M J Antony: Takeovers across borders

OUT OF COURT

As economic borders slowly disappear and trans-national corporations attempt to take over companies from various countries, questions arise about the law applicable to such acquisitions.

Is it the law where the multinational is incorporated or the law where the target company is registered? Private international law is yet to give clear guidance on this issue.

Therefore, the regulators and tribunals have to use their ingenuity to arrive at a satisfactory answer. This problem arose a fortnight ago in the Supreme Court while deciding Technip SA vs SMS Holding Pvt Ltd.

There were five protagonists in this case, with a complex shareholding pattern. Technip, Coflexip, IFP and ISIS were all incorporated in France.

Seamec, registered in India, was a subsidiary of Coflexip through a chain of wholly-owned subsidiaries controlled by the majority of shareholders in Seamec.

The question that arose for consideration was the date of acquisition when Technip acquired control of Seamec through Coflexip as the value of the shares fell steeply in a year.

If Technip controls Coflexip, it also controls Seamec. If there has been a change of control of Seamec, Technip would be bound to offer to purchase the shares of the minority shareholders in Seamec in accordance with the provisions of the Securities and Exchange Board of India (Substantial Acquisition of Shares & Takeover) regulations.

On the complaint by certain shareholders of Seamec before Sebi, the board held that the French law applied to the takeover of Coflexip and consequently Seamec by Technip.

It found that Technip had violated the regulations while acquiring 58 per cent of the shares and control of Seamec without making any public offer.

So it was asked to make a public announcement according to the regulations.

Some minority shareholders of Seamec appealed to the Securities Appellate Tribunal. It reversed the Sebi view and held that the Indian law would apply to the takeover.

Technip, therefore, moved the Supreme Court. It argued that since it and Coflexip were registered in France and the takeover of Coflexip by Technip also took place in France, the law applicable was French.

The Supreme Court has upheld this view, overruling the tribunal judgement.

The primary dispute, therefore, was whether the transaction should be judged according to the French law or the Indian law. After wading through a number of Indian and foreign judgements, and the 1997 Bhagwati Committee report on takeovers, the Supreme Court came to certain conclusions that would rule such future transactions.

The three-judge bench stated that questions about the status of a corporation are to be decided according to the law of domicile or incorporation, subject to certain exceptions including the exception of domestic public policy.

This is because a corporation is purely an artificial body created by law. It can act only in accordance with the law of its creation. It is to that law alone that all questions concerning the creation and dissolution or the corporate status could be referred to unless it is contrary to public policy.

Regarding public policy, the court said that it must relate to the basic principles of morality and justice. Domestic public policy will take precedence only if the foreign law is in flagrant or gross breach of the basic norms.

"In a sense, all statutes enacted by Parliament can be said to be part of the Indian public policy. But to discard a foreign law only because it is contrary to an Indian statute would defeat the basis of private international law to which India indisputably subscribes," the judgement said.

Moreover, an examination of the French regulations on takeovers would show that they are as rigorous as the Indian rules. The difference relates only to the prescribed limits of shareholding for control of one company by another.

This could not make the French law violative of any public policy underlying the Indian laws and regulations so as to disregard the French law, the Supreme Court emphasised.

It also concluded that ultimately it was for the court to resolve the conflict by looking at the text of the French law and the material on record to decide the proper application of the provisions.