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The aim of my research in this paper is the critical analysis of the provisions relating to offer price in the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, and the reasons for the justification of their enactment replacing the 1997 Code and how the 2011 Code differs from the 1997 Code. The researchers also aim to critically analyze the extent to which the new Code can be useful as against the 1997 Code. The researcher will also analyze the various provisions and will give his suggestions for the necessary amendments.

STATEMENT OF PROBLEM

The 2011 Code has substituted the Takeover Code of 1997 as it was inefficient to cover all the aspects of takeovers and also there were many lacunas. Still, merely two years after the takeover code came into existence, SEBI is now busy preparing a new draft for takeovers to replace the 2011 Code. This means there must be major issues with the 2011 Code as well. The researcher also is anxious to know what the need is of again substituting a new takeover code.

Offer Price in open offers has always been a controversial issue. Different countries have different provisions for determining the offer price. The researcher is eager to know the various ambiguities in determining the offer price and how the Indian scenario differs from the foreign one.

The researcher also seeks to know why there is a need to review the existing provisions to determine of offer price. There are various confusing terms in the 2011 Takeover Code like ‘Volume Weighted Average Market Price’, ‘Volume Weighted Average Price’, Tendering Period, etc. The researcher is keen to know the meanings of these terms and how they are useful in the determination of offer prices.

RESEARCH QUESTIONS:

1. What is the criterion for the determination of offer price in different countries?

2. What are the various provisions relating to the offer price in the takeover code?

3. What is the procedure to determine the offer price as per the takeover code 2011 and the restrictions to it?

4. What were the loopholes in the 1997 Code and what are the loopholes in the 2011 Code? What could be the suggestions to tackle these loopholes?

RESEARCH METHODOLOGY:

In this paper, the researcher has primarily used both descriptive and analytical methodologies of research. The researchers have heavily relied upon the Regulations under the Code, Committee Reports, and the original cases.

SCOPE AND LIMITATION

In this paper, the researchers will be restricting themselves mainly to the Regulations under the 2011 Takeover Code and the Indian cases and will be focusing on the procedure for the Determination of the Offer Price and the safeguards involved.

MODE OF CITATION

A uniform method of citation is followed throughout this paper.

SOURCES OF DATA

The researcher has mainly relied upon secondary sources to obtain sufficient data for this project, which includes books relating to Takeover Code 2011 available in the Library, Internet sources, original cases and journals.

SEBI Takeover Regulations 2011:

Background

SEBI at their Board Meeting held on 28 July 2011 had considered the report of the Takeover Regulations Advisory Committee [TRAC] and accepted most of the recommendations made by TRAC. SEBI has, on 23 September 2011, notified SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 [SAST 2011].

SAST aims at protecting the interest of the investors in securities of a listed company providing amongst others, an opportunity for the public shareholders to exit where there is a substantial acquisition of shares or voting rights or control over a listed company, consolidation of holdings by existing shareholders and related disclosures and penalties for non-compliance, etc. SAST requires an acquirer to make an offer to shareholders of the target company on acquiring shares exceeding stipulated thresholds. It also contains provisions relating to open offer size and offer price, the time-bound process for making an open offer, exemption from making an open offer, etc.

What is the ‘offer price’?

The offer price is the price at which the acquirer announces to acquire shares from the public shareholders under the open offer. The offer price shall not be less than the price as calculated under regulation 8 of the SAST Regulations, 2011 for frequently or infrequently traded shares.

• The acquirer can make an upward revision to the offer price at any time up to 3 working days before the opening of the offer.

Relevant Terms:

• Tendering Period (Regulation 2(za))

• This means the period within which shareholders may tender their shares in acceptance of an open offer to acquire shares, made under these regulations. 1 Securities And Exchange Board Of India (Substantial Acquisition Of Shares And Takeovers) Regulations, 2011, notified on 23rd Sept. 2011, available at http://www.caalley.com/sebi11/1316778211380.pdf, last visited on 25-11-2013.

• Volume Weighted Average Market Price (Regulation 2(zb))

This means the product of the number of equity shares traded on a stock exchange and the price of each equity share divided by the total number of equity shares on the stock exchange.

• Volume Weighted Average Price (Regulation 2(zc))

This means the product of the number of equity shares bought and the price of each such equity shares divided by the total number of equity shares bought.

Achuthan Committee on Takeover Regulations report to SEBI -Offer price:

The minimum price payable as the offer price continues to be regulated. The minimum offer price is classified between the price payable for direct acquisitions and indirect acquisitions. The major changes proposed are (i) market price to be based on 12 weeks volume-weighted average of market prices as against higher weekly averages of market prices for 26 weeks or 2 weeks; (ii) a qualitative improvement and expansion in the look-back provision; (iii) in the case of indirect acquisitions, ascription of value to the target company under certain circumstances.

