BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No. 130 of 2011
Date of decision:12.09.2012 - IP holding Asia Singapore PTE Ltd.
a company incorporated under the
laws of Singapore with its registered
office at 1, Robinson Road,
#17-00, AIA Tower,
Singapore – 048542. - International Paper Company
a company incorporated under the
Business Corporation Law of the
State of New York
with its principal executive office at
6400 Poplar Avenue, Memphis,
Tennessee – 38197
United States of America …Appellants
Versus
Securities and Exchange Board of India
SEBI Bhavan, Plot No. C4-A, G-Block,
Bandra Kurla Complex,
Mumbai – 400 051.
… Respondent
Mr. Janak Dwarkadas, Senior Advocate with Mr. Shank Sengupta, Mr. Zal
Andhyarujina and Ms. Aditi Awasthy, Advocate for Appellants.
Mr. Kumar Desai, Advocate with Ms. Harshada Nagare, Advocate for the Respondent.
2
CORAM : P. K. Malhotra, Member & Presiding Officer ( Offg .)
S. S. N. Moorthy, Member
Per : P. K. Malhotra
The issue that arises for our consid eration in this appeal is whether the
appellants are liable to pay to the public shareholders the non-compete fee that has been
agreed to be paid to the outgoing promoters of the company being taken over. The facts
of the case, which are not in dispute, may first be noticed.
- Appellant no.1 is a company incorporated under the laws of Singapore. It is held
by appellant no.2 i.e., International Paper Co mpany of USA through its subsidiary IP
International Holdings Inc. Appellant no.2 is said to be a globa l paper and packaging
company and its business includes manufact uring of uncoated pa pers, industrial and
consumer packaging. - Appellants entered into a share purchase agreement (SPA) with the promoters of
Andhra Pradesh Paper Mills Limited (the target company) on March 29, 2011 to acquire
2,12,60,008 fully paid-up equity shares forming 53.46% share capital of the target
company at a price of523/- per share aggregating to an amount of11,118,984,184.
An exclusivity fee of21.20 per share is also to be paid to the promoter group sellers and, therefore, it was decided by the appellants to add the same to the offer price. The equity shares proposed to be acquired under the share purchase agreement represents the equity shareholding of the promoter group sellers in the target company. In terms of regulations 10 & 12 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (for short the takeover code), a public announcement dated April 1, 2011 was published with regard to the proposed open offer for acquisition of upto 85,67,521 shar es of the target company from the existing shareholders representing 21.54% of the voting capita l at a price of544.20
per fully paid-up equity share of face value of ` 10 each. The said offer price was
arrived at in accordance with the provisions of sub-regulation (4) of regulation 20 of the
takeover code. Subsequently, in compliance with the requirement of regulation 18 of 3
the takeover code, the appellants, through their merchant banker, filed the draft letter of
offer with the Securities and Exchange Board of India (the Board) on April 15, 2011. - It is the case of the appellants that the promoter group sellers of the target
company have been the controlling shareholde rs and had extensive participation in the
management and operation of the target comp any for a substantial period of time and
have gained deep knowledge of the paper and pulp industry in India and experience in
the business and affairs of the target compa ny. Being the controlling shareholders and
having knowledge of business of the target company, each of the promoter group sellers
of the target company are capable of offering competition. In consideration for the non-
compete undertakings of the sellers as set out in the SPA as well as in the Non-Compete
Agreement, the appellants agreed to pay an aggregate amount of2,77,95,30,000 to the promoter group sellers as non-compete fee. The said non-compete fee, to be paid to the promoter group sellers, comes to130.74 per share. The non-compete fee is within
the limits of 25% of the offer price arrived at in accordance with the provisions of the
takeover code. The non-compete fee was to be paid to the promoter group sellers in the
proportion set out below:
PURCHASE PRICE AND NON-COMPETE FEE TO EACH SELLER
No. Name of the Seller Purchase Price
(INR)
Non-Compete
Fee (INR)
Consideration
(INR)
1 LAKSHMI NIWAS
BANGUR
224,510,302 56,123,283 280,633,585
2 LAKSHMI NIWAS
BANGUR (LN Bangur
Family Welfare Trust)
4,231,070 1,057,687 5,288,757
3 ALKA DEVI BANGUR 70,940,766 17,733,835 88,674,601
4 YOGESH BANGUR 95,545, 824 23,884,629 119,430,453
5 SHREEYASH BANGUR 40,573,817 10,142,678 50,716,495
6 SURBHI BANGUR 43,317,475 10,828,541 54,146,016
7 SHREEYASH BANGUR (on
behalf of Anica Bangur Trust)
14,644,000 3,660,720 18,304,720
8 APURVA EXPORT PVT.
LTD.
119,118,480 29,777,342 148,895,822
9 DIGVIJAY INVESTMENTS
LTD.
5,136,914,368 1,284,126,926 6,421,041,294
10 THE PERIA KARAMALAI
TEA
639,677,639 159,907,179 799,584,818
11 AMALGAMATED
DEVELOPMENT LTD.
