Wednesday, June 1, 2011

Non Compete Fee, Takeover Code: Part 1

Non Compete Fee is fees that is paid to the selling promoter(s) so that they do not re enter the same business and pose a threat to the acquired Company. This fee is not included in the offer price made to the public shareholders. For e.g., the acquirer pays Rs. 75 per share to the promoters and an additional Rs. 15 per share as non compete fee i.e. the promoters are paid a total of Rs. 90 per share whereas the offer price made to the public shareholders is only Rs. 75 per share.

In principle there is nothing in either the Takeover Code or any other related legislation that bars an acquirer from paying an additional non-compete fee to the promoter(s). On the contrary, in recent years SEBI has approved several transactions (here and here) where the promoter group was paid a higher price per share compared to the public shareholders. The higher price being justified as a non-compete fee.  The takeover code, however, imposes a restriction on the acquirer in that the non-compete fee cannot exceed 25% of the price offered to shareholders in the open offer.

Allowing the acquirer to pay an additional non-compete fee has several commercial justifications. However such additional payments have to be regulated inorder to ensure that the public shareholders are not discriminated against unfairly. In other words SEBI has to ensure (which it has in several instances) that the non-compete fee is paid by the acquirer only when there is an actual threat of the selling promoter re entering into the business. The non-compete fee is not justified when say, even after the acquisition the promoter continues to be a co promoter or the board of directors of the acquired company has equal representation from the selling promoter and the acquirer. Ultimately whether the payment of non-compete fee is justified or not depends on the facts and circumstances of a particular case.

Interestingly the TRAC Report recommends that the non-compete fee should be completely done away with.  The following observations of the TRAC are apposite:

“4.9.4 The Committee concluded that in keeping with the spirit of equal treatment  for all shareholders, and the scope for abuse of non-compete payments, the  Takeover Regulations ought to be explicit that consideration paid for the  shares in any form to the selling shareholder and his affiliates, concurrent with the purchase of shares, whether termed as ―control premium, or ―non-compete fees or otherwise must be added to the negotiated price per share for the purpose of determining open offer pricing.

4.9.5 The Committee concluded that once the extant exemption in respect of non-compete fee is deleted from the Takeover Regulations, and it is clearly articulated that apart from the share acquisition agreement, consideration in any form inclusive of all ancillary and collateral agreements shall form part of the negotiated price, it is in the selling shareholders‘ interests to ensure that the negotiated price truly reflects the value of the scrip fairly. Since this negotiated price in any case would be one of the parameters for fixing the offer price, if such price were higher than other proposed parameters, all shareholders will get the same negotiated price.”

In a subsequent post we will discuss the recent ruling of SAT in E-Land Fashion China holdings Limited and other related judgments inorder to ascertain the prevailing jurisprudence on non-compete fees. 

No comments:

Post a Comment