Securities Appellate Tribunal
Sebi vs Ondel Nalco India Limited on 9 April, 2003
JUDGMENT
G.N. Bajpai, Chairman
1. BACKGROUND 1.1 Suez Lyonnaise des Eaux (hereinafter referred to as "the Acquirer") is a company stated to be organized and existing under the laws of France.
1.2 H2O is stated to be a wholly owned subsidiary of the Acquirer, was a company, stated to be, incorporated under the laws of the State of Delaware, United States of America.
1.3 Ondeo Nalco Company ,formerly known as "Nalco Chemical Company",(hereinafter referred to as "ONC USA" )is a company, stated to be, organized and existing under the laws of the State of Delaware, United States of America.
1.4 ONC USA has a subsidiary, Ondeo Nalco India Ltd. (hereinafter referred to as "the Target company") formerly known as Nalco Chemicals Ltd. ONC USA holds 80% shares in the equity capital of the Target company. The shares of the Target company are listed at the Stock Exchange, Mumbai and the Calcutta Stock Exchange.
1.5 On 14.09.2001, Securities and Exchange Board of India (SEBI) received a complaint inter alia alleging that the Acquirer has acquired control over the Target company pursuant to an Agreement dated 27.06.99 entered into between the Acquirer,H2O & ONC USA and the Acquirer has not made public announcement under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred to as "the Regulations").
2. SHOW CAUSE NOTICE 2.1 A show cause notice dated 8.7.2002 was issued to the Acquirer inter alia stating that :
2.2 the Acquirer admittedly, acquired control of 100% shareholding of ONC USA pursuant to an agreement dated 26/6/1999 and consequently, the Acquirer acquired control of worldwide operations of the US company and its subsidiaries including the Target company in terms of Regulation 2(1)(c).
2.3 the Acquirer was under an obligation to make public announcement to acquire a minimum of 20% shares of the Target company in terms of the Regulations 10 &12, within 4 working days from the date of June 26, 1999 in terms of sub regulations (1) & (3) of regulation 14 of the Regulations.
2.4 Why one or more or all action(s) under Regulation 44 and Regulation 45 of the Regulations and Sections 11, 11B,15H & 24 of the SEBI Act, should not be initiated against it for violations.
3. In reply to the show cause notice, the Acquirer replied vide its letter dated 23.9.02. The submissions made therein are reproduced in the subsequent paragraphs.
4. A hearing before the Chairman, SEBI, was granted to the Acquirer on 14.12.2002 wherein the Acquirer made submissions. Subsequent to the hearing the Acquirer filed written submissions on 30.12.02.
5. SUBMISSIONS OF THE ACQUIRER 5.1 The Acquirer has vide its letter dated 23.9.02, 30.12.02 and during the hearing dated 14.12.2002 has inter alia made the following submissions -
The Agreement and Plan of Merger was a tri-partite agreement entered into on the 27th June 1999 by and between the Acquirer, H2O and ONC USA .
This Agreement and Plan of Merger contained a composite scheme of arrangement including the merger. The transactions as entered into under the said Agreement and Plan of Merger was an arrangement encompassing the Offer and the Merger. The consideration for the composite arrangement was one, indivisible consideration. The relevant portions of the Agreement and Plan of Merger which unambiguously evidence the scheme of arrangement including the merger are -
WHEREAS, the Boards of Directors of Acquirer, H2O and ONC USA have each determined that it is in the best interests of their respective stockholders for Acquirer to acquire ONC USA upon the terms and subject to the conditions set forth herein; and WHEREAS, in furtherance of such acquisition, it is proposed that H2O shall make a cash tender offer (the "Offer") to ...... upon the terms and subject to the conditions of this Agreement and the Offer (shares of Common Stock and shares of ESOP Preferred Stock are hereinafter collectively referred to as "Shares"); and WHEREAS, the Board of Directors of ONC USA (the "Board") has adopted resolutions determining that the Offer and the Merger are fair to and in the best interests of the holders of the Shares (the "Holders") and recommending that the Holders approve the Merger, this Agreement and the other transactions contemplated hereby and adopt this Agreement and tender their Shares pursuant to the Offer; and WHEREAS, also in furtherance of such acquisition, the Boards of Directors of Acquirer, H2O and ONC USA have each approved the merger (the "Merger") of H2O with and into ONC USA in accordance with the General Corporation Law of the State of Delaware ("Delaware Law") following the consummation of the Offer and upon the terms and subject to the conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements herein contained, and intending to be legally bound hereby, Acquirer, H2O and ONC USA hereby agree as follows:
SECTION 1.02. Company(ONC USA) Action. (a) ONC USA hereby approves of and consents to the Offer and represents that (i) the Board, ...... determined that the Merger is advisable and that this Agreement and the transactions contemplated hereby, including the Offer and the Merger, are fair to and in the best interests of the Holders, (B) approved and adopted this Agreement and the transactions contemplated hereby (such approval and adoption having been made in accordance with the provisions of (S) 203 of Delaware Law), (C) recommended that the stockholders of ONC USA accept the Offer, approve the Merger and approve and adopt this Agreement and the transactions contemplated hereby and (D) took all other applicable action necessary to render (x) Section 203 of the General Corporation Law of the State of Delaware and other state takeover statutes and (y) the Rights Agreement, inapplicable to the Offer and the Merger, and (ii) ...... laws.
SECTION 2.01. The Merger. Upon the terms and subject to the conditions set forth in Article VII, and in accordance with Delaware Law, at the Effective Time (as hereinafter defined) H2O shall be merged with and into ONC USA . As a result of the Merger, the separate corporate existence of H2O shall cease and ONC USA shall continue as the surviving corporation of the Merger (the "Surviving Corporation").
