Daiichi Sankyo’s indirect acquisition

of shares in Zenotech Laboratories

through Ranbaxy Laboratories
under the SEBI (Substantial Acquisition of
Shares and Takeovers) Regulations

MBA Law 2020-22 | Trimester V | Financial Market Regulations

GROUP PROJECT

GROUP 3

A003 JOSEPH K ANTONY

A004 GOKUL R
A025 ABEL JOHN
A030 NANDAKISHORE S
 Table of Contents

SETTING THE CONTEXT ..................................................................................................... 3

Historical Introduction .................................................................................................................. 3

Introduction to the Takeover Code ............................................................................................. 4

INDIRECT ACQUISITIONS AS PER THE TAKEOVER CODE ..................................... 6

Categories of Indirect Acquisitions............................................................................................. 7

DAIICHI-RANBAXY-ZENOTECH DEAL .......................................................................... 8

Ranbaxy acquires stake in Zenotech ........................................................................................... 8

Daiichi Sankyo acquires controlling stake Ranbaxy ............................................................... 9

Indirect acquisition of Zenotech shares – Open Offer ............................................................ 9

Zenotech objects the Offer Price before SEBI and SAT ........................................................ 10

Zenotech appeal before Hon’ble Supreme Court ................................................................... 10

ISSUE BEFORE THE SUPREME COURT ........................................................................ 12

Controversy surrounding the offer price (under 1997 Takeover Code) ............................. 12

Supreme Court's interpretation of ‘persons acting in concert’ ............................................ 14

CONCLUSION ...................................................................................................................... 16

Later Amendments specific to Indirect Acquisitions ...................................................... 17

Plagiarism Report ................................................................................................................ 19

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SETTING THE CONTEXT

Historical Introduction
In accordance with international jurisprudence, the Securities and Exchange Board of
India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (‘Takeover
Code’) regulate the direct and indirect acquisition of stakes in Indian listed companies
and ensure transparency in the company's operations.

Additionally, the Takeover Code protects the interests of public shareholders by

requiring acquirers to provide an exit opportunity to public shareholders in the event
of a takeover or substantial acquisition.1

The Takeover Code evolved from the SEBI Act, 1992, which expressly mandated SEBI
to regulate significant acquisitions of shares and takeovers through appropriate
measures. SEBI established a legal framework in this regard by enacting the takeover
regulations, 1994, which took effect on November 4, 1994. SEBI appointed a committee
to review the 1994 takeover regulations in November 1995, chaired by Justice P.N.
Bhagwati (the Bhagwati Committee). 2 On February 20, 1997, SEBI notified the

1 Additionally, the Takeover Code aims to ensure that the Indian securities market is fair,
equitable, and transparent.
2 The aforementioned committee issued its report in January 1997.

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Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (‘1997 Code’),
repealing the 1994 takeover regulations.

In line with international practices, the evolution of the Takeover Regulations is

summarised in the time line as under:

The 1997 Code was amended on a periodic basis to reflect market developments,
regulatory and judicial rulings, as well as evolving global practises. In 2001, a
reconstituted committee chaired by Justice P.N. Bhagwati conducted a review of the
1997 Code. In May 2002, the reconstituted Bhagwati committee submitted its report.3

Introduction to the Takeover Code

Given the increasing level of M&A activity in India, the sophistication of the takeover
market, the decade-long regulatory experience, and numerous judicial
pronouncements, it was determined that a review of the 1997 Code was necessary.
SEBI, by order dated September 4, 2009, established the Takeover Regulations
Advisory Committee (‘TRAC’), chaired by Mr. C. Achuthan, with the mandate to
examine and review the 1997 Code and to recommend appropriate amendments. SEBI
implemented the Takeover Code, repealing the 1997 Code, with effect from October
23, 2011.

SEBI overhauled India's takeover regime and rewrote the rules governing public
M&A with the introduction of the Takeover Code. In comparison to the 1997 Code,
the Takeover Code establishes a significantly more straightforward, precise, and

3 Additional amendments to the 1997 Code were made based on the same.

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unambiguous regulatory framework. While the 1997 Code's fundamental premises
have been retained in the Takeover Code, TRAC has also examined international best
practises, jurisprudence established by courts and tribunals over the years, and the
market's changing needs in order to propose a new set of takeover regulations. SEBI
adopted the majority of the TRAC's recommendations and attempted to strike a
balance between the interests of various stakeholders, including acquirers,
shareholders, and the target company. While the overarching philosophy of
protecting public shareholders' interests in takeover situations remains intact, other
critical changes have been made.

