The Securities Appellate Tribunal in an order dated December 15, 2016, in Sanjay Dalmia & Others v. SEBI, upheld the penalty of Rs. 1 crore (10 million) imposed on the directors of Golden Tobacco Limited (GTL) for violation of Regulation 23 of the SEBI Takeover Regulations, 1997. Under Regulation 23, the target company, during the offer period, can neither sell, transfer, encumber or dispose of its assets, which is not in the company’s ordinary course of business, nor enter into an agreement to do so, without shareholders’ approval.

GTL had entered into an MoU with another company for developing its property post the public announcement of an open offer by the acquirer and during the offer period. The MoU stated that it was subject to approval from the shareholders and a formal agreement would be entered into after the company got the requisite approval. The Appellants contended that the MoU was not a binding contract and was merely in the nature of an agreement to agree, and accordingly by executing the MoU without the approval of shareholders, the Appellants had not violated Regulation 23. However, SAT stated that the objective behind Regulation 23 would be defeated if it was held that ‘agreement’ did not include ‘MoU’. SAT observed that the provision sought to ensure that there is no change in the conditions of the target company during the subsistence of the offer period which may affect the shareholders’ decision to participate in the open offer. Further, SAT held that the clause under the MoU which restricted GTL from selling or disposing its property until payment of dues in case the proposal was rejected by shareholders, was an ‘encumbrance’, and hence contravened Regulation 23.

Companies often execute MoUs before entering into a legally binding agreement. However, this decision makes it clear that during the offer period, the directors of a company are not only prohibited from entering into an agreement to sell or transfer assets, but also from entering into MoUs in relation to such sale or transfer of assets.