ROFR clause extends BCCI and Nike’s legal relationship

A news piece (reported in the Business Standard dated 27 April, 2011), captured my attention about the importance of ‘first right to refusal’ clause (called as ROFR in businesso-legal lingua franca) in a legal agreement.

The news piece reported –“Nike, the official apparel sponsors for the Indian National Cricket Team since December, 2005 has extended its contract for a period of five years with the Board of Control for Cricket in India (BCCI)”; “Nike had the first right of refusal in this case. The BCCI did not go into the market to see if others were interested”.

The scope of this note is limited to (a) the meaning and scope of ROFR clause and (b) how a ROFR clause is typically drafted by transactional lawyers.

ROFR clause

A “right of first refusal” is simply a fancy name for a small bundle of contract terms. In the simplest terms, a right of first refusal is a privilege to preempt a contract’s execution by matching the price and terms of a third party’s acceptable offer. Such rights have enjoyed a long history of generally consistent treatment in the common law.

Generally, the right of first refusal is granted as one element of a larger transaction-for example the right of first refusal is generally incidental clause to the full-fledged sports-sponsorship agreement, share purchase agreement etc. It is conceivable, however, that parties might contract solely for the grant of the right of first refusal.

Wordings of ROFR clause

Generally, a ROFR clause as worded as follows:

 Right of First Refusal

(a)        If at any time, either party (Intending Party)  proposes to Transfer all or some of the Shares to any Third Party, then the Other party as “Vesting Party” shall have a right of first refusal (the First Refusal Right) with respect to such Transfer as provided in this Clause [__].

(b)        If either party receive a bona fide, firm and irrevocable offer to acquire Shares and the Intending Party proposes to accept such offer, then such Intending Party shall send a written notice (the Offer Notice) to the Vesting Party, which notice shall state the following:

(i)        the name and address and beneficial ownership of the proposed Purchaser (the ROFR  Offer Purchaser),

(ii)        the number of Shares that the Intending Party  hold in the Company and those which are proposed to be Transferred (the ROFR Offered Shares),

(iii)       the amount of the proposed consideration   offered by the ROFR Offer Purchaser (ROFR Offer Price),

(iv)       a representation that the ROFR Offer Price set out in the Offer Notice represents the entire consideration receivable by the Intending Party  for or in connection with the proposed offer.

(v)        All other terms and conditions of the Proposed Offer.

(c)        The Vesting Party shall have the right to exercise this option within a period of [__] days (ROFR Offer Period) from the Offer Notice exercisable by it through the delivery of a notice (ROFR Acceptance Notice), to purchase for cash, in the aggregate the ROFR Offered Shares at a purchase price equal to the ROFR Offer Price and upon the other terms and conditions set forth in the Offer Notice.

(d)        The failure of the Vesting Party to give a ROFR Acceptance Notice within the ROFR Offer Period in accordance with the provisions of this Clause [__] shall be deemed to be a waiver of such Vesting Party’s First Refusal Right.

(e)        In the event the Vesting Party do not exercise their First Refusal Right under Clause [__], the Intending Party may Transfer all of the ROFR Offered Shares to the ROFR Offer Purchaser identified in the Offer Notice on the terms and conditions set forth  therein.

(f)        The final closing of any purchase of ROFR Offered Shares by the Vesting Party shall be held at the registered office of the Company before the expiry of the [__] months period after the giving of the ROFR Acceptance Notice under Clause [__] or at such other time and place as the parties to the transaction may agree. At such closing, the Intending Party and/or shall deliver certificates representing the ROFR Offered Shares, accompanied by duly executed instruments of Transfer. Save as otherwise agreed, such ROFR Offered Shares shall be free and clear of any Encumbrance, and the Intending Party shall so represent and warrant and shall further represent and warrant that it is the beneficial and recorded owner of such ROFR Offered Shares. The Vesting Party purchasing ROFR Offered Shares shall deliver at such closing (or on such later date or dates as may be provided in the Offer Notice with respect to payment of consideration by the ROFR Offer Purchaser) payment in full of the ROFR Offer Price in accordance with the terms set forth in the Offer Notice and any requisite transfer taxes.

