TAKEOVERS

CONCEPTULISING THEIR WORKING AND REGULATORY REGIMES AROUND THE WORLD AND THEIR RELEVANCE WITH REFERENCE TO THE PRESENT CONTEXT WITH REFERENCE TO INDIA

- Suneera Nerissa Madhok

INTRODUCTION

Since the initiation of the liberalization and globalization policies in India in July 1991, an attempt is definitely being made by our policy makers to recast the institutional, organizational and legal arrangements in line with those practiced in the established market economies. In view of exploring the changing institutional framework in the context of economic reforms, the objective of this paper is to examine the recent scenario in the private corporate sector in India and to evaluate the position of corporate control mechanisms in relation to takeovers in India and other parts of the world. In the course of analysis, the article reviews the various corporate policies adopted or recommended in different countries over time and raises certain related issues pertaining to and in contrast with the situation in international markets and the international regulatory regime that might throw light on the on-going process of designing of an appropriate regulatory framework for India in the post-liberalization regime.

SECTION ONE – THE CONTEXT

Until a couple of year’s back, the news that Indian companies having acquired American-European entities was very rare. However, this scenario has taken a sudden U-turn. The recent upsurge in the Indian markets, inflow of funds and the greater “India Story” has seen Indian companies both big and small going “shopping”- shopping for bigger fish in the global ocean. Indian companies are scouring the world for the best buys. But the most glaring point to take note of is that it is not only the bigger companies with deep pockets alone who are on the prowl. Medium-sized companies, many of which are relatively unknown, are venturing into forays to acquire global status by acquiring companies in the United States, Europe and South-east Asia. Buoyant Indian Economy, extra cash with Indian corporate, Government policies and newly found dynamism in Indian businessmen have all contributed to this new acquisition trend.

The trend which started with the Information Technology companies and Information Technology Enabled Services has now spread to the pharmaceuticals, automobile, chemicals, health-care, gems and jewelry and heavy industries sectors, to name a few.

SECTION TWO – SOME BASIC CONCEPTS AND LOGISTICS OF A TAKEOVER

On account of globalization and growing cross-borders trade and liberal trade policies including free trade zones and international investment incentives and policy framework in both the developed and developing economic markets, there has been an upsurge in growth and expansion of corporate bodies world over. Takeovers have been effective machinery for balancing global economics and prompt the aforementioned phenomenon.

Broad Concept and Meaning of a Takeover

The term “takeover” implies the acquisition of control of shares in one company by another company or persons or group of related companies or persons. A company is said to be taken over when the acquiring company or the person is able to nominate the majority of members on the board of directors of the company being acquired, on account of the voting power they command at the shareholders meeting .

M.A. Weinberg, one of the pioneers in treatising the law in practice relating to takeovers, has defined a takeover as:

“a transaction or a series of transactions whereby a person (individual, group of individuals or company), acquires control over the assets of a company, either directly by becoming the owner of those assets or indirectly by obtaining control of the management of the company. Where shares are closely held (that is by a small number of persons), a takeover will generally be effected by agreement with the holders of the majority of the share capital of the company being acquired. Where the share are held by the public generally, the takeover may be effected (i) by agreement between the acquirer and the controllers of the acquired company,  (ii) by purchase of shares on the stock exchange, or (iii) by means of a ‘takeover-bid’.”

Thus, technically a takeover in business refers to one company (the acquirer, or bidder) purchasing another (the target company). When a bidder makes an offer for another, it will usually inform the board of the target beforehand. If the board feels that the value that the shareholders will get will be greatest by accepting the offer, it will recommend the bid. Otherwise it will reject it. And if the board rejects, the bid will become “hostile”. If the bidder makes the offer without informing the board beforehand, the offer is also considered hostile. If the price offered is high enough, shareholders may vote to accept the offer even if management resists converting this hostile bid into a success . Before proceeding any further, it is pertinent to broadly examine the kinds of takeovers.

Takeovers – Kinds and Methods:

Takeovers may be broadly classified into three kinds:

i. Friendly Takeover: A friendly takeover is with the consent of the target company. In a friendly takeover, there is an agreement between the management of two companies through negotiations and the takeover bid may be with the consent of majority or all shareholders of the target company. Ideally a friendly takeover is a result of negotiations between two groups. Therefore, it is often called negotiated takeover.

ii. Hostile Takeover: When an acquirer company does not offer the target company the proposal to acquire its undertaking but silently and unilaterally pursues efforts to gain control against the wishes of existing management, such acts of acquirer are known as ‘hostile takeover’. Such takeovers are hostile on the management and are thus called hostile takeover. The main consequence of a bid being considered hostile is practical rather than legal. If the board of the target co-operates, the bidder will be able to conduct extensive due diligence into the affairs of the target company. It will be able to find out exactly what it is taking on before it makes a commitment. A hostile bidder will know only the information on the company that is publicly available and will therefore be taking more of a risk. Banks are also less willing to back hostile bids with the loans that are usually needed to finance the takeover.
iii. Bail Out Takeover:  A “Bail-out Takeover” implies takeover of a financially sick company by a profit earning company to bail out the former is known as bail out takeover. Such takeover normally takes place in pursuance to the scheme of rehabilitation approved by the financial institution or the scheduled bank, who have lent money to the sick company. The lead financial institutions, evaluates the bids received in respect of the purchase price track record of the acquirer and his financial position. This kind of takeover is done with the approval of the Financial Institutions and banks.

