APPEAL No. 22/2001
In the matter of:
Eaton Corporation Appellant
(Appeal arising out of the order dated 24.4.2001 made by the Chairman, Securities and Exchange Board of India)
Corporation, the Appellant herein, is a company incorporated and existing
under the laws of the State of Ohio, in the United States of America. Eaton
Industries Inc, also incorporated in Ohio, was its wholly owned subsidiary.
It has been stated that the said Eaton Industries Inc, pursuance to an
Agreement and Plan of Merger, merged with another company namely Aeroquip
Vickers Inc. Aeroquip Vickers Inc. is also incorporated under the laws
of the State of Ohio. Aeroquip Vickers Inc in turn has a wholly owned subsidiary
by the name Aeroquip Corporation, incorporated and existing under the laws
of the State of Michigan in the United States of America. The said Aeroquip
Corporation has a fully owned subsidiary by the name Vickers Inc. Said
Vickers Inc incorporated under the laws of the State of Delaware in the
United States of America holds 51% in the share capital of its subsidiary
namely Vickers System International Ltd (VSIL), which is a public company
incorporated in India, under the Companies Act, 1956. "Eaton Group" structure
is clear from the following chart: -
been reported that the Appellant�s direct subsidiary Eaton Industries Inc.
merged with Aeroquip-Vickers Inc with effect from 9.4.1999. As a result
Aeroquip Vickers Inc. continued to exist as the surviving company and became
a wholly owned subsidiary of the Appellant. On the Appellant becoming the
holding company of Aeroquip Vickers Inc., name of its subsidiaries underwent
change � the name of Aeroquip Corporation changed to Eaton Aeroquip Inc,
Vickers Inc changed to Eaton Hydraulics. In this scenario, the Respondent
felt that control over VSIL has changed attracting the provisions of SEBI
(Substantial Acquisition of Shares and Takeovers) Regulations (the 1997
Regulations) and accordingly embarked on an inquiry to find out the extent
of compliance with the requirements of the same the by the concerned parties.
The Respondent, based on the assessment of the information made available
to it in the written and oral representations by the representatives of
VSIL and the Appellant in the inquiry, concluded that the Appellant has
acquired control over VSIL without making a public announcement to acquire
shares from the share holders of VSIL in terms of regulation 12 of the
1997 Regulations. The Respondent viewed that since the Agreement and Plan
of Merger between the Appellant, Eaton Industries and Aeroquip Vickers
Inc., was entered into on 31.1.1999, the requisite public announcement
ought to have been made within 4 days from the said date in terms of regulation
14 (1) and 14 (3) of the 1997 Regulations. On the said premises the Respondent
vide order dated 24.4.2001, directed the Appellant to make a public announcement
within 30 days from the date of the order to acquire shares from the shareholders
of VSIL in accordance with the relevant provisions of the regulations,
at an offer price to be computed in the following manner:
" 1. Determine whether or not the shares of the Target Company are �infrequently traded� in terms of Explanation (i) to Regulation 20 (3) of the regulations, taking into consideration January 31, 1999 and actual date of public announcement, as the reference dates.
2. Upon determination of the frequency of trading as stated above, the minimum offer price shall be calculated in terms of Regulation 20 (2) and/or Regulation 20 (3) of the regulations, as may be applicable, taking into consideration the said dates as the reference dates.
3. Add an interest @ 15% p.a. towards consideration for the loss of interest caused to the shareholders and being the penalty for the delay in making the public announcement, to the highest price calculated as stated at Point # 2 above. The interest shall be computed for the period from January 31, 1999 till the date of the Public Announcement.
