Partly allowed

Rohdia v. SEBI

SAT7 Nov 2001

Case brief

AI extract

What is this about?

The Tribunal examined whether the appellant acquired control of an Indian target company by exercising a call option over its UK holding company, triggering takeover obligations. It held the appellant had waived its exemption right through public statements and was directed to make a public offer, modifying the interest direction regarding shareholder eligibility.

What did the court decide?

Appeal partly allowed; direction to make a public offer upheld; direction to pay interest on offer price modified to apply only to shareholders holding stock on 14.6.2000.

Rohdia Vs. SEBI — Securities and Capital Markets | SAT (2001)

Partly allowed

Rohdia v. SEBI

SAT7 Nov 2001

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Case brief

AI extract

What is this about?

What did the court decide?

Appeal partly allowed; direction to make a public offer upheld; direction to pay interest on offer price modified to apply only to shareholders holding stock on 14.6.2000.

¶69

19.7.2001, on an erroneous assumption that change in control of the Indian company took place only on exercise of the call option by the Appellant, ignoring the fact that ISPG had acted at the behest of the Appellant, and that exercise of the call option by the Appellant was an integrated indivisible transaction . In this context he referred to several paras in the various contractual arrangements between the parties, such as the Heads of Agreements, the Call Option Agreement, the Bond Purchase Agreement, the Phosphate Call Option Agreements etc. and the statements made in press release, offer documents, applications to the authorities and also the correspondence entered into by the parties in this regard. Copies of these documents have been filed in the appeal proceedings. Referring to the Heads of Agreement, learned Senior Counsel stated that it describes Donauchem as the Appellant’s partner in the setting up of the arrangement leading to the UK offer, that in the press release issued prior to the UK offer clearly states in the "background of the offer" that ISPG had been created as a result of a cooperation between Donau Chemie and the Appellant. Counterin.g the Respondent’s contention that the Appellant acted as a mere financier and not as an acquirer for the purpose of the UK offer. Shri Chagla submitted that it is evident from the documents on record that the Appellant had initially intended to acquire the UK company in the year 1999, that it was compelled to structure the acquisition of the UK company by way of an arrangement with Donau Chemie AG, as a direct acquisition of the UK company by the Appellant would have had an adverse impact on the proposed merger of Rhone Poulenc’s life sciences business with that of Hoechst AG., that the Appellant therefore intended to acquire the UK company after the merger of Rhone Poulenc’s life business with that of Hoechst AG. He stated that deferment of acquisition was not possible in the wake of bid by Albermarle Corporation. He further stated that Donau Chemie AG is a small company not involved in the business of the targeted the UK company that the said company set up a chain of subsidiaries which ended with a special purpose vehicle incorporated to effect the acquisition, that it was the Appellant who arranged funds for the public tender offer required for the acquisition and controlled such public tender through contractual arrangements. He submitted that the Appellant was not a financier as is being made out by the Respondent. It could be seen, that no borrower would enter into an agreement which gives unconditional right to the lender to acquire the shares of its subsidiaries, as such a right if at all would be given only upon a breach of the lending agreement and not otherwise; that no lender would enter into an agreement such as the Phosphate call option Agreement giving the borrower the right to buy the most important part of the lender’s business in case the lender failed to exercise the right akin to the call option, that it is unusual to disclose the business strength and further plans of the lender in the public announcement and letter of offer if he is not connected in any manner with the acquisition, that it is unusual to have a lender take active interest in the management of the tender offer, that it is unusual to have a lender approach the European Commission to seek its no objection to a tender in the UK made by the borrower and the European Commission giving the approval to the lender, that it is highly unusual to describe the business strength and future plans of the lender in the letter of offer, which disclosure has nothing whatsoever to do with the public offer. In this context he also referred to the veto power and substantial control vested in the Appellant over the decision making by Danube etc., to show that, it was not a mere financial arrangement. Shri Chagla submitted that there is ample evidence flowing from the documents on record to show that the Appellant was virtually having control over the acquirer and also that the Appellant was a person acting in concert with the acquirer.

