Nirma Washed Out!

Nirma’s 7-year battle is finally over. The company made an open offer but after discovering it was unviable asked to permission to withdraw it. SEBI said no, SAT said no and this month the Supreme Court said no as well on grounds that such a practice will destabilize the securities market. What does this mean for M&A in the context of the new takeover code? Payaswini Upadhyay finds out

In July 2005, Nirma invoked a pledge on the 24.25% Shree Ram Multi Tech’s shares it held as collateral. This triggered the takeover code and Nimra made a public announcement of an open offer at Rs 18.60/sh. It also stated in the announcement and in its letter to SEBI that Shree Ram Multi Tech has suffered business losses and it may withdraw the offer as per Regulation 27 of the Takeover Code.

In the September quarter of the same year, the audit committee of Shree Ram Multi Tech detected several financial irregularities and ordered an investigative audit. The report noted an over Rs 350 cr embezzlement. 

In March 2006, the report was made public. Consequently, Shree Ram Multi Tech’s share price fell to Rs 8.

Since the open offer was pending Nirma turned to SEBI asking for an exemption, withdrawal or revision in the offer price. SEBI denied all 3 requests saying Nirma should have conducted adequate due diligence before allowing for an open offer to be triggered. Nirma argued that as an external party, it could not have detected the fraud before invoking the pledge.  

Nirma appealed in SAT which ruled in SEBI’s favor to say

a- Nirma should have conducted due diligence
b- It made the open offer with full knowledge of Shree Ram Multi Tech’s poor financial condition, several winding up petitions and recovery proceedings against it and that
c- SEBI can allow withdrawal of an open offer under Regulation 27 only when it is impossible to make that offer.

This month, the Supreme Court upheld SAT’s order on all 3 grounds and ruled that the 1997 Takeover Code allows withdrawal of an open offer only if it becomes legally impossible to do so.

Amrish Shah
Partner, EY
“I think the SC has very clearly laid down the circumstances under which a withdrawal is permitted under the old code and they are looking at impossibility of performance. Obviously they are saying when you go to the Board to seek a withdrawal, a fluctuation in price and whatever may be the reason for the fluctuation cannot become the reason for someone to withdraw. The entire basis is if they allow this to happen, I think it will create a problem from an investor protection perspective because minority shareholders will lose out and a lot of offers can be made and withdrawn of this ground and the entire shareholder-related integrity aspect will be lost.”

But that’s under the old regime. Regulation 23 of the 2011 takeover code allows an acquirer to withdraw an open offer if the conditions in the public announcement and letter of offer are not met. And experts say the new condition is friendlier for acquirers in a negotiated deal scenario as opposed to pledgees.

PR Ramesh
Senior Consultant, ELP
“The regulations do not make a distinction between the nature of an acquirer - whether it’s a deal or a pledgee- the situation is the same. But typically, in the case of a pledgee what happens is he is just triggering the Code without any agreement or due diligence being done. To this extent, his chances of getting out of the open offer commitment is mitigated because there is no agreement which has a disclosure saying I can withdraw it subsequently I get to know-so his scope is limited as he will get to know only after he takes control.”

Bharat Anand
Partner- M&A, Khaitan & Co.
“I think it’s more in the deal situation because when it’s a pledge, you have the right to choose how many shares you want to invoke. So don’t invoke 25% or more in one go. Do 24% and do 24% times the number of shares you have under the pledge. Don’t acquire them but sell them on market rate and try and reduce your loss on the relevant repayment covenant. But if the idea is to take the shares and if the idea is to take control, then you can’t invoke the pledge beyond 25% and then say, look we have discovered a mistake –please exempt us. Then I think you’re asking the regulator for too much because as the SC has said the regulator’s job is to protect the market and minority shareholders.

Which is why even now takeover regulations do not allow for a withdrawal on the mere fact that conditions disclosed in the public announcement have not been met. A withdrawal can be permitted only if the reasons for conditions not being met are outside the reasonable control of the acquirer.
 
Amrish Shah
Partner, EY
“If you look at the new Code, I think it allows the leeway to the acquirer in certain circumstances- say for instance, he puts down if there is an action under the anti-bribery act or there is some fraud detected - can it be a beyond the reasonable control of the acquirer; I would think yes. So the target has not yet become part of them and therefore it’s beyond their control as its being controlled by the current promoter. What do they need to do? Any such statement needs to be disclosed in the public statement and letter of offer. Second they need to rescind that agreement and then they can withdraw and they don't need to go to the Board in my mind if such be the case...because it’s a specific exception carved out for such type of events.”

Bharat Anand
Partner- M&A, Khaitan & Co.
14:54:50-14:54:48
Let’s take a very practical term which people include in an M&A deal. You often have between signing the deal and closing the deal a Material Adverse Change which says that if the target undergoes a material adverse change, I will not go ahead and do the deal. Now assume that’s the condition we have in our document and we disclose that condition in the offer letter as well. Question arises, say for eg, target has a billion dollar tax liability, can you escape making an offer? Now I think if you’re in a mandatory bid regime, where you’ve entered into an agreement to acquire more than 25%, to rely on a material adverse change condition is going to be a very difficult proposition. But if on the other hand it was a voluntary offer and in that you write we haven’t done due diligence on the target, we will ask the target for information and if we discover something untoward, we will not close the deal. In that situation SEBI will be more sympathetic.

The Supreme Court’s decision in the Nirma case may have some bearing on Golden Tobacco’s case which is currently pending in SAT- the difference being the acquirers in this case made a voluntary open offer. And while the new regime gives more leeway to acquirers to withdraw open offers, it’ll be interesting to see how SEBI interprets reasons beyond the reasonable control of the acquirer.

In Mumbai, Payaswini Upadhyay