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INDIRECT ACQUISITIONS AS PER THE TAKEOVER CODE

Globally, shareholdings, ownerships, and the rights that come with them are critical
and important assets. In today's competitive environment, corporate growth is not
only organic but also inorganic, which has resulted in a considerable increase in
M&A activity among listed and unlisted organisations. In response to this growing
tendency in M&A activity, regulators have created restrictions that safeguard not
only majority shareholders' rights, but also those of public shareholders and
minority shareholders. The protection of public and minority shareholders' interests
is a critical corporate governance issue that takes on added significance in the case of
publicly traded enterprises. Acquisitions are classified into two categories under the
Takeover Code: direct and indirect acquisitions:

Direct Acquisition: Acquisition of such number of shares that the shareholding of

Acquirer along with Persons Acting in Concert (PAC) 4 exceeds the stipulated
thresholds and crosses the limit of 25% of shares or voting control of the target
company4. This will trigger an obligation to make an Open Offer.

Indirect Acquisition: Acquisition of shares or voting rights in, or control of, any
company or other entity that would enable the acquirer or PAC with him to exercise
or direct the exercise of such percentage of voting rights in, or control over, a target
company that would entail the obligation to make an open offer.

Indirect Acquisition means the acquisition of shares or voting rights in, or control over,
any company or other entity that would enable the acquirer or PAC working with him
to exercise or direct the exercise of such percentage of voting rights in, or control over,
a target company that would trigger the obligation to make an open offer.

The concept of Indirect Acquisition was introduced in the 1997 regulations as per the
recommendations of the Bhagwati Committee through an explanation in the then

4 Reg. 2 (1) (q), Takeover Code

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prevailing regulations, which restricted the trigger for being covered as an indirect
acquisition of a target company only through its listed or unlisted Holding Company.
In its 2010 report, the TRAC advised that any indirect acquisitions that resulted in the
potential to exercise voting rights in excess of the target company's existing voting
rights or control over the target company trigger an obligatory open offer.

Additionally, the TRAC recommended that where the target company comprised a
‘predominant part of the business’ of the organisation being purchased, such an indirect
acquisition be treated as a direct acquisition for all purposes under the proposed
revised takeover standards.5

Categories of Indirect Acquisitions

1. Deemed Direct Acquisition

Such an indirect acquisition is treated as a direct acquisition under the 2011

Regulations for all intents and purposes and the provisions in relation to direct
acquisitions will apply.

2. Indirect Acquisition
If the 80% threshold test as indicated above is not met, the acquisition is treated as an
indirect acquisition under the Takeover Code and certain distinct provisions relating
to indirect acquisitions shall apply.

5An objective criteria was devised in this regard in order to ascertain what constitutes a
"predominant part of the business."

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DAIICHI-RANBAXY-ZENOTECH DEAL

Ranbaxy acquires stake in Zenotech

On October 3, 2007, Ranbaxy Laboratories Limited entered into a Share Purchase and
Share Subscription Agreement (`SPSSA') with Zenotech's promoter to acquire
78,78,906 shares (27.35 percent of the company's fully paid-up equity share capital) at
a negotiated price of Rs. 160.00 per equity share and to subscribe for 54,89,536 fully
paid-up equity shares at the same price pursuant to a preferential allotment by
Zenotech.

Thus, Ranbaxy was legally required to make a public announcement regarding the
acquisition of shares in the company from ordinary shareholders, as the shareholding
exceeded 15%. It sought to acquire from shareholders equity shares in Zenotech
constituting 20% of its expanded share capital at a quoted offer price of Rs. 160.00 per
equity share in the public announcement. On November 8, 2007, Ranbaxy and
Zenotech completed the share purchase transaction, and Zenotech's shareholders
approved the preferential allotment on November 23, 2007. On November 23, 2007,
Zenotech preferentially allotted 54,89,536 fully paid-up shares to Ranbaxy.6