7,842,908 1,960,577 9,803,485
12 M.B.COMMERCIAL CO.
LTD.
102,874,623 25,716,689 128,591,312
13 PLACID LIMITED 72,145,758 18,035,060 90,180,818
14 THE SWADESHI
COMMERCIAL CO. LTD.
8,514,440 2,128,447 10,641,887
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15 MUGNEERAM
RAMCOOWAR BANGUR
7,862,782 1,965,545 9,828,327
16 SHREE KRISHNA AGENCY
LTD.
1,344,110 336,002 1,680,112
17 THE KISHORE TRAIDNG
CO. LTD.
3,405,776 851,379 4,257,155
18 THE GENERAL
INVESTMENT CO. LTD.
1,880,708 470,141 2,350,849
19 SAMAY BOOKS LTD. 21,046,566 5,261,239 26,307,805
20 MAHARAJA SHREE
UMAID MILLS LTD.
4,502,592,772 1,125,562,101 5,628,154,873
Total 11,118,984,184 2,779,530,000 13,898,514,184
- The key terms and conditions of the non-compete agreement as stated in the
appeal memo are reproduced hereunder for ease of reference: “2. COVENANTS
2.1 Non-Compete Obligations
Each of the Sellers hereby agrees and undertakes that for the
period commencing on the Effective Date and ending on the
date that is 3 (three years) from the Effective Date (the
“Restricted Period”), he or she shall not, have the right to
carry on the Business and in connection therewith shall not,
directly or indirectly, either individually or in partnership
with, as part of a joint venture with, or otherwise in
conjunction in any other manne r with any other Person and
without prejudice to, or in any manner diluting, the generality
of the foregoing, the Sellers’ shall not:
(a) Own, manage, operate, join, establish, develop, carry on,
or participate in the ownership, management, operation or
control of, or be otherwise connected in any manner with;
or assist in carrying on or be engaged in, any business that
is the same or similar to the Business and/or which
competes with the Business of the Company or the
Purchaser in any manner whatsoever, including, without
limitation, as an employer, employee, owner, partner,
consultant, adviser, principal, agent, stockholder,
member, trustee or proprietor, or otherwise;
(b) render any services or advise, assist, aid in establishing
managing, operating, providing or developing or act as
consultant or professional a dvisor to any Person engaged
in any activity anywhere in India which is the same as
and/or similar to the Business and/or which competes
with the Business of the Company or the Purchaser, either
on its own account or on be half of any other Person
whether as an agent, licensee, advisor, consultant or under
any other relationship;
(c) provide any technical know-how, expertise or any
information in any manner or form whatsoever for the
purpose of and/or relating to the manufacturing, selling,
supplying, marketing or distributing of products or
services constituting part of any business anywhere in
India that is the same as and/or similar to the Business or
which competes with the Business;
(d) advise, consult with, invest in, lend money to, guarantee
the debts or obligations of, or otherwise have any other
financial interest in any Person engaged in any manner
whatsoever in any business that is the same or similar to
the Business and/or which competes with the Business of
the Company or the Purchaser, other than wholly-passive
investments in any such Person that is publicly-traded,
5
provided that, the Company’s ownership of any such
publicly-traded Person shall not exceed one percent 1%;
(e) deal with the clients, customers, suppliers of goods or
services, agents, consultants, contractors of, or any other
Person who has a business relationship with the Company
or the purchaser in any manner which may directly or
indirectly adversely affect the Business of the Company
or the Purchaser; or
(f) use or allow to be used any trade names, trademarks,
domain names used by the Company or any other name
intended or likely to be confused with such trade names,
trademarks or domain names.
The provisions of this Clause 2.1 are in addition to, and not in
lieu or limitation of, any legal or other contractual obligations
relating to non-competition that the Sellers may have to the
purchaser under the Share Purchase Agreement; and in each
case, without prejudice to the aforesaid, shall not be entitled,
and shall be deemed to have waived, its right to carry out any
of the foregoing activities in relation to the Business during
the Restrict Period.
2.2 C o n f i d e n t i a l it y
Each of the Sellers shall mainta in and cause to be maintained
strict confidentiality by them and their Affiliates, of all
Confidential Information, data and materials relating to the
Business and affairs of the Company and shall not disclose to
anyone, after the Effective Date, such Confidential
Information, data and materials without the prior written
permission of the Purchaser. All such Confidential
Information, data and materials relating to the Business and
affairs of the Company that the Sellers are in possession of
shall be given to the Purchaser on, or immediately after the
Effective Date, and the Sellers shall deliver a certificate to the
Purchaser certifying as to such delivery except where such
information is required to be kept with the Sellers under
Applicable Law or under an order or judgment of a court.
In the event any Confidential Information is required to be
disclosed by the Sellers:
(a) in response to any summons or subpoena or in connection
with any litigation; or
(b) to comply with any Applicable Law, order, judgement,
regulation or ruling.
the Sellers shall promptly notify the Purchaser in writing of
the same and of the action which is proposed to be taken in
response and in such case, the Sellers shall only be entitled to
disclose Confidential Information to the extent that (i) the
Purchaser has consented to (which consent shall not be
unreasonably withheld by the Purchaser), or (ii) the Sellers
are advised by their legal advisers that the Sellers are required
to disclose, in which case th e Sellers will use commercially
reasonable efforts to disclose only the minimum Confidential
Information required to comply with the Applicable Law,
rule, regulation, bye-laws, or or der of any court, tribunal or,
governmental or regulatory body.
