This article is written by Aishwarya Shankar pursuing a Diploma in M&A, Institutional Finance and Investment Laws. This article has been edited by Zigishu (Associate, Lawsikho).
This article has been published by Sneha Mahawar.
To understand the topic of the paper we must first know what a takeover actually is? A takeover also called acquisition is the process of a buyer company or an acquirer buying or bidding for a significant amount of shares of the Seller Company or target/Acquired Company. A larger company typically conducts takeovers for a smaller one. In a takeover bid, the acquirer usually offers cash, stock, or a mix of both, “bidding” a specific price to purchase the target company. Takeover regulation is essential to protect the rights of the stakeholders, the public and others affected by it. The regulation is also important for safeguarding the rights of the target company and shielding them from being oppressed by the buyer company. Depending on the economic system of India and the UK their takeover Regulations also differ.
Types of takeover
There are four types of Takeover, these include:
A friendly takeover is a type of acquisition where a company acquires the other company where the board of directors of both the companies approves of the transaction. Both companies have a common motive and advantage. In this type of takeover, both shareholders and management are in consensus on both buyer and seller sides of the deal. E.g. takeover of Whatsapp by Facebook and Flipkart by Walmart.
This type of acquisition happens when the target company does not approve of the acquisition. The acquiring company must collect a majority stake in the target company for automatic acquisition. A hostile takeover mostly happens through a tender offer. In a tender offer, a company tries to purchase shares from the existing or outstanding shareholders of the target company at a premium over and above the current market. E.g. takeover of Ashok Leyland by Hindujas.
Reverse takeover bid
A reverse takeover bid takes place when a private concern buys a public company. The main stimulus behind this takeover is to get the private company listed without initiating an initial public offering (IPO) as the process of being listed is costly, time-taking and tedious. Thus in this kind of takeover, a private company by acquiring a public company automatically becomes a listed company.
A backflip takeover takes shape when the acquirer becomes the subsidiary of the target company. A common motive behind this takeover is to retain the brand name of the smaller yet well-known company. This way, the larger acquirer can gain strong brand recognition and market share of the smaller company.
Why is there a need for a takeover code
Mergers and acquisitions have grown exponentially in the last few years and a range of strategic reasons have been motivating factors for companies to opt for takeover. These include increasing integration of markets, economies of scale, elimination of competition, product differentiation, vertical integration, technology requirements, strategic change in focus, and rehabilitation of loss-making units, improved corporate governance, etc.
Everybody in today’s day and age is aiming for a good Shareholding and ownership in a high potential company and to protect the interests of these stakeholders, States have enacted various securities laws. To achieve a credible corporate governance rating it is imperative to have efficient and well-planned takeover regulations in place.
The fundamental corporate governance principle is to ensure that the interests of the shareholders of listed companies are taken good care of in case of a takeover especially the interest of a minority shareholder which is why enactment of Takeover laws has been necessary in most of the common law countries.
The takeover rules and regulations make sure that public shareholders of a listed company are given fair treatment in relation to a takeover of a listed company thus maintaining stability in the securities market.
The takeover regulations are drafted with the objective of offering an opportunity to exit from the company at the most promising and beneficial terms for the public shareholders of a company.
Any considerable acquisition done by a company may lead to complications or misunderstandings with the minority shareholders or a change in company policies and control that the minority shareholders would not want to be a part of. The key objective of the regulation is to check hostile takeovers and safeguard the interests of minority shareholders. This ensures that no unjustified advantage is taken by the majority shareholders. Thus it makes the whole process just and in the best advantage of the company.
Takeover regulations in India
Laws governing takeover code in India
The Companies Act, 2013
Section 261 of the Companies Act, 2013 talks about the preparation of a scheme of rehabilitation, revival and the takeover of an insolvent company by a solvent company with the approval of the National Company Law Tribunal (NCLT). Section 230 (11) says that a takeover should have complied with the regulations drafted by the Securities and Exchange Board. Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeover) Regulation, 2011 also called the Takeover code, is prepared under the Securities and Exchange Board of India Act, 1992. Many amendments have come in overtime in the takeover code, the most recent being in June 2020. According to Section 250 (3) the NCLT has been empowered to guide a company’s manager/administrator to take over the assets and supervision of the company.
