The Concept of PAC

Often, investors without ostentatious connection between them collaborate to gain control of
businesses. Such collaboration, is unfair to retail investors as they may not be given the statutory exit
opportunity (the public offer) upon change in control, as imposed shareholding limits are not crossed
by any of the entities working in tandem individually. To give retail investors their due exit opportunity,
securities regulation in most jurisdictions identify the concept of 'Persons Acting in Concert' or PAC to
denote these investors, and club and consolidate their shareholdings and acquisitions of such holding
for the purposes of public offer triggers and disclosures to bourses. In India, the risk of such 'teaming
up' of entities to covertly acquire control in a listed entity may be sufficiently higher by virtue of most
corporations being closely held, as large concentrated shareholdings make it easier to dictate
investment decisions, propagate collusive actions and do all of it without much brouhaha, as
juxtaposed to a dispersed shareholding model wherein such decisions (and all decisions generally)
require consent from a vast number of shareholders. Further, in an offshoot issue arising from the
above, shareholder activism and working of proxy advisory firms is largely at its nascent stages in
India, further adding to the risk. Regulatory framework pertaining to takeovers must thus be suitably
equipped to mitigate these risks.

Concert Parties in the UK

The term 'Persons/Entities Acting in Concert' has its roots in the City Code on Takeovers and Mergers,
a set of guidelines and rules that were promulgated in 1968. The code was promulgated to protect
interests of minority shareholders from the practice of 'warehousing', 1 which entailed a number of
seemingly independent parties buying shares in a manner that did not trigger the threshold for
disclosure of interest under section 33 of the Companies Act 1967. 2 The Code also laid down the
mandatory bid rule, to ascertain a share of the control premium to minority shareholders, 3 and
recognised the concept of PAC or 'Concert Parties' for the purposes of the same. The Code defines
Persons Acting in Concert or Concert Parties by laying down some conditions and requirements
that must be met in order to hold entities as PAC or 'Concert Parties'. Further, it lays down a list of
relationships that shall result in entities or persons being classified as PAC or Concert Parties, subject to
rebuttal. The crucial requirements for being classified as PAC, is that the persons should have an
agreement or some kind of understanding, pursuant to which they act together to either obtain or
consolidate control of a company or act towards frustrating the successful outcome of an offer for the
company.4 The list of relationships that will entail all persons being deemed to be PACs or Concert
Parties, includes within its ambit relationships between A) a company, its parent, subsidiaries and
fellow subsidiaries, and their associated companies5, and companies of which such companies are
associated companies.6 B) A company and its directors and close relatives and trusts settled by any of
them.7 C) A company and its Pension Scheme which invests collected monies and a company and the
pension schemes of any parent, subsidiary, fellow subsidiary and associated companies. 8 D) A fund
manager and funds she manages on a discretionary basis. 9 E) An individual and her close relatives and
1 Andrew Johnston, Takeover Regulation: Historical and Theoretical Perspectives on the City Code, The Cambridge Law
Journal, Vol. 66, No. 2 (Jul., 2007), pp. 422-460 (hereinafter referred to as Jhonston)
2 The section mandated disclosure of shareholding above 10% to the public.
3 Jhonston, Supra Note 1.
4 The City Code On Takeovers And Mergers, 1968 (Hereinafter referred to as 'The City Code')
5 The test for the 'associate company' relationship is that of ownership or control of 20% or more equity share capital.
6 The City Code
7 Id.
8 Id.
9 Id.
trusts settled by any of them. 10 F) the close relatives of a founder of a company, their close relatives,
and the related trusts of any of them. G) An Investment Advisor and her client or others acting in
concert with such client, in each case in respect of the interests in shares of that adviser and persons
controlling , controlled by or under the same control as that adviser. H) directors of a company which is
subject to an offer or where the directors have reason to believe a bona fide offer for their company
may be imminent. I) shareholders in a private company who sell their shares in that company in
consideration for the issue of new shares in a company to which the Code applies, or who, following
the re-registration of that company as a public company in connection with an initial public offering or
otherwise, become shareholders in a company to which the Code applies.

The importance of the determination of concert parties, and the subsequent aggregation of their
holdings, assumes great importance in the determination of whether the trigger for a mandatory open
offer, being 30% of the entire equity capital of the company 11, is reached or not. Further, under law, the
persons forming a part of the concert parties, once determined to be so, are extolled to the position of
the offeror for the purpuses of certain requirements under the Code. The statutory mandate of whether
or not disclosures ought to be made to the bourses by the concert parties, as well as certain stautory
restrictions on acquisition of shares in a company that applies to an offeror is applicable to such
persons forming a part of the concert party collective. Rule 8 of the Code posits that a person that is
determined to be acting in concert with the offeror, has to provide disclosure of all dealings in equity
(or other securrities) of the company to the stock exchanges by 12 pm of the next trading day. 12 Further,
as per Note 6 pertaining to Rule 8 of the Code, all arrangements such as opposing positions in
derivatives such as option contracts, entered into/taken up by the offeror with a concert party or a
position taken up by a concert party has to be disclosed by the offeror.13