SECTION 2.02. Effective Time; Closing. As promptly as practicable after the satisfaction or, if permissible, waiver of the conditions set forth in Article VII, the parties hereto shall cause the Merger to be consummated by filing this Agreement or a certificate of merger or certificate of ownership and merger (in either case, the "Certificate of Merger") with the Secretary of State of the State of Delaware, in such form as is required by, and executed in accordance with, the relevant provisions of Delaware Law (the date and time of such filing being the "Effective Time").
SECTION 2.03. Effect of the Merger. At the Effective Time, the effect of the Merger shall be as provided in the applicable provisions of Delaware Law. ........
SECTION 6.01. Stockholders' Meeting. ONC USA , acting through the Board, shall, in accordance with applicable law ....... following consummation of the Offer for the purpose of considering and taking action on this Agreement and the transactions contemplated hereby (the "Stockholders' Meeting") and (ii) ...... the stockholders of ONC USA approve and adopt this Agreement and the Transactions and ...... At the Stockholders' Meeting, Acquirer and H20 shall cause all Shares then owned by them and their Subsidiaries to be voted in favor of the approval and adoption of this Agreement and the Transactions. The record date for the Stockholders' Meeting shall be a date subsequent to the date Acquirer or H2O becomes a record holder of Shares purchased pursuant to the Offer.
SECTION 7.01. Conditions to the Merger. The respective of each party to effect the Merger shall be subject to the satisfaction at or prior to the Effective Time of the following conditions:
(a) Stockholder Approval. This Agreement and the Transactions shall have been approved and adopted by the affirmative vote of the stockholders of ONC USA to the extent required by Delaware Law and the Restated Certificate of Incorporation of the Company;
(b) .......;
(c) ........;
(d) No Order. No United States federal or state or Republic of France governmental authority ....... (a "Governmental Order") which is then in effect and has the effect of prohibiting consummation of the Merger; and
(e) Offer. H2O or its permitted assignee shall have purchased all Shares validly tendered and not withdrawn pursuant to the Offer.
3. The scheme under the Agreement and Plan of Merger clearly provided that the success of the Offer to Purchase the shares by H2O was a condition precedent to the Merger. This scheme as approved by the Board of Directors of each of H2O , Acquirer and ONC USA was required to be placed before the shareholders of each of the H2O and the ONC USA after the expiration of the Offer to Purchase the shares from the shareholders of the ONC USA .
4. In fact the parties to the Agreement and Plan of Merger performed their obligations as per the terms and conditions contemplated in the said Agreement, in as much as pursuant to and in compliance of the said Agreement and Plan of Merger an "Offer to Purchase for Cash All of the outstanding Shares of Common Stock (Including the Associated Preferred Stock Purchase Rights) and ....... of ONC USA at ....... by H2O Acquisition Company ...", was made on the 1st July.
5. This Tender Offer Statement, in prescribed Form Schedule 14D-1, made pursuant to Section 14(d)(1) of the Securities Exchange Act of 1934 informed the Securities Exchange Commission (SEC) of the intention of the H2O therein, to make an offer to acquire all the securities of the ONC USA .
6. The offer document clearly provided that the offer was being made pursuant to the Agreement and Plan of Merger as of 27th June 1999 , among the Acquirer, H2O and the ONC USA . The Merger Agreement provides that, as promptly as practicable after consummation of the Offer, H20 will be merged with and into the ONC USA . As required by the regulations of SEC this Agreement and Plan of Merger was made an exhibit to the offer document and marked as Exhibit (c)(1) and was available for general inspection by the shareholders of ONC USA.
7. The offer document also disclosed that the Board of Directors of the ONC USA had unanimously "(i) determined that the merger is advisable and that the merger agreement and the transactions contemplated thereby, including the offer and the merger, are fair to and in the best interests of the holders of shares, (ii) approved and adopted the merger agreement and the transactions contemplated thereby, (iii) recommended that the stockholders of the ONC USA accept the offer, approve the merger and adopt the merger agreement and the transactions contemplated thereby......".
a) With reference to the merger, the Tender Offer document provided that the H2O shall be merged with and into the ONC USA on the date of the merger agreement and a certificate of merger or a certificate of ownership and merger be filed with the Secretary of the State of Delaware. Furthermore, the Tender Offer document also provided that following the merger the separate corporate existence of the H2O shall thereupon cease and the ONC USA shall continue as the surviving corporation and shall continue its corporate existence as a subsidiary of the Acquirer and shall continue to be governed by the laws of the State of Delaware.
b) The offer closed on 8th November 1999, and subsequent thereto the scheme of merger in terms of the aforementioned Agreement and Plan of Merger was made effective on 20th December 1999 when in terms of the laws of the State of Delaware the Certificate of Merger which merged H2O Acquisition Company with ONC USA was received and filed with the Office of the Secretary of State of the State of Delaware, United States of America.
8. The Certificate of Merger which is filed with the Secretary of State, the State of Delaware at 9 AM on 20th December 1999 and bearing filing No. 991550611-0234821 has the approval of the laws of the State of Delaware. Moreover, the indirect acquisition of control over the Target company pursuant to the merger which has the approval of the laws of the State of Delaware is a case enjoying the specific statutory exemption, thus taking it out of the ambit of Regulation 12. In other words, the fact evidencing merger of H2O Acquisition Company with ONC USA under the laws of the State of Delaware and as a result ONC USA becoming the indirect subsidiary of The Acquirer, and thereby being said to have acquired indirect, nay remote, control over the Target company is covered under the automatic exemption available under Regulation 3(1)(j)(ii). It is submitted that once an acquisition falls under the automatic exemption category provided in the Regulations, the same cannot be deprived by an administrative order.
9. It is submitted that the Certificate of Merger is akin to a sanction of a scheme of arrangement under the relevant provisions of the Companies Act 1956 by the appropriate judicial authority. Given that such a sanction is granted by the relevant authority, it would only be proper for any administrative authority to accept the sanction so granted. Similarly the Certificate of Merger dated 20th December 1999 filed in accordance with the laws of the State of Delaware is conclusive of the merger of H2O Acquisition Company into ONC USA thereby making ONC USA the only surviving corporation pursuant to the merger, and such merger evidenced by the said Certificate of Merger would not be open to challenge by any administrative body.
