Offer period under SEBI regulations can start from share purchase agreement, says...

Offer period under SEBI regulations can start from share purchase agreement, says SC

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The Supreme Court has held that the offer period for the purposes of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, can commence from the date of a concluded agreement i.e. share purchase agreement as in the present case. This order came from a two-judge bench of the Supreme Court, comprising of Justices Ranjan Gogoi and N.V. Ramana, in the case of Securities & Exchange Board of India v. Burren Energy India Ltd. & Ors. [Civil Appeal No. 361 OF 2007, decided on 2 December 2016].

The basic facts of the case are as under. Burren Energy India Ltd. was incorporated in December, 2004 under the laws of England and Wales with its registered office in London. Burren was formed to acquire the entire of the equity share capital of one Unocal Bharat Limited (“UBL”), incorporated in Mauritius in July, 1996. The shares of the aforesaid UBL were acquired in September, 1996 by one Unocal International Corporation (“UIC”) incorporated in California in USA.

UBL held 26.01% of the issued share capital of Hindustan Oil Exploration Co. Ltd. (“the target company”). Burren entered into a share purchase agreement with UIC on 14 February, 2005 to acquire the entire equity share capital of UBL. This agreement was entered into in England and by virtue thereof all the shares of UBL were registered in the name of Burren on the same day itself i.e. 14 February, 2005. On account of this Burren came to hold 26.01% of the share capital in the target company. As the acquisition was beyond the stipulated 15% of the equity share capital of the target company the provisions of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 got attracted making it obligatory on the part of Burren to make a public announcement in accordance with the Regulations. Such public announcement in the form of a public offer for sale/purchase of 20% of the shares of the target company at a determined price of Rs. 92.41 per fully paid up equity share was made on 15 February, 2005 by Burren and UBL acting as a person acting in concert.

On 14th February, 2005 i.e. date of execution of the share purchase agreement, Burren appointed two of its Directors (Mr. Finian O’Sullivan and Mr. Atul Gupta) on the board of UBL and on the same date UBL, which is a person acting in concert with Burren, appointed the same persons on the board of directors of the target company. According to SEBI, this amounted to violation of Regulation 22(7) of the said Regulations inasmuch as the said appointment was made during the offer period which had commenced on and from 14th February, 2005 i.e. date of execution of the share purchase agreement. The relevant part of Regulation 22(7) is reproduced below:

“(7) During the offer period, the acquirer or persons acting in concert with him shall not be entitled to be appointed on the Board of Directors of the target company…”.

Now, “offer period” is defined in Regular 2(1)(f) as under:

“2(1)(f) “Offer period” means the period between the date of entering into Memorandum of Understanding or the public announcement, as the case may be and the date of completion of offer formalities relating to the offer made under these regulations”

The contention of the company was that since the public announcement was made on 15 February, 2005, therefore the offer period would begin from that date, whereas the directors were appointed one day before that, due to which the said appointments were not “during” the offer period. It was contended that there was no Memorandum of Understanding entered into this case.

Mainly on this ground, the Securities Appellate Tribunal, Mumbai had reversed the order of the Adjudicating Officer dated 25th August, 2006 imposing a penalty of Rs.25 lakhs on them for the said violation.

On appeal before Supreme Court, it was argued by the appellant that the words ‘Memorandum of Understanding’ are not words of Art conveying a single meaning. In an appropriate situation a ‘Memorandum of Understanding’ may also include a concluded agreement between the parties. Even in a given case where a Memorandum of Understanding is to fall short of a concluded agreement and, in fact, the concluded agreement is executed subsequently, the ‘offer period’ would still commence from the date of the Memorandum of understanding. If the offer period commences from the date of such Memorandum of Understanding, there is no reason why the same should not commence from the date of the share purchase agreement when the parties had not executed a Memorandum of Understanding. It was also submitted that the commencement of the ‘offer period’ from the date of public announcement would primarily have relevance to a case where acquisition of shares is from the market and there is no Memorandum of Understanding or a concluded agreement pursuant thereto.

The Supreme Court held that it is correct that in the definition of ‘offer period’ contained in Regulation 2(1)(f) of the Regulations, relevant for the present case, a concluded agreement is not contemplated to be the starting point of the offer period. But such a consequence must naturally follow once the offer period commences from the date of entering into a Memorandum of Understanding which, in most cases would reflect an agreement in principle falling short of a binding contract. If the offer period can be triggered of by an understanding that is yet to fructify into an agreement, there is no reason how the same can be said not to have commenced/started from the date of a concluded agreement i.e. share purchase agreement as in the present case.

Accordingly, the order of the said Tribunal was set aside and the penalty of Rs. 25 lakh imposed by the Adjudicating Officer was restored.

Read full order of the court:

 

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