Introduction:

In recent years, directors and officers liability insurance has become a core component of corporate insurance. As many as 95% of Fortune 500 companies maintain directors and officers (“D&O”) liability insurance today. Furthermore, it has become a commonplace of the financial world that disappointed investors will charge corporations and their officers and directors with securities fraud whenever a company’s stock drops significantly in price. Studies indicate that the average settlement of securities fraud litigation in 1999 was greater than $8 million, with average defense costs exceeding $1 million. In light of these numbers, it should not be surprising that such litigation has become almost routine, and D&O liability insurance plays a large role in handling it. At the same time, the D&O insurance industry has become highly specialized and new products are constantly emerging to meet the needs of specific markets. This article will discuss the historic and current trends in the industry. In addition, this article will address some of the primary legal and coverage concerns that must be considered by underwriters, claims handlers, corporations and their executives, and the attorneys who represent them.

History of D&O Insurance:

In the 1930s, in the wake of the depression, Lloyd’s of London introduced coverage for corporate directors and officers. At the time, corporations were not permitted to indemnify their directors and officers. Joseph P. Monteleone & Nicholas J. Conca, Directors and Officers Indemnification and Liability Insurance: An Overview of Legal and Practical Issues, 51 Bus. Law 573, 574 (1996). However, directors and officers did not perceive a great risk, and the insurance did not sell. Well into the 1960s, the market for D&O coverage was negligible. In the 1940s and 1950s, courts, corporations and directors and officers began to see benefits to corporate indemnification and prompted state legislatures to enact laws permitting it. Then, during the 1960s changes in the interpretation of the securities laws created the realistic possibility that directors and officers themselves, and not only corporations, could face significant liability. See Roberta Romano, What Went Wrong with Directors’ and Officers’ Liability Insurance, 14 Del. J. Corp. L. 1, 21 & nn. 74-77 (1989). Insurers responded to these changes by reviving specialty coverage for the “personal financial protection” of directors and officers.

The historic focus on “personal financial protection” distinguished D&O insurance from other kinds of commercial insurance that cover identified areas of corporate risk. Insurers had defined corporate risks they would insure. General liability insurance provided corporate insurance for bodily injury or property damage claims; fidelity bonds afforded specified first-party coverage for losses corporations incur due to certain acts of their officers, directors, or employees. D&O coverage, on the other hand, was not intended to be corporate insurance; much less an attempt at general corporate insurance for liability caused the corporation by virtue of the acts of its directors and officers. In recent years, however, D&O coverage has undergone a number of changes.

Current Importance of D&O Insurance:

The D&O industry matured and evolved during the 1970s through the 1990s, and continues to do so today. From its modest beginnings in the 1930s, D&O insurance has become a fixture in today’s corporate world. Starting with basic D&O coverage, the industry has spawned a large number of new and related products. The original focus on “personal financial protection” is no longer the single driving force behind the industry, and D&O insurance is often coupled with coverages designed to protect the corporation, in addition to its directors and officers, from various liabilities.

During the 1980s, the first litigated disputes between D&O insurers and federal regulators (or the former bank officials whom the regulators sued) brought D&O coverage into the forefront in many significant and often highly publicized matters. In recent years, corporations of all kinds and their directors and officers have seen an increasing number of claims and increasingly large settlements. Watson Wyatt Worldwide, D&O Liability Survey Report (1997). Thus, D&O insurance remains an important protection for directors and officers. In addition to the traditional protections, the industry has set a trend toward expanding D&O coverage – both in terms of who is protected and against what they are protected. Many underwriters now write coverages that offer protection to the company for its own liability and for specific corporate concerns.

Claims against Directors and Officers:

As noted above, claims against directors and officers generally have been increasing over time. As of the most recent Wyatt survey, 31% of all companies – an all time high – could expect to have at least one claim made against its directors or officers, and each company averaged 0.87 claims – also an all time high. Watson Wyatt Worldwide, D&O Liability Survey Report, at pp. 42-44 (1997) (the “1997 Wyatt Report”). The frequency of claims against directors and officers, and the susceptibility of officers and directors to claims corresponds to a number of factors, including the size of the company, the company’s type of business, whether the company is publicly or privately owned, and its number of shareholders. For example, companies with greater assets are more likely to have claims made against their directors and officers and on average experience more claims per company than smaller companies. Publicly held companies have two to three times as many claims made against their directors and officers than privately or closely held companies. However, companies with greater than 500 shareholders have a higher claim frequency than smaller companies, regardless of private or public status. Id.

Specifically, according to the 1997 Wyatt Report, companies with assets less than $100 million had a 12% susceptibility to claims, but companies with assets greater than $10 billion had a 63% chance of having a claim made against its directors or officers, and companies with assets greater than $1 billion averaged 1.64 claims per company in 1997. Large banking companies are the most likely type of business to have claims made against their directors and officers and average the most claims per company. Forty-two percent of large banks will have at least one claim made, while the large banking industry as a whole can expect an average of 6.69 claims per company. With the explosion of technology companies in the last ten years, and the corresponding fluctuations in their stock prices, claims against technology companies have also increased dramatically.

Basic Coverages:

At its most basic, D&O insurance protects directors and officers from liability arising from actions connected to their corporate positions. Due to general expansion in the industry, market pressures and the industry’s responses to the development of case law, D&O insurance has expanded beyond its original and basic coverage. Thus, a single policy now may provide multiple and varied options by standard form or endorsement. The individual coverages discussed below typically are subject to distinct terms, conditions and deductibles, and even may be subject to distinct policy limits or sublimits. However, some common threads run through each coverage offered in a D&O policy. For example, D&O insuring agreements generally specify that coverage is limited to claims first made during the policy period. In addition, the insurer typically does not have a duty to defend but is required to cover the costs of the insured’s defense.

Insuring Agreement [A] (D&O):

Although each policy will employ its own language, Insuring Agreement A, often referred to as “A-Side Coverage,” typically provides coverage directly to the directors and officers for loss – including defense costs – resulting from claims made against them for their wrongful acts. A-Side Coverage applies where the corporation does not indemnify its directors and officers. A corporation may not indemnify its directors or officers because it either (1) is prohibited by law from doing so, (2) is permitted to do so by law and the company’s bylaws but chooses not to do so, or (3) is financially incapable of doing so, due to bankruptcy, liquidation, or lack of funds. The laws regarding indemnification differ from jurisdiction to jurisdiction. Insuring Agreement A additionally may specify that coverage is limited to those claims connected to an insured’s capacity as an insured director or officer of the company. This issue of capacity recurs throughout D&O coverage analysis. The limiting language may appear in the insuring clause, in the definitions of “wrongful act” or “insured” found elsewhere in the policy, or in all three clauses. Although a claim sometimes implicates an insured in a single and clear capacity, a claim may well arise out of an individual’s multiple capacities. For example, an individual may be sued as a director and a shareholder of a company (perhaps as a purchaser or seller of company stock), or an officer of a homeowner’s association may also be a homeowner and it may not be clear whether his or her actions were taken as one or the other – or both. Similarly, a corporations’ lawyer may also sit on the board of directors.

Insuring Agreement [B] (Corporate Reimbursement):

A typical Insuring Agreement B, or “B-side coverage,” reimburses a corporation for its loss where the corporation indemnifies its directors and officers for claims against them. B-side coverage does not provide coverage for the corporation for its own liability. The language and conditions of Insuring Clause B typically mirror Insuring Clause A.

Entity Securities Coverage:

Many D&O policies offer an optional coverage to protect the corporation against securities claims. Such coverage provides protection for the corporation for its own liability. Many policies today provide such coverage to the corporation whether or not its directors and officers are also sued; other policies, however, provide such coverage only where the corporation is a co-defendant with its directors and officers. Entity coverage may be part of the policy form as “Insuring Agreement C” or may be added as an endorsement. The addition of entity coverage for securities claims is a relatively new development, and addresses concerns and confusion raised by court rulings regarding allocation. See e.g. Nordstrom, Inc. v. Chubb & Son, Inc., 54 F.3d 1425 (9th Cir. 1995).

EPL Coverage:

Employment Practices Liability (“EPL”) coverage also has become a common addition to corporate coverage – often by endorsement to the D&O policy or as a stand-alone policy issued to the company. This coverage typically protects directors, officers, employees and/or the company against employment-related claims brought by employees and, in certain circumstances, specified third-parties. For example, it provides coverage for wrongful dismissals or failures to promote, sexual harassment, and other violations of federal, state or local employment and discrimination laws brought by the company’s employees. EPL claims have also seen a dramatic increase in frequency and severity over the past decade.

Defence Issues:

Most D&O policies do not impose a duty to defend on the insurer. They do, however, provide coverage for defense costs and give the insurer the right to associate with the defense and approve defense strategies, expenditures, and settlements.

Right to Select Counsel:

(A) The D&O insurer cannot impose its choice of counsel on an insured – the insured generally has the right to select counsel, subject to the insurer’s consent. D&O policies typically provide that an insurer may not unreasonably withhold approval of an insured’s choice of counsel. This feature is important to the insured corporation, which typically has developed ongoing relations with corporate and litigation counsel that it would want to use in high-stakes litigation against the company.

(B) Reimbursement and Advancement of Defense Costs Although D&O insurers generally do not have a duty to defend, D&O policies do cover defense costs. The primary questions that arise in connection with the payment of defense costs regard (1) control over the costs incurred and (2) when the insurer must make defense payments. In connection with the first question, although insurers do not control an insured’s defense, under D&O policies they are required to reimburse only reasonable defense costs arising out of covered claims. Thus, an insured or his chosen counsel does not get a blank check.

Whether a D&O insurer must, or should, advance defense costs – that is, pay them as they are incurred – is a common question. Many of the issues affecting coverage cannot be resolved until the claim has been resolved. Specifically, certain exclusions only apply after a finding of fact has been made. For example, as discussed below, policies generally exclude coverage for losses arising out of fraud. The exclusion only applies, however, where there is a final judgment finding fraud. Thus, where fraud is alleged, coverage is uncertain until the completion of the claim. In such situations, insurers may have an interest in not advancing defense costs until coverage is certain. However, insurers have an interest in seeing their insured vigorously defend claims against them. A vigorous defense can be a costly endeavor that may be well beyond the means of an insured. Thus, many policies provide that insurers advance defense costs under the condition that, should the facts ultimately demonstrate a lack of coverage, the insured will reimburse the advanced monies.

Key Provisions and Exclusions:

Twenty years ago, underwriters offered D&O policies based on two basic forms, and courts had seen very few cases in which they were asked to interpret those policies. Today, the number of D&O policy forms and cases interpreting them has multiplied. Although there are trends and standards within the industry, the specific language found in these policies differs from insurer to insurer and from policy to policy. Any coverage analysis must take into account the specific language found in the policy at issue. As a general matter, clear policy language will govern the application of coverage to a particular claim.

Definition of Claim:

Common to all coverages in a D&O policy is that each insuring clause generally provides coverage on a “claims-made” basis. In other words, it provides the coverage described for claims made during the period for which the coverage is purchased. Additionally, the insured typically must report the claim to the insurer during the policy period or within a reasonable time.

D&O policies generally define claim as any (1) civil, criminal or administrative proceeding, or (2) written demand for damages against an insured. Who is included as an insured will depend on which coverages are implicated and how the term is defined in the policy. That is, if it is a securities claim, and the policy so provides, a claim may be made against the company or against a director or officer. If it is an employment claim, and the policy so provides, a claim may be made against the company, a director or officer, or an employee.