6 Daiichi had been absent from the scene up to this point.

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Daiichi Sankyo acquires controlling stake Ranbaxy
Later, on June 11, 2008, Daiichi entered into a SPSSA with:
(i) Malvinder Singh and others, Ranbaxy's promoters, and
(ii) Ranbaxy Laboratories Ltd.

to acquire 30.91 percent of Ranbaxy's fully paid-up equity share capital

Additionally, Daiichi would subscribe for shares equal to 11% of Ranbaxy's fully paid-
up equity share capital and 2,38,34,333 share warrants. On the same day, Ranbaxy
informed the stock exchanges that because Ranbaxy held 46.85 percent of Zenotech's
equity shares, the SPSSA has also “triggered an 'Open Offer' to be made by Daiichi to the
public shareholders of 'Zenotech' to acquire a minimum of 20 percent of the Equity Shares of
'Zenotech' at a price to be determined under the SEBI Regulations”

On June 16, 2008, it made a public announcement to Ranbaxy shareholders that it

intended to acquire a total of 22.01 percent of Ranbaxy's fully paid-up equity share
capital. The public announcement stated that each share would be offered at a price
of Rs. 737.00. Daiichi acquired control of Ranbaxy on October 20, 2008, when it
acquired more than 50% of Ranbaxy's share capital.7

Indirect acquisition of Zenotech shares – Open Offer

As part of its acquisition of Ranbaxy, Daiichi acquired 46.85 percent of Zenotech's
equity share capital, which was previously held by Ranbaxy. Daiichi made a public

7 On that date, Ranbaxy became a Daiichi subsidiary.

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announcement to Zenotech shareholders offering a price of Rs. 113.62 per Zenotech
share.

Zenotech objects the Offer Price before SEBI and SAT

Zenotech's promoters filed a complaint with the SEBI claiming that Daiichii's offer
price should not have been less than Rs. 160 per share. However, SEBI did not agree
to this contention.8

Resultantly, Zenotech's promoters filed separate appeals with the Security Appellate
Tribunal (SAT) against the SEBI's decision. The SAT upheld the Zenotech's promoters’
claim and reversed the SEBI's decision, ordering Daiichi to make a Rs. 160 per share
offer to Zenotech shareholders.9

Zenotech appeal before Hon’ble Supreme Court

Daiichii Sankyo appealed before the Supreme Court. The main issue considered in the
appeal was whether the offer price of Rs. 113.62 per share made by Daiichii for
acquisition of shares in Zenotech was fair and lawful.

8 SEBI after due consideration of the matter turned down the claim of the respondents (vide
letter dated June 18, 2009 in the case of N. Narayanan's complaint and letter dated June 22,
2009 in the case of the complaint of Dr. Chigurupati)
9 Order of SAT dated 07.10.2009 in Appeal Nos. 137/138 of 2009

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While resolving a dispute over the offer price quoted by Daiichi in its public
announcement for an indirect acquisition of Zenotech Laboratories Ltd, the Hon'ble
Supreme Court clarified the meaning of the term 'persons acting in concert' as used in
the 1997 Takeover Code.10

10 Civil Appeals No. 7148 and 7314 of 2009 decided on. 08.07.2010

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ISSUE BEFORE THE SUPREME COURT

Controversy surrounding the offer price (under 1997 Takeover Code)

Regulations governing 'offer price'

While deliberating on the question, the Supreme Court discussed the sections of the
code governing 'offer price' and how it must be assessed.11 According to Regulation
20 of the 1997 Takeover Code, where an acquisition falls within Regulations 10 or 1112,
the offer price must be set in accordance with Regulation 20(4) and (5).13 Similarly,
Regulation 20(12) of the 1997 Takeover Code deals exclusively with indirect takeovers
and requires that the offer price be set in accordance with (i) the date of the parent
company's public announcement and (ii) the date of the target company's public
announcement.

The offer price in an indirect takeover must also be calculated in compliance with the
1997 Takeover Code's Regulations 20(4) and (5). The Supreme Court noted in this case
that the Zenotech share price was to be established on June 16, 200814, and January 19,
200915.