Summary of Regulation 8 – Minimum Open Offer Price:

Regulation 8(1):

Regulation of Minimum offer price of open offers:- Regulation 8(1) of the 2011 Code provides that the open offer for acquiring shares under Regulation 3, 4, 5, or 6 shall be made at a price not lower than the price determined under sub-regulation (2) or (3) as the case may be. The objectives of regulating minimum offer price determine to give public shareholders an exit option on terms not inferior to the terms obtained by a substantial shareholder from the acquirer for his large shareholding. As there is no justification for a premium payable to substantial shareholders, there is also no justification for any regulated mechanism or premium payable to public shareholders. Further, the minimum price should also prevent acquirers from building a stake over some time without offering that price to shareholders in the offer.

Report of the Takeover Regulations Advisory Committee under the Chairmanship of Mr. C. Achuthan, July 19, 2010, available at http://www.sebi.gov.in/cms/sebi_data/attachdocs/1287826537018.pdf, last visited on 29-11- 2013.

8 Regulation 8(2):

Minimum Offer Price in Case of Direct Acquisition and Deemed Direct Acquisition of Shares, Voting Rights or Control of the Target Company: The minimum open offer price shall be the highest of the following: a) Highest negotiated price per share of the Target Company under the agreement that attracted the open offer.

b) Volume-weighted average price paid or payable for acquisitions by the Acquirer or PAC during 52 weeks preceding the date of the public announcement.

c) Highest price paid or payable for any acquisition by the Acquirer or PAC during 26 weeks preceding the date of the public announcement.

d) Where shares are frequently traded – volume weighted average market price of the Target Company during 60 trading days immediately preceding the date of the public announcement.

e) Where shares are infrequently traded – the price determined by the Acquirer and Manager to the open offer taking into account valuation parameters, including, book value, comparable trading multiples, and such other parameters as are customary for the valuation of shares of such companies.

f) In case of Deemed Direct Acquisition where the net assets value or sales turnover or market capitalization of the Target Company is more than 15% of the consolidated net asset or sales turnover or the enterprise value of the entity or business being acquired as per the latest audited annual financial statements, the per-share value of the Target Company computed by the Acquirer.

Example

Mr. A wants to take over CBB Ltd a Listed Company. CBB Ltd has 10,00,00,000 shares outstanding. He purchased shares of CBB Ltd as per the details presented in the table given below. Some purchases were made on the stock exchange and some of them were made privately from other shareholders. He agrees with Mr. H who holds 16% shares of CBB Ltd on 15th March 2011 to purchase his entire shareholding at the rate of 850 per share. The shares of CBB Ltd are frequently traded. The public announcement was made on 1st April 2011. Calculate the minimum price payable in the open offer.

Date of Acquisition	Price Paid per share	No of Shares Acquired
15/03/2010	500	15,00,000
15/04/2010	550	5,00,000
15/05/2010	650	10,00,000
15/06/2010	450	25,00,000
15/07/2010	700	5,00,000
17/08/2010	750	10,00,000
12/09/2010	470	5,00,000
06/10/2010	590	5,00,000
09/11/2010	640	10,00,000
09/12/2010	900	10,00,000
Total		1,00,00,000

The Minimum open offer price shall be the Highest of the following:-

• Rs.850 agreed to be paid to Mr. H.
• Rs.900 is the highest price paid for any acquisition during the twenty-six weeks immediately preceding the date of the public announcement. (Since 01/10/2010).
• Rs. 750 being the volume-weighted average market price of such shares for sixty trading days immediately preceding the date of the public announcement.
• Rs.764 being the Volume-weighted average price paid for acquisitions during 52 weeks preceding the date of Public Announcement.

Date of Acquisition	Price Paid per share (A)	No of Shares Acquired (B)	Product (A x B)
15/04/2010	550	5,00,000	27,50,00,000
15/05/2010	650	10,00,000	65,00,00,000
15/06/2010	450	25,00,000	1,12,50,00,000
15/07/2010	700	5,00,000	35,00,00,000
17/08/2010	750	10,00,000	75,00,00,000
12/09/2010	470	5,00,000	23,50,00,000
06/10/2010	590	5,00,000	29,50,00,000
09/11/2010	640	10,00,000	64,00,00,000
09/12/2010	900	10,00,000	90,00,00,000
15/03/2011	850	1,60,00,000	13,60,00,00,000
Total		2,45,00,000	18,82,00,00,000

 VWAP = 18,82,00,00,000/2,45,00,000 = 764

So the minimum price will be Rs.900 per share.

Regulation 8(5): The 15% criteria for indirect acquisition:

• The proportionate net asset value of the company as a percentage of the consolidated net value of the entity or business being acquired.
• The proportionate sale turnover of the target company as a percentage of the consolidated sales turnover of the entity.
• The proportionate market capitalization of the target company as a percentage of enterprise value for the entity or business being acquired.
• Is more than 15% based on the most recent audited annual financial statement.
• The acquirer is required to compute and disclose in the letter of offer the per share value of the target company taken into account for the acquisition along with a detailed description of the methodology adopted for the computation.

