Supreme Court interprets ‘persons acting in concert’

By Vivek Vashi, Bharucha & Partners
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Can a mere holding and subsidiary company relationship be considered to be one of “persons acting in concert” under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (Takeover Code)? This was recently answered by the Supreme Court in connected appeals in Daiichi Sankyo Co Ltd v Chiguripati and Daiichi Sankyo Co Ltd v Narayan & Anr.

In October 2007 Ranbaxy Laboratories agreed with Zenotech Laboratories and its promoter to buy 27.35% of Zenotech’s equity share capital at Rs160 (US$3) per share. Pursuant to the Takeover Code, Ranbaxy made a public offer to acquire a further 20% of shares in Zenotech at Rs160 per share. The post-offer announcement said Ranbaxy’s shareholding in Zenotech stood at 46.85%.

Vivek Vashi Bharucha & Partners
Vivek Vashi
Bharucha & Partners

On 11 June 2008, Daiichi Sankyo agreed to acquire Ranbaxy’s promoters’ 30.91% holding in Ranbaxy. Subsequently, in October 2008, Daiichi acquired more than 50% of Ranbaxy’s shareholding. As a consequence, Daiichi indirectly acquired Ranbaxy’s 46.85% holding in Zenotech’s and was obliged, under the Takeover Code, to acquire at least 20% of Zenotech’s shares. In January 2009 Daiichi made a public offer to Zenotech’s shareholders at Rs113.62 per share based on the then stock market price of Zenotech’s shares.

Two complaints were filed before the Securities and Exchange Board of India (SEBI) – one by a shareholder and the other by the promoter of Zenotech. They claimed that Daiichi should not have offered a price lower than what Ranbaxy previously offered for Zenotech shares and the offer price could not have been less than Rs160 per share. SEBI rejected the complaints and the complainants preferred appeals before the Securities Appellate Tribunal (SAT). The SAT, while allowing the appeals, directed Daiichi to offer Rs160 per share to Zenotech’s shareholders. Daiichi impugned this decision before the Supreme Court.

How is the offer price set?

Sub-regulation 12 of regulation 20 of the Takeover Code states the offer price of shares of a company being taken over indirectly and as a consequence of the acquisition of the primary target be determined with reference to the price on two dates: (a) when the public offer was made in regard to the parent company and (b) when the public offer was made for the secondary target company. The higher of the two is the target price.

Sub-regulation (4) of regulation 20 details various ways for determining the share price with the stipulation that the highest among them would be the offer price. Clause (b) of sub-regulation (4), which was vital in this case, is based on the price paid by the acquirer or “persons acting in concert” for acquisition of shares of the target company within 26 weeks prior to the date of the public announcement.

The complainants alleged that Daiichi and Ranbaxy were “persons acting in concert” from 11 June 2008 when the former agreed to buy the latter’s shares, or from 20 October 2008 when Ranbaxy became a subsidiary of Daiichi. Hence, Daiichi was bound to offer Rs160 per share as Ranbaxy had offered this price within 26 weeks from the date on which Daiichi made the public offer and the date of public announcement by Ranbaxy. This was higher than the Rs113.62 per share Daiichi offered Zenotech’s shareholders.

The decision

The Supreme Court referred extensively to the Bhagwati committee report on takeovers and also analysed the concept of “persons acting in concert” under regulation 2(e) of the Takeover Code to determine if sub-regulation 4(b) of regulation 20 was applicable.

The court said the concept of “persons acting in concert” under regulation 2(e)(1) is based on a target company on one side and two or more persons acting together with a common objective or purpose on the other. The “shared common objective or purpose” is vital to determine if they are acting in concert. A relationship born only by chance does not suffice. The mere fact that two companies are in a relationship of a holding and subsidiary, without anything else, is inadequate. Further, the date on which the public announcement of acquisition was delivered was immaterial.

As Ranbaxy and Daiichi had not entered into the June 2008 agreement with a shared objective or purpose of acquiring substantial shares in Zenotech, they could not have been “persons acting in concert” under regulation 2(e)(1) of the Takeover Code. The deeming provision under regulation 2(e)(2) of the code could not do away with the elements of target company or common objective and purpose. Moreover, the deeming clause of regulation 2(e)(2) could operate only prospectively, not retrospectively.

Ranbaxy became a subsidiary of Daiichi in October 2008 and Ranbaxy’s purchase of Zenotech’s shares in January 2008 was not a “person acting in concert” with Daiichi as there was no coming together to attain a common purpose. Rather, it was by accident. The Supreme Court agreed with the offer price and held that a simple holding company and subsidiary relationship without a common purpose or objective is not sufficient to comprise “persons acting in concert”.

Vivek Vashi is the mainstay of the litigation department at Bharucha & Partners.

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