Apex court redefines takeover code

WITHOUT CONTEMPT

A recent decision of the Supreme Court interpreting the takeover code in the Seamec case has opened up an entirely new dimension"" and, this is not about the court's verdict on the applicability of foreign law.

The court has laid down some interesting propositions that will govern indirect and incidental acquisitions of listed companies in India.

Henceforth, an indirect incidental takeover of a listed company need not trigger the open offer obligations under the takeover code.

It would have to be shown that the shareholding in such a listed company formed a substantial portion of the assets of the main company being taken over.

Alternately, it would have to be shown that the main purpose of the entire transaction was the indirect acquisition of control over the listed company.

Technip SA, a French company acquired 29.68 per cent shares of Coflexip SA, another French company in April 2000. Coflexip was the ultimate holding company of Seamec, which is a listed company in India.

The shares in Coflexip were bought by Technip from Stena International BV. The other shareholder in Coflexip was ISIS, another French company promoted by IFP, an institution created by a decree of the French government, holding 18.17 per cent in Coflexip. At the relevant time, ISIS was also the single largest shareholder of Technip with an 11 per cent holding in Technip.

Therefore, the aggregate holding of Technip and ISIS was 47.85 per cent in April 2000. Along with the acquisition of 29.68 per cent, Technip was able to induct three directors onto Coflexip board of directors. The directors nominated by Technip and ISIS aggregated to six of the 11 directors in April 2000 and rose to seven of the 12 directors in May 2000.

Sebi passed an order in September 2002, holding that Technip did not have any obligation to make an open offer in India for shares of Seamec in April 2000.

But Sebi ruled that Technip ought to have made an open offer in July 2001 for shares of Seamec because that was when Technip had made an open offer under the French law for shares of Coflexip, which would have resulted in Technip taking over indirect control over Seamec.

Technip did not challenge the Sebi order. But shareholders of Seamec challenged it arguing that the open offer ought to have been made in April 2000, when the open offer price would have been priced at Rs 238 for a share. In July 2001, the open offer price for Seamec shares was Rs 43 for a share.

The Securities Appellate Tribunal (SAT), relying on shareholder agreements applicable to Coflexip and circumstances of the case found that in April 2000 though Technip acquired only 29.68 per cent of Coflexip, its holding and its rights had to be viewed in conjunction with the holding and the rights of ISIS, since the two were in concert. The SAT found that they voted in the same manner at Coflexip general body meeting.

Therefore, the ISIS-Technip combine had a majority control over Coflexip board of directors, and thereby control over Seamec. The SAT ruled that Technip ought to have made an open offer in April 2000 and not in July 2001.

The Supreme Court has reversed the SAT decision, thereby reviving the Sebi order. In doing so, the apex court has said it is important to show that the action in concert is actually in relation to the specific target company i.e. Seamec.

Applying the French law to the relations between Technip and ISIS and relying on solemn undertakings given by Technip to French authorities that it was not in concert with any person, the apex court has ruled that the SAT ought not to have determined that Technip, in concert with ISIS, "controlled" Coflexip. Consequently, Technip could not be said to have acquired control over Seamec.

Relying on the French law, the apex court noted that under the French law, the mere similarity of behaviour did not constitute concerted action. The court ruled that Technip and Coflexip could at best have had a "strategic alliance".

It ought to have been shown that the acquisition of 29.86 per cent of Coflexip in April 2000 was with an objective of acquiring control over Seamec, or it ought to be shown that the shareholding in Seamec constituted a significant portion of Coflexip's assets.

There was hardly any reference to Seamec in the decision-making relating to the transaction in April 2000, and therefore, it cannot be held that Technip and ISIS were in concert for controlling Seamec.

If one were to only apply these two tests i.e. the size of the assets of the indirectly controlled company, and whether acquisition of such company was the main purpose of the transaction, Technip need not have made the open offer even with reference to July 2001.

It is only because Technip had not challenged the Sebi order and has completed the open offer that even the Sebi order did not get reversed.

(The author is a partner of JSA, Advocates & Solicitors. The views here are personal)

somasekhar@jsalaw.com