Schemes of arrangement have been a favoured route for corporates to acquire shares of listed companies, given the many obvious pros of acquisitions undertaken through a court/ National Company Law Tribunal (NCLT) based scheme of arrangement. Schemes have also been used to undertake group level restructurings, a consequence of which could be the indirect transfer of shares of a listed company from one group company to another.
One of the biggest advantages of acquiring shares in, and/or control over, a listed company pursuant to a scheme of arrangement is that such an acquisition is exempt from the requirements of making a mandatory open offer under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover Regulations), subject to certain conditions being met.
Until the recent amendment to the Takeover Regulations (as discussed later), Regulation 10(1)(d)(ii) of the Takeover Regulations exempted acquisitions pursuant to a scheme of arrangement or reconstruction directly involving the target company, and approved by an order of a court or tribunal or a competent authority under any law or regulation, Indian or foreign, from the obligation to make an open offer under the Takeover Regulations.
Regulation 10(1)(d)(iii) of the Takeover Regulations exempted acquisitions pursuant to a scheme of arrangement or reconstruction not directly involving the target company and approved by an order of a court or a tribunal or a competent authority under any law or regulation, Indian or foreign, subject to:
- The component of cash and cash equivalents in the consideration paid being less than 25% of the consideration paid under the scheme.
- Where after implementation of the scheme of arrangement, persons directly or indirectly holding at least 33% per cent of the voting rights in the combined entity are the same as the persons who held the entire voting rights before implementation of the scheme.
The rationale for exempting schemes of arrangement, whether involving the target company directly or not, has been to facilitate genuine transactions. While assessing genuineness may be simpler in the case of schemes involving the target company directly, in respect of exemption for mergers not involving or dealing with the target company, the Report of the Takeover Regulations Advisory Committee (dated July 19, 2010) under the chairmanship of Mr. C. Achutan had considered the possibility of not providing such an exemption at all.
However, the committee concluded that such an elimination of the exemption may not be equitable in the case of transactions that are genuine mergers (which several other laws including the Income Tax Act, 1961 also recognise as deserving special treatment). A court, tribunal, or a competent authority acts as a watchdog, and acquisitions pursuant to an order passed by them were deemed to be genuine transactions, thereby being exempted from mandatory open offer obligations under the Takeover Regulations. The Takeover Regulations, 1997 in fact did not mandate for the scheme to be approved by an order of a court, tribunal or competent authority, and this condition was brought in the Takeover Regulations in 2011.
Recently, the Securities and Exchange Board of India (SEBI) has, pursuant to the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Amendment Regulations, 2019, deleted the references to ‘competent authority’ in both Regulation 10(1)(d)(ii) and Regulation 10(1)(d)(iii) of the Takeover Regulations (the Amendment), with effect from March 29, 2019.
Prior to the Amendment, the Takeover Regulations did not define the term ‘competent authority’ nor did the regulations provide any guidance on it. Schemes of arrangement in India need to mandatorily be approved by the NCLT (which took over the historical jurisdiction of high courts post the effectiveness of the Companies Act, 2013). Globally, however, the merger process varies vastly across jurisdictions, with many jurisdictions not requiring any formal sanction/ order of a court or any other regulatory authority for effecting a merger.
In this context, in the recent past, various corporates and multi-jurisdictional groups had approached SEBI seeking informal guidance on whether mergers conducted in accordance with the laws of the relevant jurisdictions overseas would meet the requirements of Regulation 10(1)(d)(iii) of the Takeover Regulations. SEBI’s informal guidance had been sought in respect of different jurisdictions – the United States (Delaware and Nevada), Germany and France.
In the United States, the merger contemplated did not itself require the approval or order of any court or competent authority, other than the review process of the United States Securities and Exchange Commission wherein it reviews the registration statement and shareholder proxy disclosure statement sent to the shareholders, and mergers are effected by filing of a certificate of merger with the Secretary of State.
In Germany, the Federal Financial Supervisory Authority was to undertake an extensive review of the exchange offer documents, but such merger did not require approval by a court or a competent authority, under German law.
The process contemplated for merger in France included the requirement to seek approval of shareholders of both companies, the appointment of a merger / contribution auditor, preparation and filing of a merger plan with the concerned registry of the Tribunal de Commerce and publication thereof in the legal gazette. The publication would start a 30-days’ opposition period granted to the creditors of the relevant companies. For the merger to be valid, companies would have to file a declaration (compliance statement) confirming compliance with the law, following which notice regarding completion of the merger would be published in the legal gazette.
Despite the detailed process prescribed under the laws of the relevant jurisdictions, SEBI had, in each of the above cases, stated that given that the mergers would be not approved by an order of a court or tribunal or a competent authority, acquisition of shares / control in the listed Indian companies pursuant to such mergers would not be exempt under Regulation 10(1)(d)(iii) of the Takeover Regulations. From an analysis of the relevant interpretative letters, it appears that SEBI looks for whether there is due consideration given by a court or a regulatory authority (and the possibility of a rejection of merger by them) in the relevant jurisdiction in question while analysing whether an overseas merger would be exempt from the requirement to make an open offer in India. With the Amendment, SEBI has laid to rest any scope of reading the process, and filings made with relevant regulatory authorities overseas within the ambit of ‘competent authority’. The rationale for the Amendment, however, remains unclear.
Global transactions involving acquisition of shares in, or control over, Indian listed companies will be significantly impacted with the Amendment, if the laws of the relevant jurisdiction do not require procuring an order of a court or tribunal to approve the merger. Moreover, even if such scheme is approved by a regulatory authority or statutory authority (such as registrar of companies or securities exchange regulator), who has the authority to reject the scheme, unless such scheme is approved by a court/ tribunal, no exemption would now be available under Regulation 10(1)(d)(iii) of the Takeover Regulations.
SEBI should re-consider its approach in light of global transactions, specifically restructurings in large groups – given that the larger rationale for providing an exemption in schemes of arrangement is to facilitate genuine commercial transactions. If a transaction is being undertaken in compliance with the laws of the relevant jurisdictions, SEBI should exempt such acquisitions from the requirement of making a mandatory open offer under the Takeover Regulations in India.