4. The acquirer shall make the aforesaid public announcement in terms of the regulations within 30 days from the date of this order and comply with the other offer formalities as provided for in the regulations."
submitted that there was no change in the shareholding or controlling pattern
in the VSIL even after the said merger as it continues to be the subsidiary
of Vickers Inc without any change in the shareholding. He stated that merger
of Eaton Industries Inc, a 100% subsidiary of the Appellant with Aeroquip
Vickers Inc and consequently the said Aeroquip Vickers becoming a 100%
subsidiary of the Appellant has in no way resulted in any change in the
control or ownership of the subsidiary companies of Aeroquip Vickers Inc.
in the chain. According to him any automatic change in the controlling
interest, as a result of change in the ownership of the ultimate holding
company, should not be considered as to have caused an acquisition of shares
or control in the subsidiary for the reason that a company is a separate
legal entity from its shareholders and as long as the holding company entity
as such has not changed, controlling interest in the subsidiary remains
unchanged. He submitted that the merger has not resulted in any change
in the shareholding pattern of the subsidiaries of Aeroquip Vickers Inc.
He reiterated that the interests and rights of minority shareholders of
VSIL have not been affected in any manner, as the Vickers Inc., continues
to be its holding company holding 51% shares, irrespective of the merger
of Eaton Industries with Aeroquip Vickers Inc, abroad.
to Shri Singhania, even if it is assumed that the Appellant had acquired
control of VSIL indirectly without acquisition of any shares, there is
no provision in the SEBI Act or in the 1997 Regulations to regulate such
an acquisition. He submitted that regulation 12 applies to an acquirer
who acquires or tries to acquire shares in the target company, that in
the present case the Appellant never acquired nor tried to acquire the
shares of VSIL. Since the applicability of the SEBI Act, is confined to
the territory of India, the Respondent is not empowered to pass an order
directing the Appellant, which is an overseas company, to comply with the
same, that an order which is not legally enforceable is bad and deserves
to be knocked off. He further submitted that the Respondent has relied
on explanation (b) to regulation 11 claiming that it has jurisdiction over
foreign companies. Citing the provisions of regulation 11, Shri Singhania
stated that explanation to the said regulation will apply to regulations10
and 11 only, and not to regulation 12. Shri Singhania further submitted
that the principle upholding corporate democracy i.e. the majority rule,
should not be ignored unless there are circumstances to show that the majority
is acting against the interest of the minority shareholders. In the instant
case Vickers Inc, with 51% holding in VSIL is the majority shareholder
and there is nothing to show that the minority shareholders� interest has
been adversely affected. He stated that regulation 12 itself has taken
care of the interest of the majority, as is evident from the proviso to
the said regulation providing that nothing contained the regulation shall
apply to any change in control which takes place in pursuance to a resolution
passed by the shareholders in a general meeting of the target company.
Shri Singhania stated that with solid 51% shares of VSIL in the hands of
Vickers Inc. it is implied that majority of VSIL had approved the change,
that passing a resolution is only a technical formality and that if the
Respondent still so insists that such a ritual need be followed, the same
will be done.
Shri Ananta Barua, on behalf of the Respondent submitted that the automatic exemption under regulation 3 (1) (j) (ii) is available only if the acquisition is as a result of merger or amalgamation of the target company located in India, and overseas acquisitions do not come under the purview of the said exemption. According to him in the instant case since the merger was taken place in USA, automatic exemption under the said regulation 3 (1) (j) (ii) is not available and compliance of the requirements of regulation 12 is necessary and therefore the impugned order has rightly directed the acquirer to make a public offer. ShriBarua referred to the following portion in the reply filed by the Respondent before the Tribunal:
to the Appellant�s contention that SEBI has no cross border jurisdiction
to enforce its order against the Appellant, Shri Barua submitted that the
Respondent has entered into a Memorandum of Understanding with the Securities
and Exchange Commission of USA and in terms of the said MOU the SEC can
be requested to proceed against the Appellant if necessary. Shri Barua
submitted that the agreement dated 31.1.1999 describes Eaton Industries
Inc as "Buyer". Shri Barua read out certain paragraphs from Justice Bhagwati
Committee report, which formed the basis for the 1997 Regulations, to emphasise
that the Regulations take care of not only acquisition of shares but also
acquisition of control, both direct and indirect. He also referred to the
definition of the expression �acquirer� provided in the regulations and
stated that the Appellant comes within the ambit of the said definition.
Shri Barua also referred to certain correspondence from the Appellant�s
counsel received in the Respondent�s office, stating therein that the Appellant
had acquired control over VSIL.
submitted that the Respondent passed the impugned order directing the Appellant
to make a public offer taking into consideration all the relevant facts
putforth before it in writing and also orally by the Appellant�s counsel.
