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ADJUDICATION
ORDER NO. - BS/AO-12/2008 ORDER
UNDER RULE 5 OF THE SECURITIES AND EXCHANGE BOARD OF INDIA (PROCEDURE FOR
HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995 IN
THE MATTER OF ADJUDICATION PROCEEDINGS AGAINST
ADC TELECOMMUNICATIONS, INC. Securities and Exchange Board
of India (hereinafter referred to as ‘SEBI’) vide order dated January 10, 2005
initiated adjudication proceedings against ADC Telecommunications, Inc.
(hereinafter referred to as ADC/ acquirer) and I was appointed as the
adjudicating officer to inquire into and adjudge under Section 15I read with
Section 15HB of the Securities and Exchange Board of India Act, 1992
(hereinafter referred to as the ‘SEBI Act’), the violation of Regulation 22(7)
of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997
(hereinafter referred as Takeover Regulations) alleged to have been committed
by the acquirer in the indirect acquisition of shares and control of Krone
Communication Limited (hereinafter referred to as the Target company). FACTS OF THE CASE 1.
KCL is stated to be a joint venture between KRONE
GmbH, a company incorporated under the laws of 2.
As the aforesaid constituted indirect acquisition
of shares and control of the target company, the acquirer and Persons acting in
concert made a public announcement on August 9, 2004 in terms of Takeover
Regulations to acquire 23% of shares capital of the target company and
accordingly filed Letter of Offer before Securities and Exchange Board of India
(SEBI) through the merchant banker. 3.
During the course of scrutiny of this filing, it
was observed that PAC replaced two of its nominee directors on the board of
Target Company with two new directors namely Shri Gokul Hemmady and Shri Micheal Day on NOTICE AND REPLY 4.
A Show Cause Notice
A&E/BS/45033/2005 dated July 15, 2005 (hereinafter referred to as SCN) was
issued to the acquirer in terms of the provisions of
Rule 4 of SEBI (Procedure for Holding Inquiry and Imposing penalties by
Adjudicating Officers) Rules, 1995 (hereinafter referred to as the Rules),
requiring the acquirer to show cause as to why an inquiry should not be held
for the violation alleged to have been committed by it. 5.
The acquirer
vide its letter dated 6.
Considering the circumstances
of the case and reply of the acquirer it was felt that an inquiry
should be held in the matter and accordingly notice of hearing dated 7.
The acquirer vide its
letter dated 8.
The acquirer made the following submissions with
regard to the alleged violations as stated above: a. The KCL is a
joint venture between KRONE GmbH, a company incorporated under the laws of
Germany and having its registered office at Beeskowdamm
3-11, Berlin, D-14167 Germany and Karnataka State Electronics Development
Corporation Limited (KEONICS) and each party is vested with the ability to
appoint directors on the Board of KCL as stated in the Articles of Association
of the KCL. b. The acquirer on
May 18, 2004 via a Share Purchase Agreement indirectly acquired control over
KCL by virtue of indirect acquisition from GenTek
Holding Corporation (“Gen Tek”) the entire equity
Capital of KRONE GmbH (now known as Krone BmbH), a
German corporation which held 2,346,000 equity shares of face value of Rs.10
each in KCL representing 51% of the voting equity capital of KCL. c. This acquisition
by the acquirer was part of a global acquisition pursuant to which, the
acquirer acquired from GenTek, the equity and assets
of several companies and businesses involved in the manufacture, sale and
distribution of telecommunications related products that are located in
different countries (“Global Acquisition”).
Pursuant to the Global Acquisition the acquirer acquired all the
outstanding shares of KRONE GmbH. By
acquiring KRONE GmbH, the acquirer also acquired indirectly all interests held
by KRONE GmbH in other companies, including KCL. d. The above
indirect acquisition of control over KCL was completed on e. There was no
Memorandum of Understanding executed between the parties for acquisition of
control in KCL by the acquirer prior to the above mentioned Share Purchase
Agreement. f.
The acquirer made a public announcement on g. The appointment
of Mr.Gokul Hemmady on the Board of KCL on July 24, 2004 was made by
KCL to fill the vacancy caused by the resignation of Mr.Phil
Hewes, nominee Director of KRONE GmbH. KCL being a joint venture between KRONE GmbH
and KEONICS each party is vested with the ability to appoint directors on the
Board of KCL as stated in its Articles of Association. h. In order that KCL
is able to carry on its activities in the ordinary course of its business
whilst complying with its Articles of Association, the appointment of Mr. Hemmady as a director was necessary and accordingly carried
out by KCL. i.
There was no change in the extent of control that
KRONE GmbH had over the Target Company as a result of this appointment. Copy of the letter dated j.
