Later Amendments specific to Indirect Acquisitions
In July, 2020, the SEBI (Substantial Acquisition of Shares and Takeovers) (Third
Amendment) Regulations, 2020 was issued to amend the Takeover Code.
1. Following regulation 17(1) of the Takeover Regulations, a new proviso has been
added specifying the amount to be put in an escrow account as performance
security.
4. Regulation 22(1) of the Takeover Regulations provides that an acquirer may not
complete the acquisition of shares or voting rights in, or control over, the target
company until the offer period has expired, regardless of whether the
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acquisition is made through a subscription to shares or a purchase of shares
subject to the obligation to make an open offer for acquiring shares.
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Plagiarism Report
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