Modes of Takeovers :

i. Staged Acquisition: Staged acquisition occurs in several stages with foreign investor initially acquiring only an equity stake, and gradually increasing their equity to 100%. Staged acquisitions allow continued involvement of previous owners where they are unwilling to sell outright, or favoured to maintain legitimacy with local consumers. The major drawbacks of this mode of takeovers are (i) shared control being a source of conflict and (ii) uncertainty over conditions of eventual full takeover.

ii. Multiple Acquisition: This mode of acquisitions involves entry by acquiring several independent businesses, and subsequently integrating them. Through multiple acquisitions global players can build a nationwide strong market position in a traditionally fragmented market.
iii. Indirect Acquisition: This is a mode of acquisition outside the focal market of a company that also owns an affiliate in the same emerging economy. The prime objective of the indirect acquisition may be outside the country. The affiliate may be a strategic asset motivating the acquisition, but this is rare. However, locally, the local affiliate may or may not fit with the existing local operations.

iv. Brownfield Acquisition: A Brownfield acquisition is one in which the foreign investor subsequently invests more resources in the operation, such that it almost resembles a Greenfield project. Brownfield acquisitions provide access to crucial local assets under control of local firms that are in many other ways not competitive. The main drawback of this form of an acquisition is that the post-acquisition investments may exceed the price originally paid for the acquired firm.

Logistics of Takeovers:

Takeovers are primarily strategic in the regard that they are thought to have secondary effects that permeate beyond the mere expansion of profitability. For instance, an acquiring company may decide to purchase a company that is profitable and has a superior distribution network in new areas which the acquiring company can utilize for its own products as well.

Further, a target company might be attractive because it allows the acquiring company to enter a new market without having to take on the risk, time and expense of establishing a concern de novo. An acquiring company could decide to take over a competitor not only because the competitor is profitable, but also in order to eliminate competition in its field and make it easier, in the long term, to raise prices.

Also, a takeover could be a vehicle to fulfill the corporate theory that the combined company can be more profitable than the two companies would be separately due to a reduction of redundant functions.

The general notion in relation to takeovers is that large companies initiate takeovers in order to improve their revenues (sales to customers) without giving sufficient regard to profit, which generally takes a hit when a company is acquired because of all the associated costs. Moreover, a premium is always paid if the target company is financially
healthy and not already desperate to be taken over.

Thus, takeovers are used as a means to achieve crucial growth and are becoming more and more accepted as a tool for implementing business strategy, whether they involve Indian companies wanting to expand or foreign companies wishing to acquire market share in India. Some of the other motivating factors behind takeovers are the desire to acquire a competency or capability, to enter into new markets or product segments, to enter into the Indian market generally, to gain access to funding resources, and to obtain tax benefits.

SECTION THREE – REGULATORY REGIME IN INDIA AND AROUND THE WORLD

Cross border acquisitions, both friendly and hostile, are increasingly international. Yet, the legal regimes governing acquisitions differ significantly, even where the purposes of relevant statutes or regulations, for example, the protection of investors, are compatible. Further, securities laws frequently are given extraterritorial effect and therefore regulatory disparities can lead to conflict and confusion.

Takeovers are dynamic corporate events and all the various permutations and combinations of the moves of the relevant parties and the resulting outcomes cannot be envisaged. For the market for corporate control to perform efficiently in the sense of effective utilization and management of corporate resources that will ensure improved performance of companies after the consolidations take place, it ought to take place within the orderly framework of regulations.

It is important that such critical processes like substantial acquisition of shares and takeovers, which can significantly influence corporate growth and contribute to the wealth of the economy through rational allocation and optimal utilization of resources, take place within the orderly framework of regulations. The regulations have to be so devised that they outline the principle, which could be the guiding lights for the unexpected events that could crop up later.

Experience in India and in the Western Countries reveals that there are several kinds of malpractices, which arise in the context of takeovers and require regulatory counter measures.  In this relation it is pertinent to study the regulatory regime in India in contrast to the regulatory regime governing takeovers world over.

A. INDIA

Regulations Governing Takeovers in India Prior to 1991:

Although prior to 1991, takeovers were restricted under Indian law, in terms of industrial licensing laws and restrictive statutory provisions, takeovers, mergers and acquisitions were not unknown. In fact, business houses like the Goenka group, or the Manu Chhabria group grew largely through acquisitions; earlier on some business houses such as the Bangur group grew mainly by taking over erstwhile Anglo-Indian firms (Bagchi (1999: 58)) .

Merger and acquisition activities continued to take place in the manufacturing sector in India during the 1980s. Since 1986 onwards, both friendly takeover bids on negotiated basis and a few hostile bids too, through hectic buying of equity shares of select companies from the stock market have been reported frequently .

The policy regime in the 1990s has greatly liberalized the possibility of industrial restructuring and consolidation through mergers and takeovers by removing various restrictions. With the adoption of liberalization policies in 1991, the Government omitted the relevant sections and provisions from the Monopolies and Restrictive Trade Practices Act, 1969 (“MRTP Act”) involving pre-entry scrutiny, by the MRTP (Amendment Act), with effect from 27.9.91 . With this, the need for prior approval of the Central Government for merger and acquisition activities was abolished. The availability of flow of funds through global depository receipts (“GDRs”) and Euro-issues has reduced the problem of finance. This, together with the dismantling of the Foreign Exchange Regulation Act controls in 1991, has led to a rise in the number of mergers and takeovers, actual and proposed.

Regulations Governing Takeovers Post Liberalization of the Indian Economy:

The policy and regulatory framework governing takeovers evolved through the 1990s. In 1992, government created the SEBI with powers vested in it to regulate the Indian capital market and to protect investors’ interests. SEBI also took over the functions of the office of the Controller of Capital Issues (“CCI”). In November 1994, with a view to regulating the takeovers, SEBI promulgated the “Substantial Acquisition of Shares and Takeover Regulations”. The SEBI regulations on takeovers were modeled closely along the lines of the UK City Code of Takeovers and Mergers. The Indian regulations have borrowed substantial concepts from and procedures from the UK code, e.g., the term “persons acting in concert”, the compulsory requirement of making a public offer on acquisition of a particular level of shares, the emphasis on following the spirit, rather than the letter, and so on. However, the essential difference is that the Indian takeover regulation is a law while the UK City Code is not .

