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Electronic copy available at: http://ssrn.com/abstract=1753341

DRAFT PAPER: OT FOR CITATIO OR CIRCULATIO

COMPARING

TAKEOVER LAWS IN

UK, INDIA &

SINGAPORE

Krishna Shorewala Vasundhara Vasumitra1

1 The authors are 5

th Year students of the B.A.LL.B. (Hons.) Course at the National Law School of

India University, Bangalore, India. The authors would like to thank Prof. V. Umakanth and Prof.

M.P.P. Pillai for their invaluable guidance without which this paper would not have been possible.

Electronic copy available at: http://ssrn.com/abstract=1753341


2

Table of Contents

Sr. No. Contents Page

No.

1. Introduction 3

2. Part I: The Economics of Takeovers 3

3 Part II: An Introductory Survey of the Laws 5

4. Part III: Mandatory Offers: Comparing Thresholds 6

5. Part IV: Penalties 9

6. Part V: Self Regulation and Legal Standing 12

7. Part VI: Role of the Courts 17

8. Conclusion 25

9. Endnotes 28

10. Bibliography 38


3

Introduction

Extensive writings are available on takeovers. These writings provide theoretical and

empirical evidence; economic and social perspectives; extensive legal analysis about laws in

the UK, EU, India and Singapore separately. However, no real comparative analysis has yet

been made about the laws across these countries and the basis for their similarities and

differences. This article seeks to fill that gap by providing such an analysis in four key areas

of takeover regulations: mandatory bids, penalties, jurisdiction and nature of regulation. In

first case, the key difference lies in the threshold levels which trigger the obligation to make

public offers. Further, difference lies in the nature of the penalties in place for violations,

jurisdiction of appellate bodies and the courts and finally, the legal nature of the regulations.

The paper is structured in the following manner: In Part I the researchers look at the

economics of takeovers and the need to regulate them. Part II introduces the network laws

and regulations governing the area of takeovers in the UK, India and Singapore. Part III looks

at mandatory offers and the rationale, if any, for the different thresholds prescribed across

jurisdictions. Part IV looks at the penalties prescribed and the basis for the differences

between them. Part V looks at the non/statutory nature of takeover laws and the reasons

for the same. Finally, Part V looks at the jurisdiction of courts and the right to appeal across

different countries. The authors are attempting to demonstrate how the differences in the

social, political and economic contexts inform greatly the shape that regulation takes in

these countries.

Part I: The Economics of Takeovers

A takeover or a tender offer is when a firm or person offers the shareholders of another to

sell their shares at specified prices. It may be friendly where the board of the company being

acquired (“target company”) welcomes such a takeover or it may be hostile where the board

disapproves but an acquiring company or persons offers the shareholders directly anyway.2

2 Fred Weston, Mark L. Mitchell and J. Harold Mulherin, Takeovers, Restructuring and Corporate

Governance (4th

ed., New Delhi: Pearson Education, 2004), at p. 35-36. (hereinafter “Weston et al.

(2004)”)


4

There may also be bailout takeovers with respect to financially weak companies as seen in

the Indian context.3

Mergers and acquisitions (“M&A”) have grown by leaps and bounds in the last decade.4

There are several reasons for the rise in its popularity. This growth has been attributed to

the various forces of change that have altered the way in which business is conducted.5

Various justifications have been offered for M&A.6 An acquirer stands to gain through an

acquisition in various ways.7 However, whether M&A activity adds any value to the acquired

firm itself is debatable.8 The operating synergy theory postulates that economies of scale

and scope help the firms achieve efficiencies greater than the sum of the combining parts.

They are also regarded as a rapid means to deal with significant forces of change.9

Further, a “market for corporate control”10

can evolve where alternate owners compete for

the right to manage under-performing companies and the shareholders can sell their shares

3 See generally, Chapter IV of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations,

1996. 4 For empirical data on the increase in takeover activity around the world, see Weston et. Al (2004);

Rajesh Chakrabarthi, William L. Megginson & Pradeep K. Yadav, “Corporate Governance in India”,

September 4 2007, available at < http://ssrn.com/abstract=1012222>. (hereinafter “Chakrabarthi et al

(2007)”) 5 See Weston et al. (2004), at 33-34.

6 The Jamshed J. Irani Committee in India provided a variety of reasons from an economic and

business perspective for the promotion of M&A activity. See M.R. Thiagarajan, “Report on Company

Law–On Mergers and Acquisitions” [2005] 61 SCL (Mag.) 41; Mahavir Lunawat, “J.J. Irani Committee

Report on Company Law–The Recommended Legislative Scheme and Major Recommendations”,

[2005] 61 SCL (Mag.) 47. 7 For an overview and illustration, see J. Fred Weston & Samuel C. Weaver, Mergers and Acquisitions

(New Delhi: Tata McGraw-Hill Publishing Company Limited, 2002), at p. 85-86. (hereinafter “Weston

and Weaver (2002)”) 8 Doubts are raised, particularly in the context of insider entrenchment which has emerged as a

counter to the Berle Means model of ownership. See Dr. Manoranjan Pattanayak, “Disentangling

Performance and Entrenchment Effect of Family Ownership: A Study of Indian Corporate

Governance”, available at <http://ssrn.com/abstract=1326485> visited on January 26 2011; Dr.

Manoranjan Pattanayak, “Insider Ownership and Firm Value: Evidence from the Indian Corporate

Sector”, available at <http://ssrn.com/abstract=962307> visited on January 26 2011; Sumon K.

Bhaumik and Ekta Selarka, “Impact of M&A on Firm Performance in India: Implications for

Concentration of Ownership and Insider Entrenchment”, William Davidson Institute Working Paper

No. 907 available at <http:ssrn.com/abstract=9700001> visited on January 26 2011. 9 Weston and Weaver (2002), at p. 116.

10 The idea of a market for corporate control has its origins in the writings of Henry Manne. For an

overview of what such a market is and how it is expected to work, see Henry Manne, “Mergers and

Market for Corporate Control”, (1965) 73 Journal of Political Economics 110; Athanasios Kouloridas,

The Law and Economics of Takeovers: An Acquirer’s Perspective (Portland: Hart Publishing, 2008), at p.

35-38.


5

to the highest bidders.11

It has been argued that such a market, if functioning well, can lead

to improved corporate governance.12

The threat of a takeover is regarded as a remedy to the

“agency problem13

” by keeping the management in check.14

However, while large markets

for corporate control exist in the US, UK and other common law countries, that is not the

case in continental Europe and Japan.15

In India, it is a growing market.16

Further, this

method of ensuring better governance has been regarded by some as an inefficient and

expensive one.17

Why regulate takeovers? For starters, mandatory public rules are arguably more socially

efficient than private rules of the company.18

There could be issues relating to antitrust,

shareholder interests, managerial mishandling etc. Regulation in common law seeks to put

power in the hands of equity shareholders who bear the right as, as has been pointed out,19

they are the bearers of the highest risks and the holders of the rights to residual profits and

assets of the company. They are the best persons to decide the fate of the company as they

are responsible for the consequences. Recent literature also suggests that takeover

regulation serve a social welfare function and emphasise on a shift from a shareholder

11

K. Sankaran & Vishwanath S.R., “Diversification via Acquisition” published in Chandreshekhar

Krishnamurti & Vishwanath S.R. (Eds.), Mergers, Acquisitions and Corporate Restructuring (New Delhi:

Response Books, 2008), at p. 3-4. 12

See Donald C. Clarke, “Nothing But Wind? The Past and Future of Corporate Governance”, 59 Am. J.

Comp. L. 75. 13

For a better understanding of the agency problem, see Adolf A. Berle & Gardiner C. Means, The

Modern Corporation and Private Property (Revised ed., New York: Harcourt, Brace & World Inc.,

1967); Stephen M. Bainbridge, Corporation Law and Economics (Federation Press, 2002), at p. 34-38;

Renier Kraakman, Paul Davies, Henry Hansmann, Gerard Hertig, Klaus Hopt, Hideiki Kanda and

Edward Rock, The Anatomy of Corporate Law: A Comparative and Functional Approach (Oxford: OUP,

2004), at p. 22; Adolf A. Berle, “For Whom Corporate Managers Are Trustees: A Note,” (1932) 45

Harv. L.R. 1365. 14

Weston and Weaver (2002), at 116. 15

For a detailed analysis of the corporate market and M&A activity in Continental Europe and Japan,

see Roberta Romano, A Cautionary Note on Drawing Lessons from Comparative Corporate Law, 102

Yale L.J. 2021, 2033 (1993); Hiroshi Oda, “The Current State of Takeover Law in Japan”, [2009] J.B.L.