Some policies offer more detailed definitions of claim. For example, a policy may state that a civil proceeding includes arbitration, mediation or other alternative dispute resolution. A policy may also explain that an administrative proceeding includes a formal investigation.

Many policies also include limiting a claim to those proceedings or demands made against an insured in his or her capacity as an insured. The capacity issue may be stated directly in the definition of claim, or may be stated in the definitions of “insured” or “wrongful act,” either of which may be part of the definition of claim.

Definition of Loss:

Loss generally includes damages, judgments, awards, settlements and defense costs. Loss usually excludes fines or penalties, taxes, treble (or other multiplied) damages, and matters uninsurable under law. Where treble or multiplied damages are assessed, a D&O policy generally will cover the base amount, but not the multiplied portion of the loss. Some policies include punitive and exemplary damages in the definition of loss. Where included, coverage of punitive and exemplary damages explicitly is effective only where permitted by applicable law.

Punitive or exemplary damages:

Some states do not permit punitive or exemplary damages to be assessed at all. See e.g. Distinctive Printing and Packaging Co. v. Cox, 443 N.W.2d 566 (Neb. 1989). Those states that do permit punitive damages to be assessed may not permit insurance against them. See e.g. City Products Corp. v. Globe Indem. Co., 151 Cal. Rptr. 494 (Cal. Ct. App. 1979). Those states prohibiting coverage of punitive damages generally base the prohibition on public policy concerns. The longstanding reasoning is that the assessment of punitive damages is intended to set an example or punish the wrongdoer, and permitting insurance against such punishment would render such punishment ineffective. Id.

Matters uninsurable under applicable law:

Matters deemed uninsurable under law also may be the basis of explicit exclusions elsewhere in a policy. For example, coverage for liability for fraud may be barred by law, as well as by a dishonesty exclusion. As discussed above, coverage for punitive damages also may be barred by law.

Exclusions-

1. ? Dishonesty Exclusion:

Dishonesty exclusions bar coverage for claims made in connection with an insured’s dishonesty, fraud, or willful violation of laws or statutes. The dishonesty exclusion also may be coupled with personal profit exclusion, barring coverage in connection with an insured’s illicit gain. These exclusions typically are followed by a severability clause – that is, a caveat providing that the acts or knowledge of one insured will not be imputed to any other insured for the purposes of applying the exclusion. In other words, the exclusion only bars coverage for the insured(s) whose acts or knowledge are the basis of the claim at issue.

In the securities context, the Private Securities Litigation Reform Act of 1995 permits a defendant to request a special verdict from the jury, identifying its judgment of each defendant’s state of mind. PSLRA, 15 U.S.C. 77z-1(d). Although a special verdict would assist in the proper application of the dishonesty exclusion, most securities lawsuits do not reach a verdict at all – they are either settled or decided on motions.

As mentioned above, many dishonesty exclusions include an adjudication clause, which provides that the exclusion only applies if the fraud or dishonesty is established by a judgment or other final adjudication. In connection with this clause, the question arises whether the judgment or other final adjudication must be in the underlying litigation. For the most part, the case law on this subject supports the position that most adjudication clauses, as they currently are written, require a final adjudication in the underlying litigation, rather than in a parallel coverage action or other lawsuit. Courts have held either that (1) the adjudication clause is ambiguous, so must be interpreted in favor of coverage, see e.g., Atlantic Permanent Fed. Sav. & Loan Ass’n v. American Cas. Co., 839 F.2d 212, 216-17 (4th Cir. 1988) (finding the phrase “a judgment or other final adjudication thereof” to be ambiguous, and therefore upholding the district court’s decision against the insurer that the provision requires a finding of deliberate dishonesty “in the underlying action itself, rather than a subsequent coverage suit”), or (2) the clause explicitly requires a finding of fraud or dishonesty in the underlying litigation. See National Union Fire Ins. Co. v. Continental Illinois Corp., 666 F. Supp. 1180, 1197 (N.D. Ill. 1987) (finding that where an adjudication clause requires “a judgment or other final adjudication thereof,” that “[t]he word ‘thereof’ refers to the suit against the directors and officers and unless there is a judgment adverse to them in the underlying suit, then the exclusion does not apply”). This issue has a significant impact on the effect of settlements. Essentially, if an underlying lawsuit is settled without a specific admission of liability, a dishonesty exclusion is unlikely to apply.

2. ? Insured v. Insured Exclusion:

As the name implies, an insured versus insured (“IvI”) exclusion bars coverage for claims made by an insured (e.g., a director, officer or corporate insured) against another insured. In addition, the exclusion may bar coverage for claims brought (1) by anyone directly or indirectly affiliated with an insured, (2) by a shareholder unless the shareholder is acting independently and without input from any insured, or (3) at the behest of an insured. The exclusion essentially prevents a company from suing or orchestrating a suit against its directors and officers in order to collect insurance proceeds. Questions regarding the application of the exclusion arise in the context of derivative lawsuits, bankruptcies and receiverships.

Specifically, it is clear that where a lawsuit is brought with the “active assistance” of an insured, the exclusion bars coverage. See e.g. Voluntary Hospitals of America, Inc. v. National Union Fire Ins. Co., 859 F. Supp. 260 (N.D. Tex. 1993), aff’d 24 F.3d 239 (5th Cir. 1994). It is not always clear, however, when a lawsuit is brought with the indirect involvement of, or at the behest of the insured, and there is very little case law expounding on the issue.

Where the policy only provides coverage for insureds when acting in their capacities as insureds – such as through a restrictive insuring agreement or definition of insured – the IvI exclusion likewise may be interpreted so as to apply only where the insured is bringing suit in an insured capacity. See Howard Savings Bank v. Northland Ins. Co., 1997 U.S. Dist. LEXIS 11857 (N.D. Ill. 1997). Where coverage does not depend explicitly on whether an insured was acting in an insured capacity, however, the IvI exclusion does not turn on the capacity issue either. See Kiewit Diversified Group Inc. v. Federal Ins. Co., 999 F. Supp. 1169 (N.D. Ill 1998).

Courts have held that where suit is brought by the receiver of a failed bank, an IvI exclusion bars coverage. Mount Hawley Ins. Co. v. FSLIC, 695 F. Supp. 469 (C.D. Cal. 1987); but see FDIC v. American Casualty Co., 814 F. Supp. 1021 (D. Wyo. 1991). Depending on the particular wording of the exclusion, some courts have held that an IvI exclusion does not bar coverage for a suit brought by a bankruptcy trustee. In re Pintlar, 205 B.R. 945 (Bankr. D. Idaho 1997); but see Reliance Ins. Co. v. Weiss, 148 B.R. 575 (E.D. Mo. 1992).

3. ? Professional Liability Exclusion:

As a general matter, D&O policies do not provide coverage for liability associated with the provision of professional services. Thus, where a bank officer is liable for acts as a banker rather than an officer of the bank, a D&O policy with a professional liability exclusion would not provide coverage. Similarly, where a doctor is the president of a professional corporation, the D&O policy would only protect him or her against liability from acts as president of the corporation, and would not provide coverage for professional malpractice claims. The line between professional services and acts outside the scope of this exclusion can be a fine one. Courts often draw a distinction between those acts that require special training or are at the heart of the profession and those acts that are administrative in nature. See e.g. Harad v. Aetna Cas. and Sur. Co., 839 F.2d 979 (3d Cir. 1988).

4. ? Prior Acts Exclusion:

Prior acts exclusions bar coverage for claims arising out of an insured’s wrongful acts prior to a specified date. The date may coincide with the termination of coverage under a previous policy. The date may also coincide with a change in corporate status – such as a merger or acquisition. For example, where a subsidiary is acquired, the prior acts exclusion may exclude coverage for the subsidiary prior to the time it became a subsidiary. In such situations, the subsidiary may have run-off coverage from a previous policy to protect against liability arising from those excluded acts.

5. ? Prior and Pending Litigation Exclusion:

Prior and pending litigation exclusions generally exclude coverage for (1) claims pending prior to the inception of the policy, or another agreed upon date, and (2) subsequent claims based on the same facts or circumstances. Conflicts primarily arise regarding the second component of this exclusion. Specifically, the question arises as to when a subsequent claim is based on sufficiently overlapping facts and circumstances to fall within the scope of the exclusion. Courts have held that the two claims need not be brought by the same plaintiffs to trigger the exclusion. See e.g., Unified School Dist. No. 501 v. Continental Cas. Co., 723 F. Supp. 564 (D. Kansas 1989) (finding exclusion applied where new plaintiffs brought new claims). Furthermore, the claims can allege different harms, and still be excluded from coverage by this provision. See, e.g., Ameriwood Indus. Int’l Corp. v. Am. Cas. Co. of Reading, Pennsylvania, 840 F. Supp. 1143 (W.D. Mich. 1993) (rejecting argument that allegation of different legal claims prevented operation of exclusion). The exclusion additionally may apply even if the two claims allege different legal violations, or are brought in different courts and pursuant to the authority of different jurisdictions. See, e.g., Bensalem Township v. Int’l Surplus Lines Ins. Co., 91-5315, 1992 U.S. Dist. LEXIS 8243 (E.D. Pa. June 15, 1992) (applying exclusion where prior claims sought relief for violations of Pennsylvania law and later claims sought relief for violations of federal law), rev’d on other grounds, 38 F.3d 1303 (3d Cir. 1994).

Meaning of Director as per the Companies Act, 1956:

A company is a legal entity and does not have any physical existence. It can act only through natural persons to run its affairs. The person, acting on its behalf, is called Director.

Section 2(13) of the Companies Act, 1956, defines a Director as any person, occupying the position of Director, by whatever name called. They are professional men, hired by the company to direct its affairs. But, they are not the servants of the company. They are rather the officers of the company.

The definition of Director given in this clause is an inclusive definition. It includes any person who occupies the position of a director is known as Director whether or not designated as Director. It is not the name by which a person is called but the position he occupies and the functions and duties which he discharges that determine whether in fact he is a Director or not. The function is everything; name matters nothing. So long as a person is duly, appointed by the company to control the company”s business and, authorized by the Articles to contract in the company”s name and, on its behalf, he functions as a Director.

The Articles of a company may, therefore, designate its Directors as governors, members of the governing council or, the board of management, or give them any other title, but so far as the law is concerned, they are simple Directors.

Meaning of Liability:

The word liability has two general connotations. In business law, liability refers to the responsibility for a company’s debt or other obligations. Some forms of business organization, such as a sole proprietorship, have unlimited liability, meaning that the owner is personally responsible for the debts and obligations of the business, and lenders or courts may look to the owner’s personal assets for payment of these obligations. Limited liability organizations, such as corporations, allow lenders and courts to only seize the assets of the business rather than the assets of the owners.

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However, liability is more frequently used in an accounting sense, where the word refers to a claim on a company’s assets. Technically, a liability is a required transfer of assets or services that must occur on or by a specified date as a result of some other event that has already occurred.

Why liability matters?

Information about a company’s liabilities is a key component of accurate financial reporting and a crucial part of thorough financial analysis. Although the Financial Accounting Standards Board, the Securities and Exchange Commission, and other regulatory bodies define how and when a company’s liabilities are reported, and although liabilities make up a significant portion of the balance sheet, not all liabilities are required to appear on the balance sheet. Therefore, analysts must also carefully study the notes to a company’s financial statements.

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Excessive liabilities can ruin a company, but they are not always detrimental. Liabilities often represent the company’s ability to defer cash outlays, allowing it to use that cash for other, possibly more profitable purposes until the obligation is due. The use of debt financing can magnify profits that would have otherwise gone unrealized.

