Great Offshore Battle and Its Relevance to Takeover Code

Great Offshore Take Over Battle Prologue The battle to acquire Great Offshore Limited (“GOL”) saw aggressive bidding by two companies, Bharti Shipyard Limited (“BSL”) and ABG shipyard limited. Of these two companies ABG limited withdrew from the bidding race a day before it had to make an open offer by selling its stake to Edelweiss capital and others. After ABG withdrew from the battle Bharti Shipyard Limited paid approximately Rs 900 crores to complete the acquisition of stake in Great Offshore Limited.

Great Offshore Limited’s share price rose from Rs 344/- per share to Rs 590/- per share as a result of the bidding war between the two companies, ABG Limited and Bharti Shipyard Limited. This increased BSL’s investment costs by around Rs 450 crores. In the following sections we attempt to evaluate the takeover battle from its inception to the commencement of the open offers by both the acquirers and in the process analyze the legal and regulatory implications of the transaction. Parties involved in the transaction 1) Great Offshore Limited

GOl was hived off from Great Eastern Shipping Company (GESC) and incorporated as a separate company on July14th, 2005 under the stewardship of Mr. Vijay Kantilal Sheth. Great Offshore is India’s prominent integrated offshore oilfield services provider offering a broad spectrum of services to upstream oil and gas producers to carry out offshore exploration and production (E) activities. From drilling services to marine and air logistics, from marine construction to port/terminal services and beyond, Great Offshore meets a wide gamut of the offshore requirements of an E operator.

GOl is listed on both the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). 2) Bharti Shipyard Limited BSL was established in 1973 as a small shipbuilding facility at Ratnagiri and incorporated as a company on June 22, 1976. Bharati Shipyard Ltd is the foremost privately operated shipyard in terms of building facilities in India. BSL has earned its reputation by constructing a large array of specialized sophisticated vessels for diverse offshore, coastal and the marine market sectors.

The synergy of operating from six locations enables BSL to have a tremendous amount of flexibility and construct a large number of vessels in a limited time period. The company is promoted by Mr. P. C Kapoor and Mr Vijay Kumar. It is listed on both the NSE and the BSE. 3) ABG Shipyard Limited ABG Shipyard Ltd. , the flagship company of ABG group was incorporated in the year 1985 as Magdalla Shipyard Pvt. Ltd. with the main objects of carrying Shipbuilding and Ship Repair business.

In a span of 15 years from the year 1991, the company has achieved the status of the largest private sector shipbuilding yard in India with satisfied customer base all around the world. ABG is an established manufacturer and service provider of a variety of ships, including bulk carriers, interceptor boats, diving support vehicles, anchor handling tugs & other multipurpose vehicles. The Shipyard has executed many prestigious Shipbuilding and Ship-repair contracts against stiff International Competition for both Export and Domestic Markets.

All these vessels have performed very well, thus establishing its reputation for building and delivering vessels of the best quality at competitive prices and delivery periods. It is promoted Mr. Rishi Agarwal and is listed on both the exchanges. Background The offshore division of GE shipping was hived off into GOl under the stewardship of Mr. Sheth in 2005. As a result he held 3% in both the companies respectively. He wanted to tighten his grip on GOL and offered to buy out the stakes of his family members in GOL. He wanted to hold 15% in GOL in his personal capacity.

He sold his 3% stake in GE shipping to his relatives and used the money to buy their stake in GOL. The price he paid for each share of GOL was Rs 850/- per share which was much more than the then market price of GOL. The money which Mr. Sheth got by selling his stake in GE shipping was not enough to buy the additional 12% stake in GOL. He needed another 300 crores to do that. Infrastructure Leasing and Financial Services Limited(“IL), one of country’s leading infrastructure and development companies, and Motilal Oswal Financial Services Limited (“Motilala Oswal”), a Mumbai based Brokerage firm stepped in to aid Mr.