749, at p. 751-754; Curtis J. Milhaupt, “In the Shadow of Delaware? The Rise of Hostile Takeovers in

Japan”, 105(7) Columbia Law Review 2171. 16

See Chakrabarthi et al (2007); <http://www.ibef.org/economy/foreigninvestors.aspx> visited on

January 26 2011. 17

John H. Farrar & Brenda Hannigan, Farrar’s Company Law (4th

ed., London: Butterworths, 1998), at

p. 589. (hereinafter “Farrar (1998)”) 18

For a discussion on the efficiency of public rules in the M&A contest, see Mike Burkhart and Fausto

Panunzi, “Mandatory Bids, Squeeze-Out, Sell-Out and the Dynamics of the Tender Offer Process” as

published in Guido Ferrarini, Klaus J. Hopt, Jaap Winter and Eddy Wymeersch (Eds.), Reforming

Company and Takeover Law in Europe (Oxford: Oxford University Press, 2004), at p. 741-742. 19

Report of the High Level Group of Company Law Experts on Issues Related to Takeover Bids (2002),

at p. 21. (hereinafter “EC Report (2002)”)


6

preference approach to a stakeholder preference approach.20

A mechanism to facilitate

takeovers is basically beneficial as it provides discipline of management and reallocation of

resources which is in the best interests in the long term of all the stakeholders and the

society at large.21

The manner and form of regulation is based on increasingly universal

principles. However, they can differ considerably on the basis of finance, economic

rationality, institutional capacity and most importantly, cultural background.22

Part II: Surveying the Laws and Legal Institutions

The takeover law in the United Kingdom has provided the broad framework for takeover

regulations for most common law countries including Australia, New Zealand, Hong Kong. 23

It has arguably, the longest experience in the regulation of takeovers.24

The City Code on

Takeovers and Mergers was (“City Code”) developed in 1968 out of the Notes for

Amalgamations of British Businesses issued in 1959 by the Issuing Houses Association.

Administered by the Takeover Panel, it was initially non-statutory and laid down General

Principles expressed broadly which were to be applied by the Panel in their spirit to achieve

the underlying purpose.25

After the European Community introduced the 2004 Takeover

Directive,26

after several aborted attempts,27

the City Code has changed considerably.

20

See Liza Rybak, “Takeover Regulation and Inclusive Corporate Governance: A Social-Choice

Theoretical Analysis”, 10(2) JCLS 407. 21

See EC Report (2002), at p. 19. 22

See Mark J. Roe, “Influence of Cultural Barriers in Evolution of Corporate Law on Takeovers”, (2003)

II(2) ICFAI Jl. of Intl. Business Law 26. 23

Emma Armson, “Models for Takeover Dispute Resolution: Australia and the UK”, 5(2) JCLS 401, at

402. 24

For a historical overview of the regulatory experience in the UK, see Robert R. Pennington,

“Takeover Bids in the UK”, The American Journal of Comparative Law, Vol. 17, No. 2 (Spring, 1969),

pp. 159-193. (hereinafter “Pennington (1969)”) 25

. Farrar (1998), at p. 590; also see Pennington (1969). 26

See generally, Direcitve 2004/25/EC of the European Parliament and of the Council of 21 April 2004

on Takeover Bids. (hereinafter “EC Directive”) 27

For a discussion of the attempts, prior to 2004, to introduce an EC Directive, see John C. Coffee Jr. &

Adolf A. Berle, “The Future as History: The Prospects for Global Convergence in Corporate

Governance and Its Implications”, Working Paper No. 144, Centre for Law and Economics Studies,

Columbia University School of Law available at

<http://papers.ssrn.com/paper.taf?abstract_id=142833> visited on January 30 2011.


7

In India, after several attempts at regulating takeovers,28

the Securities and Exchange Board

of India (“SEBI”), a statutory body created with the aim of protecting the interests of

the investors and development of the securities market,29

introduced the SEBI

(Substantial Acquisition of Shares and Takeover) Regulations, 1997 (“Indian Code”) with the

objective of protecting the interest of the small shareholder and making the entire

acquisition process fair, equitable and transparent by making the incumbent management of

the target company aware of the acquisition and ensure that the process does not distort

the security market.30

The Rules are in the form of delegated legislation made in exercise of

the rule making powers of the SEBI under Section 30 of the SEBI Act.31

They have a clear

statutory basis, unlike the Codes in the UK and Singapore. It has been amended and revised

a number of times after that.32

In the context of Singapore, the Singapore Code on Take-Overs and Mergers (“STC”) was

introduced in accordance with the directions given under Section 13933

and in exercise of

the powers granted under Section 321 of the Securities & Futures Act.34

Pursuant to the

recommendations made in the 1999 Consultation Paper,35

the STC went through substantial

28

First, there was Clause 40 in the listing agreement which provided for the regulation of takeovers in

a limited way in the form of mandatory bids by any person who sought to acquire 25% or more of the

shares. In 1990, the Government, in consultation with the Securities and Exchange Board of India

(“SEBI”) (before it became a statutory body), substituted Clause 40 with Clauses 40A and 40B.

Thereafter, the Securities and Exchange Board of India Act of 1992 empowered the SEBI to regulate

takeovers and the SEBI passed the Substantial Acquisition of Shares and Takeovers Regulations of

1994 and retained Clauses 40A and 40B in the Listing Agreement. However, after two years of the

administration of these Regulations, they were found to be inadequate. The P.N. Bhagwati

Committee, in its Report, suggested amendments to the regulations and laid down 10 general

principles which should guide the interpretation and operation of the regulations, especially in

situations which wouldn’t specifically be covered by the regulations. This led to the introduction of

the 1997 Regulations. – J.C. Verma &Sanjeev Kumar, Corporate Mergers, Amalgamations and

Takeovers (Concept, Practice & Procedure) (5th

ed., New Delhi: Bharat Law House, 2008), at p. 602-604

(hereinafter “Verma & Kumar (2008)”); Vinayak Mishra & Priyanka Rathi, “SEBI (Substantial

Acquisition of Shares and Takeovers) Regulations, 1997: An Overview”, [2008] 85 SCL (Mag.) 91. 29

Preamble of the Securities & Exchange Board of India Act, 1992 (“SEBI Act”) 30

Poornima Sampath and Nikhil E. Chandra, “The Takeover Code – Protection for the Shareholder”

[2000] 38 CLA (Mag.) 164; Also see, Kishore R. Chhabaria v. Chairman, SEBI [2003] 46 SCL 385. 31

Section 30 of the SEBI Act, 1992: (1) The Board may, by notification, make regulations consistent

with this Act and the rules made thereunder to carry out the purposes of this Act... 32

See Mahavir Lunawat, “SEBI (Substantial Acquisition of Shares and Takeovers) (Second Amendment)

Regulations, 2004 – An Overview” [2005] 58 SCL (Mag.) 19. 33

Section 139 of the Securities and Futures Act: Take-over Code. 34

Section 321 of the Securities and Futures Act. 35

See Consultation Paper on Revision of the Singapore Code on Takeovers and Mergers (1999)

available <www.mas.gov.sg> visited on January 4 2011. (hereinafter “Singapore Consultation Paper

(1999)”)


8

changes.36

It is based on the original UK Model and retains the non-statutory character

originally seen in the UK. The Securities Industry Council (“SIC”) is empowered to administer

the STC.37

While the rules and their underlying principles are, prima facie, similar, it is the

context in which they operate that makes the difference.

Part III: Mandatory Offers: Comparing Thresholds

An offer or a bid is when one company makes a general offer to acquire the whole of the

shares, or the whole of a class of shares, of another company either for cash, kind or a

combination of both.38

A mandatory offer is when a person is obligated by law to make such

a general offer after a statutory minimum number of shares is acquired (known as the

“mandatory threshold”). A mandatory offer does not consider the difference between de

jure and de facto control. If a mandatory threshold is crossed, it is presumed that the holder

of the shares has control although, in fact, he may not.39

The rule is concerned only with the

acquisition of the shares and it is irrelevant whether, in fact, the acquirer acquires control or

not.40

There are several justifications for the mandatory bid rule, some genuine and others

suspect.41

One of the foremost priorities is to maintain equality among shareholders and

ensure that even the minority shareholders should be given an equal opportunity to sell on

the same terms as the controlling shareholders.42

The person concerned cannot acquire

shares in excess of the threshold limit by either market purchases or any form of preferential

allotment.43

The principle behind the rule is that regulation must seek to prevent abuse of

36

For details, see Press Statement dated 6th

December 2001 of the Monetary Authority of Singapore

available at <www.mas.gov.sg> visited on January 14 2011. 37

See Sections 138, 139 of the Securities and Futures Act; Section 14 of the Securities Industry Act. 38

Pennington (1969), at 160. 39

For a discussion of the concept of control, see K.R. Chandratre, “Concept of Control Under SEBI

Takeovers Regulations”(2006) 38 TCR 261 (Mag.). 40

Luxury Foams v. SEBI (SAT Order dated 20 March 2002, Appeal No. 48/2001) sourced from Shishir

Jose Vayttaden Shishir Vayttaden on SEBI’s Takeover Regulations 1st

Edition (New Delhi; Lexis Nexis,

2010). (hereinafter “Vayttaden (2010)”). 41

For a discussion of the justifications for the mandatory bid, see Luca Enriques, “The Mandatory Bid

Rule in the Proposed EC Takeover Directive: Harmonization or Rent-Seeking?” as published in Guido

Ferrarini, Klaus J. Hopt, Jaap Winter and Eddy Wymeersch (Eds.), Reforming Company and Takeover

Law in Europe (Oxford: Oxford University Press, 2004), at p.767-795. 42

For a detailed discussion for the economic, legal and theoretical justifications for equal treatment,

see William D. Andrews, “The Stockholder’s Right to Equal Opportunity in the Sale of Shares”, (1965)

78(3) Harv. L.R. 505. 43

See, for example, Shailashri Bhaskar, “Takeover Regulations in India” [2006] 10 CLC (Mag.) 543.