Example

Astra Inc. is a company incorporated in the USA, It has a Subsidiary in India by the name of Astra India Limited that is listed on BSE and NSE. Vertigo Inc. acquires 51% of Astra Inc. for $6,000. The Consolidated NAV of Astra Inc. is $4,000 Crores, Consolidated Sales is $8000 Crores and Market Capitalization is $10,000 Crores. NAV of Astra India is $1,000 Crores, Sales are $ 3000 Crores and Market Capitalization is $3,000 Crores.

Since there is an indirect acquisition of Astra India, Vertigo will have to make an open offer in India. Since the Proportionate NAV, sales, and Market Cap of Astra India as a percentage of the consolidated NAV, sales, and Market Cap of Astra INC is 25%, 37.5%, and 30% respectively the provisions of this sub-regulation are attracted. Hence Vertigo Inc. is required to compute and disclose, in the letter of offer, the per-share value ascribed to Astra India when determining the price for the acquisition of Astra Inc., along with a detailed description of the methodology adopted for such computation.

Case on Regulation 8(2)(c):

A. R. Dahiya & Associates v. SEBI (2006):

The highest price paid or payable for any acquisition (whether or not such acquisition is exempt from open offer obligations by Regulation 10), whether by the acquirer or by any PAC during the 26 weeks immediately preceding the date of the PA is to be considered in determining offer price for direct acquisitions and indirect acquisitions which meet the parameters of Regulation 5(2), whether the acquisition fructifies or not.

Regulation 8(3): Offer Price in Case of Indirect Acquisition of Shares, Voting Rights or Control of the Target Company

The minimum open offer price shall be the highest of the following:

a) Highest negotiated price per share, if any, of the Target Company under the agreement that attracted the open offer.

b) Volume-weighted average price paid or payable for acquisitions by the Acquirer or PAC during 52 weeks preceding the earlier of (a) the date on which the primary acquisition is contracted, and (b) the date on which intention or decision to make a primary acquisition is announced in the public domain.

c) Highest price paid or payable for any acquisition by the Acquirer or PAC during 26 weeks preceding the earlier of: (a) the date on which the primary acquisition is contracted, and (b) the date on which intention or decision to make a primary acquisition is announced in the public domain.

d) Where shares are frequently traded – volume weighted average market price of the Target Company during 60 trading days immediately preceding the earlier of (a) the date on which the primary acquisition is contracted, and (b) the date on which intention or decision to make a primary acquisition is announced in the public domain.

e) Where the minimum offer price cannot be computed as per any of the parameters, it shall be a fair price determined by the Acquirer and the Manager to the open offer taking into account valuation parameters including, book value, comparable trading multiples, and such other parameters as are customary for valuation of shares of such companies .

f) Where net assets value or sales turnover or market capitalization of the Target Company is more than 15% of the consolidated net asset or sales turnover or the enterprise value of the entity or business being acquired as per the latest audited annual financial statements, the per-share value of the Target Company computed by the Acquirer.

g) Highest price paid or payable for any acquisition by the Acquirer or PAC during the earlier of:

h) (a) the date on which the primary acquisition is contracted; (b) the date on which the intention or decision to make a primary acquisition is announced in the public domain; and (c) the date on which the public announcement is made under the Takeover Code, 2011.

Comment:

The Conditions for minimum price in case of Indirect Acquisitions are also the same. However, one additional criterion has been prescribed which is as follows:-

The highest price paid or payable for any acquisition, whether by the acquirer or by any person acting in concert with him, between the earlier of, the date on which the primary acquisition is contracted, and the date on which the intention or the decision to make the primary acquisition is announced in the public domain, and the date of the public announcement of the open offer for shares of the target company made under these regulations. [Regulation 8(3)(d)]

Also, the cut-off date is the date of the contract or the date on which the intention or the decision to make the primary acquisition is announced in the public domain instead of the date of PA. [Regulation 8(3)(e)]

1997 Code v. 2011 Code: Regulation 8(2) (direct acquisitions and indirect acquisitions deemed to be direct acquisitions) and Regulation 8(3) (indirect acquisitions):

For frequently traded shares, the market price-based parameter used in the 2011 Code for determining the minimum offer price is 60 trading day volume-weighted average market price (VWAMP) instead of the average market of the weekly high and low of the closing prices/ daily intra-day high and low prices of shares under the 1997 Code since the daily volume weighted average price data are currently readily available. Use of VWAMP would ensure that the resultant price is more representative and eliminates the outlier effects of high and low prices and is a more accurate determinant of the prices at which shares are actually transacted.

The TRAC Report: It discusses the rationale for using 60-day VWAMP instead of the average of the weekly high and low of the closing prices/ daily intra-day high and low prices as under:

“4.7.10

While considering the continued market price linkage, the Committee concluded, that the 26-week average is too long a period to consider and that a 2-week average is a too volatile period to consider. The Committee considered 4-week and 12-week averages i.e. 20 and 60 trading day averages in its consideration set to arrive at the optimum period for the market price linkage, and data for 46 randomly selected companies (from the top 1000 by market capitalization) for the last 3 years is presented in Annexure 6. While the 4-week average was closer to the spot price, the Committee felt that it faced an issue of higher volatility, similar to the 2-week average.