10. The Agreement and Plan of Merger contemplated a composite indivisible arrangement, and was disclosed to the shareholders of ONC USA in accordance with the relevant provisions of the Securities Exchange Commission Act 1934, of the USA. The Offer to Purchase the shares of ONC USA was a pre-condition to the merger, and the consideration under the said Agreement and Plan of Merger was one whole and not capable of being split by an administrative body when the parties themselves did not contemplate any splitting of the consideration.
11. Any interpretation of applicability of Regulation 3(1)(j)(ii) to the scheme of arrangement including merger as set out in the Agreement and Plan of Merger dated 27th June 1999 would create an absurd consequence namely that if any offer to buy the outstanding 20% shares of the Target company was at all made prior to the completion of the overseas merger by way of the arrangement which clearly is exempted, could not have thereafter reversed the offer of purchase of the outstanding 20% shares in the Target company . Therefore such interpretation would patently be inconsistent with and contrary to the exemption as provided for in Regulation 3(1)(j)(ii). In other words the scheme of arrangement being that of a composite scheme was incapable of any dissection only with a view to suit the minority shareholders in India and would in effect frustrate the composite scheme of arrangement including the merger to that extent.
12. It is therefore submitted, the shares to be acquired were that of ONC USA, and not that of the Indian Target company. Secondly the acquisition of shares which was a pre-condition to the merger, was to be made by an Offer to Purchase by H2O Acquisition Company, which company as a result of the merger into ONC USA no longer exists. The Acquirer did not nor even presently holds any shares in the Target company. In fact the Acquirer does not even hold any shares of ONC USA. ONC USA is not a direct subsidiary of the Acquirer. The common shares of ONC USA are owned by Leo Holdings Inc., a Delaware corporation which is owned by another company which is owned by the Acquirer. In view of the remoteness of holding specifically in the context of Regulations, The Acquirer cannot and ought not to be held to be in control of ONC USA nor a direct holding company. The Annual Reports of the Acquirer clearly show that ONC USA was not even pursuant to the merger, an Affiliate nor an Associate company of the Acquirer; its financials were merely consolidated into the final accounts of the Acquirer. Consolidation of ONC USA accounts into that of the Acquirer is a matter of financial accounting, and does not alter the fact that ONC USA is not a direct subsidiary, nor an affiliate nor an associate of the Acquirer.
13. At the relevant time i.e. 1st July 1999 when the tender offer document was submitted to SEC the Acquirer, neither had the intent nor did it in fact acquire any shares or voting rights or control in or over the Target Company, as such it is not the "acquirer" within the meaning of Regulation 2(1)(b) of the Regulations, whether of shares or voting rights in the Target Company.
14. As at 1st July 1999, when the filing was done with SEC, ONC USA was already controlling 80% of the shareholding of the Target Company, and the Agreement and Plan of Merger was not to affect this position and in fact did not affect the shareholding structures or holdings in the Target Company. This did not even affect the non-promoters shareholding which then and now continues to be held 20% by persons other than ONC USA. By virtue of the merger, there was not to be any change in the non-promoter shareholding as no new person was acquiring any stake in the Target Company.
15. The 'acquirer' of the shares of the Target Company was in any event not the Acquirer, as is evident from the filings done with SEC. Merely because the H2O as referred to in the Agreement and Plan of Merger merged into ONC USA, the Acquirer came to become the ultimate holding company of ONC USA. This incidental action was not a case of acquisition of shares or a transaction entered into with the intention of and for the sole purposes of acquiring control over the Target Company. In any event it does not and cannot mean that the Acquirer is the 'acquirer' of shares or in control of ONC USA as per the definition under Regulation 2(1)(b) of the Regulations; and as such the provisions of the Regulations are not attracted.
16. Under the context of the merger, the Acquirer is not the immediate holding company of ONC USA. Without prejudice, at best the Acquirer can only be considered as the ultimate parent. It is pertinent to mention that in the chain of ownership of ONC USA there are more than one company beneath the Acquirer, holding shares either directly or indirectly in ONC USA. In view of the remoteness and particularly in the context of the Regulations the Acquirer can not and ought not to be held as the holding company.
17. While pursuant to the merger the Acquirer became an indirect holding company of ONC USA and such 'passive' acquisition may on a combined reading of Regulation 12 with Regulation 2(1)(c) be at best interpreted as being 'an indirect acquisition' however the 'passive' acquisition by the Acquirer is in any event exempted under Regulation 3(1)(j)(ii) and as a result Regulation 10, 11 and 12 of the Regulations are not applicable.
18. The global restructuring resulting in the Acquirer becoming the remote holding company post the merger, is as per the Agreement and Plan of Merger. This agreement was not entered into to bring about change of control over the Target Company but was purely a fallout and incidental to the global restructuring arrangements and does not change the shareholding pattern of the Target Company. ONC USA continues to remain the substantial shareholder of the Target Company.
19. It is submitted that the right to nominate and appoint majority directors on the Board of Directors of the Target Company also continues to be with ONC USA and there has been no change with regard thereto. The Board of Directors of the Target Company as at 1st July 1999 comprised of 4 persons all of whom were nominated and appointed by ONC USA. The current composition of the Board of Directors of the Target Company consists of a total of 8 directors of which the majority positions i.e. 5 directors are persons nominated and appointed by ONC USA, while 3 are independent directors appointed in compliance of the relevant regulations of corporate governance.
