Luxottica Group S.P.A, In Re (Acquisition Of Shares/ Voting Rights)

1.0 BACKGROUND

1.1 Ray Ban Sun Optics India Ltd. (formerly known as Bausch & Lomb India Ltd.) (hereinafter referred to as “Target company”) is a company incorporated under Companies Act, 1956 and is having its registered office at Bhiwadi, Rajasthan. The shares of the Target company are listed at Jaipur Stock Exchange, The Stock Exchange Mumbai, The Delhi Stock Exchange Association Limited, The Calcutta Stock Exchange Association Limited, The Stock Exchange Ahmedabad.

1.2 Bausch & Lomb South Asia Holdings Inc., a Delaware corporation, USA, is 100% subsidiary of Bausch & Lomb Inc., a New York corporation, U.S.A (hereinafter referred to as the “Seller”).

1.3 Bausch & Lomb India Holding Limited, a company incorporated in USA is 100% subsidiary of Bausch & Lomb South Asia Holdings Inc. Bausch & Lomb India Holding Limited held 44.152% shares/voting rights in the Target company.

1.4 Luxottica Group S.P.A is a company incorporated in Italy and is listed on New York and Milan Stock Exchanges.(hereinafter referred to as the “Acquirer”).

1.5 Rayban Holding Inc., a Delaware corporation, U.S.A is a wholly owned subsidiary of the Acquirer.

1.6 The holding pattern of the Seller and the Acquirer is given below:

1.7 On 6 September 2001 SEBI received a complaint vide letter dated September 6, 2001, inter alia, stating that the Seller and the Acquirer had entered into an agreement dated 28.4.99 wherein Sunglass business of the Seller world wide was sold to the Acquirer and consequently the Acquirer has acquired shares representing 44.152% of the paid up capital of the Target company and has thereby triggered the provisions of the Substantial Acquisition of Shares and Takeovers Regulations, 1997 (hereinafter referred to as the ‘said Regulations’).

1.8 On receipt of the aforesaid complaint, the Target company and the Acquirer were called upon vide letter dated 25 September, 2001 and letter dated 27 September, 2001 respectively, to provide the factual details. In response thereto, the Target company and the Acquirer submitted their replies vide letters dated 11 October 2001 and 5 November 2001 respectively. The Acquirer was also given a hearing on 16.1.02, wherein they reiterated the submissions made vide letter dated 5 November, 2001. The aforesaid submissions were considered and were not found to be satisfactory and accordingly, a show cause notice dated 19.02.2002 was issued to the Acquirer.

2.0 SHOW CAUSE NOTICE

2.1 Pursuant to the hearing dated 16.1.02 SEBI issued a show cause notice dated 19.02.02 to the Acquirers stating inter alia, that:—

i) pursuant to the agreement dated April 28, 1999 the Acquirer agreed to acquire 44.152% shares of the Target company and consequently, the control over the Target company. In view of the same, the said acquisition of control is covered under regulation 2(1)(c) of the said Regulations;

(ii) a public announcement to acquire a minimum of 20% shares was to have been made by the Acquirer in terms of regulation 14(1) read with regulation 14(3) of the said Regulations within 4 working days from the date of entering into agreement i.e April 28, 1999;

(iii) the Acquirer has acquired the said shares/voting rights and control of Target Company in the manner as stated above without making a public announcement as required under the provisions of the said regulations, they have therefore, prima-facie, violated the provisions of regulations 10 & 12 read with regulation 14(1) & 14(3) of the said Regulations and are therefore, liable for penal action under the said Regulations and Securities and Exchange Board of India Act, 1992 (hereinafter referred to as “the SEBI Act”);

(iv) in view of the aforesaid why one or more or all action(s) under regulation 44 and regulation 45 of the said Regulations and Sections 11, 11B, 15H & 24 of the SEBI Act, should not be initiated against them for violations specified therein.

2.2 The Acquirer submitted its reply to the abovesaid show cause notice vide their letter dated 5 March, 2002.

2.3 Thereafter a personal hearing was granted to the Acquirer on 30 May, 2002.

3.0 SUBMISSIONS OF THE ACQUIRER

The submissions made by the Acquirer vide their letters dated 22.1.02 & 5.3.02 and during the hearings granted to them on 16.1.02 and 30.5.02 are given in subsequent paras.

3.1 On April 28, 1999 the Acquirer and the Seller executed a Purchase Agreement, governed by the law of New York, for the purchase by the Acquirer Group from the Seller Group the business of producing, marketing, distributing and selling sunglasses and certain related accessories in various locations around the world.

3.2 The Purchase Agreement was entered into pursuant to an open auction conducted by Seller a U.S company quoted at the New York Stock Exchange, for the sale of its global Eyewear Business (“Business”). The auction was for this Business, and the price was fixed with reference to this Business. The Seller group, i.e, B & L (Bausch & Lomb) and its subsidiaries, carried on various businesses, including the business of manufacturing and selling surgical aids, the business of eyecare appliances (primary contact lenses and their accessories) and the Business referred to above. The Business was carried on in more than 38 states and nations which are listed in Schedule 1.1(a) and 1.1(b) to the Purchase Agreement. In order for it to spin off the Business which was the subject matter of the auction sale, it was necessary for Seller to take various steps with reference to various countries and places in which the Business was carried on, depending upon the circumstances, the format of the Business and the applicable laws.