Sheth in funding the buying, accepting shares of GOL as collateral. Mr. Sheth pledged 14. 89% f the shares to raise the loan, but he was required to bring in more shares as the price of the shares dropped. He failed to do so. He sought the help of his friend Mr. P. C Kapoor of BSL. Mr. Kapoor cleared the debt by taking the pledge of 14. 89% stake in GOL. After the above incidents Mr. Sheth failed to make the interest payments to BSL owing to market crash and poor performance of GOL. As a consequence BSL invoked the pledge and acquired the 14. 89% of GOL on May6, 2009 at Rs 31/- per share.

Chronology of Events Sr. No| Date| Event| 1. | May 30,2009| Mr. Sheth resigned from the post of vice chairman and managing director of GOL | 2. | June 3, 2009| Open offer under Regulation 10 to acquire up to 78,26,788(20% of the share capital) of GOL at Rs 344/- per share by BSL, Natural Power ventures Private Limited (“NPVPL”) and Dhanshree Properties Private Limited (“DPPL”). | 3. | June 23, 2009| Public announcement of competitive bid for acquiring 32. 13% share of the capital of GOL by Eleventh Land Private Developers Limited (ELDPL”) and ABG at Rs 375/- per share| 4. July 4, 2009| NPVPL along with DPPL and BSL revised their offer price to Rs 405/- per share. | 5. | July 29, 2009| ABG acquired 1,926,721 shares (4. 92% of the share capital) of GOL at INR 449. 99/- per share. | 6. | July 29, 2009| ABG revised its offer price to INR 450/- per share. | 7. | July 30, 2009| ABG acquired 212,348 shares (0. 57% of the share capital) of GOL at INR 450/- per share. | 8. | August 3, 2009| ABG acquired 150,000 shares (0. 38% of the share capital) of GOL at INR 498. 39/- per share (max. INR 519/-). 2 The cumulative shareholding of ELDPL and ABG increased to 7. 87% of the share capital of GOL. | 9. | August 3, 2009| ABG revised its offer price to INR 520/- per share. | 10. | August 4, 2009| ABG issued Second Addendum to their public announcement of June 23, 2009 summarizing the developments of the latest status of shareholding in GOL, the new offer price (INR 520/- per share) and the revised maximum consideration (INR 6,536,957,440) for the acquisition of 12,571,072 shares in GOL. | 11. | September 16, 2009| BSl picked up an additional 3% stake in GOL through GPPL at 560/- share.

Therefore the offer price was hiked to Rs 560/- per share. | 12. | September 30, 2009| BSL retracted from the earlier stand to make open offer only under regulation 10 of the Takeover code. It moved SEBI to modify their public announcement and make an offer under Regulations 10 and 12. | 13. | October 8, 2009| BSL increased its stake in GOL to 23. 17% by buying 302,140 equity shares of GOL for about INR 14. 24 crores through open market transactions through DPPL. | 14. | November 18, 2009| ABG received SEBI approval for open offer for 32. 12% stake in GOL at INR 520/- per share.

The open offer was permitted under Regulations 10 and 12 as ABG had made public announcement for open offer under Regulations 10 and 12 in the first place itself. | 15. | November 18, 2009| SEBI issued the observation letter permitting open offer by BSL only under Regulation 10. | 16. | November 20, 2009| BSL issued the second corrigendum explaining to the shareholders that offer would be under Regulation 10 only in light of the SEBI observation letter. | 17. | November 23, 2009| ABG and PAC issued the Letter of offer to the shareholders of GOL. | 18. November 24, 2009| BSL and PACs issued the Letter of offer to the shareholders of GOL. | 19. | December 1, 2009| BSL revised the offer price to INR 590/- per share. | 20. | December 2, 2009| ABG sold its entire stake of 8. 29% (3,078,000 shares) stake in GOL through stock market sale. As of now, ABG holds only 517 shares of GOL. ABG sold its stake at significant gains over its purchase price. | 21| December 4, 2009| SEBI has summoned ABG for clarifications on sale of its stake before the commencement of the open offer. | Legal and Regulatory Considerations

Regulation 25 of the Takeover Code permits Competitive Bidding Under the following conditions (1) Any person, other than the acquirer who has made the first public announcement, who is desirous of making any offer, shall, within 21 days of the public announcement of the first offer, make a public announcement of his offer for acquisition of the shares of the same target company. Explanation. —An offer made under sub-regulation (1) shall be deemed to be a competitive bid. (2) No public announcement for an offer or competitive bid shall be made after 21 days from the date of public announcement of the first offer. 3) Any competitive offer by an acquirer shall be for such number of shares which, when taken together with shares held by him along with persons acting in concert with him, shall be at least equal to the holding of the first bidder including the number of shares for which the present offer by the first bidder has been made. (4) Upon the public announcement of a competitive bid or bids, the acquirer(s) who had made the public announcement(s) of the earlier offer(s), shall have the option to make an announcement revising the offer.

