SEBI orders public disclosure at M&A negotiation stage: Compromises deal certainty and amplifies directors’ liabilities

Introduction

Are you in the middle of exploring a confidential listed M&A deal? If yes, SEBI may have just opened a Pandora’s box by mandating you to disclose the details of the transaction as it unfolds – effectively bidding adieu to deal certainty. In what could be termed as nothing else than an overzealous attempt to protect public shareholders, SEBI recently passed an order (In the matter of Reliance Industries Limited¹ ) stating: (a) all ongoing deal negotiations are unpublished price sensitive information (UPSI); (b) if there is a media leak about such negotiations, the listed company should proactively disclose material details of these negotiations; and (c) listed company cannot wait for finalization of deal metrics or execution of definitive documents to make disclosures to the market.

Brief facts and Order

Facebook signed a deal to invest in Jio Platforms Limited (Jio), a subsidiary of the listed company, Reliance Industries Limited (Reliance) after several months of negotiation. They entered into a term sheet on March 4, which clearly created no binding obligation on either party, and each party could walk out of the deal at any time. The deal received approval from the boards of Reliance and Facebook on April 18 and the binding agreements were entered into on the day when the deal was announced to the public i.e., April 22. However, before the deal was announced, on March 24, 2022, the Financial Times (FT) published a news article about a possible investment by Facebook in Jio.

SEBI’s adjudicating officer held that Reliance violated its disclosure obligations by not proactively disclosing information about the negotiations with Facebook when FT published its news article. SEBI did not dispute Reliance’s submissions that the definitive deal documents had not been entered into when the news article was published. In fact, at the time of publication, the parties had not even settled on the deal price. However, the gist of SEBI’s order is that the publication of the FT article resulted in selective availability of information regarding the deal which Reliance should have rectified by disclosing the ongoing negotiations.

SEBI has not elaborated on the rationale sufficiently for this conclusion; in fact, the order does not differentiate between market speculation and information generated based on concrete happenings, and has simply held that disclosures have to be made upon any leak to ensure information symmetry (irrespective of whether such information is concrete or not).

Analysis of SEBI’s Order

1. Public M&A – Deal Certainty and Price Certainty Compromised. In public M&A, price certainty (and consequently deal certainty) is heavily dependent on deal confidentiality. This is because most of these transactions have to be undertaken at or above a SEBI prescribed floor price which is based on the historic price movement of the stock in question (lookback period of 10 days to 180 days prior to deal announcement).
   
   So, how exactly are public announcements timed in M&A transactions? Disclosures are typically made only after the deal commercials are frozen and binding documents are executed, in order to ensure that the deal price is immune from post-announcement stock price fluctuations. If a listed company is forced to confirm market speculation/ rumours on social media and provide details of a half-baked deal, investors could lose price certainty overnight. If the price movement drives the minimum floor price too high, then, the commercial viability of many deals will get thwarted.
   
   The situation is further compounded when listed foreign investors such as Facebook and Blackstone explore Indian transactions. For them, potential transactions in India may not just be UPSI/ MNPI in India but MNPI in their home jurisdiction as well. In such a scenario, premature disclosures regarding potential transactions may expose them to regulatory issues in their home jurisdiction. Overall, the SEBI order imposes a significant practical hurdle in protecting deal certainty and requires a relook.
2. Unclear Disclosure Obligation – Increase in Directors’ Liability. Public shareholders can now hold the companies and their directors and officers to an impossible standard: making them liable either for disclosing incomplete information which turns out to be untrue if a deal falls through, or for not confirming market rumours and social media chatter before definitive documents are signed.
   
   Most companies, as a policy, do not comment on market speculation. For example, JSW Steel was recently asked to confirm a rumour that it planned to sell its Italian business. JSW Steel responded stating that it “continues to evaluate its investments in various strategic assets portfolio, including overseas assets & takes decision regarding potential value creation in line with its capital allocation policy, to achieve its long-term vision”. There has never been a need to confirm or deny any such rumours.
   
   Recent news confirms that the Reliance order is already being used as a litigation threat against boards of listed companies. In July 2022, certain investors wrote to SEBI, calling for action against Zomato with regard to its Blinkit acquisition. The media had reported on the deal before the official announcement from Zomato. The investors contended that by not issuing a clarification at the time of the media leak, Zomato caused them losses which they could have avoided with what they termed as ‘timely disclosures’. In the letter they called attention to a “recent SEBI order where a blue-chip company and its employees were penalized for similar violations”.
   
   If a listed company confirms market rumours due to SEBI’s new prescription, and the price rises sharply and the deal subsequently falls through, this may very well be seen as fuelling of market speculation or market manipulation which are both punishable under SEBI regulations. The SEBI order effectively translates to a very high subjective compliance standard which most companies are likely to fall foul of, thereby exposing them and their boards to considerable liabilities.
   
3. Premature disclosure of UPSI – Counterproductive to public interest. SEBI has consciously adopted a principles-based disclosure regime vis-à-vis a rules-based one. The core objective in mandating disclosure of UPSI is enshrined in the insider trading code – i.e. prompt dissemination of UPSI once it becomes ‘concrete and credible’. Listed companies are also given the duty and discretion to make this assessment, instead of prescribing every situation that mandates disclosures.
   
   SEBI’s order has now introduced an irreconcilable self-contradicting position. On the one hand, SEBI regulations stipulate that UPSI should be disclosed to the public only when it is ‘concrete and credible’, to ensure appropriate price discovery. On the other, the SEBI order requires disclosures pursuant to any form of market rumours/ leaks. What happens if the market reacts sharply to such half-baked disclosures but the deal eventually gets abandoned? Public shareholders investing on the basis of such halfbaked disclosures stand to lose the most. Viewed in this light, disclosure of concrete UPSI is more important than disclosing incomplete UPSI.
   
   In fact, the obligation on listed companies is now completely unclear - would they, for example, be required to disclose all information related to all their transactions if there was a generic market rumour? What happens in a bid situation? Would details of every potential bidder and their commercials on offer have to be disclosed even before they submit the bid? Would this principle also apply to other forms of leaks – say media reports about confidential arbitration proceedings?
   
   The existing disclosure regime of SEBI is well equipped to handle all forms of disclosures and attendant failures as well. SEBI’s order in this matter dilutes the essence of the disclosure regime, complicates the compliance climate for listed companies, and possibly does more harm than good to public shareholders.

Conclusion

The order imposes a Sophie’s choice for the boards of listed companies. This also upends the careful balance that SEBI had hitherto maintained, and risks moving away from being a principle-based regulator to an over-prescriptive, rules-based regulator. Companies and investors would also be left at the mercy of unknown individuals with unknown motives. As noble as SEBI’s intent may be, this is a fit case for SEBI to reassess and apply the existing law purposively to avoid creating uncertainty.

¹ Adjudication Order No. Order/BM/LD/2022-23/ 17202-04.