3.3 The conclusion that pursuant to the agreement dated April 28, 1999 (“Global Agreement”) Acquirer is “an “Acquirer” in terms of regulation 2(1)(b) and the said acquisition of control is covered under regulation 2(1)(c) of the “Regulations” is incorrect since the Purchase Agreement does not set out a definitive agreement to acquire, and was, on the contrary, subject to a series of conditions, to happen both in India and elsewhere, the satisfaction of which was uncertain both legally and factually and since, even if their satisfaction eventually would be possible, the time required for such possible satisfaction was entirely unpredictable at the time the Purchase Agreement was entered into.

3.4 The Purchase Agreement sets out that so far as concerns the global transaction (other than India), it was to be undertaken in four separate and distinct stages, the satisfaction of each of which was a pre-condition to the creation of any purchase obligation under the Agreement. The aforesaid steps in brief are as follows:—

The first step of the Purchase Agreement which was the pre-condition of any further step under the Agreement was the satisfaction of the conditions set forth in Section 7.1 and 7.3 of the Purchase Agreement. Section 7.1(b) sets out the following condition precedent to any obligation of the Acquirer or seller under the Agreement namely:

“7.1(b) Regulatory Authorizations: All consents, approvals, authorizations and orders of Governmental Entities that are necessary to permit the consummation of the Transactions directly relating to the U.S and which, if not obtained, would be reasonably likely to subject any Seller Entity, Seller Entity or Transferred Subsidiary, or any officer, director or agent of any such Person, to civil or criminal liability or could render any Transactions directly relating to the U.S void or voidable (the “Required Consents”) shall have been obtained and all applicable waiting periods specified under the HSR Act shall have been lapsed or been terminated.”

Once the above contingency had been satisfied, the transaction was to proceed in three separate steps as set out in Section 3.2(b) and 3.3(b), (c) & (d), the performance of each of which was dependent upon the obligation to perform the preceding step. The relevant provisions of Section 3.2(b) and 3.3(b), (c) & (d) are reproduced below for ready reference:

“3.2(b) Anything in this Agreement to the contrary notwithstanding, it is understood and agreed that the Closing shall occur in two separate steps, both to occur on the Closing Date with the second step (the “Second Step”) to occur immediately after the first step (the “First Step”). All references to the “Closing” herein shall be deemed to refer to the transactions referred to below that are to occur at the First Step and the Second Step respectively and such transactions together constitute all of the transactions referred to in Section 3.1

(i) At the First Step, Buyer or a direct or indirect subsidiary of Acquirer (the “Killer Loop Purchaser”) shall purchase the Purchased Shares constituting all of the issued and outstanding shares (the “Killer Loop Shares”) of capital stock of Killer Loop S.P.A, an Italian Corporation …in consideration for the payment to such Seller Subsidiary of a portion of the Purchase Price in the amount of U.S$ 44,527,000 (provided that the Purchase Price for the Killer Loop Shares shall be deemed by the parties to be adjusted to be equal to the amount thereafter allocated to the Killer Loop Shares pursuant to the Allocation Principles)…

(ii) At the Second Step, immediately after the consummation of the First Step, Killer Loop, which shall then by virtue of the First Step be a Acquirer Subsidiary …shall purchase all of the Purchased Assets and all of the remaining Purchased Shares and assume the Assumed Liabilities …all pursuant to and in accordance with all of the terms, provisions and conditions of this Agreement…”

“3.3(b) On the Closing Date, the Closing shall occur with respect to all of the Purchased Assets and Assumed Liabilities other than those relating to a Deferred Country (“Deferred Net Assets”) and other than the Purchased Shares of a Transferred Subsidiary based in a Deferred Country (“Deferred Shares”). A Deferred Closing shall occur with respect to each Deferred Country as soon as practicable following the receipt of the required Foreign Approval …but no more than thirty (30) days following such event (the “Deferred Closing Date”). On each Deferred Closing Date (i) the applicable Seller Entities shall transfer, convey and assign to the Acquirer Entities any Purchased Assets included in the Deferred Net Assets relating to such Deferred Country and any Deferred Shares relating to such Deferred Country …(ii) the applicable Acquirer Entities shall assume the Assumed Liabilities included in the Deferred Net Assets relating to such Deferred Country …and (iii) the Seller Entities shall be entitled to treat as delivered the allocable portion of the Purchase Price relating to the Deferred Net Assets and Deferred Shares relating to such Deferred Country, together with any interest or other earnings thereon.

3.3(c) Between the Closing Date and any applicable Deferred Closing Date (a “Deferred Period”), the Deferred Net Assets, the Transferred Subsidiaries represented by any Deferred Shares (the “Deferred Subsidiaries”) the allocable portion of the Purchase Price relating to the Deferred Net Assets and Deferred Shares and certain other matters shall be administered as described in Schedule 3.3(c) hereto.