The obligations of confidentiality shall not apply to any
information that has become ge nerally available to the public
for reasons other than the breach of any of the confidentiality
obligations contemplated unde r this Agreement by the
Sellers.”
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In addition, the SPA dated March 29, 2011 also makes provisions in this regard and the
relevant provisions of the agreement are reproduced hereunder for ease of reference:
“6. NON-COMPETE
6.1 The Sellers acknowledge and agr ee that due to the nature of
their association with the Company they have confidential and
proprietary information related to the Business and operations
of the Company. The Sellers acknowledge that such
information is of material to the Business, and will continue
to be so after the consummation of the transactions
contemplated herein, and that disclosure of such confidential
information to others, especially the Company’s existing
and/or potential competitors, or the unauthorized use of such
information by others would cause substantial loss and harm
to the Company. In addition, the Sellers acknowledge that
they are capable of offering competition to the Business and
the Company and, if the Sellers were to become substantially
involved in any of the activities detailed in the Non-compete
Agreement, such involvement would present a substantial risk
of using the Company’s trade secrets and confidential
information and would have a detrimental effect on, and cause
irreparable harm to the Business.
6.2 The Sellers undertake, jointly and severally, that from the date
of this Agreement and for a period of 3 (Three) years
following the Closing Date, none of them shall compete with
the Business or any of the Purchaser Group Members or their
Affiliates carrying on the same business in any manner as
more particularly set out in the Non-Compete Agreement.
6.3 Each of the Sellers hereby agrees and undertakes that on and
from the Closing Date and during the period of 3 years from
Closing Date, he/she/it shall not, directly or indirectly, by
itself or in association with or through any Person, either
individually or in partnership with, as part of a joint venture
with, or otherwise in conjunction in any other manner with
any other Person in any manner whatsoever:
(a) induce or attempt to induce any Person to leave the
employment of the Company, or employ or attempt to
employ any Person, who is or has been a Key Employee
of the Company since the date of execution of this
Agreement; or
(b) induce or attempt to induce any Person, who is or has
been at any time since the date of execution of this
Agreement a supplier of goods or services to the
Company, to cease to supply, or to restrict or vary the
terms of supply, to the Company; or
(c) canvass or solicit, or attempt to canvass or solicit, orders
from any Person who is or has been at any time since the
date of execution of this Agreement, a customer of the
Company for any of the products supplied by the
Company as part of its Business, or persuade such
customer to cease doing business or to reduce the amount
of business which any such customer has been doing or
might propose to do with the Company.
(d) Solicit, or attempt to solicit in any manner, any Person to
invest in the Company or any client/customer of the
Company, or in business of the type of or similar to the
Business of the Company.
6.4 The Sellers acknowledge and agree that the restrictions in
Clause 6.1, 6.2 and 6.3 and the Non-Compete Agreement are no more
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extensive than what is reasonable to protect the Purchaser as the
purchaser of the Sale Shares, the Purchaser Group Members and their
Affiliates, the Company and the continuing shareholders, the Business
and goodwill of the Company bein g acquired by the Purchaser as a
consequence of the purchase of the Sale Shares.”
- The Board called for further clarificat ions from the appellants on the issue of
non-compete fee to the promoter group sellers which were pr ovided from time to time
and after considering the said information, the Board, vide its letter dated August 3,
2011, conveyed its comments on the draft letter of offer and, inter alia, asked the
appellants to revise the offer price from544.20 to674.93, i.e., by adding the amount
of ` 130.73 in the offer price, being paid to the promoter group sellers as non-compete
fee, for the reasons stated below:
“i. Out of the twenty promoter entities, only five entities (i.e. Mr.
L.N. Bangur, Ms Alka Bangur, Mr. Shreeyas Bangur and two
HUFs whose Kartas are Mr. L.N. Bangur and Mr. Shreeyash
Bangur) are eligible to get the non-compete fees.
ii. From the details furnished by MB, we have noted that apart
from the aforesaid entities, the other promoter sellers i.e. 13
companies and two individuals (Mr. Yogesh Bangur and Ms.