Such determination however, is not an easy task and is often mired by technical complexities. This is
exacerbated by the fact that proof of cooperation is often indirect as undisclosed arrangements resulting
in formation of concert parties, are often obfuscated from the public. Evidence thus, has to be drawn
from the facts and circumstances of each case. However, certain actions by investors will not raise the
presumption of them acting in concert. For example, the mere fact that shareholders cooperate to
achieve certain goals to protect their interests, such as initiating a derivative action claim, will not by
itself lead to a determination of them being concert parties, unless such cooperation between them is
objected and ended towards attaining control of the board of directors. 14 It is pertinent to note, that such
protection is necessary as it is a fundamental principle of good corporate governance that shareholders
come together to put their stamp on, and protect their interests in the company in which they invest.
Even the European Union Takeover Directive, provides for a 'White List' of activities that shareholders
can cooperate in reagard to, without raising the presumption of them acting in concert by itself.
However, the fact remains that each case has to be judged on the basis of its unique facts.
PAC in India
Public M&A in India is regulated by the SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations 2011. This set of regulations, commonly referred to as the 'takeover code', was

10 Id.
11 Rule 9, City Code
12 Rule 8, City Code
13 Note 6 on Rule 8, City Code
14 Practice Statement 26, Takeover Panel, September 2009.
promulgated to ascertain that the public shareholders of a company are offered a mandatory exit
opportunity upon change in control. The concept of PAC is enshrined in regulation 2(1)(q)(1), which
defines the term as - persons who, with a common objective or purpose of acquisition of shares or
voting rights in, or exercising control over a target company, pursuant to an agreement or
understanding, formal or informal, directly or indirectly co-operate for acquisition of shares or voting
rights in, or exercise of control over the target company.15
It is pertinent to note that the definition of PAC was initially promulgated in previous takeover codes,
and the extant definition is similar to the one in the 1997 Takeover Code. The conditions for persons to
be determined as PACs are enumerated herein - A) Persons ought to have a common objective, device
or purpose. B) Such device, purpose or objective has to be for the purposes of acquisition of either
shares or voting rights in the target company. Further, it can also be to acquire control of the Target. C)
These persons ought to act together, or cooperate for such acquisition. D) The cooperation extending
between such persons must be by virtue of an agreement between them. The agreement can be formal,
such as a Shareholders Agreement which enlists progressive acquisition by such persons in time, or an
informal one, such as an oral agreement or arrangement.
Much like the position in the UK and other jurisdictions, the determination of whether persons are
PACs, is a factual one. The Securities Appellate Tribunal (SAT) has held in Hitachi Home and Life
Solutions Inc v. SEBI16 reiterated the same amd posited that the test laid down in the definition of PACs
has to be pitted against the factual matrix of each case. The Supreme Court in Technip SA vs SMS
Holdings Private Limited & Others17 held that to be acting in concert with an acquirer, persons must
fulfill certain 'bright line' tests. They must have commonality of objectives and a community of interest
and their act of acquiring the shares or voting rights in company must serve this common objective.
The commonality of objective should be established between the acquirer and a shareholder in order to
trigger off Regulations 10, 11 and 12.
The Regulations, much like the City Code in UK, also deems certain categories of persons as PAC by
virtue of the relationship they share. Certain relationships, are so intimate, that the law presumes that
such intimate relationship precludes the parties from acting independently. It also presumes that by
virtue of such intimate relationship, one party is in a position to influence the other to act in furtherance
of the former's objective. However, such presumption is rebuttable. The persons deemed to be PACs
have to thus adduce evidence to prove to the contrary. Under the Takeover Code, the categories of
persons who are deemed to be PAC is given in Regulation 2(1)(q)(2). 18 These are - A) A company and
its holding or subsidiary company or any other company under the same management or control; 19 B) a
company, its directors, and managers.20; C) Directors of a company, holding company, subsidiary

