In the matter of:

Eaton Corporation                                                              Appellant

Vs.

Chairman,
Securities and Exchange Board of India                        Respondent
 

APPEARANCE:

Shri D.C.Singhania
Advocate

Shri R.K.Dubey
Advocate

Shri Sameer Rastogi
Advocate
I/b. Singhania & Co.,                                                 for Appellant

Shri Ananata Barua
Division Chief, SEBI                                              for Respondent
 
 

(Appeal arising out of the order dated 24.4.2001 made by the Chairman, Securities and Exchange Board of India)

Eaton 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: -
 

It has 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."

Shri D.C.Singhania, learned Counsel appearing for the Appellant submitted that Eaton Industries Inc and Aeroquip Vickers Inc are incorporated in USA, that the said Eaton Industries is a 100% subsidiary of another American Company namely Eaton Corporation (the Appellant). He submitted that pursuant to an "Agreement and Plan of Merger" entered into among the Appellant, Eaton Industries Inc and Aeroquip Vickers Inc. on 31.1.1999, the said Eaton Industries Inc merged with Aeroquip Vickers Inc. and consequently the holding company of the said transferor company became the holding company of Aeroquip Vickers Inc. In this context he referred to the copy of the said agreement and the "Appeal Certificate" dated 9.4.1999 issued by the Secretary of State, State of Ohio and stated that the said merger is in accordance with the provisions of the laws of the State of Ohio. A copy of the Agreement was filed with the appeal. Certified copy of the Appeal Certificate was produced at the time of the arguments. Shri Singhania submitted that since the merger, which according to the Respondent has resulted in change in the control of VSIL, has the approval of the laws of the State of Ohio, provisions of regulations 10, 11 and 12 of the 1997 Regulations are not attracted in view of the automatic exemption available under regulation 3 (1) (j) (ii) of the 1997 Regulations, that once it is out of the purview of the regulations, no direction can be issued and as such the impugned order issued by the Respondent is beyond its powers.
 

Shri Singhania, 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.
 

According 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:

Referring 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.
 

Shri Barua 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 9^th 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:

Regulation 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:

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 20^th 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)

The finding that "there is no proposal of merger" is contrary to the facts on record. Respondent was not unaware of the agreement dated 31.1.1999, as it has referred to the same in the order. Therefore in the light of the statutory "Certificate of Merger" and "Agreement and Plan of Merger" produced by the Appellant, it is difficult to hold that " there was no proposal of merger" as mentioned in the order. The fact that the VSIL had vide its letter dated 23.4.1999 informed the Bombay Stock Exchange that there had been a change in its control is factually correct. But the act of reporting the fact of change in the control does not in any way disqualify the acquisition to avail the exemption provided under regulation 3 (1) (j) (ii). On the contrary non-reporting of the same would have invited penal consequences.
 

The statement 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).
 

From the 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.
 

For the reasons stated above the appeal is allowed and the impugned order is setaside.