Shrbhi Bangur) are not eligible to get the non-compete fee for
not competing with the acquirer/Target company as they do
not have any experiences/expertise in the area of operation of
the Target Company and are therefore not capable of offering
any competition. They are mere shareholders of the target
company. As regards the 13 companies, none of them are in
the business of pulp and paper manufacturing which is the
product line of the Target Comp[any. Furthermore, they don’t
to even have such business obj ectives in their main object
clause. Further, the two individuals (i.e. Mr. Yogesh Bangur
and Ms. Surbhi Bangur) are getting the non-compete fee
merely for being the relatives of the Mr. L.N.Bangur who is a
director of the target company, which does not seem to be
logical.
iii. Further, the MB has failed to furnish sufficient justification as
to why the aforesaid 15 members of the promoter group are
getting the non-compete fees.
iv. It has been submitted by the acquirer/Merchant Banker that
the acquirer on the ground of prudence and good corporate
practice has decided to pay the exclusivity fees (i.e. the fees
paid to the promoter group sellers for not to solicit acquisition
proposals from, or enter into any negotiations with, any party
other than the acquirer in relation to the sale of shares held by
them in target company) to all the public shareholders. The
\acquirer/Merchant Banker has failed to justify why the same
logic has not been used while paying a different price per
share (without the non-compete fee) to all the public
shareholders.”
- The appellants are aggrieved with the aforesaid observations made by the Board
under which, out of 20 promoter group selle rs, the Board has stated that only 5 8
individuals are eligible to get the non-comp ete fee and further dire ction to revise the
offer price by adding the non-compete fee. - We have heard Mr. Janak Dwarka das, Senior Advocate and Mr. Zal
Andhyarujina, Advocate for the appellants and Mr. Kumar Desai, Advocate for the
respondent Board, who have take n us through the records. It is vehemently argued on
behalf of the appellants that the Board has incorrectly observed that out of 20 promoter
group sellers, only 5 individuals are eligible for payment of non-compete fee and that
the remaining 15 promoters, 13 of which are corporate entities and two individuals are
not capable of offering any competition. It was submitted on behalf of the appellants
that the Board has misdirected itself in co ming to the conclusion that two individuals
namely, Yogesh Bangur and Surbhi Bangur are not eligible to be paid non-compete fee
as they are mere shareholders in the target company and relatives of L.N. Bangur. It
was submitted that these two promoter group se llers are part of the Bangur family and
by virtue of their being associated with the management of the target company and
being shareholders in the ot her corporate entities, they have acquired considerable
knowledge of the pulp and paper industries an d, are therefore, cap able of competing
with the business of the target company. The extended Bangur family has been for a
long period of time associated with the pulp and paper business and there is no basis for
creating a distinction between these two indi viduals and the other individual promoter
entities who have been found to be eligible for non-compete fee. These two individuals
are qualified individuals and are capable of setting up new competing business. - It was further submitted on behalf of the appellants that the Board has also
misdirected itself in coming to the conclusion that the 13 corporate promoter entities are
not entitled to non-compete fee as none of them are in the business of manufacturing
and/or sale of pulp and paper. According to the appellants, these 13 promoter group
sellers have substantial shareholding in th e target company and have been involved in
the business and operations of the target co mpany for a substantia l period of time.
These corporate promoter group sellers, by vi rtue of being business entities, with the
prime object of working for profit and being privy to confidential information about the 9
business of the target company, are capable of offering formidable competition.
According to the appellants, the non-comp ete agreement does not merely prohibit the
promoter group sellers from co mpeting with the target comp any, it also prohibits each
of the promoter group sellers from indirectly competing with the business of the target
company, including investing in any business which is capable of competing with the
business of the target comp any. It was further submitted that the impugned order is
contrary to the takeover code and does not provide detailed reasons for not allowing
payment of non-compete fee to all the promoter group sellers. - The leaned counsels for the appellants further submitted that payment of non-
compete fee to each of the promoter group selle rs protects the continuing shareholders
of the target company by restricting poten tial competition from the promoter group
sellers. It was also submitted that the Bo ard cannot direct the appellants to make
payment of non-compete fee only to certai n promoters to the exclusion of other
promoters. Merely restraining selected individual promoters will not ensure that the
corporate promoters would also automatically be restrained from competing with the
business of the target company. Each of the corporate promoters, although closely held
in family business, is a separate and dis tinct legal entity in its own rights and non-
compete covenant agreed to by an individual promoter w ill not necessarily bind other
independent corporate entities forming part of the promoter group sellers. - Learned counsel for the appellants also relied on th e orders passed by this
Tribunal in the case of Tata Tea Limited v. Securities and Exchange Board of India
[Appeal no. 136 of 2008 decided on 15.9.2009], Ce mentrum IB. V. v. Securities and
Exchange Board of India [Appeal no. 28 of 2008 decided on 8.7.2008], and E-Land
Fashion China Holdings Limited v. Securities and Exchange Board of India [Appeal no.
27 of 2011 decided on 24.5.2011], and submitted that the Board would have no
occasion to interfere if payment is made to the outgoing seller within the limits
prescribed under the regulation and is made to a seller who can offer competition to the
business of the target company. It was further submitted that while examining the
validity of the non-compete fee, the question to be addressed is whether the outgoing 10
sellers are capable of providing competition to the business, alone or in association with
other parties. According to them, the pr omoter group sellers, being a part of the
management of the target company, have the capacity and capability to offer formidable
competition and are thus eligible for the non-compete fee and therefore, the Board erred
in making observations to the contrary. - Mr. Kumar Desai, learned counsel for the respondent Board supported the
observations made by the Board in the impugned letter and submitted that on the basis
of information provided, the Board is entitl ed to determine whether a person is capable
of competing or not and whether payment of non-compete fee, payable to the promoter
group sellers, was only a device to reduce the price payable to the other shareholders.