4.7.11

Another change the Committee has proposed is the use of volume-weighted average price (VWAP) in place of the average of the weekly high and low of the closing prices /daily intra-day high and low prices of shares under the existing Regulations since the daily volume-weighted average price data are currently readily available. The use of VWAP would ensure that the resultant price is more representative eliminates the outlier effects of high and low prices and is a more accurate determinant of the prices at which shares are transacted.

4.7.12

Based on the data and deliberations, the Committee concluded on using the 60 trading day VWAP as a market price parameter and recommends that this be incorporated in the Takeover Regulations, with a clear view to doing away with this parameter as soon as practicable.”

Additional Pricing Provisions:

Regulation 8(6):

If the acquirer or any PAC has any outstanding convertible instruments convertible into shares of the target company at a specific price, the price at which such instruments are to be converted into shares shall also be considered.

Regulation 8(7):

The price paid for shares of the target company shall include control premium or non-compete fees or any other fee.

Regulation 8(8):

Where the acquirer has acquired or agreed to acquire whether by himself or through or with PACs any shares or voting rights in the target company during the offer period, whether by subscription or purchase, at a price higher than the offer price, the offer price shall stand revised to the highest price paid or payable for any such acquisition: Provided that no such acquisition shall be made after the third working day before the commencement of the tendering period and until the expiry of the tendering period.

Regulation 8(10):

Where the acquirer or persons acting in concert with him acquires shares of the target company during twenty-six weeks after the tendering period at a price higher than the offer price under these regulations, the acquirer and persons acting in concert shall pay the difference between the highest acquisition price and the offer price, to all the shareholders whose shares were accepted in the open offer, within sixty days from the date of such acquisition: Provided that this provision shall not apply to acquisitions under another open offer under these regulations or under the Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009, or open market purchases made in the ordinary course on the stock exchanges, not being negotiated acquisition of shares of the target company whether by way of bulk deals, block deals or in any other form.

Regulation 8(11):

Where the open offer is subject to a minimum level of acceptances, the acquirer may, subject to the other provisions of this regulation, indicate a lower price, which will not be less than the price determined under this regulation, for acquiring all the acceptances despite the acceptance falling short of the indicated minimum level of acceptance, in the event the open offer does not receive the minimum acceptance.

Regulation 8(12):

In the case of any indirect acquisition, other than the indirect acquisition referred in sub-regulation (2) of regulation 5, the offer price shall stand enhanced by an amount equal to a sum determined at the rate of ten percent per annum for the period between the earlier of the date on which the primary acquisition is contracted or the date on which the intention or the decision to make the primary acquisition is announced in the public domain, and the date of the detailed public statement, provided such period is more than five working days.

Regulation 8(13):

The offer price for partly paid-up shares shall be computed as the difference between the offer price and the amount due towards calls-in-arrears including calls remaining unpaid with interest, if any, thereon.

Regulation 8(14):

The offer price for equity shares carrying differential voting rights shall be determined by the acquirer and the manager to the open offer with full disclosure of justification for the price so determined, being set out in the detailed public statement and the letter of offer: Provided that such price shall not be lower than the amount determined by applying the percentage rate of premium, if any, that the offer price for the equity shares carrying full voting rights represents to the price parameter computed under clause (d) of sub-regulation 2, or as the case may be, clause (e) of sub-regulation 3, to the volume-weighted average market price of the shares carrying differential voting rights for sixty trading days computed on the same terms as specified in the aforesaid provisions, subject to shares carrying full voting rights and the shares carrying differential voting rights, both being frequently traded shares.

Example

ABC Limited has 2 classes of Equity shares namely Ordinary Equity Shares and DVRs. The open offer price of Ordinary shares in Rs.130 per share. The 60-day VWAMP of ordinary shares is Rs.100 per share and for DVRs Rs.50 per share. Calculate the minimum offer price for DVRs. The offer price of ordinary shares is at a 30% premium to its 60-day VWAMP. Hence the minimum price for DVRs will be Rs.65.

Regulation 8(16):

For purposes of clause (e) of sub-regulation (2) and sub-regulation (4), the Board may, at the expense of the acquirer, require a valuation of the shares by an independent merchant banker other than the manager to the open offer or an independent chartered accountant in practice having a minimum experience of ten years.

Other Factors in Computation of Offer Price

Conversion Rate for Convertible Instruments: Where the Acquirer or PAC has any outstanding convertible instruments convertible into shares of the Target Company at a specific price, the price at which such instruments are to be converted shall be considered.

Look Back Period: Where the Acquirer or PAC has acquired any shares of the Target Company during 26 weeks after the tendering period at a price higher than the offer price paid, the Acquirer and PAC shall pay the difference between the highest acquisition price and offer price, to all the shareholders whose shares were accepted in the open offer, within 60 days from the date of such acquisition except where acquisitions are according to the Delisting Regulations or open market purchases made in the ordinary course on the stock exchanges which are not negotiated deals or bulk deals or block deals or in any other form.