3.3(d) In the event that a Deferred Closing has not occurred with respect to each Deferred Country within eighteen (18) months following the Closing Date, the Deferred Net Assets Deferred Subsidiaries, the allocable portion of the Purchase Price relating to the Deferred Net Assets and Deferred Shares and certain other matters with respect to Deferred Countries where a Deferred Closing has not occurred within such period shall be administered as described in Schedule 3.3(d) hereto.”

Consequently, the obligation to transfer shares of the Transferred Subsidiary based in a Deferred Country would arise only on satisfaction of the conditions/contingency specified in Sections 3.2(b) and 3.3(b) thereof and until then the deferred subsidiary would continue to be managed by Seller or its direct or indirect Subsidiary concerned in accordance with the provisions of Schedule 3.3(c) of the Purchase Agreement, and if the Deferred Closing has not occurred in respect of a Deferred Subsidiary within 18 months of the Closing Date defined in the Purchase Agreement, the transaction with respect to the deferred shares in relation to which the Deferred Closing has not occurred will be abandoned according to the provisions of Schedule 3.3(d) of the Purchase Agreement. This represents an important difference from the statement in paragraph 2.1 of SEBI's Show Cause Notice dated 19/2/02 which does not refer to any condition whatsoever.

3.5 It is clear from the provision contained in sub-Section (a) of Section 6.4 of the agreement that the Seller is required as a pre-condition for the Indian transaction, to purchase from Target Company as soon as practicable all assets of Target Company which relate to business or businesses other than the Eyewear Business and to cause Target Company to use the proceeds of such sale to satisfy any liabilities which relate to such other business or businesses, so that after such purchase and discharge of such liabilities, the only assets and liabilities which remain with Target Company are those of the Eyewear Business.

This provision is made because under the Purchase Agreement it is only the Eyewear Business of Seller and its subsidiaries which is intended to be taken over by the Acquirer Group and its subsidiaries and hence it is provided that the other businesses of Target Company should be bifurcated from the Eyewear Business and purchased by the Seller.

3.6 It will thus be seen that so far as the purchase of 44.152% shares of Target Company held by Bausch & Lomb South Asia Inc is concerned, the obligation on the part of Killer Loop S.P.A to purchase these shares would arise if and only if and when all the assets of Target Company which relate to the business or businesses other than the Eyewear Business are purchased by Seller and the proceeds of the sale are applied to discharge any liabilities relating to such business or businesses so that Target Company would then be carrying on only the Eyewear Business and would own only the assets and liabilities relating to the Eyewear Business.

3.7 That it was not within the power of Bosch & Lomb South Asia Inc to dispose of any business of Target Company which is an Indian company governed by the Companies Act 1956. It is provided by Section 293 of the Companies Act 1956, read with the Articles of Association, that Target Company could not have disposed of its undertaking or a substantial part of its undertaking without the necessary approval of the General Body of Shareholders. But Bausch & Lomb Inc indirectly owned and had voting power only in respect of 44.152% shares of Target Company and was therefore not in a position, of itself, to get a resolution passed by the General Body of Shareholders authorising the sale of the business or businesses of Target Company other than the Eyewear Business. The possibility could not have been ruled out that the shareholders owning the remaining approx. 56% shares (or at least more than the 44.152% shares) may have voted against the passing of such a resolution. The purchase of the business or business of Target Company other than the Eyewear Business by the seller would therefore have been dependent entirely upon the decision of the shareholders owning the remaining approximate 56% shares.

3.8 That the legal effect of the described conditions not happening would be that 44.152% shares of would not be required to be purchased since, the rule of New York contract law under long-standing, clear judicial precedent, is that no liability can arise on a promise qualified by conditions, and no contract arises, unless and until the condition is satisfied or occurs. This rule of New York law is essentially similar to that under Section 32 of the Indian Contract Act.

3.9 That no effective and binding obligation came into existence requiring the Acquirer Group to purchase 44.152% shares of Target Company held by B & L South Asia Inc., since it was conditional on the business or businesses other than Eyewear Business of Target Company having been acquired by Seller which in its turn was dependent upon the decision of the shareholders of Target Company other than B & L South Asia Inc.

3.10 The obligation of Acquirer Group to purchase the 44.152% shares of Target Company would then mature into a legally enforceable obligation only if and when the business or businesses other than the Eyewear Business of Target Company were purchased by Seller and the sale proceeds were utilised to satisfy the liabilities of such business or businesses. This may not have happened at all within 24 months of the Closing Date, in which event the transaction would have been abandoned so that there would have been no Agreement or obligation requiring Acquirer Group to purchase 44.152% shares of Target Company held by B & L South Asia Inc.