The 1994 Takeover Code was observed to be inadequate in handling the complexity of the situation. Hence, a committee chaired by Justice P.N. Bhagwati was appointed in November 1995 to review the 1994 Takeover Code. The committee’s report of 1996 formed the basis of a revised Takeover Code adopted by SEBI in February 1997. The revised Takeover Code provides for the acquirer to make a public offer for a minimum of 20% of the capital as soon as 10% ownership and management control has been acquired. The creeping acquisitions through stock market purchases over 2% over a year also attracted the provision of open offer. However, acquisitions by those owning more than 51% ownership do not attract the provisions of the code. The price of the public offer is to depend on the high/low price for the preceding 26 weeks or the price for preferential offers, if any. In order to ensure compliance of the public offers, the acquirers are required to deposit 50% of the value of offer in an escrow account. Furthermore, the acquirer has to disclose sources of funds. Some more amendments to the code were announced by the government in October 1998. These amendments include revision of the threshold limit for applicability of the code from 10% acquisition to 15%. The threshold limit of 2% per annum for creeping acquisitions was raised to 5% in a year. The 5% creeping acquisition limit has been made applicable even to those holding above 51%, but below 75% stock of a company.

Current regulations, by making disclosures of substantial acquisitions mandatory, have sought to ensure that the equity of a firm does not covertly change hands between the acquirer and the promoters. Moreover, the right of the existing management to withhold transfer of shares under Section 22A of the SCRA, dealing with free tranferability and registration of listed securities of companies has been withdrawn in the recently introduced Depository Regulations Act, 1996, with effect from 20.9.1995. However, under Sections 250 and 409 of the Companies Act, target companies can shelter against raiders if the proposed transfer prejudicially affects the interests of the company.

Buyback of shares has been recently introduced and the Takeover Code will not include companies that are planning offers under the buy-back norms. However, takeover defense mechanisms as poison pills for incumbent management as in US and UK are not allowed under the current regulations.

The main objective of the regulations governing takeovers is to provide greater transparency in the acquisition of shares and the takeover of ownership and control of companies through a system based on disclosure of information. Instead of discovering that the management of the company one owns has covertly changed hands, resulting in huge gains for the promoter, a shareholder could now expect to be informed each time, and at what price a firm’s equity changed hands. Moreover, if the shareholder had less faith in the new owners, he could sell the shares without incurring a loss, since SEBI regulations stipulate that a buyer must make a public offer to buy shares at the same price at which the acquisition is made. The current regulations on takeovers in India seem to have taken a liberal view towards takeovers.

Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulation, 1997.

As specified hereinabove, in India, the primary regulations governing takeovers is SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 , popularly known as the “Takeover Code.” These regulations seek to regulate the whole process of acquisition and takeovers, based on principles of transparency, fairness and equal opportunity for all. The Takeover Code lays down the procedures governing any attempted takeover of a company whose shares are listed on one or more recognized stock exchanges in India.

The regulations imperatively try and set up a structured disclosure mechanism to ensure greater transparency.  Thus one of the most important aspects of the Takeover Code is that any acquirer of more than 5%, 10%, 14%, 54% or 74% of the shares or voting rights in a company has to disclose, at every stage, the aggregate of his or her shareholding or voting rights. The disclosure must be made to the company and to the stock exchanges where shares of the target company are listed .

There are various other, continual disclosure obligations; for example, the acquirer also has to disclose to the company and the relevant stock exchanges any purchase aggregating two percent or more of the share capital of the target company within two days of such purchase and must also disclose what his or her aggregate shareholding will be after the acquisition. A failure to make such disclosure will incur a penalty of Rs. 250 million or three times the amount of profits resulting from such failure, whichever is greater .

Moreover, before acquiring shares or voting rights that (together with the shares or voting rights held by persons acting in concert with the acquirer) would entitle the acquirer to exercise 15% or more of the voting rights of a company, the acquirer must make a public announcement that he or she will acquire, at a minimum, an additional 20% of the equity shares of the company .

Interpretational Issues:
Under the Regulations, an  “acquirer” means any person who, directly or indirectly, acquires or agrees to acquire shares or voting rights in the target company, or acquires or agrees to acquire control over the target company, either by himself or with any person acting in concert with the acquirer;

Further, a “person acting in concert” 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 cooperate 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)… … … … ..

These definitions have been examined by SAT in the case of Modipon Ltd. vs. SEBI & Ors   where it was held that since the provisions of regulation 2(1)(e)(2) defining person acting in concert being a deeming provision, must be read in conjunction of regulation 2(1)(e)(i) which states that persons acting in concert comprises of 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 company or control over the target company. 

Further, the SAT observed that a promoter as such need not be an acquirer automatically. Any person, and shareholder including the promoter will become an acquirer or a person acting in concert with the acquirer, only if he falls within the definition of these expressions provided in regulation 2(b) and 2(e). It is the conduct of the party that decides the identity. A dormant promoter or a promoter simpliciter who neither acquires nor agrees to acquire shares or voting rights or control over the target company is not an
acquirer and his shareholding in the target company cannot be considered as the shareholding of the acquirer warranting exclusion from the public shareholding. Similarly, if the characteristics of a person acting in concert stated in the definition are found missing in the case of a person, it may not be proper to consider him as a
person acting in concert with the acquirer.