Mr. Michael H. Day was appointed as Alternate
Director to Mr. Gokual Hemmady
on k. Mr.Michael Day’s
appointment was in any case as an alternate director to Mr.Gokul
Hemmady (original director) and as per the Companies
Act, 1956 provisions the alternate director vacates his office as soon as the
original Director enters the State where the meetings of the Board are
held. The concept of an alternate
director helps the board to function effectively and is resorted to take care
of a situation when the original director is not in a position to attend the
meetings of the board of a company. An
alternate director is in a way a substitute for the original director and by
such an appointment no new office of Director is created by his appointment. l.
We have complied with the relevant provisions of
the Takeover Regulations. The acquirer required control over KCL indirectly as
a result of Global Acquisition by virtue of acquisition of KRONE GmbH outside m. According to
Regulation 14(4) of the Takeover Regulations “Timing of the Public Announcement
of Offer” in case of indirect acquisition or change in control, a public
announcement shall be made by the acquirer within three months of consummation
of such acquisition or change in control or restructuring of the parent of the
company holding shares of or control over the target company in India. n. In terms of the
Regulation 14(4) of the Takeover Regulations the acquirer made the Public
Announcement on o. Regulation 22(7)
of the Takeover Regulations provides that during the offer period, the acquirer
or persons acting in concert with him shall not be entitled to be appointed on
the board of directors of the target company.
p. From the scheme
and purpose of the Regulations it can be said that an acquirer without having
made a public offer should not appoint a nominee on the board of a target
company and where the appointment of a director to the board is out of
replacement of an existing director of a person acting in concert, this
restriction is not intended. q. Mr.Hemmady was a
replacement of an existing nominee director (Phil Hewes)
on the board of KCL and not a new appointment to the board of KCL by the
acquirer in view of the acquisition of indirect control by the acquirer over
KCL. The appointment was made by KCL
without impacting the overall board membership enjoyed by KRONE GmbH and,
thereby, without acquiring any additional rights/control or prejudicing any shareholders’
interest. KRONE GmbH maintained status
quo in terms of its effective representation on the Board of KCL and did not
disturb the level playing field (for instance, for any competitive bids). r. It is further
submitted that the term “offer period” under Regulation 2(1)(f) of the
Regulations “means the period between the date of entering into Memorandum of
Understanding or the public announcement, as the case may be, and the date of
completion of offer formalities relating to the offer made under these
regulations”. s. In this regard,
the term “Memorandum of Understanding” is not defined under the Takeover
Regulations. The term has also been used
in Regulation 21(A) “Offer conditional upon level of acceptance” which is
reproduced below: “21A. (1) Subject to the provisions
of sub-regulation (8) of Regulation 22, an acquirer or any person acting in
concert with him may make an offer conditional as to the level of acceptance
which may be less than twenty per cent : Provided that where the public offer
is in pursuance of a Memorandum of Understanding, the Memorandum of
Understanding shall contain a condition to the effect that in case the desired
level of acceptance is not received the acquirer shall not acquire any shares
under the Memorandum of Understanding and shall rescind the offer.” t.
It is submitted that the term “Memorandum of
Understanding” was brought into the definition of “offer period” and Regulation
21(A) vide SEBI (Substantial Acquisition of Shares and Takeovers) (Second
Amendment) Regulations, 2002 dated 9th September, 2002. In absence of any definition of the term
provided in the Regulations, it can be said that when both “offer period” and
Regulation 21(A) are read together the term “Memorandum of Understanding” in
“offer period” may be implied to be referring to the “Memorandum of Understanding”
in Regulation 21(A) only. u. This means that
where an acquirer has entered into a Memorandum of Understanding for
acquisition of shares in a target company on a condition to the effect that in
case the desired level of acceptance is not received the acquirer shall not
acquire any shares under the Memorandum of Understanding, the offer period in
that case for the purposes of restriction on appointment of directors on the
board of a target company starts from the date of the Memorandum of Understanding. Where there is a consummation of acquisition
of shares or control without any condition as to the level of acceptance of
offer to be made by the acquirer, the offer period begins from the date of
public announcement. v. In this regard it
is submitted that the acquisition of control by the acquirer in KCL was
pursuant to an agreement between the relevant parties and not under a
‘Memorandum of Understanding’ conditional upon the level of acceptance of the
offer to be made by the acquirer under the Regulations, hence the offer period
in case of the acquirer started only from the date of Public Announcement made
by the acquirer i.e. from August 9, 2004. w. Even if the
appointment of Mr.Gokul Hemmady
is considered as an appointment by the acquirer or persons in concert after
acquisition of indirect control of the KCL by the acquirer, the fact that the
appointment has been made prior to the date of Public Announcement goes to show
that the acquirer has complied with the Regulations by not appointing any
person to the board of KCL after the start of the offer period on August 9,
2004. x. Without prejudice
to the above, the alleged violation has neither given any disproportionate gain
or unfair advantage to the acquirer or person acting in concert nor caused any
loss to any investor/shareholder. The acquirer has not appointed any nominee to
the board of the target company after the Public announcement and when informed
by the SEBI that the appointment of Mr. Hemmaday and
Mr. Day seemed to be in violation of the Regulation 22(7), the said persons recused themselves and refrained from participating in any
discussion and the decision and the decision making of the board of the target
company regarding all matters concerning the public offer. CONSIDERATION
OF EVIDENCE AND FINDINGS 9.
