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Supreme Court decides on interpretation of Takeover Regulations, 1997

Finsec Law Advisors

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The Supreme Court, in the matter of SEBI v. Burren Energy India Ltd., has interpreted the meaning of “offer period” and “acquirer” under Regulation 2(1)(f) and Regulation 22(7), respectively of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997.

Burren, an English company, signed a share purchase agreement (SPA) with Unocal International Corporation for purchase of its subsidiary, Unocal Bharat Ltd (UBL). On execution of the SPA, Burren became an indirect holder of 26.01% shares of an Indian company, Hindustan Oil Corporation Company Limited (HOCL), which were held by UBL. Burren appointed two directors in UBL on the day of execution of SPA. On the same day, these directors were appointed on the board of HOCL. Due to the SPA, the requirement of public announcement under the Takeover Regulations was triggered.

Regulation 22(7) of the Takeover Regulations prohibits an acquirer along with persons acting in concert (PAC), from being appointed on the board of the target company, during the subsistence of offer period. Further, offer period is defined as the period between signing of a Memorandum of Understanding (MoU) / date of public announcement and completion of offer formalities. The Supreme Court held that if the offer period can begin on the day when a mere understanding is achieved between the parties, then in cases where there is no MoU, the offer period shall commence on the day of execution of a conclusive arrangement, the SPA in the instant case. Moreover, an acquirer and a PAC can be either a natural person or an artificial person. Therefore, the prohibition under Regulation 22 shall be applicable when an acquirer / a PAC are appointed as a director and also when it appoints another director to represent itself on the board of the target company. Thus, Burren was held liable for violation of Takeover Regulations.

These anomalies have been resolved in the 2011 Takeover Regulations, under which an offer period commences from the date of agreement, formal and/or informal, and the prohibition of appointment of directors is applicable in a similar way on the corporate acquirers appointing their representative, as it is for an individual acquirer. However, this case will guide the regulator and listed companies towards a purposive interpretation of the Takeover Regulations and prevent its non-compliance.