3.11 That the lump sum price advanced for the global Eyewear Business of Seller to the extent ascribed to Deferred Net Assets and Deferred Shares relating to a Deferred Country, was to be held by the Seller Entity in escrow until a Deferred Closing occurred with respect to such Deferred Country, or until the transaction was abandoned pursuant to Schedule 3.3(d), and if abandoned, such amount should be refunded pursuant to the provision of letter (e) of Schedule 3.3(d) of the Purchase Agreement. Therefore, the fact that any payment made in relation to a Deferred Closing was not to be regarded as a definitive payment but rather as an advance payment to be held in escrow until either the completion of the Deferred Closing or its abandonment, and to be refunded in the case the conditions for such closing were not satisfied.

3.12 That the conclusion that the Acquirer is not eligible for exemption under Regulation 3(1)(j)(ii) is incorrect since before any definitive and unconditional obligation arises under the Purchase Agreement to purchase the 44.152% shares of Target Company, Acquirer and Seller restructured their intermediate shareholding by providing for a merger between two companies incorporated in the State of Delaware, USA, respectively one indirectly wholly owned subsidiary of Acquirer and one of Seller. Such restructuring impacted on the future possible acquisition of the 44.152% shares of Target Company, which would not be acquired any longer, but rather would pass under the control of Acquirer as a consequence of the perfection of the above restructuring by way of merger contemplated under an amendment to the Purchase Agreement on February 3, 2000 (the “Third Amendment”). The Third Amendment also reiterated that if the spin off in India of the businesses other than the Business was not achieved within 24 months, the contemplated merger would be abandoned.

3.13 That the transfer of the Indian vision care business (i.e non Eyewear Business) of Target Company was eventually completed on October 23, 2000, and the Merger Agreement dated October 27, 2000 was entered into pursuant to the Third Amendment dated February 3, 2000 to consummate the Deferred Closing contemplated in the said Amendment. By virtue of the Merger, Ray Ban Holdings Inc controlled by Acquirer Group acquired control over the 44.152% shares held by Bausch & Lomb India Holdings Inc in Target Company. Prior thereto, there was no definitive or enforceable agreement or obligation of Purchase or Merger, but only a contingent agreement to merge in terms of the Third Amendment, which contingent agreement matured into an enforceable obligation on October 23, 2000 when the Spin Off Transaction occurred between Target Company and the Bausch & Lomb Indian subsidiary in respect of the Indian Business other than the Eyewear Business.

3.14 That it is denied that Acquirer Group has “control” over Target Company, and is able to exercise “control” over the management or policy decisions of the Target Company, much less with effect from 28 April, 1999. Firstly, as observed, the Board of Directors of the Target Company was re-constituted only on October 29/30, 2000, prior to which the Board of Directors consisted of persons directly or indirectly nominated by Target Company. Even after 29/30 October, 2000, Acquirer Group did not acquire control over Target Company. The expression “Control” is defined under Section 2(c) of the Regulations as does not envisage permissive control which arises only if the majority Shareholders or even a minority of Shareholders holding shares in excess of 44.152% of Target Company, do not decide to vote against a proposal made by the Acquirer Group.

3.15 That we have no record of any such views having been expressed by Mr. Shailendra Tandon and, if expressed, represented his personal views and not the views of Acquirer. Even such personal views make it clear that no deal for the acquisition of the shares of Target Company had been finalized up to August 5, 1999.

That the Annual Report of Bausch & Lomb India Ltd. for 1998-1999 in its relevant portion states as follows:

“In terms of the agreement between Seller and Acquirer, Acquirer will consider purchasing Seller's current shareholdings in your Company, provided requisite governmental regulatory approvals in the U.S and India are satisfactorily obtained and the vision care business of our Company is divested.”

This shows that up to the date of Annual Report there was no binding obligation on Acquirer to acquire the share holding in the Indian Target Company.

When the Annual Report of Target Company for 1999-2000 was finalized, the contingency specified in the Purchase Agreement for the Deferred Closing with regard to India had not yet occurred.

The Annual Report for 2000-2001 was finalized after the merger between Bausch & Lomb South Asia Holdings Inc., a Delaware Corporation and Ray Ban Holdings Inc a Delaware Corporation.

3.16 That the acquisition of control of 44.152% shares in Target Company took place pursuant to merger in Delaware USA between Bausch & Lomb South Asia Inc and Ray Ban Holdings Inc., and was, therefore, exempt from the provisions of Regulation 12 by virtue of the exemption granted by Regulation 3(1)(j)(ii).

3.17 That in view of the exemption granted under Section 3(1)(j)(ii), there has been no violation of the provisions of Regulations 10 and 12 read with Regulation 14(1) and 14(3) of the Take Over Regulations or any provisions of SEBI Act.

3.18 That in view of the exemption granted under 3(1)(j)(ii), public announcement in terms of Regulation 14(1) read with 14(3) of the Regulations was not required.

4.0 ISSUES

4.1 I have taken into consideration the facts of the case, the submissions written as well as made by the Acquirer during the hearings and also the documents submitted by them in support of their submissions.

4.2 From the above the following issues arise which need consideration:

1. Whether the Acquirer falls within the definition of the term “Acquirer” as defined in Regulation 2(1)(b)?

2. Whether the Acquirer has triggered the said Regulations. If yes, when did the obligation on the part of the Acquirer arise, to make public announcement?