The order has been made according to the provisions of the law and exercising
the authority vested in the Respondent taking into consideration the interest
of the shareholders of VSIL, directing the Appellant to make a public announcement
and at the same time grant a reasonable compensation to the investors for
the interest loss caused to them due to the Appellant having failed to
make public announcement.
I have carefully considered the rival contentions putforth by the parties before me in the pleadings and oral submissions. There is no dispute about the fact that Aeroquip Vickers Inc which was the ultimate holding company of VSIL, became a subsidiary of the Appellant as a result of the merger of Eaton Industries, its 100% subsidiary, with the said Aeroquip Vickers Inc. The scheme of the merger is as per the "Agreement and Plan of Merger" dated 31.1.1999 entered into among the Appellant, Eaton Industries Inc. and Aeroquip Vickers Inc.. A copy of the said agreement has been filed with the appeal. The Appellant has also produced a copy of the "Certificate of Merger" dated 9.4.1999 issued by the Secretary of State, the State of Ohio. This certificate bears ample proof of the merger of Eaton Industries Inc., with Aeroquip Vickers Inc. It has been stated in the certificate that the merger is to be effective from 9th April 1999 and "the name of the entity surviving the merger is Aeroquip-Vickers Inc". In para v of the certificate under the heading "Merger Authorised" it has been stated:
This merger was adopted, approved and authorised by each of the constituent entities in compliance with the laws of the State under which it is organised, and the persons signing this certificate on behalf of each of the constituent entities are duly authorised to do so"
12 is the general rule. But regulation 3 (1) exempts certain types of acquisitions
from the scope of regulations 10, 11 and 12 (Chapter III). In addition
to the specific exemption cases provided in regulation 3 (1) (a) to (k),
sub regulation (l) enables SEBI to exempt such other cases from the applicability
of Chapter III., which are not automatically exempted. In the instant case
we are not on the special exemption under sub regulation (l). We are on
the specific statutory exemption, which takes out the case from the ambit
of regulation 12.
One of such automatic exemptions provided under regulation 3 (1) (j) reads as under:
(j) pursuant to a scheme:
(ii) of arrangement or reconstruction including amalgamation or merger or de-merger under any law or regulation, Indian or foreign"
Glaxo Smithkline Plc a company incorporated in England (Acquirer), made an application to the Securities and Exchange Board of India (SEBI) vide application dated 5th June 2000 to seek an exemption from the SEBI under Regulations 3 & 4 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 [SEBI (SAST) Regulations] from having to make a public offer under Chapter III in respect of following four Indian listed companies;
a) Glaxo India Ltd (GIL)
b) Burrough Wellcome (India) Ltd (BWIL)
c) Smithkline Beecham Consumer Health Care Ltd (SBCHL)
d) Smithkline Beecham Pharmaceuticals (India) Ltd. (SBPIL)
GIL and BWIL are subsidiaries of Glaxo Wellcome plc (GW, a company registered in England). SBCHL is a subsidiary of Horlicks Limited (HL, a company registered in England) which is in turn a subsidiary of Smithkline Beecham plc (SB, a company registered in England). SBPIL is a subsidiary of Eskaylab Limited (EL, incorporated in England). EL is in turn a wholly owned subsidiary of SB.
The boards of GW and SB have unanimously agreed to a merger of equals to form a new group called Glaxo Smithkline (GSK). To implement the proposed acquisition the procedure to be followed is called Scheme of Arrangement. Under the Scheme of Arrangement GW and SB would become wholly owned subsidiaries of GSK. GSK shares will be issued by GSK to the former shareholders of GW and SB in ratio 58.75% and 41.25% of the issued share capital of GSK respectively.
The Acquirer submitted that the Scheme of Arrangement clearly falls within Regulation 3 (1) (j) (ii) of the said Regulations, the obligation to make a public offer does not apply to reconstruction including amalgamation or merger or de-merger. The acquirer also submitted that all the elements of Regulation 3 (1) (j) (ii) viz. Scheme of Arrangement and merger under a recognised law (in this case English Law) are clearly met and accordingly there is no obligation to make a public offer as a consequence of the merger of GW and SB.