According to the learned counsel for the Board, non-compete fee is payable to a person
who, after selling shares in the company, is capable of setting up the same business
which will compete with the business of the company whose controlling shares were
sold by him. He has drawn our attention to the terms of the share purchase agreement
and submitted that the covenants for which the non-compete fee was payable were set
out in two clauses which include non- compete obligations, maintenance of
confidentiality and handing ove r the said confidential info rmation. According to the
learned counsel for the Board, maintena nce of confidentiali ty and non-compete
obligations are separate and distinct covenants though related to each other, which are
normally supported by separate and inde pendent considerations. Non-compete
agreement does not segregate the amount payable for non-compete and the amount
payable for delivery of the said confidential information. According to him, access to
the confidential information related to the business and affairs of the target company
will be available only with those persons who are handling day to day affairs of the
target company and could not possibly be ava ilable with all the promoters of the target
company who are mere shareholders of the co mpany like any other shareholder. It is
only those persons, who could have access to the information relating to the business or
affairs of the target company and would be in a position to compete with the target
company by setting up rival business, who would be entitled to non-compete fee and
not any other shareholder of the company. It was further submitted by him that the 11
information made available by the appellants through its merchant bankers was
examined by the Board and it is only after examining that information that the Board
came to the conclusion that only 5 individuals are entitled to non-compete fee and the
remaining two individuals and 13 companies, though part of promoter group, are not in
a position to offer competition to the targ et company and hence not entitled to non-
compete fee. It was further submitted by him that Yogesh Bangur and Surbhi Bangur
who were shareholders of the target comp any and part of the promoter group sellers,
were only family members of L.N. Bangur and were not directors of the target company
or involved in day to day business of the targ et company. Both of them are being paid
non-compete fee. On the other hand, Mrs. Sh eetal Bangur, who is one of the directors
of the target company and into day to day business of the company, is not being offered
any non-compete fee. Similarly, 13 compan ies which are promoter group sellers are
into different types of business which has nothing to do with the business of paper and
pulp and are not into day to day business of the target company and so are not capable
of offering any competition to the target company. It was therefore submitted that in the
facts and circumstances of the present ca se and keeping in view the terms and
conditions of the non-compete agreement and the information supplied by the merchant
bankers, the Board came to the conclusion that from the promoter group sellers, only
those promoters who are directors of the company and who are carrying on the business
of the company and consequently had nece ssary knowledge, experience and expertise
relating to the business of the company we re entitled to non-compete fee. These
persons were identified by the Board as L. N. Bangur, his wife Mr s. Alka Bangur, his
son Shreyas Bangur, and two HUFs wherein L. N. Bangur and his son Shreyas Bangur
were the kartas. If the total non-compete fee of2,77,95,30,000 was to be divided amongst these persons, the price per share would come to4096. Therefore, the
Board has rightly directed the appellants to add130.73 per share, being the non- compete fee, to the offer price of544.20 as a non-compete fee payable which would
be much above the 25% limit prescribed under regulation 20(8) of the takeover code. 12 - Before we deal with the respective conten tions of the parties, it is necessary to
look at the relevant provisions of regulation 20 of the takeover code which deal with the
offer price in a public announcement. “Offer price.
20.(1) The offer to acquire shares under regulation 10, 11 or 12 shall
be made at a price not lower than the price determined as per sub-
regulations (4) and (5).
2……………………………………………….
3…………………………………………………………
(4) For the purposes of sub-regulation (1), the offer price shall be
the highest of-
(a) the negotiated price under the agreement referred to in sub-
regulation (1) of regulation 14:
(b) price paid by the acquirer or persons acting in concert with
him for acquisition, if any, including by way of allotment
in a public or rights or preferential issue during the twenty-
six week period prior to the date of public announcement,
whichever is higher;
(c) the average of the weekly high and low of the closing
prices of the shares of the target company as quoted on
the stock exchange where the shares of the company are
most frequently traded during the twenty-six weeks or the
average of the daily high and low of the prices of the
shares as quoted on the stock exchange where the shares
of the company are most frequently traded during the two
weeks preceding the date of public announcement,
whichever is higher.
5………………………….
6…………………………………….
7……………………………………………..
8.Any payment made to the persons other than the target company in
respect of non-compete agreement in excess of twenty-five per cent of
the offer price arrived at under sub-regulation (4) or (5) or (6) shall be
added to the offer price.”
It will be seen that sub-regulation (1) of regulation 20 of the takeover code thereof
provides that the offer to acquire shares under regulation 10, 11 or 12 shall be made at a
price not lower than the price determined as per sub-regulations (4) & (5) thereof. It is
not in dispute that the price of ` 544.20 arrived at by the appellant is in conformity with
the said provisions. However, sub-regulat ion (8) thereof further provides that any
payment made to a person other than the target company in respect of non-compete
agreement in excess of 25% of the offer price arrived at under sub-regulation (4), (5) or
(6) shall also be added to the offer price.