The issue for consideration in this present mater
is whether the appointment of Shri
Gokul Hemmady and Shri Micheal Day, as directors on
the board of the target company, by the acquirer along with PAC, after entering
into share purchase agreement amounts to violation of Regulation 22(7) of
Takeover Regulation, 1997. Regulation 22 (7) of Takeover Regulations, 1997
"(7) During the offer period, the acquirer or persons acting in concert with him shall not be entitled to be appointed on the board of directors of the target company: [Provided that in case of acquisition of shares or voting rights or control of a Public Sector Undertaking pursuant to a public announcement made under the proviso to sub-regulation (1) of regulation 14, the provisions of sub-regulation (8) of regulation 23 shall be applicable:] [Provided further that where the acquirer, other than the acquirer who has made an offer under regulation 21A, after assuming full acceptances, has deposited in the escrow account hundred per cent of the consideration payable in cash where the consideration payable is in cash and in the form of securities where the consideration payable is by way of issue, exchange or transfer of securities or combination thereof, he may be entitled to be appointed on the Board of Directors of the target company after a period of twenty-one days from the date of public announcement.] 10.
In this regard it is noted that the mandate of
Regulation 22(7) clearly specifies that during the offer period, the acquirer or persons acting in concert with him
shall not be entitled to be appointed on the board of directors of the target
company. The term “offer period” is defined under Regulation 2(1)(f) of the Takeover Regulations. Regulation
2 (1) (f) of Takeover Regulations, 1997 "[(f)
"offer period" means the period between the date of entering into
Memorandum of Understanding or the public announcement, as the case may be and
the date of completion of offer formalities relating to the offer made under
these regulations]" 11.
In the present case, Shri
Gokul Hemmady and Shri Micheal Day were appointed
as directors on the board of KCL on 12.
The acquirer has also contended that as Memorandum
of Understanding was not signed between the parties, the offer period as
contemplated under Regulation 22(7) of Takeover regulation will be reckoned from
the date of public announcement and not from the date of Share purchase
agreement. Further the acquirer has made
an attempt to derive the meaning of MOU from Regulation 21A of the Takeover
Regulations and has contended that MOU is applicable only in cases of Offer
Conditional upon level of acceptance as mandated under Regulation 21A of the
Takeover Regulations. It is noted in this context that the acquirer has tried
to distinguish between agreement between the parties and MOU however both the
terms appear to convey the same meaning. 13.
At this juncture it is also pertinent to understand
the rationale for providing such restriction on appointment of directors in
terms of Regulation 22(7). The rationale of imposing the said restriction can
be seen from the report of committee dated The
committee was informed that certain restrictions placed by Regulations like
induction of directors etc. during offer period are circumvented by inducting
directors on or after the date of MOU but before Public Announcement. The
committee felt that the intention of the Regulation while placing such
restrictions is to ensure that the acquirers do not take control of the company
till all formalities are completed. In the light of the above, the committee
recommends that ‘offer period’ may be reckoned to be from the date of the MOU,
if any, to the date of completion of all formalities. Meaning thereby the said restriction
is placed by Regulation 22(7) with a view to prevent the acquirer from taking
control over the target company before completion of all formalities related to
takeover. Such control can be misused to the detriment of the target company
and its shareholders. 14.
In the case of indirect acquisition the offer
period starts with the date of public announcement. In regard it is noted that
the indirect acquisition was completed on 15.
Further, as the appointment of director was made
prior to the public announcement it cannot be held that the appointment was
made during the offer period in violation of the provisions of Regulation 22(7)
of the Takeover Regulations. In view of the same the violation of Regulation
22(7) by acquirer has not been established and hence the adjudication
proceeding against the acquirer is disposed of. 16.
In terms of the provisions of Rule 6 of the SEBI
(Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer)
Rules 1995, copies of this order are sent to ADC Telecommunications, Inc. and
to the Securities and Exchange Board of India.
Place: Mumbai Biju. S DATE: |
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