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Sebi vs Clariant International Ltd. on 16 October, 2002

Securities Appellate Tribunal
Sebi vs Clariant International Ltd. on 16 October, 2002
Bench: G Bajpai


JUDGMENT

G.N. Bajpai, Chairman

1. BACKGROUND

1.1. Clariant AG is a Swiss public listed company.

1.2. Clariant International Ltd. (hereinafter referred to as “the Acquirer”) is a Swiss, publicly listed company and is a wholly owned subsidiary of Clariant AG.

1.3. Hoechst AG (hereinafter referred to as “Hoechst”) is a German, publicly listed company.

1.4. EBITO Chemiebeteiligungen AG (hereinafter referred to as “EBITO “) is a Swiss company. EBITO was floated on 19.05.2000 as a special purpose vehicle by the Acquirer and Hoechst . The Acquirer held 49% shares and Hoechst held 51% shares of the total equity capital of EBITO.

1.5. Colour-Chem Ltd. (hereinafter referred to as ” the Target company”) is a company incorporated under Companies Act, 1956 and is having its registered office at Mumbai. The shares of the Target company are listed at The Stock Exchange Mumbai (hereinafter referred to as BSE) and National Stock Exchange (hereinafter referred to as NSE). The Acquirer holds 50.1% equity shares in the Target company.

1.6. The Acquirer and Hoechst entered into purchase agreement for transfer of Hoechst’s German Specialty Chemical business to the Acquirer. Pursuant to the master agreement between Hoechst and Clariant AG a draft stock purchase agreement for transfer of 50.1% of the share capital of the Target company held by Hoechst AG in favour of the Acquirer was entered into between Hoechst and the Acquirer.

1.7. The Acquirer vide letter dated November 26, 1997 filed an application with Securities and Exchange Board of India ( hereinafter referred to as “SEBI”) seeking exemption from the applicability of Chapter III of the SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 1997(hereinafter referred to as the ” said Regulations” )for acquiring 5,83,708 equity shares representing 50.1% of the total equity capital of the Target company.

1.7. In the abovesaid exemption application the Acquirer inter alia, stated that

1.7.1. the Acquirer had entered into an agreement with Hoechst for the merger of the specialty chemicals businesses of the two companies. Under this agreement Clariant AG will acquire Hoechst’s specialty chemicals business, whereas Hoechst becomes a 45 per cent shareholder of the Acquirer. To effect this transaction, Hoechst has transferred its German specialty chemicals operations to a new subsidiary, which is subsequently been transferred to Clariant AG as a contribution in kind against issue of shares of the Acquirer to Hoechst.

1.7.2. As a part of restructuring referred to above Hoechst will transfer its entire shareholding, representing 50.1% of the total share capital in the Target company, to the Acquirer for consideration of cash.

1.7.3. the acquisition is in pursuance to a scheme of arrangement for construction under foreign law which is covered under regulation 3(1)(j)(ii).

2.0. The aforesaid application was forwarded to Takeover Panel in terms of the provisions of sub-regulation (4) of regulation 4 of the Regulations. The Takeover Panel, considered the application and vide its letter dated March 11, 1998 forwarded a report inter alia recommending as follows :

“On consideration of the application of the Applicant along with annexures thereto and additional information furnished by the Applicant vide the letter dated 26th February, 1998, the Takeover Panel is of the view that the exemption as sought by the Applicant may not be granted since so for as the Indian company viz. the Target company is concerned, it is pure and simple case of purchase of entire 50.1 percent of its total equity share capital so far held by Hoechst AG by the applicant. Hence, keeping the objective intended to be achieved by the Takeover Code, the grant of exemption as sought is not recommended”.

3. Based on the recommendation of Takeover Panel as stated above and after taking into consideration the facts of the case, SEBI vide its order dated 9/9/1998 while rejecting the application of the Acquirer seeking exemption from the making of an open offer in the matter of the acquisition of 50.1% of the equity capital of the Target company, directed the Acquirer to make a public offer as required under the Regulations if they are desirous of acquiring the proposed equity capital of the Target company.

4. Against the aforesaid Order of SEBI dated 09.09.1998, the Acquirer preferred an appeal before the Appellate Authority with Central Government . Appellate Authority while upholding SEBI’s order mentioned in its order dated 20.11.1998, inter alia that :

“…We do not find this scheme per se under any law or regulation similar to scheme under Sick industrial Companies (Special provisions) Act, 1985. It is a scheme voluntarily agreed to between the two companies for which they are obtaining necessary approvals under various laws. No exemption is provided for obtaining approval from the Indian laws in such cases under SEBI’s regulation……If the word “arrangement” were to be interpreted widely and meant to include all schemes for which the same approvals are obtained by companies, then it will open flood gate for various “scheme of arrangement” which the companies might enter into and then claim exemption under this provision. There would be nothing to protect the investors interest in such cases or any guidelines or laws to safeguard it. For this reasons, therefore, we reject the appellant’s arguments on this count.”

5. Thereafter, on 31.10.2000 EBITO filed a report with SEBI and claimed exemption from applicability of Chapter III of the Regulations under regulation 3(1)(e)(i), i.e.interse transfer amongst group companies i.e. transfer of 50.1% shares of the Target company held by Hoechst to EBITO. In the aforesaid report, the EBITO was stated as subsidiary of Hoechst, and falling under Section 2(ef) of the MRTP Act, 1969.

As per the information submitted by the EBITO in the said report, the acquisition was found to be covered under regulation 3(1)(e)(i) and eligible for exemption. The submissions of EBITO were taken on record by SEBI and the same was conveyed to EBITO by SEBI, vide letter dated 23/11/00.

6. On 12.11.2001, SEBI received a complaint inter alia, alleging violation of regulation 12 by the Acquirer.

6.1. On receipt of the aforesaid complaint, the Target company and the Acquirer / EBITO were called upon vide letter dated 06.12.2001 and letter dated 03.12.2001 respectively, to provide the factual details. In response thereto, the Target company and the Acquirer / EBITO submitted their replies vide letters dated 12.12.01 and 09.01.02 respectively. The aforesaid submissions/ explanations were considered by SEBI and were not found to be satisfactory and accordingly, a show cause notice dated 20.02.2002 was issued to the Acquirer.

7. SHOW CAUSE NOTICE

7.1. SEBI issued a show cause notice dated 20.02.02 to the Acquirers pointing out inter alia, that :-

(i) the Acquirer intended to acquire substantial shares and control over the Target company from Hoechst. It was held by SEBI as well as the Appellate Authority that in the event of the Acquirer acquiring the substantial shares and control of the Target company, the Acquirer would be required to make a public offer to the shareholders of the Target company in terms of the said Regulations. Thus, the so called re-organization or the scheme or arrangement devised by the Acquirer subsequently so as to acquire substantial shares and control over the Target company was actually undertaken to circumvent the provisions of the said Regulations and more so, the Order of SEBI/ Appellate Authority and to avoid the open offer obligations.

(ii) the claim of the Acquirer that the acquisition of shares of Target Company is covered under regulation 3(1)(j)(ii) does not appear to be correct as the aforesaid scheme per se does not appear to be under any law or regulation but a scheme voluntarily agreed to between two companies for which they might have obtained necessary approvals under various laws including under Swiss law.

(iii) On February 23, 2001, when EBITO became the 100% subsidiary of the Acquirer, the Acquirer acquired the 50.1% of the Target company which was held by EBITO and triggered the provisions of regulation 10. Further, with the said acquisition, the Acquirer has acquired the control over EBITO and with the result, it has acquired control over the Target company as well in terms of regulation 2(1)(c) and triggered the provisions of regulation 12.

(iv)a public announcement to acquire a minimum of 20% shares from the shareholders of the Target company was required to be made by the Acquirer in terms of the regulations, within 4 working days from the date of 26.11.97, in conformity with regulation 14(1) read with 14(3) of the said Regulations.

(v) the Acquirer have acquired the said shares/voting rights and control of the Target company in the aforesaid manner without making a public announcement as required by the provisions of the regulations and therefore, have prima-facie violated the provisions of regulations 10 & 12 read with 14(1) & 14 (3) of the regulations and are therefore liable for penal action under the said Regulations and Securities and Exchange Board of India Act, 1992.

In view of the above, the Acquirer was called upon to show cause as to why one or more or all action(s) under regulation 44 and regulation 45 of the said Regulations and Sections 11, 11B, 15H & 24 of the SEBI Act, should not be initiated against it for violations specified above.

7.2. The Acquirer submitted its reply to the abovesaid show cause notice vide its letter dated April 26, 2002.

8. HEARING

Thereafter a personal hearing was granted to the Acquirer on 10 August, 2002 wherein it made its submissions. The submissions made by the Acquirer vide reply dated April 26, 2002 and during the personal hearing have been considered in the subsequent paragraphs.