13
- This Tribunal had occasion to deal w ith the provision of sub-regulation (8) in
the 3 cases referred to above (Cementrum IB.V., Tata Tea Ltd. and Eland Fashion
China Holding) and this is what the Tribunal had observed in the case of Tata Tea Ltd.
“5. The takeover code, as originally framed, did not contain any provision
governing the payment of non-compete fee by the acquirers to the sellers of
the business. The matter was referred to the Bhagwati Committee, which, on
a consideration of the issue, recognised that an acquirer may legitimately pay
non-compete consideration to the prom oter shareholder(s) and made the
following recommendations:-
“Parameters for determining offer price
On non-compete payment the Committee noted that there is a need to
address the situation specially where the acquirer passes on a significantly
large portion of the consideration to the outgoing promoter in the form of
non-compete fee and only a token amount is shown as negotiated price for
acquisition of shares under the agreement. The Committee felt that in such
cases the offer price does not truly reflect the actual consideration paid and
this could be used as a ploy for reducing the cost of acquisition through
public offer.
The Committee recommends that
Any payment in respect of non-compete agreement in excess of 25% of
consideration paid to persons other than the target company shall be deemed
to form part of the consideration paid for acquisition of shares and should be
factored in for the purpose of reckoning offer price.”
These recommendations were accepted by the Board and Regulation 20 of
the takeover code was recast in Septem ber 2002 providing, inter alia, for a
regulatory framework for payment of non-compete fee. Clause (8) of
Regulation 20 was introduced for the first time with effect from 9.9.2002
and the same reads as under:-
“(8) Any payment made to the person s other than the target company in
respect of non-compete agreement in excess of twenty five per cent of the
offer price arrived at under sub-regulation (4) or (5) or (6) shall be added to
the offer price.”
A bare reading of the aforesaid provision makes it clear that any payment
made to persons other than the targ et company in respect of non-compete
agreement in excess of 25 per cent of th e offer price shall be added to the
price to be offered to all the shareholders. While looking into the
justification for the non-compete co nsideration, scrutiny by the Board
cannot be ruled out though in inquiring into the rationale for allowing
such fee to the promoter sellers, it would hardly have any role to play.
To elaborate, if the non-compete fee is 25 per cent or less, the question
whether it could be added to the offer price or not will have to be
determined by the Board in the lig ht of the facts of each case.
Supposing, the fee is paid to a perso n who cannot compete, the Board
may be entitled to say that it is only a device to reduce the offer price.
In such a case the Board may justifiably direct its addition to the offer
price. On the other hand, if the payment is made to an outgoing seller
who can offer competition to the business of the target company, the
Board shall have no occasion to interfere. (emphasis supplied)
- The recommendations made by the Bhagwati Committee clearly
recognise the legitimacy of the non- compete fee payable to the outgoing
sellers. Regulation 20(8) based on these recommendations puts a cap on
such payments so that an acquirer c ould not reduce the cost of acquisition
through public offer thereby deprivin g the public shareholders of their
legitimate dues. When examining the validity of the non-compete fee, the 14
question to be addressed is whether the outgoing sellers are capable of
providing competition to the business alone or in association with third
parties and not whether the business was dependent on the outgoing
sellers. (emphasis supplied) When an acquirer takes over a business from
the outgoing seller(s), it is obvious that the sellers have specific knowledge
of that business and have access to and are in possession of crucial trade
secrets of the target company which if disclosed or misused would be
detrimental to and could cause irrepara ble harm to the target company and
its continuing shareholders and by vi rtue of their association with that
business, they (out going sellers) are capable of offering competition to the
business being taken over. In such cases, it would be legitimate for the
acquirer to enter into a non-compete agreement with the promoter sellers if
he feels threatened by a lurking fear of competition from them. It is neither
for the Board and not even for this Tr ibunal to analyse the threat perception
of the acquirer. We are of the view that a non-compete agreement would
then protect not only the target company but also its continuing shareholders.
An acquirer has a right to protect his investment/business from competition
by a seller of the business and this right is a long standing customary
element in business sale transactions and is even recognised by law. Section
27 of the Contract Act recognises that non-compete agreements are not in
restraint of trade if the restrictions placed are reasonable. The Law of
Contract (Treitel, Sweet & Maxwell) 11 th Edition at page 455 after relying
on Connors Bros. Ltd & Ors. vs. Connors succinctly states the law as under:-
“A person who sells shares in a compan y which he controls may covenant
not to compete in respect of the business carried on by the company. Such a
covenant may be valid if it was in substance the seller who, through his
control of the company, carried on the business”.
Again, the terms of the non-compete agreement have necessarily to be
decided between the acquirer and the outgoing promoter sellers and based as
they are, on business considerations, the Board and this Tribunal have no
role to play. However, if they agr ee to fix the non-compete fee in excess of
25 per cent of the offer price as determ ined under sub-regulations (4) or (5)
of Regulation 20 of the takeover code, the amount in excess of 25 per cent of
the offer price shall be added to the of fer price which shall be offered to all
the public shareholders.”
