This article has been written by Hinal Khakkhar, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.

Introduction

Offer price and offer period with relevance to acquisition of shares and takeover of companies in India is governed and regulated by SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, which replaced the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

An “offer price” is the price at which the acquirer can buy underlying assets which can be shares, voting rights or any other assets of the company which is being acquired. The acquirer may gain control over the target company by acquiring the shares and other assets of the company. In other words, the offer price under the Takeover Code is the price that is offered to pay by the acquirer, for buying assets of the company or stake in the company. 

The offer price is only determined after the company has made a public announcement or the open offer. After the offer price is determined, the offer period is of utmost importance. “Offer period” is the period that starts from the instant the offer price is announced till the date of signing of Memorandum of Understanding (MoU) and the date of completion of all the other related formalities.

The takeover Code’s main intention is to ensure that all the shareholders of the target company should be given fair and equal treatment in relation to substantial acquisition of shares and takeovers and also the process should take place in a fair manner. 

Take over basically means the acquisition of control of a company by purchasing shares of the company, at a specified price which is at offer price within the specified period which is the offer period in order to gain control of the company. 

The purchaser of the company is known as the ‘acquirer’ and the company being purchased is known as the ‘target company’. A target company is a company that has been granted recognition under the Securities Contracts Act, 1956 and whose shares are listed on a stock exchange. Let’s have a glimpse of definitions of each.

Offer price

The offer price is the price determined by the acquirer for the purpose of buying shares or voting rights in the target company. There are several provisions that are laid down in the takeover code which are to be followed by the acquirer, while determining the offer price or, before announcing the offer price to the existing shareholders and the public. The provisions are framed by SEBI (SAST) Regulations, 2011 for a fair determination of the offer price. 

Offer price under the takeover code can be determined by considering Regulation 8, of the SEBI (SAST) Regulations, 2011 which specifically deals with the determination of offer price. Also, Regulation 20(12) of the Takeover Code deals specifically with indirect takeovers. In case of an indirect acquisition, the offer price should be determined by taking into consideration the date of the public announcement for the company, or it is to be the date of the public announcement for the acquisition of shares of the target company, accordingly whichever is higher has to be considered for the determination of the offer price.

The above given are the ways to determine the offer price, for acquiring substantial shares in the company which is provided by the acquirer.

Example: Daiichi Sankyo- Jayaram Chigurpati

Offer period

As per Regulation 2(p) of the Takeover Code SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011, the offer period means the period which is considered to from the date of signing an agreement, or to acquire shares or voting rights in the company or to gain control over a target company a public announcement is required, or the date at which the public announcement is done, or the date on which the payment of consideration has been done to the shareholders who have accepted the offer made, or the date on which offer made is withdrawn.

Commencement of the offer period is from the date of the Memorandum of Understanding (MoU). During the offer period, the existing shareholders of the target company are given exit rights, and they can offload their burden and exit by selling shares on the offer price when an open offer is made by the acquirer. 

As per regulation 22(1) of the Takeover Code, the acquisition of shares or voting rights is not complete in the target company until the expiry of the offer period. Recently, Apex Court had clarified the concept of the offer period in SEBI v. Burren Energy India Limited (CA No. 361 of 2007), stated as follows:

1. In case, the acquirer has entered into MoU with the target company or any person who is in control of the target company, the date of signing of MoU should be considered as the commencement date of the offer period, prior to the date of entering into a share purchase agreement or before making a public announcement.
2. In case, the acquirer has not entered into MoU with the target company or any person who is in control of the target company, the commencement date of offer period must be considered from the date of entering into a share purchase agreement between the acquirer and the target company.
3. In case, the acquirer has not entered into any sort of MoU or share purchase agreement with the target company or any person who is in control of the target company, the date of commencement of the offer period must be considered as the date of making the public announcement.

Takeover Code

The takeover is done by the acquisition of the control of a company that is already registered with the SEBI. It takes place generally by the acquisition of shares or purchases from shareholders of the company, where the price of shares is specified in such a way that control of the company is gained. Takeover regulations are applicable only for listed companies. Takeovers are generally done by large companies to reduce competition and without the permission of the other company’s board of directors. 

Example: Mindtree and Larsen Toubro (L&T)

Types of a takeover are as follows:

1. Legal Context – Friendly takeover, Hostile takeover.
2. Business context – Horizontal takeover, Vertical takeover, Conglomerate takeover.

The fundamental objectives of the Takeover Code are to provide a fair and transparent framework that will facilitate takeover activities. It will also ensure that the disclosures are made very accurate of all the material information made to various stakeholders, which will be responsible to make informed decisions by the stakeholders. This provides fair and competitive competition, through which the existing shareholders are given the opportunity to exit their investment from the target company when such substantial acquisition of shares or takeover takes place of a target company.

Relevance of offer price and offer period under the Takeover Code

The SEBI (Substantial Acquisition of Shares and Takeovers) Regulation, 2011 governs the transactions relating to the acquisition of shares of a target company, where such acquisition includes components, such as offer price and offer period. Thus, we can say that offer price and offer period both are part of the process for the takeover of the target company and, hence are governed by SEBI (Substantial Acquisition of Shares and Takeovers) Regulation, 2011. The acquisition of shares and voting rights to be conducted in a fair and transparent manner is the main intention for imposing these regulations.

Basically, the acquirer for the acquisition of shares of a target company has to make a public announcement. The offer price is the disclosure that has to be made in the public announcement. So generally, in the public announcement the disclosure of offer price is made, a number of shares to be acquired from the public is made, the purpose of the acquisition is disclosed, the appropriate procedure an acquirer should follow in accepting the shares tendered by the shareholders and the period within which all the formalities pertaining to the offer would be completed. 

The shareholders of the target company should be made aware of the exit opportunity which is available for them when a takeover takes place or substantial acquisition of shares takes place, and this is the main purpose of making a public announcement. The shareholders, on the basis of disclosure in the announcement made, may decide upon selling their stake to the acquirer or continue with the target company with the new management. The public announcement should have various disclosures for a shareholder to decide thereon. The offer period gives leverage to the shareholders to offload their burden by selling their existing shares to the acquirer exit from the target company, during the time of the offer period.

Example

FLIPKART-WALMART: Walmart acquired 77% of Flipkart for $16 billion, making it the largest acquisition involving an Indian company, in 2018.

Penalties

The Takeover Code has certain penalties laid down for non-compliance of the provisions. General obligations are laid down by the takeover code which are to be followed by the acquirer, the target company and the merchant banker while deciding on the offer price. The acquirer, the board of directors of the target company if fails to obey these regulations or if non-compliance happens, the penalty is imposed as per Regulation 45 of the Takeover Code. Any person who is found in violation of any of the provisions shall be liable to attract penalty under the Takeover Code and the SEBI Act.

Any person who is the acquirer, if fails to comply with the obligations which are laid in regulations, the entire sum of money in the escrow account will be liable to be forfeited, and appropriate action will be taken on the acquirer.

Penalty or punishment may also include criminal prosecution or monetary penalties.

Conclusion

Offer price directly means offering a determined price to the existing shareholders of the target company by the way of an open offer, with the intention to purchase shares from the shareholders and providing exit rights. 

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