Provided that if no such announcement is made within fourteen days of the announcement of the competitive bid(s), the earlier offer(s) on the original terms shall continue to be valid and binding on the acquirer(s) who had made the offer(s) except that the date of closing of the offer shall stand extended to the date of closure of the public offer under the last subsisting competitive bid. (5) The provisions of these regulations shall mutatis mutandis apply to the competitive bid(s) made under sub-regulation (1). 6) The acquirers who have made the public announcement of offer(s) including the public announcement of competitive bid(s) shall have the option to make upward revisions in his offer(s), in respect of the price and the number of shares to be acquired, at any time up to seven working days prior to the date of closure of the offer: Provided that the acquirer shall not have the option to change any other terms and conditions of their offer except the mode of payment following an upward revision in offer .

Provided further that any such upward revision shall be made only upon the acquirer,— (a) making a public announcement in respect of such changes or amendments in all the newspapers in which the original public announcement was made; (b) simultaneously with the issue of public announcement referred in clause (a), informing the Board, all the stock exchanges on which the shares of the company are listed, and the target company at its registered office; (c) increasing the value of the escrow account as provided under sub-regulation (9) of regulation 28. 7) Where there is a competitive bid, the date of closure of the original bid as also the date of closure of all the subsequent competitive bids shall be the date of closure of public offer under the last subsisting competitive bid and the public offers under all the subsisting bids shall close on the same date. The following legal regulations were referred to through the course of the Takeover battle: From the above Regulation25(1) we can clearly see that the Takeover Code permits ABG to make a competitive bid against the offer of BSL within 21 days from the date of public announcement of the BSL’s offer.

The shareholders are free to tender their shares according to their choice and normally the offer of the acquirer who offers the highest price becomes successful. Also, as such the provisions for open market acquisition of shares, competitive bidding and revision of the offer do not discriminate against hostile takeovers in India. BSL was the first to make the open offer and within 21 days as the regulation stipulates ABG made a counter offer. Since BSL made the first offer it is the acquirer who made the first public announcement as mentioned under Regulation 25 and ABG? offer which followed the first offer is the competitive bid. As per Regulation 25(7) which is mentioned above, it is a legal requirement that the date of closure of all the open offers in a competitive bid should be the same. The offers can open on different dates but they should necessarily close on the same date which should be the date of closure of public offer under the last subsisting competitive bid. In the instant case, BSL? s offer period was initially scheduled as July 25, 2009 to August 13, 2009 and ABG? offer period was initially scheduled as August 13, 2009 to September 1, 2009. Since the last subsisting competitive bid was ABG? s offer, both the offers had to close on September 1, 2009. The surge to acquire stake in GOL and the rage to prevail over the competitor was so severe that both BSL and ABG ventured into a bidding war, revising the offer price constantly and in this process failed to stick to the timelines under the public announcements. Therefore, both the acquirers had to seek approval of SEBI for rescheduling their offer periods.

SEBI suggested the acquirers to align both the open offers and complete it simultaneously. Hence, the open offers by BSL and ABG were re-scheduled to simultaneously commence on December 3, 2009 and close on December 22, 2009. Despite criticisms of the above regulation, SEBI maintains that running the open offers simultaneously would be in the interest of the shareholders as that would give them an option to tender shares to both the companies. This may give a better exit opportunity to the shareholders.

As per Regulation 25(4) the original acquirer who makes the first public announcement is prohibited from withdrawing his offer in case there is a competitive bid at a higher price but can make upward revisions to his offer both in terms of price and the number of shares to counter the competitive bidder. Upward revision of offer price and the shares is permitted by Regulation 26 of the Takeover Code subject however to keeping the other terms of the offer unchanged.

