SAT sets aside Sebi order on Heidelberg offer

In July 2006, Heidelberg Cement bought a majority stake of 50.1 per cent in Mysore Cement for $100 million (Rs 400 crore) from from the S K Birla group, the promoters.

The open offer to acquire the public shares from the market was announced at Rs 58 per share, while the promoters were paid Rs 14.5 per share over and above the offer price as a non-compete fee.

Following this, Sebi passed an order asking Heidelberg Cement to either pay the same price along with the non-compete fees to the minority share holders or acquire shares from the B K Birla group without the 25 per cent non-compete fees at Rs 58. Heidelberg subsequently approached SAT against the Sebi directive.

The SAT bench observed that Heidelberg was entirely justified in paying a non-compete fee to the promoters of Mysore Cement.

"The promoter sellers of Mysore Cement being members of the S K Birla group and having had a long association with the company are definitely in a position to create competition for the target company," said the order.

In a counter argument presented against the open offer, the council's had said that sellers of Mysore Cement were were only shareholders and not taking any active part in the business and could not, therefore, be expected to compete with the acquired company.

"It was incongruous to have a non-compete agreement with certain erstwhile promoters when two members of the promoter group, S K Birla and Siddharth Birla, continued to hold shares and be on the board of directors of Mysore Cement," said the council.

Sebi's take over code mentions that if the non-compete fees paid to the promoters is in excess of 25 per cent of the open offer, then the fees should be paid to all the shareholders of the company.

However, in the case of Mysore Cement, SAT observed that the fees paid to S K Birla Group did not exceed the 25 per cent limit. "The matter of non-compete fee - whether it should be paid and if so, how much - is primarily a matter to be decided by the acquirer and the target company in the facts and circumstances of each case," the order said.