The above mentioned wording essentially captures the essence of a ROFR clause.  This clause may be re-drafted/ tweaked according to the subject matter of the contract (e.g. a sports contract, Share Purchase Agreement, Investment agreement, Real-estate transactions, Assignment agreement etc.) and negotiations between the parties to the contract.

BCCI-Nike deal

In this deal, Nike had the ROFR rights vested in it according to the sponsorship agreement.  However, as per the press statement of a Nike official- BCCI did not go into the market to see if others were interested, that means, Nike did not even exercised the its ROFR right vested by virtue of the sponsorship agreement between BCCI and Nike.  This may be a potential ‘anti-trust’/ competition law dispute, as prima facie it appears that BCCI and Nike have colluded and the sponsorship agreement between then is a ‘tying agreement’, which is per se anti-competitive.  However, that’s not the scope of this note- it’s for Nike’s competitors to take note of.

Some observations

• Some ROFR clauses contain a pre-set ROFR price, (or a formula by which the ROFR price will be set) when and if the owner decides to sell. Transactional lawyers need to negotiate and draft such agreements very carefully. The price (or the formula the parties adopt to set the price) at the time they enter into their agreement may unreasonably undervalue the subject matter (for e.g. property, playing ability of a sportsman etc.) at such time in the future when the ROFR is triggered by the then owner’s decision to sell. 
• Needless to say, that, the ROFR clause should be there in writing.
• Transactional lawyers, while drafting a ROFR clause, must also ensure that (a) there is a mention of ROFR exercise period and (b) the period is not too long and at the same time should be reasonable for the ROFR vesting party to take decisions.  Otherwise this may face wrath of the courts ultimately leading to nullification if ROFR clause.

Cairn-Vedanta deal: Takeaways for a Takeover lawyer

This year no other takeover deal is as widely publicized as acquisition of Cairn India Limited by Vedanta.  With Vedanta as a party- there is always a problem and publicity.  I am sure takeover lawyers acting for Vedanta (and Cairn-to an extent) must be having a great time, as they are the ones who are witnessing and experiencing the glitches of this famous-rocked deal.  Some of the important transactional aspects of this deal are discussed below:

No Put-option, Call-option arrangements and RoFR clause should be there in the SPA

Under the SPA signed between Vedanta and Cairn (relevant clause produced verbatim from the letter of offer dated 1 April, 2011):

The Sellers and the Acquirers have also entered into put and call arrangements in relation to a portion of the Sale Shares of the Target that may be retained by the Sellers on account of the adjustments mentioned in (a) above. The put and call obligations relate to a number of the Target Equity Shares equal to the difference between (A) 51% of the Voting Capital and (B) aggregate of (i) the number of Equity Shares actually acquired by the Acquirers at completion as defined under the SPD, (ii) the number of Equity Shares sold by the Sellers to any person at any price provided they were first offered to the Acquirers or its nominees at a price of Rs.405 per Equity Shares with a period of acceptance of at least 21 days and such offer was made to the Acquirers after a period of 6 months from completion as defined under the SPD and (iii) number of Equity Shares acquired pursuant to the exercise of the options mentioned herein. The put and call options are subject to a maximum of 10% (exercisable in two tranches of up to 5% each) of the issued share capital of the Company as at the date of exercise of options in terms of the SPD. The first tranche becomes exercisable from July 31, 2012 for a period of six months for up to 5% of the issued share capital of the Target at the time. The second tranche is exercisable from July 31, 2013 for a period of six months for up to 5% of the issued share capital of the Target at the time. The exercise price for the put and call obligations for both tranches is US$ equivalent of Rs. 405/- per Equity Share. The exchange rate has been fixed under the SPD as 1 US$ = Rs. 46.765. The SPD further provides that the Acquirers would not be required to purchase under the put options as mentioned above any Equity Shares of the Target where such acquisition would require the Acquirer or any member of its group to make any offer under the SEBI (SAST) Regulations.