The Bombay High Court in the case of K.K. Modi vs. SAT  has also clarified as to when a person can be said to be acting as person acting in concert. The relevant observations in the judgment are as under :

“As the Tribunal has rightly pointed out, there is no hard and fast rule that a promoter must always be deemed to be an acquirer or a person acting in concert with the acquirer. On the facts, it may be held that a promoter shares the common objective or purpose of substantial acquisition of shares with the acquirer. It may well be that he may not share the said common objective or purpose. If he does, he shall be deemed to be a person acting in concert with the acquirer but if he does not, he cannot be deemed to be an acquirer merely because he happens to be a promoter. Regulation 2(1)(e)(2) also makes this clear. The persons named therein are deemed to be persons acting in concert with other persons in the same category, unless the contrary is established. It, therefore, follows that even though there is a presumption that the persons described therein may
be deemed to be persons acting in concert with the acquirer, the presumption is rebuttable, and therefore, in each case, the facts have to be examined to reach a conclusion as to whether a person is or is not acting in concert with the acquirer for the purpose of substantial acquisition of shares or voting rights or gaining control over the target company. He may do so by an express agreement or understanding, and the agreement or understanding may be proved decide to increase his shareholding in the company by substantial acquisition of shares or voting rights in the company. The mere fact that one of the promoters of the company wishes to do so, is no reason to hold that the other promoters also necessarily share his objective or purpose. The other promoters may, in fact, be opposed to the acquirer acquiring further shares in the target company, and if they fail to prevent the acquirer from doing so, they may be inclined to dispose of the shares held by them. In such a situation, it cannot be said that the other promoters share the common objective or purpose of the acquirer. ” (emphasis supplied).

In Phiroze Sethna Pvt. Ltd. v. SEBI  the SAT has held that the term ‘acquirer’ covers not only completed acquisition but also agreement to acquire. Persons acting in concert are those who co-operate in different ways with the acquirer so that he achieves his objective of acquiring shares or voting rights or control of the target company. The facts of each case determine whether a person is or is not acting in concert with the acquirer. Their actions are the determining factor. It must be shown that they are acting in concert with the acquirer. In the same case SAT interpreted Regulation in the following terms:

“It is clear from a perusal of Regulation 11(1)  that for this clause to be triggered :
(a) the acquirer should have made acquisition of shares or voting rights in the target company during earlier financial years to the extent of more than 15% but less than 75%;
(b) the acquisition of additional shares or voting rights that triggers Regulation 11(1) during the relevant financial year should provide the acquirer more than 5% of voting rights;
(c) the same acquirer should be involved, in the acquisitions of both the initial shares as well as additional shares; and
(d) such acquisitions should be either by the acquirer himself or with the persons acting in concert with him.

It is important that the identity of the acquirer and the persons acting in concert with him is clear to all. There should not be any ambiguity about the identity of such persons as they carry certain duties and obligations.”

In Hardy Oil Pvt. Ltd. v. SEBI   the SAT observed that a plain reading of Regulation 10 makes it abundantly clear that no acquirer shall acquire 15% or more shares or voting rights in a company unless he makes a public announcement to acquire shares of such company in accordance with the Regulations. The word “unless” in the opinion of the tribunal, only mandates that as and when the Regulations get triggered or become applicable, the acquirer has to make a public announcement to acquire shares of the target company in accordance with the Regulations. It does not mean that a public offer has to be made before the acquisition. The Regulations only impose an obligation on the acquirer to make a public announcement if he/it acquires the requisite percentage of shares. The word unless may have different connotations and in each case the context in which it is used will have to be looked into to find out the correct meaning. In some circumstances, the word unless may mean a condition precedent but it need not necessarily be so in every case. Having regard to the context in which it is used in Regulation 10, the tribunal were clearly of the view that it makes the acquisition conditional upon a public announcement being made and it does not mean that the public announcement has to be made before the acquisition. Such public announcement could be made before or after the acquisition.

One of the meanings assigned to the word ‘unless’ in Black’s Law Dictionary (6th edition) is “a conditional promise” meaning thereby that the condition has to be met irrespective of the time frame in which the promise is to be fulfilled.

Further, SAT held that if making of a public announcement was a condition precedent as contended on behalf of the appellant, then the Regulation would have read “unless such acquirer has made a public announcement” instead of “unless such acquirer makes a public announcement”. Use of the word ‘makes’ merely signifies the mandatory nature of the public announcement which could be made before or after the acquisition. Regulation 10 does not prescribe the time frame within which such an announcement is to be made. The time schedule for making such an announcement is prescribed by Regulation 14. Clause (1) of Regulation 14 provides that the public announcement referred to in Regulation 10 shall be made not later than 4 working days of entering into an agreement for acquisition of shares or voting rights. Regulation 14(1) does not refer to the date of acquisition. It only refers to the date of entering into the agreement for acquiring shares. Shares could be acquired within four days of entering into the agreement or thereafter and the period of four days for making the public announcement shall start running from the date of the agreement. It is possible that an agreement to acquire shares may be entered into today and the shares are acquired the following day. The acquirer would still have three more working days to make the public announcement because the period of four days is to start from the date of the agreement and not from the date of acquisition. It is, therefore, wrong to contend that the public announcement must always precede the acquisition of shares.

Furthermore, it was observed that the explanation to Regulation 11 makes it clear that the acquisition referred to in Regulation 10 and 11 would include both direct and indirect acquisitions. If one read Regulation 14(1) in isolation it would cover both direct as well as indirect acquisition but when this clause is read along with clause (4) thereof it leaves no room for doubt that Regulation 14(1) deals only with direct acquisitions and Regulation 14(4) deals with all indirect acquisitions. The language of clause (4) of Regulation 14 is clear and it provides that in the case of indirect acquisition, a public announcement shall be made by the acquirer within 3 months of consummation of such acquisition.

In the landmark case of  In Re: Sterling Investment Corporation Private Limited; In Re: Shapoorji Pallonji and Company Limited; In Re: Cyrus Investments Limited  the tribunal held that the acquirers plea that the violation of Regulation 10 and/or Regulation 12 was technical in nature in view of the difficulties of interpretation of the Regulations and due to a bonafide belief that they were not required to make a public offer for the shares acquired and also their contention that they had not acted deliberately in defiance of law or in conscious disregard of their obligations and had not made any gain or unfair advantage nor had they caused any loss to any one, and the default, if any, was not of a repetitive nature and thus there was no “mens rea” on their part and hence having regard to the fact that they had not committed any default in the past, no proceedings ought to have been initiated against them, would not stand good in law, since the words of Regulation 10 would not attract any contrary interpretation as inferred by the acquirers in this case.

