The Securities Appellate Tribunal’s (SAT) recent ruling in Dr Jayaram Chigurupati v SEBI, Daiichi Sankyo Co, Ranbaxy Laboratories and Zenotech Laboratories Ltd (2009) has taken the principles of purposive interpretation to a whole new level. SAT had the opportunity to examine the concept of persons acting in concert and those who believe that the concept is fairly well settled (pursuant to the guidance of the Bhagwati Committee report and judgments such as Technip SA v SMS Holding (Pvt) Ltd & ors [2005], KK Modi v SAT [2003] and Hitachi Home and Life Solutions Inc v SEBI [2006]) are in for a surprise. In SAT’s ruling, two new angles were introduced to the concept of persons acting in concert. First, it stated that a relationship between two persons who are ‘deemed to be acting in concert’ is a static relationship and need not be applied to the specific acquisition in question. Secondly, if two persons are deemed to have acted in concert today, the long arm of the law can deem them to have acted in concert retrospectively simply to ensure that minority shareholders are provided an exit at a higher price. Background
In October 2007 Ranbaxy Laboratories Ltd acquired 44.59% stake in Zenotech. This was followed by an open offer to the public shareholders. The offer price was Rs160 per share. In June 2008 Daiichi acquired a substantial stake in Ranbaxy and, as a result of an open offer that was completed in October 2008, held 52.5% of Ranbaxy. Pursuant to the acquisition of control over Ranbaxy, Daiichi indirectly acquired control over Zenotech and hence made an open offer to the public shareholders of Zenotech in January 2009.
Based on Regulations 20(4) and 20(12) of the Takeover Regulations, Daiichi fixed the offer price at Rs113.62 per share. The offer documents clearly justify the offer price, which included a two-week and a 26-week look back from the date of the public announcement to the shareholders of Ranbaxy and to the shareholders of Zenotech respectively.
The offer price justification also indicated that one of the criterion for determination of the offer price in case of an indirect acquisition, which is the highest price paid by the acquirer or a person acting in concert with them for any acquisition during the 26-week period prior to the date of the public announcement to the shareholders of Ranbaxy, was not applicable in Zenotech. This was because Daiichi had not acquired any shares of Zenotech during the 26-week period prior to 16 June 2008 (the date on which the open offer was made to the public shareholders of Ranbaxy). This was contested by Dr Jayaram Chigurupati, the promoter shareholder of Zenotech, who claimed that the offer price should be Rs160 per share. Dr Jayaraman’s claim was on the basis that, though Daiichi (the acquirer) did not acquire any shares during the 26-week period prior to 16 June 2008, Ranbaxy, which became a subsidiary of Daiichi on 20 October 2008 (and was therefore deemed a person acting in concert with Daiichi), had acquired shares of Zenotech pursuant to an earlier open offer at the rate of Rs160 per share. While the Securiteis and Exchange Board of India rejected the claim, SAT has recently passed an order upholding it.
A person acting in concert is defined under the Takeover Regulations as persons who, for a common objective or purpose of substantial acquisition of shares or control, co-operate by acquiring shares or control over a company. Additionally, the Takeover Regulations specifies certain persons to be deemed persons acting in concert with other persons unless the contrary is established. For example, a company is deemed to be in concert with its holding company, subsidiary or companies under the same management. SAT Ruling
Based on the above definition and deeming provision, SAT in its order has held that since Ranbaxy and Daiichi are deemed persons acting in concert from October 2008, they will be persons acting in concert for the 26-week period prior to 16 June 2008. Through this order, SAT has propounded that, once two companies share a holding and subsidiary relationship, anything that they ever did is deemed to have been done in concert as far as the Takeover Regulations are concerned and it is needless to go into the specific acquisition in question. The general principle of interpretation of a legal fiction is to give effect to the objective for which it was introduced and to refrain from extending it for purposes beyond its objective. The concept of persons who are deemed to have acted in concert has been introduced because it is presumed that, by virtue of the subsidiary-holding relationship shared by two persons, they would have acted in concert and in case they did not, the burden of proving so has been shifted onto them. Given that Ranbaxy and Daiichi did not share a close relationship during the period in question and had no commonality of objective or purpose, it is unclear how they could be deemed to have acted in concert. One would assume that it is not difficult for Ranbaxy and Daiichi to rebut this presumption and establish to the contrary that they did not in fact act in concert in connection with the acquisition in question.
If one were to go by the SAT’s interpretation of deemed persons acting in concert, which neither references the concerned acquisition nor provides the benefit of establishing the contrary, all future offer documents made by multinational companies will run into hundreds of pages as every step-up holding company, subsidiary and commonly managed company will be deemed to have acted in concert with the offerer, irrespective of the fact that it is fairly routine for affiliate companies not to be acting in concert at all times.
SAT in its ruling has reasoned that the case warrants a retrospective application of the concept of persons acting in concert, as it is purported to serve the higher objects of the Takeover Regulations, which are payment of the highest price to the public shareholder. While no-one can dispute the fact that the Takeover Regulations do expressly specify that the offer price should be the highest of the various reference prices, it does not necessarily warrant a tangential interpretation to fairly straightforward legislative text in the guise of purposive interpretation. Therefore, Daiichi and Ranbaxy are now said to have acted in concert irrespective of the fact that they were not a holding subsidiary at the reference point in time and irrespective of the fact that they clearly could not have acted in concert at all.Comment
While we can only wait and watch the Honorable Supreme Court’s views on this matter, the public shareholders of Zenotech do not appear to have been convinced by SAT’s reasoning as the share is currently hovering around Rs113.
By Akila Agrawal, partner,Amarchand Mangaldas.E-mail: akila.agrawal@amarchand.com.
Dr Jayaram Chigurupati v SEBI, Daiichi Sankyo Co, Rambaxy Laboratories and Zenotech Laboratories Ltd(Unreported, October 9 2009)
Hitachi Home and Life Solutions Inc v SEBI[2006] 65 SCL 339 (SAT)
KK Modi v SAT [2003] 413 CompCas 418 (Bom)
Technip SA v SMS Holding (Pvt) Ltd & ors[2005] 5 SCC 465