20. Without prejudice and in any event, in the overall transaction of the acquisition of the shares of ONC USA, the investment of ONC USA in the Target Company was insignificant so much so that ONC USA's investment in the Target Company did not even find a mention in the Agreement and Plan of Merger. This insignificance is amply demonstrated by the following financial data - the total assets of the Target Company as against the total assets of ONC USA for the six months period ended 30th June 1999 would not even constitute more than 0.5%. The gross revenue of the Target Company forms less than 1% of the revenue of ONC USA on a gross turnover basis. The Acquirer did not nor had any occasion to attribute any specific values to the investment of ONC USA in the Target Company. Furthermore, the Acquirer did not nor did it consider necessary to direct a due diligence of the Target Company prior to completion of the acquisition of ONC USA.
21. The public shareholding in the Target Company is only 20%. Any imposition of orders by SEBI of making of public announcement to acquire the remainder shareholding would be against the very interests of the shareholders whose rights and interest are to be preserved by SEBI while applying its own Rules and Regulations. It is submitted that if pursuant to directions by SEBI our client is mandated to make an announcement in terms of the Regulations, and if an offer pursuant to such a public announcement results in the Acquirer acquiring more than 10% of the shares from the public shareholders then clearly it would under Regulation 21(3) qualify for seeking de-listing the shares of the Target Company, to the detriment of those very shareholders whose interests SEBI is to protect. It is submitted that any interpretation resulting into a detriment to the public shareholders cannot be upheld.
22. The representations made by the Target Company at the time of seeking investment from the public shareholders in the year 1990 and as per the agreement with the relevant stock exchanges for continued listing of its shares on the stock exchanges were, and are, that the shareholding of the non-promoter holding shall be 20%. Any direction imposing upon the Acquirer to make a public announcement will not be in harmony with the notification SMDRP/POLICY/CIR-28/01 issued by SEBI on 2nd May 2001 while amending clause 40-A of the Listing Agreement which stipulates that one of the conditions for continued listing shall be that the Target Company shall maintain on a continuous basis the minimum level of non-promoter holding at the same level of public shareholding as required at the time of listing.
23. The transaction under the Agreement and Plan of Merger was duly informed to the shareholders of the Target Company at the first available opportunity, namely, at their 11th Annual General Meeting held on 21st July 1999 and were once again informed through the Report of the Board of Directors of the Target Company for the year ended 31st March 2000, who did not view this as an indirect acquisition triggering the provisions of the Regulations.
6. ISSUES 6.1 I have taken into consideration the facts of the case, the submissions written as well as made by the Acquirer during the hearings and also the documents submitted by them in support of their submissions.
6.2 From the above the following issues arise which need consideration:
i) Whether the Acquirer falls within the definition of the term "Acquirer" as defined in Regulation 2(1)(b) ?
ii) Whether the Acquirer has triggered the said Regulations. If yes, when did the obligation on the part of the Acquirer arise, to make public announcement ?
iii) Whether the acquisition of 80% shares/voting rights or control of the Target company, by the Acquirer is exempt under regulation 3(1)(j)(ii).
6.3 CONSIDERATION OF ISSUES
i) Whether the Acquirer falls within the definition of the term "Acquirer" as provided in Regulation 2(1)(b) ?
Before dealing with the issue it will be pertinent to refer to clause (b) of sub regulation (1) of regulation 2 and regulation 12 which read as under :
"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."
Regulation 12 (Acquisition of control over a company) "Irrespective of whether or not there has been any acquisition of shares or voting rights in a company, no acquirer shall acquire control over the target company, unless such person makes a public announcement to acquire shares and acquires such shares in accordance with the regulations.
Provided that nothing contained herein shall apply to any change in control which takes place in pursuance to a resolution passed by the shareholders in a general meeting".
From the reading of the aforesaid regulations it is implicit that as per the definition of the Acquirer contained in regulation 2 (1) (b), not only a person directly or indirectly acquiring the shares or voting rights in the Target company or acquiring control over the Target company is an Acquirer, but the one agreeing to acquire shares/ voting rights or control is also an Acquirer. It is not necessary that one should actually acquire shares /voting rights or control to be covered under regulation 2(1)(b). It would suffice if a person agrees to acquire shares or voting rights or control over the Target company.
Further ,on a combined reading of the regulation 12 with regulation 2 (b) it is clear that the indirect acquisition of control, including acquisitions through the chain of subsidiaries , would attract the provisions of regulation 12.
From the facts of the case, it is observed that the Acquirer, H2O and ONC USA entered into a Agreement and Plan of Merger on 27.06.99. As per the terms of the aforesaid agreement in the first stage H2O was to make an open offer to the shareholders of ONC USA. In the second stage after the consummation of the public offer, H2O was to be merged with ONC USA as per the prevailing laws of USA. In pursuance of the Agreement dated 27.06.99, H2O made an open offer to the shareholders of ONC USA and acquired 97% shares and control of ONC USA and indirect control over the Target company and after the aforesaid acquisition of shares and control over ONC USA, H2O was merged into ONC USA on 20.12.99.
I have noted the contention of the Acquirer that " it is not an Acquirer in terms of regulation 2(1)(b) and the said acquisition of control is not covered under regulation 2(1)(c) since the Acquirer neither had the intention to acquire nor did it in fact acquire any shares or voting rights or control in or over the Target company". This contention of the Acquirer is not tenable. The provision of regulation 2(1)(b) is very clear that not only a person directly or indirectly acquiring the shares or voting rights in the Target company or acquiring control over the Target company is an Acquirer, but the one agreeing to acquire shares/ voting rights or control is also an Acquirer. Further , it is not necessary that one should actually acquire/ in fact acquire shares /voting rights or control to be covered under regulation 2(1)(b). It would suffice if a person agrees to acquire shares or voting rights or control over the Target company. Further the " intention to acquire" is not the criterion for determining whether a person is acquirer or not, it is the conduct of the person which will determine whether a person is acquirer or not. In the instant case from the conduct of the Acquirer and the facts of the case it is implicit that pursuant to Agreement and Plan of Merger dated 27.06.99 the Acquirer acquired control over ONC USA and indirectly over Target company and therefore the Acquirer squarely falls within the definition of the term acquirer as given in regulation 2(1)(b).
