This article is written by Swati Atrawalkar, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho. This article takes you through the everything about takeover by reverse bid. Its advantages and challenges, the global perspective on the subject and existing regulatory framework.

Introduction

To understand the ‘Takeover by Reverse Bid’, first let’s understand in brief the word “Takeover” and types of the Takeover and “Reverse Bid”.

Takeover as indicates taking control of something. In takeover, the acquirer takes control of the target company by acquiring the shares to the extent that controlling interest on that company can be created. It is an acquisition of the control on the company. 

Reverse Bid is contrary to Regular Bid. In Regular Bid, the acquirer offers price to target, contrary in Reverse Bid Target offers price to acquirer and the lowest target shall be the successful bidder.

Public Limited Company acquires the Private Limited Company is a case of Takeover, whereby acquirer company (Public Limited Company) may offers cash or stock to target company (Private Limited Company). However, a private company (smaller) acquires control over private company (large) is a case of Takeover by Reverse Bid. 

What is Takeover Reverse Bid

Like Merger and Acquisitions, Takeover Reverse Bid is also one of the mechanisms of corporate restructuring. It is adopted to achieve better collaboration of corporate restructuring. Here private company’s shareholders acquire majority of shares in the public company and get control over the public company. Resulting, private company acquires status of public traded company without following a prescribed process of Initial public offer (IPO). It is a global practise adopted by corporate sector in order to achieve better synergy. Takeover by Reverse Bid is one of the types of the Takeover can be understand by differentiate the same with other types of Takeover.

Types of Takeover Bid

Friendly Takeover:

Friendly takeover takes place when bidder intends to offer for another company with the pre intimation to board of directors and board of directors accepting the offer seems better for shareholders. Usually, in private companies, board are of the similar mind to cooperate shareholders, if the shareholders decide to sell the company. Such amicable takeover with the consent of board of directors and shareholders is called as Friendly Takeover.

Hostile Takeover:

As name indicates, here target Company dissented and bidder/ acquiring company pursue to take over the same. Under Hostile takeover, interested party allows to take over a target company despite its management is unwilling to give its assent for merger or takeover. Here Bidder may make its offer directly once it has firm decision and announcement to make an offer. 

Reverse Takeover:

Reverse Takeover is also called as Bail Out Takeover. It activates when any profit earning company intended to take over the financially weak company. Financially weak company does not being a sick industry. Usually a private company acquires public company with an intension to avoid necessary expenses and time required in a IPO. Private company by acquiring listed company becomes public company and saved its times and efforts behind the paperwork and cost to make it listed one.

Process of Reverse Takeover Bid

Shareholders of private company acquires the control of the company traded publically by way of purchase and get it merged. The shareholders of private company receive substantial majority of the shares of the public company and control of its board of directors. This process takes place a time period of one week. Acquirer and target company exchanges it information first, negotiate the merger terms and then get execute a share exchange agreement. As per closing terms of the share exchange agreement, the public company or target company issues its substantial shares and control of the board of directors to the shareholders of the private company and shall pay to public company for its contribution to the private company. This exchange of shares and change of control of board of director eventualise the process of Reverse Takeover. The private company transforms into a public company. Resulting, the small private company exceeds the market capitalisation of the public company by a considerable amount. 

It is important to see its drivers and challenges to understand Reverse Takeover more visibly:

Drivers

1. No additional capital required to make a company as a listed company.
2. Reverse Bid simplify the process of making the company listed one and saves cost and time.
3. Financially weak company becomes less vulnerable to market conditions due to conventional IPO as in reverse takeover, IPO get executed between the acquiring private company and the amalgamating target company. This flexibility of market condition gets higher position in the market to the company executed reverse takeover and control over the IPO and in stock market.
4. Tax exemptions and rebates to the acquiring private company for reverse takeover of financially weak public company. 

