August 03 2010
In its judgment in M/s Daiichi Sankyo Company Ltd v Jayaram Chigurupati,(1) which was issued on July 8 2010, the Supreme Court clarified the issue of when two persons can be said to be 'acting in concert' for the purposes of the Takeover Code.(2) The court has held that two or more persons are acting in concert when there is a target company on one hand and two or more persons on the other hand and such persons must have come together with the shared objective or purpose of acquiring shares in the target.
The phrase 'person acting in concert' has been defined by Regulation 2(e) of the code in the following words:
"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."
While giving its judgment the court considered the abovementioned definition as well as certain other provisions of the code, which are as follows.
Regulation 10 of the code requires that a party acquiring 15% or more of the shares or voting rights in a listed company must make a public announcement to acquire shares in that company.
The offer price for shares for such announcement is determined by Regulation 20(4) of the code, which states that:
"For the purposes of Sub-regulation 1, the offer price shall be the highest of:
(a) the negotiated price under the agreement referred to in Regulation 14(1);
(b) the price paid by the acquirer or persons acting in concert with him for acquisition, if any, including by way of allotment in a public or rights or preferential issue during the 26-week period prior to the date of public announcement, whichever is higher; and
(c) the average of the weekly high and low... closing prices of the shares of the target company as quoted on the stock exchange where the shares of the company are most frequently traded during the 26 weeks or the average of the daily high and low... prices of the shares as quoted on the stock exchange where the shares of the company are most frequently traded during the two weeks preceding the date of [the] public announcement, whichever is higher."
The relevant time to determine the offer price in terms of the above quoted provision for an indirect acquisition is provided in Regulation 20(12) of the code which, among other things, provides that:
"[t]he offer price for indirect acquisition or control shall be determined with reference to the date of the public announcement for the parent company and the date of the public announcement for acquisition of shares of the target company, whichever is higher, in accordance with Sub-regulation 4 or Sub-regulation 5."
On October 3 2007 Ranbaxy Laboratories Limited, an Indian company, entered into an agreement with Zenotech and its promoters to purchase and subscribe to fully paid-up equity shares in Zenotech at Rs160 a share. In order to do so, Ranbaxy was required to make a public announcement to acquire shares from Zenotech's ordinary shareholders under Regulation 10.
On October 5 2007 Ranbaxy made an announcement to acquire equity shares in Zenotech constituting 20% of its expanded share capital. Ranbaxy quoted an offer price of Rs160 a share as the negotiated price under an agreement dated October 3 2007, which was the highest price arrived at under Regulation 20(4). On completion of the open-offer formalities on January 30 2008, Ranbaxy's shareholding in Zenotech constituted 46.85% of Zenotech's total share capital.
On June 11 2008 Daiichi Sankyo Company Ltd entered into an agreement with Ranbaxy and its promoters to purchase and subscribe to a large block of fully paid-up equity capital in Ranbaxy.
On June 16 2008, as mandated by law, Daiichi Sankyo made a public announcement to Ranbaxy's shareholders to acquire an aggregate of 22.01% of Ranbaxy's fully paid-up equity share capital.
On October 20 2008 Daiichi Sankyo acquired more than 50% of Ranbaxy's share capital. Consequently, Ranbaxy became a subsidiary of Daiichi Sankyo.
On January 19 2009, as a result of its direct takeover of Ranbaxy, Daiichi Sankyo also indirectly acquired control of 46.85% of Zenotech's equity share capital, which was held by Ranbaxy. In order to conclude the indirect acquisition of Zenotech, Daiichi Sankyo was required to make an open offer. In the public announcement Daiichi Sankyo offered Rs113.62 a share, which was based on the share price on the stock exchange.
The offer price in the public announcement led to a dispute between Daiichi Sankyo and the shareholders of Zenotech. The shareholders claimed that the offer price breached Regulation 20. They argued that the provisions of Regulation 20(4)(b), read with Regulation 20(12), applied in this case, and that as Ranbaxy was Daiichi Sankyo's subsidiary on the date of the public announcement, the two companies were acting in concert. Therefore, the price of Rs160 that Ranbaxy offered during the public offer, being higher than the price calculated by Daiichi Sankyo under Regulation 20(4)(c), was the only possible offer price for the public announcement. Daiichi Sankyo contended that it was not acting in concert for the acquisition of shares in Zenotech. Furthermore, it was argued that neither Daiichi Sankyo nor any alleged partner in the concerted action had acquired Zenotech shares in the 26 weeks preceding the public announcement for Zenotech and Ranbaxy. Therefore, Regulation 20(4)(b) did not apply.
The Supreme Court considered the meaning of the term 'person acting in concert' and sought to determine whether Daiichi Sankyo and Ranbaxy could be considered as such.
The court also considered the time at which an acquirer and a person acting in concert with it must be deemed to be acting in concert in order for Regulation 20(4)(b) to apply. In other words, for the application of Regulation 20(4)(b), is it sufficient that Daiichi Sankyo and Ranbaxy were related when Daiichi Sankyo made the public announcement to acquire shares of Zenotech or will the regulation apply only if Daiichi Sankyo and Ranbaxy were related when Ranbaxy acquired shares of Zenotech?
After considering the scheme of the code, the amendments made to it in 2002 and the recommendations of the second Bhagwati Committee, the court held as follows:
The mere existence of a linking relationship between a holding company and a subsidiary company - or other relationship as contained in the deeming provision of Regulation 2(e)(2) - does not by itself mean that two companies are acting in concert. Rather, such a determination requires an action with an underlying commonality of intent to acquire shares of a target.
In light of this judgment, the threshold for establishing that two or more persons are acting in concert for the purpose of the code has been raised, since persons acting together for some other purpose will not fall within the definition. A complainant must demonstrate the parties' common intent or objective to acquire shares in the target company.
Thus, in interpreting civil law provisions, the court has read into the issue an element of criminal law, in that: (i) the act (consisting of a series of acts) must have been performed by more than one person; and (ii) every such act cumulatively resulting in the acquisition of shares in a target is deemed to have been performed in furtherance of the common intention of all persons.
For further information on this topic please contact Vijayendra P Singh or Aashish Gupta at Amarchand & Mangaldas & Suresh A Shroff & Co by telephone (+91 11 2692 0500), fax (+ 91 11 2692 4900) or email (email@example.com or firstname.lastname@example.org).
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