3. Whether the acquisition of 44.152% shares/voting rights or control of the Target company, by the Acquirer is exempt under regulation 3(1)(j)(ii)?

4.3 CONSIDERATION OF ISSUES

i) Whether the Acquirer falls within the definition of the term “Acquirer” as provided in Regulation 2(1)(b)?

Before dealing with the issue it will be pertinent to refer to clause (b) of sub regulation (1) of regulation 2 which reads as under:

“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.”

In this regard, the Acquirer has contended that “it is not an Acquirer in terms of regulation 2(1)(b) and the said acquisition of control is not covered under regulation 2(1)(c) since the Purchase Agreement does not set out a definitive agreement to acquire and is subject to a series of conditions, to happen both in India and elsewhere, the satisfaction of which was uncertain both legally and factually”. This contention of the Acquirer is not tenable for the reasons as discussed hereinafter.

As per the definition of the Acquirer contained in regulation 2(1)(b), not only a person directly or indirectly acquiring the shares or voting rights in the Target company or acquiring control over the Target company is an Acquirer, but the one agreeing to acquire shares/voting rights or control is also an Acquirer. It is not necessary that one should actually acquire shares/voting rights or control to be covered under regulation 2(1)(b). It would suffice if a person agrees to acquire shares or voting rights or control over the Target company.

Hon'ble Mumbai High Court in the case of B.P Plc v. Securities and Exchange Board of India being first appeal no. 582 of 2001 in SEBI Appeal no. 11/2001 vide its order dated August 8, 2001, [2001] 34 SCL 469 (BOM) has held that “the word Acquirer could not be interpreted to mean only a person who has already acquired the shares. On the contrary the definition of Acquirer in regulation 2(1)(b) clearly mentions acquires or agrees to acquire shares or voting rights in the Target company, or acquires or agrees to acquire control over the Target company. From the above it is very clear that even someone who agrees to acquire shares or voting rights or agrees to acquire control over the Target company would come within the definition of Acquirer….if the word Acquirer were to mean only those who have already acquired shares then the provisions regarding public announcement in SEBI Regulations would be rendered nugatory. The salutary protections contemplated through public announcement would be lost.”

In view of the above, in the instant case, when the Acquirer entered into Purchase Agreement on 28/4/99 with the Sellers which provided for acquisition of 44.152% shares of the Target company held by the Seller through its subsidiaries, the Acquirer came within the ambit of definition of term “Acquirer” as defined in the said Regulations.

ii) Whether the Acquirer has triggered the said Regulations. If yes, when did the obligation on the part of the Acquirer arise, to make public announcement?

In this regard it will be pertinent to refer to regulations 10, 12 and 14 which are reproduced hereunder:

Regulation 10 (Acquisition of fifteen per cent or more of the shares or voting rights of any company)

“No acquirer shall acquire shares or voting rights which (taken together with shares or voting rights, if any, held by him or by the persons acting in concert with him), entitle such acquirer to exercise [fifteen] percent or more of the voting rights in a company, unless such acquirer makes a public announcement to acquire shares of such company in accordance with the Regulations”.

Explanation: For the purposes of regulation 10 and regulation 11, acquisition shall mean and include—

1. direct acquisition in a listed company to which the regulations apply;

2. indirect acquisition by virtue of acquisition of holding companies, whether listed or unlisted, whether in India or abroad”

Regulation 12 (Acquisition of control over a company)

“Irrespective of whether or not there has been any acquisition of shares or voting rights in a company, no acquirer shall acquire control over the target company, unless such person makes a public announcement to acquire shares and acquires such shares in accordance with the regulations.

Provided that nothing contained herein shall apply to any change in control which takes place in pursuance to a resolution passed by the shareholders in a general meeting”.

Regulation 14 (Timing of the public announcement of offer)

Regulation 14(1): “The public announcement referred to in Regulation 10 or Regulation 11 shall be made by the merchant banker not later than four working days of entering into an agreement for acquisition of shares or voting rights or deciding to acquire shares or voting rights exceeding the respective percentage specified therein”.

Regulation 14(3): “The public announcement referred to in Regulation 12 shall be made by the merchant banker not later than four working days after any such change or changes are decided to be made as would result in the acquisition of control over the target company by the acquirer”.

From the facts of the case it is clear that the purchase agreement was admittedly entered into between the Acquirer and the Seller on April 28, 1999 wherein a clear intention of acquiring substantial shares/voting rights i.e 44.152% shares and control over the Indian Target company existed. In view of the said agreement the provisions of the said Regulations got triggered on 28 April, 1999 since in terms of regulations 14(1) and 14(3) the public announcement has to be made by the Acquirer within 4 working days of entering into an agreement or taking any decision which would result in change in control of the Target company. Accordingly, once the said Regulations have been triggered the Acquirer is under an obligation, to make a public announcement in terms of the Regulations.