9.0. SUBMISSIONS OF THE ACQUIRER / EBITO

The submissions made by the Acquirer vide its letters dated 26/4/02, 7/8/02 and 2/9/02 and during the hearing granted on 10/8/02 are inter alia, as under :

9.1. Under a scheme of demerger / spin off, Hoechst agreed to transfer its entire global business of specialty chemicals to the Acquirer. The merger was in conformity with and pursuant to the provisions of the German, Swiss and European Union (“EU”) laws and regulations and had been approved by all the competent authorities under Swiss, German and EU laws and regulations ;

9.1.1. As a part of and incidental to the global merger of Hoechst’s specialty chemicals business with the Acquirer 5,83,708 equity shares of Rs.100/- each constituting 50.1% of the paid-up capital held by Hoechst in the Target company were to be transferred to the Acquirer, a wholly owned subsidiary of Clariant AG. The proposed transfer of shares in the Target company was an integral part of and incidental to the global demerger from Hoechst of specialty chemicals business and its merger with the Acquirer and must not be considered in isolation on a stand alone basis. A draft stock purchase agreement was drawn up between the Acquirer and Hoechst for purchase of shares of the Target company. The said Agreement clearly stated in the preamble that the proposed transaction is a part of the worldwide merger of the specialty chemicals business of Hoechst with the Clariant AG ;

9.1.2. As the proposed transfer of shares of the Target company from Hoechst to the Acquirer pursuant to the scheme of merger of the specialty chemicals business of Hoechst into the Clariant AG, was duly approved under the German, Swiss and European Union laws, the incidental transaction of transfer of shares qualified for exemption from regulation 10 of the said Regulations by virtue of Regulation 3(1)(j)(ii) thereof. The Acquirer made an application dated 8th August 1997 to the Chairman, SEBI claiming exemption on the above ground. As SEBI did not accept the above contention, an application dated 26th November 1997 was made to the Chairman, SEBI for exemption under Regulation 4 read with Regulation 3(1)(l) of the Takeover Regulations ;

9.1.3. SEBI Chairman by an order dated 9th September 1998 rejected the request for exemption under Regulation 3(1)(j)(ii) and Regulation 4. While rejecting the request for exemption, SEBI passed an order to the effect that the Acquirer should make a public offer “if they are desirous of acquiring the proposed equity capital of the Target company” ;

9.1.4. the Acquirer preferred an appeal from the above order dated 9th September 1998 to the Appellate Authority, the Ministry of Finance, which rejected the appeal by its order dated 10th November 1998 ;

9.2. It may be stressed here that the request for exemption made to SEBI was based on a proposal for re-organisation, which was tentatively under consideration. It was only exploratory in character and was not a consummated transaction. In view of SEBI’s rejection of the request for exemption, that proposal was not pursued and abandoned ;

9.3. Since Hoechst had exited the speciality chemicals business, it was decided by Hoechst to hive-off the shares of the Target company and transfer them to a special purpose vehicle, namely, EBITO, EBITO was incorporated in 19th May, 2000 and Hoechst subscribed to 51% of paid up capital of EBITO;

9.4. Over the past four decades the Target company had represented Hoechst’s Specialty Chemicals Division in India and had subsisting technology agreements for specific product groups within the Specialty Chemicals Division of Hoechst. The Target company enjoyed the benefit of Hoechst Specialty Chemicals Divisions’ global marketing set up for the exports of its products world wide and sourced several chemicals products for Hoechst from local sources. When Hoechst transferred its Specialty Chemicals business / division to the Clariant AG in 1997, the Target company’s business association / relationship was necessarily transferred to the Acquirer, even though there was admittedly no transfer of ownership or control of the Target company to the Acquirer from 1997 to 2001. Right from 1997 the Target company was, by virtue of its close integration with the Specialty Chemicals Division, treated as a member of the Clariant Global family, adopted the Acquirer logo & followed the Acquirer corporate identity guidelines. In these circumstances, the balance capital of EBITO (49%) was subscribed to by the Acquirer ;

At the incorporation of EBITO on 19th May, 2000 there were three directors, viz., Dr. Thomas Kuehlhorn, Dr. Herbert Wohlmann and Dr. Andreas Walde. All the three Directors were elected by the shareholders unanimously. The appointment of the directors was however not governed by any agreement. Dr. Kuehlhorn was employed by Hoechst whereas Dr. Herbert Wohlmann and Dr. Andreas Walde were employed by the Acquirer. Dr. Kuehlhorn resigned on 3rd September, 2001. Dr. Wohlmann and Dr. Walde continue as Directors of EBITO till date ;

9.5. On 13th October 2000 Hoechst transferred its entire shareholding in the Target company to EBITO , a subsidiary company of Hoechst, for an aggregate consideration of DM 50 Million (i.e. at a price of Rs. 1880.15 per share). The consideration of DM 50 Million was paid by EBITO to Hoechst out of funds borrowed by EBITO from Hoechst. Being a subsidiary company, that transaction was clearly exempt under Regulation 3(1)(e)(i), it being a transfer from Hoechst to its subsidiary company.

Pursuant to regulation 3(3), the BSE and NSE were notified of the details of the proposed transfer more than four working days in advance of the proposed transfer.

By a letter dated 31st October, 2000 EBITO reported the aforesaid transaction of purchase to SEBI as required under Regulation 3(4) of the Regulations. It was clearly stated that EBITO was a subsidiary of Hoechst and thus a group company eligible for exemption under Regulation 3(1)(e)(i);

9.6. EBITO was designed to be financially self-sufficient. The interest / borrowing cost being incurred by EBITO was expected to be covered by the receipt of dividends from the Target company which had ranged from 8,22,532 Euro (CHF 1,307,849.34) in 1998-99 to 940,997.52 Euro (CHF 1,490,560.39) in 1999-2000. The entire purchase price for the Target company shares having been financed by borrowings, the real value of EBITO consisted merely of its own share capital of CHF 202000 (CHF 102000 held by Hoechst and CHF 100000 held by the Acquirer). It was expected that the interest burden of EBITO would be CHF 1.2 to 1.3 Million and that the flow of dividend would range from CHF 1.3 to 1.4 Million ;

9.7. However, during the last quarter, October – December of the year 2000, the financial results of the Target company sharply deteriorated. This was unforeseen and primarily due to the failure of the Agro Chemical business resulting from erratic monsoon conditions in that year. Several cotton growing areas did not receive adequate rainfall which affected the cotton crop and consequently the demand for one of the most profitable products of the Target company viz, MMA – Mono methyl Acetoacetamide, intermediate for the pesticide Monocrotophos, also fell sharply. This resulted in a loss of Rs. 59 lakhs in the operations of the Target company in the last quarter of 2000 (in contrast with the last quarter of the previous year which earned the Target company a profit of Rs. 376 lakhs). This was for the first time in several years that the Target company suffered a loss in its operations ;

9.8. It was through the quarterly financial results of the Target company that EBITO in January 2001 learned that the expected dividend income from the Target company of between CHF 1.3 million and CHF 1.4 million would in fact not materialize that year ;

9.9. Under the Swiss Law, the Board of Directors is obliged to have an interim balance sheet drawn up, whenever it has reason to believe that the Company has negative equity. As the Board was aware that EBITO was, incurring interest liability which would not be offset by dividend, and as EBITO had no reserves, the Board of Directors of EBITO was in the changed circumstances obliged under the Swiss Law to have an interim balance sheet prepared as on 31.01.2001. This balance-sheet showed equity in the amount of CHF 64,014 i.e., considerably less than 50% of the nominal capital of EBITO (CHF 202,000) ;

9.10. As the balance sheet did not show negative equity, the Board of EBITO was not compelled to file for bankruptcy. However, under the mandatory provisions of Article 725 of the statutory Swiss Code, the Board of Directors of EBITO had necessarily to convene an Extra Ordinary General Meeting and propose a financial reorganization / restructuring.

Article 725 of the Swiss Code of Obligations reads as follows:

“If the last annual balance sheet shows that half of the share capital and the legal reserves are no longer covered, the board of directors shall without delay call a general meeting of shareholders and propose a financial reorganisation.

In case of a substantiated concern of over indebtedness, an interim balance sheet must be prepared and submitted to the auditors for examination. If the interim balance sheet shows that the claims of the Company’s obligees are neither covered if the assets are appraised at on-going business values nor at liquidation values, then the board of directors shall notify the judge unless obligees of the company subordinate their claims to those of all other Company obligees to the extent of such insufficient coverage.”

The effect of this law is that, if there is erosion of more than 50% of the networth of the Company, the Company must compulsorily reduce its share capital.

The Board of directors of EBITO was also required to be cognizant of Article 621 of the Swiss Code of Obligations which prohibited reduction of the share capital of any company to below CHF 100,000.

On 31st January 2001, the net worth of EBITO was eroded by more than 50%. It therefore became necessary under Article 732 under the said Article 725 to convene an extra ordinary meeting of the shareholders on 23rd February 2001, so as to reduce EBITO ‘s capital.

Article 732 also mandates that “in no case shall the share capital be reduced below to 100,000 Swiss Francs”.