Challenges

1. Such takeover comes with a high risk of non-disclosers related to pending litigations, frauds related to corporate governance, improper accounts, sell of stock by public company, shareholders with any malafide intensions. Thus due diligence is required to safeguard the interest of Acquiring Company and to avoid public stakeholder to be exposed at high risk.
2. Management of acquiring company having lack of experience to manage the affairs of listed company.
3. Listed company intending to merge or amalgamate with private company has to follow the stringent guidelines as prescribed for valuation of public limited company, on the contrary acquiring company has flexibility in exaggerating the valuation of its stock.
4. Due to this Reverse Takeover, shareholders of public company becomes minority shareholders whereas promoters of acquiring private company becomes majority shareholders in the Takeover Company. 
5. Shareholder of Public Company may get undervalued or undercompensated. 
6. In Reverse Takeover, unlisted private company may avoid various public disclosures as mandated by regulatory.
7. Such disclosure requirements may reduce management flexibility and may harm the company due to leakage of valuable information to suppliers, business partners, customers and competitors. 

An overview of Reverse Takeover

Reverse Takeover is a very uncommon corporate restructuring in India as it is common in other developed countries such as USA, China and U.K. One of the example we can cite here is ICICI Bank merged with ICICI financial Services and ICICI capital Services by Reverse Takeover and attained second largest Bank in India in 2002. 

Reverse Takeover are not limited to indigenous and can be expanded its business in cross boarder Reverse Takeover. An unlisted company of one country may get listed on foreign stock exchange by taking over a public listed company of that foreign nationals. Many Chinese companies get listed on U.S. Stock exchange and get access to the U.S. Capital. ‘Yatra’ one of the Indian private company in the travel field get merged with one of the US Company ‘Terrapin’. Yatra was unlisted private company and post this reverse takeover it will be able to listed in US Stock. 

Regulatory Framework on the Reverse Takeover

1. Reverse Takeover has no express prohibitions under the Company Law and under the SEBI Regulations Act. The Reverse Takeover is governed as a regular merger and takeover. However, provision given under Section 232 (h) of the Companies Act 2013 states an amalgamation between listed and unlisted companies, the resultant company shall be treated as unlisted company. Thus it is not wrong to say that the companies act is not intending in essence to gain the benefits of public company by private company. Hence any listed company undergoing mergers required court approval.
2. As per Circular dated 4th February 2013, any listed company is mandatorily required to obtain approval from SEBI. As per circular dated 21st May 2013, SEBI mandate to regulate the scheme on minority shareholders and its interest due to inadequate disclosures and extravagant valuations. Due to these two circulars any Reverse Takeover between private company and listed public company shall be subject to scrutiny of SEBI. Reverse Takeover between Emami Realty and Zandu Realty has been declined by SEBI subsequently. Thus it is amply clear that like Companies Act SEBI is not very supportive to mergers Reverse Takeovers or we may say not supportive when shares of public listed companies skewed in the hands of private limited company which are unlisted. 
3. Unlike Companies Act 2013 and SEBI regulations, Income Tax Act encourages reverse Takeovers by granting incentives scheme to such companies. Benefits in the form of accumulated loss and depreciation allowance are given to the entity created due to amalgamation of sick companies under section 72 A of the Finance Act. 

Conclusion

Therefore, Reverse Takeover even though is not categorically prohibited under the Indian laws, it is strictly regulated by Companies Act and under the various SEBI Circular. 2015 amended circular under SEBI has simplified the procedure of delisting the companies. Still it is complex, time consuming and costly like board approvals, shareholder approvals, stock exchange permissions, appointment of merchant bankers, opening of escrow accounts, public announcement, issuing letter of offer, tendering shares etc. Therefore, even though section 232 (h) of the company’s act disallowed unlisted private company from acquiring the position of listed company, however there is no bar on the delisting from the stock exchanges through Reverse Takeover with an unlisted private company whereby company acquires a status of Unlisted Company.

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