This article is written by Advocate Shamika Vaidya pursuing Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.com. Here she has listed disclosures, delisting, and approvals during acquisitions.

Disclosure, Delisting, and Approvals During Acquisitions

Disclosures

• The adjudicating and appellate tribunals have elucidated the need and importance of disclosures by promoters and acquirers during and pursuant to the acquisitions.  
• The provisions in the act envisaged keeping the investors updated about the change in the shareholding patterns in the company.
• One of the most discussed corporate fraud, Satyam was a result of the clandestine raising of funds by the promoters by pledging almost all their shares. This triggered the necessity to ameliorate the then prevalent disclosure-related provisions.

Types of disclosures

• There are two types of disclosures, event-based disclosure, and continuous disclosures. The former one is made pursuant to the acquisition or disposal of the shares and the later made on a continuous basis.

Event-based Disclosures

• Regulation 29(1) of the takeover code states that if any acquirer along with the PAC acquires shares or voting rights that aggregate to 5% or more, then they are obliged to disclose it.

• Any person who already holds shares or voting rights that aggregates to 5% or more and further any change in the shareholding pattern that exceeds 2% of the total shareholding or the voting rights has to disclose the changes.
• Furthermore, even if the incident of the holding falls below 5% which is the threshold for disclosure, it is mandatory to disclose it.
• The disclosures have to be made within two working days pursuant to the intimation of allotment of shares or the acquisition.

Continual Disclosures

• Acquirer along with Persons Acting in Concert who holds shares or voting rights in the company that aggregates to 25% or more have to disclose their aggregate shareholdings and voting rights as on the thirty-first day of March.
• The promoters along with the Person Acting in Concert of the target companies have to disclose their shareholdings as on the thirty-first day of March.
• The company is required to make annual disclosures even though there is no change in the shareholdings pattern.

Astral Coke and Projects Ltd

• SEBI slapped promoters with a whopping penalty of Rs. 35 Lakh due to repetitive non-disclosures on the changes in the shareholdings under the Takeover Code.
• SEBI concluded with the remark that non-disclosures on changes in the shareholding company is depriving the shareholders of the important information.   
• The entire security market of India stands on the disclosure regime and accurate and timely disclosures are fundamental in maintaining market integrity.

Rationale

• Acquiring 5% or above in a company is not a small investment. Acquirers infuse capital in the company either to invest or to acquire a controlling stake in the company. In the latter instance, they can steadily acquire a stake in the company.
• Therefore, the threshold for the disclosure being 5% acts as an alert to the target company and the shareholders.
• The disclosure includes information of the Person Acting in Concert, antecedents of the promoters and other information that is paramount to get a fair idea of the acquirer.
• Furthermore, to keep the shareholders and the investee informed whether or not the acquirer is steadily increasing his stake, acquirers are mandated for continuous disclosures.   

Disclosure on encumbrance on the shares

• The promoter of a target company has to disclose the details of the shares that are pledged by him or PAC.
• Further, they also have to disclose the details of invocation or release of such encumbrance on the shares.
• SEBI slapped a fine of Rs. 15 lakh on United Breweries (Holding) Ltd for default in disclosing the creation and invocation of pledge transactions in the shares of United Spirits. (Read the full story here)

To whom are the disclosures to be made

• The disclosures are to be made to every stock exchange where the shares of the target company are traded and the registered office of the target company.
• The stock exchange, in turn, hosts the disclosures on its website as a way to inform the public.

1. A fine was slapped on Pal & Paul Builders Ltd. for default to make annual disclosures for 14 years.
2. The company defended contending that the Delhi Stock Exchange was non-functional.
3. SEBI denied the contentions of the company stating that the non-functioning of the Delhi stock exchange does not absolve the company from making disclosures.

Delisting of the target company

• Earlier companies who wanted to delist pursuant to the takeover had to first launch the takeover offer and then the delisting offer.
• A listed company has to comply with Minimum Public Holding, that is at least 25% of the stake in the company has to be held by the public shareholders. In other words, the non-public holding in the company cannot exceeding 75%.
• This would restrict the acquirers from acquiring a full stake of selling promoters. The result is suboptimal transaction structures. To know more on delisting and how it affects the shareholders, you can read an article here.
• By the virtue of the new provision, the acquirers looking forward to buyout companies can do so just in one go.