Given the substantial erosion in EBITO ‘s share capital, the financial restructuring / reduction required would have resulted in EBITO ‘s share capital being reduced below CHF 100,000. Thus, it would not have been sufficient to undertake a financial restructuring / re-organization merely by effecting a reduction of EBITO ‘s capital. It was accordingly also essential for EBITO to increase its capital (after the initial reduction) by a resolution of its shareholders at a general meeting. Hoechst had as aforesaid withdrawn from the Specialty Chemicals business and had transferred its German Specialty Chemicals business to the Acquirer. Since Hoechst had also received the consideration for the Target company’s shares, it was not interested in any further investment in EBITO . Accordingly Hoechst was not agreeable to bring in any further monies by way of subscribing to new capital for EBITO . In view of this statutory requirement to maintain a minimum capital of 100,000 Swiss Francs, it also became necessary to increase the share capital of EBITO to restore it to its former level of 202,000 Swiss Francs Hence, the entire additional capital required to be subscribed to for the restoration of EBITO ‘s financial position to that which was statutorily acceptable, had necessarily to be subscribed to by the Acquirer ;

9.11. Thereafter, on 23rd February, 2001, it became necessary under the Swiss laws to restructure share capital of EBITO . The required resolutions of the shareholders of EBITO were passed on 23rd February, 2001. EBITO ‘s share capital was reduced and on the same day increased so as to result in a new share capital of CHF 202000. On the Acquirer subscribing to the additional capital issued, the Acquirer became the 100% shareholder of EBITO . As a consequence of the Scheme of financial reorganization / reconstruction effected pursuant to and under the mandatory requirements of Swiss Law, EBITO which holds the shares of the Target company, became a 100% subsidiary of the Acquirer. Necessarily post-March 2001 the Target company was completely integrated vis-à-vis its ownership, with the Acquirer;

9.12. As a consequence of the foregoing provisions of the Swiss laws and Regulations, EBITO ‘s share capital had to be reduced and restructured in the manner described above and, with effect from 23rd February 2001, it became a wholly owned subsidiary of the Acquirer. Such capital reduction, reconstruction and re-organisation took place in accordance with the Swiss laws and Regulations and falls squarely within the exemption available under Regulation 3(1)(j)(ii) of the said Regulation ;

9.13. The attention is also invited to order of the Chairman SEBI in the case of Digital Corporation, wherein it has rightly been held that there was no change in control or management of the Target company in India and, consequently Regulation 12 was not attracted. Further ,in the Securities Appellate Tribunal order in Eaton Corporation, it has been recognized that a merger abroad was eligible to exemption under Regulation 3(1)(j)(ii) and held that :

“Regulation 12 of the Takeover Code is the general rule. But regulation 3(1) exempts certain types of acquisitions from the scope of regulations 10,11 and 12 (Chapter III). In addition to the specific exemption cases provided in regulation 3(1)(a) to (k), sub-regulation (i) enables SEBI to exempt such other cases from the applicability of Chapter III, which are not automatically exempted. In the instant case, we are not on the special exemption under sub-regulation (l). We are on the specific statutory exemption which takes out the case from the ambit of regulation 12.”

9.14. It is submitted that till date, no change has occurred in the management or control of the Target company and it continues to be managed by Mr. K.J. Bharucha, the Managing Director of the Target company since October 1995. Likewise the Board of Directors continue to remain the same, other than minor changes, resulting from retirement of overseas Directors. There is also no proposal for making any change in the Board of Directors of the Target company. the Acquirer has thus not acquired control over the Target company by reason of being 100% shareholder of EBITO . It is further submitted that EBITO holds 50.1% shares of the Target company. The Acquirer has not acquired any shares or voting rights in the Target company. EBITO continues to hold these shares and there has been no change in the shareholding of the Target company. In any event the Acquirer has become a 100% shareholder of EBITO by operation of Swiss laws and in accordance with a scheme of reduction, reconstruction and re-organisation implemented in accordance with Swiss laws. Such scheme falls squarely within the exemption available under Regulation 3(1)(j)(ii) of the Code. It cannot therefore be said that the Acquirer has violated regulations 10 or 12 of the Takeover Regulations.

9.15. Once it is established that the acquisition of indirect control was acquired pursuant to a Scheme of arrangement or reconstruction under the Swiss law / regulation, the exemption under Clause 3(j)(ii) applies and that SEBI cannot deny / disallow an exemption expressly available under the statutory takeover regulations, by alleging that such Scheme was undertaken to circumvent the provisions of the Regulations. For example, if an acquisition of shares or control takes place pursuant to a Scheme of arrangement or reconstruction under sections 391 / 394 of the Companies Act, 1956, SEBI cannot deny / disallow the exemption specifically available under 3(1)(j)(ii) of the statutory takeover regulations, by alleging that such Scheme was undertaken to circumvent the provisions of the Regulations.

9.16. Without prejudice to the aforesaid it may be mentioned that the facts clearly establish that the financial reorganization / arrangement or reconstruction undertaken by EBITO in February 2001 was not preconceived and was not undertaken to acquire the shares / control of the Target company and that it was a response to an unforeseen economic / financial events.

As stated above the financial structure of EBITO was designed to enable the interest outgoing to be offset by the Target company dividend.

However, for the first time in many years the Target company made a loss in the quarter ending 2000. It was this unforeseen and totally unexpected factor which triggered off the Swiss Code and mandated the Board of Directors of EBITO to undertake a financial reorganization / scheme of arrangement or reconstruction in order to comply with the statutory Swiss Code of Obligations.

9.17. In November 1997 there was no concluded / effective agreement between Hoechst and the Acquirer to acquire the shares of the Target company. The 1997 Umbrella Agreement provided for an immediate / effective transfer only of the German Specialty Chemicals business of Hoechst and merely recorded / reflected an intent to transfer Hoechst’s Non-German Specialty Chemicals assets / business through separate local agreements from companies of Hoechst group to companies of the Acquirer group, subject to obtaining requisite local sanctions and for the separate consideration to be mentioned in such agreements. The draft Share Purchase Agreement was just that – a mere draft and was not treated as a binding / concluded agreement.

9.18. This is also confirmed by SEBI in the Show Cause Notice, which does not allege any concluded / binding agreement to acquire the Target company shares in November 1997, and instead merely states that the Acquirer “Intended to acquire substantial shares & control over the Target company from Hoechst AG.”

9.19. SEBI had considered all the agreements while declining exemption vide its order 9.9.98 and had not required the Acquirer to make an announcement / offer. In fact SEBI vide its order dated 9.9.98 did not treat the tentative intended / proposed transaction of the Target company shares as a concluded / binding agreement and instead SEBI held that the Acquirer would be required to “make a public offer as required under the Regulations If they are desirous of acquiring the proposed equity capital of the Target company”.

9.20. The Appellate Authority vide its order dated 20.11.1998 had upheld SEBI’s order and inter alia held that “it is clear that the agreement (Umbrella Agreement) was not an inseparable whole and eventualities were visualized where certain transfers may not take place”. Accordingly, the tentative / intended / proposed transfer was held to be separate from the 1997 Umbrella Agreement and SEBI’s order that a public offer was required to be made only if the Acquirer was desirous of acquiring the proposed equity capital of the Target company, was upheld.

9.21. Since then, SEBI for the past three / four years had never alleged that the 1997 Umbrella Agreement, or the November 1997 draft share purchase agreement, was a concluded / binding agreement to acquire shares / control which attracted / triggered Regulation 14 of the Regulations and only in February 2002 it is contended / alleged for the first time after a lapse of four years, that in November 97 the provisions of Regulations 10 & 12 had been triggered and that a public announcement to acquire shares was required to have been made by the Acquirer within 4 working days of the date of November 26, 1997 under Regulations 14(1) read with 14(3). It is respectfully submitted that it is not open for SEBI (which had been apprised of all facts / documents in 1997 itself) to allege in February 2002 that a public announcement / offer was required to be made in November 1997, especially in view of its order in 1998 that the Acquirer was required to make a public offer only “If they are desirous of acquiring the proposed equity capital of the Target company.

9.22. Moreover having regard to the Appellate Authority’s order delinking the tentative intended acquisition of the Target company shares by the Acquirer in November 1997, from the 1997 Umbrella Agreement, it is not permissible for SEBI to now contend that the acquisition relates to the 1997 umbrella Agreement / draft share purchase agreement. SEBI has itself accepted / recorded in its letter / notice that the Share Purchase Agreement was not pursued further by the Acquirer or Hoechst. In fact there is intrinsic evidence to show that the 1997 Agreement did not fructify / was not proceeded with. The separate consideration of DM 70.637 million computed at a price of Rs. 2,455.38 per share was never paid and the shares were never transferred to the Acquirer. Moreover under the Draft Agreement, the Directors of the Target company were to resign on closing and an Extra – ordinary General Meeting was to be held to elect new Directors. In fact the Directors have continued unchanged and no Extra – ordinary General Meeting was ever held.