Determining the offer price

Regulation 20(4) establishes three distinct methods for calculating the offer price.
According to the regulation, it must be the greater of:
• the negotiated price pursuant to Regulation 14(1)

11 Regulation 20 of 1997 Takeover Code lays down the manner in which the offer price is to
be determined under various circumstances.
12 Regulations 10 and 11 prescribe thresholds (in percentage) of shareholding. When the

acquirer exceeds these thresholds by acquiring shares or voting rights in the target, it is
required to make a public announcement.
13 Regulations 10 and 11 prescribe thresholds (in percentage) of shareholding. When the

acquirer exceeds these thresholds by acquiring shares or voting rights in the target, it is
required to make a public announcement.
14 The date of the public announcement of the parent company, Ranbaxy.
15 The date of the public announcement for Zenotech, the indirectly acquired company.

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 • the price paid by the acquirer or persons acting in concert with the acquirer for
acquisition, if any, (including through allotment in a public or rights or preferential
issue) during the 26-week period preceding the date of public announcement; or
• the average of the weekly high and low of the target company's shares' closing prices as
quoted on the stock exchange, if the target company's shares are quoted on the stock
exchange.

The first point is irrelevant because it applies to direct takeovers. The issue in this case
stems from the fact that Daiichi Sankyo used the third technique, whereas Zenotech's
promoters used the second.
Contentions surrounding the offer price
According to Daiichi Sankyo, the second method was inapplicable because it was not
acting in concert with Ranbaxy to acquire Zenotech shares. As a result, the third
technique was the sole provision that could be used to determine the offer price. On
the other hand, Zenotech's promoters said that Daiichii Sankyo and Ranbaxy were
'persons acting in concert' when they signed the agreement on June 11, 2008, and then
again on October 20, 2008, when Ranbaxy became a subsidiary of Daiichii Sankyo.
They contended that Ranbaxy paid Rs. 160 per share for Zenotech shares in January
2008, well within the 26-week period beginning June 16, 2008 (i.e., the date on which
Daiichii Sankyo made the public announcement for the shares in Ranbaxy). In light of
this, Zenotech's promoters believed Daiichi Sankyo should have used Regulation
20(4)(b) to establish the offer price for Zenotech shares, which should have been Rs.
160, not Rs. 113.62.

Finally, the issue centred on the applicability of Regulation 20(4)(b) in calculating

Daiichii Sankyo's offer price. Regulation 20(4)(b) contemplates a scenario in which the
acquirer or people acting in concert with the acquirer pay a price for the target's shares.
The court considered the meaning of the term "persons acting in concert" in this
context, as well as the stage at which persons may be deemed to be acting in concert
for the purposes of determining the applicability of Regulation 20(4)(b).

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Supreme Court's interpretation of ‘persons acting in concert’

The court noted in this context that the concept of "persons acting in concert" is
predicated on the premise that on one side, there is a target, and on the other, there
are two or more entities that come together with the common objective or purpose of
acquiring large shares in the target. Thus, unless there is a target whose shares are to
be acquired by two or more entities acting in concert, no persons can act in concert.
Similarly, the court noted that no parties can act in concert unless they share a common
purpose of acquiring significant interests in the target. Such a relationship can exist
only as a result of a meeting of minds pursuant to a formal or informal agreement or
understanding.

The court held that Ranbaxy's argument that by signing the agreement, it became a
person acting in concert with Daiichi Sankyo could not be recognised, because the
essential precondition of a 'shared aim' to acquire large interests in Zenotech was
missing. If Daiichi Sankyo and Ranbaxy entered into the deal with the express purpose
of purchasing the majority of Zenotech's shares, they would qualify as people acting
in concert. This, however, was not the case.

Additionally, the court considered Regulation 2(e)(2), noting that this sub-regulation
cannot be viewed as a stand-alone rule (1). This meant that, while sub-regulation (2)
was a deeming rule, it was a deeming provision that specified nine particular
instances in which one organisation would be deemed to be acting in concert with
another. This meant that in such instances, if one of the parties made or agreed to
make a significant acquisition of shares in a target, it would be believed to be acting
in furtherance of a shared objective or purpose with the other entity in the pair. In this
case, the two would be considered "persons acting in concert" The underlying notion
of a common goal would remain constant. As a result, the court stated that Regulation
2(e)(2) must be read in connection with Regulation 2(e)(1) (1). Thus, even under this
sub-regulation, persons found to be acting in concert must intend to acquire a
significant stake in the target.