9

control.44

The philosophy is that no proprietary right exists for a major shareholder to

receive an extra premium for the control he enjoys to the exclusion of the remaining

shareholders.45

In India, the threshold for triggering the mandatory offer is the lowest at 15%. Regulation 10

prohibits an acquisition that entitles the acquirer to exercise voting rights in excess of 15%

without a public announcement to acquire such shares in accordance with the Regulations.46

The threshold was increased from 10% in 1998.47

The threshold limit is a precise one and not

an indicative one.48

Regulation 11, after several amendments,49

relates to consolidation of

holdings in case of holdings beyond 15% and also obligates a person to make a public offer

in most cases, while allowing for an acquisition of 5% in a financial year without triggering

the mandatory offer obligation (also known as “creeping acquisition”).50

In the UK, the threshold limit is set at a higher 30%. Therefore, a person cannot acquire

shares that entitle him to more than 30% of the voting rights or, when he holds more than

30% but less than 50%, shares which increase his percentage of voting rights without making

a public offer under the City Code.51

There is no provision for a creeping acquisition. There

was an allowance earlier for an acquisition of 1% over a period of 12 months but that was

abolished after severe criticism for its lack of any justification in principle.52

However,

In Singapore also, the threshold limit is 30%.53

Initially, it was 25% which was subsequently

raised to 30% on the recommendation in the Consultation Paper.54

Creeping acquisition is

44

See Weinberg & Blank, Takeovers and Mergers (London: Sweet & Maxwell, 2004), at p. 4207

(hereinafter “Weinberg & Blank (2004)”). 45

Ibid., at p. 4209. 46

Regulation 10 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. 47

SEBI (Substantial Acquisition of Shares and Takeovers) (Amendment) Regulations, 1998. 48

See Ashwin Doshi v. SEBI (SAT Order dated 25 October 2002, Appeal No. 44/2001) sourced from

Vayttaden (2010). 49

For an overview of the amendments made to Regulation 11, see B.J. Shah, “Recent Amendments to

Regulations 10 and 11 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997: A

Critique”, [2005] 61 SCL (Mag.) 97; Mahavir Lunawat, “SEBI (Substantial Acquisition of Shares and

Takeovers) (Second Amendment) Regulations, 2004 – An Overview”, [2005] 58 SCL (Mag.) 19. 50


Rule 9.1 of the City Code on Takeovers and Mergers. 52

Weinberg & Blank (2004), at p. 4210. 53

Rule 14.1(a) of the Singapore Code on Take-Overs and Mergers. 54

See Singapore Consultation Paper (1999).


10

allowed up to 1% over a period of six months without triggering the obligation to make a

public offer.55

One may ask, why do these thresholds differ? At a certain level, these thresholds in practice

are arbitrary.56

However, they have clear welfare implications of changing these thresholds

(for example, in the value attached to toehold acquisitions57

) which are required to be

considered before changing them.58

The difference, perhaps, can be explained by looking at

the shareholdings and the ownership structures prevailing in these countries. Looking at

Singapore, there is a very limited number of companies that are widely held.59

Most

companies are either government linked (where the government owns 20% or more of the

share capital),60

government owned or family controlled.61

There are also significant cross

55

Rule 14.1(b) of the Singapore Code on Take-Overs and Mergers. 56

Weinberg & Blank (2004), at 4209. 57

For a detailed analysis of toehold acquisitions and its welfare effects in various situations, see Eitan

Goldman & Jun Qian, “Optimal Toeholds in Takeover Contests” available at

<http://ssrn.com/abstract=422020> visited on January 20 2011; Sandra Betton, B. Espen Eckbo &

Karin S. Thorburn, “Corporate Takeovers” Tuck School of Business Working Paper No. 2008-47

available at < http://ssrn.com/abstract=1131033> visited on January 20 2011; S. Abraham Ravid &

Matthew I. Spiegel, “Toehold Strategies, Takeover Laws and Rival Bidders”, Yale ICF Working Paper

No. 99-05; Arturo Bris, “When do Bidders Purchase a Toehold? Theory and Tests” (October 1998)

available at < http://ssrn.com/abstract=139824> visited on January 20 2011. 58

Lan Luh Luh, Ho Yew Kee, Ng See Leng, “Mandatory Bid Rule: Impact of Control Thresholds on

Takeover Premiums”, [2001] SJLS 433-452. 59

See Rafael La Porta, Florencio Lopez-de-Silanes & Andrei Shleifer, “Corporate Ownership Around

the World”, (August 1998), Harvard Institute of Economic Research Paper No. 1840 available at

<http://ssrn.com/abstract=103130> visited on January 24 2011. (hereinafter “La Porta et al. (1998)”) 60

For a detailed analysis of government linked companies and their functioning in Singapore, see

Charlie Charoenwong & Pornsit Jiraporn, “Earnings Mangement to Exceed Thresholds: Evidence from

Singapore and Thailand” (March 2008) available at <http://ssrn.com/abstract=1104523> visited on

January 20 2011; Tan Lay Hong, “A Balanced Scorecard Approach to Survey Corporate Governance

Practices in Singapore’s Listed Companies: STI Companies And Government-Linked Companies” (May

1, 2006), available at http://ssrn.com/abstract=905048> visited on January 20 2011; Bernardo

Bortolotti, Veljko Fotak, William L. Megginson & William Miracky, “Sovereign Wealth Funds

Investment Patterns and Performance”, FEEM Working Paper No. 22.2009 available at

<http://ssrn.com/abstract=1364926> visited on January 20 2011; Carlos D. Ramírez and Ling Hui Tan,

“Singapore Inc. versus the Private Sector: Are Government-Linked Companies Different?” IMF Staff

Papers, Vol. 51, No. 3 (2004), pp. 510-528. 61

Stijn Claessens, Simeon Djankov, Joseph Fan, and Larry Lang1, “Expropriation of Minority

Shareholders in East Asia” (December 1999) <http://ssrn.com/abstract=202390> visited on January 20

2011; Lim Mah Hui and Teoh Kit Fong, “Singapore Corporations Go Transnational”, Journal of

Southeast Asian Studies, Vol. 17, No. 2 (Sep., 1986), pp. 336-365. (hereinafter “Hui & Fong (1986)”);

Melissa Ong, “Contextualising Corporate Social Responsibility in Singapore”, Lee Kuan Yew School of

Public Policy Research Paper Series: LKYSPP09-011-CAG004 available at

<http://ssrn.com/abstract=1464684> visited on January 20 2011 (hereinafter “Ong (2008)”); Stijn

Claessens, Simeon Djankov, and Larry H.P. Lang, “The Separation of Ownership and Control in East

Asian Corporations”, (November 1999) available at <http://ssrn.com/abstract=206448> visited on

January 20 2011.


11

holdings across these firms which are again, ultimately, controlled by these same families.62

Therefore, in these companies, a person or group of persons not only exercise control over

the company but also have a controlling interest in terms of voting power. Consequently, a

high number of shares would be required in order to challenge this kind of control thereby

justifying the 30% threshold.

Unlike Singapore, however, in the UK, ownership of most companies is widely dispersed,63

and has been so since the beginning of the 20th

century for several reasons.64

With the rise

of institutional investors,65

a large amount of the equity shareholdings in the majority of the

UK firms are controlled by them.66

Family ownership and/or control over companies is very

low as compared to other European countries.67

However, since controlling stakes are held

by institutional investors, it is very difficult to acquire control over the voting rights in the

company, thereby justifying the high threshold.68

Turning to the odd man out, India has taken to the Anglo-American system despite the

unique features of Indian corporate culture.69

It has an ownership system which is a hybrid

of the English and Singaporean systems. On one hand, India has an insider model of

corporate governance where the dominant corporations were controlled by a small bunch of

“insider” shareholders.70

Such a group is usually a family or the State and the inter-locking

and pyramiding of corporate control within these groups helps secure their position and

62

See Hui & Fong (1986). 63

See La Porta et al. (1998). 64

Julian Franks, Colin Mayer & Stefano Rossi, “Ownership: Evolution and Regulation”ECGI – Finance

Working Paper No. 09/2003 available at <http://ssrn.com/abstract=354381> visited on January 26

2011. 65

For a detailed analysis of the rise of the institutional investor in the UK, see Krishna Shorewala and

Apoorvaa Paranjpe, “Institutional Investors, Corporate Governance and Global Standards: An Indian

Perspective”, International Company and Commercial Law Review (forthcoming); Paul L. Davies,

“Institutional Investors in the United Kingdom,” as published in Contremporary Issues in Corporate

Governance (D.D. Prentice and P.R.J. Holland eds., Oxford: OUP, 1993), at 69-73; Brian R. Cheffins,

Corporate Ownership and Control: British Business Transformed (Oxford: OUP, 2008), at p. 164. 66

For an overview of the share of institutional investors in equity markets, see Bernard S. Black &

John C. Coffee Jr., “Hail Britannia? Institutional Investor Behaviour Under Limited Regulation”, (1994)

92 Mich. L.R. 1993. 67

See Mara Faccio and Larry H.P. Lang, “The Separation of Ownership and Control: An Analysis of

Ultimate Ownership in Western European Corporations”, (February 2000), EFA 0136 avilable at

<http://srrn.com/abstract=222429> visited on January 20 2011. 68

Brian Cheffins Company Law: Theory, Structure and Operation (Clarendron Press; Oxford, 1997). 69

For example, see Lalita S. Som, “Corporate Governance Codes in India,” Economic and Political

Weekly, Vol. 41, No. 39, (September 30 - October 06, 2006), pp. 4152-4160. (hereinafter “Som

(2006)”) 70

Umakanth Varottil, “A Cautionary Tale of the Transplant Effect on Indian Corporate Governance,”

21(1) Nat. L. Sch. Ind. Rev. (2009).


