In a recent order, SEBI refused permission for the withdrawal of a voluntary takeover offer by an acquirer. The details of the case involving an offer by Mr. Pramod Jain and Pranidhi Holdings Private Limited for shares in Golden Tobacco Limited are discussed at the Indian Legal Space Blog, as are reasons for SEBI’s decision.
The following are some of the takeaways from SEBI’s order:
1. SEBI would permit withdrawal of an offer under the Takeover Regulations only in exceptional circumstances. That, in turn, reinforces the sanctity of a takeover offer. Once made, the offer must be taken to fruition by the acquirer. It does not matter whether the offer has been triggered mandatorily due to the acquirer’s acquisitions of stock beyond prescribed thresholds or even if it is merely a voluntary offer. This imposes a significant onus on acquirers to possess the required certainty to be able to complete the offer;
2. SEBI has provided a narrow interpretation to the withdrawal provisions under Reg. 27 of the erstwhile Takeover Regulations of 1997. In other words, although an offer and acceptance thereof are contractual matters, they are a specialized type of contract governed by the provisions of the Takeover Regulations, and cannot be subject to unilateral withdrawal rights of offerors.
3. One of the grounds for withdrawal raised by the acquirer pertained to mismanagement of the target company by its management when the offer was pending, some of which also allegedly violated Reg. 23 of the 1997 Regulations which requires the target not to take certain actions without the approval of its shareholders. This also resulted in a significant drop in value of the target, compared to the time when the offer was launched. However, this ground by itself was found by SEBI to be insufficient to permit a withdrawal of the offer. Instead, SEBI’s approach suggests that these are matters of caution to be exercised by the acquirer by way of deeper due diligence before launching the offer. Such a stance by SEBI seems to impose greater obligation on acquirers to perform more extensive due diligence on the target (which is not always straightforward when the target is uncooperative, such as in a hostile situation), and any dispute regarding the business condition or value of the target cannot give the acquirer a right to walk away from the offer. Nevertheless, SEBI did note the possibility of a breach of the Takeover Regulations on the part of the target and its management, which would require further investigation.
Although SEBI’s order buttresses the position set out previously by the Securities Appellate Tribunal in the Nirma Industries Limited case (2008) which limits the scope of the acquirer’s withdrawal rights, its result goes further in applying the same principles to a voluntary offer as well. As far as possible wrongful conduct of the target is concerned, that is a risk which the acquirer will have to absorb as it is required nevertheless to proceed with the offer so as to protect the interest of the public shareholders.