From perusal of the provisions of regulations 10 & 12, it is clear that there is a prohibition on the Acquirer, not to acquire shares or voting rights or control of the Target company unless the Acquirer makes a public announcement to acquire shares in accordance with the regulations and acquires such shares in accordance with the regulations. Thus the regulations not only mandates issuance of public announcement by the Acquirer but also requires the Acquirer to acquire such shares in accordance with the regulations. It is clear that issuance of public announcement is not a post acquisition requirement but definitely a pre acquisition requirement.

Further the contention of the Acquirer that on the date of entering into the Purchase Agreement there was no binding obligation on them is not tenable since the word “deciding to acquire” and “would” used in regulations 14(1) & 14(3) convey that what the said regulation is concerned with is the likely acquisition of shares or voting rights or control and not the actually effected acquisition of shares or voting rights or control. The word “deciding to acquire” and “would” in the context need be understood in its literal sense as expressing probability of acquisition of shares/voting rights.

In this regard, the Hon'ble Mumbai High Court in B.P Plc case has held that “Even Regulation 12, mentions in categorical terms as “no Acquirer shall acquire control over the Target company unless such person makes a public announcement to acquire shares and acquires such shares”.

Therefore what is contemplated is that a public announcement must precede any acquisition of shares and then only a person can acquire shares. Any other interpretation would render public announcement superfluous and the objectives sought to be achieved would be lost.

This is all the more abundantly clear from Regulation 14(3) mentions about the necessity of public announcement when “any such change or changes are decided to be made as would result in the acquisition of control over the Target company by the Acquirer”. That is to say, when any such change is decided to be made, the same would result in acquisition or control, then public announcement will have to be made. Therefore, once a decision is taken, which would result in acquisition or control, then public announcement must precede such acquisition or control. That is the decision to later on result in acquisition or taking control.”

Thus when the Acquirer, in the instant case, announced its intention to acquire the 44.152% capital of the Target company by way of entering into Purchase Agreement with the Seller on 28/4/99 it constituted an intention to acquire indirectly, the control over the Indian Target company and the obligation to make Public Announcement arose on that day which was to be made within four working days of 28.4.99 i.e the date of entering into the said agreement.

I find that as required under the aforesaid regulations, no public announcement has been made by the Acquirers and therefore they have violated regulations 14(1) & 14(3) of the said Regulations.

The contention of the Acquirers that on the day of the entering into the aforesaid purchase agreement there was no binding obligation and Purchase Agreement was subject to fulfillment of so many conditions and definitive, unconditional and legally enforceable obligation arose under the Purchase Agreement only on 27/10/2000 and therefore they could not have made the public announcement within the four working days of entering into the aforesaid agreement in terms of regulations 14(1) and 14(3) is not tenable for the reasons as discussed in detailed in the subsequent paras.

From the scheme of the said Regulations it is implicit that Regulations do not in any way suggest that the public announcement or offer should be made only in respect of a concluded acquisition and that the public announcement should be unconditional. In this regard, it is relevant to refer to clauses (xvi), (xvii) and (xviii) of regulation 16, sub regulation (8) of regulation 22 and clause (b) of sub-regulation (1) of regulation 27 which read as under—

Regulation 16 — “The public announcement referred to in regulation 10 or 11 or 12 shall contain the following particulars, namely—

(xvi) — statutory approvals, if any, required to be obtained for the purpose of acquiring the shares under the Companies Act., 1956 (1 of 1956), the Monopolies and Restrictive Trade Practices Act, 1969 (54 of 1969), the Foreign Exchange Regulation Act, 1973 (46 of 1973), and/or any other applicable laws;

(xvii) approvals of banks or financial institutions required, if any;

(xviii) whether the offer is subject to a minimum level of acceptances from the shareholders.

Regulation 22(8) contemplates that an offer can be made conditional upon minimum level of acceptances, subject to fulfillment of certain conditions.

Further, sub-regulation (1) of regulation 27 permits withdrawal of an offer in case of refusal of statutory approvals.

Thus, from the reading of the aforesaid provisions, it is clear that a public announcement of offer to acquire the shares/voting rights or control of/over the Target company, may be subject to conditions. The public announcement can be made subject to receipt of statutory approvals, receipt of approval of banks or financial institutions or it can be subject to receipt of minimum level of acceptances from the shareholders. In case of refusal of statutory approvals, the offer can also be withdrawn by the Acquirer. In view of the aforesaid the public announcement with conditions has been recognized by the said Regulations.

In the similar situation, the Hon'ble Mumbai High Court in the case of B.P Plc has held that “…..the contention that regulatory approvals have to be obtained even prior to agreeing to acquire cannot be sustained. In fact in the public announcement it is always mentioned that the offer is subject to such regulatory approval. That is why in Regulation 27, it is mentioned that a public offer can be withdrawn if a required statutory approval is refused. Therefore, it is clear that a public offer can be made by a public announcement even before obtaining the required regulatory approval.”

From the aforesaid it is clear that the Acquirers could have made conditional public announcement to the shareholders of Indian Target company stating inter alia, the conditions subject to which acquisition of Target company was to be carried out.