12

control over the company. It also increases the potential for violation of the rights of the

minority shareholders.71

However, when one looks at the absolute ownership, these persons

or groups own relatively small percentages of the voting rights in the company, much lesser

than a majority percentage, although they exercise considerable control over the

corporations.72

A large amount of equity capital is owned by institutional investors, both,

domestic73

and foreign.74

Further, there are a wide number of dispersed shareholders across

the country.75

Thus, even a threshold as low as 15% can sometimes affect the amount of

control exercised in a company, thereby justifying the low threshold.

Part IV: Penalties

In the UK, the Panel has the power to make rules regarding actions for the breach of the

rules provided in the Code after following the proper procedure.76

It is also empowered to

provide for rules ordering payment of compensation and interest77

where it thinks is just and

reasonable.78

Violation of offer document rules attracts liabilities in the form of fines.79

Under the rules, the Takeover Panel has disciplinary powers under the Code which include

the power to issue a private or public statement of censure, suspend or withdraw any

special status granted by the Panel to such a person or make it conditional, report it to a

British or overseas regulatory authority (most notably the Financial Services Authority) and

71

Rajesh Chakrabarti, “Corporate Governance in India – Evolution and Challenges,” (January 17, 2005)

available at <http://ssrn.com/abstract=649857> visited on January 26 2011. 72

See Ram Kumar Kakani & Tejas Joshi, “The Tata Group after the JRD Period: Management and

Ownership Structure”, (February 2008) available at <http://ssrn.com/abstract=889394> visited on

January 26 2011 (shareholding structure of the Tata Group); Tarun Khanna & Krishna Palepu, “The

Evolution of Concentrated Ownership in India: Broad Patterns and a History of the Indian Software

Industry”, National Bureau of Economic Research Working Paper No. 10613 avilable at

<http://unpan1.un.org/intradoc/groups/public/documents/APCITY/UNPAN019738.pdf> visited on

January 30 2011 (for a discussion on the ownership structure in Indian companies). 73

<http://www.sebi.gov.in/mf/rmmf.html> visited on January 26 2011; <http://www.sebi.gov.in/

mf/staaprmar2002.html> visited on January 26 2011; 51st

Annual Report: 2007-2008 of the Life

Insurance Corporation of India; <http://www.sebi.gov.in/odi/2009.html> visited on January 26 2011;

<http://www.sebi.gov.in/odi/2003.html> visited on January 26 2011; Som (2006). 74

<http://www.ibef.org/economy/foreigninvestors.aspx> visited on January 26 2011. 75

Tarun Khanna & Krishna Palepu, “The Evolution of Concentrated Ownership in India: Broad Patterns

and a History of the Indian Software Industry”, National Bureau of Economic Research Working Paper

No. 10613 avilable at <http://unpan1.un.org/intradoc/groups/public/documents/APCITY/UNPAN0197

38.pdf> visited on January 30 2011. 76

See Section 952 of the Companies Act, 2006. 77

Section 954 of the Companies Act, 2006 read with Para 10(c) of the Introduction to the City Code on

Takeovers and Mergers. 78

Rt. Hon Dame Mary Arden and Prof. Dan Prentice Buckley on Companies Act Volume 1 (Lexis Nexis

Butterworths, 2009). 79

Section 953 of the Companies Act, 2006.


13

ask them to take disciplinary or enforcement action or issue a “cold-shoulder80

” ruling.81

The

Panel can turn to the High Court for enforcement in certain cases.82

In Singapore, Section 140 of the Securities & Futures Act (“SFA”) makes it an offence for any

person to make an offer without an intention to make or honour or without any reasonable

grounds for believing that he will be able to perform his obligations if the offer is accepted

or approved punishable with fine and/or imprisonment of up to 7 years.83

Further, the SFA

and the STC prohibit persons in possession of price sensitive information from dealing84

and

the SFA also provide for criminal sanctions for insider trading.85

However, breach of the STC

itself does not attract any criminal liability per se,86

although the SIC has the power to invoke

such sanctions (including public censure) as it may decide for breach of the rules.87

Also, if

SIC has reason to believe that a criminal offence has been committed, then it can

recommend the Attorney General to prosecute the offender.88

In India, on the other hand, the Regulations clearly impose severe liabilities for the breach of

the regulations. Penalties include forfeiture of money deposited in escrow account,89

cancellation of certificate of registration, directing sale of shares acquired in violation of the

Regulations, directing the person not to deal in securities any further and prosecution which

may extend to barring the person from entering the market.90

These include not only civil

liabilities but also criminal prosecution.91

It has been held that penalty is penal in nature and

80

A cold-shoulder ruling is where the Panel publishes a Panel Statement indicating that the person is

someone who is not likely to comply with the Code. The rules of the Financial Services Authority and

some other regulatory bodies oblige their members not to deal with a person who is the subject of

such a ruling. – Buckley (2008), at Para 2857 of 16-98. 81

Para 11(b) of the Introduction to the City Code on Takeovers and Mergers. 82

See Section 955 of the Companies Act, 2006. 83

Section 140 of the Securities & Futures Act. 84

Rule 11.1 of the Singapore Code on Takeovers and Mergers; Sections 218 and 219 of the Securities

& Futures Act. 85

Sections 221 and 232 of the Securities & Futures Act. 86

Section 139(8) of the Securities & Futures Act. 87

Section 139(9) of the Securities & Futures Act. 88

Singapore: Takeover Guide, Alan and Gledhill available at <www.alanandgledhill.com> visited on

January 20 2011. 89

An acquirer is required to deposit a part of the money to be paid for the acquisition into an escrow

account. The quantum of the money deposited varies with the total size of the acquisition. – See


Verma and Kumar (2008), at p. 612. 91

See Regulation 45 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997

read with Sections 24, 15H, 11B, 11(4), 11D and 15HB of the Securities and Exchange Board Act, 1994;

Also see N. Sridharan, “Eleventh Amendment in the SEBI (Substantial Acquisition of Shares and

Takeover) Regulations, 1997”, [2005] 57 SCL (Mag.) 142.


14

was intended to act as a deterrent and must be imposed with discretion.92

In civil

proceedings, mens rea need not be alleged and proved;93

although its presence may support

the levying of the penalty vis-à-vis a case where the omission is genuine without intention to

violate laws and bona fide is demonstrated.94

Thus, when we compare India, the UK and Singapore, we see that while India has strong

penalties for the violation of the rules under takeover regulations, the UK and Singapore do

not. Further, in the case of the UK, this is true despite the fact that the Takeover Panel is

statutorily empowered to impose compensatory liabilities where breach results in requiring

pecuniary payments, a power it has rarely exercised. Thus, UK and Singapore appear to have

taken a softer stand on the issue as compared to India. This can be understood by, once

again, examining the context in which these rules operate.

In the context of the UK, Pennington opined: “The legal and other sanctions bear no logical

relationship to the seriousness of contraventions…in the case of the suspension or revocation

of a stock exchange quotation, the sanction may harm the very investors whose interests are

intended to be protected. Nevertheless, this does not matter if…the City Code [is] in fact

complied with, and the very effective sanction inducing the City institutions and the

supervisory panel set up under the code to ensure that this is done, is the knowledge that if

there are only a few serious contraventions, the self- regulation of the City will be supplanted

by statutory control by the Government, with all the additional work, loss of time, (which is

always material in takeover bids) and inflexibility which Government regulation entails.95

”

.