9.23. The 2001 acquisition of control of EBITO by the Acquirer under the Scheme of reconstruction / financial reorganization and the resultant acquisition of indirect control of the Target company, and NOT undertaken pursuant to the Umbrella Agreement, or the Draft Share Purchase Agreements of November 1997. There is a gap of almost four years between the 1997 tentative Agreements (whereunder the Target company shares were proposed to be transferred by Hoechst to the Acquirer for DM 70.37 million and the financial re-organization undertaken by EBITO in February 2001. In the interregnum, the shares of the Target company had been transferred from Hoechst to EBITO at a substantially different rate (for an aggregate amount of DM 50 million) and such transfer had been notified to and recorded / accepted by SEBI. As stated above the subsequent re-organization of EBITO consequent to the mandatory requirement of Swiss law is not and cannot be related to the 1997 draft purchase Agreement.

9.24. That the Acquirer has not committed any contravention of regulation l0, 11 or 12 or any other regulation. It is also submitted that the case falls squarely within the exemption available under regulation 3(1)(j)(ii) of the Regulations and, consequently, there is no obligation on the Acquirer to make a public offer.

10. ISSUES

10.1. After taking into consideration the facts of the case, the submissions written as well as oral as made by the Acquirer during the hearings and also the documents submitted by them in support of their submissions, the following issues arise which need consideration:

i) Whether the Acquirer intended/decided to acquire shares/voting rights/control over the Target company pursuant to the Draft Stock Purchase Agreement dated 21.11.97 ?

ii) Whether the acquisition of 50.1% of shares/voting rights of the Target company by EBITO from Hoechst on 13.10.2000 was actually eligible for exemption as claimed by EBITO vide its report dated 31.10.2001?

iii) Whether the acquisition of shares of the Target company pursuant to the stated restructuring of EBITO, is exempt u/r 3(1)(j)(ii) as claimed by the Acquirer/ EBITO ?

iv)Has Acquirer acquired substantial shareholding / control over the target company in contravention of the said regulation. If so, when did the obligation on the part of the Acquirer arise, to make public announcement ?

11. CONSIDERATION OF ISSUES

11.1. Whether the Acquirer intended/decided to acquire shares/voting rights/control over the Target company pursuant to the Draft Stock Purchase Agreement dated 21.11.97 ?

It has been contended by the Acquirer that SEBI had considered all the agreements while declining exemption vide its order dated 09.09.98 and had held that the Acquirer would be required to “make public offer as required under the Regulations if they are desirous of acquiring the proposed equity capital of the Target company”. Consequently, the Acquirer had not acted upon the draft Stock Purchase Agreement entered into with Hoechst on 21.11.97. Further, SEBI had for the past 3 – 4 years never alleged that the 1997 umbrella agreement or the November 1997 draft Share Purchase Agreement was a concluded / binding agreement to acquire shares / control which triggered the regulations and only in February 2002 it is contended / alleged for the first time after a lapse of 4 years that in November 1997 the provisions of regulations 10 & 12 had been triggered. It is also contended by the Acquirer that it is not open for SEBI, which had been apprised of all facts / documents in 1997 itself, to allege in February 2002 that a public announcement was required to be made in November 1997.

The Acquirer has also submitted that till date, no change has occurred in the management or control of the Target company and it continues to be managed by Mr. K.J. Bharucha, the Managing Director of the Target company since October 1995. Further, the Board of Directors continue to remain the same, other than minor changes resulting from retirement of overseas directors and also there is no proposal for making any change in the Board of Directors of the Target company.

In this regard, it would be relevant to refer to regulation 2(1) ( c), which defines control. Regulation 2(1)(c) reads as under:

“control” shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner; ”

It is seen that Hoechst decided to sell off its specialty chemical business globally to the Acquirer in 1997. Hoechst entered into a “Master Agreement” with Clariant AG which provided, inter-alia, that ” Hoechst non german specialty chemical activities will be transferred to the Acquirer on a country by country basis in the form of asset or share transactions.” Pursuant to the same, Hoechst and the Acquirer entered into a draft stock purchase agreement on 21.11.97 whereby Hoechst was to sell its 50.1% shareholding in the Target company to the Acquirer. The Acquirer made an application dated 26.11.97 to SEBI seeking exemption from the making of an open offer under the said Regulations for acquisition of the said shares of the Target company, which was rejected by SEBI and SEBI’s said order rejecting the exemption application was upheld by the Appellate Authority.

Further, it is observed that the Target company has made the following disclosures in its Annual Reports :

Financial Year Reference Disclosure
1997-98

(Annual Report dated 15.6.98)

Page 1 We are now part of the Clariant Group- the world’s largest specialty Chemicals company born out of the integration of Hoechst AG’s specialty chemical division with Clairant AG. This change help us to leverage our existing strength and expand our operations. It entails change in the organizational structure.

Item No.5

Page 16

Mr. J. Mahler was appointed as a Director of the company w.e.f. 14/5/98. ….. Mr. Mahler is a member of the Board of Management of the Acquirer.

Para 32 Page 19 The process of obtaining the necessary approvals from the appropriate Indian authorities for transfer of shares from Hoechst AG to the Acquirer is in progress and transfer formalities are expected to be completed shortly.

Para 11

page 24

The proposed transfer of Hoechst AG shareholding of 50.1% in ColourChem to the Acquirer is underway. Meanwhile, ColourChem has fully integrated into the Acquirer global family and assumed new corporate identity.

The Acquirer, the worlds leading specialty chemical company, is now represented in India by two legal entities, ColourChem Ltd and the Clariant (India) Ltd.

1998-99

(Annual Report dated 20.5.99)

Page 2 The Target company, India’s leading specialty chemical company, is now a part of the Acquirer group- the world’s No. 1 specialty chemical company, headquartered in Switzerland. The ‘new’ Clairant was formed out of the spin-off of the Sandoz Chemicals Division in 1995 and the integration of Hoechst’s Specialty Chemicals business in 1997.

The global tie up helps ColourChem add even greater value to its products and the performance for the benefit of its customers, employees and shareholders.

Page 4 Colour-Chem has assumed the Clariant Group identity, logo and design in all its communications and advertising media.

Page 10 Colour-Chem’s environment, safety and health affairs activities are guided by the Clariant Global policies

Page 21

Para 32

The process of transfer of shares from Hoechst AG to the Acquirer is in progress and is expected to be completed shortly

Page 25

Point 6

From 1st January, 1999, the pigments and additives business of the Acquirer India Limited was integrated into the Pigments & Additives Division of The Target company.

1999-2000

(Annual Report dated 17.5.00)

Page 2 Colour-Chem is a subsidiary of the Acquirer a
leading fine and specialty

Chemicals company…….

Page 18

Para 37

The process of transfer of shares from Hoechst AG to the Acquirer is in progress and is expected to be completed shortly.

Page 21 Dr. R. Handte was first appointed as a Director of the Company (the Target company) from 29.8.1991 and subsequently was the Chairman of the Company from 21.11.97 to 3.4.2000. His visionary leadership and dynamic approach guided the company through the initial years of organizational change associated with the integration with the Clariant AG.

2000-01 Page 8

Para 36

The 58,37,080 equity shares of Rs.10/- each, constituting 50.1% of the paid up capital of your company held by Hoechst AG were transferred to EBITO (a subsidiary of the Acquirer) in Oct. 2000.

It is also observed that the Acquirer has made the following disclosures in its Annual Reports :

Financial Year Reference Disclosure
1997

(Annual Report dated 24.4.98)

Page 37 In India the Acquirer still has two group companies due to local circumstances. The aforesaid two companies are mentioned on page 62, are viz, Clariant India Ltd, Mumbai and The Target company have been included as part of the Clariant group.

Point 1 Page 68 In notes to the consolidated Financial Statement under accounting policies:

“All companies in which the Clariant Ltd, Muttenz, holds a majority equity investment and possesses the majority of the voting rights are fully consolidated.”

Point 25 Page 84 The principal affiliates, joint ventures and associated companies are listed on pages 62 to 63.

Page 62 Under the heading “The most important companies of the Claraint Group Affiliated companies and other holding as at December 31, 1997. Although the economic transfer has taken place, in some countries the Hoechst companies could not be transferred to the Acquirer under national civil law in 1997.”

Participation in The Target company, Mumbai is shown as above 50 and up to 90% bracket.

Page 72 The companies and the assets formerly belonging to the Hoechst Specialty Chemical business have been fully integrated in the Claraint group Financial Statements. The legal transfer of some companies and assets has not been completed as of December 31, 1997. It is anticipated that all transactions will be fully realized by the year 1999.

1998

(Annual Report dated 19.3.99)

Page 14 In the past year we successfully completed the integration of the specialty chemicals business acquired from Hoechst, and our efforts to exploit synergies arising from the merger-amounting to some CHF 500 million as announced back in December 1996-are proceeding according to plan.

Page 36 Both our companies in India achieved above-average results. Fourteen integration teams came up with ideas and measures for integration operations and processes. A new fully automated plant for manufacturing emulsion came on stream at the Roha site.

Page 84 ColourChem Limited was included under the heading “The most important companies of the Claraint Group
Affiliated companies and other holding as at December 31, 1998. Although the economic transfer has taken place, the Hoechst companies marked with an asterisk could still not be transferred to the Acquirer under national civil law in 1998.”