While deciding the appeal in the case of Cementrum IB. V. (supra), this Tribunal had
observed that the question of non compete fee – whether it should be paid and if so how
much – is primarily a matter to be decided by the acquirer and the target company in the
facts and circumstances of each case. The onl y restraint placed by the takeover code on
the matter is that the quantum of fee cannot exceed 25% of the offer price. It was also
observed by the Tribunal that the mischief of excessive non compete fee is sought to be
curbed in the takeover code by limiting th e quantum of non compete fee. Although the
question whether further scrutiny into the justification for such fee in any given case can
be undertaken by the Board was raised in th at appeal, the Tribunal did not consider it
necessary to attempt a general response to that question. However, in the case of Tata
Tea Limited (supra), this Tribunal had specifically observed that while looking into the
justification for the non compete considera tion, scrutiny by the Board cannot be
ruled out. It was further observed by the Tribunal that if the fee is paid to a person
15
who cannot compete, the Board may be entitled to say that it is only a device to
reduce the offer price and in such a case the Board may justifiably direct its
addition to the offer price. On the oth er hand, if the payment is made to an
outgoing seller who can offer competition to the business of the target company,
the Board shall have no occasion to interf ere. The question to be addressed is
whether outgoing sellers are capable of providing competition to the business,
alone or in association with third pa rties and not whether the business was
dependent on the outgoing seller. (emphasis supplied)
- In the case in hand, we find that the material made available by the appellants
through its merchant banker and the clarifications furnished by them were examined by
the Board and the Board came to a definite conclusion that none of the 13 promote
group seller companies carried on the business of paper and pulp which was the product
line of the target company. It also came to the conclusion that there is no object clause
in the memorandum of association of any of the said 13 promoter group sellers which
permits them to carry on the business carried on by the target company. It was further
noted that one of these 13 companies is onl y a charitable and religious trust namely,
Mugneeram Ramcoowar Bangur Charitable an d Religious Trust which had nothing to
do with the pulp and paper business carried on by the target company and, therefore, not
in a position to offer any competition to the target company. Yet another company
namely, Samay Books Limited is in the business of printing and publishing and yet
another company Maharaja Shree Umaid Mills Ltd. was carrying on business as
composite textile mill which could not have the necessary knowledge or experience
relating to paper and pulp business and therefore not capable of offering any
competition to the target company. We have also looked into the information provided
by the merchant banker to the Board. With regard to the justification sought by the
board for non-compete fee to these thirteen corporate entities, we find that the merchant
banker has stated primary reasons for ente ring into a non-compete agreement with the
promoter group sellers as: 16
“1. Promoter Group Sellers have substantial experience and
understanding of the paper industry in India. As such, their
competency and ability to compete with APPM, the Acquirer and
the PAC is, in our view, not in doubt.
- By virtue of their association with APPM (their affiliation with
APPM began in 1981) and knowledge of its business,
understanding of the market, access to market information and
industrial connections, the Promoter Group Sellers are capable of
offering competition to the Business of APPM, which could
cause irreparable harm to APPM. - The Promoter Group Sellers have acknowledged and agreed
under the Non Compete Agreement that as controlling
shareholders of APPM and by thei r extensive participation in the
management and operations of A PPM for a substantial period of
time, they have acquired comprehensive expertise of the Business
and the crucial trade secrets of the Company, and have been in
possession of the confidential information relating to the
Company and the Business. The Promoter Group Sellers have
further acknowledged that by virtue of their association with the
Company and by using their expertise and confidential
information belonging to the Company, they are capable of
offering competition to the Busi ness of the Company, which
could cause irreparable harm to the Company, its continuing
shareholders and the Acquirer.”
The information about the current business of 13 promoter group en tities, as provided
by the promoter group sellers, is as under:
“Summary Statement providing Current Business
Srl.
No.
Name of the Company Current Business
1) Apurva Export Pvt. Ltd : To trade and Invest in Shares & Securities and
grant loan
2) Digvijay Investments Ltd. : To Invest in Shares and Securities and grant loan
3) The Peria Karamlal Tea &
Produce Co. Ltd.
: To Plant, Grow and Produce Tea, Produce Co. Ltd.
To Generate Wind Energy and To Invest in Shares
and Securities and grant loan.
4) Amalgamated Development : To Tr ade in Land and Shares and Limited
Securities and grant loan.
5) M.B. Commercial Co. Ltd. : To Trade in Shares and Securities and Land and
Landed Property
6) Placid Limited : To Trade & Invest in Shares & Securities and Land
& Landed Property.
7) The Swadeshi Commercial : To Trade in Paper and Invest in Company Limited
Shares and Securities. To Acquire and grant
Landed Property on Rent
8) Mugneeram Ramcoowar
Bangur Charitable and
Religious Company
: To grant Charity and Donation for Charitable and
Religious purpose and to invest in shares and
securities.
9) Shree Krishna Agency Ltd. : To invest in Shares and Securities and Land &
Landed Property and grant loan
10) The Kishore Trading Co. Ltd. : To trade in Paper and Shares & Securities.