In the UK, as discussed in the Datafin case,96

although the Panel does not have any de jure

authority, its de facto powers are immense. Simply because its sanctions are limited, indirect

and lack a legally enforceable base (as they did prior to the 2004 EC Directive), they are no

less effective. Therefore, there is demonstrable need as such felt in the UK to give greater

sanctions for breach of the City Code. Fundamentally, the Code was envisaged as voluntary,

and not obligatory, in character.97

This explains why, even after the statutory powers were

92

Diamond Projects (P.) Ltd. v. SEBI, [2005] 59 SCL 549; Hindustan Steel Ltd. v. State of Orissa, [1972]

83 ITR 26. 93

SEBI v. Cabot International Capital Corp. [2004] 51 SCL 307. 94

N. Sridharan, “Acquisition of Shares and Disclosure of Shareholding Under SEBI’s Takeover Code”,

[2006] 68 SCL (Mag.) 131. 95

Pennington (1969), at p. 170. 96

R v. Panel on Take-overs and Mergers, ex p Datapin plc., [1987] QB 815, at 826. 97

Pennington (1969), at 177.


15

introduced in compliance with the EC Directive, the penalties under the Code remain, by and

large, the same.

The researchers believe that many of the aforementioned reasons for such a system in the

UK also explain the situation in Singapore. Further, it can also be explained by the principles

and features that were emphasised in its drafting. Emphasis was laid on speeding up the

takeover process, providing flexibility and preventing contentious litigation.98

Further, as has

already been discussed,99

the Singapore market is a relatively small market with key families

and the government controlling a large portion of the equity share capital, and these are the

most likely persons to act as bidders in a takeover process. Therefore, not only is it easy to

enforce compliance with the STC by the SIC but it is also in the best interests of these various

players in the market for corporate control who cannot afford censure from the market in

which they hope to operate in the future.

Finally, the business environment and policies behind regulation in Singapore is very

different from the West. The government has a conscious policy of not regulating areas

unless absolutely necessary. In an attempt to make Singapore as business friendly as

possible, the government is hesitant to increasing business costs and legislate on issues that

could otherwise be voluntarily addressed by companies. Instead, it employs a mixture of

consensus building and the incentivising compliance, rewarding good corporate behaviour

and providing voluntary guidelines to help companies achieve that. 100

In India, on the other hand, there are many more players in the stock market. In 1996, a year

before the Indian Code came in place; many unfair practices, greater inefficiencies and lesser

transparency were reported in the Indian markets as compared to the UK and Singapore.

The investors did not feel protected as such.101

The researchers believe that, considering the

growing size of the market, the prevailing sentiment among the investors and the resources

of the SEBI, it was not practical for SEBI to simply apply the non-statutory system with

limited sanctions that prevailed then in the UK and would later be introduced in Singapore.

Therefore, it was considered more expedient and in the best interest of promoting better

practices in the takeover process in the Indian market to provide for greater sanctions in

98

See Singapore Consultation Paper (1999). 99

See Part III supra. 100

Ong (2008). 101

See L.C. Gupta, “Challenges before Securities and Exchange Board of India”, Economic and Political

Weekly, Vol. 31, No. 12 (Mar. 23, 1996), pp. 751-753+755+757.


16

certain cases, including both, civil and criminal liabilities. And the securities market has

improved under SEBI Regulations.102

The liabilities can also be explained from the clear statutory basis of the SEBI and the Indian

Code as compares to the UK and Singapore. The Indian Code is a piece of delegated

legislation103

based in the SEBI Act which not only gives the SEBI powers of directions,104

but

also prescribes monetary105

and criminal sanctions for its rules.106

Further, India’s

constitutional setup would not allow for the kind of flexibility that is afforded to the Panel or

the SIC in the UK and Singapore, especially, in the light of the fact that the laws in India allow

for criminal sanctions which must be provided by statute prospectively.107

However,

flexibility is allowed for to the extent that criminal sanctions can only be imposed by the

courts on receipt of a complaint from SEBI.108

Thus, we see in the area of penalties, that the variation in the penalties is a result of the

principles that are valued and emphasised on across jurisdictions coupled with their

institutional and constitutional realities. In that sense, the principles across UK, Singapore

and India are, in several ways, similar. However, their market conditions, institutional

realities and policy considerations vary considerably thereby explaining the divergences.

Further, in the case of the UK and Singapore, although the substance of the regulations is, by

and large, the same, the systems in which they operate are quite different.

Part V: Self Regulation

UK and the impact of the EU Directive

102 Montek S. Ahluwalia, “Economic Reforms in India since 1991: Has Gradualism Worked?”, The

Journal of Economic Perspectives, Vol. 16, No. 3 (Summer, 2002), pp. 67-88 103

For an overview of delegated legislation in India, its scope and limits, see Salmond, Jurisprudence

(P.J. Fitzgerald Ed., 12th

ed., London: Sweet & Maxwell, 1967), at p. 112; C.K. Takwani, Lectures on

Administrative Law (3rd

ed., Lucknow: Eastern Book Company, 2001), at p. 60-63; S.P. Sathe,

Administrative Law (6th

ed., New Delhi: Butterworths, 1999), at p. 27-30, 64. 104

Sections 11 and 11B of the SEBI Act, 1992. 105

Section 15H of the SEBI Act, 1992. 106

Sections 24 and 27 of the SEBI Act, 1992.. 107

See, in the context of the criminal sanctions under the SEBI Act, Videocon International v. SEBI

[2008] 82 SCL 460 (Bom.) and Swedish Match AB v. SEBI and Anr., (2004) 11 SCC 641 sourced from

Vayttaden (2010). 108

Section 26(1) of the SEBI Act, 1992.


17

Prior to the Companies Act, 2006 the City Code as well as the Panel did not have a statutory

basis or authority and so the entire system is one of self regulation. However the courts had

tacitly decided not to step in this area making the City Code as well as the Panel a reference

point for good commercial practice.109

The City Code is not a statute and hence not drafted

in legalese with the intent being that it is meant for ordinary commercial men to use as a set

of guidelines for their dealings in the corporate world. This intent has been manifested in the

Introduction to the General Principles as follows:

“It is impracticable to devise rules in sufficient detail to cover all circumstances which can

arise in offers. Accordingly, persons engaged in offers should be aware that the spirit as well

as the precise wording of the General Principles and the ensuing Rules must be observed.

Moreover, the General Principles and the spirit of the Code will apply in areas or

circumstances not explicitly covered by any Rule.”110

The “spirit and intent” philosophy underlying the Code indicates that there is no need to

cover all eventualities.

The Importance of Flexibility

Why do merger transactions require regulation by a flexible regime when a potentially more

rigid structure of regulation is adopted for other corporate transactions? The most obvious

response to this is the observation that the methods of achieving a successful outcome to a

bid or of defending a bid constantly evolve and challenge the parties involved as well as the

regulators at the helm of the transaction. Bids may be structured in different ways with

consideration being in cash, securities or a combination of the two. Methods of financing

change depending on the market and its liquidity and the amount of information required by

shareholders also differ based on industry and shareholding structures. The City Code seeks

to respond to these changes and thus fluidity is maintained to respond to these changes and

to prevent the participants from following the letter by manipulating their bids and at the

same time thwarting the spirit and intent of the City Code.

Apart from flexibility in interpretation, the existence of a non statutory regime allowed for

more rapid amendment to the City Code than if it was comprised either in a statute or even

109

Lord Alexander of Weedon “Takeovers: The Regulatory Scene” (1990) J.B.L 203, 213-214. 110

Introduction to the City Code on Takeovers and Mergers


18

a statutory instrument. This problem of uncertainty in interpretation of the Code by the

Panel though present is not a matter of over concern for the regulators. This is because

uncertainty in interpretation of the Principles is something that concerns lawyers and Courts

whose role is minimal if not absent in this sphere. The City Code has been designed by the

market for those operating the market and informal consultation with the Executive of the

Panel is preferred to seeking legal or judicial intervention. Other benefits include informality,

speed, flexibility and effective control while criticism abounds as to its arbitrary and

inconsistent nature aimed at permitting dealings to protect an active market and those who

benefit from it.111

This need to preserve the flexible nature of the City Code as it was in its non statutory form

stemmed from the paramount importance given to maintain a free and fair market at all

costs.

The clear example of where the conflicting arguments for certainty and flexibility meet

headlong is in the scheme of operation of the Panel’s powers of dispensation as most rules

allow the panel to waive their application suited to differing sets of circumstances. This

exercise of dispensation powers might result in the Panel having to compromise on the legal

rights and equitable principles relating to the parties involved.

This clear prominence to fair and free market as the mandate of the Panel was underlined by

its Chairperson in a speech where he noted that the Panel does not control all aspects of

takeovers but focuses primarily on ensuring fairness to shareholders.

The Impact of the EU Directive on the UK Companies Act, 2006 (CA, 2006)

The regulation of takeovers is a further area where Community Law has come to be a

significant source of relevant rules. After a very long gestation period, the Community

eventually adopted Directive of the European Parliament and the Council on the takeover

bids. One of the requirements of the Directive is that Member states should “designate the

authority or authorities competent to supervise bids” This made it mandatory for the United

Kingdom to place the takeover rules on some sort of statutory footing. In fact the proposed

changes in the legal status of the Panel was the basis for the UK Government’s initial

111

Geoffrey Morse “Controlling Takeovers: The Self Regulation option in the United Kingdom” (1998)

J.B.L 58, 60-61.