The matter was forwarded to the Takeover panel for their recommendation who were of the opinion that sub-clause (ii) of clause (1) of regulation 3 of the Takeover code also covers cases where the control is effectively passed and the exemption as sought was recommended to be granted.
It was observed that there was global restructuring resulting in forming of a holding company i.e. GSK as per the scheme. It appeared that by the said scheme it is not intended to bring about change of control over the target companies in India. The indirect acquisition of the joint controlling interest of the Target Companies in India is purely a fallout and incidental to the global restructuring arrangements and does not change the shareholding pattern of the Target companies. The immediate holding company of the Target Company will continue to remain the same.
After considering the submissions and the recommendation of the Takeover Panel, the Chairman of the SEBI in exercise of powers under Securities and Exchange Board of India Act, 1992 read with sub-regulation (6) of regulation 4 of the said Regulations, granted exemption to Glaxo Smithkline Plc from making public offer in respect of transfer of control from single to joint in respect of Glaxo India Ltd, Burrough Wellcome (India) Ltd, Smithkline Beecham Consumer Health Care Ltd and Smithkline Beecham Pharmaceuticals (India) Ltd."
It appears that the Respondent had not the benefit of perusing the "certificate of merger" issued by the State of Ohio, while making the impugned order as is evident from the following observation in the order:
"It would also be relevant to state that the regulation 3 (1) (j) (ii) of the regulations exempts only such arrangements or reconstruction including merger of amalgamation that has taken place under any law or regulation. Hence with reference to the submissions of the acquirer to the effect that the acquisition has been effected pursuance to a plan of merger between ANV and the acquirer. I have noted that in the case under consideration there is no proposal of merger. Further, the target company vide letter dated 20th June 2000 has explicitly stated that ANV is still in existence. Hence the present case is a case of indirect change in the control of immediate or ultimate holding company of the Target Company and therefore Regulation 12 would be applicable". (emphasis supplied)
of VSIL that Aeroquip Vickers Inc is still in existence does not mean that
there was no merger or amalgamation. It is to be noted that Eaton Industries
Inc. was a 100% subsidiary of the Appellant. As a result of the merger
of the said Eaton Industries, the surviving Aeroquip Vickers Inc being
the transferee company had to issue its shares to the Appellant in exchange
of the shares of the said Eaton Industries Inc for merger consideration
and consequently Aeroquip Vickers Inc became the Appellant�s subsidiary.
It has been stated in para IV of the appeal memorandum that "the effect
of the said merger was that Aeroquip Vickers Inc. became a wholly owned
subsidiary of Eaton Corporation". This statement remains unrebutted by
the Respondent. The fact that it was due to merger, Aeroquip Vickers Inc
became subsidiary of the Appellant seem to have escaped attention of the
Respondent. It is also to be noted that the said merger has the approval
of the laws of the State of Ohio. In these circumstances the survival of
Aeroquip Vickers Inc being the Transferee Company as a 100% subsidiary
of the Appellant, cannot be considered as a factor, which would take off
the case from the purview of regulation 3 (1) (j) (ii).
fact evidencing merger of Eaton Industries with Aeroquip Vickers Inc. under
the laws of the State of Ohio and as a result Aeroquip Vickers Inc becoming
the subsidiary of the Appellant, it is clear that the instant case is covered
under the automatic exemption available under regulation 3 (1) (j) (ii).
Since the case is exempted from complying with the requirement of regulation12,
issuance of the impugned order asking the Appellant to comply with the
requirements of regulation 12 cannot hold good. Once an acquisition falls
under any one of the automatic exemption categories provided under the
regulation, the Respondent cannot knock off that exemption. An exemption
provided by the law cannot be taken away simply by an administrative order,
like the one impugned in the appeal. Since the order is issued beyond the
authority of the Respondent, it fails. Therefore I do not consider it necessary
to examine the other contentions purforth by the parties.
reasons stated above the appeal is allowed and the impugned order is setaside.
Date: July 18 2001