Liability of directors under the Companies Act, 1956

?Position of director:

The directors are the custodian of the interests of the shareholders. Their position is fiduciary vis-?-vis the Company. The directors must exercise their power for the benefit of the Company. There exists a relationship of a trustee and trust between the directors and the shareholders of the Company. The directors have been held trustees of the assets of the Company and in many cases the courts have directed them to reimburse the loss to the Company, where it was found that directors have applied the Company’s money in payment of an improper commission.? Each section also specifies the penalty to be paid in case of default, imprisonment or both.

The strictness with which the courts view the responsibility and the sacredness of the trust reposed in the directors had been? emphasized in many cases. Their position has further changed in the era of Corporate Governance to the extent that the directors have to protect the interests of not only the shareholders but also other stakeholders.

In this article an attempt is made to define the extent and scope of liabilities of Directors viz. Managing Director, Working Director and an ordinary Director under the Companies Act, 1956.

Liabilities of Directors:

The liabilities of the directors vary according to the status of the Company i.e. whether the Company is private or public. But in all cases in discharging the duties of his position, he must act honestly, carefully and without any negligence. The various liabilities of directors under the companies Act, 1956 may be summarized as under:

1. Filing of various documents with Registrar of Companies:

a) Annual Return within 60 days of the annual general meeting.

b) Balance Sheet within 30 days of laying the accounts at the annual general meeting.

c) Return of Allotment of Shares in Form No. 2 within 30 days of Allotment of shares.

d) Change in Directors / Secretary (Appointment / Re-appointment /Cessation/ Resignation etc.) in Form No. 32 within 30 days of such change.

e) Registration of certain resolutions and agreements u/s 192 in Form No. 23 within 30 days of passing of such resolutions etc.

f) Creation & modification of charges in Form No. 8 & 13 and Satisfaction of charges in Form No. 17 & 13, within 30 days of creation, modification and satisfaction respectively.

2. Holding of various Meetings under Companies Act, 1956:

a) Board Meeting:

b) Annual General Meeting

c) Extra-ordinary General Meeting

3. Maintenance of Statutory Books under Companies Act, 1956:

a) Minutes Book: for Board meeting and General meetings separately u/s 193.

b) Register of Members : showing name, address and occupation of each member,?the? share held including the distinctive numbers, the amount paid on the shares etc.u/s 150/151

c) Register of interested Directors etc. : showing the required particulars u/s 301

d) Register of Directors, Managing Directors and Secretary : showing the required particulars about them etc. u/s 303

e) Register of Directors, Managing Directors and Secretary shareholding: showing the required details about shareholding etc. u/s 307.

f) Register of Charges: showing the particulars of charges on the assets of the company u/s 143.

g) Register of Investments showing particulars of investment u/s 49/ 372A.

h) Register of Transfer of Shares: along with details relating to the transferor and the transferee and the No. of shares transfer etc.

4. Liability for negligence

5. Standard and degree of care and skill

6. Special Statutory Protection against Liability [S.633]

7. Fiduciary Duties

1.Directors as Officers in Default:

a) . Acceptance of public deposit

Directors and Officers Liability Insurance

(often called D&O) is insurance payable to the directors and officers of a company, or to the corporation itself, to cover damages or defense costs in the event they are sued for wrongful acts while they were with that company.

Typical sources of claims include shareholders, shareholder-derivative actions, customers, regulators, and competitors (for anti-trust or unfair trade practice allegations).

Directors and Officers Liability insurance is commonly purchased with a companion product “Corporate Reimbursement Insurance” (or “Company Reimbursement Insurance”). When purchased together, a single insurance policy is normally issued which is entitled “Directors and Officers Liability and Company Reimbursement Insurance”. Modern Directors? & Officers policies now frequently include cover for the Company Entity itself as well as Employment Practice Liability.

D&O insurance is usually purchased by the company itself, even when it is for the sole benefit of directors and officers. Reasons for doing so are many, but commonly would assist a company in attracting and retaining directors. Where a country’s legislation prevents the company from purchasing the insurance, a premium split between the directors and the company is often done, so as to demonstrate that the directors have paid a portion of the premium.

A common misperception of D&O insurance is that it makes directors or officers able to engage in acts they know to be wrong; this is not the case. Intentional acts are not covered in D&O insurance. Only negligence by directors or officers would be covered.

In a recent spate of litigation, a number of adverse court verdicts regarding the liability of directors and officers of companies to a third party were passed where the directors and officers were held personally liable for payment of compensation to the third party. Ordinarily, the directors and officers are bound by duty towards the company itself, shareholders, employees, creditors, customers, competitors, members of the public, government and other regulatory bodies. Any breach or non-performance in the duties can result in claims against the companies and/or its directors of the company by reason of any wrongful act in their respective capacity. The Directors’ and Officers’ Liability Insurance policy has been designed specifically to meet any financial liabilities imposed upon them.

This policy is necessary for directors and officers of every company if they wish to avoid potential litigation owing to-

Failure of supervision. Inaccuracy in statements of financial accounts. Lack of judgement and good faith. Mismanagement of funds. Mis-statements in prospectuses. Allotment of shares. Unauthorised loans or investments. Failure to obtain competitive bids. Imprudent expansion resulting in a loss. Using inside information. Unwarranted dividend payment, salaries or compensation. Misleading statements filed with the stock exchange. Misrepresentation in acquisition agreement for the purchase of another company. Wrongful dismissal of an employee.

Risks covered:

This policy covers all claims made in event of-

Mergers, takeovers and divestment. Liquidation. Changes in control of shareholding. Share issues. Shareholder claims. Misdeeds of co-directors. Trustee accountability and responsibility. Customs and excise allegations. Administrative liabilities. Termination of employment. Disposal of old firm/ entry of new owners. Miscellaneous litigation.

Compensation Offered:

The extent of indemnity being severely restricted by the Companies’ Act will reimburse the extent of legal costs expended only if the Director/ Officer successfully defend the act taken against him.

Also, coverage is available on a ‘claims made’ basis and applies only to claims made against the Board of Directors during the policy period, irrespective of when the wrongful act occurred.

The cover applies to-

Liabilities arising from any claim made against Directors and/ or Officers of the company by reason of any wrongful act in their respective capacity. Liabilities against the company where it is required to indemnify the Directors/ Officers pursuant to common or statutory law provisions or Memorandum and Articles of Association. The company and its subsidiaries that are under the common control of the Directors/ Officers.

Exclusions:

The policy will not pay for the losses arising from any claim. Prior and pending litigation and claims submitted under previous policies. Bodily injury, sickness, disease, emotional distress, death, damage or destruction of tangible property including loss.? Insured v/s Insured. viz. Directors suing each other. Illegal personal profit and remuneration. Deliberate, dishonest or fraudulent acts. Pollution and/ or contamination. Insider trading. Outside directorship (can be covered with specific information).

This policy is offered by:

National Insurance Company Ltd. (NIC) The Oriental Insurance Company Ltd. (OIC) United India Insurance Company Ltd. (UIIC) The New India Assurance Company Ltd. (NIAC) Directors & Officers Liability is the liability (or exposure to litigation) of corporate board members and officers arising out of their actions pertaining to their management duties of the corporation. Directors & Officers Liability Insurance insures the personal assets of corporate board members and officers [as well as the company's corporate assets] from lawsuits arising out of their capacity as directors or officers of the cooperation.

What are the responsibilities of Corporate Boards?

Review & authorize major corporate actions. Advice & counsel management on corporate decisions. Review & oversee proper audit procedures. Review the Cooperation’s investments. Stay informed about the Corporation’s financial status and legal developments.

Assist management in decision-making Verify the Corporation is in compliance with all applicable statutes, regulations & laws. Monitor management’s performance.

Directors & Officers of corporations are responsible for the affairs of their companies. They must use good faith and prudent judgment in their service to the corporation. Directors & Officers have certain duties and responsibilities when acting in the service of the corporation. These duties are, as follows:

General Duties – Directors & Officers must act in good faith and prudent judgment in their service to the cooperation.

Common Law Duties – The following are the common law duties-

Duty of Loyalty – Directors? & Officers must avoid conflicts of interest, self-dealing, and misuse of corporate assets.

Duty of Obedience -Directors? & Officers must act within the boundaries established by statute, corporate charter or by-laws, and written policies and procedures.

Duty of Diligence and Care - Directors? & Officers must conduct themselves with the care that an ordinary person would exercise under similar circumstances and in similar capacities.

Statutory Duties - There are several laws and statutes that regulate the actions and decisions of Directors? & Officers.

Securities Laws Anti-Trust Laws Employment Laws ERISA Violations Racketeering Laws Tax Laws Environmental Laws Intellectual Property & Patent Laws State Corporation Laws

Business Judgment Rule – Directors & Officers have historically been protected from personal liability against them by a legal principal known as the Business Judgment Rule. This legal principal shields corporate directors & officers by applying the rule for mistakes in judgment (i.e. second-guessing). As long as the director or officers has acted according to the duties of loyalty, obedience and diligence, then the director or officer may be protected by the Business Judgment Rule.

Directors & Officers Liability Claims:

Directors & Officers of both Public and Private Companies face legal liabilities in their service to the corporation. The claims experience between the two varies. Public Companies experience more frequency and severity of claims related to shareholder issues, while both Public and Private Companies face similar experience for Employment Related Claims. Below is a partial list of typical claimants:

Shareholders Employees Creditors Customers/Clients Competitors Government Regulatory Agencies

There are three categories of protection against personal liability of Directors & Officers of corporations:

Indemnification:

The corporation may indemnify their directors & officers for litigation. This is usually accomplished by incorporating an indemnification clause in the corporate by-laws or by a separate written indemnification agreement. Indemnification is also often available and governed through state law. Some conduct by the directors & officers is not indefinable, such as dishonest/illegal acts or intentional misconduct. Indemnification may not be available to directors & officers in cases of financial insolvency or bankruptcy.

Common Law and Statute:

Business Judgment Rule – Courts may apply the Business Judgment Rule to protect directors & officers from personal liability.

Liability-Limiting Statutes – some state and federal laws provide limitation of liability in certain cases.

Insurance Coverage:

Insurance provides protection for individual directors & officers when the corporation is not permitted to indemnify or financially unable to indemnify the directors & officers.

When the corporation does indemnify, D&O insurance will Pay On Behalf Of or indemnify the corporation for payments made to the directors & officers.

In some cases, coverage may be provided for the corporate entity, in cases where the corporation is being held liable. D&O insurance provides Balance Sheet Protection for the corporation. Insurance allows the corporation to transfer risk from its own balance sheet to that of the insurer.

D&O insurance helps the corporation attracts and retain quality board members.

Bhopal disaster Case, AIR 1990 SC 273:

The Bhopal disaster was an industrial disaster that occurred in the city of Bhopal, Madhya Pradesh, India, resulting in the immediate deaths of more than 3,000 people, according to the Indian Supreme Court. A more probable figure is that 8,000 died within two weeks, and it is estimated that an additional 8,000 have since died from gas related diseases.

The incident took place in the early hours of the morning of December 3, 1984, in the heart of the city of Bhopal in the Indian state of Madhya Pradesh. A Union Carbide subsidiary pesticide plant released 42 tones of methyl isocyanate (MIC) gas, exposing at least 520,000 people to toxic gases. The Bhopal disaster is frequently cited as the world’s worst industrial disaster The International Medical Commission on Bhopal was established in 1993 to respond to the disasters.

Background and causes:

The Union Carbide India, Limited (UCIL) plant was established in 1969 near Bhopal. 51% was owned by Union Carbide Corporation (UCC) and 49% by Indian authorities. It produced the pesticide carbary (trademark Sevin). Methyl isocyanate (MIC), an intermediate in carbary manufacture, was also used. In 1979 a plant for producing MIC was added to the site. MIC was used instead of less toxic (but more expensive) materials, and UCC was aware of the substance’s properties and how it had to be handled.