• Regulation 5A states that, if the acquirer intends to delist a company pursuant to the takeover, he should clearly state his intention to do so in the Detailed Public Statement.
• In case the acquisition by the acquirer along with the PAC exceeds the maximum permissible non-public shareholding then he is not eligible to make a voluntary delisting, he can only do so pursuant to twelve months from the date of the completion of the offer period.
• An acquirer also cannot delist the company in case a competing offer is made.
• Regulation 22(3) of the takeover code states that the acquisition shall complete the acquisition contracted not later than twenty-six weeks from the expiry of the offer period.
• The acquirer shall complete the acquisitions contracted under any agreement attracting the obligation to make an open offer not later than twenty-six weeks from the expiry of the offer period as stated by Regulation 5A (2)(iii).
• Regulation 5A (2) and (3) states the measures to be taken in the event of failure of delisting offer.
• Xchanging Solutions was the first company to take benefit of the new provision to delist pursuant to the acquisition.
• Later, the discoverable price was not acceptable to the company, therefore, it decided not to go with the plan and continue with the open offer. (See story here)

Approvals

Regulation 18(11) of the takeover code states that the acquirer is obliged to pursue all the statutory approvals in order to complete the acquisition.

Acquisitions are either structured through the NCLT route or Share Acquisition route. In both ways, approvals are mandatory.

Moreover, the Agreements entered into by the parties clearly mention requisite approvals as Conditions Precedents.

External Approvals

Approval from Competition Commission of India

• Section 5 (a) of the Competition Act, 2002 states that if an acquirer and the target company qualify certain thresholds as explicitly mentioned in the Act then the acquisition will be considered as a combination.
• The Act states that any of the combination having an Appreciable Adverse Effect on the Competition (AAEC) are void.
• The Competition Commission can suo moto inquire if it is of the view that the combinations are likely to cause an AAEC on the competition.
• Any company entering into the combination has to follow the due procedure as laid down by the Act and other regulations.
• Regulation 6 of the Combination Regulations and section 5(6) of the Competition Act state that the acquisition by a public financial institution, foreign institutional investor, bank or venture capital fund pursuant of a loan or investment agreement is to be filed in Form III.
• In case of an acquisition, the acquirer has to file the notice in either Form 1 or 2. If the acquisition is carried out without the consent of the target company the acquirer can mention the information that is available to him.
• The CCI gives approvals to the transactions which it thinks does not have AAEC. Recently, SoftBank received approval from the Competition Commission of India for acquiring 22.44% in Delivery. (Read the story here)

Approval from Reserve Bank of India

1. NBFC, both accepting public and not accepting deposits need prior written approval from the Reserve Bank of India in case they want to acquire a company unless they do not fall under exceptions as stated in Non-Banking Financial Institutes (Acquisition or transfer of Control) Directions, 2015 (See Link).
2. Persons who intend to acquire along with Person Acting in Concert shares equal to or more than 5% the total paid-up share capital or 5% of the voting rights in private sector banks have to seek prior approval by the RBI as directed by the master regulation(See Link).
3. Indian Companies being acquired by the foreign companies need to take approval from the Reserve Bank of India on various issues, for example, Round-tripping or Reverse Round tripping as mentioned in the Overseas Direct Investment Regulations needs scrutiny from RBI before approving the takeover.

Approvals from, Tax Authorities, Sectoral Authorities, and SEBI is as well required during acquisitions.

Internal Approvals

Amendment in the Articles of Association

• The foremost step for the company who intends to acquire other company is altering the Memorandum of Association of the Company in any way refrain the company from acquiring the other company.
• S 13(1) of the Companies Act mentions the process for altering the Memorandum of Association requiring a special resolution by the shareholders. The same has to be thereafter filed before the Registrar of the Companies along with MGT-14.

Board Resolution

• Section 179(j) states that if a company has to take over or acquire a controlling/ substantial stake in another company then a resolution from the board of directors is mandatory.

Conclusion

Securities and Exchange Board of India (Substantial Acquisitions and Takeovers) Regulation, 2011 has safeguarded interests of the shareholders by introducing concepts like the open offer. Competitive offers, disclosures, and approvals, this has tremendously helped in keeping the market integrity. Alongside, it has also eased provisions for the companies by introducing the delisting provision. Although the takeover code can be one of the contentious regulation it is also instrumental in perpetuating the faith of shareholders interest.

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