Under the public announcement made on 16 August 2010, under the section ‘background of the offer’, it was mentioned:

g. The Sellers and the Acquirers have also entered into put and call arrangements in relation to a portion of the Equity Shares of the Target that may be retained by the Sellers. The put and call obligations relate to a number of the Target shares equal to the shortfall between the number of Equity Shares actually acquired by the Acquirers at Closing as defined under the SPD and 51% of the Voting Capital, subject to a maximum of 10% of the Voting Capital of the Target (“Balance Shares”).

In addition to the options, if the Sellers propose to transfer any of the Balance Shares after the expiry of 6 months from the date of consummation of the transactions under the SPA, the Acquirers will have right of first refusal in respect of those shares at Rs. 405 per Equity Share. The Sellers have agreed to give the Acquirer a pre-emption right over any subsequent disposal of Equity Shares where such disposal would result in the recipient of the shares holding more than 20% of the issued share capital of the Target.

h. As regards the Equity Shares other than the Balance Shares, the Sellers have agreed to give the Acquirers a preemption right over any subsequent disposal of Equity Shares where such disposal would result in the recipient of the shares holding more than 20% of the then issued equity share capital of the Target.

In this context, it may be noted that SEBI vide its letter no. CD/DCR/TO/BV/OW/9093/2011, dated March 18, 2011 has communicated that in its view the above-mentioned put option and call option arrangements and the Right of First Refusal do not conform to the requirements of a spot delivery contract nor with that of a contract of Derivatives as provided under section 18A of the Securities Contracts (Regulation) Act, 1956. Therefore, SEBI is of the view that the above-mentioned put option and call option arrangement along with the right of first refusal are in violation of Notification No. SO 184(E) dated March 1, 2000 issued by SEBI. In view of this, the Acquirers and Sellers have agreed that the call and put option arrangement between the Sellers and the Acquirers and the right of first refusal to the Acquirers as provided in the SPD shall not be exercisable or enforceable. Hence the Acquirers and Sellers will be unable to act on the call and put option arrangement and right of first refusal.

It would be helpful to understand, (a) what are put-option and call-option agreements, (b) what are the requirements of spot delivery contract, (c) meaning and scope of section 18A of SCRA and (d) the scope of Notification No. SO 184(E) dated March 1, 2000 issued by SEBI.

(a)     put-option and call-option agreement: put and call options are generally used terminologies in business jurisprudence to mean the holder of this option (put sometimes also referred as forced purchase) has the right to sell but not the obligation to sell the shares of an entity and the holder of this option (call) has the right to call for shares (or purchase shares) but has no obligation to call the shares of an entity respectively.

(b)     requirements of spot delivery contract: Under section 2 (i) (a) of the SCRA, spot delivery means a contract which provides for:

(i) actual delivery of securities and the payment of a price therefore either on the same day as the date of the contract or on the next day, the actual period taken for the dispatch of the securities or the remittance of money therefore through the post being excluded from the computation of the period aforesaid if the parties to the contract do not reside in the same town or locality;

(ii) transfer of the securities by the depository from the account of a beneficial owner to the account of another beneficial owner when such securities are dealt with by a depository.

(c)  meaning and scope of section 18A of SCRA: Under section 18A of the SCRA, contracts in derivate shall be legal and valid if such contracts are—

(i) traded on a recognised stock exchange;

(ii) settled on the clearing house of the recognised stock exchange, in accordance with the rules and bye-laws of such stock exchange.

This means any other derivative contracts apart from as stated above are illegal and without the authority of law.  However, this view is not accepted by most of the law-firms in India and the market-practice is to insert put-option or call-option clauses in a share purchase agreement or any other share deal.