Participation in The Target company, Mumbai is shown as above 50 and up to 90% bracket and Colour -chem Ltd is also shown with an asterisk.

1999

(Annual Report dated 17.5.00)

Page 81 Under the heading “Administration and general overhead costs”

In 1999, the Acquirer and Hoechst settled certain outstanding claims related to the Acquirer’s 1997 purchase of the Hoechst Specialty business. The result of this settlement, net of adjustments for related liabilities, is reflected in the income statement as a one off contribution of CHF 34 million within Administrative and general over head costs. The net adjustment to assets acquired has been recorded in the income statement as required by IAS 22. The related cash flows have been presented within the operating cash flows of the Group.

Page 98 ColourChem was included under the heading “The most important companies of the Claraint Group – “Affiliated companies and other holding as at December 31, 1999”.

Although the economic transfer has taken place, the Hoechst companies marked with an asterisk could still not be transferred to the Acquirer under national civil law in 1998.”

Participation in The Target company, Mumbai is shown as above 50 and up to 90% bracket and Colour -chem Ltd is also shown with an asterisk.

2000

(Annual Report dated 16.3.01)

Page 94 ColourChem was included without any qualifications (as was done during the previous years 1997, 98 & 99) under the heading “Principal companies of companies of the Claraint Group (heading has been changed w.e.f. year 2000) Affiliated companies and other holding as at December 31, 2000.”

From the above, it is observed that it has been categorically disclosed in the Annual Report of the Target company for the Financial Year ended 31.03.2000 that the Target company is a subsidiary of the Acquirer.

It would be pertinent to refer here to section 4 of the Companies Act which describes a subsidiary company.

Section 4 of the Companies Act, 1956reads as under :-

4(1)For the purposes of this Act, a company shall be subject to the provisions of sub section(3), be deemed to be a subsidiary of another if, but only if, –

(a)that other controls the composition of its Board of Directors; or

(b)that other –

(i)where the first mentioned company is an existing company in respect of which the holders of preference shares issued before the commencement of this Act have the same voting rights in all respects as the holders of equity shares, exercises or controls more than half of the total voting power of such company ;

(ii)where the first mentioned company in any other company, holds more than half in nominal value of its equity share capital ; or

(c)the first mentioned company is a subsidiary of any company which is that others subsidiary.

In terms of Section 4 of the Companies Act, 1956, a company can be termed as a subsidiary of another company either by virtue of the control exercised by that other company or by virtue of the shareholding to the extent of more than half of the equity share capital held by that other company.

In the instant case, it is seen that the majority shareholding of the Target company was held by Hoechst and it had also been disclosed in the Annual Report that the shares of the Target company held by Hoechst are in the process of transfer in favour of the Acquirer.

Thus, such disclosure about the Target company being subsidiary of the Acquirer must have been made only due to the fact of control over management being exercised by the Acquirer over the Target company .

Although it is contended by the Acquirer that no change in management of the Target company has taken place, however, it is observed from the aforesaid Annual reports of the Target company that Dr. R. Handte, (who was the member of the Executive Committee of the Board of Management of the Acquirer) was director of the Target company from 29.08.91 to 20.11.97. Thereafter Dr. R. Handte was appointed as Chairman of the Target company on 21.11.97 and he continued to be the Chairman till 03.04.2000. Subsequently, Dr. R. Handte continued as director in the Target company from 04.04.2000 to 24.05.2001. It is also observed from the annual reports that Mr. J. Mahler (who is a member of the Board of Management of the Acquirer), was appointed as director on the board of the Target company w.e.f. 14.5.98 till 29.07.99. Thus, the contention of the Acquirer that there was no change in the management of the Target company is not tenable. Further, even if it is assumed that the appointment of Dr. R. Handte, as Chairman was a stop gap arrangement by the Acquirer since it had filed an application before SEBI from claiming exemption for the acquisition of shares of the Target company as pleaded by the Acquirer, the same however, is belied by the fact that Dr. R. Handte continued to be the Chairman of the Target company till 03.04.2000 and was a director on the Board of Target company till 24.05.01, despite final disposal of the application on 20.11.98 (i.e., the date of the passing of the order by the Appellate Authority) as the interest of the Acquirer in the Target company should have ended on the final disposal of the application of the Acquirer. The aforesaid fact clearly establishes that the Acquirer was in de facto control of the Target company.

It is also observed from the disclosures made in the Annual Report of the Target company that the operations of the Target company were managed in compliance with the guidelines of the Acquirer. That the Target company has fully integrated into Clariant Global Family, that it has assumed new corporate entity and the Acquirer is now represented in India by two legal entities – the Target company and Clariant (India) Ltd and the process of transfer of shares from Hoechst to the Acquirer is in progress and is expected to be completed shortly.

It would be relevant to refer here to the International Accounting Standard IAS 27.

International Accounting Standard IAS 27 regarding Consolidated Financial Statements and Accounting for Investments in subsidiaries defines the scope of these financial statements as follows:

“The standard should be applied in the preparation and presentation of consolidated financial statements for a group of enterprises under the control of parent

The following terms are used in this standard with the meaning specified:

Control (for the purpose of this standard) is the power to govern the financial and operating policies of an enterprise as to obtain benefit from its activities.

A Subsidiary is an enterprise that is controlled by another enterprise (known as the parent).

A parent is an enterprise that has one or more subsidiaries

A group is a parent and all its subsidiaries

Consolidated financial statements are the financial statements of a group presented as those of a single enterprise.”

On reading of International Accounting Standard IAS 27 with disclosures made by the Acquirer in its Annual reports as mentioned above, it is observed that the Acquirer by virtue of having acquired control of the Target company considered the Target company as part of its group and therefore, included the Target company in its consolidated financial statements. This establishes the fact beyond doubt that the Target company was part of the Acquirer group and that too as its subsidiary. The disclosure made by the Target company in its annual reports, as discussed in detail in preceding paras, further supports and reinforces this fact.

From the above it can thus be inferred that the Acquirer had acquired control over the Target company even before the EBITO was formed as a special purpose vehicle on 19.5.2002 .

Further, it is also quite pertinent to note the composition of the equity capital and the composition of the Board of Directors of EBITO . The equity capital of EBITO was formed with 51% shares being held by Hoechst and 49% shares by the Acquirer. Whereas, out of three directors on the Board of EBITO, the Acquirer had two directors as against one of Hoechst. It appears that EBITO was formed in the said manner so that it could be controlled by the Acquirer by virtue of its majority of Directors, which in turn would have enabled the Acquirer to continue to exercise control over the Target company.

Thus, in view of the aforesaid, it is clear that EBITO was in fact a subsidiary of the Acquirer by virtue of management control being with them although EBITO was apparently shown to be a subsidiary of Hoechst by virtue of its 51% shareholding i.e. marginally higher shareholding than that of the Acquirer i.e. 49% shareholding in EBITO.

The Acquirer has also contended that it had not acted upon the draft stock purchase agreement entered into on 21.11.97. It is observed from the disclosures above referred to, that the Acquirer was in a position to control the management or policy decisions of the Target company although it may not have acquired the voting rights held by Hoechst in the Target company. Had it not been so, the Acquirer would not have included the Target company as part of its group and also in the consolidation of the financial statements. Thus, the intention of the Acquirer to acquire the substantial shareholding of the Target company was continuing since the date of entering into agreement dated 21.11.97 with Hoechst for acquisition of the shares of the Target company. In fact the Acquirer was already controlling the target company and only a formal shape was to be given to the acquisition of shareholding / control of the Target company. The aforesaid de facto control was given the formal shape by the subsequent formation of EBITO by both the buyer (the Acquirer) and the seller (Hoechst) and the transfer of shares of the Target company by the seller (Hoechst) to the EBITO and then reduction in capital and increase in capital of EBITO resulting in the Acquirer becoming the holding company of EBITO and ultimately the Target Company. That is, the Acquirer attempted and achieved indirectly, what it could not achieve directly.

From the aforesaid facts, it is clearly established that the Acquirer had not only intended/decided to acquire control over the Target company but had actually acquired control over the Target company on 21.11.97. Otherwise all the subsequent events, i.e., formation of EBITO (wherein there are only two shareholders, i.e., Hoechst holding 51% of the equity and the Acquirer holding the balance 49% equity of EBITO ), transfer of shares of Target company from Hoechst to EBITO for which finances were provided by Hoechst to EBITO and consequent restructuring of EBITO by virtue of which Hoechst exited from EBITO and the Acquirer came in the sole control of EBITO, would not have been possible without clear understanding and careful planning between Hoechst and the Acquirer. The above exercise was nothing but a devise to achieve the objective of acquiring the Target company which emanated from the “Master Agreement” and the draft stock purchase agreement entered into between Hoechst and the Acquirer on 21.11.97.

