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.