Case Studies:

i.    Luxottica v. SEBI:

In April 1999, in a global acquisition, the Luxottica group of Italy acquired the sun-glass business of Bausch & Lomb, US, for $ 640 million. As Bausch & Lomb, US, had a 44% in Bausch & Lomb India through B&L South Asia Holdings, the control of the Indian subsidiary passed into the hands of Luxottica upon the takeover.

The Luxottica group also appointed its nominees on the board of B&L India and later rechristened it as Ray Ban Sun Optics India. The board was reconstituted in October 2000. B&L India was incorporated by Montari Industries and Bausch & Lomb in 1990 to manufacturer and market soft contact lenses, eye-care solutions, frames and sunglasses.

Despite a change in management control in B&L India, Luxottica failed to make the 20% mandatory open offer to shareholders. In its reply to a show-cause notice from Sebi, Luxottica clarified that there was no question of violation as the deal was not an acquisition but only a merger under rule 31 (j)(2) of the Takeover Code. In a complaint filed with SEBI last year, small shareholders alleged that the acquisition of shares by Luxottica attracts the provisions of regulations 10, 11 and 12 of the code.

In January 2002, SEBI started investigation into the matter and issued a notice to Luxottica SPA of Italy for a hearing to ascertain whether there was any violation of the takeover code following its indirect acquisition of Bausch & Lomb India.

In August 2002, SEBI came out with a ruling that Luxottica had violated regulation 10 and 12 of the Takeover Code and directed Luxottica to make a 20% open offer for RayBan by taking 28 April 1999 (the date of global acquisition) as the reference date. It asked the Italian company to make a public announcement within 45 days of the order and also pay a 15% interest to shareholders from April 1999 till the date of actual payment of consideration.

On 29 October 2003, Luxoticca Group SPA and Rayban Indian Holdings announced an open offer to acquire 20% equity of Rayban Sun Optics India at Rs 104.3 per share. This apart, shareholders are also eligible to receive 15% interest of Rs 70.68 per share. As per an order dated 29 August 2003, the interest would be paid only to shareholders holding shares on the day of the acquisition of 28 April 1999.

However, on 18 November 2003, the Supreme Court (SC) stayed the SAT order dated 29 August 2003 concerning Luxottica SPA’s open offer for shares of RayBan Sun Optics. Earlier, Luxottica had filed an appeal with the apex court on 12 September 2003 under Section 15Z of the SEBI Act against the judgment and the final order dated 29 August 2003 passed by SAT. In the mean time, SEBI has also filed its counter appeal before SC against the SAT order, which primarily relates to shareholders’ eligibility to receive interest.

ii.    Technip SA vs. SMS Holdings Pvt. Ltd

In the above matter, eight appeals were heard together on the issue of application of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 to the control of South East Asia Marine Engineering and Constructions Ltd. (SEAMEC) acquired by Technip through Coflexip without making public announcement. SEBI had directed Technip to make a public announcement and also to pay interest @ 15 per cent per annum to the shareholders for the delayed public announcement. In appeal, SAT had held that the applicable law to the question as to when control of SEAMEC has been taken over by Technip was the Indian law. The view of SEBI was that the applicable law for determining the date on which Technip acquired control over Coflexip would be the French Law. In the appeal filed by Technip before the Supreme Court, it was urged that the applicable law was French law since Technip and Coflexip were both registered in France and the takeover of Coflexip by Technip also took place in France. Hon’ble Supreme Court was pleased to uphold SEBI’s order and set aside the order passed by SAT. Hon’ble Supreme Court was pleased to observe that for the purpose of determining Technip obligation under the Takeover Code, SAT should have addressed itself as SEBI had done to the question whether ISIS and Technip were acting in concert to obtain
control over the target company i.e., SEAMEC.

iii.    Swedish Match Singapore Case:
Swedish Match Singapore agreed to acquire majority shareholding in Haravon and Seed subsequent to 17th December, 1997 wherefor the public offer was made. SMS comprising of Haravon and Seed had 28.28 per cent and 10.33 per cent whereas Jatia Group comprising of AVP and Plash had 5 per cent and 15 per cent respectively whereas public / others had 41.39 per cent shares. In concert with each other the two Groups acquired shares from public.

On or about 25th August, 1999 by acquiring preferential shares the Swedish Match Group obtained 52.11 per cent and Jatia Group obtained 24.11 per cent as a result whereof in Wimco the shares held by public/others came down to 23.78 per cent. Both Swedish Group and Jatia Group were exercising the joint control. By reason of Jatia Group obtaining out of the joint control by transfer of shares in favour of Swedish Match Singapore, a subsidiary of Swedish Match AB (a
part of Swedish Match Group) obtained 74 per cent of shares whereas shares i.e. Haravon – 46.18 per cent, Seed – 5.93 per cent and SMS – 21.89 per cent. Thus, the extent of shares of Jatia Group came down to 2.22 per cent. Jatia Group sold their shares to public as a result whereof shares of public became 23.78 per cent. S.M.S. is a subsidiary of the Singapore Match Group. The Swedish Match is the holding company being the owner of the 100 per cent shares of SMS. It stands categorically admitted by the Appellants herein that acquisition of shares from Jatia Group in favour of SMS was done by the Swedish company as a group and not as an individual company. Factually, therefore, it is not correct to contend although in its notice dated 28-1-2002. SEBI had given indication thereof, that SMS had acquired 21.89 per cent shares of its own. Even if SMS had done so, Regulation 10 would apply as no public announcement was made therefor.

SMS was a part of the Swedish Match Group and they acquired 21.89 per cent shares from Jatia Group. On or about 25th August, 1999, indisputably, Swedish Group and Jatia Group acted in concert with each other. By reason of acquisition made in September, 2000, Swedish Group, as acquirer, together with Jatia Group, had acquired more than 15 per cent but less than 75 per cent of shares. Any of those acquirers whether Swedish Match Group or Jatia Group, therefore was prohibited from acquiring by itself any additional share entitling it to exercise more than 5 per cent of the voting rights.