(d) scope of Notification No. SO 184(E) dated March 1, 2000 issued by SEBI: Under the notification, no person in the territory to which the said SCRA extends , shall, save with the permission of the Board, enter into any contract for sale or purchase of securities other than such (i) spot delivery contract or (ii) contract for cash or (iii) hand delivery or (iv) special delivery or (v) contract in derivatives as permissible under the securities laws.

Now, considering the present Cairn-Vedanta deal- SEBI was of the view that the put option and call option arrangement along with the right of first refusal are in violation of Notification No. SO 184(E) dated March 1, 2000 issued by SEBI.

I have not seen the letter issued by SEBI (as it is not public), however, under the letter of offer issued by Vedanta dated 1 April, 2011, it appears that the (i) put option and call option arrangement; (ii) ROFR clause; and (iii) pre-emption rights clause under the SPA are not valid under the terms of the SEBI notification No. SO 184(E) dated 1 March, 2000.  This also means that put option and call option arrangement and ROFR clause are not (i) spot delivery contract or (ii) contract for cash or (iii) hand delivery or (iv) special delivery or (v) contract in derivatives.

So, from now-onwards (unless appealed before the court of law by Vedanta or Cairn or any other interested party-which is not foreseeable as of now), it is desirable that the takeover lawyers or the bankers transacting a takeover deal should not include put option and call option arrangement, and ROFR clause in the SPA as SEBI may disallow such SPAs and this may elongate/ delay the takeover process if such clauses are inserted in the SPA.

Domain of Statutory approvals

The approvals required under the Cairn-Vedanta deal are manifold which includes (i) approval from UK Listing Authority rules and (ii) approval from RBI.  It was clarified that as per the corrigendum to the PA dated 5 April, 2011, the statutory approval only includes approval from RBI and not the UK Listing Authority as stated under the SEBI Takeover code.  This certifies the fact the domain of SEBI Takeover code is national or domestic in nature and the domain of the word statutory approval under regulation 27 of the SEBI Takeover code, is only limited to the Indian Statutory bodies. It appears that SEBI has approved this interpretation of ‘statutory approval’ by Vedanda as there are no press-reports or other communication from SEBI to nullify this approach taken by Vedanta.  Vedanta’s interpretation of ‘statutory approval’ also gains approval from regulation 16(xvi) of the takeover code, under which statutory approvals, if any, required to be obtained for the purpose of acquiring the shares under the Companies Act, 1956, the Monopolies and Restrictive Trade Practices Act, 1969, the Foreign Exchange Regulation Act, 1973 (46 of 1973), and/or any other applicable laws. However, the word ‘applicable law’ is not defined and is generally understood to mean domestic Indian laws.

Insertion of new PACs after the PA and LOO

It can be done. Under the Cairn-Vedanta deal, after the PA (dated 16 August, 20100 and LOO (1 April, 2011) (filed with SEBI and sent to the shareholders), there was a new PAC i.e., Sesa Resource Limited (“SRL”) was added to the bunch of acquirers and PACs on 5 April, 2011.

No restriction on acquirers to purchase shares during the offer period

From the various press reports published and regulation 7 SEBI Takeover code filing, I understand that there was a further acquisition of 10.51% shares/ voting rights of the target company (Cairn) by a PAC of Vedanta- Sesa Goa Limited by way of bulk deal (purchased from Petronas International Corp Limited). 

Corporate strategy

It appears that Vedanta is desperate to gain control over Cairns India by acquiring 51% or more shares or voting rights of Cairns India.  So, the above-mentioned acquisition will result in shareholding of about 51%, thereby giving Vedanta the control over Cairns India.  This strategic move by Vedanta would make open offer inconsequential.

Perpetual bonds issue

This write-up is on issuance of bonds under the Indian laws.  By way of example I have considered the issue of perpetual bonds.  The unique features of the perpetual bond securities (“Perpetual Bonds”) are that (i) they are perpetual in nature with no maturity or redemption and (ii) can be are called only at the option of the company issuing the bonds.

