![Sample our Economics, Finance,Business & Industry journals, sign in here to start your access, latest two full volumes FREE to you for 14 days]({"type":"image" , "src" : "/sda/5931/TOC-Subject-Sample-2021-Economics-Finance-Business-Industry.jpg"})
Abstract
This article delves into the manner in which a potential acquirer in India should be governed after gaining access to non-public information about the target company while conducting due diligence and after the potential acquirer makes a decision to abort the proposed transaction on the basis of the aforesaid information. In the process, particular emphasis will be laid on how to handle the unpublished price sensitive information (UPSI), amongst other non-public information gathered while conducting due diligence in light of the facts stated above, vis-à-vis the Securities and Exchange Board of India (SEBI) (Prohibition of Insider Trading) Regulations, 2015. Thereafter, the article will deal with the relevance of mens rea in cases where the potential acquirer, termed an “insider”, deals in the securities of the target company while in possession of UPSI acquired while conducting due diligence, the fact that the information possessed is UPSI, however, being unknown. Finally, the article will conclude and suggest a way forward to remove the ambiguities present under the extant legal regime encountered while dealing with the aforesaid aspects.
Notes
1 See http://www.sebi.gov.in/cms/sebi_data/attachdocs/1386758945803.pdf, accessed on 3 March 2016.
2 The word “acquirer” has been defined under Regulation 2(i) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 as “any person who, directly or indirectly, acquires or agrees to acquire whether by himself, or through, or with persons acting in concert with him, shares or voting rights in, or control over a target company”.
3 The term “due diligence” has now been internationally accepted to include a broad spectrum of investigative procedures in relation to an acquisition of a company's shares or of assets in a commercial context, a joint venture project, a financing transaction, the issue of securities and other general pre-contractual inquiries. See http://www.iflr.com/Article/2027418/Legalduediligence.html, accessed on 3 March 2016.
4 http://www.mondaq.com/india/x/17241/Operational+Performance+Management/Legal+Due+Diligence, accessed on 3 March 2016. Also see http://www.bakermckenzie.com/files/Uploads/Documents/MA_Guide_.pdf, accessed on 3 March 2016.
5 The rationale behind specifically mentioning those transactions which do not trigger open offer is explained in section B of the article.
6 See Jayshree P Upadhyay, “Acquisition Picture Hazy after New Due-diligence Norms”, Business Standard, 1, 15 October 2015.
7 See Regulation 3(1), SEBI (Prohibition of Insider Trading) Regulations, 2015.
8 Ibid.
9 See Regulation 3(2), SEBI (Prohibition of Insider Trading) Regulations, 2015.
10 See Regulation 4, SEBI (Prohibition of Insider Trading) Regulations, 2015.
11 See Proviso to Regulation 4 of the SEBI (Prohibition of Insider Trading) Regulations, 2015.
12 See Regulation 3(3), SEBI (Prohibition of Insider Trading) Regulations, 2015.
13 See Regulation 3, SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.
14 See Regulation 13, SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.
15 See Regulation 15, SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.
16 Such time should generally be before the time when the company agrees to conduct due diligence as that would be in the best interest of the company in light of what has been envisaged under Regulation 3(3)(i) of the SEBI (Prohibition of Insider Trading) Regulations, 2015.
17 See Regulation 3(3)(ii), SEBI (Prohibition of Insider Trading) Regulations, 2015.
18 Regulation 2(g), SEBI (Prohibition of Insider Trading) Regulations, 2015.
19 Regulation 2(d), SEBI (Prohibition of Insider Trading) Regulations, 2015.
20 The word “control” has been defined under Regulation 2(e) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 as including the “right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner; Provided that a director or officer of a target company shall not be considered to be in control over such target company, merely by virtue of holding such position.”
21 “Fiduciary relationship”, as per the P. Ramanatha Aiyar, Advanced Law Lexicon (3rd edn, Nagpur, LexisNexis, 2005), means inter alia when one person assumes control and responsibility over another. In the case of Treesa Irish W/o Milton Lopez v The Central Public Information Officer, The Appellate Authority, The Central Information Commission and Union of India (UOI), 2012 (275) ELT 410 (Ker), the Court correctly pointed out that such “fiduciary relationship, although arises out of a transaction involving trust between two parties, requires something more than mere trust to make the relationship fiduciary. It also cannot be equated with mere privacy or confidentiality. At the heart of fiduciary relationship lie reliance, de facto control and dominance.” So, the potential acquirer who by virtue of his majority shareholding in, or management rights or shareholders agreements or voting agreements with, the target company who is able to exercise de facto control over the latter should primarily owe a fiduciary duty towards the target company as against other shareholders. The fact that controlling shareholders owe a fiduciary duty towards their corporations also finds support in US in cases such as Pepper v Litton 308 US 295 (1939) and Stoumbos v Kilimnik 988 F2d 949.
22 In the case of Nellie Wapshare v Pierce Lasha & Co Ltd, AIR 1960 Mad 410, it was held that “a ‘fiduciary relationship’ arise in the context of a jural relationship. Where confidence is reposed by one in another and that leads to a transaction in which there is a conflict of interest and duty in the person in whom such confidence is reposed, fiduciary relationship immediately springs into existence.” Such jural relationship is likely to exist where the Board of Directors of the target company gets a non-disclosure agreement signed by the potential acquirer in furtherance of which the latter would be entitled to gain access to UPSI while conducting due diligence on the target company.