I have noted the submission of the Acquirer that the Acquirer has acquired the shares of ONC USA and not that of the Indian Target company. Further, it is contended that the Acquirer does not even hold any shares of ONC USA as it is not a direct subsidiary of the Acquirer. Further, the common shares of ONC USA are owned by Leo Holdings Inc., a Delaware Corporation which is owned by another company which is owned by the Acquirer. Therefore, it is contended that in view of the remoteness of holding of the Acquirer specifically in the context of the Regulations, the Acquirer cannot and ought not to be held in control of ONC USA. The aforesaid contention of the Acquirer is not tenable since provisions of the Regulations cover cases of indirect acquisition of Target companies by virtue of acquisition of holding companies whether in India or abroad. Further the definition of term acquirer covers a person directly or indirectly acquiring the shares or voting rights/ control in the Target company. In the instant case the Acquirer has by acquiring shares or voting rights/ control over ONC USA has indirectly acquired shares or voting rights/ control in the Target company. Therefore , I find no merit in the submission that the Acquirer does not directly hold shares in ONC USA and has not directly acquired shares of the Target company and the remoteness of holding of the Acquirer is not tenable.
I have noted the submission of the Acquirer that the incidental action of the Acquirer was not a case of acquisition of shares or a transaction entered into with the intention of and for the sole purpose of acquiring control over the Target company. I find no merit in this contention that acquisition of control over the Target company was incidental and an unintended consequence and was not intentional , is of not much relevance. From the scheme of the Regulations it is clear that the nature of acquisition, whether direct or indirect is of no relevance. The regulations are attracted on acquisition of control whether the same is intended or not.
I have noted the submission of the Acquirer that the Acquirer is not the immediate holding company, ONC USA. Further, in the chain of ownership of ONC USA there are more than one company beneath the Acquirer, holding shares either directly or indirectly in ONC USA. Therefore, it is contended that in view of the remoteness and particularly in the context of the Regulations, the Acquirer cannot and ought not to be held as the holding company of the Target company. I find no merit in this submission in view of the reasons stated hereinbefore.
I have noted the submission of the Acquirer that pursuant to the merger the Acquirer became an indirect holding company of ONC USA and such a passive acquisition may on a combined reading of regulation 12 with regulation 2(1)(c) can at best be interpreted as being indirect acquisition. In this context it is stated that its a case of indirect acquisition of shares/voting rights/control over the Target company and the same has triggered the provisions of the Regulations.
Here it will be pertinent to advert to observations of Hon'ble Mumbai High Court in the case of B.P. Plc vs. Securities and Exchange Board of India being first appeal No. 582 of 2001 in SEBI Appeal No. 11/2001, which vide its order dated August 8, 2001, [2001] 34 SCL 469 (BOM) has inter alia held that - "the word Acquirer could not be interpreted to mean only a person who has already acquired the shares. On the contrary the definition of Acquirer in regulation 2(1)(b) clearly mentions acquires or agrees to acquire shares or voting rights in the Target company, or acquires or agrees to acquire control over the Target company. From the above it is very clear that even someone who agrees to acquire shares or voting rights or agrees to acquire control over the Target company would come within the definition of Acquirer.... if the word Acquirer were to mean only those who have already acquired shares then the provisions regarding public announcement in SEBI Regulations would be rendered nugatory. The salutary protections contemplated through public announcement would be lost."
In view of the above, in the instant case , the Acquirer falls within the ambit of definition of term "Acquirer" as defined in the regulation 2(1)(b) of the Regulations.
ii) Whether the Acquirer has triggered the said Regulations. If yes, when did the obligation on the part of the Acquirer arise, to make public announcement ?
In this regard it will be pertinent to refer to regulations 10, 12 and 14 which are reproduced hereunder:
Regulation 10 (Acquisition of fifteen per cent or more of the shares or voting rights of any company) "No acquirer shall acquire shares or voting rights which (taken together with shares or voting rights, if any, held by him or by the persons acting in concert with him), entitle such acquirer to exercise [fifteen] percent or more of the voting rights in a company, unless such acquirer makes a public announcement to acquire shares of such company in accordance with the Regulations".
Explanation: For the purposes of regulation 10 and regulation 11, acquisition shall mean and include -
(a) direct acquisition in a listed company to which the regulations apply;
(b) indirect acquisition by virtue of acquisition of holding companies, whether listed or unlisted, whether in India or abroad"
Regulation 12 (Acquisition of control over a company) "Irrespective of whether or not there has been any acquisition of shares or voting rights in a company, no acquirer shall acquire control over the target company, unless such person makes a public announcement to acquire shares and acquires such shares in accordance with the regulations.
Provided that nothing contained herein shall apply to any change in control which takes place in pursuance to a resolution passed by the shareholders in a general meeting".
Regulation 14 (Timing of the public announcement of offer) Regulation 14(1) : "The public announcement referred to in Regulation 10 or Regulation 11 shall be made by the merchant banker not later than four working days of entering into an agreement for acquisition of shares or voting rights or deciding to acquire shares or voting rights exceeding the respective percentage specified therein".
Regulation 14(3) : "The public announcement referred to in Regulation 12 shall be made by the merchant banker not later than four working days after any such change or changes are decided to be made as would result in the acquisition of control over the target company by the acquirer".
From perusal of the provisions of regulations 10 and 12,it is clear that there is a prohibition on the Acquirer, not to acquire shares or voting rights or control of the Target company unless the Acquirer makes a public announcement to acquire shares in accordance with the regulations and acquires such shares in accordance with the regulations. Thus the regulations not only mandates issuance of public announcement by the Acquirer but also requires the Acquirer to acquire such shares in accordance with the regulations. It is clear that issuance of public announcement is not a post acquisition requirement but definitely a pre- acquisition requirement.
