SEBI Erred in Directing Acquirer to Make Additional Payment to Shareholders As Backstop Guarantee Can’t Be Considered As Share Price Payment | SAT

Case Details: Diageo PLC v. Securities & Exchange Board India [2023] 153 taxmann.com 444 (SAT-Mumbai)

Judiciary and Counsel Details

• • Tarun Agarwala, Presiding Officer & Ms Meera Swarup, Technical Member
  • Pesi Modi, Sr. Adv. Neville Lashkari, Ms Sneha Jaisingh, Manan Shah & Ms Tanya Chaudhry for the Appellant.
  • Pradeep Sancheti, Sr. Adv. Mihir Modi, Arnav Misra, Mayur Jaisingh, Poorva Garg, Mulla & Mulla & Vinay Chauhan, Advs. for the Respondent.

Facts of the Case

In the instant case, the acquirer company (i.e. a subsidiary company of the appellant company), acquired the target company and a share purchase agreement (SPA) was executed to sell shares of the target company to the acquirer. Subsequently, the appellant company and the acquirer made a public announcement of an open offer for shares of the target company.

Meanwhile, an offshore loan was given to the company ‘W’ in which the trustee of the target company had an interest and a bank agreed to take over the loan by refinancing ‘W’. ‘The holding company (D) of the appellant executed a backstop guarantee in favour of the said bank vide backstop guarantee commitment agreement.

Since the loan was not repaid by ‘W’, ‘D’ made repayment of the same. A SEBI official gave an interview contending that the offer price in the said open offer should have included the amount paid under the guarantee.

Based on the said interview, the impugned order was passed by the SEBI, directing the appellant and target company to make additional payments to shareholders of the target company who had tendered shares in the open offer.

The appellant had challenged the said order by filing an appeal to the Securities Appellate Tribunal (SAT).

It was found that repayment of the loan by ‘D’ did not led to the additional acquisition of shares of the target company by ‘D’. Further, the backstop guarantee could not be considered as payment for shares acquired under the SPA.

SAT Held

The SAT held that since the backstop guarantee was not incidental to SPA and they were two distinct transactions, Regulation 8(10) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 was not attracted. Therefore, the impugned order was to be quashed.