The Competition Act, 2002
This Act controls and manages the transactions which have an unfavourable effect on the healthy competition between companies in India.
Evolution of the takeover code
The road map of the Takeover code came to life due to the SEBI Act, 1992 which made regulation of acquisition and takeovers mandatory. This led to the formation of the takeover Regulation of 1994. In November 1995, a committee was formed by SEBI to review the takeover regulation, 1994, chaired by Justice P.N Bhagwati. Taking the suggestion of the committee Substantial Acquisition of (Shares and Takeovers) Regulation, 1997 was announced on February 20, 1997, repealing the code of 1994.
However, due to the growing changes and complexities in the takeover market, these regulations become ineffective. To tackle this situation an advisory committee, named Takeover Advisory Committee was established in September 2009. Mr. C. Achuthan was the chairman of this committee. On the suggestion of this committee, the famous Takeover Regulation of 2011 was introduced which repealed the 1997 code.
Securities and Exchange Board of India (takeover code), 2011
The Securities and Exchange Board of India (SEBI) regulates companies that are listed on the stock exchanges of India. The SEBI (Substantial Acquisition of Shares and Takeovers, hereinafter referred to as SAST) Regulations, 2011 (Takeover Code) restricts and keeps a check on the acquisition of shares and voting rights in a listed company.
If an acquirer wants to acquire shares of a listed target company and the cumulative shareholding of the acquired company touches 25%, then the acquirer has to make a mandatory open offer to the outstanding shareholders of the target company to acquire 26% shares of total share capital of the target. They cannot record the extra shares acquired by them in their name till they make an open offer. SEBI has made this step mandatory so as to protect the interest of the shareholders and to also give them an easy way to exit in case they do not wish to be a part of the new arrangement.
If the acquirer so far holds 25% or more shares in the target company and has formerly made an open offer for that 25% and now plans to acquire more than 5% shares in the target company in one financial year, then the acquirer has to first give an open offer again to the outstanding shareholders to acquire at least 26% of the total share capital of the target.
If an individual or a company already holds 25% more shares in the target company and acquires additional 5% shares in a financial year it is not obligatory to provide an open offer to public shareholders, this theory is called creeping acquisition. By applying this concept an acquirer can grow his stake in the target entity by acquiring additional 5% shares in each financial year without compulsorily making an open offer.
SAST (Amendment) Regulations, 2020
After taking into account the changes in the financial situation of the companies owing to the pandemic, SEBI had to make changes in the Substantial Acquisition of Shares and Takeovers Regulations. According to the amendment made by SEBI, an acquirer can now purchase further shares in the target that is more than the 5 % limit but not more than10 %, which is conditional.
The situation was such that the acquirer had to be the promoter of the company and the shares acquired had to be preferential shares. This amendment was made only for a period of a year (FY20-21). In this period, the acquirer could buy further stake without the need of a public announcement for an open offer.
SAST (Amendment) Regulations, 2021
As per the new amendment, if the target company has its securities listed on the innovators’ growth platform, the limit of acquisition of 25 % will be extended to 49%.
In the same way, the acquisition limit of 5 % voting rights has been increased to 10 %. Further, the pattern or outline of voting of the meeting in which the open offer takes place should also be disclosed by the company.
Voluntary open offer
It is an offer made through a public announcement in cases where the acquirer together with persons acting in concert already have 25% or more voting rights or equity shares in the target company and desire to increase their stake in the target company, for this they make a total offer of 10% of the total share capital of the Target Company. It is not a mandatory offer but at the option of the acquirer.
Takeover Code’s Regulation 2(1)(q)(1) defines persons acting in concert (“PAC”) as persons who have the same objective of acquirement of shares or voting rights in, or having control over the target company, relating to an agreement, collaborate for the acquisition of share or employ control over the target company.