Further, in terms of regulations14(1) and 14(3) the public announcement has to be made by the Acquirer within 4 working days of entering into an agreement or taking any decision which would result in change in control of the Target company. Accordingly, once the said Regulations have been triggered the Acquirer is under an obligation, to make a public announcement in terms of the Regulations.
From the facts of the case it is clear that the Acquirer, H2O and ONC USA admittedly entered into a Agreement and Plan of Merger on 27.06.99. As per the terms of the aforesaid agreement in the first stage H2O was to make an open offer to the shareholders of ONC USA. In the second stage after the consummation of the public offer, H2O was to be merged with ONC USA as per the prevailing laws of USA. The merger transaction was inter alia contingent upon receipt of majority of shares by H2O in the open offer and obtaining of requisite consent of the shareholders of ONC USA who did not tender their shares in the open offer made by H2O.
In pursuance of the Agreement dated 27.06.99, H2O made an open offer to the shareholders of ONC USA and Tender offer document dated 01.07.99 was filed with Securities Exchange Commission (SEC), USA.
In the said Tender offer document it was inter alia disclosed by H2O at Clause 10 ( Background of the offer)- the negotiations between the representatives of the Acquirer and ONC USA begin on 09.04.99 for acquisition of shares of ONC USA. On 13.04.99, a Confidentiality Agreement was entered between the wholly owned subsidiary of the Acquirer with ONC USA. On 21.04.99 various presentations were made by ONC USA and on 09.06. 99, an understanding was reached regarding the acquisition price of $54 per share of common stock of ONC USA subject to the outcome of due diligence review. On 27.06.99, the Agreement and plan of merger was entered into between the Acquirer, H2O and ONC USA.
From the aforesaid, it is clear that the Acquirer had decided to acquire substantial shares/voting rights and control over ONC USA and indirect control over the Indian Target company on 9.04.99. In furtherance of such decision of acquiring control over ONC USA and indirect control over the Indian Target company the Acquirer, H2O and ONC USA entered into a Agreement and Plan of Merger on 27.06.99 which was followed by making of open offer by H2O and consequent acquisition of actual control by the Acquirer over ONC USA.
In view of the said negotiations between the representatives of the Acquirer and ONC USA the provisions of the Regulations got triggered on 09.04.99, i.e., the date on which the Acquirer decided to acquire control over ONC USA and the negotiations for acquiring control over ONC USA were started between the representatives of Acquirer and ONC USA.
In this regard, the Hon'ble Mumbai High Court in B.P. Plc case has held that " ........This is all the more abundantly clear from Regulation 14(3) mentions about the necessity of public announcement when "any such change or changes are decided to be made as would result in the acquisition of control over the Target company by the Acquirer". That is to say, when any such change is decided to be made, the same would result in acquisition or control, then public announcement will have to be made. Therefore, once a decision is taken, which would result in acquisition or control, then public announcement must precede such acquisition or control. That is the decision to later on result in acquisition or taking control."
In view of the above, the Acquirer has triggered the said Regulations and obligation on the part of the Acquirer to make the public announcement arose on 9.04.99, which was to be made within 4 working days from the date of 9.04.99. I find that as required under the aforesaid regulations, no public announcement has been made by the Acquirer and therefore it has violated regulations 14(1) & 14(3) of the said Regulations.
(iii) Whether the acquisition of 80% shares/voting rights or control of the Target company, by the Acquirer is exempt under regulation 3(1)(j)(ii) ?
Before dealing with this issue it would be pertinent to advert to Regulation 3(1)(j)(ii) which lays down that :
Nothing contained in Regulations 10, 11, 12 of these Regulations shall apply to acquisition of shares/voting rights or control of a company pursuant to a scheme of arrangement or reconstruction including amalgamation or merger or demerger under any law or regulation, Indian or foreign.
As per the regulation 3(1)(j)(ii), exemption from the provisions of regulation 10, 11 and 12 is available only if the acquisition of shares is pursuant to the scheme of merger.
From the facts of the instant case, it is observed that pursuant to the Agreement and Plan of Merger dated 27.06.99 entered into between the Acquirer, H2O and ONC USA, H2O made a public offer on 01.07.99 for acquiring the shares of ONC USA.
In the Tender offer documents filed before SEC inter alia following disclosures were made to the shareholders of ONC USA.
a) The offer is conditioned upon among other things, there being validly tendered and not withdrawn prior to the expiration of the offer at least such number of shares which when added to any shares of common stock already owned by the Acquirer, constitute a majority of the then outstanding shares of common stock on a fully diluted basis.
b) Under clause 11 of the offer document, it has been stated that the purpose of the offer is to enable the Acquirer to acquire as many outstanding shares as possible as the first step in acquiring the entire equity interest in ONC USA. The purpose of the merger is for the Acquirer to acquire all shares not purchased pursuant to the offer. Upon consummation of the merger, ONC USA will become a direct wholly owned subsidiary of the Acquirer. The offer is being made pursuant to the merger agreement.
Under the DGCL, the approval of ONC USA's Board of Directors and the affirmative vote of the holders of a majority of the outstanding common stock is required to approve and adopt the merger agreement and the transactions contemplated thereby including the merger. In addition, the ONC USA's certificate of incorporation provides that the affirmative vote of 60% of the holders that are not a Control person (as defined in the certificate of incorporation of the company) is required to approve and adopt the merger agreement and the transactions contemplated thereby.
The said offer of H2O closed on 8.11.99 and H2O received 97% shares of ONC USA. On 20.12.99 , a certificate of Merger was obtained from the Secretary of State of Delaware, USA wherein H2O was merged with ONC USA and ONC USA was the surviving corporation.