Non-Compete Fees and Controlling Premium: In line with the spirit of equal treatment of all shareholders, the Takeover Code, 2011 provides for the omission of the separate non-compete fees to the promoters/sellers, which were previously under the Takeover Code, 1997 allowed to be paid to the controlling shareholders to an extent of 25% of the offer price. The Takeover Code, 2011 provides that any direct or indirect non-compete fees or control premium paid to the controlling shareholders would be added to the offer price. 17 This change is targeted to benefit the public shareholders of a company who will get the same price as offered to the promoters/sellers.

Adjustments to Minimum Offer Price: The Takeover Code, 2011 provides for adjustment to the minimum open offer price in the following cases: (a) If during the offer period, the Acquirer directly or through PAC agrees or acquires any shares or voting rights in the Target Company in any manner at a price higher than the minimum offer price, the minimum offer price shall stand revised to such higher price. (b) Where the open offer is subject to the minimum level of acceptance and the open offer does not receive the minimum acceptance, the Acquirer may indicate the lower price for acquiring all the acceptances. (c) For corporate actions like rights issues/ bonus issues/ stock splits/dividends/ de-mergers/ reduction of capital etc. where the record date for effecting the same falls 3 business days before the commencement of the tendering period.

Interest in Case of Delayed Public Statements: In case of an indirect acquisition, the minimum offer price would stand increased by 10% p.a. for the period commencing on the earlier of (a) the date on which primary transaction is contracted, or (b) the date on which the intention/decision to make a primary acquisition is announced in the public domain, and ending on the date of detailed public statement, provided such period is more than 5 working days.

· VOLUME WEIGHTED AVERAGE MARKET PRICE “Volume weighted average market price” means the product of the number of equity shares traded on a stock exchange and the price of each equity share divided by the total number of equity shares traded on the stock exchange; the Number of shares traded on the Stock Exchange on a particular day: X Market Price: Y X1*Y1+X2*Y2+X3*Y3……… Volume weighted Average Market Price = X1+X2+X3……………..

· VOLUME WEIGHTED AVERAGE PRICE “Volume weighted average price” means the product of the number of equity shares bought and the price of each such equity share divided by the total number of equity shares bought; Number of shares bought on a particular day: A Market Price: B A1*B1+A2*B2+A3*B3……… Volume weighted Average Price = A1+A2+A3……………..

· WEIGHTED AVERAGE NUMBER OF TOTAL SHARES “Weighted average number of total shares” means the number of shares at the beginning 18 of a period, adjusted for shares canceled, bought back, or issued during the aforesaid period, multiplied by a time-weighing factor;

Example – Volume Weighted Average Market price:

Sr. No	No of Shares Traded (A)	Market Price Per Share (B)	Product of (A) and (B)
1	200	500	1,00,000
2	300	667	2,00,100
3	500	898	4,49,000
4	700	450	3,15,000
5	600	999	5,99,400
Total	2300		16,63,500

Volume Weighted Average Market price = Product of (A and B) /Total of A = 1663500/2300 = Rs.723.26

Daiichi Sankyo Company Ltd. v. Jayaram Chigurupati and Ors. (2010 SC)

[S.H. Kapadia, C.J., Aftab Alam and Swatanter Kumar, JJ.]

The critical question as to what price was to be offered by Daiichi (Rs. 160 or Rs. 113.62?). The exact bone of contention between the parties was whether it was Regulation 20 (4) (b) or Regulation 20 (4) (c) that was applicable. Daichii maintained that since neither itself nor any of its PAC acquired any share of Zenotech in the past 26 weeks, the price parameter under Regulation 20 (4) (b) is not applicable and the price is governed by 20 (4)(c) which was disputed by the Respondents. The argument between both parties therefore turned out to be whether the payment of Rs 160 by Ranbaxy in January 2008 (that fell within 26 weeks before 16.06.2008) was a payment made by a PAC of Daiichi. This led to the legal issue as to who is a PAC.

The Supreme Court accepted Daiichi’s contentions, holding that Regulation 20(4)(b) is inapplicable. It cited two reasons for this ruling – first, that Daiichi and Ranbaxy are not “persons acting in concert” for Regulation 20(4)(b), and secondly, even if they are, Ranbaxy had purchased Zenotech shares before that relationship had begun. As to the first, the Court referred to the definition of the term “persons acting in concert” in Regulation 2(1)(e) of the Takeover Code. It provides that persons acting in concert are persons who directly or indirectly cooperate by acquiring (or agree to do so) shares/voting rights or control over the target company “for a common objective or purpose of substantial acquisition of shares or voting rights or control”. Regulation 2(1)(e)(2) provides that certain categories of persons are “deemed” to be “persons acting in concert” with each other, and sub-regulation (i) provides that this includes a company, its holding company, and its subsidiary. As we have noted, Ranbaxy became a subsidiary of Daiichi in October 2008 and had paid Rs. 160 for Zenotech shares in January 2008. Relying on this fact, the Securities Appellate Tribunal had held that Regulation 20(4)(b) applies.