During the night of December 2-3, 1984, large amounts of water entered tank 610, containing 42 tones of methyl isocyanate. The resulting reaction generated a major increase in the temperature inside the tank to over 200?C (400?F), raising the pressure to a level the tank was not designed to withstand. This forced the emergency venting of pressure from the MIC holding tank, releasing a large volume of toxic gases. The reaction was sped up by the presence of iron from corroding non-stainless steel pipelines. A mixture of poisonous gases flooded the city of Bhopal. Massive panic resulted as people woke up in a cloud of gas that burned their lungs. Thousands died from the gases and many were trampled in the panic.

Theories for how the water entered the tank differ. At the time, workers were cleaning out pipes with water, and some claim that because of bad maintenance and leaking valves, it was possible for the water to leak into tank 610. UCC maintains that this was not possible, and that it was an act of sabotage by a “disgruntled worker” who introduced water directly into the tank However, the company’s investigation team found no evidence of the necessary connection.

The 1985 reports give a quite clear picture of what led to the disaster and how it developed, although they differ in details.

Factors leading to this huge gas leak include:

The use of hazardous chemicals (MIC) instead of less dangerous ones Storing these chemicals in large tanks instead of several smaller ones Possible corroding material in pipelines Poor maintenance after the plant ceased production in the early 1980s Failure of several safety systems (due to poor maintenance and regulations)

Plant design and economic pressures to reduce expenses contributed most to the actual leak. The problem was then made worse by the plant’s location near a densely populated area, non-existent catastrophe plans, shortcomings in health care and socio-economic rehabilitation, etc. Analysis shows that the parties responsible for the magnitude of the disaster are the two owners, Union Carbide Corporation and the Government of India, and to some extent, the Government of Madhya Pradesh.

Compensation from Union Carbide:

The Government of India passed the Bhopal Gas Leak Disaster Act that gave the government rights to represent all victims in or outside India. UCC offered US$ 350 million, the insurance sum. The Government of India claimed US$ 350 billion from UCC. In 1989, a settlement was reached where UCC agreed to pay US$ 470 million (the insurance sum, plus interest) in a full and final settlement of its civil and criminal liability. When UCC wanted to sell its shares in UCIL, it was directed by the Supreme Court to finance a 500-bed hospital for the medical care of the survivors. Bhopal Memorial Hospital and Research Centre (BMHRC) was inaugurated in 1998. It was obliged to give free care for survivors for eight years.

Legal proceedings leading to the settlement

On 14th December 1984, the Chairman and CEO of Union Carbide, Warren Anderson, addressed the US Congress, stressing the company’s “commitment to safety” and promising to ensure that a similar accident “cannot happen again”. However, the Indian Government passed the Bhopal Gas Leak Act in March 1985, allowing the Government of India to act as the legal representative for victims of the disaster, leading to the beginning of legal wrangling.

March 1986 saw Union Carbide propose a settlement figure, endorsed by plaintiffs’ US attorneys, of $350 million that would, according to the company, “generate a fund for Bhopal victims of between $500-600 million over 20 years”. In May, litigation was transferred from the US to Indian courts by US District Court Judge. Following an appeal of this decision, the US Court of Appeals affirmed the transfer, judging, in January 1987, that UCIL was a “separate entity, owned, managed and operated exclusively by Indian citizens in India”. The judge in the US granted Carbide’s forum request, thus moving the case to India. This meant that, under US federal law, the company had to submit to Indian jurisdiction.

Litigation continued in India during 1988. The Government of India claimed US$ 350 billion from UCC. The Indian Supreme Court told both sides to come to an agreement and “start with a clean slate” in November 1988.[Eventually, in an out-of-court settlement reached in 1989 , Union Carbide agreed to pay US$ 470 million for damages caused in the Bhopal disaster, 15% of the original $3 billion claimed in the lawsuit. By the end of October 2003, according to the Bhopal Gas Tragedy Relief and Rehabilitation Department, compensation had been awarded to 554,895 people for injuries received and 15,310 survivors of those killed. The average amount to families of the dead was $2,200.

Throughout 1990, the Indian Supreme Court heard appeals against the settlement from “activist petitions”. Nonetheless, in October 1991, the Supreme Court upheld the original $470 million, dismissing any other outstanding petitions that challenged the original decision. The decision set aside a “portion of settlement that quashed criminal prosecutions that were pending at the time of settlement”. The Court ordered the Indian government “to purchase, out of settlement fund, a group medical insurance policy to cover 100,000 persons who may later develop symptoms” and cover any shortfall in the settlement fund. It also “requests” that Carbide and its subsidiary “voluntarily” fund a hospital in Bhopal, at an estimated $17 million, to specifically treat victims of the Bhopal disaster. The company agreed to this. However, the International Campaign for Justice in Bhopal notes that the Court also reinstated criminal charges.

M.C. Mehta v. Union of India, AIR 1987 SC 965 (Oleum Gas Leak Case):

The case of M.C. Mehta v. Union of India originated in the aftermath of oleum gas leak from Shriram Food and Fertilizers Ltd. complex at Delhi. This gas leak occurred soon after the infamous Bhopal gas leak and created a lot of panic in Delhi. One person died in the incident and few were hospitalised. The case lays down the principle of absolute liability and the concept of deep pockets.

Directors Liability Insurance in Canada:

Directors & Officers liability Insurance is a claims made policy which covers the Directors, Officers, and Employees for their exposure as D’s & O’s for the manner in which they conduct the affairs of the Association. The policy covers defense costs, wrongful acts, and administrative errors and omissions.

Coverage’s:

Insured’s Liability Insurance- pay on behalf of the Insured all loss for which the insured is not indemnified by the Entity (even by reason of the Entities Insolvency) and for which the Insured shall become legally obligated to pay because of a wrongful act committed in the discharge of Administrative Duties. Directors & Officers Indemnification Insurance – The Insurer agrees to pay on behalf of the Entity all loss for which the Entity shall be required by law, it’s articles of incorporation or its by-laws to indemnify the Directors & Officers. Penal Defense Costs – will reimburse a D & O, if found innocent, of criminal charges which result from his/her administrative activities within the Entity.

Limits of Insurance:

Coverage A & B- $1,000,000 per loss $10,000,000 per year The annual aggregate is split among 6 provinces

Conclusion:

In the contemporary liberalization global business environment, the role of the director and officer of a company is becoming more significant. The new dimension of the corporate governance is warrant more transparency in the corporate transaction. In the process, the director and officer of the board to shoulder specific duties and responsibilities. Any lopes in their performance may be fatal to the company and shareholder of the company. The company have to pay for it. The alternative available to companies to protect form such liability is insurance. The director and officer insurance provide protection to the company, the director and officer to come out of the tangle litigation . The director and officer are getting and more exposed to variety of legal liability in the increasingly litigious corporate world. Their duties and responsibilities have further multiplied due to specific requirement for good corporate governance. But there are lot of litigations and constraints on the part of the directors to be always vigilant so that they can always take right decision to ensure the best performance of the company. The major constraints come form macro factors like market risk, technology risk, political risk or financial risk where they do not have any control.

So they are porn to make mistakes and commit wrongful act in some case. For wrongful act they are liable to stakeholders under the best practice of the corporate governance. The director and officer liability insurance policy help the directors and the to company transfer such the risk and legal liability to professional fund mangers.

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Most of the companies not aware of the availabilities insurance protection against the risk of corporate liability. the promoter director and officers are not aware of the extent of the coverage available to them. The gaps in the awareness about the availability of legal protection are causing damages to the companies. With the lack of knowledge of indemnification and protection of the director and officer of the company, the Memorandum and Article are silent on the issue the protection of the directors and officer of and their indemnification. because of this, the director and officer face various litigation and fixed with the personal liabilities. As such its essential, which preparing the memorandum and article of Association, to incorporate the clause relating to protection of their director and officer form their liability.

The people governing the companies should also know the extent of the coverage available under the director and officer polices. They do not protect the liabilities arising out of fiduciary relationship and the personal liabilities. to protect the directors and officer form their personal liabilities. To protected directors and officer form their personal liabilities arising due to discharging of statutory duties of companies, the company should either incorporated the clause in the Memorandum and Article, or purchase separate polices to cover personal liabilities. The company should have awareness about their fact excluding and inclusion clause in the director and officer polices. The company should understand the required extent of legal protection to director and officer, and purchase the director and officer polices to that extent. If they fail in understanding the policy they purchase of fail the required policy, the protection may not be available to the companies for which they planned and the court may impose penalties or order payment of damages either by the companies or the director and officer of the companies, in the personal capacities, thus the understanding the director and officer policy and their coverage is an important element

In Indian aware relating director and officer insurance [polices are and their coverage is very low. The concept of the good governance and social responsibility of the companies are exposing the director and officer to various risk. The director and officer made accountable to the inrnal and external people and to society and government. in the complex business environment , the director and officer require protection at every phase. As such the company should come forward to help them out of the problem. If the no people will be afraid of taking the position of the director and officers. The investors, creditors, supplier who are dependent of the company also suffer losses.

In the present corporate environment the role of the director more crucial. If the independent director ask to compensate stake holder and companies for the failure of a business taken by the board of the director, no one come forward to involve in the management of the company . As the are not spared form the liabilities claim, the company have to forego the expertise of independent director, and they should exclude form the liability or should have strong protection form available liabilities.

The director and officer polices liabilities are more costly. There is different product designed by different insurance companies in India and abroad. The Indian multinational companies operating across the global have to inevitable purchase director and officer insurance and other professional indemnity polices to save the interest of the stakeholders. While purchasing the polices company should the right insurance polices to cover the required liabilities. While selecting the polices of every company and its directors should understand the nature of their business, excepted possible litigation and liabilities. Probable claimant extent of the cost and expenditure either to file or defend the suit , the applicable existing local and national law, the hierarchy of the court, the mood and attitude of the court to such issue, to possible fraud and moral hazard in the area. After? understanding the requirement?? director and officer polices can be purchased to that affect. Once the police purchased the company and CEOs should read the policy cautiously and understand the term and condition of the policy.


About the Author:

TAKEOVERS

CONCEPTULISING THEIR WORKING AND REGULATORY REGIMES AROUND THE WORLD AND THEIR RELEVANCE WITH REFERENCE TO THE PRESENT CONTEXT WITH REFERENCE TO INDIA

- Suneera Nerissa Madhok

INTRODUCTION

Since the initiation of the liberalization and globalization policies in India in July 1991, an attempt is definitely being made by our policy makers to recast the institutional, organizational and legal arrangements in line with those practiced in the established market economies. In view of exploring the changing institutional framework in the context of economic reforms, the objective of this paper is to examine the recent scenario in the private corporate sector in India and to evaluate the position of corporate control mechanisms in relation to takeovers in India and other parts of the world. In the course of analysis, the article reviews the various corporate policies adopted or recommended in different countries over time and raises certain related issues pertaining to and in contrast with the situation in international markets and the international regulatory regime that might throw light on the on-going process of designing of an appropriate regulatory framework for India in the post-liberalization regime.