Condition Precedents for issue of bonds in India

1.      Certified copy of the Memorandum & Articles of Association of the Company should contain the clause of the ‘bond issuance’.

2.      Certified true copy of the resolution passed by the Board of Directors at the meeting approving the issue of Perpetual Bonds.

3.      Certified true copy of the resolution passed by the Members of the Company at the Annual General Meeting under section 293(1)(d) of the Companies Act, 1956.

4.      Credit rating letter from rating agency.

5.      Letter from debenture trustees giving its consent to act as debenture trustees.

6.      In-principle approval from the recognized stock exchanges.

Market precedents for Perpetual Bonds issuance

1.      In India recently, Tata Steel came up with the issue of Perpetual Bonds (17 March, 2011).  As per the term-sheet and the information memorandum available at the NSE website, Tata Steel came out with an issue of:

“UNSECURED, SUBORDINATED PERPETUAL, LISTED, RATED HYBRID SECURITIES IN THE FORM OF NON CONVERTIBLE DEBENTURES ON A PRIVATE PLACEMENT BASIS”

2.      All the above-mentioned adjectives are the characteristics of the Perpetual Bonds issued by Tata Steel.  It is a new type of instrument issued for the first time in India, at least as per the reports in the media.  The meaning of the hybrid instrument is described below:

a.      Unsecured: this means the Perpetual Bonds issued by Tata Steel to the investors or the debt holders is not backed by any security.  Generally, the debt issuances in India are secured by portion of land (e.g. mortgage of immovable property) or some movable properties as security (e.g. hypothecation of stocks, shares etc) .  However, in the present case there is no security available to the investors.

b.      Subordinate perpetual:  Perpetual Bonds are subordinated to the claims of all other senior or secured creditors. The Securities are senior only to share capital and any other securities at par with share capital of the Issuer.

Bonds issued are perpetual in nature unless the Tata Steel or Issuer elects to redeem the securities as permitted under the brief terms and conditions of the issue. Accordingly, the Perpetual Bonds have no fixed final redemption date. In addition, holders of the Perpetual Bonds have no right to call for the redemption of the bonds, although they may launch proceedings against the Issuer in the event of non-payment other than as validly deferred and insolvency of the Issuer or winding-up.

c.      Rated Hybrid securities: Perpetual Bonds would be rated by a credit rating agency.

d.      Listed: Listed on the recognized stock exchange.

If anybody knows

How are these Perpetual Bonds hybrid? I am not able to make out; to me it appears to be a simple NCD with no traces of equity involved.

A decent write-up on the Tata Steel’s Perpetual Bonds offering can be viewed at the web link: http://www.livemint.com/2011/03/22223432/Biggest-debtor-Tata-Steel-turn.html

In my view, typically such type of issues are subscribed by the group companies of the issuer, as no investor would like to have a ‘call option’ and “no” ‘put option’ especially when the investor is giving money as a debt and that too unsecured.

Role of Transactional Lawyer

In my experience, a lawyer is generally asked to draft (i) the information memorandum, (ii) debenture trust deed, (iii) share pledge agreement, (iv) Hypothecation and Mortgage agreement, (v) Put option agreement etc. 

Recently there has been a trend of company secretary or compliance officers or legal counsel of the issuer company drafting the above-mentioned transaction documents-which are fairly standard in nature.  If there is some complexity law firms are hired.

In my view the most important document is the term-sheet, which essentially covers the terms of the debt issuance.  Typically, a term-sheet consists of information on issuer, arranger, commitment provider, type of instrument issued, status of securities, tenure, put/call option, record date, use of proceeds, distribution/rate, pay-in date, mode of placement, CPs to the issue, taxes and governing laws.  A transactional lawyer must carefully read and understand the term sheet, if necessary clarify the terms from the bankers and/ or issuer company concerned.

I would like to discuss the above-mentioned agreements in greater details in some other posts.