SEBI Order on Takeover Regulation dated September 06, 2018

On September 6, 2018, Securities and Exchange Board of India (“SEBI”) passed an order under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 ("Takeover Regulations”) in the matter of United Spirits Limited . It was alleged that the status of United Spirits Limited (“USL”) had changed from being an entity jointly controlled by the United Breweries Holding Limited ("UBHL") and KFInvest ("KFIL") collectively known as “UB Group” and the Diageo group, to a solely controlled entity of Diageo group post two open offers whereby Diageo group acquired more than 54% (fifty four%) of the voting capital on its own and the rights given to the UB Group post that were considered to be not sufficient enough to constitute control in terms of regulation 2(1) (e) of the Takeover Regulations, thereby violating regulation 4 of the Takeover Regulations since no public announcement had been made in this regard. SEBI noted that in a case where one of the two promoters renounces his control over the target company such that the entire control of the company vests in the hand of the lone promoter who continues, it cannot be said that there is a 'change in control' as the public shareholders are familiar with both the promoters being in control of the company and have accepted the same. Hence, it was of the view that alleged trigger of open offer arising out of cessation of joint control is not substantiated. SEBI also addressed the aspect of change in control from joint to sole, as follows On this issue the report of the First Bhagwati Committee, which led to the drafting of the of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (“Regulations 1997”) read as follows “The Committee, therefore, agreed to define control. The Committee also felt that concept of joint control which is often seen in practice should also be recognised. The Regulations should make it explicit that cessor of any one person from joint control, thus giving the remaining person or persons sole control or taking of any person or persons in joint control by a person having sole control shall not be construed as ‘change in control over the company’ attracting the Regulations." The aforesaid view reflected in the text of Regulations, 1997 which read as follows "Regulation 12 Acquisition of control over a company.—Irrespective of whether or not there has been any acquisition of shares or voting rights in a company, no acquirer shall acquire control over the target company, unless such person makes a public announcement to acquire shares and acquires such shares in accordance with the Regulations. Provided that nothing contained herein shall apply to any change in control which takes place in pursuance to a resolution passed by the shareholders in a general meeting. Explanation (i) For the purposes of this Regulation where there are two or more persons in control over the target company, the cessor of any one such person from such control shall not be deemed to be a change in control of management nor shall any change in the nature and quantum of control amongst them constitute change in control of management Provided however that if the transfer of joint control is through sale at less than the market value of the shares, a shareholders meeting of the target company shall be convened to determine mode of disposal of the shares of the outgoing shareholder, by a letter of offer or by block-transfer to the existing shareholders in control in accordance with the decision passed by a special resolution, Market value in such cases shall be determined in accordance with Regulation 20 (ii) where any person or persons are given joint control, such control shall not be deemed to be a change in control so long as the control given is equal to or less than the control exercised by person(s) presently having control over the company.” The Achuthan Committee Report which led to the drafting of the Takeover Regulations did not discuss this issue nor did this issue find a specific mention in the text of the Takeover Regulations. But considering that the essential jurisprudence of the two Regulations relating to acquisition of control has not changed, one would assume that the Bhagwati Committee Report's rationale on cessation of joint control to sole control not constituting acquisition of control must continue even in the context of the Takeover Regulations. Thus, in a case where one of the two promoters renounces his control over the Target Company such that the entire control of the company vests in the hand of the lone promoter who continues, it cannot be said that there is a 'change in control' as the public shareholders are familiar with both the promoters being in control of the company and have accepted the same. Download Pdf