It will be pertinent to refer here to the observations in the order of the Securities Appellate Tribunal (SAT), Mumbai in the matter of Rohdia SA v. SEBI & Others in Appeal No. 36/2002, wherein it was inter alia held “…….. The Appellant agreed to the view expressed by SEBI and accordingly in the letter of offer issued to the shareholders of the Indian company, it was stated that “should Rhodia exercise the call option, the resultant indirect acquisition/change of control of A&W on account of acquisition of Danube of the Acquirer would be governed by the Takeover Regulations” (emphasis supplied). In this context it is to be noted that Directors of the Indian Company in their report to the share holders on the company’s annual accounts for the year 1999 had also stated as follows:

“Share holders are aware that Rhodia SA had acquired Albright & Wilson Plc through ISPG Ltd UK. As required under the SEBI Takeover Regulations, ISPG had made an open offer to the shareholders in October, 1999, against which a few acceptances have been received. Having received all the European and US regulatory approvals, Rhodia SA has exercised its option to acquire ISPG/ Unless exempted by SEBI Rhodia will be required to make another open offer to the shareholders”. (emphasis supplied)

Both these statements are made to the shareholders of the Indian Company. The Appellant has admitted that ISPG and the Indian Company were under the joint control of the Appellant before it exercised the call option on 15.3.2000. That being the case the Appellant cannot disown the statement made by ISPG and the Indian Company and the above statements have to be considered as the statement of the Appellant as well. In this view of the matter, it is a commitment by the Appellant that it would be making a public offer in the event it exercises the call option. Though the acquisition, as explained in this order come under the category of change of control from joint control to single control and thereby exempted from the compliance of the requirements of the regulations, the Appellant has in effect waived the benefit of exemption by making the statements referred to above and as a result, in my view, the Appellant is required to make a public offer as promised to the public. Incidentally, the poor response to ISP’s offer referred to in the impugned order can be attributed to the hope created by the Appellant’s statement that it would make a public offer in the event of closure of call option, which appeared to be a certainty in the facts and circumstances explained to them. In that case, the public offer from the Appellant would have been more attractive to the investors, compared to the offer from a shell company like ISPG. In this context, it is to be noted that Shri Chagla had produced press reports to support his argument that the public perception was that the Appellant was the Acquirer. Public perception based on the disclosure by the Appellant in the offer document cannot be viewed differently. It is very clear that the Appellant had waived its right of exemption, by making the above statements to the investors of the Indian Company.”

From the aforesaid order of Securities Appellate Tribunal it is clear that disclosures made by the Target company to its shareholders in its annual report assume considerable importance and are to be taken seriously. The disclosures made by the Target company in the instant case clearly point towards the fact that the control of the Target company had already changed hands from Hoechst to the Acquirer pursuant to the entering into a draft stock purchase agreement between the Hoechst and the Acquirer.

It is also observed from the disclosures made by the Target company in its annual report for the year 1998-1999 that target company had admittedly adopted the identity, logo of the Acquirer and has adopted its design in all the commercials and advertising.

Thus in view of the facts as discussed and dealt with above viz. the appointment of Dr. R. Handte as the Chairman of the Target company from 21.11.97 to 03.04.2000, the appointment of J. Mahler (who is also a member of the Board of Management of the Acquirer) as Director of the Target company with effect from 14.05.98, the adoption of logo of the Acquirer by the Target company, the compliance of guidelines of the Acquirer by the Target company in running its business and consolidation of accounts of Target company by the Acquirer with its own accounts , it is clear that the Acquirer not only intended to acquire the control over the Target company but had actually acquired control over the Target company pursuant to the draft stock purchase agreement dated 21.11.1997.

11.2. Whether the acquisition of 50.1% of shares/voting rights of the Target company by EBITO from Hoechst on 13.10.2000 was actually eligible for exemption as claimed by EBITO vide its report dated 31.10.2000 ?

Pursuant to the transfer of shares of the Target company by Hoechst to EBITO on 13.10.2000, EBITO filed a report with SEBI under regulation 3(4) of the said Regulations on 31.10.2000 stating, inter alia, that no regulations (viz. 10, 11 & 12) were triggered, as the acquisition was an inter se transfer amongst group companies. It was claimed that the said acquisition would fall under Regulation 3(1)(e)(i) i.e. the transaction being an inter-se transfer amongst group companies, in view of the fact that the transferor (Hoechst) is a parent company and the transferee (EBITO) is a subsidiary and inter connected undertaking, hence are group companies falling under Sec.2(ef) of the MRTP Act, 1969.

Based on the aforesaid submissions of EBITO, the application was taken on record by SEBI and the same was conveyed by SEBI to EBITO vide letter dated 23.11.2000.

It is observed that in the report, EBITO didn’t disclose the following material information:

a)EBITO was formed on 19.05.00 as a special purpose vehicle by the Acquirer and Hoechst ;

b)the total paid up capital of EBITO was CHF 2,02,000, out of which Hoechst held CHF 1,02,000 (51%) and the Acquirer held CHF 100,000 (49%) ;

c)there was an agreement between Hoechst and the Acquirer by virtue of which the Acquirer had two out of three directors and Hoechst had one director on the board of EBITO ;

d)the acquisition of 50.1% shares held by Hoechst in the Target company by EBITO aggregating to DM 50 million was financed through borrowing/loans extended by Hoechst ;

e)the various disclosures made by the Target company in its Annual Report as stated hereinbefore and by the Acquirer as detailed above.

The aforesaid disclosures particularly the disclosures made by the Acquirer as well as by the Target company in its Annual Reports, as discussed in detail hereinabove, were material to consider whether the said transfer of shares was eligible for exemption under the said regulation. The above said facts from which it was clear that the Acquirer had acquired control over the Target company in 1997, were not disclosed in the said application.

The exemption as claimed by EBITO was taken on record by SEBI and conveyed to them vide its letter dated 23.11.2000. This was based on incomplete information furnished by EBITO and if complete facts been disclosed to SEBI, the submissions of EBITO would not have been accepted by SEBI as it would have been evident that de facto control of the Target company had already changed on 21.11.97 when the draft stock purchase agreement was entered into between Hoechst and the Acquirer. Further, for the alleged acquisition of control of the Target company by the Acquirer in violation of the Regulations, SEBI would have directed the Acquirer to make an open offer to the shareholders of the Target company in accordance with the said regulations.

11.3. Whether the acquisition of shares of the Target company pursuant to the stated restructuring of EBITO is exempt u/r 3(1)(j)(ii) as claimed by the Acquirer/EBITO ?

Before dealing with the issue it will be relevant to refer to regulation 3(1)(j)(ii).

Regulation 3(1)(j)(ii) reads as under :-

” Nothing contained in Regulation 10,11and 12 of these Regulation shall apply to:…………….

(j)pursuant to a scheme-

(i)……

(ii)of arrangement or reconstruction including amalgamation or merger or demerger under any law or regulation, Indian or foreign.”

The Acquirer has submitted vide its letter dated 07.08.2002 that EBITO acquired the shares of the Target company from Hoechst on 13.10.00 out of borrowings and loans advanced by Hoechst . The said loans were expected to be repaid by EBITO out of the dividends received from the Target company. It is stated that during the last quarter i.e. Oct–Dec, 2000, the operations of the Target company resulted in a loss of Rs. 59 lacs as against the profit of Rs. 376 lacs in the corresponding quarter of the previous year and EBITO was not able to meet its liabilities. That in Feb 2001, EBITO underwent a scheme of reorganization/reconstruction as per the Swiss laws. The Acquirer has stated the following reasons for restructuring of EBITO :

a. Due to unexpected adverse development like, loss of Rs.59 lakhs incurred by the Target company in the last quarter of 2000 compared to profit of Rs.376 lakhs in the corresponding quarter of last year and devaluation of Indian rupee against Swiss Franc by 12.2%, EBITO ‘s financial position deteriorated because of sharp fall in dividends as EBITO was to service its loan from the receipt of dividends from the Target company.

b. Deterioration/erosion of its share capital compelled EBITO to undertake financial restructuring under the Swiss Law.

Further submitted that as a result of the aforesaid reorganization, EBITO became the 100% subsidiary of the Acquirer. The change in control and substantial acquisition of shares of the Target company by the Acquirer is claimed to be exempted under Reg. 3(1)(j)(ii).

