Stay as promoter and get non-compete fee too in a Takeover transaction

In a recent verdict, the Securities Appellate Tribunal (SAT) [E-Land Fashion China Holdings Limited v. SEBI, 24 May, 2011], ruled that the non-compete fee can be paid to the promoters (without including the non-compete fee in the open offer price) by the acquirer even if (a) the promoters are still continuing as promoters of the acquired company; (b) the promoters are in joint control of the acquired company; (c) the promoters have the right to appoint the board of director, managing director of the acquired company; (d) the promoter shave the ROFR; (e) the promoters have a full tag along right in case of sale of the acquirers; (f) the promoters have mandatory put-option to sell its shares to the acquirer.

To me the judgment of SAT is erroneous and bad in law and SEBI must appeal before the honorable Supreme Court to get the correct the interpretation of non-compete fee paid under regulation 20(8) of the SEBI Takeover regulations, 1997 (SEBI Takeover code).

In the intent and domain of regulation 20(8) of SEBI Takeover code, is to stop and discourage the erstwhile promoters/ selling shareholders of the acquired company to directly/indirectly compete with the new promoters (and or acquirers).  If the selling shareholders are still the part of the acquired entity and exercising rights such as appointing the board of directors, managing director, having ROFR, put option etc., then paying non-compete fee to the selling holders is just like- paying non-compete fee to a non-competitor, which is not the intention (literal or implied) of the SEBI Takeover code.  These erstwhile promoters/ selling shareholders are no where competing with the acquirers-although it may be conceded that these erstwhile promoters/ selling shareholders have potential to compete with the acquirers, however, this remains a possibility only.  And, if we were to look the SPA/SSA signed by these erstwhile promoters/ selling shareholders and the acquirers, it can easily be inferred that the erstwhile promoters/ selling shareholders are still in the game and playing in the same team although under different captain.

The verdict of Tata Tea case, Cementrum IB.V case cannot be mindlessly applied in such cases (as above), as the facts of both the cases are entirely different.

Takeaways for Transactional Lawyers

Well, till the time this SAT order is challenged and reversed by the Supreme Court, a non-compete agreement may be entered into the selling shareholders and the acquirers under which the selling shareholders may still be a categorized as promoter and take major decisions of the acquired entity (for e.g., appointing of managing director, board of directors etc.).