From the aforesaid facts it is clear that the instant case is not a case of direct merger between two companies pursuant to a scheme of merger . In the instant case the merger between the H2O and ONC USA has taken place pursuant to the open offer ( made by the Acquirer to acquire majority shareholding ) as distinguished from "scheme........." as envisaged in the Regulations. In the instant case, the merger between H2O, a wholly owned subsidiary of the Acquirer and ONC USA was contingent upon acquisition of majority shares in the open offer made by H2O for acquisition of shares of ONC USA. Further, in case if the requisite number of shares, i.e., majority shares, were not received in the open offer by H2O, the merger between the two companies would not have been carried out. On receiving 97% shares in the open offer, H2O acquired majority shareholding in ONC USA and also acquired control over it.
The Regulations were triggered when H2O acquired majority shares in ONC USA and resultantly acquired indirect control over the Target company. The subsequent merger of H2O with ONC USA on 20/12/99 pursuant to acquisition of majority shareholding in ONC USA is nothing but consolidation of control already acquired by H2O/ Acquirer pursuant to the open offer.
It is also observed that exit opportunity has been provided to the shareholders of ONC USA by way of making of public offer by H2O wherein in the Tender offer document it was adequately disclosed that after consummation of the offer, H2O will be merged with ONC USA. Pursuant to such a disclosure 97% shares were tendered in the open offer made by H2O i.e. shareholders holding 97% shares in ONC USA exercised the exit option as a result of change in control over ONC USA. Therefore, the shareholders of ONC USA were given an opportunity to take a decision whether to exit from the company or to stick with it as a result of possible change in parent / control of ONC USA. The same opportunity has not been extended to the shareholders of the Target company despite the indirect change in the control of the Target company. In this context it is stated that the public offer requirement provided in the Regulations is in recognition of the shareholders' right to exit from the Target company and availing of the benefit of the public offer in the context of substantial acquisition of shares or voting rights or acquisition of control over the Target company, by an Acquirer.
Further in this context it will be pertinent to advert to the Bhagwati Committee Report dated 18.01.97 wherein it has inter alia been stated that "
"........... that the Regulations for substantial acquisition of shares and take over should operate principally to ensure fair and equal treatment of all shareholders in relation to substantial acquisition of shares and takeovers..........". The Committee also recognised that the process of take over is complex and is inter related to the dynamics of the market place. It would therefore be impracticable to devise regulations in such detail as to cover the entire range of situations, which could arise in the process of substantial acquisition of shares and takeovers . Instead there should be a set of General Principles which should guide the interpretation and operation of the Regulations , especially in circumstances which are not explicitly covered by the Regulations. These principles are:
(i) Equality of treatment and opportunity to all the shareholders
(ii) Protection of interests of share holders
(iii) .........
(x).......
In the event of any ambiguity or doubt as to the interpretation of the regulation, the concerned authority shall pay adequate attention to and be guided by any one or more of the aforesaid general principles having a bearing on the matter"
Thus one of the principles to be followed in acquisitions is "equality of treatment and opportunity to all share holders". For this purpose the applicable principle should be to the extent possible the same to the shareholders of the holding company as well as the shareholders of its subsidiaries which are also acquired in the same chain of action. There cannot be two entirely different standards. Therefore, if the shareholders of ONC USA were given an opportunity to take a decision whether to exit from the company or to remain with it as a result of possible change in parent / control of ONC USA , the same opportunity should also have been extended to the shareholders of the Target company in tandem with the principle of "equality of treatment and opportunity to all shareholders.
The Acquirer has contended that the acquisition of indirect control over the Target company is exempt from the provisions of the regulations as the aforesaid transaction is pursuant to the merger which has the approval of the laws of State of Delaware and the same enjoys the specific statutory exemption under regulation 3(1)(j)(ii) ,taking it out of the ambit of regulation 12. Further, the Acquirer has also contended that the agreement and plan of merger contained a composite scheme of arrangement including the merger and the aforesaid agreement was an arrangement encompassing the offer and the merger and consideration for the composite arrangement was one indivisible consideration.
The aforesaid contention of the Acquirer is not tenable. The term arrangement as given in Regulations cannot be interpreted so widely so as to include schemes as stated hereinbefore envisaging making of open offer with a view to acquiring majority shareholding in the company in the first stage and then subsequently carrying out merger between the companies in the second stage because it will open floodgates for various schemes of arrangement which the companies might enter into and then claim exemption under Regulation 3(1)(j)(ii) and would result in defeating the purpose /spirit of the Regulations.
Further , as stated hereinbefore in terms of Committee report , in the event of any ambiguity or doubt as to the interpretation of the Regulations, the concerned authority shall pay adequate attention to and be guided by any one or more of the general principles having a bearing on the matter, which interalia includes protection of interests of shareholders.
Further, it is also to be noted that the 1997 Regulations is a beneficial piece of legislation. A bare mechanical interpretation of the words and application of legislative intent devoid of concept or purpose will reduce the remedial and beneficial measures provided for in the legislation to futility. It has to be borne in mind that while interpreting the provisions of the said Regulations due regard has to be paid to the objective behind the enactment of Regulations apart from the protection of the interest of the shareholders in terms of providing an adequate exit opportunity to the shareholders in the event of change in control or substantial acquisition of shares/ voting rights by an Acquirer.
In this regard it will be pertinent to advert to the judgment of Hon'ble Supreme Court in Reserve Bank of India vs. Peerless General Finance and Investment Co. (1987) 1 SCC 424 wherein it has , interalia , been observed that "Interpretation must depend on the text and the context. They are the bases of interpretation. One may well say if the text is the texture, context is what gives colour. Neither can be ignored. Both are important. That interpretation is best which makes the textual interpretation match the contextual. A statute is best interpreted when we know why it was enacted."