On the perusal and examination of the contentions of the Acquirer and other material available on record, it is found that : –

a) as per the balance sheet of EBITO as on 31.01.01, the long term liability (loan) was 4,03,95,447 CHF against the paid up capital of 202,000 CHF. The long term liability is approximately 200 times the paid up capital ;

b) EBITO was formed on 19.05.00 and received only one dividend from the Target company of 0.94 million CHF. This dividend in euro terms was approx. 15% more than the previous year’s dividend declared by the Target company and after the adjustment of devaluation of Indian Rupee. The said amount was less than the amount required for servicing the borrowed funds as the minimum amount required for servicing was stated to be CHF 1.2 – 1.3 million ;

c) the financials of the Target company for the years April 99-March 00 and April 00-March 01 were as under :

Rs. In lakhs
Financial year Q1 Q2 Q3 Q4 Total
1999-00 596 910 376 233 2115
2000-01 482 298 -59 147 868

As contented by the Acquirer, assuming that the company had done extremely well in the following year, i.e. 2000-01 and had paid sufficient dividend so as to be sufficient to service the loan, EBITO would have got the dividend not earlier than May 2001, as the dividend of 40% was declared on 24.05.01, as per the Press Release of the Target company dated 24.05.01. However, the balance sheet of EBITO drawn as of 31/01/2001 shows an accumulated loss of CHF 137,986, which is more than 50% of the paid up capital of EBITO. Even the dividend received during the first year of the existence of EBITO (i.e. during 2000) was not sufficient to service the loan taken to acquire the shares of the Target company. EBITO must be aware that the next dividend, if any, was due not earlier than May, 2001. In such a situation, EBITO must be well aware of the pitfalls of borrowing such a huge sum against such a low capital. This clearly indicates that the financial structuring of EBITO was done with high debt to equity with a not unknown possibility that the financial health of EBITO would deteriorate to such an extent that it would attract the relevant provisions of law compelling it to go for restructuring.

In the light of the above, the argument put forth by the Acquirer that due to the unexpected loss incurred by the Target company during the last quarter of year 2000, resulted in deterioration of the financial health of EBITO resulting in mandatory restructuring under Swiss Law, does not appear to be realistic ;

Further, it is given to understand that according to the Article 732 if there is an erosion of more than 50% of the net worth of the Company under the said Article 725, an extra ordinary meeting of the shareholders is to be convened and steps for financial reorganisation of the company has to be taken. However, it is unclear from the Article quoted from the Swiss Law by the Acquirer that how financial reorganisation could be construed to be reduction and increase of capital only, as claimed by the Acquirer. More over, the said Article/s do not stipulate that pursuant to reduction and increase of capital, the incremental capital has to be given to the existing shareholder only. The shareholding of Hoechst in EBITO was written off and the capital was issued afresh to the Acquirer and with the result, the Acquirer acquired 100% in EBITO. In view of the same, the claim that the said scheme of arrangement was a statutory one appears to be unfounded and rather it appears to be pre-planned.

Besides, even if it is assumed as contended by the Acquirer that such a method of restructuring or scheme of arrangement was done as required under Swiss law, the following facts need to be considered in order to examine whether the same would be covered under the provisions of regulation 3(1)(j) (ii) of the Regulations :-

i) various disclosures made in the Annual Reports of the Target company as detailed above.

ii) the Acquirer while disclosing its Affiliated companies and other holdings as on 31.12.98 has included the Target company in its list with an asterisk, with a qualification that “Although economic transfer has taken place, the Hoechst companies marked with an asterisk could still not be transferred to the Acquirer under national civil law in 1998.” The same disclosure was repeated in the year 1999. However, no such qualification appeared while disclosing its Affiliated companies and other holdings as on 31.12.2000.

iii) EBITO was formed on 19.05.2000, with 51% held by Hoechst and 49% by the Acquirer. It acquired the 50.1% shares of the Target company held by Hoechst on 13.10.2000. It was claimed that EBITO became a 100% subsidiary of the Acquirer in February 2001. Therefore, the Target company could have become a subsidiary of the Acquirer (without any qualification as referred to above) only in February, 2001 and not earlier. However, as on 31.12.2000, it was disclosed by the Acquirer that the Target company had become an Affiliated company in which it held above 50% and upto 90% (without any qualification as referred to above).

iv) EBITO acquired the 50.1% shares of the Target company held by Hoechst on 13.10.00 out of the funds advanced by Hoechst as loans to the extent of Approx. DM 50 million.

v) In February 2001, EBITO was stated to have undergone a restructuring and with the result, it became a 100% subsidiary of the Acquirer.

vi)From the annual report of the Target company for the 1997-98 it is seen that Dr R Reinhard Handte, a member of the executive committee of the Board of Management of the Acquirer and Head of Corporate development/R&D/ESHA of the Acquirer was appointed as the Chairman of the Target company on 21.11.97 and continued as Chairman up to 03.04.00( page 21 of annual report for the year 1999-00).

From the above, it is seen that the consideration received by Hoechst for having sold its shares held in the Target company was nothing but its own money.

Further, after restructuring EBITO becoming 100% subsidiary of the Acquirer, the Acquirer automatically acquired the shares/voting rights in the Target company. At the time of restructuring the Acquirer did not appear to have paid any consideration to Hoechst for its 51% shares in EBITO, which EBITO cancelled / deleted and reissued in the Acquirer’s name. From the same it appears that Hoechst had sold its shareholding/controlling stake in the Target company to the Acquirer (through EBITO ) without receiving any consideration. The Acquirer therefore, appears to have acquired the 50.1% voting rights in the Target company without any consideration.

From the aforesaid disclosures it is clear that the transfer of shares of the Target company by Hoechst to EBITO (as stated in the report dated 31.10.2000 filed by EBITO before SEBI) was nothing but transfer of shares of the Target company from Hoechst to the Acquirer.

From the above, it is clear that the Acquirer had already acquired control over the affairs of the Target company on 21.11.97. The subsequent formation of a subsidiary company namely EBITO and the restructuring adopted to transfer the shareholding of Hoechst in the Target company to the Acquirer through EBITO was only a modus operandi adopted to regularize the transfer of control already effected pursuant to the draft stock purchase agreement entered into between Hoechst and the Acquirer on 21.11.97.

In view of the above, the exemption under regulation 3(1)(j)(ii) is not available to the Acquirer as the regulations had already been triggered as a result of acquisition of control of the Target company by the Acquirer on 21.11.97 and the subsequent claiming of exemption by the Acquirer on the ground of re-organization / restructuring of EBITO is not tenable.

Further, it is observed that the so called “mandatory restructuring of EBITO under Swiss law” through which the 50.1% shares held by Hoechst was transferred to the Acquirer was a scheme voluntarily devised and executed amongst the parties namely, Hoechst, the Acquirer and EBITO for their commercial objective of regularising the control already acquired by the Acquirer over the Target company on 21.11.97. Such a scheme of arrangement cannot be claimed to be covered under the provisions of regulation 3(1)(j)(ii) of the said Regulations.

This view is supported by the observations made by the Appellate Authority in its order dated 20.11.98 which upheld the order of SEBI rejecting the application made by the Acquirer when it sought the exemption from the applicability of the Regulations with regard to its proposed acquisition of the Target company pursuant to the draft purchase agreement. Appellate Authority in the said order had inter-alia observed that

“…We do not find this scheme per se under any law or regulation similar to scheme under Sick industrial Companies (Special provisions) Act, 1985. It is a scheme voluntarily agreed to between the two companies for which they are obtaining necessary approvals under various laws. No exemption is provided for obtaining approval from the Indian laws in such cases under SEBI’s regulation.”

“…..If the word “arrangement” were to be interpreted widely and meant to include all schemes for which the same approvals are obtained by companies, then it will open flood gate for various “scheme of arrangement” which the companies might enter into and then claim exemption under this provision. There would be nothing to protect the investors interest in such cases or any guidelines or laws to safeguard it….”

It may be mentioned that generally merger / restructuring / reorganization of the parent companies abroad results in unintentional and incidental acquisition of Target companies in India and the same is a remote consequence of the acquisition by the parent company. From the facts of the instant case and the chain of events from 21.11.97 (the date of agreement between Hoechst and the Acquirer for the transfer of shares of the Target company) till the acquisition of shares of the Target company by the Acquirer on 23.02.01 (the date of restructuring of EBITO ), it is evident that the acquisition of the Target company was intentional and other events including the merger / restructuring / reorganization appear to have been so devised as to achieve the ultimate goal of acquiring control / substantial shareholding of the Target company. The floating of EBITO and subsequent arrangements were incidental to the main objective of acquisition of control of the Target company, which could not be achieved earlier, in view of SEBI rejecting exemption application filed by the Acquirer.

Thus, from the above it can be reasonably concluded that the scheme was devised to regularize the de facto control of the Target company which the Acquirer had already acquired on 21.11.97 and to avoid making of open offer to the shareholders of the Target company and thus circumventing the provisions of the said Regulations. By doing so the Acquirer has done indirectly what it could not have done directly under the law and it has thus violated the letter and spirit of the said Regulations.

Therefore, such a scheme of arrangement or restructuring is not exempt under regulation 3(1)(j)(ii) as claimed by the Acquirer. Thus, as claimed by the Acquirer that the acquisition of voting rights by the Acquirer in the Target company is eligible for exemption from the applicability of the Chapter III of the Regulations cannot be accepted.

It would also be pertinent to refer here to the Justice Bhagwati Committee Report , based on which the Regulations, 1997 have been drafted, which mentions that the objective of the Regulations is to provide an orderly framework within which the process of substantial acquisition of shares/control could be conducted and it further states that the Regulations for substantial acquisition of shares and takeovers should operate principally to ensure fair and equal treatment of all share holders in relation to substantial acquisition of shares and takeovers; the Regulations should ensure that such process do not take place in a clandestine manner without protecting the interest of the share holders.