11) The General Investment Co.
Ltd.
: To invest in Shares and Securities
To acquire and grant landed property on rent
12) Samay Books Limited : Printing and Publishing and to invest in Shares and
Securities
13) Maharaja Shree Umaid Mills
Ltd.
: A Composite Textile Unit for manufacturing
Cotton and Blended Fabrics and Yarn and Invest in
Shares and Securities.”
17
Information made available to the Board with regard to 13 corporate promoter group
entities shows that they are directly or indirectly controlled by the same promoter group
and held significant equity share capital in each of the said companies but that by itself
does not indicate that these promoter group co mpanies which are into separate business
are either involved in day to day business of the target company or are capable of
competing with the business of the target company providing a threat perception to the
business of the appellants. It was for th e promoter group sellers and its merchant
bankers to place material on record about the capacity of these promoter group
corporate entities to compete with the business of appellant s or their involvement into
day to day business of the target compa ny. The information made available by the
merchant banker, as noted above, are only bald statements and it does not disclose as to
how these entities are privy to the information relating to the target company. Even the
information made available with regard to current business of these entities does not
make us any wiser as to how they are in a position to offer competition to the business
of the target company.
As the promoter group sellers have failed to place sufficient material before the Board
in this regard, we cannot find any fault with the conclusions arrived at by the Board that
payment of non-compete fee is a sham depriv ing other shareholders of their rightful
claims to get just price for their shares.
- It is also surprising to note that tw o of the family members of Mr. L.N. Bangur
namely, Yogesh Bangur and Surabhi Bangur , who were only shareholders of the
company are being offered non-compete fee bu t no non compete fee is offered to Mrs.
Sheetal Bangur, another family member of L.N. Bangur although she is a director of
the target company and involved in the day to day business of the target company. It
was argued on behalf of the appellants that no such reason was given in the impugned
order and consequently the appellants had no opportunity to submit their case on this
point and, in any event, the argument made is purely speculative without reference to
the facts concerning Sheetal Bangur’s position in the target company. 18 - We are unable to accept this argument of th e appellants. It is very much in the
knowledge of the appellants and it is a matter of record that Sheetal Bangur is one of the
directors on the board of the target company and she is not being paid non-compete fee.
Be that as it may, the promoter group seller s have not placed any material on record
either before the Board or before this Tri bunal to show that Yogesh Bangur and Surbhi
Bangur were either involved in day to day business or are capable of competing with the
business of the target company or are even capable of giving threat perception to the
appellants or existing shareholders of th e company. We cannot find fault with the
finding of the Board that they are not enti tled to non-compete fee merely because they
are family members of L.N. Bangur or belonged to the promoter group. - Here we may note another argument advan ced by the parties. It was argued by
the learned senior counsel for the appellants that the covenants in the non-compete
agreement provide for both non-compete ob ligations as well as an obligation to
maintain confidentiality. According to him, it is necessary and advisable to do so as a
non-compete obligation without a corresponding obligation to maintain confidentiality,
would render any non-compete agreement ine ffective. Therefore, the promoter group
entities are being paid non-compete fee for non-compete obligations as well as for
maintenance of confidentiality. Learne d counsel for the Board submitted that
maintaining confidentiality and non-compete are two distinct and separate covenants
though related to each other which are normally supported by separate and independent
considerations. The non-compete agreemen t entered into between the appellant and
promoter group sellers does not segregate the amount payable from non-compete fee
and the amount payable for delivery of the confidential information. - We are of the view that this issu e needs no elaborate consideration for two
reasons. One, it is settled legal positio n that non-compete obligations without a
corresponding obligations to maintain c onfidentiality would render any non-compete
agreement ineffective. That is why even learned counsel for the Board very fairly stated
that the two are related to each other. Secondly, in the case in hand, we have come to
the conclusion that in spite of information sought by the Board, the appellants/promoter 19
group sellers or their merchant bankers have failed to place sufficient material on record
to justify payment of non-compete fee to 15 entities on the basis of principles laid down
in earlier orders of this Tribunal referred to above. Hence the Board was justified in
making the impugned observations.
We, therefore, do not find any merit in the appeal and the same is dismissed with
no order as to costs.
By an interim order dated August 11, 2011, we had directed the appellants to
deposit in an escrow account a sum calculated on the basis of ` 130.73 per share
payable under the open offer to the public shareholders and the appellants were allowed
to go ahead with the open offer. The appellants may now pay the balance amount to the
shareholders who had offered their shares in the open offer, within a period of six weeks
from the date of this order.
Sd/-
P. K. Malhotra
Member &
Presiding Officer ( Offg.)
Sd/-
S.S.N. Moorthy
Member
12/9/2012
ddg
After we have pronounced the order, learned counsel for the appellant prays that
the operation of this order may be stayed for a period of four weeks to enable the
appellant to explore the possibility of f iling appeal before the Supreme Court. The
prayer is granted.
Sd/-
P. K. Malhotra
Member &
Presiding Officer ( Offg.)
Sd/-
S.S.N. Moorthy
Member
12/9/2012
Prepared & compared by-ddg