Further, according to Blackstone the most fair and rational method for interpreting a statute is by exploring the intention of the legislature through the most natural and probable signs which are "either the words, the context, the subject matter, the effect and consequence or the spirit and reason of law. (Commentaries on the Laws of England Vol. 1 p.59). Hon'ble Supreme Court in District Mining Officer V Tata Iron and Steel Company 9JT 2001 SC 183 had held that "a statute is an edict of the legislature, and in construing a statute, it is necessary, to seek the intention of its maker. A statute has to be construed according to the intent of them that make it and the duty of the Court is to act upon the true intention of the legislature. If a statutory provision is open to more than one interpretation the Court has to choose that interpretation which represents the true intention of the legislature."
The legislative intent behind the Regulations is clear. The objective is to protect the interests of investors in securities. It is with the said objective that regulations 10, 11 and 12 have been framed providing an exit opportunity to the existing share holders of a company under acquisition, and that exit opportunity can not be denied by resorting to such interpretation which might defeat the purpose of the Regulations.
I have noted the submission of the Acquirer and that the Agreement and Plan of Merger was not entered into to bring about change of control over the Target company but was purely a fallout and incidental to the global restructuring arrangements and does not change the shareholding pattern of the Target company. Further, the right to nominate and appoint the majority of the Board of Directors of the Target company also continues to be with ONC USA and there has been no change in this regard. The aforesaid contention of the Acquirer that acquisition of control over the Target company was incidental and unintended consequence and it was a fall out of global restructuring is of not much relevance. From the scheme of the Regulations it is clear that the nature of acquisition, whether direct or indirect is of no relevance, from the compliance angle of the requirements of Regulations . If the provisions of Regulations 10,11 and 12 are triggered then the Acquirer has to make an open offer in accordance with the Regulations.
I have noted the submission of the Acquirer that the investment of ONC USA in the Target company was so insignificant that it did not find a mention in the Agreement and Plan of Merger. Further, the gross revenue of the Target company constitutes less than 1% of the revenue of ONC USA on a gross turnover basis and the Acquirer did not consider it necessary to conduct due diligence of the Target company prior to the completion of acquisition of ONC USA. The aforesaid contention of the Acquirer is not tenable since the requirement of the Regulations is very clear i.e. if the provisions of regulations 10,11 and 12 are triggered then the Acquirer has to make an open offer in accordance with the Regulations and the fact that contribution of the Target company is minimal cannot be a ground for not providing the exit opportunity to the shareholders of the Target company as provided for in the Regulations.
I have noted the submission of the Acquirer that public shareholding in the Target company is only 20% and any direction by SEBI to make public announcement to acquire the remainder shareholding would be against the very interest of shareholders whose rights and interests are to be preserved by SEBI since it might lead to delisting of the shares of the Target company on the stock exchanges. The aforesaid contention of the Acquirer is not tenable because the shareholders of the Target company have a right to be provided with a opportunity of exit by the Acquirer. Therefore the Acquirer cannot escape the statutory obligation of making of public announcement on the ground that it might lead to delisting of the shares of the Target company on the stock exchanges .
I have noted the submission of the Acquirer that the shareholders of the Target company were informed at the first available opportunity, i.e. on 21.07.99 at the 11th AGM about the transaction under the Agreement and Plan of Merger. In this regard it is stated that such disclosure without making of public announcement by the Acquirer is meaningless as the shareholders of the Target company were not a party to the Agreement and Plan of Merger dated 27.06.99 vide which the control of their parent company i.e. ONC USA was proposed to be changed and therefore could not have consented to or objected to such a change of control of parent company.
I find the Acquirer has cited various orders passed by SEBI in the cases of acquisition of following Target companies viz. Digital Equipment India Ltd., Glaxo India Ltd., Vickers System International Ltd., Rayban Sun Optics, Rexroth (India) Ltd., Caprihans India Ltd. I have carefully considered the aforesaid orders passed by SEBI. I find that the facts of this case are different from the facts in the cases cited in support by the Acquirer.
In view of the aforesaid I find that acquisition of substantial shares/voting rights or control over the Target company by the Acquirer is pursuant to the open offer dated 01.07.99 made by H2O as distinguished from the scheme of arrangement as envisaged in the regulations.
In view of the aforesaid the acquisition of 80% shares/voting rights or control of the Target company, by the Acquirer is not exempt under regulation 3(1)(j)(ii) .
7. CONCLUSION In view of the aforesaid, I find that the Acquirer has violated regulations 10 and 12 read with sub-regulations (1) and (3) of regulation 14, as the Acquirer has acquired 80% shares/voting rights and control in the Target company, without making public announcement to acquire shares/voting rights or control of the Target company in accordance with the said Regulations
8. ORDER 8.1 In view of the findings made above, in exercise of the powers conferred upon me under sub-section (3) of Section 4 read with Section 11B SEBI Act 1992 read with regulations 44 and 45 of the said Regulations, I hereby direct the Acquirer to make public announcement as required under Chapter III of the said Regulations in terms of regulations 10 & 12 taking 09.04.99 as the reference date for calculation of offer price. The public announcement shall be made within 45 days of passing of this order.
8.2 Further, in terms of sub regulation (12) of regulation 22, the payment of consideration to the shareholders of the Target Company has to be paid within 30 days of the closure of the offer. The maximum time period provided in the said Regulations for completing the offer formalities in respect of an open offer, is 120 days from the date of public announcement. The public announcement in the instant case ought to have been made taking 09.04.99 as a reference date and thus the entire offer process would have been completed latest by 07.08.99. Since no public announcement for acquisition of shares of the Target Company has been made by the Acquirer when the Regulations were triggered i.e. on 09.04.99, it would be just and equitable to direct the Acquirer to pay interest @ 15% per annum on the offer price, from 08.08.99 till the actual date of payment of consideration by the Acquirer, to all the shareholders who tender the shares in the open offer to be made by the Acquirer in terms of this Order and whose shares are accepted by the Acquirer .
8.3 This order shall come into force with immediate effect.