In view of the above, the Acquirer has triggered the said Regulations and obligation on the part of the Acquirer to make the public announcement arose on 28.04.99, which was to be made within 4 working days from the date of entering into the purchase agreement i.e 28.04.99 The Acquirer has failed to make the public announcement and has therefore, contravened the provisions of regulations 14(1) & 14(3).

(iii). Whether the acquisition of 44.152% shares/voting rights or control of the Target company, by the Acquirer is exempt under regulation 3(1)(j)(ii)?

Before dealing with this issue it would be pertinent to advert to Regulation 3(1)(j)(ii) which lays down that:

Nothing contained in Regulations 10, 11, 12 of these Regulations shall apply to acquisition of shares/voting rights or control of a company pursuant to a scheme of arrangement or reconstruction including amalgamation or merger or demerger under any law or regulation, Indian or foreign.

As per the regulation 3(1)(j)(ii), exemption from the provisions of regulation 10, 11 and 12 is available only if the acquisition of shares is pursuant to the scheme of merger and not the other way round as has been done in the instant case by the Acquirer by entering into a merger agreement much later than entering into of the purchase agreement by the Acquirer.

From the facts of the case it is seen that the Acquirer decided to acquire the abovesaid shares of the Target company and entered into the purchase agreement with the Seller on 28.04.99 However, thereafter, as per the opinion of their counsel dated 28.01.2000, the Acquirer carried out the third amendment dated 03.02.2000 to the aforesaid purchase agreement dated 28.04.99 providing for the merger. It was also submitted by the Acquirer that their counsel advised them that the arrangement of merger will not expose the Acquirer to any risk if the Acquirer does not make a public offer before acquiring 44.152% shares of the Target company. Subsequently, Ray Ban Sun Optics Inc USA was floated by the Acquirer for the purposes of acquiring 44.152% shares by way of merger of Ray Ban Sun Optics Inc USA with Bausch & Lomb South Asia Holdings Limited Inc. The same was followed by hiving off of the business other then Eyewear business of the Target company on 23.10.2000 and entering into merger agreement on 27.10.2000 and reconstitution of Board of Directors of Target company on 30.10.2000 From the aforesaid it is clear that the merger was pursuant to the proposed acquisition of 44.152% shares/control over the Target company by way of purchase agreement and hence the subsequent merger agreement dated 27/10/2000 was only a mode adopted to transfer the shares of the Target company to the Acquirer.

Any actions subsequent to the triggering of the said Regulations will not have bearing on the making of the open offer by the Acquirer as the said Regulations have already been triggered. In the instant case after having agreed to acquire 44.152% shares of the Target company vide purchase agreement dated 28/4/99, the Acquirer vide the third amendment dated 3/2/2000 to the purchase agreement provided for the inclusion of merger clause to carry out the acquisition of the Target company. Such a clause providing for merger was introduced as a device/artifice which was created/adopted by the Acquirer subsequent to the actual triggering of the said Regulations on 28/4/99 and hence the Acquirer cannot claim exemption on the ground that the control of the Target company changed as a result of merger which is specifically exempt under regulation 3(1)(j)(ii) from making public announcement as required under the provisions of regulations 10 and 12.

It is also observed from the facts of the case and the chain of events, that all the series of actions of the Acquirer are directed towards one end i.e of acquiring the shares/control of the Target company. The aforesaid intention is running through the chain of events right from the date of the purchase agreement for acquisition of 44.152% shares/control over the Target company towards which various intermediate steps were being taken and which has finally culminated into actual acquisition of 44.152% shares/voting rights of Target company and acquisition of control by way of appointment of all the six Directors on the Board of the Target company on 30/10/2000 i.e two days after the date of merger agreement. It is not as if things were uncertain and were not capable of being carried out as stated by the Acquirer.

It is also very pertinent to mention here that the Acquirer during the personal hearing on 30/5/02 admitted that the merger route was adopted later on as advised by the counsel and accordingly third amendment dated 3/2/2000 was carried out to the purchase agreement dated 28/4/99. Further, the aforesaid fact is also reinforced by the following statement, made by Mr. Shailendra Tandon on August 5, 1999 in the Business Standard, the then Executive Director of the Target Company.

“Luxottica will have to come out with an open offer to buy atleast 20% stake from the public since Securities and Exchange Board of India Takeover Code will get triggered once the deal is finalized in India”.

This statement reflects the perception of the management of the Target company and cannot be ignored. In this regard, the Acquirer has stated that “….. they have no record of any such views having been expressed by Mr. Shailendra Tandon and if expressed represented his personal views and not the views of the Acquirer. Even such personal views make it clear that no deal for the acquisition of shares of the Target company had been finalized upto August 05, 1999 …….. As contented by the Acquirer this statement may not be attributable to the Acquirer but it clearly indicates as to how the nature of transaction and applicability of the said Regulations was understood even by the Target company.