¶88

Shri Desai submitted that till the call option was exercised by the Appellant acquiring 100% shares of ISPG’s holding company, the ISPG was not a part of the Appellant. He referred to the documents on record and submitted that ISPG was a wholly owned subsidiary of Danube which is a 100% subsidiary of Donauchem GmbH, an Austrian company which in turn is a wholly owned subsidiary of Donau Chemie AG group, that there was no shareholding of Rhone Poulenc or the Appellant in ISPG, that it has also been so stated in the letter of offer. It is an undisputed fact that ISPG was a wholly owned subsidiary of Danube and not a group company of Rhodia at the time of acquisition of the UK Company by it. Shri Desai also referred to the statement in the offer letter dated 15.10.1999 that "Albright & Wilson exercised indirect control to the extent of approximately 72.79% of the paid up share capital of A&W through 2 of its 100% subsidiaries. Thus by virtue of this acquisition, the acquirer i.e. ISPG has indirectly acquired control in A&W". Shri Desai stated that in the letter of offer it has been mentioned that the offer is made by the acquirer i.e., ISPG which is a wholly owned subsidiary of Danube/Donau Chemie and there was no director from the Appellant in the acquirer company and until exercise of the call option the acquirer was to operate the UK Company as an independent business subject to Rhodia’s prior consent being required in relation to significant corporate transactions including certain acts affecting the asset or the capital of the acquirer, the UK company and Danube, that this consent cannot be construed as an exercise of control over ISPG. Shri Desai submitted that the Indian shareholders did not much favourably respond to ISPG’s offer to purchase the shares mainly for the reason that they expected the Appellant to make an offer on exercise of the call option and therefore they were waiting for the said offer to materialise, that this belief of the shareholders was based on the disclosure made in the letter of offer on the impending call option by the Appellant and the consequential change in ownership of the company.

¶92

Shri Rohit Kapadia, learned Senior Counsel appearing for Respondent No.2 submitted that from the documents filed by the Appellant in the appeal proceeding it is clear that ISPG was distinct and separate from the Appellant that the said ISPG was the acquirer of the UK Company and its Indian subsidiary. The Appellant acquired the UK Company by acquiring 100% shares of Danube, the holding company of ISPG, on exercising the call option. Shri Kapadia, in support of his argument referred to the public announcement issued by SBI capital market on behalf of ISPG regarding the cash offer by ISPG for the acquisition of the shares of the Indian Company, a copy of which is Exhibit 8 to the appeal and pointed out that in the public announcement it has been stated that it is being issued "on behalf of ISPG" and described the said ISPG as the "acquirer", that "it was not considered appropriate for Rhodia at this stage to acquire Albright and Wilson Plc UK with immediate and unconditional effect". It has also been stated in the public announcement that "until the earlier of the exercise or the expiration of Rhodia’s option, the acquirer will operate Albright & Wilson as an independent business subject to Rhodia’s prior consent being required in relation to significant corporate transactions including certain acts affecting the assets or capital of the acquirer, Albright & Wilson and Danube". Shri Kapadia stated that the statement indicates management will be totally clear of any other influence. He also referred to the statement that neither the acquirer nor Rhodia own shares in the other and no directors of the acquirer are also the directors of Rhodia and vice versa, and submitted that the ISPG and the Appellant are at arms length and not connected with each other. The reference to main call option and the phosphate call option does not indicate in any manner that the Appellant had control over the acquirer. Shri Kapadia further submitted that it has been clearly stated in the public announcement that only the two subsidiaries of the UK Company are the persons acting in concert and the Appellant’s name has not been mentioned as a person acting in concert, as claimed by the Appellant. He also referred to the affirmative statement in the public announcement that the acquirer has indirectly acquired control in the Indian Company. Shri Kapadia submitted that the statement in the public announcement that the acquirer is a wholly owned subsidiary of Danube which in turn is a wholly owned indirect subsidiary or Donau Chemie AG, Austria, that the acquirer was specially incorporated for the purpose of acquisition of the UK company also suggests that ISPG is not controlled in any manner by the Appellant.

