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‘Succession’ under the Takeover Regulations

Finsec Law Advisors

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In an informal guidance issued on July 23, 2018, SEBI has stated that conversion of the status of a promoter of a listed company from a private limited company to a limited liability partnership (“LLP”) would be considered to be a ‘succession’, and the same shall be exempted in terms of Regulation 10(1)(g) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Regulations”).

Fidelo Foods Private Limited (“FFPL”) held 18.19% shares in India Finsec Limited (“Target Company”). As per the informal guidance, FFPL proposes to change its status from a private limited company to an LLP. On conversion, Fidelo Foods LLP will hold the 18.91% shareholding in the Target Company and along with other promoters, who would be deemed to be persons acting in concert, would exercise voting rights over more than 25% of the shareholding of the Target Company. In this context, a question was raised whether an open offer is required to be made in terms of Regulation 3 of the Takeover Regulations.

Regulation 10(1)(g) of the Takeover Regulations exempts the acquirer of shares by way of succession, transmission, or inheritance from the obligation of making an open offer under Regulation 3 or 4 of the said regulations. In the current case, SEBI took the view that since the proposed acquisition is pursuant to conversion of a private limited company into an LLP and the ownership of FFPL is proposed to be transferred to Fidelo Foods LLP without any change in the nature of business and control, the proposed conversion would fall within the meaning of ‘succession’ and would be exempt under Regulation 10(1)(g).

In a Securities Appellate Tribunal order in March 2001, it was held that an acquisition cannot be considered to be by way of transmission, inheritance or succession if any purchase consideration is paid. However, apart from this, there is a lack of understanding on what constitutes a succession or transmission. In light of this, the informal guidance is a welcome clarification.