.The concept of “persons acting in concert” (“PAC”) is a core concept under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“SEBI Takeover Code”) and has over time also been subject matter of various disputes arising out of interpreting the term. At the stage of structuring the transaction and making disclosures, the term may also lead to certain unintended consequences based on how other regulators may examine it whilst evaluating the approval request or exemptions in relation to the transaction. However, the focus of this article is to provide readers with a summary of: (i) the purpose of the said concept under SEBI Takeover Code; (ii) the jurisprudence that has evolved over time that will assist in identifying bright line tests for interpreting the term; and (iii) our views on some challenges that remain open.
In the context of the SEBI Takeover Code, the PACs will have following implications:
(i) The term “acquirer” includes “persons acting in concert” and they collectively have joint and several liability under the SEBI Takeover Code.
(ii) Aggregate shareholding of such persons is considered for determining various shareholding thresholds under the SEBI Takeover Code e.g., seeking exemption under creeping acquisition, inter-se transfers, maximum non-promoter shareholding, etc.
(iii) Whilst interpreting the term “control”, the direct and indirect shareholding of acquirer and PACs are aggregated.
(iv) There is a cooling-off period and no further acquisitions are permitted in the target company by acquirer and PACs for a period of 6 (six) months after completion of the open offer (except in case of voluntary offer).
(v) During the offer period or 26 (twenty-six) weeks after the tendering period, if any PACs acquire shares of the target company at a price higher than the offer price, it will result in upward revision of the open offer price.
(vi) If anytime during 52 (fifty-two) weeks immediately preceding the date of public announcement, the acquirer and / or PAC has acquired shares (constituting more than 10%) in the target company for cash, the open offer must provide an option to public shareholder to only receive cash consideration as compensation for tendering their shares in the offer.
(vii) The acquirer along with PACs are not permitted to dispose of any shares held by them in the target company during the offer period.
(viii) The public announcement, detailed public offer, letter of offer and other documents during the open offer must specifically identify the “persons acting in concert”. Post completion of the open offer, the changes to shareholding and other periodic disclosures also require reporting of PACs.
(ix) The concept is also relevant whilst making disclosures for persons constituting “promoters” as the regulations also require periodic disclosure of the PACs with promoters and their change in shareholding including creating encumbrances.
The concept of PACs has been in the SEBI Takeover Code since it was first promulgated in 1997 and has undergone few revisions over time. The first committee formed under the chairmanship of Justice P.N. Bhagwati, former Chief Justice of India, on the basis of which the SEBI Takeover Code was initially finalized, recommended the concept of PACs and also made several suggestions that included a bright line test to be satisfied before any entity / individual could qualify as PAC, identifying a set of group that by very nature should be presumed to be acting in ‘concert’ and to imply rebuttable presumption for such group of persons. These principles have broadly been adopted in the SEBI Takeover Code and have evolved over a period, especially with further recommendations from few other committee reports that came in later.
The definition of ‘person acting in concert’ is divided into the two limbs:(i) General Category: includes persons who have common objective or purpose of acquisition of shares or voting rights in or exercising control over target company; and (ii) Deemed PAC Category / Groups: there are certain categories of entities and individuals who are deemed to be acting in concert, such as, holding company; company under same management; an alternative investment fund and its sponsor, trustees, trustee company and manager; an investment company or fund and any person who has an interest in such investment company or fund as a shareholder or unitholder having not less than 10 (ten) per cent of the paid-up capital of the investment company or unit capital of the fund; etc.[1]
The first limb of the definition i.e., the General Category has an inclusive and wide definition. However, over the past few years, the jurisprudence that has evolved suggests following bright line tests for identifying persons falling in this category:
1. Key elements to determine a person as a person acting in concert are: (i) common objective or purpose; (ii) must be an agreement or understanding; and (iii) the persons must co-operate with each other.[2]
2. The common objective has to be substantial acquisition of shares. The agreement pursuant to which such shares are acquired could be formal or informal. Close business association between two or more persons does not by itself make them “persons acting in concert”.[3]