Examining the term “persons acting in concert”, the Court observed that the deeming provision does not provide that the mere existence of a holding-subsidiary relationship is sufficient to create this relationship. The Court held further that the deeming provision does not dispense with the requirement that the parties must have cooperated for the common objective or purpose of substantial acquisition of shares, and held further that this must be established as a matter of fact, on an analysis of the conduct of the parties. In addition, the Court found the relationship of “persons acting in concert” must exist not at the time of the public announcement, but at the time of acquisition, for Regulation 20(4)(b). As a result, even assuming Ranbaxy and Daiichi were “persons acting in concert”, this relationship did persist between the parties at the time Ranbaxy purchased the shares of Zenotech.

Sukumar Chand Jain v. SEBI (2008)6 :

N.K. Sodhi J.:

“Having offered the shares which have been accepted, he cannot be allowed to make a grievance that the price offered by the acquirer was not adequate or that the same price which was offered to Rakesh Agrawal and his group of shareholders should have been offered to him and other public shareholders. Given this conduct of the appellant, he is estopped from challenging the purchase made by the acquirer nor can he claim a higher price. As already observed, he was not satisfied from the beginning as to the price offered by the acquirer so why did he offer his shares unconditionally? Having done so, he has to be non-suited on this ground. This apart, the main relief sought in the appeal cannot be granted. The primary prayer made in the memorandum of appeal is to issue a direction to the acquirer to pay the additional price to all the shareholders as was paid to Rakesh Agrawal and his group in the form of a non-compete fee. It is not in dispute that the acquirer had come out with a public announcement and thereafter a letter of offer was issued to all the public shareholders and there would have been the large number of shareholders who did not offer their shares presumably for the same reason for which the appellant was making a grievance, namely, that the price offered by the acquirer was not adequate. Since there would be a large number of shareholders who did not offer their shareholding and today if the acquirer were to be directed to pay an additional amount to the shareholders who had offered their shares, we would be doing injustice to those shareholders who did not offer their shares. For this reason as well the claim of the appellant has to be rejected.”

Alstom Sextant and Ors. v. The Securities and Exchange Board of India (2010 Securities Appellate Tribunal, Mumbai)

N. K. Sodhi: HELD:

The offer price for the indirect acquisition, as in the case before us, has to be determined in terms of Regulation 20(12) concerning the date of the public announcement for the parent company and also concerning the date of the public announcement for the acquisition of shares of the target company and the higher of the two as worked out by sub-regulation (4) would be the offer price. However, to work out the offer price even concerning these two dates, we have to work out the highest price according to the mode prescribed in sub[1]regulation (4) of Regulation 20. This sub-regulation prescribes three different modes in Clauses (a), (b), and (c) for determining the offer price, and the highest of the three shall be the offer price. When we read Regulation 20(12) with Regulation 20(4) it becomes clear that the offer price has to be worked out according to the three different modes prescribed in sub-regulation (4) concerning the two dates mentioned in sub-regulation (12) and the highest of all shall be the offer price.

We need to examine whether November 30, 2009, is a relevant date to determine the offer price. It must be noted that the announcements made by the Consortium and the seller in their press releases of November 30, 2009, the relevant portions of which have been reproduced hereinabove, merely notified the public that they were entering into exclusive negotiations for the acquisition of the parent company. It is clear from the press releases that no agreement was reached between them on that date and the parties only agreed to negotiate exclusively to reach a final agreement for the proposed sale. Mr. Cooper was right in contending that the press releases did not amount to an announcement of the global acquisition of the parent company. How could these announcements amount to a concluded contract between the parties for the takeover of the parent company when one of the parties namely, the Consortium had admittedly extended its offer on that day to keep the negotiations open till June 30, 2010? There is yet another reason why we cannot hold that there was a concluded contract for the takeover of the parent company on November 30, 2009.

The learned Counsel for the Board strenuously argued that since the Consortium and the seller had agreed on the price of the business to be taken over by the acquirer, the announcements made on November 30, 2009, should be taken as a concluded contract between the parties on which date the parent company had been taken over and, therefore, the Board was right in directing the appellants to work out the offer price concerning this date as well. We cannot accept this argument. The price of the business is, no doubt, one of the essential ingredients of a concluded contract but surely that is not the only one. The press releases made on November 30, 2009, do not constitute a fully negotiated document as they did not include several disclosure schedules and other clauses that were yet to be negotiated and agreed upon. Since the SPA was executed between the parties on January 20, 2010, we cannot but hold that a legally binding and concluded contract for taking over the parent company came into existence only on that date. It was on this date that the global acquisition of the parent company was also announced. We are, therefore, satisfied that November 30, 2009, cannot be considered as a reference date for calculating the offer price as on that date there was no agreement to acquire the parent company and there was only an intention to try and reach an agreement in that regard.

As a result of the aforesaid discussion, we hold that the Board was in error in directing the appellants to recalculate the offer price concerning November 30, 2009. This date shall be ignored and the parties to proceed further by law. The appeal is disposed of accordingly with no order as to costs.