The SAT held that Regulation 11 does not brook any other interpretation. If additional shares are acquired entitling an acquirer to exercise more than 5 per cent of the voting rights, the statutory embargo to the effect that the acquirer (in this case Swedish Match Group) must make a public announcement to acquire shares in accordance with the Regulation comes into operation. If such a meaning is not assigned, the disjunctive clauses contained in the expressions “either by himself or through or with person acting in concert with him”, may not carry a true and effective meaning.

Critical Evaluation of the Regulations:
There are  a number  of  problem  areas that needs immediate attention  of  the  regulators  to  make  the  Code  more  meaningful  in  the  interest  of investors at large. Certain exemptions such as preferential offers and stake transfer to co-promoters have been misused by  the incumbent managements and should be brought under the purview of the Code. The terms such as ‘change in control’, ‘persons acting in concert’ and promoters need to be clearly defined. Another area of concern for small investors is the provision relating to open offers mainly its size and pricing. There is an absence of simple and transparent regulations and  a  high  degree  of ad-hocism and confusion on how the changes  in  ownership stake at the  global level affect the application of the Code.  The present creeping acquisition limit of as high as 10 per cent hardly leaves any room for raiders to put the inefficient managements on their toes and should be reduced.  However, special provisions should be made for professionally managed companies without any identified promoter group to  protect them from hostile takeovers.

SEBI  should  also provide for better disclosure  norms governing corporate M&As. The role of financial institutions in the case of a takeover should be well defined. The provisions for bailout takeovers should  not  limit  competition  and  bring  maximum benefits to financially weak companies thereby benefiting the economy. The issue of disinvestment of PSUs needs to be elaborately addressed in the Code.

Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 :

Under the Foreign Exchange Management (Transfer and Issue of Security by a Person Resident Outside India) Regulations, 2000, any acquisition of shares of an Indian company by a nonresident must comply with the foreign-exchange laws. Such an acquisition may be by way of subscribing to new shares or acquiring existing shares. Foreign investments in sectors or activities subject to the RBI’s automatic route do not require any prior approval of the FIPB. Under India’s present FDI policy, any sale of shares from a resident to a nonresident (and vice versa) is permitted under the RBI’s automatic route, provided certain conditions (inter alia, those relating to pricing) are complied with.

B. UNITED STATES OF AMERICA

In the United States most large corporations are publicly owned and federal law protects investors primarily through mandated disclosure in capital raising and change of control transactions, and the prohibition of fraud and manipulation in the public securities markets . Tender offers are regulated by the SEC pursuant to the Williams Act , which amended the Securities Exchange Act of 1934 (“Exchange Act”) in 1968. The Williams Act was sought to effectively remedy block purchases and large rapid accumulations, which could result in changes in corporate control, were taking place secretly .

The Williams Act generally deals with the disclosure obligations of bidders and was intended to equalize the protection of investors in takeover contests . The Williams Act also gives investors equal or fair rights to participate in the public tender offer.

Any person who acquires a beneficial interest of five percent or more of any class of equity security subject to the annual and periodic reporting provisions of the Exchange Act (essentially, the common stock of all publicly traded issuers) must file a statement of ownership with the SEC within ten days after such acquisition . Further, the filing must state the purchaser’s future intentions with regard to the target company; that is, whether the purchaser intends to make a tender offer or engage in some other control transaction . A bidder must commence an offer within five days of a public announcement of an offer that includes the price and number of securities sought .

The Williams Act and implementing SEC regulations also address certain substantive or procedural aspects of tender offers. These include making tendered shares withdrawable for a specified period of time, requiring pro rata acceptance when an offer for less than one hundred percent of shares is made, requiring that tender offers be made to all security holders, and that all offerees be paid the same price .  In addition, § 14(e) of the Exchange Act  contains a general tender offer antifraud provision prohibiting the use of all fraudulent, deceptive, and manipulative acts and practices in connection with a tender offer and gives the SEC authority to define, and prescribe means reasonably designed to prevent, such acts and practices as are fraudulent, deceptive, or manipulative. Pursuant to such authority, the SEC adopted Rule 14e-3 , which, among other things, prohibits anyone in the possession of insider information about an unannounced tender offer from trading on such information.

The Williams Act generally facilitates tender offers, but corporate governance in the United States is left to state law. Further, corporate fiduciary duty regulation under state law is not, as a general matter, preempted by the Williams Act, so the SEC does not regulate the defenses available to a bidder .  In Schreiber v. Burlington Northern, Inc., it was argued that a renegotiation by a target company of the terms of a tender offer breached the company’s fiduciary duty to its shareholders, was manipulative, and violated the antifraud provisions of the Williams Act .  The United States Supreme Court rejected this argument, however, holding that the Williams Act dealt with disclosure, not unfairness in the takeover context. As a matter of state law, although directors are obliged to exercise due care and loyalty , and must obtain the highest price once a company is on the auction block , they have considerable latitude in resisting a takeover bid .  Further, state statutory law can be quite protective of directors attempting to block an unwelcome bidder .

C. UNITED KINGDOM

i. The City Code on Takeovers and Mergers:

The rules of engagement for any proposal to obtain control of a U.K. public company are set out in the City Code on Takeovers and Mergers (“Code” or “Blue Book”). The Code is administered by the Panel on Takeovers and Mergers (“Panel”). It is a developing body of general principles, rules and guidance notes published and amended from time to time by the Panel. The Code is supplemented by general and case-specific rulings issued by the Panel. There is also a wealth of non-published guidance that has precedential significance. This considerable body of materials represents the accumulation of over 35 years of Panel regulation of public takeovers in the U.K.