19

opposition to the Directive, despite the fact that the Directive’s substantive content was

heavily influenced b the City Code.112

The UK Government aimed to produce a situation of

compliance with the directive where the Panel could carry on in practice as much as before

Thus Section 942 of the Companies Act, 2006 simply confers certain statutory powers upon

the Panel but does not seek to regulate the constitution of the Panel.

The most obvious limitation of a self regulation regime is the lack of legal force behind the

City Code. The only legal basis given to the Code is under Section 143 of FSMA which

provides for endorsing and sanctioning powers of the FSA. It seems as if the so called

advantages of self regulation were reiterated yet again and again to ensure compliance by

participants in the marker who otherwise had little reason to listen to the regulator which

had no legal force behind it. These desperate measures have now been rendered obsolete

under statutory regulation where the regulator and the rules are fully backed up by the force

of law. Nevertheless the CA 2006 has been designed in a way that retains the current system

with the Panel having responsibility for takeover regulation.

Self Regulation in Singapore and its continued existence

Although the STC is promulgated as a subsidiary legislation and is given legal backing by the

Singapore Companies Act, it is non-statutory in that a breach of the Code is not a

transgression of the law. The SIC Consultation paper on the subject discussed the prospect

of switching to a statutory form and discounted the possibility in the near future due to the

advantages that a non statutory regime offers:

“Take-over rules in non-statutory form have important advantages: (i) prompt rulings as

opposed to Court judgments which would take time; (ii) flexibility in

administering/interpreting provisions according to specific circumstances as the non-

statutory rules are not rendered in legal language; and (iii) certainty as the Court is normally

reluctant to review Council's rulings, particularly in the midst of a take-over offer. Parties

112

Company law implementation of the European Directive on Takeover Bids- A Consultative

Document issued by the DTI (January 2006) available at <http://www.bis.gov.uk/files/file10384.pdf>

visited on 30th January 2011.


20

thus cannot use the Court process to stall or frustrate a take-over offer. From our discussions

with market practitioners, the consensus is that rules and practices governing M&A

transactions should remain in non-statutory form in view of the inherent benefits of speed,

flexibility and certainty.”113

A fundamental issue that arose when the SIC was contemplating amendments to the STC

and had invited suggestions from the market towards the same was with regard to the issue

of whether Singapore should adopt the US model or retain the existing UK model (also

known as the City model) for regulating M&A activities. The fundamental difference

between the two being that In the US, directors of a target company have more

independence to determine their response to a bid situation and are given the discretion to

put a proposed offer to shareholders for consideration or alternatively reject it outright. In

comparison, the UK model requires the board to obtain competent independent advice on

any bona fide offer received, whether welcome or not. In addition, directors are prohibited

from engaging in actions that have the effect of frustrating the bona fide offer.

In their Consultation document on the subject, the SIC noted that while there may be

advantages in empowering directors to hold out for a better offer and/or negotiate for

better terms under the US model, the flip-side is that shareholders could be deprived of an

opportunity to consider and accept a take-over proposal which the directors have

rejected.114

The SIC went on to note that the STC does not prohibit competing offers for the

same offeree company. Interested parties are always free to make a rival bid if they so

decide. In fact, the Singapore Code requires the offeree company to treat all offerors

equally. This creates a situation where the Board’s primary duty in the face of a bid is to

ensure that their actions are in favour of the company and not the vested interests of the

entrenched management.115

Since the mandate of the STC is similar to the UK code giving primacy to the shareholder’s

interests and maintaining of a fair and free market, the SIC observed that the general

consensus among market practitioners was to retain the current UK system, i.e. the board

should obtain advice on all bona fide offers received and not to reject any out of hand. This

view is based on the fundamental principle that shareholders, as owners of the target

113



See Singapore Consultation Paper (1999).


21

company, should have the right to decide for themselves whether to accept or reject an

offer for their shares.

Thus Singapore decided to retain its parent model of the UK self regulation system as it felt

that the benefits of the same outweighed the advantage of having legal force backing the

Singapore Takeover Code as well as the rulings of the SIC, an aspect that will be discussed

further in the section on appeals in the UK, Singapore and Indian context.

Having discussed the advantages of a self regulatory regime in the UK and Singapore, the

researchers attempted to understand why India decided to give a clear statutory basis to its

Takeover Regulations as well as clearly underlined the powers and function of SEBI, the body

regulating takeovers in the country thereby depriving it of the flexibility in approach that the

UK Takeover Panel and the SIC seem to enjoy. This can possibly be explained by examining

the context in which takeover regulations were introduced in India. In the post 1990 era of

globalization, there was a wave of corporate restructuring which marked a shift from

friendly to hostile takeovers. In such a scenario protection of the interest of the small

investors and the shareholders of the target company became the focus of attention and

this intent would not have been served well under a self regulation regime. The major

market players who wielded great influence in the corporate market of that day would have

made huge profits at the expense of these small investors. The Government thus decided to

bring in a structured takeover regulation regime with legal force behind it such that these

investors were not defrauded and the SEBI was given wide powers to further this intent.

Thus the self regulatory nature of Takeover regulations in the UK and Singapore was virtually

impossible to achieve in India where the market was such that a statutory means of control

became necessary to prevent exploitation and unfairness.

Part VI: The Role of the Courts

The Low likelihood of Tactical Litigation: Impact of the Self regulation feature on the limited

scope for judicial review of the Takeover Panel in the UK.

With the coming of the Directive, the Panel and the Government’s central concern was not

with the formal status of the Panel but with preserving in its statutory framework, the

propensity for speedy rulings which are at the same time, flexible and binding in the course

of the bid and cannot easily be challenged in litigation before the ordinary courts. A


22

fundamental concern in this regard was to prevent the emergence of tactical litigation,

designed to disrupt the bid timetable or delay the implementation of a Panel ruling.116

Prior

to the coming into force of the Directive and its implementation, this was made possible

through a speedy appeal system within the Panel itself. This was coupled with the Court’s

limited and” after the event” judicial review approach that was in line with the prominence

given to the Panel rulings.117

This helped preserve the system of intra Panel appeals process that was already in existence

such that rulings of the Panel Executive were referred to the Panel Hearings Committee and

from the Panel Hearing Committee, a formal appeal could be made to the Takeover Appeal

Board. The second limb of the pre directive system of dealing with tactical litigation was

focussed on exercise of judicial restraint in exercising their powers of review. Article 4(6)

permits the UK courts to maintain their restraint but does not require it. The Datafin118

case

established the basis for making the Panel rulings subject to judicial review in the Pre

Directive era on the grounds that the Panel, although a private body was performing a public

function. The impact of the Datafin ruling was tempered to a great degree by the limitations

placed on this power. The expectations with respect to the Panel rulings were that the

parties abide by them even if one of them had signalled that it intended to seek judicial

review. Secondly the grounds for review were limited. These limitations are highlighted in

the belief that the rules of the Panel had very low likelihood of being declared ultra vires and

the Panel is given considerable latitude in its rulings. Moreover the expectation drew from

the fact that the Courts would intervene only after the bid was concluded. This makes the

option of judicial review limited to its actual function of overseeing the Panel’s ruling as

opposed to being used as a device for tactical litigation.119

116

Jonathan Mukwiri “The Myth of Tactical Litigation in UK Takeovers” Journal of Corporate Law

Studies Vol. 8 Part 2 p.373 (October 2008). (hereinafter “Mukwiri (2008)”) 117

Article 4(6) of the Directive preserves this approach of judicial restraint by providing that:

“this directive shall not affect the powers of the Member states to designate judicial or other

authorities responsible for dealing with disputes and for deciding on irregularities committed in the

course of bids or the power of Member states to regulate whether and under which circumstances

parties to a bid are entitled to bring administrative or judicial proceedings. In particular, this Directive

shall not affect the power which courts may have in a member state to decline to hear legal

proceedings and to decide whether or not such proceedings affect the outcome of a bid.” 118

R. v. Panel on Takeovers and Mergers, ex p. Datafin Limited. (1987) Q.B. 815 CA. 119

Mukwiri (2008), at p.382.


23

In fact most scholarship120

on the subject seems to conclude that the change from self

regulation to statutory is hardly noticeable since the CA2006 has replicated to the maximum

extent possible the practices and procedures of the Panel and placed them in a statutory

context. Moreover the Government in the Consultative document released by the DTI on the

implementation of the European Directive indicates that the Government’s intent was

neither to undermine nor be inconsistent with the restrictive approach in Datafin.

One of the principles derived from the ruling in the Datafin case is the non interventionist

principle- the relationship between the Panel and the Courts is to be historic rather than

contemporaneous. The principle has two limbs namely that the Court will not intervene in

an ongoing takeover bid and that the Court’s role will be limited to guiding the Panel on how

to act in a future case of a similar nature.

As was subsequently stressed in R v. Panel on Takeovers and Mergers, ex p. Guinness121

, this

is a supervisory or long stop jurisdiction. It does not involve the courts substituting their

judgment for the commercial experience of the Panel.