For a successful voluntary open offer to take place the acquirer or PAC must not have taken over any shares by creeping acquisition or by a mode that is exempted for the period of 52 weeks preceding the public announcement nevertheless he can buy shares via Bonus or an open offer.
- The open offer should be for at least 10 outstanding shares.
- If a voluntary open offer is made, the following compliances should be adhered to:
- The acquirer must not buy any shares in the course of the open offer
- The acquirer is not allowed to acquire any shares during the six months after the conclusion of the open offer but he can make an additional Voluntary offer or a competing offer during that period.
Takeover regulations in the UK
The United Kingdom’s Takeover Code has been a broad framework or a guidebook for framing takeover regulations for countries with common laws like Australia, New Zealand, and Hong Kong. The Companies Act, 1985 is the main law that governs the affairs of companies functioning in the UK. The companies in the UK are regulated by the City Code on Takeovers & mergers, which is a body of rules framed and administered by the panel on Takeovers & Mergers. The UK has the most experience and skill in the regulation of takeovers. The City Code on Takeovers and Mergers was framed in 1968. The city code is issued and managed by the Takeover Panel, which acts as supervisory authority to carry out a set of regulatory functions relating to takeovers under the EU Takeover Directive. According to Part 28 of the Companies Act 2006, the City Code has statutory consequences and the Panel is a statutory body. The Panel implements the City Code and also gives directions that are obligatory to control any person breaching the City Code. Other legislation which covers certain aspects of corporate takeover activities includes the Enterprise Act, 2002, The Competition Act, 1998 Financial Services and Markets Act, 2000, Rules governing Substantial Acquisition of Shares, and the Criminal Justice Act, 1993.
The City Code is a set of rules and principles that administer mergers and takeovers of entities with registered offices in the UK. The Code is made to guarantee that shareholders are treated fairly and acts as a planned framework for takeovers to be conducted.
The mandatory bid rule is the most significant rule of the City Code. The rule states that if a person acquires shares that (together with persons acting in concert) carry 30 % or more of the voting rights of an entity, in that case, he has to make a mandatory offer in cash for the target at the maximum price paid by the person (or persons acting in concert) for an interest in target company shares in the 12 months prior to the offer is announced.
Thus the threshold for triggering the mandatory offer in the city code is set at 30%. There is no provision for a creeping acquisition in the UK’s Takeover code. There was a provision in the past for a takeover of 1% in the duration of 12 months except that was scrapped after harsh disapproval for its lack of any justification in principle.
The panel came up with this rule so as to make sure that a holding of 30 % or more does not give the holder legal control or valuable control over the affairs of the company. According to the belief of the panel, it is unfair for the shareholders to find that they have to be shareholders in a business that may have different management, objectives, policies to which they do not want to be a party to and they have left with no better option than selling the shares in the market. Thus the panel is of the view that this must be taken as a change of control and so the dissenting shareholders should be given the opportunity to exit by selling their shares. The objective is to achieve equal treatment for all shareholders. The EU Takeover Directive also says that the affiliate states have a mandatory offer regulation when control changes.
In the UK, as we know the Panel has the power to make rules in cases of breach of the rules given in the Code. It also has the authority to offer rules ordering payment of compensation and interest where it thinks is fair and reasonable. Infringement of these rules can give rise to liabilities in the shape of fines. The Panel in addition has corrective powers given in the Code which comprise the power to issue a public or private statement of, suspend, censure, or withdraw any special status established by the Panel for such a person.
Take-over codes are shaped as per the economic conditions, market, Government policies, types of companies, etc. in a particular country. The takeover code of the UK portrays a shareholder-oriented strategy while in the case of India there seems to be a striking sense of balance between state control ensuring value maximization and fairness of the shareholders. Further UK’s City code is focused more on the capital market while the Indian Takeover Code gives prime importance to the protection of labour force and welfare. In terms of penalties, SEBI in India imposes severe penalties. It has been empowered to impose strict criminal and civil penalties whereas in the UK the takeover panel have powers of censure which permit them to bring the guilty party to the task but in a less strict manner.
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