The Securities and Exchange Board of India (SEBI) recently announced key changes to the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. Accordingly, when a target company faces an open offer, its shareholders will now have to be mandatorily provided with a written reasoned recommendation on the offer by a committee of independent directors of the company. This change was proposed by the Takeover Regulations Advisory Committee (TRAC) and is in keeping with good corporate governance practices followed in most jurisdictions. The TRAC report however does not detail the scope of the recommendation or its contents.
Historically, target companies have played a passive role during open offers in India, irrespective of whether the offer is made due to a change in control or otherwise.
The role of a target company is limited to providing information about itself for inclusion in the offer documents and to assisting in the share transfer process, apart from adhering to the specific obligations relating to the conduct of the company during the offer period.
This new requirement compels the independent directors of a target company to take an active stand on the offer. It is interesting to note that unlike other jurisdictions, where this obligation is on the board of directors as a whole, in India, the obligation is only on the independent directors. This is a move in the right direction as in most open offers the directors who have been nominated by the controlling shareholders may not be able to provide an unbiased recommendation.
Content is vital
It is advisable for SEBI to provide some guidance on the content of such recommendations. In fact, the content will determine whether the recommendation enables public shareholders to make an informed decision or merely adds to the paperwork of an open offer.
A review of some of the recommendations given by the board of directors of target companies in other countries indicates that it is a fairly elaborate process. The recommendation generally includes a detailed analysis of the offer price and comments on whether it is attractive. It is also common practice to obtain a third party’s opinion on whether the offer price is adequate. In the Indian context, since the offer price has a statutory floor price, it is debatable if independent directors would want to expressly comment on the attractiveness of the price.
The TRAC report does envisage that the committee should have the freedom to consult and engage external advisers, at the expense of the target company, in order to make the recommendation. Even so, it is highly probable that any opinion of the independent directors on the attractiveness of the offer price will be heavily qualified.
Reveal future plans
Such recommendations in other jurisdictions also detail the impact that the offer will have on the target company, its shareholders, employees and other contracting parties. For the independent directors of an Indian company to give their recommendation on this aspect, it is essential that the open offer document that is issued by the acquirer elaborate on its future strategic plans for the target company. A glance at open offer documents in general shows that in most cases such disclosures are sketchy and limited. Acquirers should provide detailed information on their future strategic plans so that independent directors can provide an informed recommendation on the impact of the open offer.
In other jurisdictions, the recommendation also includes disclosures by the board of directors on their individual shareholding and their intended actions with regard to the public offer. It may be a good idea for the recommendation under the new takeover regulations to include such details about both the independent directors and other directors on the board.
Needless to mention, any recommendation made by the committee of independent directors should be in keeping with their fiduciary duties to the target company and its stakeholders. The fundamental fiduciary duties of a director are loyalty, good faith, due care and disclosure.
In the event that SEBI does not provide additional guidance on the content of such recommendations, it is likely that independent directors and their advisers will fall back on the practice followed in other jurisdictions.
Extend to mergers?
A similar requirement could also be imposed on the independent directors of listed entities to separately provide their recommendation when mergers or demergers are proposed for the consideration of the shareholders and creditors.
Akila Agrawal is a partner at Amarchand & Mangaldas & Suresh A Shroff & Co. She can be reached at email@example.com. The views expressed in this article are those of the author and do not reflect the official policy or position of Amarchand Mangaldas.
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