23 However, in the case of Re Satyam Computer Services Limited and Others, WTM/RKA/EFD-SRO/108-117/2015, the SEBI pointed out that the primary purpose of Insider Trading Regulations is to ensure that the insiders do not breach their fiduciary duty towards the investors and other stakeholders. Thus, no distinction was made between the controlling and non-controlling shareholder, or a shareholder with whom a non-disclosure agreement has been entered into and one with whom it has not, for the purpose of determining the fiduciary relationship of a person. The author however disagrees with this viewpoint for reasons stated in the previous two notes.
24 Regulation 4, SEBI (Prohibition of Insider Trading) Regulations, 2015.
25 See Regulation 8, SEBI (Prohibition of Insider Trading) Regulations, 2015.
26 Rule 8, Schedule A, SEBI (Prohibition of Insider Trading) Regulations, 2015.
27 Notes to Regulation 4, SEBI (Prohibition of Insider Trading) Regulations, 2015.
28 Rule 4 read with Rule 1, Schedule A, SEBI (Prohibition of Insider Trading) Regulations, 2015.
29 See Regulation 9(1), SEBI (Prohibition of Insider Trading) Regulations, 2015.
30 “Compliance Officer” has been defined by virtue of Regulation 2(1)(c) of the SEBI (Prohibition of Insider Trading) Regulations, 2015 as “any senior officer, designated so and reporting to the board of directors or head of the organization in case board is not there, who is financially literate and is capable of appreciating requirements for legal and regulatory compliance under these regulations and who shall be responsible for compliance of policies, procedures, maintenance of records, monitoring adherence to the rules for the preservation of unpublished price sensitive information, monitoring of trades and the implementation of the codes specified in these regulations under the overall supervision of the board of directors of the listed company or the head of an organization, as the case may be.”
31 Rule 3, Schedule B, SEBI (Prohibition of Insider Trading) Regulations, 2015.
32 Ibid.
33 Rule 4, Schedule B, SEBI (Prohibition of Insider Trading) Regulations, 2015.
34 Rule 5, Schedule B, SEBI (Prohibition of Insider Trading) Regulations, 2015.
35 Ibid.
36 See Schedule A read with Regulation 8, SEBI (Prohibition of Insider Trading) Regulations, 2015.
37 See Schedule B read with Regulation 9, SEBI (Prohibition of Insider Trading) Regulations, 2015.
38 Regulation 3(2), SEBI (Prohibition of Insider Trading) Regulations, 2015.
39 In this case, the members of the due diligence team would be insiders for having gained access to UPSI while conducting due diligence on the target company.
40 See Regulation 3(3), SEBI (Prohibition of Insider Trading) Regulations, 2015.
41 Regulation 4, SEBI (Prohibition of Insider Trading) Regulations, 2015.
42 See Section 195, Companies Act, 2013.
43 SEBI v Cabot International Capital Corporation (2004) 51 SCL 307 (Bom).
44 Rakesh Agarwal v SEBI (2004) 49 SCL 351 (SAT). In this case, the Securities Appellate Tribunal (SAT) held that intention/motive of the insider has to be taken cognisance of even though the SEBI Regulations do not specifically bring in mens rea as an ingredient of insider trading.
45 Section 15G(i) reads that “If any insider who, either on his own behalf or on behalf of any other person, deals in securities of a body corporate listed on any stock exchange on the basis of any unpublished price-sensitive information shall be liable to a penalty of twenty-five crore rupees or three times the amount of profits made out of such failure, whichever is higher.”
46 Rajiv B Gandhi v SEBI (2008) 84 SCL 192 (SAT). Also see Re Abhijit Rajan, Ex-Chairman and Managing Director of Gammon Infrastructure Projects Limited, WTM/RKA/ISD/22/2015.
47 Chandrakala v SEBI, Appeal No 209 of 2011.
48 It is important to note that Regulation 10 of the Insider Trading Regulations, 2015 provides that any contravention of these regulations shall be dealt with by the Board in accordance with the SEBI Act, 1992.
49 SEBI v Cabot International Capital Corporation (2004) 51 SCL 307 (Bom).
50 Rajiv B Gandhi v SEBI (2008) 84 SCL 192 (SAT).
51 Chandrakala v SEBI, Appeal No 209 of 2011.
52 See Jayshree P Upadhyay, “Acquisition Picture Hazy after New Due-Diligence Norms”, Business Standard, 1, 15 October, 2015.
53 While a shareholder may or may not own a fiduciary duty towards their company, a director whether executive or non-executive mandatorily owe a fiduciary duty towards the company and is duty bound to act in good faith and protect the interest of their company: See Sangramsinh P Gaekwad & Ors v Shantadevi P Gaekwad, Civil Appeal No 6359 of 2001; Shri Kishore Kundan Sippy and Shri … v Samrat Shipping and Transport, 2004 118 CompCas 472 CLB, 2004 50 SCL 493 CLB.
54 See http://www.sebi.gov.in/cms/sebi_data/attachdocs/1386758945803.pdf, accessed on 3 March 2016.
Additional information
Notes on contributors
Pravesh Aggarwal
Pravesh Aggarwal. The author thanks Dr. Vipan Kumar, Assistant Professor of Law, Rajiv Gandhi National University of Law, Punjab, India, for his invaluable support and guidance.