SECTION ONE – THE CONTEXT

Until a couple of year’s back, the news that Indian companies having acquired American-European entities was very rare. However, this scenario has taken a sudden U-turn. The recent upsurge in the Indian markets, inflow of funds and the greater “India Story” has seen Indian companies both big and small going “shopping”- shopping for bigger fish in the global ocean. Indian companies are scouring the world for the best buys. But the most glaring point to take note of is that it is not only the bigger companies with deep pockets alone who are on the prowl. Medium-sized companies, many of which are relatively unknown, are venturing into forays to acquire global status by acquiring companies in the United States, Europe and South-east Asia. Buoyant Indian Economy, extra cash with Indian corporate, Government policies and newly found dynamism in Indian businessmen have all contributed to this new acquisition trend.

The trend which started with the Information Technology companies and Information Technology Enabled Services has now spread to the pharmaceuticals, automobile, chemicals, health-care, gems and jewelry and heavy industries sectors, to name a few.

SECTION TWO – SOME BASIC CONCEPTS AND LOGISTICS OF A TAKEOVER

On account of globalization and growing cross-borders trade and liberal trade policies including free trade zones and international investment incentives and policy framework in both the developed and developing economic markets, there has been an upsurge in growth and expansion of corporate bodies world over. Takeovers have been effective machinery for balancing global economics and prompt the aforementioned phenomenon.

Broad Concept and Meaning of a Takeover

The term “takeover” implies the acquisition of control of shares in one company by another company or persons or group of related companies or persons. A company is said to be taken over when the acquiring company or the person is able to nominate the majority of members on the board of directors of the company being acquired, on account of the voting power they command at the shareholders meeting .

M.A. Weinberg, one of the pioneers in treatising the law in practice relating to takeovers, has defined a takeover as:

“a transaction or a series of transactions whereby a person (individual, group of individuals or company), acquires control over the assets of a company, either directly by becoming the owner of those assets or indirectly by obtaining control of the management of the company. Where shares are closely held (that is by a small number of persons), a takeover will generally be effected by agreement with the holders of the majority of the share capital of the company being acquired. Where the share are held by the public generally, the takeover may be effected (i) by agreement between the acquirer and the controllers of the acquired company,  (ii) by purchase of shares on the stock exchange, or (iii) by means of a ‘takeover-bid’.”

Thus, technically a takeover in business refers to one company (the acquirer, or bidder) purchasing another (the target company). When a bidder makes an offer for another, it will usually inform the board of the target beforehand. If the board feels that the value that the shareholders will get will be greatest by accepting the offer, it will recommend the bid. Otherwise it will reject it. And if the board rejects, the bid will become “hostile”. If the bidder makes the offer without informing the board beforehand, the offer is also considered hostile. If the price offered is high enough, shareholders may vote to accept the offer even if management resists converting this hostile bid into a success . Before proceeding any further, it is pertinent to broadly examine the kinds of takeovers.

Takeovers – Kinds and Methods:

Takeovers may be broadly classified into three kinds:

i. Friendly Takeover: A friendly takeover is with the consent of the target company. In a friendly takeover, there is an agreement between the management of two companies through negotiations and the takeover bid may be with the consent of majority or all shareholders of the target company. Ideally a friendly takeover is a result of negotiations between two groups. Therefore, it is often called negotiated takeover.

ii. Hostile Takeover: When an acquirer company does not offer the target company the proposal to acquire its undertaking but silently and unilaterally pursues efforts to gain control against the wishes of existing management, such acts of acquirer are known as ‘hostile takeover’. Such takeovers are hostile on the management and are thus called hostile takeover. The main consequence of a bid being considered hostile is practical rather than legal. If the board of the target co-operates, the bidder will be able to conduct extensive due diligence into the affairs of the target company. It will be able to find out exactly what it is taking on before it makes a commitment. A hostile bidder will know only the information on the company that is publicly available and will therefore be taking more of a risk. Banks are also less willing to back hostile bids with the loans that are usually needed to finance the takeover.

iii. Bail Out Takeover:  A “Bail-out Takeover” implies takeover of a financially sick company by a profit earning company to bail out the former is known as bail out takeover. Such takeover normally takes place in pursuance to the scheme of rehabilitation approved by the financial institution or the scheduled bank, who have lent money to the sick company. The lead financial institutions, evaluates the bids received in respect of the purchase price track record of the acquirer and his financial position. This kind of takeover is done with the approval of the Financial Institutions and banks.

Modes of Takeovers :

i. Staged Acquisition: Staged acquisition occurs in several stages with foreign investor initially acquiring only an equity stake, and gradually increasing their equity to 100%. Staged acquisitions allow continued involvement of previous owners where they are unwilling to sell outright, or favoured to maintain legitimacy with local consumers. The major drawbacks of this mode of takeovers are (i) shared control being a source of conflict and (ii) uncertainty over conditions of eventual full takeover.

ii. Multiple Acquisition: This mode of acquisitions involves entry by acquiring several independent businesses, and subsequently integrating them. Through multiple acquisitions global players can build a nationwide strong market position in a traditionally fragmented market.

iii. Indirect Acquisition: This is a mode of acquisition outside the focal market of a company that also owns an affiliate in the same emerging economy. The prime objective of the indirect acquisition may be outside the country. The affiliate may be a strategic asset motivating the acquisition, but this is rare. However, locally, the local affiliate may or may not fit with the existing local operations.

iv. Brownfield Acquisition: A Brownfield acquisition is one in which the foreign investor subsequently invests more resources in the operation, such that it almost resembles a Greenfield project. Brownfield acquisitions provide access to crucial local assets under control of local firms that are in many other ways not competitive. The main drawback of this form of an acquisition is that the post-acquisition investments may exceed the price originally paid for the acquired firm.

Logistics of Takeovers:

Takeovers are primarily strategic in the regard that they are thought to have secondary effects that permeate beyond the mere expansion of profitability. For instance, an acquiring company may decide to purchase a company that is profitable and has a superior distribution network in new areas which the acquiring company can utilize for its own products as well.

Further, a target company might be attractive because it allows the acquiring company to enter a new market without having to take on the risk, time and expense of establishing a concern de novo. An acquiring company could decide to take over a competitor not only because the competitor is profitable, but also in order to eliminate competition in its field and make it easier, in the long term, to raise prices.

Also, a takeover could be a vehicle to fulfill the corporate theory that the combined company can be more profitable than the two companies would be separately due to a reduction of redundant functions.

The general notion in relation to takeovers is that large companies initiate takeovers in order to improve their revenues (sales to customers) without giving sufficient regard to profit, which generally takes a hit when a company is acquired because of all the associated costs. Moreover, a premium is always paid if the target company is financially

healthy and not already desperate to be taken over.

Thus, takeovers are used as a means to achieve crucial growth and are becoming more and more accepted as a tool for implementing business strategy, whether they involve Indian companies wanting to expand or foreign companies wishing to acquire market share in India. Some of the other motivating factors behind takeovers are the desire to acquire a competency or capability, to enter into new markets or product segments, to enter into the Indian market generally, to gain access to funding resources, and to obtain tax benefits.

SECTION THREE – REGULATORY REGIME IN INDIA AND AROUND THE WORLD

Cross border acquisitions, both friendly and hostile, are increasingly international. Yet, the legal regimes governing acquisitions differ significantly, even where the purposes of relevant statutes or regulations, for example, the protection of investors, are compatible. Further, securities laws frequently are given extraterritorial effect and therefore regulatory disparities can lead to conflict and confusion.

Takeovers are dynamic corporate events and all the various permutations and combinations of the moves of the relevant parties and the resulting outcomes cannot be envisaged. For the market for corporate control to perform efficiently in the sense of effective utilization and management of corporate resources that will ensure improved performance of companies after the consolidations take place, it ought to take place within the orderly framework of regulations.

It is important that such critical processes like substantial acquisition of shares and takeovers, which can significantly influence corporate growth and contribute to the wealth of the economy through rational allocation and optimal utilization of resources, take place within the orderly framework of regulations. The regulations have to be so devised that they outline the principle, which could be the guiding lights for the unexpected events that could crop up later.

Experience in India and in the Western Countries reveals that there are several kinds of malpractices, which arise in the context of takeovers and require regulatory counter measures.  In this relation it is pertinent to study the regulatory regime in India in contrast to the regulatory regime governing takeovers world over.

A. INDIA

Regulations Governing Takeovers in India Prior to 1991:

Although prior to 1991, takeovers were restricted under Indian law, in terms of industrial licensing laws and restrictive statutory provisions, takeovers, mergers and acquisitions were not unknown. In fact, business houses like the Goenka group, or the Manu Chhabria group grew largely through acquisitions; earlier on some business houses such as the Bangur group grew mainly by taking over erstwhile Anglo-Indian firms (Bagchi (1999: 58)) .

Merger and acquisition activities continued to take place in the manufacturing sector in India during the 1980s. Since 1986 onwards, both friendly takeover bids on negotiated basis and a few hostile bids too, through hectic buying of equity shares of select companies from the stock market have been reported frequently .

The policy regime in the 1990s has greatly liberalized the possibility of industrial restructuring and consolidation through mergers and takeovers by removing various restrictions. With the adoption of liberalization policies in 1991, the Government omitted the relevant sections and provisions from the Monopolies and Restrictive Trade Practices Act, 1969 (“MRTP Act”) involving pre-entry scrutiny, by the MRTP (Amendment Act), with effect from 27.9.91 . With this, the need for prior approval of the Central Government for merger and acquisition activities was abolished. The availability of flow of funds through global depository receipts (“GDRs”) and Euro-issues has reduced the problem of finance. This, together with the dismantling of the Foreign Exchange Regulation Act controls in 1991, has led to a rise in the number of mergers and takeovers, actual and proposed.

Regulations Governing Takeovers Post Liberalization of the Indian Economy:

The policy and regulatory framework governing takeovers evolved through the 1990s. In 1992, government created the SEBI with powers vested in it to regulate the Indian capital market and to protect investors’ interests. SEBI also took over the functions of the office of the Controller of Capital Issues (“CCI”). In November 1994, with a view to regulating the takeovers, SEBI promulgated the “Substantial Acquisition of Shares and Takeover Regulations”. The SEBI regulations on takeovers were modeled closely along the lines of the UK City Code of Takeovers and Mergers. The Indian regulations have borrowed substantial concepts from and procedures from the UK code, e.g., the term “persons acting in concert”, the compulsory requirement of making a public offer on acquisition of a particular level of shares, the emphasis on following the spirit, rather than the letter, and so on. However, the essential difference is that the Indian takeover regulation is a law while the UK City Code is not .

The 1994 Takeover Code was observed to be inadequate in handling the complexity of the situation. Hence, a committee chaired by Justice P.N. Bhagwati was appointed in November 1995 to review the 1994 Takeover Code. The committee’s report of 1996 formed the basis of a revised Takeover Code adopted by SEBI in February 1997. The revised Takeover Code provides for the acquirer to make a public offer for a minimum of 20% of the capital as soon as 10% ownership and management control has been acquired. The creeping acquisitions through stock market purchases over 2% over a year also attracted the provision of open offer. However, acquisitions by those owning more than 51% ownership do not attract the provisions of the code. The price of the public offer is to depend on the high/low price for the preceding 26 weeks or the price for preferential offers, if any. In order to ensure compliance of the public offers, the acquirers are required to deposit 50% of the value of offer in an escrow account. Furthermore, the acquirer has to disclose sources of funds. Some more amendments to the code were announced by the government in October 1998. These amendments include revision of the threshold limit for applicability of the code from 10% acquisition to 15%. The threshold limit of 2% per annum for creeping acquisitions was raised to 5% in a year. The 5% creeping acquisition limit has been made applicable even to those holding above 51%, but below 75% stock of a company.