The Panel asserts authority only in relation to change of control transactions where the target is either a U.K. public company (whether or not or wherever listed) or its equity securities have been traded during the last 10 years and in either case the company has some substantial administrative connection with the British Isles (U.K., Channel Islands and Isle of Man). The Panel has traditionally refused to accept jurisdiction merely because the target is U.K. incorporated; its concern is to regulate transactions only where the target is clearly within its control range although the scope of Code application will change upon introduction of the measures designed to implement the European Takeover Directive due in 2006. For similar control-related reasons, although not prescribed in the Code, the Panel invariably insists that an overseas bidder be represented by a U.K. regulated adviser in order that it can exercise effective jurisdiction over a participant on the bidder side.

The Code is not intended to be subjected to detailed legal interpretation and is not static. It must be applied according to particular circumstances consistent with the general principles. The most important principles of the Code are:

• equality of information to all bidders and all shareholders;

• an offer should only be announced if the bidder is able to implement it in full (this includes a requirement to be fully financed from the outset);

• during an offer period or when one is in contemplation no action can be taken by the board of the target out of the ordinary course that could frustrate any bona fide offer;

• all documentation should be prepared with the highest standards of care and accuracy;

• all parties must endeavour to prevent the creation of a false market; this particularly relates to indications of bid intentions; and

• all shareholders (of the same class) must be treated equally.

The Panel encourages consultation and is prepared to exercise discretion when applying the Code and when developing or adjusting its provisions. Consultation is discrete and generally highly interactive and rapid.

Often described as a consensus driven, non legal structure, the Code and the authority of the Panel to enforce it is in effect secured by operation of the financial services regime. In particular, regulated entitles such as financial advisers are vulnerable if they allow a client to breach the Code. Furthermore, breach of the Code will have negative implications when interpreting the market abuse provisions in the Financial Services and Markets Act 2000 (“FSMA”).

Further, breach of the Code or cocking a snoop at the Panel may at the least draw a public criticism, the broad implications of which are uncertain, or result in the London market “cold-shouldering’ those in breach the Code and who refuse to be bound by Panel determinations.

Finally, implementation of the European Takeover Directive will place the current structure on a statutory footing by mid 2006, which expected broadly to replicate much of the existing requirements there will be some detailed alterations to the bid process. The relationship with the Panel as statutory regulator is also likely to change over time.

ii. Other Laws:

Although there is no comprehensive legislation dealing with offer process, a miscellany of laws and regulations may be applicable, the key ones being as described below.

Provisions of the Criminal Justice Act 1993 regulate insider dealing while the FSMA imposes market abuse rules that affect any publication or activity that could have market implications.

The Companies Bill received the Royal Assent and became the Companies Act 2006 (the 2006 Act) on November 8, 2006 .  The 2006 Act consolidates all previous companies legislation and will replace (with a very few minor exceptions) the Companies Act 1985 in its entirety. The provisions on shareholder communication, and in particular the electronic communications provisions, were brought into force in January 2007, at the same time as the provisions implementing the EU Takeovers Directive and the EU Transparency Directive. The remainder of the 2006 Act will be brought into force by October 2008 .

The 2006 Act’s impact on the rules on financial assistance and directors’ duties are of particular interest with regard to takeovers.

Financial Assistance: The 2006 Act abolishes the prohibition on the giving of financial assistance by private companies and their subsidiaries for the purpose of acquiring shares in that company. In accordance with the Second Company Law Directive (77/91/EEC) , the prohibition on giving financial assistance will be retained for public companies under the 2006 Act . [FN102] The new rules on financial assistance have been broadly welcomed.

An EU Directive amending the Second Company Law Directive was formally adopted and published this year .  The new Directive states that public companies will be able to provide financial assistance if certain conditions are met .

Directors’ Duties: The 2006 Act codifies the common law and equitable principles that presently govern the duties owed by directors to their companies. While some of the seven codified duties set out in the 2006 Act are relatively uncontroversial, others have been criticized. Although the 2006 Act provides that the new statutory duties shall have effect in place of directors’ common law and equitable duties, regard must be had to the common law and equitable rules and principles in interpreting and applying the statutory duties.

The EU Takeovers Directive was implemented in the United Kingdom on May 20, 2006 . The implementation of the Takeovers Directive has led to some substantive changes to the current regulatory system in the United Kingdom. The regulations place the Panel on Takeovers and Mergers on a statutory footing for the first time, giving the Panel powers to make rules on takeovers, introduce a new criminal offence for breach of the takeover documentation requirements, and make changes to the squeeze-out procedures on bids .

D. AUSTRALIA

Owing to a number of scandals in the securities markets of Australia in the 1980s, it now has an extensive scheme of takeover regulation. It is embodied in a federal law which is implemented by each state adopting the federal legislation; this serves as a means of assuring uniformity among states .  A National Companies and Securities Commission (NCSC) has authority to monitor trading in target company securities, and to administer the takeover legislation.

Prescribed information must be set forth in tender offer materials, which must be registered with the NCSC and served on the target company and appropriate securities exchange before it can be used and before a tender offer can commence .  The target company then must prepare and file with the NCSC a statement containing its recommendation and prescribed information, including unpublicized changes, if any, in its financial condition .  Both the bidder’s materials and the target company’s materials must be transmitted to the shareholders .

There are special procedures if the takeover is to be effectuated by purchases on a stock exchange .  There are also detailed substantive provisions governing, among other things, the period the offer remains open, conditions to the offer, market purchases, and best price requirement .  If specified percentages are acquired, then the bidder can compel the remaining shareholders to sell on the same terms , and, if the bidder acquires ninety percent, the remaining shareholders that did not tender can compel the bidder to buy their shares on the same terms, which they previously refused .

