The Indian securities law mandates a person (Acquirer), that is directly or indirectly (i) acquiring shares or voting rights beyond a prescribed limit in; or (ii) control over; a listed company (Target), to make an open offer to acquire certain additional percentage of shares from public shareholders of the Target – to provide them a right to exit at a particular price if they do not wish to continue with Target after its acquisition by Acquirer. Owing to the volatility and fluctuation in share price of the Target during the open offer, the Securities and Exchange Board of India (SEBI) (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover Regulations) prescribe a strict timeline of 10 days for completion of all open offer-related procedures. It is within the said period that Acquirer is required to pay consideration to shareholders for the shares tendered by them during the open offer process.
Within the said timeline, Takeover Regulations also require the Acquirer to procure statutory approvals required to complete the open offer without any default, neglect or delay.1 However, in case of delay in procuring such statutory approvals, SEBI has been empowered to grant extension for completion of the open offer process, which is subject to Acquirer paying certain interest (as determined by SEBI) on the open offer price to exiting shareholders for delay in payment of consideration for shares tendered in the open offer process.
Unfortunately, the extant Takeover Regulations recognise non-receipt of statutory approval(s) as the only acceptable cause of delay, and ignore all other practical grounds owing to which Acquirer, for no fault of its own, may be unable to complete its obligations within 10 days. Recognising this lacuna, SEBI has released a discussion paper (DP) aimed at, inter alia, inclusion of inter-se dispute among parties, valuation disputes, various stages of litigations, etc. as reasons for which extension may be granted to an Acquirer. While the DP is a welcome step, another vital aspect that it fails to deliberate on concerns the payment of interest by Acquirer to shareholders for delay in open offer caused by reasons that are not attributable to it. This paper analyses this issue, and examines certain judicial precedents and instances to highlight that a blanket approach mandating an Acquirer to pay interest to shareholders for delay in payment of consideration due to legally unavoidable reasons makes it prejudicial for Acquirer in certain instances.
Delay not attributable to Acquirer
In relation to the issue of payment of interest to shareholders in cases of delay in acquisition of Colour Chem Limited (target company) by Clariant International Limited, the Supreme Court of India2 generally outlined the rationale for payment of interest to shareholders as a 'just and equitable' remedy for breach of their statutory right to secure a timely exit from the target company3. Generally, payment of such interest due to delay by the Acquirer on account of its fault, negligence, or omission in completing the open offer process would certainly be a just and equitable relief for shareholders. However, such principle, if applied while ignoring situations where such delay is caused by reasons beyond Acquirer's control would be inequitable to Acquirer.
An issue relating to such payment for delay caused for external reasons arose in matter of acquisition of Saurashtra Cement Limited (target company) where the acquirers sought to withdraw the open offer, inter alia, due to delay caused by impending litigations. Having initiated in 1999, for the next two decades, the acquirers went through different rounds of appeals and re-consideration of the SEBI order (of 1999) directing the acquirers to complete the open offer process. Given a substantial passage of time, the acquirers expressed their inability to complete the open offer process. However, in its latest order of 2019 (after subsequent appeals and remands), while directing acquirers to proceed with the open offer, SEBI also instructed them to additionally pay interest to shareholders for the delay in open offer process. Rejecting the contention of Acquirers that delay had occurred on account of continuous litigations, SEBI observed that the interest cannot be reduced by reason of any pending litigation and that the acquirers cannot be given any benefit of 'passage of time' only because of continuous litigation pursued by them.
Similarly, in a matter involving acquisition of Hindustan Zinc Ltd.4, Securities Appellate Tribunal (SAT) deliberated on the issue of payment of interest to shareholders for acquirers' failure to pay timely consideration to non-resident shareholders of the target company due to a delay in securing approval from the Reserve Bank of India (RBI). SAT opined that Regulation 22(12) of the erstwhile 1997 takeover regulations [corresponding to Regulation 18(11) of Takeover Regulations] is "a no fault liability clause", where-under interest would be imposed on acquirers for delay, regardless of any fault or negligence on their part. However, given that the RBI approval was not considered as a statutory requirement for acquirers to complete the open offer process, SAT set aside the interest on acquirers by concluding that there was no 'delay' in open offer process under the Takeover Regulations.
The impending acquisition of Fortis Healthcare Limited (FHL) by IHH Healthcare Berhad (IHH) is a prime example of the narrative above, where IHH has been restrained from proceeding with the open offer in view of the status quo order passed by the Supreme Court of India. Even though IHH had deposited the consideration amount for shareholders in a non-interest bearing escrow account within prescribed timelines, it has been restrained from proceeding with the open offer due to Court's order. Given that neither IHH had any control over cause of such delay nor is it earning any benefit it, SEBI should consider that direction to pay interest here would be a 'double whammy' for IHH to pay interest (i) on borrowings taken for acquisition transaction; and (ii) to shareholders of FHL due to delay, considering that transaction consideration is lying in a non-interest bearing escrow account.
Unlike securities law, in other commercial legislations such as the Insolvency and Bankruptcy Code, 2016, the judicial approach has been to allow the exclusion of litigation time from the strict timeline of the resolution process.5 Principally, therefore, imposition of an interest obligation on an Acquirer for delay caused on account of Court's order (or impending litigation) falls foul of the long-standing equitable principle of actus curiae neminem gravabit, (that there shall be no prejudice caused to any person by an act of the court).6
Way forward
While SEBI's concern in protecting shareholder's interest is understandable, this principle, however, without case-to-case assessment by SEBI of the cause of delay resembles an albatross hanging around the Acquirer's neck, and thereby, fails to meet the ends of justice for all parties involved in transaction. In our view, to strike an effective balance between protection of shareholders' interest and Acquirer's interest obligation, Takeover Regulations should be amended or interpreted as to provide SEBI the power to examine reasons for delay while determining the interest obligation of the Acquirer. Besides, such determination may also factor-in whether the Acquirer is earning any return or benefit from such delay in open offer. Accordingly, in our considered view, SEBI should re-consider this aspect, else, it may miss yet another opportunity towards reforming the law as just and equitable for all parties involved.
*Authors are working as Associates with L&L Partners (formerly, Luthra & Luthra law offices), a leading full-service law firm in India. The authors thank Mr. Vaibhav Kakkar, Partner, L&L Partners, and Mr. Sahil Arora, Senior Associate, L&L Partners for providing their valuable inputs and guidance.
Footnotes
1. Regulations 18(10) & 18(11), Securities and Exchange Board of India (SEBI) (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.
2. Clariant International Limited and Others v. Securities and Exchange Board of India, (2004) 8 SCC 524.
3. SMS Holdings Private Limited v. Securities Exchange Board of India, (2004) 59 CLA 31; Luxoticca Group SpA v. Securities and Exchange Board of India, (2004) 58 CLA 375.
4. Sterlite Opportunites and Ventures Limited v. Securities and Exchange Board of India, [2006] 65 SCL360 (SAT).
5. Jaiprakash Associates Limited & Another v. IDBI Bank Limited & Another, C.A. 8437 of 2019.
6. Jang Singh v. Brij Lal and Others, AIR 1966 SC 1631.
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