Current regulations, by making disclosures of substantial acquisitions mandatory, have sought to ensure that the equity of a firm does not covertly change hands between the acquirer and the promoters. Moreover, the right of the existing management to withhold transfer of shares under Section 22A of the SCRA, dealing with free tranferability and registration of listed securities of companies has been withdrawn in the recently introduced Depository Regulations Act, 1996, with effect from 20.9.1995. However, under Sections 250 and 409 of the Companies Act, target companies can shelter against raiders if the proposed transfer prejudicially affects the interests of the company.

Buyback of shares has been recently introduced and the Takeover Code will not include companies that are planning offers under the buy-back norms. However, takeover defense mechanisms as poison pills for incumbent management as in US and UK are not allowed under the current regulations.

The main objective of the regulations governing takeovers is to provide greater transparency in the acquisition of shares and the takeover of ownership and control of companies through a system based on disclosure of information. Instead of discovering that the management of the company one owns has covertly changed hands, resulting in huge gains for the promoter, a shareholder could now expect to be informed each time, and at what price a firm’s equity changed hands. Moreover, if the shareholder had less faith in the new owners, he could sell the shares without incurring a loss, since SEBI regulations stipulate that a buyer must make a public offer to buy shares at the same price at which the acquisition is made. The current regulations on takeovers in India seem to have taken a liberal view towards takeovers.

Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulation, 1997.

As specified hereinabove, in India, the primary regulations governing takeovers is SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 , popularly known as the “Takeover Code.” These regulations seek to regulate the whole process of acquisition and takeovers, based on principles of transparency, fairness and equal opportunity for all. The Takeover Code lays down the procedures governing any attempted takeover of a company whose shares are listed on one or more recognized stock exchanges in India.

The regulations imperatively try and set up a structured disclosure mechanism to ensure greater transparency.  Thus one of the most important aspects of the Takeover Code is that any acquirer of more than 5%, 10%, 14%, 54% or 74% of the shares or voting rights in a company has to disclose, at every stage, the aggregate of his or her shareholding or voting rights. The disclosure must be made to the company and to the stock exchanges where shares of the target company are listed .

There are various other, continual disclosure obligations; for example, the acquirer also has to disclose to the company and the relevant stock exchanges any purchase aggregating two percent or more of the share capital of the target company within two days of such purchase and must also disclose what his or her aggregate shareholding will be after the acquisition. A failure to make such disclosure will incur a penalty of Rs. 250 million or three times the amount of profits resulting from such failure, whichever is greater .

Moreover, before acquiring shares or voting rights that (together with the shares or voting rights held by persons acting in concert with the acquirer) would entitle the acquirer to exercise 15% or more of the voting rights of a company, the acquirer must make a public announcement that he or she will acquire, at a minimum, an additional 20% of the equity shares of the company .

Interpretational Issues:

Under the Regulations, an  “acquirer” means any person who, directly or indirectly, acquires or agrees to acquire shares or voting rights in the target company, or acquires or agrees to acquire control over the target company, either by himself or with any person acting in concert with the acquirer;

Further, a “person acting in concert” comprises, -

(1) persons who, for a common objective or purpose of substantial acquisition of shares or voting rights or gaining control over the target company, pursuant to an agreement or

understanding (formal or informal), directly or indirectly cooperate by acquiring or agreeing to acquire shares or voting rights in the target company or control over the target company,

(2) without prejudice to the generality of this definition, the following persons will be deemed to be persons acting in concert with other persons in the same category, unless the contrary is established :

(i) a company, its holding company, or subsidiary or such company or company under the same management either individually or together with each other;

(ii) a company with any of its directors, or any person entrusted with the management of the funds of the company;

(iii) directors of companies referred to in sub-clause (i) of clause (2) and their associates;

(iv)… … … … ..

These definitions have been examined by SAT in the case of Modipon Ltd. vs. SEBI & Ors   where it was held that since the provisions of regulation 2(1)(e)(2) defining person acting in concert being a deeming provision, must be read in conjunction of regulation 2(1)(e)(i) which states that persons acting in concert comprises of persons who for a common objective or purpose of substantial acquisition of shares or voting rights or gaining control over the target company, pursuant to an agreement or understanding (formal or informal) directly or indirectly, co-operate by acquiring or agreeing to acquire shares or voting rights in the company or control over the target company. 

Further, the SAT observed that a promoter as such need not be an acquirer automatically. Any person, and shareholder including the promoter will become an acquirer or a person acting in concert with the acquirer, only if he falls within the definition of these expressions provided in regulation 2(b) and 2(e). It is the conduct of the party that decides the identity. A dormant promoter or a promoter simpliciter who neither acquires nor agrees to acquire shares or voting rights or control over the target company is not an

acquirer and his shareholding in the target company cannot be considered as the shareholding of the acquirer warranting exclusion from the public shareholding. Similarly, if the characteristics of a person acting in concert stated in the definition are found missing in the case of a person, it may not be proper to consider him as a

person acting in concert with the acquirer.

The Bombay High Court in the case of K.K. Modi vs. SAT  has also clarified as to when a person can be said to be acting as person acting in concert. The relevant observations in the judgment are as under :

“As the Tribunal has rightly pointed out, there is no hard and fast rule that a promoter must always be deemed to be an acquirer or a person acting in concert with the acquirer. On the facts, it may be held that a promoter shares the common objective or purpose of substantial acquisition of shares with the acquirer. It may well be that he may not share the said common objective or purpose. If he does, he shall be deemed to be a person acting in concert with the acquirer but if he does not, he cannot be deemed to be an acquirer merely because he happens to be a promoter. Regulation 2(1)(e)(2) also makes this clear. The persons named therein are deemed to be persons acting in concert with other persons in the same category, unless the contrary is established. It, therefore, follows that even though there is a presumption that the persons described therein may

be deemed to be persons acting in concert with the acquirer, the presumption is rebuttable, and therefore, in each case, the facts have to be examined to reach a conclusion as to whether a person is or is not acting in concert with the acquirer for the purpose of substantial acquisition of shares or voting rights or gaining control over the target company. He may do so by an express agreement or understanding, and the agreement or understanding may be proved decide to increase his shareholding in the company by substantial acquisition of shares or voting rights in the company. The mere fact that one of the promoters of the company wishes to do so, is no reason to hold that the other promoters also necessarily share his objective or purpose. The other promoters may, in fact, be opposed to the acquirer acquiring further shares in the target company, and if they fail to prevent the acquirer from doing so, they may be inclined to dispose of the shares held by them. In such a situation, it cannot be said that the other promoters share the common objective or purpose of the acquirer. ” (emphasis supplied).

In Phiroze Sethna Pvt. Ltd. v. SEBI  the SAT has held that the term ‘acquirer’ covers not only completed acquisition but also agreement to acquire. Persons acting in concert are those who co-operate in different ways with the acquirer so that he achieves his objective of acquiring shares or voting rights or control of the target company. The facts of each case determine whether a person is or is not acting in concert with the acquirer. Their actions are the determining factor. It must be shown that they are acting in concert with the acquirer. In the same case SAT interpreted Regulation in the following terms:

“It is clear from a perusal of Regulation 11(1)  that for this clause to be triggered :

(a) the acquirer should have made acquisition of shares or voting rights in the target company during earlier financial years to the extent of more than 15% but less than 75%;

(b) the acquisition of additional shares or voting rights that triggers Regulation 11(1) during the relevant financial year should provide the acquirer more than 5% of voting rights;

(c) the same acquirer should be involved, in the acquisitions of both the initial shares as well as additional shares; and

(d) such acquisitions should be either by the acquirer himself or with the persons acting in concert with him.

It is important that the identity of the acquirer and the persons acting in concert with him is clear to all. There should not be any ambiguity about the identity of such persons as they carry certain duties and obligations.”

In Hardy Oil Pvt. Ltd. v. SEBI   the SAT observed that a plain reading of Regulation 10 makes it abundantly clear that no acquirer shall acquire 15% or more shares or voting rights in a company unless he makes a public announcement to acquire shares of such company in accordance with the Regulations. The word “unless” in the opinion of the tribunal, only mandates that as and when the Regulations get triggered or become applicable, the acquirer has to make a public announcement to acquire shares of the target company in accordance with the Regulations. It does not mean that a public offer has to be made before the acquisition. The Regulations only impose an obligation on the acquirer to make a public announcement if he/it acquires the requisite percentage of shares. The word unless may have different connotations and in each case the context in which it is used will have to be looked into to find out the correct meaning. In some circumstances, the word unless may mean a condition precedent but it need not necessarily be so in every case. Having regard to the context in which it is used in Regulation 10, the tribunal were clearly of the view that it makes the acquisition conditional upon a public announcement being made and it does not mean that the public announcement has to be made before the acquisition. Such public announcement could be made before or after the acquisition.

One of the meanings assigned to the word ‘unless’ in Black’s Law Dictionary (6th edition) is “a conditional promise” meaning thereby that the condition has to be met irrespective of the time frame in which the promise is to be fulfilled.

Further, SAT held that if making of a public announcement was a condition precedent as contended on behalf of the appellant, then the Regulation would have read “unless such acquirer has made a public announcement” instead of “unless such acquirer makes a public announcement”. Use of the word ‘makes’ merely signifies the mandatory nature of the public announcement which could be made before or after the acquisition. Regulation 10 does not prescribe the time frame within which such an announcement is to be made. The time schedule for making such an announcement is prescribed by Regulation 14. Clause (1) of Regulation 14 provides that the public announcement referred to in Regulation 10 shall be made not later than 4 working days of entering into an agreement for acquisition of shares or voting rights. Regulation 14(1) does not refer to the date of acquisition. It only refers to the date of entering into the agreement for acquiring shares. Shares could be acquired within four days of entering into the agreement or thereafter and the period of four days for making the public announcement shall start running from the date of the agreement. It is possible that an agreement to acquire shares may be entered into today and the shares are acquired the following day. The acquirer would still have three more working days to make the public announcement because the period of four days is to start from the date of the agreement and not from the date of acquisition. It is, therefore, wrong to contend that the public announcement must always precede the acquisition of shares.

Furthermore, it was observed that the explanation to Regulation 11 makes it clear that the acquisition referred to in Regulation 10 and 11 would include both direct and indirect acquisitions. If one read Regulation 14(1) in isolation it would cover both direct as well as indirect acquisition but when this clause is read along with clause (4) thereof it leaves no room for doubt that Regulation 14(1) deals only with direct acquisitions and Regulation 14(4) deals with all indirect acquisitions. The language of clause (4) of Regulation 14 is clear and it provides that in the case of indirect acquisition, a public announcement shall be made by the acquirer within 3 months of consummation of such acquisition.

In the landmark case of  In Re: Sterling Investment Corporation Private Limited; In Re: Shapoorji Pallonji and Company Limited; In Re: Cyrus Investments Limited  the tribunal held that the acquirers plea that the violation of Regulation 10 and/or Regulation 12 was technical in nature in view of the difficulties of interpretation of the Regulations and due to a bonafide belief that they were not required to make a public offer for the shares acquired and also their contention that they had not acted deliberately in defiance of law or in conscious disregard of their obligations and had not made any gain or unfair advantage nor had they caused any loss to any one, and the default, if any, was not of a repetitive nature and thus there was no “mens rea” on their part and hence having regard to the fact that they had not committed any default in the past, no proceedings ought to have been initiated against them, would not stand good in law, since the words of Regulation 10 would not attract any contrary interpretation as inferred by the acquirers in this case.

Case Studies:

i.    Luxottica v. SEBI:

In April 1999, in a global acquisition, the Luxottica group of Italy acquired the sun-glass business of Bausch & Lomb, US, for $ 640 million. As Bausch & Lomb, US, had a 44% in Bausch & Lomb India through B&L South Asia Holdings, the control of the Indian subsidiary passed into the hands of Luxottica upon the takeover.