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Additionally, the court highlighted that the deeming rule included in Regulation
2(e)(2) is prospective in nature and cannot be applied retroactively. Thus, the court
determined that in this case, the deeming rule would establish a presumption that
Daiichi Sankyo and Ranbaxy acted in concert, assuming that the criterion set forth in
sub-regulation (1) was likewise satisfied post-October 20, 2008. (ie, the date on which
Ranbaxy became a subsidiary of Daiichii Sankyo). As a result, it cannot be stated that
Ranbaxy's acquisition of Zenotech shares in January 2008 was in coordination with
Daiichi Sankyo.

Concerning the timing of when a person is said to be acting in concert with another,
the court determined that it was irrelevant that the acquirer and the entity that
purchased shares in the target earlier should be acting in concert at the time of the
target's public statement. What was critical was that the other corporation acted in
cooperation with the acquirer throughout the target's share purchase.

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CONCLUSION

The Court clarified the terms of the 1997 Takeover Code relating to PACs in this
judgement. To this aim, the Court relied heavily on the 1997 Justice P. N. Bhagwati
Committee Report and the 2002 Reconvened Committee on Takeover Code Report in
analysing the Takeover Code's provisions.

Recognizing the guidance and assistance provided by these committee reports, the
Court emphasised the importance of the 'object and purpose' clause in statutory
interpretation. Additionally, the Court maintained that, as with Acts, it is necessary to
include a 'object and purpose' clause in subordinate legislation such as Regulations to
ensure that their interpretation by the Court is effective, simple, and consistent with
the intention of their passage. In this regard, the Court has urged a shift in legislative
strategy toward the inclusion of an 'object and purpose' phrase in all delegated
legislation, taking into account the fact that subordinate legislation regulates
extremely complex and specialised domains of activity.

In comparison to the 1997 Regulations, the 2011 Regulations establish a more

comprehensive and transparent framework for indirect purchases. SEBI and the
TRAC have made tremendous strides in educating corporations and practitioners
about indirect acquisitions and the legal framework and criteria that govern them. The
factors that trigger the duty to make a legal tender offer in the context of an indirect
acquisition have been explicitly defined, and the regulations include extensive
deadlines and price procedures for deemed direct and indirect acquisitions.

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Later Amendments specific to Indirect Acquisitions

In July, 2020, the SEBI (Substantial Acquisition of Shares and Takeovers) (Third
Amendment) Regulations, 2020 was issued to amend the Takeover Code.

The Amendment Regulations, inter alia, make the following changes:

1. Following regulation 17(1) of the Takeover Regulations, a new proviso has been
added specifying the amount to be put in an escrow account as performance
security.

2. A new proviso has been added to regulation 17(3)(c) of the Takeover

Regulations, stating that the deposit of frequently traded and freely
transferable equity shares or other freely transferable securities with
appropriate margin may be used to maintain the escrow account required by
regulation 17(1) of the Takeover Regulations. The new proviso specifies that
securities may not be deposited in connection with indirect acquisitions for
which a public notice has been made in accordance with regulation 13(2)(e) of
the Takeover Regulations.

3. Following regulation 18(11) of the Takeover Regulations, a new sub-regulation

11A has been added. The new sub-regulation 11A specifies that if the acquirer
is unable to make payment to shareholders who accepted the open offer within
such period, the acquirer shall pay interest at a rate of 10% (ten percent) per
annum to all such shareholders whose shares were accepted in the open
offer.

4. Regulation 22(1) of the Takeover Regulations provides that an acquirer may not
complete the acquisition of shares or voting rights in, or control over, the target
company until the offer period has expired, regardless of whether the

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acquisition is made through a subscription to shares or a purchase of shares
subject to the obligation to make an open offer for acquiring shares.

Nevertheless, regulation 22(2A) of the Takeover Regulations provided, inter

alia, that an acquirer may acquire shares of a target company through
preferential issue or the stock exchange settlement process, other than through
bulk or block deals, subject to the following: I such shares being held in an
escrow account; and (ii) the acquirer exercising no voting rights over such
shares held in the escrow account. Regulation 22(2A) of the Takeover
Regulations has been repealed pursuant to the Amendment Regulations,
removing the prohibition on bulk or block transactions.

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Plagiarism Report

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