3. Two or more persons may join hands together with the shared common objective or purpose of any kind but so long as the common object and purpose is not of substantial acquisition of shares of a target company they would not comprise “persons acting in concert”.[4]
4. The element of the shared common objective or purpose is the sine qua non for the relationship of “person acting in concert” to come into being.[5]
5. In all matters the direct evidence of agreement or understanding is not available the courts can rely on circumstantial evidences.[6]
The second limb of the definition i.e., the Deemed PAC Category, lays down the categories of entities/persons that will be deemed to be “persons acting in concert” unless the contrary is proven to rebut the presumption. Various orders and judgements have provided an insight into what may be considered as rebuttal to this deeming provision. A few such rebuttals have been summarized hereinbelow:
1. The deeming provision has to be read in conjunction with the first part of the definition. In other words, persons who are deemed to be acting in concert must have the intention or the aim of acquisition of shares of the target company.[7]
2. Persons who are deemed to be acting in concert must together have some intention to acquire shares of the company and where the objective of one person is at cross purpose with the objectives of another person from the same category, it cannot be considered that they have a common objective.[8]
3. Despite forming part of the same promoter/promoter group, it is primarily the intention, action and relationship of a person that determine whether a person is acting in concert with the acquirer.[9]
4. Though a presumption can be made that the persons in a category would be “persons acting in concert”, it can be rebutted either by positive evidence or negative facts discernable through conduct of the parties.[10]
5. Co-promoters of the target company cannot be said to be “persons acting in concert” with the acquirer who also happens to be one of the promoters of the target company, unless the evidence on record clearly establishes that the promoters share the common objective or purpose of substantial acquisition of shares of voting rights for gaining control over the target company with the acquirer.[11]
The abovementioned orders or judgements illustrate that judicial and quasi-judicial forums subject the presumption of persons being PACs to the tests laid down in the first limb of the definition. In the absence of a common objective or intention to acquire shares or control of a target company, obligations under the SEBI Takeover Code are not imposed on the persons belonging to the same category.
The complexity of global transactions, multi-layered corporate structures, various new forms of security arrangements, thrust on beneficial ownership disclosures, regulatory overlaps and similar requirements open new avenues and complications in a transaction, making it difficult to definitively conclude the status of any entity or individual as a “person acting in concert”. Most often, the definition of the term ‘control’ takes center stage whilst evaluating the entities involved and determining PACs. There is no conclusive jurisprudence on the term under SEBI Takeover Code and many specific regulators, such as, tax authorities, CCI and sector specific regulators, such as, in insurance, banking, aviation, have their own definition or interpretation of the term which creates overlaps and complexities. Similarly other security structures, such as, loans, warrants, convertibles, exchangeable securities, notes, etc. could have certain terms which may make it difficult to clearly establish if they fall under the category of “common objective”, as such matters could have an independent commercial understanding and yet could fall within the unintended ambit of PACs.
The content of this document do not necessarily reflect the views/position of Stratage Law Partners but remain solely those of the author(s). For any further queries or follow up please contact Stratage Law Partners at [email protected]
[1] Regulation 2(q) of the SEBI Takeover Code.
[2] SEBI in the matter of Dr. Chandra Kumar Jain in relation to Genus Prime Infra Limited (Adjudication Order No. EAD/KS/VB/AO/02/2017-18).
[3] Hon’ble SAT in Triumph International Finance India Ltd. vs. Securities Exchange Board of India – (SAT Appeal No 183 of 2009) dated 09.02.2010.
[4] Hon’ble Supreme Court in Daiichi Sankyo Company Limited vs. Jayaram Chigurupati and Ors – (2010) 7 SCC 449;
[5] Supra Note 3.
[6] Hon’ble Supreme Court in Technip SA vs. SMS Holding (Pvt.) Ltd. & Ors. – (2005) 5 SCC 465.
[7] Supra Note 4.
[8] SEBI in relation to Swarnajyothi Agrotech & Power Limited (Adjudication Order No. EAD/KS/VB/AO/101-102/2017-18.
[9] SEBI in relation to Genus Prime Infra Limited (Adjudication Order No. EAD/KS/VB/AO/02/2017-18).
[10] Hon’ble SAT in SBEC Systems (India) Ltd. vs. Securities Exchange Board of India – (SAT Appeal No 443 of 2018) dated 29.01.2020.
[11] Hon’ble Bombay High Court in K.K. Modi vs. Securities Appellate Tribunal – (2003) 113 Comp Case 418 Bom.