Regulation 10(1)(d)(ii) and (iii) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 exempts acquirers from open offer obligations in cases where acquisitions happen through schemes of arrangement undertaken pursuant to an order of an Indian or foreign court, tribunal, or competent authority. In a peculiar informal guidance released on October 30, in the matter of M/s. Linde India Limited, SEBI has taken a somewhat literal and restrictive interpretation of the exemption under Regulation 10(1)(d)(iii).
Here, a German company, which indirectly held 75% of a listed Indian Company (Target Company), entered into a merger arrangement with a Delaware company. The merger arrangement did not directly involve the Target Company and was conducted in accordance with the applicable corporate and securities laws of Germany and the US. The German company sought an informal guidance arguing that the merger arrangement ought to be granted an exemption under the Takeover Regulations as any indirect change in shareholding in or control over the Target Company was pursuant to a merger which was conducted in accordance with applicable foreign laws and after securing the necessary regulatory approvals. Unlike India, the foreign jurisdictions concerned do not have a court sanctioned process for implementation of a scheme of arrangement and mergers are not required to be approved by a court or competent authority. Nevertheless, the merger had to withstand the strict regulatory scrutiny by the Federal Financial Supervisory Authority of Germany, the U.S. Securities and Exchange Commission, and the applicable Delaware law.
SEBI did not discuss the merits of any change in shareholding or voting rights in, or control over the Target Company. SEBI limited its analysis to whether the scheme was pursuant to an order of a court, tribunal, or competent authority. As there was no requirement for the involvement of a court, tribunal, or competent authority in the present case, SEBI held that the transaction would not be exempted under Regulation 10(1)(d)(iii). While SEBI addressed the immediate concern raised, the guidance has raised further questions regarding the scope and purpose of the exemption under Regulation 10(1)(d)(iii). It is not viable to assume that every jurisdiction would have a court sanctioned scheme approval process. The protections conferred by a court sanctioned mechanism in India are achieved by other means in other jurisdictions. Therefore, the current informal guidance seems to be short-sighted and further clarity is necessary in line with the purpose behind such an exemption under the Takeover Regulations, i.e. to facilitate genuine mergers.