It seems that this attitude of deference on part of the Courts to the Panel continues despite

the statutory framework within which the Panel is placed.122

The statute encourages this

trend by giving the Panel “power to do anything that it considers necessary or expedient for

the purpose of, or in connection with its functions. This provides a legitimate legal basis to

the Panel’s wide range of powers and thus ensures that the statutory framework does not

take away but in fact adds to the Panel’s vires.123

Thus the scheme of the Companies Act,

2006 seems to suggest the Government’s intention to fit the requirements of the Directive

to the existing mandate of the Panel instead of vice versa. The Companies Act, 2006 actively

blocks off any avenues made available by the statutory recognition of the Code through

Section 956(1) and (2) which state that no action for breach of statutory duty lie in respect

of a contravention of a requirement imposed by or under the Panel’s rules and that

120

Mukwiri (2008), also see Gower and Davies Principles of Modern Company Law 8th

Edition 28-6

(London; 2008). 121

(1990) 1 Q.B. 146 CA. 122

In implementing the Directive, Part 28 of the CA 2006 primarily aims to prevent the occurrence of

tactical litigation. Introducing the Bill (that lead to the CA 2006) IN Parliament, Lord Sainsbury of

Turville said “The Bill’s provisions aim to ensure that tactical litigation seeking to delay or frustrate a

takeover bid will not become a feature of our takeover markets”- The Parliament Undersecretary of

State, Department of Trade and Industry, “Company Law Reform Bill”, HL Col 186 11 January 2006

available at <http://www.publications.parliament.uk/pa/ld199900/ldhansrd/pdvn/lds06/text/60111-

08.htm> visited on 27th January 2011). 123

See ss. 942(2),943,944(1) and 945. In effect the CA 2006 through these sections reinforces the

Panel’s rule making and quasi judicial nature in regulating takeovers.


24

contravention of such a rule based requirement does not render the transaction in which it

occurs void or unenforceable.

Thus the statutory provisions now in force are designed to ensure the continuance of the

perceived advantages of a self regulatory approach while allowing the Panel for the first

time, to impose sanctions directly on wrongdoers. It is duly noted that despite these recent

statutory changes, the City Code is for all practical purposes a self regulatory instrument.

Before the implementation of the Takeover Directive, the City’s self regulatory capacity was

built upon a combination of legislative inactivity and its ability to deny access to its market

to those who flaunt the rules. The dominant theoretical view of the City Code remains that it

is both a regulatory solution to a market failure and that it ensures market accountability to

shareholders since the implementation of the Directive has changed nothing much in terms

of the content.

The principles laid out in Datafin have been preserved in the new statutory regime as well

and interestingly the Singapore takeover regime also seems inclined to follow the UK

principle of minimal interference with the self regulation of takeovers.

The Singapore context- Limited Nature of Appeal as an Inevitable Feature of Self Regulation.

As has already been discussed, the STC is non-statutory in that it does not have the force of

law. Its primary objective is fair and equal treatment of all shareholders in a takeover or

merger situation.

The STC is not concerned with the financial or commercial advantages or disadvantages of a

take-over or merger; and the MAS as well as the SIC seem to believe that such matters

should be decided by the company and its shareholders. The STC represents the collective

public opinion on the standard of conduct to be observed in general, and how fairness can

be achieved in particular, in a take-over or merger transaction. A fundamental requirement

is that shareholders in the company subject to a take -over offer must be given sufficient

information, advice and time to consider and decide on the offer.124

This is in line with the

UK approach of regulating takeovers and this attitude stems from the similarity in views

124

Extract from [Monetary Authority of Singapore - The Singapore Code of Take-overs and Mergers]

available at

<http://www.mas.gov.sg/resource/sic/The_Singapore_Code_on_Take_Overs_and_Mergers_1_April_

2007.pdf> visited on 30th January 2011.


25

between the two countries with regard to the principle of shareholder primacy as well as the

regulating of takeovers by an autonomous institution which gives due regard to the pulse of

the market and not the black letter of law. It is also consistent with the Singaporean policy of

keeping the costs of business low and creating an attractive business environment.125

The SIC is administered and enforced by the SIC. The SIC is provided with discretion to waive

the application of the Take-over Code and such discretion allows the SIC to waive the Take-

over Code where the costs of compliance outweigh the benefits.

The SIC is approached in case of confusion about the operation of certain regulations and

regular consultation with the SIC is deemed necessary all through the course of the Takeover

bid to prevent flouting any of the requirements. Pursuant to Section 139 of the SFA, the SIC

may also issue rulings on the interpretation of the General Principles and the Rules in the

Takeover Code and lay down the practices to be followed by parties in a Takeover offer and

matters connected therewith. Section 139(7) holds that these rulings are final and binding

in nature. This indicates that the Datafin principle have been reflected in the administration

of the Takeover Code in Singapore as well and the “final and binding” portion of Section

139(7) indicates legislative intent to give credence to this notion of minimal judicial

intervention in the working and regulation of takeovers.

While this theory is yet to be tested in courts of Singapore and there is no judicial

affirmation of the view that final and binding nature of SIC rulings means that no appeal to

courts can take place, this appears to be the most plausible interpretation possible of

Section 139(7). This is because the rationale that was reflected in Datafin and later adopted

in the Companies Act, 2006 of UK has been echoed time and again under the Singapore

regime. Singapore’s reluctance to shift to a statutory regulation regime and their decision to

continue with the self regulation system that even UK has shifted away from reflects the

importance that the Singapore takeover scene gives to autonomy of the market and the

desire to keep commercial decisions away from the stronghold of the courtrooms. The

mantra seems to be speed and flexibility of rulings which SIC strives to achieve and which

would suffer a serious setback if court control was made permissible and an appeal

mechanism was recognized and established.

125

See Ong (2008).


26

Right to appeal in the Indian context: Legislative and Judicial affirmation

The right to appeal is a statutory right in India. The right to appeal against SEBI’ rulings arises

from Section 15T of the SEBI Act.126

As Somashekhar Sundaresam notes in his column in

Business standard127

, this provision can be read widely and examines the impact of an order

by the SAT which allows for appeal scrutiny over decisions and actions of SEBI. In the given

ruling by SAT, it disposed of an appeal by National Securities Depository Ltd. and ruled that

its appellate jurisdiction covers all orders made by SEBI. The term “order” has been

exhaustively defined in this SAT order and is predicated on a literal reading of Section 15T

which allows for an appeal from any “order” made by SEBI. SAT noted that “The right of

appeal is a statutory right and it has necessarily to be governed by the provisions of the

statute which creates it” It extended this to argue that the SEBI Act which gives the power to

appeal does not restrict it so as to exclude orders. SAT observed that “The language used in

Section 15T is of widest amplitude and makes every order passed by the board appealable,

whether it be in exercise of its administrative, legislative or judicial/ quasi judicial powers.” It

also noted that the Parliament had the legislative capacity to limit the right of appeal as it

had done under Section 15Z of the Act. Section 15Z provides for an appeal from SAT to the

Supreme Court and the Section clearly restricts such appeals to only questions of law and

excludes questions of fact.

While the power of SAT to sit in appeal over SEBI rulings is made clear by a literal reading of

Section 15T much like the Takeover Board of Appeals in UK, the question of jurisdiction of

civil courts over SEBI was made clear by a Single judge bench of the Bombay High Court in a

ruling that was dealt with by Mr. Somasekhar Sundaresan in his column in the Business

Standard.128

The issue that arose for consideration was whether civil courts could exercise or

even possessed jurisdiction to try matters that came within the regulatory purview of the

SEBI and it was ruled that the court had no jurisdiction. This was based on the Court’s

interpretation with respect to Section 15Y and 20A of the SEBI Act which as per the court are

to be read as ousting the jurisdiction of every civil court over matters which the SEBI has

jurisdiction over. Thus all functions to be performed by the SEBI including adjudicatory

126

Section 15T of the SEBI Act, 1992. 127

Somasekhar Sundaresan “Every decision of the SEBI is appealable” available at <http://business-

standard.com/india/storypage.php?autono=261102> visited on 30th

January 2011. 128

Somasekhar Sunderesan “Civil Courts have no jurisdiction over SEBI Act” available at

<http://bsl.co.in/india/news/civil-courts-have-no-jurisdiction-over-sebi-act/228732/> visited on 30th

January 2011.


27

functions of the SEBI and the SAT are not within the jurisdiction of the civil courts. The Court

also held that there is no injunctive power available with regard to any action performed by

SEBI in pursuance of its powers.

The rationale behind such a judgment is that SEBI has been constituted as an expert body

performing specialised functions and hence the concept of speedy and effective rulings as

given by the SEBI would be lost if the judicial process was allowed to intervene in its mode

and manner of functioning. The appellate power of the Courts has also been severely

restricted under Section 15Z as has been noted above and the reason for that is along the

same lines. SAT is the specialised appellate body created for an appeals process from actions

of the SEBI and hence a further appeal from SAT can lie only to Supreme Court on questions

of law.