It is also observed that in the Annual Report of the Target company for the year 1998, it was stated inter alia, that “in terms of the agreement between Seller and Acquirer, Acquirer will consider purchasing Seller's current shareholding in your company, provided requisite Governmental regulatory approvals in the U.S and India are satisfactorily obtained and the Vision Care Business of our company is divested”.

It is also observed that the transferee company under the Merger Agreement dated 27/10/2000 is Ray ban Holdings Inc. U.S.A which was formed much after the execution of the Purchase Agreement on April 28, 1999 with the sole and exclusive objective of merging Bausch and Lomb South Asia Holdings Inc and Ray Ban Holdings Inc. U.S.A

In view of the same and the observations made in the preceding paras I find that the merger route has been devised by the Acquirer as a device/artifice subsequently with the intention of circumventing the said Regulations and to avoid making of public offer to the shareholders of the Target company. As already mentioned in preceding paras, the aforesaid fact has also been acknowledged by the Acquirer during the hearing before the Chairman on 30/5/02. In this regard it is stated that the Acquirer cannot, after an obligation under the said Regulations has arisen, devise arrangement/agreements of a nature, which are entered into for the specific purpose of circumventing the Regulations and which in turn adversely affect the interest of the shareholders of the Target company. The object of the said Regulations is not to be defeated by any ingenious devices, arrangements or agreements devised by an Acquirer so as to deprive the shareholders of the exit opportunity available to them under the Regulations, as a result of substantial acquisition of shares/voting rights or change in control. In the instant case the ingenious device of merger devised by the Acquirer and the Seller is contrary to the policy/objective of the said Regulations and is contrary to the spirit of the Regulations. From the chronology of events as stated hereinbefore it is implicit that the third amendment to the purchase agreement was admittedly carried out pursuant to the opinion of the counsel after a gap of around 10 months of the purchase agreement dated 28.04.99 Therefore, it is clear that the said amendment to the purchase agreement was an afterthought and its purpose was to defeat the provisions of the said Regulations and to evade the obligation of making of open offer to the shareholders of the Target company which had arisen as a result of triggering of the Regulations on 28/4/99 i.e the date of purchase agreement.

Further, it has to be borne in mind that the Regulations are a beneficial piece of social legislation and while interpreting the provisions of the said Regulations due regard has to be paid to the objective behind the enactment of Regulations apart from the interest of the shareholders in terms of providing an adequate exit opportunity to the shareholders in the event of change in control or substantial acquisition of shares/voting rights by an Acquirer. In this regard it will be pertinent to advert to the judgement of Hon'ble Supreme Court in Reserve Bank of India v. Peerless General Finance and Investment Co., (1987) 1 SCC 424 wherein it has, interalia, been observed that “Interpretation must depend on the text and the context. They are the bases of interpretation. One may well say if the text is the texture, context is what gives colour. Neither can be ignored. Both are important. That interpretation is best which makes the textual interpretation match the contextual. A statute is best interpreted when we know why it was enacted.”

In view of the aforesaid I find that acquisition of substantial shares/voting rights or control over the Target company by the Acquirer is pursuant to purchase agreement dated 28/4/99 as distinguished from the merger agreement dated 27/10/2000 and merger clause was incorporated much later in the purchase agreement to defeat the provisions of the said Regulations and to evade the obligation of making of open offer to the shareholders of the Target company and therefore no exemption is available to the Acquirer under regulation 3(1)(j)(ii) from the provisions of the Regulations.

5.0 CONCLUSION

In view of the aforesaid, I find that the Acquirer has violated regulations 10 and 12 read with sub-regulations (1) and (3) of regulation 14, as the Acquirer has acquired 44.152% shares/voting rights and control in the Target company, without making public announcement to acquire shares/voting rights or control of the Target company in accordance with the said Regulations.

6.0 ORDER

6.1 In view of the findings made above, in exercise of the powers conferred upon me under sub-section (3) of Section 4 read with Section 11B SEBI Act 1992 read with regulations 44 and 45 of the said Regulations, I hereby direct the Acquirer to make public announcement as required under Chapter III of the said Regulations in terms of regulations 10 & 12 taking 28/4/99 as the reference date for calculation of offer price. The public announcement shall be made within 45 days of passing of this order.

6.2 Further, in terms of sub regulation (12) of regulation 22, the payment of consideration to the shareholders of the Target Company has to be paid within 30 days of the closure of the offer. The maximum time period provided in the said Regulations for completing the offer formalities in respect of an open offer, is 120 days from the date of public announcement. The public announcement in the instant case ought to have been made taking 28/4/99 as a reference date and thus the entire offer process would have been completed latest by 27/8/99. Since no public announcement for acquisition of shares of the Target Company has been made, which has adversely affected interest of shareholders of Target Company, it would be just and equitable to direct the Acquirer to pay interest @ 15% per annum on the offer price. The Acquirer is hereby accordingly directed to pay interest @ 15% per annum to the shareholders for the loss of interest caused to the shareholders from 27/8/99 till the date of actual payment of consideration for the shares to be tendered in the offer directed to be made by the Acquirer.

1. This order shall come into force with immediate effect.