Takeover Code Zoom Lens: IP holding Asia Singapore PTE Ltd. and International Paper Company
Case Details: ZOOM LENS of SAT order in the matter of IP holding Asia Singapore PTE Ltd.and International Paper Company
Target Company:The Andhra Pradesh Paper Mills Limited
Acquirers:IP holding Asia Singapore PTE Limited (Acquirer) and International Paper Company (PAC)
Industry:Paper
Merchant Banker:Lazard India Private Limited ( Formerly Lazard Credit Capital Limited)
Case Abstract
The Andhra Pradesh Paper Mills Limited, a L N Bangur Group Compnay was incorporated on June 29, 1964 as a joint venture between the Government of Andhra Pradesh and Somani Group, to take over Andhra Paper Mills, a concern run by the Government of Andhra Pradesh. The company is one of the biggest integrated paper and pulp manufacturing centers in India and manufactuers produces indispensible writing, printing and copier papers for foreign as well as domestic markets. The shares of the Company are listed on NSE and BSE.
Acquirers:
IP holding Asia Singapore PTE Limited (Acquirer/Appellant) was incorporated on September 15, 2010 as a Private Company under the laws of Singapore. The Acquirer is an investment holding company incorporated to invest in companies in South Asia region. All shares in the Acquirer are held by IP International Holdings Inc, a subsidiary of the PAC.
Incorporated in 1941 in New York, International Paper Company (PAC/ Appellant) is a global Paper and Packaging Company. Its businesses include uncoated papers and industrial and consumer packaging, complemented by xpedx, the company’s North American distribution company.
Sellers: NA
Target Company:The Andhra Pradesh Paper Mills Limited
Acquirers:IP holding Asia Singapore PTE Limited (Acquirer) and International Paper Company (PAC)
Industry:Paper
Merchant Banker:Lazard India Private Limited ( Formerly Lazard Credit Capital Limited)
Case Abstract
Target Company:
The Andhra Pradesh Paper Mills Limited, a L N Bangur Group Compnay was incorporated on June 29, 1964 as a joint venture between the Government of Andhra Pradesh and Somani Group, to take over Andhra Paper Mills, a concern run by the Government of Andhra Pradesh. The company is one of the biggest integrated paper and pulp manufacturing centers in India and manufactuers produces indispensible writing, printing and copier papers for foreign as well as domestic markets. The shares of the Company are listed on NSE and BSE. Acquirers:
IP holding Asia Singapore PTE Limited (Acquirer/Appellant) was incorporated on September 15, 2010 as a Private Company under the laws of Singapore. The Acquirer is an investment holding company incorporated to invest in companies in South Asia region. All shares in the Acquirer are held by IP International Holdings Inc, a subsidiary of the PAC.
Incorporated in 1941 in New York, International Paper Company (PAC/ Appellant) is a global Paper and Packaging Company. Its businesses include uncoated papers and industrial and consumer packaging, complemented by xpedx, the company’s North American distribution company.
Sellers: NA
Triggering event:
1. On March 29, 2011, IP holding Asia Singapore PTE Limited and International Paper Company (hereinafter collectively referred to as Appellants) entered into a Share Purchase Agreement (SPA) with the Promoters of Andhra Pradesh Paper Mills Limited (Target Company) to acquire 53.46% equity shares at a price of Rs. 523/- per share. Further an exclusivity fee of Rs. 21.20 per share is also paid to the promoter group sellers and accordingly, the same was added to the offer price.
2. The open offer was made to acquire up to 85,67,521 shares at an offer price of Rs. 544.20 per fully paid-up equity share.
3. Being the controlling shareholders and having knowledge of pulp and paper business of the Target Company, each of the promoter group sellers of the Target Company are capable of offering competition to the Appellants. Accordingly, the Appellants have agreed to pay Rs.130.74 per share as non-compete fee to promoters group sellers, which is within the limit of 25% of the offer price arrived at in accordance with the provisions of the Regulation 20 of the SEBI (SAST) Regulations, 1997.
4. After considering the submission and information furnished by the appellants, the Board directed the appellants to revise the offer price from Rs. 544.20 to Rs. 674.93, to include the amount of non-compete fees of Rs.130.73 on the following grounds:
6. However, the Board held that the acquirers have failed to justify why the same logic has not been used while paying a different price per share, without the non compete fee, to all the public shareholders.
Contention by the Appellants
The two individual promoters are part of the Bangur family and by virtue of their being associated with the management of the Target Company, they have acquired considerable knowledge of the pulp and paper industries and are therefore capable of competing with the business of the Target Company.
Further, the other 13 promoter group sellers have substantial shareholding in the Target Company and have been involved in the business of the Target Company for a substantial period of time. These corporate promoter group sellers with the prime object of working for profit and being privy to confidential information about the business of the Target Company are capable of offering competition.
The non-compete agreement does not merely prohibit the promoter group sellers from competing with the Target Company, but it also prohibits each of the promoter group sellers from indirectly competing with the business of the Target Company, including investing in any business which is capable of competing with the business of the Target Company.
The Board would have no occasion to interfere if payment is made to the outgoing seller within the limits prescribed under the regulations and is paid to a seller who can offer competition to the business of the Target Company.
SAT Decision:
Hon'ble SAT observed that the 13 promoter group sellers are directly or indirectly controlled by same promoter group but by itself are not involved in the day to day business of the Target Company nor are capable of competing with the business of Target Company. Further the two individual promoters who were merely shareholders of the Target Company are being offered non-compete fee but no non compete fee is offered to Mrs. Sheetal Bangur, another family member of L.N. Bangur although she is a director of the Target Company and involved in the day to day business of the Target Company. Accordingly we are unable to accept this argument of the appellants. Thus it was held that the aforesaid entities are not entitled to non-compete fees merely because they are family members of L N Bangur or belong to the promoter group of the Target Company.
