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Case Abstract:

Target Company:

Zenotech Laboratories (ZLL) was incorporated in 1989, and engaged in the business of developing and manufacturing bio pharmaceuticals and generic chemical products. ZLL is a specialty generic injectables company with expertise in the area of bio-technology. ZLL’s injectables product portfolio primarily serves niche therapy areas like oncology and anaesthesiology. It has R&D facilities in India and the U.S., and it has manufacturing facilities located near Hyderabad.

Acquirers:

Daiichi Sankyo was established in the year 2005 as a joint holding company of Sankyo Co., Ltd. and Daiichi Pharmaceutical Co., Ltd. Thereafter in the year 2007, Sankyo Co., Ltd. and Daiichi Pharmaceutical Co., Ltd. merged into Daiichi Sankyo. Daiichi Sankyo is engaged in the business of research and development, manufacturing, import, and sales and marketing of pharmaceutical products globally.

Sellers:

As a result of acquisition of its stake in Ranbaxy Laboratories Limited (RLL) together with the acquisition of control, the acquirer has indirectly acquired substantial shares in the Target Company.

Triggering event:

Ranbaxy-Zenotech Deal:
On October 03, 2007, “RLL” entered into share purchase agreement with the promoters of “ZLL” for acquiring 27.35% shares of “ZLL” at a price of Rs.160 per share. Further, on the same day, the Board of Directors of “ZLL” has agreed to issue 54,69,538 Equity Shares to “RLL” at a price of Rs.160 per share. Pursuant to the above acquisition, RLL made the public announcement to the shareholders of “ZLL” to acquire upto 20% shares at a price of Rs.160 per share which closed on January 15, 2008 and the last date for payment is January 28, 2008. On the completion of above acquisition, “RLL” holds 46.79% shares of “ZLL”.

Ranbaxy-Daiichi Deal:
On June 11, 2008, the acquirer has entered into share purchase and share subscription agreement with the promoters of “RLL” and “RLL” to acquire 34.81% stake of the paid up capital of “RLL” at a price of Rs.737 per share. Further, the agreement also provides the allotment of 46,258,063 (11.03%) Equity Shares and 23,834,333 warrants of RLL to acquirer at a price of Rs.737 per share.
Pursuant to the above acquisition, on June 14, 2008, the acquirer has given public announcement to the shareholders of “RLL” to acquire 20% of paid up capital of RLL at a price of Rs.737 per share. As a result of the above, on October 20, 2008, the Acquirer holds 52.5% of “RLL” and “RLL” became the subsidiary of the Acquirer. The remaining 48,020,900 equity shares held by the Sellers were acquired by the Acquirer on November 7, 2008, taking the shareholding of the acquirer to 63.92%.
Daiichi acquisition of ZLL:
As on October 20, 2008, “RLL” held 46.85% shares of “ZLL”, thus, as a result of acquisition of RLL, the acquirer has indirectly acquired 46.85% shares of “ZLL”.

Offer Details:

In terms of SEBI Takeover Regulations, the acquirer has given an open offer to the shareholders of “ZLL” to acquire up to 68,85,000 (20%) Equity Shares of the equity share capital of “ZLL” at a price of Rs. 113.62 per share. However, the offer ran into a controversy with regard to the determination of price offered by the acquirer to the shareholders of “ZLL”.

Legal Hurdles:-

1. In July, the Madurai bench of the Madras High Court had given a stay on the open offer, following complaints made by minority shareholders. However, Daiichi got relief from the Supreme Court to go ahead with the offer.
2. Dr. Jayaram Chigurupati and other shareholders of ZLL made a complaint to SEBI against Daiichi alleging the violation of SEBI Takeover Regulations in relation to the determination of offer price to be paid to the shareholders of “ZLL”. It has been alleged that Daiichi is required to make the offer at a price of Rs.160 per share being the price paid by the “RLL” to the shareholders of “ZLL” during the period between January 15, 2008 to January 28, 2008.

Appeal to SAT:

Against the above communication of SEBI, the complainant filed the appeal to SAT on two issues:
• The price offered by Daiichi was not in conformity with the SEBI Takeover Regulations;
• Open offer to the shareholders of “ZLL” was not made within the time as Daiichi was required to make the open offer to the shareholders of “ZLL” simultaneously with the offer made to the shareholders of “RLL”.
In the appeal SAT ordered the acquirer to revise the offer from Rs.113.62 per share to Rs.160 per share on the ground that “RLL” being person acting in concert with Daiichi, the price of Rs.160 paid by it to the shareholders of “ZLL” would also be considered while determining the offer price to be paid to the shareholders to “ZLL” by Daiichi. However, SAT rejected the second appeal and held that the offer by the acquirer to the shareholders of “ZLL” was well within the time.

Supreme Court Order:

Supreme Court of India has settled a long standing dispute between pharma major Daiichi Sankyo (“Acquirer”) and the minority shareholders of Zenotech Laboratories over the Open Offer Price to paid to the shareholders of Zenotech Laboratories Limited (“ZLL”) and ruled that the Offer Price of Rs.113.62 per share offered by the Acquirer was lawful and fair.

The Hon’ble Supreme Court of India ruled that:

1. The concept of ‘persons acting in concert’ under Regulation 2(e)(1) is based on a target company on one side, and two or more persons acting together with a common objective or purpose of substantial acquisition of shares etc. on the other. Without there being a target company, the concept of ‘persons acting in concert’ is meaningless – it would be as irrelevant “as a cheat with no one as a victim of his deception”.

2. As long as there is no shared objective of substantial acquisition of shares of a target company, there can be no question of persons acting in concert. Without there being such a common objective, the concept is again meaningless – it would be tantamount to being as meaningless as “criminal conspiracy without any agreement to commit a criminal offence”. ‘Persons acting in concert’ is not something which happens fortuitously or by accident or chance; it happens only be design.

3. Thus, for the concept of ‘persons acting in concert’ to be relevant, there must (a) be a target company, and (b) the persons must be acting with the shared common objective or purpose of substantial acquisition of shares in that target company.

4. The deeming provision of Regulation 2(1)(e)(2) of SEBI Takeover Regulations does not do away with any of these two elements. Regulation 2(1)(e)(2) is not a provision independent of Regulation 2(1)(e)(1); but the two must be read together. The deeming provision will have effect in cases where a company or its holding company “makes or agrees to make a move for substantial acquisition of shares etc. of a certain target company.” In such cases, “it would be presumed that the move is in pursuance of a common objective and purpose jointly shared by the holding company and the subsidiary company.”

5. But the mere fact that two companies are in a holding-subsidiary relationship would not mean, without anything more, that the two companies are ‘persons acting in concert’.

6. Furthermore, Regulation 2(1)(e)(2) does not create any stand-alone test; it merely creates a rebuttable presumption. This presumption does not operate retrospectively; it applies only from the date two or more persons come together in one of the relationships specified; and does not date back.

7. For the application of Regulation 20(4)(b), it is not relevant or material that the acquirer and the other person, who had acquired the shares of the target company on an earlier date, should be acting in concert at the time of the public announcement for the target company. The relevant time is the time of purchase of shares of the target company.