SECTION FOUR – THE PRESENT SCENARIO AND RECENT SIGNIFICANT TAKEOVERS IN INDIA

Recently, India has made a number of high profile, multi billion dollar acquisition in Europe and North America. In early 2007, Tata Steel acquired the Anglo- Dutch Steelmaker Corus and the Indian aluminium firm Hindalco acquired its U.S- Canadian rival, Novelis. India’s auto industries are also making their global presence felt. Tata motors have already acquired the South Korean firm Daewoo’s truck making unit and is not expanding itself in Latin America in partnership with Italy’s Fiat. Another company Mahindra and Mahindra, India’s largest tractor and utility vehicle maker is already selling tractors in Texas and is believed to acquire a gearbox company in Italy. Also, Indian Pharmaceutical firms have embarked on an aggressive global expansion. Last year Ranbaxy made a number of Acquisitions in Europe, United States and Africa and is now eyeing Germany’s Merk Generics. Likewise Hyderabad based Dr. Reddy’s Laboratories has already acquired the German drug maker Betapharm. Moreover, Sun Pharmaceuticals, India’s most valuable drug maker is buying Israel’s Taro Pharmaceutical Industries.
The study of FICCI on India’s Inc Acquisition abroad points out eight different strategic reasons as to why are Indian companies acquiring entities globally.

HUTCH – VODAFONE:
Hutchison Telecommunication International Limited (HTIL) is a leading global provider of telecommunication services. It offers services in Hong Kong and operates or is rolling out mobile telecommunication services in Macau, India, Israel, Thailand, Sri Lanka, Ghana, Indonesia and Vietnam. “HTIL” is a listed company with American Depositary Shares quoted on the New York Stock Exchange and Shares listed on the Stock Exchange of Hong Kong. Recently HTIL decided to exist Indian market and thereby sold its entire holdings in Hutch Essar Limited (HEL) to Vodafone International Holding B.V a subsidiary of Vodafone Group Plc. HTIL held 52 per cent of HEL directly, another 15 was held by Asim Ghosh, Hutchison Essar managing director and Analjit Singh, chairman of Health care group Max India and the remaining 33 per cent was held by Essar Group, an Indian conglomerate but two-thirds of its stake is in turn controlled through an offshore company for tax reasons, classifying it as foreign. HTIL thereafter entered into a Contractual settlement agreement with the Essar Group, under which the Essar Group announced proposed disposal of its interest in Hutchison Essar Limited for a cash consideration of approx US.1 Billion.
The controversy which arose was 15% stake belonging to local partners were held indirectly by HTIL and that HTIL through a complex shareholding arrangement, has violated an Indian law that limits foreign direct investment in domestic Telecom Operators to 74 per cent.
Vodafone thereby filed an application with “Foreign Investment Promotion Board” (FIPB) with regard to its foreign direct investment. FIPB gave its approval stating the Vodafone’s holding in the joint venture with Essar is 52% and did not include 15% held by local partner. However, FIPB was of the opinion minority shareholders in the new venture can only sell their stakes to Indian residents.

MITTAL – ARCELOR:
Mittal Steel, owned by L N Mittal & family, has its headquarters in London and Rotterdam. It has plants in 14 countries spread across Europe, Asia, North America and Africa. Its first acquisition took place in 1989. Arcelor was founded in 20 02 by merger of Abred of Luxembourg, Arcelia of Spain and Usinor of France. Its turnover is valued at 033 billion. Its plants, joint ventures and subsidiaries are spread across 60 countries. In the year 2006, Mittal Steel made an offer to acquire Arcelor. Its original offer to Arcelor was for 017.5 billion. In May it increased the offer to 024 billion and the final offer was 026.9 billion. Mittal’s final offer was accepted. Mittal paid 040.37 a share for Arcelor nearly double the price, it was trading before the first bid was made. When Mittal made first bid, Arcelor rejected it with vengeance. It recommended to shareholders not to sell shares to Mittal as the two companies did not share the same strategic vision, business model and values. A couple of European governments did not like the idea of an Indian taking over an European company. The French foreign minister felt it would affect 28,000 jobs and that the bid was ill-prepared and hostile. However, Mittal Steel said jobs would be safeguarded. Arcelor took the matter to regulators to thwart the takeover. But the regulators did not find any anti-trust provisions being violated and asked Arcelor not to issue shares to anyone without investors’ explicit consent. To begin with, Arcelor refused to meet Mittal until a string of demands were met and simultaneously arranged a 013 billion deal with Severstal of Russia to keep Mittal away. As shareholders wrath grew over the Severstal agreement and pressures from other quarters increased, Arcelor accepted Mittal’s final bid. Arcelor had to pay 0130 million as a fine to Severstal for breaching the contract. Ultimately, L N Mittal succeeded in acquiring Arcelor. Now the combined capacity of Arcelor Mittal is 109.7 million tonnes.

TATA-CORUS:
The London-based Corus Group was one of the world’s largest producers of steel and aluminum. Corus was formed in 1999 following the merger of Dutch group Koninklijke Hoogovens N.V. with the UK’s British Steel Plc. Tata Steel is the India’s largest private sector steel company. Tata Sons is the promoters of the Tata Steel with approximately 23.8% of share capital of Tata Steel. Tata steel was in look out of various acquisition opportunities including the Corus Group. Soon Tata steel started the discussions with the Board and Management of the Corus Group and made a non-binding offer to acquire 100% equity in Corus Group at 455 pence per share. Tata Steel UK, a UK resident wholly-owned indirect subsidiary of Tata Steel, was formed just for the purpose of making the Acquisition. Corus Group received competiting offers from both Tata Steel U.K and CSN Acquisition Limited. Thereby the Panel on Takeovers and Mergers announced the last day for each Tata and CSN to announce revised offers for the company shall be 30th January 2007.  The final revised offer announced by Tata Steel was at price 608 pence in cash per Corus Share. However the final revised offer announced by CSN Acquisition was at price 603 pence in cash per share. The Corus directors consider the terms of the Final Tata Offer to be fair and reasonable, so far as Corus Shareholders are concerned. Given that the price of the Final Tata Offer is five pence above that of the Final CSN Offer, the Corus Directors believe that the Final Tata Offer represents the best value for Corus Shareholders. At the Court meeting and Extra-ordinary meeting shareholders approved the Scheme of arrangement between the Corus Group and Tata Steel U.K by the requisite majority. Thereby Corus announced to implement the recommended offer by Tata Steel UK Limited.

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