The Luxottica group also appointed its nominees on the board of B&L India and later rechristened it as Ray Ban Sun Optics India. The board was reconstituted in October 2000. B&L India was incorporated by Montari Industries and Bausch & Lomb in 1990 to manufacturer and market soft contact lenses, eye-care solutions, frames and sunglasses.

Despite a change in management control in B&L India, Luxottica failed to make the 20% mandatory open offer to shareholders. In its reply to a show-cause notice from Sebi, Luxottica clarified that there was no question of violation as the deal was not an acquisition but only a merger under rule 31 (j)(2) of the Takeover Code. In a complaint filed with SEBI last year, small shareholders alleged that the acquisition of shares by Luxottica attracts the provisions of regulations 10, 11 and 12 of the code.

In January 2002, SEBI started investigation into the matter and issued a notice to Luxottica SPA of Italy for a hearing to ascertain whether there was any violation of the takeover code following its indirect acquisition of Bausch & Lomb India.

In August 2002, SEBI came out with a ruling that Luxottica had violated regulation 10 and 12 of the Takeover Code and directed Luxottica to make a 20% open offer for RayBan by taking 28 April 1999 (the date of global acquisition) as the reference date. It asked the Italian company to make a public announcement within 45 days of the order and also pay a 15% interest to shareholders from April 1999 till the date of actual payment of consideration.

On 29 October 2003, Luxoticca Group SPA and Rayban Indian Holdings announced an open offer to acquire 20% equity of Rayban Sun Optics India at Rs 104.3 per share. This apart, shareholders are also eligible to receive 15% interest of Rs 70.68 per share. As per an order dated 29 August 2003, the interest would be paid only to shareholders holding shares on the day of the acquisition of 28 April 1999.

However, on 18 November 2003, the Supreme Court (SC) stayed the SAT order dated 29 August 2003 concerning Luxottica SPA’s open offer for shares of RayBan Sun Optics. Earlier, Luxottica had filed an appeal with the apex court on 12 September 2003 under Section 15Z of the SEBI Act against the judgment and the final order dated 29 August 2003 passed by SAT. In the mean time, SEBI has also filed its counter appeal before SC against the SAT order, which primarily relates to shareholders’ eligibility to receive interest.

ii.    Technip SA vs. SMS Holdings Pvt. Ltd

In the above matter, eight appeals were heard together on the issue of application of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 to the control of South East Asia Marine Engineering and Constructions Ltd. (SEAMEC) acquired by Technip through Coflexip without making public announcement. SEBI had directed Technip to make a public announcement and also to pay interest @ 15 per cent per annum to the shareholders for the delayed public announcement. In appeal, SAT had held that the applicable law to the question as to when control of SEAMEC has been taken over by Technip was the Indian law. The view of SEBI was that the applicable law for determining the date on which Technip acquired control over Coflexip would be the French Law. In the appeal filed by Technip before the Supreme Court, it was urged that the applicable law was French law since Technip and Coflexip were both registered in France and the takeover of Coflexip by Technip also took place in France. Hon’ble Supreme Court was pleased to uphold SEBI’s order and set aside the order passed by SAT. Hon’ble Supreme Court was pleased to observe that for the purpose of determining Technip obligation under the Takeover Code, SAT should have addressed itself as SEBI had done to the question whether ISIS and Technip were acting in concert to obtain

control over the target company i.e., SEAMEC.

iii.    Swedish Match Singapore Case:

Swedish Match Singapore agreed to acquire majority shareholding in Haravon and Seed subsequent to 17th December, 1997 wherefor the public offer was made. SMS comprising of Haravon and Seed had 28.28 per cent and 10.33 per cent whereas Jatia Group comprising of AVP and Plash had 5 per cent and 15 per cent respectively whereas public / others had 41.39 per cent shares. In concert with each other the two Groups acquired shares from public.

On or about 25th August, 1999 by acquiring preferential shares the Swedish Match Group obtained 52.11 per cent and Jatia Group obtained 24.11 per cent as a result whereof in Wimco the shares held by public/others came down to 23.78 per cent. Both Swedish Group and Jatia Group were exercising the joint control. By reason of Jatia Group obtaining out of the joint control by transfer of shares in favour of Swedish Match Singapore, a subsidiary of Swedish Match AB (a

part of Swedish Match Group) obtained 74 per cent of shares whereas shares i.e. Haravon – 46.18 per cent, Seed – 5.93 per cent and SMS – 21.89 per cent. Thus, the extent of shares of Jatia Group came down to 2.22 per cent. Jatia Group sold their shares to public as a result whereof shares of public became 23.78 per cent. S.M.S. is a subsidiary of the Singapore Match Group. The Swedish Match is the holding company being the owner of the 100 per cent shares of SMS. It stands categorically admitted by the Appellants herein that acquisition of shares from Jatia Group in favour of SMS was done by the Swedish company as a group and not as an individual company. Factually, therefore, it is not correct to contend although in its notice dated 28-1-2002. SEBI had given indication thereof, that SMS had acquired 21.89 per cent shares of its own. Even if SMS had done so, Regulation 10 would apply as no public announcement was made therefor.

SMS was a part of the Swedish Match Group and they acquired 21.89 per cent shares from Jatia Group. On or about 25th August, 1999, indisputably, Swedish Group and Jatia Group acted in concert with each other. By reason of acquisition made in September, 2000, Swedish Group, as acquirer, together with Jatia Group, had acquired more than 15 per cent but less than 75 per cent of shares. Any of those acquirers whether Swedish Match Group or Jatia Group, therefore was prohibited from acquiring by itself any additional share entitling it to exercise more than 5 per cent of the voting rights.

The SAT held that Regulation 11 does not brook any other interpretation. If additional shares are acquired entitling an acquirer to exercise more than 5 per cent of the voting rights, the statutory embargo to the effect that the acquirer (in this case Swedish Match Group) must make a public announcement to acquire shares in accordance with the Regulation comes into operation. If such a meaning is not assigned, the disjunctive clauses contained in the expressions “either by himself or through or with person acting in concert with him”, may not carry a true and effective meaning.

Critical Evaluation of the Regulations:

There are  a number  of  problem  areas that needs immediate attention  of  the  regulators  to  make  the  Code  more  meaningful  in  the  interest  of investors at large. Certain exemptions such as preferential offers and stake transfer to co-promoters have been misused by  the incumbent managements and should be brought under the purview of the Code. The terms such as ‘change in control’, ‘persons acting in concert’ and promoters need to be clearly defined. Another area of concern for small investors is the provision relating to open offers mainly its size and pricing. There is an absence of simple and transparent regulations and  a  high  degree  of ad-hocism and confusion on how the changes  in  ownership stake at the  global level affect the application of the Code.  The present creeping acquisition limit of as high as 10 per cent hardly leaves any room for raiders to put the inefficient managements on their toes and should be reduced.  However, special provisions should be made for professionally managed companies without any identified promoter group to  protect them from hostile takeovers.

SEBI  should  also provide for better disclosure  norms governing corporate M&As. The role of financial institutions in the case of a takeover should be well defined. The provisions for bailout takeovers should  not  limit  competition  and  bring  maximum benefits to financially weak companies thereby benefiting the economy. The issue of disinvestment of PSUs needs to be elaborately addressed in the Code.

Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 :

Under the Foreign Exchange Management (Transfer and Issue of Security by a Person Resident Outside India) Regulations, 2000, any acquisition of shares of an Indian company by a nonresident must comply with the foreign-exchange laws. Such an acquisition may be by way of subscribing to new shares or acquiring existing shares. Foreign investments in sectors or activities subject to the RBI’s automatic route do not require any prior approval of the FIPB. Under India’s present FDI policy, any sale of shares from a resident to a nonresident (and vice versa) is permitted under the RBI’s automatic route, provided certain conditions (inter alia, those relating to pricing) are complied with.

B. UNITED STATES OF AMERICA

In the United States most large corporations are publicly owned and federal law protects investors primarily through mandated disclosure in capital raising and change of control transactions, and the prohibition of fraud and manipulation in the public securities markets . Tender offers are regulated by the SEC pursuant to the Williams Act , which amended the Securities Exchange Act of 1934 (“Exchange Act”) in 1968. The Williams Act was sought to effectively remedy block purchases and large rapid accumulations, which could result in changes in corporate control, were taking place secretly .

The Williams Act generally deals with the disclosure obligations of bidders and was intended to equalize the protection of investors in takeover contests . The Williams Act also gives investors equal or fair rights to participate in the public tender offer.

Any person who acquires a beneficial interest of five percent or more of any class of equity security subject to the annual and periodic reporting provisions of the Exchange Act (essentially, the common stock of all publicly traded issuers) must file a statement of ownership with the SEC within ten days after such acquisition . Further, the filing must state the purchaser’s future intentions with regard to the target company; that is, whether the purchaser intends to make a tender offer or engage in some other control transaction . A bidder must commence an offer within five days of a public announcement of an offer that includes the price and number of securities sought .

The Williams Act and implementing SEC regulations also address certain substantive or procedural aspects of tender offers. These include making tendered shares withdrawable for a specified period of time, requiring pro rata acceptance when an offer for less than one hundred percent of shares is made, requiring that tender offers be made to all security holders, and that all offerees be paid the same price .  In addition, § 14(e) of the Exchange Act  contains a general tender offer antifraud provision prohibiting the use of all fraudulent, deceptive, and manipulative acts and practices in connection with a tender offer and gives the SEC authority to define, and prescribe means reasonably designed to prevent, such acts and practices as are fraudulent, deceptive, or manipulative. Pursuant to such authority, the SEC adopted Rule 14e-3 , which, among other things, prohibits anyone in the possession of insider information about an unannounced tender offer from trading on such information.

The Williams Act generally facilitates tender offers, but corporate governance in the United States is left to state law. Further, corporate fiduciary duty regulation under state law is not, as a general matter, preempted by the Williams Act, so the SEC does not regulate the defenses available to a bidder .  In Schreiber v. Burlington Northern, Inc., it was argued that a renegotiation by a target company of the terms of a tender offer breached the company’s fiduciary duty to its shareholders, was manipulative, and violated the antifraud provisions of the Williams Act .  The United States Supreme Court rejected this argument, however, holding that the Williams Act dealt with disclosure, not unfairness in the takeover context. As a matter of state law, although directors are obliged to exercise due care and loyalty , and must obtain the highest price once a company is on the auction block , they have considerable latitude in resisting a takeover bid .  Further, state statutory law can be quite protective of directors attempting to block an unwelcome bidder .

C. UNITED KINGDOM

i. The City Code on Takeovers and Mergers:

The rules of engagement for any proposal to obtain control of a U.K. public company are set out in the City Code on Takeovers and Mergers (“Code” or “Blue Book”). The Code is administered by the Panel on Takeovers and Mergers (“Panel”). It is a developing body of general principles, rules and guidance notes published and amended from time to time by the Panel. The Code is supplemented by general and case-specific rulings issued by the Panel. There is also a wealth of non-published guidance that has precedential significance. This considerable body of materials represents the accumulation of over 35 years of Panel regulation of public takeovers in the U.K.

The Panel asserts authority only in relation to change of control transactions where the target is either a U.K. public company (whether or not or wherever listed) or its equity securities have been traded during the last 10 years and in either case the company has some substantial administrative connection with the British Isles (U.K., Channel Islands and Isle of Man). The Panel has traditionally refused to accept jurisdiction merely because the target is U.K. incorporated; its concern is to regulate transactions only where the target is clearly within its control range although the scope of Code application will change upon introduction of the measures designed to implement the European Takeover Directive due in 2006. For similar control-related reasons, although not prescribed in the Code, the Panel invariably insists that an overseas bidder be represented by a U.K. regulated adviser in order that it can exercise effective jurisdiction over a participant on the bidder side.