Thus, it can be concluded that in view of the disclosures made by the Acquirer as well as by the Target company in its Annual Reports, as detailed above, it is clear that the Acquirer had acquired control over the Target company in 1997 and therefore, an open offer ought to have been made to the shareholders of the Target company much before the stated re-organization / restructuring of EBITO. Since the same had not been done, the acquisition of control over the target company by the Acquirer is in violation of provisions of the Regulations. Further, the Acquirer cannot claim the benefit of exemption u/r 3(1)(j)(ii), for the subsequent acquisition of shares/voting rights as already discussed in detail, the whole scheme of financial re-organization was nothing but a device to indirectly achieve the acquisition of shares / voting rights in the Target company , which was not permitted directly.

In view of the above, the contention of the Acquirer that SEBI cannot deny / disallow an exemption expressly available under the statutory takeover regulations by alleging that such scheme was undertaken to circumvent the provisions of regulations, is not tenable, as the subsequent floating of EBITO and restructuring etc, was nothing but an effort by the Acquirer to formalize the acquisition of shareholding/control over the Target company which it had already acquired.

I have also noted the submissions of the Acquirer that the financial reorganization / arrangement or reconstruction undertaken by EBITO in February 2001 was not preconceived and was not undertaken to acquire the shares / control of the Target company and that it was a response to an unforeseen economic / financial events. In view of the reasons detailed hereinbefore the aforesaid contention of the Acquirer is not tenable.

It is noted that the Acquirer has submitted that there was no concluded / effective agreement between Hoechst and the Acquirer to acquire the shares of the Target company and the draft share purchase agreement was merely a draft and was not treated as a binding / concluded agreement. In this regard, it may be mentioned that the facts on record discussed in detail point to the contrary since the Acquirer had already acquired control over the Target company pursuant to the entering of draft share purchase agreement and had started asserting the same as is evident from the events subsequent to the entering into an agreement.

It is also noted that the Acquirer has contented that SEBI had considered all the agreements while declining exemption vide its order dated 9.9.98 and had not required the Acquirer to make an announcement. Further, SEBI had held that the Acquirer would be required to make public offer under the regulations if it was desirous of acquiring the proposed equity capital of the Target company. In this regard, it may be mentioned that from the subsequent events as stated hereinbefore more particularly the disclosures made in the annual report of both the target company and the Acquirer, and the appointment of nominee of the Acquirer as the Chairman of Target company indicates that the control of the Target company had already changed from Hoechst to the Acquirer and that being so, the Acquirer’ s contention is not tenable in the facts of the case.

I have noted that the Acquirer has referred to the order passed by Chairman SEBI in the case of Digital Corporation. In this regard it may be mentioned that the facts of the Digital corporation case are distinct from the facts of the instant case and therefore the findings of the said order are not relevant in context of the present case. The Acquirer has also referred to the Securities Appellate Tribunal order in Eaton Corporation case. In this regard, it may be mentioned that the Acquirer had acquired control over the Target company much before the filing of exemption application before SEBI and which again was not maintainable for the reasons given in detail hereinbefore. Therefore, the findings of Securities Appellate Tribunal are not applicable in the instant case.

11.4. When did the obligation on the part of the Acquirer arise, to make public announcement ?

In this regard it would be pertinent to refer to regulations 10, 12 and 14 which are reproduced hereunder:

Regulation 10 (Acquisition of fifteen per cent or more of the shares or voting rights of any company)

“No Acquirer shall acquire shares or voting rights which (taken together with shares or voting rights, if any, held by him or by the persons acting in concert with him), entitle such Acquirer to exercise [fifteen] percent or more of the voting rights in a company, unless such Acquirer makes a public announcement to acquire shares of such company in accordance with the Regulations”.

Explanation: For the purposes of regulation 10 and regulation 11, acquisition shall mean and include –

(a) direct acquisition in a listed company to which the regulations apply;

(b) indirect acquisition by virtue of acquisition of holding companies, whether listed or unlisted, whether in India or abroad”

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”.

Regulation 14 (Timing of the public announcement of offer)

Regulation 14(1) : “The public announcement referred to in Regulation 10 or Regulation 11 shall be made by the merchant banker not later than four working days of entering into an agreement for acquisition of shares or voting rights or deciding to acquire shares or voting rights exceeding the respective percentage specified therein”.

Regulation 14(3) : “The public announcement referred to in Regulation 12 shall be made by the merchant banker not later than four working days after any such change or changes are decided to be made as would result in the acquisition of control over the Target company by the Acquirer”.

From the facts of the case it is clear that the purchase agreement was admittedly entered into between the Acquirer and Hoechst on 21.11.97 wherein a clear intention of acquiring substantial shares/voting rights i.e. 50.1% shares and control over the Indian Target company existed. In view of the said agreement the provisions of the said Regulations got triggered on 21.11.97 , since in terms of regulations14(1) and 14(3) the public announcement has to be made by the Acquirer within 4 working days of entering into an agreement or taking any decision which would result in change in control of the Target company. Accordingly, once the said regulations have been triggered the Acquirer was under an obligation, to make a public announcement in terms of the Regulations.

From perusal of the provisions of regulations 10 & 12, it is clear that the Acquirer is mandated , not to acquire shares or voting rights or control of the Target company unless the Acquirer makes a public announcement to acquire shares in accordance with the regulations and acquires such shares in accordance with the Regulations. Thus the regulations not only mandate issuance of public announcement by the Acquirer but also requires the Acquirer to acquire such shares in accordance with the regulations. It is clear that issuance of public announcement is not a post acquisition requirement but definitely a pre acquisition requirement.

In this regard, the Hon’ble Mumbai High Court in B.P. Plc case has held that ” Even Regulation 12, mentions in categorical terms as “no Acquirer shall acquire control over the Target company unless such person makes a public announcement to acquire shares and acquires such shares”.

Therefore, what is contemplated is that a public announcement must precede any acquisition of shares / control and then only a person can acquire shares / control. Any other interpretation would render public announcement superfluous and the objectives sought to be achieved would be lost.

This is all the more abundantly clear from Regulation 14(3) mentions about the necessity of public announcement when “any such change or changes are decided to be made as would result in the acquisition of control over the Target company by the Acquirer”. That is to say, when any such change is decided to be made, the same would result in acquisition or control, then the public announcement will have to be made. Therefore, once a decision is taken, which would result in acquisition or control, then public announcement must precede such acquisition or control. That is the decision to later on result in acquisition or taking control.”

In view of the above, more specifically as stated at para 11.1, the Acquirer had not only agreed to acquire the shares of the Target company pursuant to entering into the said Master Agreement/Draft Stock Purchase Agreement but in fact, had actually acquired the control over the Target company in terms of the Regulations on 21.11.97. The events subsequent to entering into draft purchase agreement clearly establish the fact that the actual acquisition of control of the Target company by the Acquirer was later on attempted to be regularized by the Acquirer through the aforesaid methods.

Thus, when the Acquirer, in the instant case, expressed its intention to acquire the 50.1% shares of the Target company by way of entering into Purchase Agreement with Hoechst on 21.11.97 it constituted an intention to acquire indirectly, the control over the Target company and thus triggered the Regulations and therefore, the obligation to make Public Announcement arose on that day which was to be made within four working days of 21.11.97, i.e. the date of entering into the said agreement.

It is found that as required under the aforesaid regulations, no public announcement has been made by the Acquirers and therefore they have violated regulations 14(1) & 14(3) of the said Regulations.

12. CONCLUSION

In view of the aforesaid, I find that the Acquirer has violated regulations 10 and 12 read with sub-regulations (1) and (3) of regulation 14, as the Acquirer has acquired 50.1% shares/voting rights and control in the Target company, without making public announcement to acquire shares/voting rights or control of the Target company in accordance with the said Regulations

13. ORDER

13.1. In view of the findings made above, in exercise of the powers conferred upon me under sub-section (3) of Section 4 read with Section 11B SEBI Act 1992 read with regulations 44 and 45 of the said Regulations, I hereby direct the Acquirer to make public announcement as required under Chapter III of the said Regulations in terms of regulations 10 & 12 taking 21.11.97 as the reference date for calculation of offer price. The public announcement shall be made within 45 days of passing of this order.

13.2. Further, in terms of sub regulation (12) of regulation 22, the payment of consideration to the shareholders of the Target company has to be made within 30 days of the closure of the offer. The maximum time period provided in the said Regulations for completing the offer formalities in respect of an open offer, is 120 days from the date of public announcement. The public announcement in the instant case ought to have been made taking 21.11.97 as a reference date and thus the entire offer process would have been completed latest by 21.3.98. Since no public announcement for acquisition of shares of the Target company has been made, which has adversely affected interest of shareholders of Target Company, it would be just and equitable to direct the Acquirer to pay interest @ 15 % per annum on the offer price. the Acquirer is hereby accordingly directed to pay interest @ 15 % per annum to the shareholders for the loss of interest caused to the shareholders from 22.3.98 till the date of actual payment of consideration for the shares to be tendered in the offer directed to be made by the Acquirer.

13.3. This order shall come into force with immediate effect.

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