Ranbaxy and Daiichi are back in the news! That’s because the Japanese drug company is locked in litigation with Ranbaxy’s Hyderabad based subsidiary Zenotech Laboratories. Zenotech demanded a higher open offer price from Daiichi based on an argument that few independent legal experts could swallow. Most lawyers and consultants that this show spoke to in August said Zenotech's claims would not stand in court. But earlier this month- the Securities Appellate Tribunal or SAT proved them all wrong by ruling in favor of Zenotech! Does this SAT order give rise to a new interpretation to the Takeover Code?

The largest acquisition in the history of Indian pharma just got a little larger!

The back story:

- In January 2008, Ranbaxy paid 160 rupees a share to purchase a majority stake in Zenotech

- On January 19th Ranbaxy closed its open offer for Zenotech at the same price of 160 rupees a share.

- About 20 weeks later, in June 2008, Ranbaxy itself was acquired by Japanese firm Daiichi Sankyo.

-Under SEBI's indirect acquisition rules, Daiichi was to make an open offer for Zenotech within 3 months.

Now, SEBI rules say an open offer has to be priced at the highest of:

-The negotiated price between the acquirer and the target

-The price the acquirer paid to purchase any shares of the target in 26 weeks prior to the public announcement

-Or, the 26 week or 2 week average of the target's stock price preceding the public announcement

The twist:

In indirect acquisitions, there are two public announcement dates. One is the open offer date for the subsidiary and the other is the acquisition announcement date of the parent. That puts 6 prices in play.

Here’s Daiichi’s list of six prices

-First using the public announcement date of the Daiichi-Ranbaxy acquisition- that’s June 16, 2008. Negotiated price: NA

-Highest price of shares acquired in 26 weeks prior to public announcement: NA

-Higher of 26 week or 2 week average stock price of zenotech prior to public announcement: Rs 113.62/ share

-Then using the public announcement date of Daiichi's open offer for Zenotech, that’s January 19, 2009.  Negotiated price: NA

-Highest price of shares acquired in 26 weeks prior to public announcement: NA

-Higher of 26 week or 2 week average stock price of Zenotech prior to public announcement: Rs109.52/ share

The highest of all these prices is Rs 113.62—and so that’s what Daiichi priced its open offer at

But Zenotech took a very different view. It used the public announcement date of the Daiichi-Ranbaxy acquisition, that’s June16, 2008

For calculation purposes, it then claimed that Ranbaxy and Daiichi are persons acting in concert and hence the highest price of shares acquired in 26 weeks prior to the public announcement was the 160 rupees that Ranbaxy had paid Zenotech. And hence, Daiichi should price its open offer at 160 per share. Now many legal experts disagreed with this 'persons acting in concert' angle. After all, Daiichi was not a person acting in concert when Ranbaxy acquired Zenotech shares.

But surprise surprise—the Securities Appellate Tribunal or SAT agreed with Zenotech’s claim. That decision has drawn contrasting reactions from the legal community.

Amrish Shah, ED, PwC:

If one looks at the line of reasoning that SAT has said, is that you look at the Persons Acting in Concert as on the target company’s Public Announcement and then apply whether those Persons Acting in Concert whether on the parents company offer date or on the targets open offer date had made any acquisitions in the previous 6 months and then apply that pricing norm. The key question is can you select a certain date for Persons Acting in Concert and apply that to a date when they were clearly not Persons Acting in Concert? And I think that’s where one can challenge this entire concept.”

Shuva Mandal, Partner, AZB & Partners:

The statute says-it doesn’t matter if you’re acting in concert as of January 2008, that is the six month look-back period. but if you were ever acting in concert we will automatically deem any price six months in advance of that date when you starting acting in concert as the fictional price for the open offer. That is unfortunately what Regulation 20 says

Hitesh Jain, Partner, ALMT Legal:

What is a person acting in concert? Commonality of objectives, control and relationship between parties; ultimately you have to consider all these factors. According to me there are no circumstances on June 16 2008 that can find that Daiichi and Ranbaxy are Persons Acting in Concert.

Sources say Daiichi is expected to appeal this SAT decision in the Supreme Court. Ironically if the SAT order stands, Daiichi will end up paying even more than Rs 160 a share for Zenotech. In past cases, SEBI has charged an interest rate of anywhere between 6% to 15% for incorrect open offer pricing- which means that unless Daiichi does win the Supreme Court appeal, it will find itself paying a lot more than it had bargained for. Like we said, the biggest deal in Indian pharma just got bigger!