Minimum open offer price – Direct v. Indirect Acquisition:

The minimum open offer price shall be the highest of the following:

In cases of direct and Deemed Direct Acquisition of shares or voting rights or control over the Target Company In case of an indirect acquisition of shares, voting rights or control over the Target Company Highest negotiated price per share of the target company under the agreement that attracted the open offer Highest negotiated price per share, if any of the target company, under the agreement attracting open offer Volume-weighted average price paid or payable for acquisitions by the acquirer or PAC during 52 weeks preceding the date of PA Volume-weighted average price paid or payable for any acquisition by the acquirer or PAC during preceding 52 weeks immediately preceding the earlier of: • the date on which the primary acquisition is contracted, and • date on which intention or decision to make primary acquisition is announced in public domain Highest price paid or payable for any acquisition by the acquirer or PAC during 26 weeks preceding the date of PA Highest price paid or payable by the acquirer or PAC for any acquisition during 26 weeks preceding the earlier of: • date on which the primary acquisition is contracted, and • date on which intention or decision to make primary acquisition is announced in public domain 23 Where shares are frequently traded – volume weighted average market price of the target company during 60 trading days immediately preceding the date of PA Where shares are frequently traded – volume weighted average market price during 60 trading days immediately preceding the earlier of: • the date on which the primary acquisition is contracted, and • date on which intention or decision to make primary acquisition is announced in public domain Where shares are infrequently traded – the price determined by the acquirer and manager to open offer taking into account valuation parameters, including, book value, comparable trading multiples and such other parameters as are customary for valuation of shares of such companies Where minimum offer price cannot be computed as per any of the parameters, it shall be fair price determined by acquirer and manager to the open offer taking into account valuation parameters including, book value, comparable trading multiples, and such other parameters as are customary for valuation of shares of such companies In case of Deemed Direct Acquisition where net assets value or sales turnover or market capitalization of the target company is more than 15% of consolidated net asset or sales turnover or the enterprise value of the entity or business being acquired as per latest audited annual financial statements, the per share value of the target company computed by the acquirer Where net assets value or sales turnover or market capitalization of the target company is more than 15% of consolidated net asset or sales turnover or the enterprise value of the entity or business being acquired as per latest audited annual financial statements, the per share value of the target company computed by the acquirer Highest price paid or payable for any acquisition by the acquirer or PAC during the earlier of: • date on which the primary acquisition 24 is contracted; • date on which intention or decision to make primary acquisition is announced in public domain; • date of PA under SAST 2011

CASTROL INDIA:-

Brief Account; In march 2000, BP-Amoco acquires UK-based Burmah Castrol for three billion pounds at a price equivalent to Rs. 334.75 per share. Castrol India is a wholly owned subsidiary of Burmah Castrol Holdings, which in turn is a wholly owned subsidiary of Burmah Castrol. Burmah Castrol is a wholly owned subsidiary of BP Amoco. In July 2000, BP Amoco and Castrol, UK, parent companies of Castrol India, announced an open offer to acquire a 20% shareholding in Castrol India at a price of Rs.311.91 per share. The offer price was 34% higher than the market price of Rs.234 prevailing then. Castrol’s offer price of Rs.311.91 was based on its 26-week average share price.

Surprisingly, the parent companies of Castrol India failed to get a green signal from SEBI regarding the same. SEBI announced its intention to examine whether the offer price should be calculated from March 2000, when the global takeover of Burmah Castrol by BP Amoco was announced, or July 2000 when the takeover went through. If the legal department of SEBI were to rule in favor of a revision of price, then SEBI’s formula of the last six-month average price would push the offer price to about Rs.350.

BP Amoco and Castrol, UK, decided to contest the SEBI order. They submitted an appeal to the appropriate Appellate Tribunal. However, at the end of April, the Securities Appellate Tribunal dismissed the petition of BP-Amoco and Castrol UK challenging the SEBI order asking them to base their open offer price on March 14, 2000, instead of July 7, 2000

Issues: This ruling set a legal precedent for determining the relevant date for calculating the price of an open offer made for an Indian company when its parent company abroad is merged into or taken over by another company.

The rationale of the SEBI decision: SEBI was right in its approach. Any takeover should be ultimately aimed towards benefiting the minority shareholders. If the global price is higher, then SEBI must aim at the higher price to make shareholders acquire this one-time benefit. The only way Indian shareholders benefit in this era of liberalization is through the domestic listing of MNCs. Unfortunately, there’s a reverse trend. Efficient companies and good MNCs are getting delisted from Indian bourses by way of buy-back offers or open offers. Importantly, Indian corporates are tapping the global equity markets to raise funds. So it’s a permanent loss for small shareholders.

International Study:

COUNTRY BY MINIMUM OFFER PRICE

BRAZIL: No.

CANADA: Generally, no. However, if the bidder has acquired shares in the target during the 90 days before the formal takeover offer in a transaction that is not generally available, the price and percentage of those shares constitute the minimum price and percentage of shares sought under the takeover bid.