Further upon the argument made by the appellants that covenants in the non-compete agreement provide for both non-compete obligations as well as an obligation to maintain confidentiality and accordingly, the promoter group entities are being paid non-compete fee for non-compete obligations as well as for maintenance of confidentiality, the Hon'ble SAT observed that non-compete obligations without a corresponding obligations to maintain confidentiality would render any non-compete agreement ineffective. Further, the appellant have failed to place sufficient material on record to justify payment of non-compete fee to 15 entities.
Hence, the Board was justified in making the impugned observations and the appeal is dismissed. Accordingly, the appellants were required to pay the balance amount to the shareholders who had offered their shares in the open offer.
However, the Appellants have filed an appeal before Supreme Court against the order of the Tribunal.
Offer Details: On April 1, 2011, the Acquirer along with PAC has made the Open Offer to the shareholders of the Target Company to acquire 85,67,521 Equity Shares representing 21.54% of the emerging voting capital of the Target Company at a price of Rs. 544.20 per Share payable in cash.
Distinguishing Feature:
- Out of 20 promoters, only 5 promoters are eligible for the non compete fee as the 15 promoters do not have any experiences/expertise in the area of operation of Target Company and are therefore not capable of offering any competition.
- Out of 15 promoters, 13 are the companies and none of them are in the business of pulp and paper manufacturing which is the product line of the Target Company. Further, they don't even have such business objectives in their main object also. The remaining 2 promoters are mere shareholders and relatives of Mr. L. N. Bangur, who is a director of the Target Company.
6. However, the Board held that the acquirers have failed to justify why the same logic has not been used while paying a different price per share, without the non compete fee, to all the public shareholders.
Contention by the Appellants
The two individual promoters are part of the Bangur family and by virtue of their being associated with the management of the Target Company, they have acquired considerable knowledge of the pulp and paper industries and are therefore capable of competing with the business of the Target Company.
Further, the other 13 promoter group sellers have substantial shareholding in the Target Company and have been involved in the business of the Target Company for a substantial period of time. These corporate promoter group sellers with the prime object of working for profit and being privy to confidential information about the business of the Target Company are capable of offering competition.
The non-compete agreement does not merely prohibit the promoter group sellers from competing with the Target Company, but it also prohibits each of the promoter group sellers from indirectly competing with the business of the Target Company, including investing in any business which is capable of competing with the business of the Target Company.
The Board would have no occasion to interfere if payment is made to the outgoing seller within the limits prescribed under the regulations and is paid to a seller who can offer competition to the business of the Target Company.
SAT Decision:
Hon'ble SAT observed that the 13 promoter group sellers are directly or indirectly controlled by same promoter group but by itself are not involved in the day to day business of the Target Company nor are capable of competing with the business of Target Company. Further the two individual promoters who were merely shareholders of the Target Company are being offered non-compete fee but no non compete fee is offered to Mrs. Sheetal Bangur, another family member of L.N. Bangur although she is a director of the Target Company and involved in the day to day business of the Target Company. Accordingly we are unable to accept this argument of the appellants. Thus it was held that the aforesaid entities are not entitled to non-compete fees merely because they are family members of L N Bangur or belong to the promoter group of the Target Company.
Further upon the argument made by the appellants that covenants in the non-compete agreement provide for both non-compete obligations as well as an obligation to maintain confidentiality and accordingly, the promoter group entities are being paid non-compete fee for non-compete obligations as well as for maintenance of confidentiality, the Hon'ble SAT observed that non-compete obligations without a corresponding obligations to maintain confidentiality would render any non-compete agreement ineffective. Further, the appellant have failed to place sufficient material on record to justify payment of non-compete fee to 15 entities.
Hence, the Board was justified in making the impugned observations and the appeal is dismissed. Accordingly, the appellants were required to pay the balance amount to the shareholders who had offered their shares in the open offer.
However, the Appellants have filed an appeal before Supreme Court against the order of the Tribunal.
Offer Details: On April 1, 2011, the Acquirer along with PAC has made the Open Offer to the shareholders of the Target Company to acquire 85,67,521 Equity Shares representing 21.54% of the emerging voting capital of the Target Company at a price of Rs. 544.20 per Share payable in cash.
Distinguishing Feature:
Non compete fee should be paid only to that outgoing promoters and shareholders who are involved in day-to-day affairs of the Company and have knowledge and expertise in the business of the Company due to which they are capable of offering of offering competition to Target Company in future. It cannot be paid merely on being promoter of the Target Company.
Queries for Discussion:
| 1.1. Whether the direction of Board and SAT to revise the offer price from Rs. 544.20 to Rs. 674.93 to include the non-compete fees is justified? | |
| 2.2. Whether the promoters who are not involved in the day to day business of the Company are capable of giving competition to the Target Company in future? | |
| 3.3.Whether the Board can interfere if the transaction is done within the limits prescribed under the regulations? | |
| 4.4. Whether the non-compete agreement can also prohibit the outgoing sellers to invest in any business capable of competing with the business of the Target Company as contended by the Appellant? | |
Prepared by: Ms. Ruchi Hans
For any professional query, please contact:
Ms. Divya Vijay
+911140622248,
Email:-divya@indiacp.com
+911140622248,
Email:-divya@indiacp.com
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