15 Regulation 2(1)(q)(1),SEBI (Substantial Acquisition of Shares and Takeovers) 2011 (hereinafter referred to as the
Takeover Code)
16 SAT Order dated July 6, 2005
17 (2005) 125 CompCas 545(SC)
18 Regulation 2(1)(q)(2), Takeover Code.
19 Regulation 2(1)(q)(2) (i), Takeover Code
20 Regulation 2(1)(q)(2) (ii), Takeover Code
company or associate company and their associates. 21 D) promoters and members of the promoter
group;22 E)immediate relatives23; F) a mutual fund, its sponsor, trustees, trustee company, and asset
management company;24 G) a collective investment scheme and its collective investment management
company, trustees and trustee company;25 H) a venture capital fund and its sponsor, trustees, trustee
company and asset management company;26 I) a foreign institutional investor and its subaccounts;27 J) a
merchant banker and its client, who is an acquirer;28 K) a portfolio manager and its client, who is an
acquirer;29 L) banks, financial advisors and stock brokers of the acquirer, or of any company which is a
holding company or subsidiary of the acquirer, and where the acquirer is an individual, of the
immediate relative of such individual30 M) an investment company or fund and any person who has an
interest in such investment company or fund as a shareholder or unit holder having not less than 10% of
the paid-up capital of the investment company or unit capital of the fund, and any other investment
company or fund in which such person or his associate holds not less than 10% of the paid-up capital of
that investment company or unit capital of that fund.31
Though the Takeover Code of 1997 had the concept of deemed PAC, a need was felt to include certain
relationships within its purview due to the ease of manipulation which existed in such relationships. As
discussed in the introduction, with large, concentrating holdings prevalent in India, the influence of
promoters in a company was immense. At the time of drafting of the takeover code, corporate
governance norms for Indian Companies were weak, resulting in huge say of promoters in the day to
day functioning of a corporation. This phenomenon increased the risk of subversion of the Takeover
Code and the mandatory open offer requirement. Thus, under the Takeover Code of 2011,
promotersand members of the promoter group, as defined int he SEBI ICDR Regulations, 32 were held
to be deemed as PAC. Further, due to the rise of Collective Investment Schemes, again in the backdrop
of weak governance norms, increased the risk of various entities associated with the scheme acquiring
control in companies without making relevant disclosures or the mandatory open offer. Thus, a
collective investment scheme, its investment management company, and its trustees and trustee
companies came to be deeped as PAC. Similarly, venture capital funds, its sponsor (s), trustees, trustee
companies and asset management companies were also included.
Like in the UK, Regulation 25(5) of the Takeover Code posits that the obligations in the Takeover
Code vests with the acquirer and PAC jointly and severally. However in practice, the primary liability
is vested with the acquirer. With it only being rare that PACs are proceeded against.

21 Regulation 2(1)(q)(2) (iii), Takeover Code

22 Regulation 2(1)(q)(2) (iv), Takeover Code
23 Regulation 2(1)(q)(2) (v), Takeover Code
24 Regulation 2(1)(q)(2) (vi), Takeover Code
25 Regulation 2(1)(q)(2) (vii), Takeover Code
26 Regulation 2(1)(q)(2) (viii), Takeover Code
27 Regulation 2(1)(q)(2) (ix), Takeover Code
28 Regulation 2(1)(q)(2) (x), Takeover Code
29 Regulation 2(1)(q)(2) (xi), Takeover Code
30 Regulation 2(1)(q)(2) (xii), Takeover Code
31 Regulation 2(1)(q)(2) (xiii), Takeover Code
32
Determination of PACs
With regard to determination of PACs, and in applying the test for PAC under the Takeover Code of
1997, certain interesting issues have arisen in India. One such, dealt with whether a mutual fund, set up
by an FII in India, and its Sub-Accounts, should be considered to be PACs. FIIs are institutional
investors registered with SEBI.33 Sub-Accounts are individual accounts of segregated funds which
operate through the FIIs. They can be individuals, companies, etc. In the case at hand, an FII had a
subsidiary in the United States, which had set up a mutual fund in India. The FII, acquired certain
shares on behalf of its sub-accounts. SEBI sought to club the holdings of the Mutual Fund and the sub-
accounts of the FII for the purposes of disclosures under the Takeover Code. SAT over-ruled the SEBI
decision, and held that they were not PACs. The rationale was that the takeover code laid down certain
relationships that were to be deemed as PACs. One such category was Mutual Fund, its Asset Manager
etc. A separate clause was that of an FII and its Sub-Accounts. SEBI connected these separate
categories to hold that the Mutual fund and the Sub-Account of the FII were PACs, and that the holding
of the FII had to be clubbed with that of the mutual fund floated by the FII's subsidiary. Such
cocatenation of categories in the takeover code, was held to be impermissible by SAT.
Another conundrum that arose, was with regard to whether promoters of the target company, by virtue
of insisting on participating in the public offer made by the acquirer, be deemed to be a PAC with the
acquirer. The Bombay High Court held that a co-promoter of target company just due to his being co-
promoter cannot be said to be PAC with the acquirer who is also a promoter of the target company, if
there is no evidence on record to prove common objective or purpose.34
Conclusion
To conclude, it would be fair to say that the concept of PACs is crucial to ensure that acquirers do not
illicitly gain control of companies without affording an exit opportunity to the retail investors. Further,
it is a tenet of good corporate governance that all shareholders be treated equally. Thus, the open offer
has to be one on equally favourable terms, as given to the promoter to acquire control. The whole
purpose of this is so that the minority shareholders get their share of the control premium. In India,
though the risks of subversion are manifold due to concentrated shareholdings, in the author's opinion,
the takeover code is armed to deal with such risks.

33 Alliance Capital Mutual Fund Vs. Securities and Exchange Board of India, (2008) 83 SCL 265 SAT.

34 K.K. Modi vs. SAT, 2002(2)BomCR523.