Promoters may now find it Difficult to Beat Takeover Code

A little over one-third of a company's public shareholders can now block moves like merger, demerger, amalgamation and capital reduction if they fear it could hurt the interest of minority investors. Promoters have often pushed through decisions through what's known as scheme of arrangements  in legal parlance to sidestep the Takeover Code and deprive minority shareholders of open offers.

That will be tougher now. Promoters, according to a new rule, cannot vote on any special resolution to approve such schemes of arrangement under Section 391-94 and 101 of the Companies Act. While changing the rules of the game, capital market regulator Sebi has made it mandatory for a company's management to seek its approval twice on any such deal first, before submitting a scheme to the high court and again before executing the court order.

http://articles.economictimes.indiatimes.com/images/pixel.gif This special resolutions to approve such schemes, in Sebi's words, can be approved "only if the votes cast by public shareholders in favour of the proposal amount to at least two times the number of votes cast by public shareholders 
against it."

Simply put, even if promoters hold 70% equity in a company, public shareholders, including foreign institutional investors (FIIs), can defeat a 'scheme of arrangement' resolution if they can muster a little more than 10% support.

Since many public shareholders typically abstain from voting, a smaller group of focused investors can derail promoter plans. In the above example, if only half the number of public shareholders investors - accounting for 15% of the shares - vote, then less than 6% shareholders can come together to thwart the proposal.

The move is aimed at discouraging deals such as Nicholas Piramal's sale of its pharma business to Abbott, the takeover of Kanoria Chemicals' business by the Aditya Birla Group, and Gwalior Chemicals' sale to Lanxess in 2009.

Clever transactions like these led to almost entire businesses changing hands without shareholders - particularly the smaller ones who till now were powerless to influence the decisions - getting a chance to sell shares in any open offer.

According to Sebi officials, a change in norms was needed after it was noticed that several schemes of arrangement involved "convoluted" structures, inadequate disclosures and exaggerated valuations, which could even shut the exit window for minority shareholders. "The circular is a welcome step as it seeks to enhance Sebi's supervision when a scheme involves a listed company.

However, Sebi will need to adhere to very strict timelines," said Amit Tandon, founder and managing director of Institutional Investor AdvisoryServices. "Further, the process will need to be monitored closely, to ensure that a few shareholders do not hold the whole scheme hostage through rent seeking," he stressed.

A Sebi circular said the regulator will 'endeavour' to comment on a draft scheme within 30 days of the date of receipt of clarifications from the applicant company, a satisfactory opinion from an independent chartered accountant and a no-objection letter from the stock exchange, whichever is later.

The regulatory decision has evoked a mixed response. Appreciating the new norms, a top investment banker said that the regulator's intention was to protect minority shareholders. "But in its current form, these norms may result in some degree of investor activism as had happened when Sebi mandated the reverse book-building process for all companies looking to delist from bourses," said the person.

According to the reverse book-building rule, acompany needs approval from more than 50% public shareholders. In several companies where promoters hold nearly 90% stocks, a small group of shareholders controlling a little over half the floating stock are demanding exorbitant price to sell their shares. Legal experts, however, have voiced concerns.

"Sebi has now assumed the power to oversee schemes of arrangement," said Akil Hirani, managing partner at Majmudar & Co. "The legal position with respect to courts overseeing merger schemes is that they should refrain from altering the commercial parameters of a scheme and must merely ensure that an independent valuation has been done," he said.

It remains to be seen whether Sebi will also verify the accuracy of a valuation report and seek major changes in draft schemes, he pointed out. But even if Sebi doesn't put question marks, Hirani said that the requirement to keep the regulator informed, before approaching the court and after getting its verdict, 'could delay the implement of any scheme of arrangement by at least two months".

Economic Times, New Delhi, 02-04-2013