Regulation 26 dealing with the upward revision of price is as follows Irrespective of whether or not there is a competitive bid, the acquirer who has made the public announcement of offer may make upward revisions in his offer in respect of the price and the number of shares to be acquired, at any time up to seven working days prior to the date of the closure of the offer: Provided that any such upward revision of offer shall be made only upon the acquirer— (a) Making a public announcement in respect of such changes or amendments in all the newspapers in which the original public announcement was made; (b) Simultaneously with the issue of such public announcement, informing the Board, all the stock exchanges on which the shares of the company are listed, and the target company at its registered office; (c) Increasing the value of the escrow account as provided under sub-regulation (9) of regulation 28.

Therefore, the only option that was available to BSL in response to ABG’s competitive bid was the upward revision of the offer price and the number of shares to be acquired. The increase in the offer price from the original price of Rs 344/- per share to Rs 590/- per share was the outcome of constant upward revisions of the offer price by both BSL and ABG. As per the above norms even the competitive bidder is not allowed to withdraw its bid. This is done because he is expected to know that that the original acquirer would revise the price and that cannot be a reason for him to withdraw the offer. ABG sold its stake in GOL to Edelweiss and others on December 2, 2009, one day before the opening of its offer.

The sale created enormous curiosity in the industry as well as the legal circles. The legality of the transaction was challenged but the takeover code does not prohibit such a sale as long as the bidder continues with the open offer. So it can be said that ABG has not violated the Takeover code. A company can withdraw the offer only under the following conditions mentioned in Regulation 27 which is as follows (1) No public offer, once made, shall be withdrawn except under the following circumstances:— (a) omitted (b) The statutory approval(s) required have been refused; (c) The sole acquirer, being a natural person, has died; (d) Such circumstances as in the opinion of the Board merit withdrawal. 2) In the event of withdrawal of the offer under any of the circumstances specified under sub-regulation (1), the acquirer or the merchant banker shall,— (a) Make a public announcement in the same newspapers in which the public announcement of offer was published, indicating reasons for withdrawal of the offer; (b) Simultaneously with the issue of such public announcement, inform – (i) the Board; (ii) all the stock exchanges on which the shares of the company are listed; and (iii) the target company at its registered office Differences between Regulation 10 and 12 of takeover code SEBI decided on November 18, 2009 not to permit BSL to make a single open offer under both Regulation 10 and Regulation 12 while allowing ABG to make the offer under both Regulations 10 and 12. This raises various interpretational issues under the Takeover Code. It is the fundamental principle that the Takeover Code would be triggered on acquisition of shares or voting rights at or beyond 15% (Regulation 10) and/or management control of the target company (Regulation 12).

The differences between Regulation 10 and Regulation 12 are as follows Regulation 10 reads “no acquirer shall acquire shares or voting rights which (taken together with shares or voting rights, if any, held by him or by persons acting in concert with him), entitle such acquirer to exercise fifteen per cent or more of the voting rights in a company, unless such acquirer makes a public announcement to acquire shares of such company in accordance with the regulations. ” Regulation 12 reads “irrespective of whether or not there has been any acquisition of shares or voting rights in a company, no acquirer shall acquire control over the target company, unless such person makes a public announcement to acquire shares and acquires such shares in accordance with the regulations.

Provided that nothing contained herein shall apply to any change in control which takes place in pursuance to a special resolution passed by the shareholders in a general meeting: provided further that for passing of the special resolution facility of voting through postal ballot as specified under the Companies (Passing of the Resolutions by Postal Ballot) Rules, 2001 shall also be provided”. While Regulation 10 deals refers to the acquisition of shares or voting rights, Regulation 12 deals with change in control. In cases where acquisition of shares beyond 15% is accompanied by change in control then there both Regulations 10 and 12 will be applied. Initially BSL limited wanted to just acquire an additional 20% shares from the public without taking any management control over GOL. It planned to retain the old management of GOL. Hence it had made an offer only under Regulation 10. When ABG shipyard made a competitive bid by using both the Regulations 10 & 12, BSL amended its offer and included Regulation 12 as well in its bid.

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