FRANCE: The bidder must offer a minimum offer price in certain circumstances, including in the case of a: · Simplified tender offer (where the price offered by a bidder holding 50% or more of the target’s share capital and voting rights cannot, without the AMF’s consent, be lower than the volume weighted average share price over the 60 trading days before the offer). · Standing market offer (where the offer must be made at the same price paid by the bidder when it acquired the relevant controlling block in target). · Mandatory offer (where the price offered by a bidder must be a 26 minimum of the highest price it paid for target shares during the 12 months before the offer). · Alternative and improved tender offer (which must be at a price at least 2% higher than the preceding bid for a cash offer). · Public buyout offer (where the price proposed by the bidder is assessed by the AMF in light of the state of the market).

GERMANY: Except in certain circumstances, the offer price must be at least equal to both: · The value of the highest consideration paid or agreed by the bidder, a concert party, or any subsidiary undertakings for the acquisition of shares in the target within the six months before the takeover announcement. · The weighted average price of such shares on the stock exchange during the last three months before the takeover announcement. If the bidder acquires shares or options in shares in the target for a higher price than the offer price either during the public bid or within one year from the end of the offer period, all shareholders who tendered their shares can claim the difference.

HONG KONG: Where a bidder and its concert parties acquire target shares within three months before the announcement of the bid, the offer must not be on less favourable terms. In a mandatory offer, the offer price must be a minimum of the highest price paid by the bidder and its concert parties for target shares acquired within six months before the bid announcement. If, during the offer period, the bidder or its concert parties acquire target shares at more than the offer price, the bidder must increase the offer to not less than the highest price paid for any shares so acquired.

UK (ENGLAND AND WALES): Generally, the offer price must be at least the highest price paid by the bidder or any concert party for the target’s shares during: · The three months before the offer period· Any period between the start of the offer period and the announcement of a firm intention to make an offer. For mandatory bids, the consideration must be at least the highest price paid by the bidder or any concert party during the 12 months prior to the announcement of the offer. If after a mandatory bid has been made (but before it closes for acceptance), the bidder or any concert party acquires a further interest in target shares above the offer price, the bidder must increase the consideration under the offer.

USA: Generally, there is no requirement to offer a minimum level of consideration. However, consideration paid in a cash tender or exchange offer must be the same for all owners of an identical class of securities, and under the all holders/best price rule, the consideration paid to any shareholder for securities tendered in a tender or exchange offer must be the highest consideration paid to any shareholder in such offer. In addition, some states require the bidder to pay equivalent consideration to shareholders in both the tender offer and squeeze-out merger in the case of a two-stage bid.

JAPAN: No.

CONCLUSION

The New Takeover Regulations differentiate in case of the offer price for indirect acquisition. The offer price for the direct acquisition is highest of the following: (a) Highest negotiated price under the agreement triggering the open offer; (b) Weighted Average Price of shares acquired by the acquirer or the PACs during 52 weeks preceding the date of the public announcement; (c) Highest price paid for any acquisition by the acquirer or PACs during 26 weeks preceding the date of the public announcement; (d) In case of frequently traded shares, volume weighted average market price for sixty trading days immediately preceding the date of public announcement and in case of shares not frequently traded, the price determined by the 28 acquirer and the manager based on the valuation of the shares arrived as per customary valuation parameters. To compute the offer price for the indirect acquisition, in addition to the above parameters listed above, any higher price paid during the period between the contracting of the primary transaction and the public announcement also has to be considered.

BIBLIOGRAPHY

CASES:

1. A. R. Dahiya & Associates v. SEBI (2006) 68 SCL 547 (SAT – Mum.)

2. Daiichi Sankyo Company Ltd. v. Jayaram Chigurupati and Ors. AIR 2010 SC 3089.

3. Shri Sukumar Chand Jain v. Securities and Exchange Board of India, SBI Capital Markets Limited, INEOS ABS (Jersey) Limited and Lanxess ABS Limited, [2008] 87 SCL 184 (SAT – Mum.), Decided On 10.04.2008, N.K. Sodhi, J. (Presiding Officer).

4. Alstom Sextant and Ors. v.The Securities and Exchange Board of India (2010 Securities Appellate Tribunal, Mumbai).

REPORTS AND REGULATIONS:

1. Securities And Exchange Board Of India (Substantial Acquisition Of Shares And Takeovers) Regulations, 2011, notified on 23rd Sept. 2011, available at http://www.caalley.com/sebi11/1316778211380.pdf, last visited on 25-11- 2013.

2. Report of the Takeover Regulations Advisory Committee under the Chairmanship of Mr. C. Achuthan, notified on 19th July 2010, available at http://www.sebi.gov.in/cms/sebi_data/attachdocs/1287826537018.pdf, last visited on 29-11-2013.

3. Justice P. N. Bhagwati Committee Report on Takeovers, available at http://www.sebi.gov.in/commreport/bagawati-report.html, last visited on 27- 11-2013

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