Regulation 46129

entitles any person aggrieved by a SEBI order to prefer an appeal to the

SAT. This regulation is substantially similar to Section 15T(1)(a) of the SEBI Act. Earlier an

appeal used to lie only to the Central Government. In 2000 the SEBI (Appeal to the Securities

Appellate Tribunal) (Amendment) Regulations 2000 made changes in line with the changes

made by the Securities Law (Amendment Act, 1999 to the appeal provisions of the SEBI

Act.130

In Rhodia SA v. SEBI131

, it has been held that the SAT exercises plenary powers when it sits in

appeal from SEBI’s orders which means that it acts like a trial court empowered to go into

questions of both fact and law. A very important ruling from the standpoint of the SAT’s

powers to rule on exercise of discretion by SEBI was laid down in Clariant International v.

SEBI132

where the Supreme Court rejected the argument that SAT should not interfere with

SEBI’s discretion .

“The Board is indisputably an expert body. But when it exercises its quasi judicial functions;

its decisions are subject to appeal. The Appellate tribunal is also an expert tribunal....The

jurisdiction of the appellate authority under the Act is not in any way fettered by the statute

129

SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997. 130

Vayttaden (2010), at p. 439. 131

(Appeal No 36/2001) sourced from Vayttaden (2010). 132

(2004) 8 SCC 524.


28

and thus, it exercises the same jurisdiction as the Board. It can exercise its discretionary

jurisdiction in the same manner as the Board.”

Regulation 46 and Section 15T of the SEBI act provide for locus standi to a “person

aggrieved” from an order of SEBI to make an appeal to SAT. In Ramprasad Somani v. SEBI133

,

SAT examined numerous decisions of SEBI to determine the standard for “aggrieved person”

and based their ruling on the holding in Adi Pherozshah Gandhi v. Advocate General in

Maharashtra134

:

“any person who feels aggrieved with the result of a case is not a person aggrieved. He must

be disappointed of the benefit which he would have received if the order had not gone the

other way. The order must cause him a legal grievance by wrongfully depriving him of

something”

It was on the basis of this formulation that the SAT had concluded that a shareholder of a

target company could appeal a finding of SEBI that the Takeover Regulations had not been

violated.

Only an “order” of the SEBI is appealable under Regulation 46. In MA Sumathi v. SEBI and

others135

the SAT laid out the test for determining what constitutes an order:

“...An order is primarily a decision which has the effect of a command whether called by such

name or not ands is distinguished from an advice or request, by the nature of consequences

that may flow form the non implementation of the same.”

Power of Review

The Central Government when it used to act as an appellate authority had held that there

was no provision in the SEBI Act or in the SEBI (Appeal to Central Government Rules 1993)

which enabled it to review its decisions. However SAT has the same powers as a civil court

under the Code of Civil Procedure, 1908 to review its own decisions. 136

133

SAT order dated 27th

September 2002, MANU/SB/0107/2002 sourced from Vayttaden (2010). 134

(1970) 2 SCC 484. 135

SAT, (Appeal No.99/2002). 136

Vayttaden (2010), at 443.


29

The scope of a review is more limited than an appeal under Regulation 46 in that while in an

appeal an order may be reversed on any ground of illegality, in a review SAT is limited to the

grounds mentioned in Order 47 Rule 1 which are:

• The discovery of new and important evidence which could not with due diligence

have been produced by him at the time of the order or

• Some mistake or error apparent on the face of the record or

• for any other sufficient reason

Thus as has been observed, unlike the situation in UK and Singapore which provide for

limited recourse to courts in case of a situation where a party is aggrieved with a decision of

the Takeover Panel or the SIC respectively, India has a structured appeals as well as review

mechanism in place. This stems from the conscious decision to adopt a statutory regime

with legal basis for SEBI and its powers. The rationale behind the Datafin principle which

seems to be the norm in both UK and Singapore is rooted in a historical context which

deems the Takeover regulatory authorities to be autonomous bodies whose function is to

facilitate the takeover process by giving speedy and flexible rulings on the interpretation of

the Code. On the other hand, India has rooted its regulation of Takeovers in statute and the

intention seemed to be protection of the innocent shareholder from being defrauded in a

self regulatory environment. Thus the SEBI’s powers though wide under the Act are subject

to the supervision of the appeals process by the SAT.

CONCLUSION

There is a considerable amount of literature available providing legal analysis of takeover

regulation in the US, the UK and Europe more generally. However, comparative literature,

particularly comparing countries in the West and the East, is severely lacking. This paper is

the first step in filling that gap. The researchers believe that such comparison could provide

a fertile ground for understanding the optimal regulation for different countries.

The researchers find that the form and substance of the Takeover Regulations as well as the

powers of the regulatory bodies are shaped by the social and economic context of the given

countries. Further, although the substance of the regulations between two countries may be

similar, the similarities may exist for widely different reasons. Therefore, in the case of

mandatory thresholds, while UK and Singapore have the same thresholds for triggering a


30

mandatory offer, in the UK, this is despite dispersed shareholdings due to the large holdings

of institutional investors; whereas in Singapore, it is because of the concentrated holdings in

major companies by either the state or a few families. In India, we see a hybrid of the two

systems with family controlled firms, but lower voting rights/share capital held thereby

justifying a low threshold.

The penalties and sanctions also differ due to the corporate milieu that they are supposed to

regulate. The Takeover Panel in the UK and the SIC in Singapore have powers of censure

which allow them to bring the erring party to task albeit in a less severe way than the SEBI in

India which has been provided with the power to impose clear civil and criminal penalties.

The basic intent in the UK behind these laws is to protect the shareholders’ interests without

disrupting the autonomy of the market for corporate control. The City Code was envisaged

as voluntary in nature. In the Singaporean context, this type of approach is workable as the

shareholding structures are narrow and consolidated in the hands of a few players who

cannot afford to risk their reputation and find it to their advantage to follow the directions

issued by the regulatory bodies. Further, it is consistent with their policy of lowering

business costs and incentivising compliance to create an attractive business environment.

As opposed to this, the statutory regime in India was warranted by the existence of multiple

players who had little to lose but a lot to gain from flouting the Takeover Regulations in a

self regulatory regime. Thus the legal force behind the SEBI and wide powers to impose

penalties keep these corporate players in check and provide respite to the investors whose

interests are safeguarded.

The right to appeal against the rulings of these regulatory bodies provides for an interesting

comparison. The principle of non interference with Panel rulings as laid down in the Datafin

case found place in the Companies Act, 2006 as well and minimal scope for judicial review

that has been provided for can only take place after the Takeover has occurred. This was

done to preserve the seeming advantages of speedy and flexible rulings that became an

integral feature of the self regulation regime. This principle has been adopted in Singapore

as well since the SIC gives precedence to disposing of disputes about interpretation of the

Code in a speedy manner so that the bid timetable is not disrupted. Contrary to this focus on

ensuring that the Takeover progresses as smoothly and speedily as possible, India has a

structured appeals mechanism for any person aggrieved with an order of the SEBI that

relates to the Takeover Regulations. The SAT which sits in appeal over the SEBI is a 3


31

member body and is overburdened with appeals from SEBI rulings. The situation worsened

to such an extent that a PIL was filed by a securities lawyer in Bombay asking for the

reconstitution of the 3 member SAT so that it could resume its work in an efficient manner

and clear the backlog that had set in.137

This raises the pertinent question about the efficacy

of an appeals process since the SAT and SEBI seem to be at constant loggerheads with the

SEBI preferring an appeal to the Supreme Court from SAT decisions that overturn or modify

its rulings.

While the right to appeal provides an avenue for redress in case of error or gross injustice by

the SEBI in exercise of its multitude of powers, there is a need to streamline the appeals

process such that it does not become a tool for tactical litigation disrupting the ongoing

Takeover bid such that it falls through as this would be to the disadvantage of both the

shareholders of the target company as well as the Indian corporate and securities market in

general.

All these comparison duly noted and commented upon above stem from the primary

differences in the nature of regulations that these 3 countries have adopted. While the UK

used to function under a self regulatory Code having moved to a statutory regime in 2006,

Singapore continues its functioning under the tutelage of the SIC and a self regulatory

Takeover Code. India on the other hand has had a statutory backing to its Takeover

Regulations since the very beginning. While it is difficult to conclusively point out one regime

as better than the other, the advantages of a self regulatory regime such as flexibility and

speed in rulings seem to outweigh the disadvantages of the lack of legal force for the same

in Singapore. However these advantages though indisputable would be over shadowed by

the problems that accompany a self regulatory Code in a country like India. The need for

legal backing to any regulation is extremely important in the Indian context where the

players are many and the desire to flout the regulations abounds. In such a scenario, the

SEBI’s role as an active watchdog is desirable. While the appeals process has tempered the

speedy nature of the SEBI’s functioning, the SEBI’s tightly held reins over the takeover

process even though it might slow down the process is still the lesser of the two evils.

137

http://www.livemint.com/articles/2009/04/03235106/Red-tape-appeals-piling-up-ag.html#

visited on 30th

January 2011.

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