Due-diligence disclosure stump potential acquirers

New insider trading norms require making price-sensitive information obtained during due diligence process public

The new insider trading norms have confused potential acquirers. Players are asking for clarity over a clause, which requires price-sensitive information obtained during due-diligence to be made public.

The requirement gets trickier for transactions such as private equity investments, where an open offer doesn’t get triggered. (In an open offer, a shareholder is given the opportunity to buy stock at a price that is lower than the current market price. The purpose of the offer is to raise cash for the company.)

“These regulations only provide for situations when after diligence, the acquirer actually acquires the company. What is not clear is a situation when he does not proceed with the acquisition after conducting the diligence. Sometimes, on the basis of unfavourable findings in the diligence, the acquirers do not proceed further with the acquisition; so in this situation, the question arises what happens to the “unpublished price-sensitive information” that has been shared with the potential acquirer in the case of an aborted transaction,” said Lalit Kumar, partner, J Sagar Associates.

The regulations, which came into effect in May, have specific guidelines for disclosure of due-diligence for deals that do not trigger an open offer. The regulations state companies would need to disclose due-diligence two trading days before the completion of deal. However, the regulations are silent on disclosures of due-diligence if the deal is not completed.

There is a concern among private equity and venture capital entities, where deal sizes are lower and often don’t trigger the 26 per cent open offer. The concern is on the due-diligence disclosure requirement, as not all potential deals are completed.

For all mergers and acquisitions, the exercise of due-diligence is conducted by the potential acquirer to determine the health of the company and to arrive at an acquisition price.

This confusion has led to some deals getting delayed as the companies fear they could be violating the regulations.

According to Tejesh Chitlangi of IC Legal, clarity from the Securities and Exchange Board of India is required.

“To address such confusion, a clarification may be issued by Sebi and till then the parties should rely on general exemption by showcasing that the communication of information was in furtherance of legitimate purposes and for performance of duties,” said Chitlangi.

“It appears that although the regulations are silent, it cannot be the intention that such diligence will not be permitted just because the transaction is aborted after the diligence,” said Kumar.

CONFUSION

• The new insider trading norms have confused potential acquirers
• Players are asking for clarity over a clause, which requires price-sensitive data, obtained during due-diligence, to be made public