Acquirer has a right to protect his investment/business from competition by a seller of the business

In a blow to the Securities and Exchange Board of India (Sebi), the Securities Appellate Tribunal (SAT) has set aside the former’s ruling in the case of Tata Tea, wherein Sebi had asked the company to pay non-compete fees to all shareholders of Mount Everest Mineral Water.Tata Tea had acquired Mount Everest in 2007, buying a stake of 24.15 per cent at Rs 140 a share, which aggregated to Rs 43.54 crore. This triggered an open offer, as shareholding was in excess of 15 per cent.

The share purchase agreement entailed payment of a non-compete consideration of Rs 3 crore to the promoters of Mount Everest in lieu of their agreeing not to compete with the company after the acquirer made the investment. The Sebi Board said Tata Tea should pay the amount as non-compete consideration to the promoters to other shareholders as well, who had tendered shares in the open offer, with interest at 10 per cent for the delay in making the payment.

In a similar case of Cementrum IB.V, SAT had set aside Sebi’s ruling, saying non-compete fee was not required to be paid to the public shareholders. Following this, DSP Merrill Lynch, the merchant banker in the deal urged the Board to follow the ruling. However, the Board said the Tribunal’s decision in Cementrum was case-specific.

But, in its ruling, SAT said,” An acquirer has a right to protect his investment/business from competition by a seller of the business…we are of the view that a non-compete agreement should then protect not only the target company but also its continuing shareholders.” SAT rejected the Sebi Board’s counsel’s argument that Tata Tea was not justified in paying non-compete fee to the promoters without paying the same to the public shareholders.