¶132

It is seen from the Heads of Agreement dated 11.3.1999 and Restatement of the Heads of Agreement dated 30.3.1999 that the Appellant and Donauchem GmbH (partner) had agreed to arrange for the acquisition of all the outstanding shares of the UK company through a public tender offer by ISPG, a wholly owned subsidiary of the Donauchem GmbH. In the said agreement Donauchem GmbH has been described as "partner" whereas the Appellant has been described only as "Rhodia". This description ‘partner’ is suggestive of the fact that both the companies were jointly making arrangements to acquire the UK Company. This assumption is further fortified from the rest of the text of the agreement. It is seen from the agreement, that the Appellant and Donauchem GmbH had agreed to enter into certain agreements to the financing of the Tender offer through Bank draft and the subordinated convertible bond issued by Danube, the ownership and management of Danube, ISPG and the UK company and the issuance by "partner" to "Rhodia" a call option and the issuance by "Rhodia" to "partner" of the Phosphates Call. It is seen from the ownership structure of the concerned entities as stated in the agreement, that ISPG will be the direct wholly owned subsidiary of Danube and ISPG was to be capitalized by capital contribution from the said Danube and such capitalization was to equal or exceed minimum amount required under applicable laws. As far as Danube is concerned, the agreement provided that it was to be capitalized by an equity contribution from "partner" and at all times prior to the earlier of the exercise of the call option or the expiration of the call option exercise period, Danube was to remain the direct wholly owned subsidiary of the said ‘partner’. Thus it is evident that Danube was structurally independent of the Appellant holding any share in it. Shri Chagla had argued that even though the Appellant had no per se participation in the ownership or management of Danube directly, it had sufficient control over the said company through the financial agreement entered into between the parties. Let us have a look at the financial arrangement provided in the agreement.

¶249

The learned Senior Counsel did not seriously press the challenge on SEBI’s power to direct the Appellant to pay interest to the shareholders of the Indian company, in view of the Tribunal’s decision in B.P.Plc (formerly B.P.Amoco) v. Securities and Exchange Board of India (supra). The view held by the Tribunal in the said case upholding SEBI’s power to levy interest applies in equal force to this case also. However, the learned Senior Counsel had pointed out that in the said order the Tribunal had viewed that interest is the return or compensation for the use or retention by one person of money belonging to another, and in this view of the matter the requirement of payment of interest should be only to those persons who were holding shares on 14.6.2000 and in a position to tender the same in case the Appellant makes a public offer as directed by SEBI. Learned senior Counsel submitted that those who purchased shares after the due date for closure of the offer as specified by SEBI have not suffered any such loss and any direction to pay interest to those shareholders also on those shares purchased after 14.6.2000 and tendered in an offer as required to be made by the impugned order would amount to unjust enrichment of those shareholders. I find some force in this argument. A person who was not holding shares and as a result not in a position to tender shares in a public offer which was required to be made by 14.6.2000 should not be entitled for any compensation for the delay involved in making the public offer and the consequential delay in the payment of the purchase consideration. He was not in a position to tender shares in response to the public offer had the Appellant made the public offer at that point of time. Therefore, those persons who were holding shares of the Indian company as on 14.6.2000 and continue to be shareholders on the closure day of the public offer made in terms of the directions given by SEBI vide the impugned order alone should be eligible to receive interest, in case the shares which he was holding on 14.6.2000 are tendered in response to the belated public offer. The impugned order stands modified to the said extent

Rohdia v. SEBI

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Rohdia v. SEBI

Case brief

What is this about?

What did the court decide?

Issues for consideration

Cases cited

Parties & counsel

Case details

Similar cases

What the court decided

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Statutes considered

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