The Code is not intended to be subjected to detailed legal interpretation and is not static. It must be applied according to particular circumstances consistent with the general principles. The most important principles of the Code are:

• equality of information to all bidders and all shareholders;

• an offer should only be announced if the bidder is able to implement it in full (this includes a requirement to be fully financed from the outset);

• during an offer period or when one is in contemplation no action can be taken by the board of the target out of the ordinary course that could frustrate any bona fide offer;

• all documentation should be prepared with the highest standards of care and accuracy;

• all parties must endeavour to prevent the creation of a false market; this particularly relates to indications of bid intentions; and

• all shareholders (of the same class) must be treated equally.

The Panel encourages consultation and is prepared to exercise discretion when applying the Code and when developing or adjusting its provisions. Consultation is discrete and generally highly interactive and rapid.

Often described as a consensus driven, non legal structure, the Code and the authority of the Panel to enforce it is in effect secured by operation of the financial services regime. In particular, regulated entitles such as financial advisers are vulnerable if they allow a client to breach the Code. Furthermore, breach of the Code will have negative implications when interpreting the market abuse provisions in the Financial Services and Markets Act 2000 (“FSMA”).

Further, breach of the Code or cocking a snoop at the Panel may at the least draw a public criticism, the broad implications of which are uncertain, or result in the London market “cold-shouldering’ those in breach the Code and who refuse to be bound by Panel determinations.

Finally, implementation of the European Takeover Directive will place the current structure on a statutory footing by mid 2006, which expected broadly to replicate much of the existing requirements there will be some detailed alterations to the bid process. The relationship with the Panel as statutory regulator is also likely to change over time.

ii. Other Laws:

Although there is no comprehensive legislation dealing with offer process, a miscellany of laws and regulations may be applicable, the key ones being as described below.

Provisions of the Criminal Justice Act 1993 regulate insider dealing while the FSMA imposes market abuse rules that affect any publication or activity that could have market implications.

The Companies Bill received the Royal Assent and became the Companies Act 2006 (the 2006 Act) on November 8, 2006 .  The 2006 Act consolidates all previous companies legislation and will replace (with a very few minor exceptions) the Companies Act 1985 in its entirety. The provisions on shareholder communication, and in particular the electronic communications provisions, were brought into force in January 2007, at the same time as the provisions implementing the EU Takeovers Directive and the EU Transparency Directive. The remainder of the 2006 Act will be brought into force by October 2008 .

The 2006 Act’s impact on the rules on financial assistance and directors’ duties are of particular interest with regard to takeovers.

Financial Assistance: The 2006 Act abolishes the prohibition on the giving of financial assistance by private companies and their subsidiaries for the purpose of acquiring shares in that company. In accordance with the Second Company Law Directive (77/91/EEC) , the prohibition on giving financial assistance will be retained for public companies under the 2006 Act . [FN102] The new rules on financial assistance have been broadly welcomed.

An EU Directive amending the Second Company Law Directive was formally adopted and published this year .  The new Directive states that public companies will be able to provide financial assistance if certain conditions are met .

Directors’ Duties: The 2006 Act codifies the common law and equitable principles that presently govern the duties owed by directors to their companies. While some of the seven codified duties set out in the 2006 Act are relatively uncontroversial, others have been criticized. Although the 2006 Act provides that the new statutory duties shall have effect in place of directors’ common law and equitable duties, regard must be had to the common law and equitable rules and principles in interpreting and applying the statutory duties.

The EU Takeovers Directive was implemented in the United Kingdom on May 20, 2006 . The implementation of the Takeovers Directive has led to some substantive changes to the current regulatory system in the United Kingdom. The regulations place the Panel on Takeovers and Mergers on a statutory footing for the first time, giving the Panel powers to make rules on takeovers, introduce a new criminal offence for breach of the takeover documentation requirements, and make changes to the squeeze-out procedures on bids .

D. AUSTRALIA

Owing to a number of scandals in the securities markets of Australia in the 1980s, it now has an extensive scheme of takeover regulation. It is embodied in a federal law which is implemented by each state adopting the federal legislation; this serves as a means of assuring uniformity among states .  A National Companies and Securities Commission (NCSC) has authority to monitor trading in target company securities, and to administer the takeover legislation.

Prescribed information must be set forth in tender offer materials, which must be registered with the NCSC and served on the target company and appropriate securities exchange before it can be used and before a tender offer can commence .  The target company then must prepare and file with the NCSC a statement containing its recommendation and prescribed information, including unpublicized changes, if any, in its financial condition .  Both the bidder’s materials and the target company’s materials must be transmitted to the shareholders .

There are special procedures if the takeover is to be effectuated by purchases on a stock exchange .  There are also detailed substantive provisions governing, among other things, the period the offer remains open, conditions to the offer, market purchases, and best price requirement .  If specified percentages are acquired, then the bidder can compel the remaining shareholders to sell on the same terms , and, if the bidder acquires ninety percent, the remaining shareholders that did not tender can compel the bidder to buy their shares on the same terms, which they previously refused .

SECTION FOUR – THE PRESENT SCENARIO AND RECENT SIGNIFICANT TAKEOVERS IN INDIA

Recently, India has made a number of high profile, multi billion dollar acquisition in Europe and North America. In early 2007, Tata Steel acquired the Anglo- Dutch Steelmaker Corus and the Indian aluminium firm Hindalco acquired its U.S- Canadian rival, Novelis. India’s auto industries are also making their global presence felt. Tata motors have already acquired the South Korean firm Daewoo’s truck making unit and is not expanding itself in Latin America in partnership with Italy’s Fiat. Another company Mahindra and Mahindra, India’s largest tractor and utility vehicle maker is already selling tractors in Texas and is believed to acquire a gearbox company in Italy. Also, Indian Pharmaceutical firms have embarked on an aggressive global expansion. Last year Ranbaxy made a number of Acquisitions in Europe, United States and Africa and is now eyeing Germany’s Merk Generics. Likewise Hyderabad based Dr. Reddy’s Laboratories has already acquired the German drug maker Betapharm. Moreover, Sun Pharmaceuticals, India’s most valuable drug maker is buying Israel’s Taro Pharmaceutical Industries.

The study of FICCI on India’s Inc Acquisition abroad points out eight different strategic reasons as to why are Indian companies acquiring entities globally.

HUTCH – VODAFONE:

Hutchison Telecommunication International Limited (HTIL) is a leading global provider of telecommunication services. It offers services in Hong Kong and operates or is rolling out mobile telecommunication services in Macau, India, Israel, Thailand, Sri Lanka, Ghana, Indonesia and Vietnam. “HTIL” is a listed company with American Depositary Shares quoted on the New York Stock Exchange and Shares listed on the Stock Exchange of Hong Kong. Recently HTIL decided to exist Indian market and thereby sold its entire holdings in Hutch Essar Limited (HEL) to Vodafone International Holding B.V a subsidiary of Vodafone Group Plc. HTIL held 52 per cent of HEL directly, another 15 was held by Asim Ghosh, Hutchison Essar managing director and Analjit Singh, chairman of Health care group Max India and the remaining 33 per cent was held by Essar Group, an Indian conglomerate but two-thirds of its stake is in turn controlled through an offshore company for tax reasons, classifying it as foreign. HTIL thereafter entered into a Contractual settlement agreement with the Essar Group, under which the Essar Group announced proposed disposal of its interest in Hutchison Essar Limited for a cash consideration of approx US$11.1 Billion.

The controversy which arose was 15% stake belonging to local partners were held indirectly by HTIL and that HTIL through a complex shareholding arrangement, has violated an Indian law that limits foreign direct investment in domestic Telecom Operators to 74 per cent.

Vodafone thereby filed an application with “Foreign Investment Promotion Board” (FIPB) with regard to its foreign direct investment. FIPB gave its approval stating the Vodafone’s holding in the joint venture with Essar is 52% and did not include 15% held by local partner. However, FIPB was of the opinion minority shareholders in the new venture can only sell their stakes to Indian residents.

MITTAL – ARCELOR:

Mittal Steel, owned by L N Mittal & family, has its headquarters in London and Rotterdam. It has plants in 14 countries spread across Europe, Asia, North America and Africa. Its first acquisition took place in 1989. Arcelor was founded in 20 02 by merger of Abred of Luxembourg, Arcelia of Spain and Usinor of France. Its turnover is valued at 033 billion. Its plants, joint ventures and subsidiaries are spread across 60 countries. In the year 2006, Mittal Steel made an offer to acquire Arcelor. Its original offer to Arcelor was for 017.5 billion. In May it increased the offer to 024 billion and the final offer was 026.9 billion. Mittal’s final offer was accepted. Mittal paid 040.37 a share for Arcelor nearly double the price, it was trading before the first bid was made. When Mittal made first bid, Arcelor rejected it with vengeance. It recommended to shareholders not to sell shares to Mittal as the two companies did not share the same strategic vision, business model and values. A couple of European governments did not like the idea of an Indian taking over an European company. The French foreign minister felt it would affect 28,000 jobs and that the bid was ill-prepared and hostile. However, Mittal Steel said jobs would be safeguarded. Arcelor took the matter to regulators to thwart the takeover. But the regulators did not find any anti-trust provisions being violated and asked Arcelor not to issue shares to anyone without investors’ explicit consent. To begin with, Arcelor refused to meet Mittal until a string of demands were met and simultaneously arranged a 013 billion deal with Severstal of Russia to keep Mittal away. As shareholders wrath grew over the Severstal agreement and pressures from other quarters increased, Arcelor accepted Mittal’s final bid. Arcelor had to pay 0130 million as a fine to Severstal for breaching the contract. Ultimately, L N Mittal succeeded in acquiring Arcelor. Now the combined capacity of Arcelor Mittal is 109.7 million tonnes.

TATA-CORUS:

The London-based Corus Group was one of the world’s largest producers of steel and aluminum. Corus was formed in 1999 following the merger of Dutch group Koninklijke Hoogovens N.V. with the UK’s British Steel Plc. Tata Steel is the India’s largest private sector steel company. Tata Sons is the promoters of the Tata Steel with approximately 23.8% of share capital of Tata Steel. Tata steel was in look out of various acquisition opportunities including the Corus Group. Soon Tata steel started the discussions with the Board and Management of the Corus Group and made a non-binding offer to acquire 100% equity in Corus Group at 455 pence per share. Tata Steel UK, a UK resident wholly-owned indirect subsidiary of Tata Steel, was formed just for the purpose of making the Acquisition. Corus Group received competiting offers from both Tata Steel U.K and CSN Acquisition Limited. Thereby the Panel on Takeovers and Mergers announced the last day for each Tata and CSN to announce revised offers for the company shall be 30th January 2007.  The final revised offer announced by Tata Steel was at price 608 pence in cash per Corus Share. However the final revised offer announced by CSN Acquisition was at price 603 pence in cash per share. The Corus directors consider the terms of the Final Tata Offer to be fair and reasonable, so far as Corus Shareholders are concerned. Given that the price of the Final Tata Offer is five pence above that of the Final CSN Offer, the Corus Directors believe that the Final Tata Offer represents the best value for Corus Shareholders. At the Court meeting and Extra-ordinary meeting shareholders approved the Scheme of arrangement between the Corus Group and Tata Steel U.K by the requisite majority. Thereby Corus announced to implement the recommended offer by Tata Steel UK Limited.


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