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 discusses the steps taken by the acquirer when the open offer is triggered.

Introduction

Acquisition of a listed company is a complicated procedure and requires the involvement of large legal teams. It is also very well paid work for top law firms. However, what are the steps that need to be taken by the acquirer when an open offer is triggered? This primer will help you to understand the big picture as well as the small steps involved in the process.

Steps to be taken by the acquirer

Here are the steps:

Step 1:  Appointment of Merchant Banker

Step 2:  Public Announcement of Open Offer

Step 3:  Escrow Account For takeover transaction

Step 4:  Detailed Public Statement

Step 5: Recommendation by the BOD of the target company

Step 6: Filing of Letter of Offer with the Board

Step 7:  Post offer advertisement

Step 8: Special Escrow Account

Step 9: Acquisition of shares

Step 1: Appointment of Merchant Banker

• Regulation 12(1) of the takeover code states that an acquirer has to appoint a Category -I Merchant Banker holding a certificate of registration granted by SEBI.
• The Merchant Banker is appointed as the manager to the open offer. To put it in other words, a merchant banker assumes the responsibility of the transaction and has to fulfill his duties with utmost diligence.
• The Merchant Banker cannot be an associate of the acquirer as well as target company and has to be appointed prior to the public announcement of an open offer.
• The Merchant Banker has to make sure that the acquirer is able to implement the open offer and firm arrangements have been made by him.
• Further, he has to make sure that the contents of the public announcements are true and are based on reliable sources and the intermediaries engaged are registered with the Board.
• A due diligence certificate has to be furnished to the Board.
• The Regulations related to SEBI (Merchant Bankers) Regulations, 2007 provides for the registration, code of conduct for the merchant bankers.  

Step 2: Public Announcement of Open Offer

• A public announcement has to made by the merchant banker on the date of agreeing to acquire shares/voting rights between the parties.
• The Public Announcement is to be made in all editions;
  • English National Daily with wide circulation
  • Hindi National Daily with wide circulation
  • The newspaper in Regional language with wide circulation
• A copy of the public announcement has to be submitted to the following;
  • To SEBI through Merchant Banker
  • To all stock exchanges where the shares of the company are listed
  • To the registered office of the target company.

The Public announcement contains basic information like;

1. Identity of the PAC
2. Nature of the proposed acquisition
3. Consideration and price per share
4. Offer price and mode of payment of consideration
5. Offer size and the minimum level of acceptance if mentioned by the acquirer.

Important Case Laws related to Open Offer

Rajesh Toshniwal Vs. SEBI (Order)

• SEBI stated that there is no rectification mechanism once an open offer is triggered.
• Further, SEBI observed that the purpose of making a public announcement is not just intimation of acquisition to the general public but providing an exit opportunity and the failure to do so is a serious matter. In the present case, the SEBI imposed the penalty on the acquirer and PAC for failing to make an open offer.

Baader Bank Aktiengesellschaft and Gulf Investment Services Holding Co.(Order)

• The open offer was triggered when Baader Bank Aktiengesellschaft and Gulf Investment Services Holding Co. made investments in an Indian Company named Parsoli Corporation Limited.
• The Company did not make a public announcement and defended themselves contending that it wasn’t a deliberate violation and being foreign investors they were not accustomed to the Indian requirements and relied on the promoters representation in good faith who misrepresented.
• SEBI observed that the investors were expected to exercise due diligence and comply with necessary regulations. Ignorance of applicable laws with regard to mandatory open offer obligation cannot absolve them.

KGPL Industries & Finvest Pvt Ltd (Order)

• KGPL Industries & Finvest Pvt. Ltd on the acquisition of Soma Textiles and Industries Ltd did not comply with the code.
• The acquirer submitted that increase in the shareholding was inadvertent and there was no mala fide intention.
• SEBI observed that motive and intention behind an acquisition are irrelevant The intention of the takeover code is to make sure that the acquirer does not consolidate the shareholdings in the target company in a clandestine manner.

Step 3: Escrow Account for takeover transaction

• Regulation 17 of the takeover code states that the acquirer needs to open an escrow account for the purpose of security for the performance of his obligations. An escrow account is to be opened prior to publishing DPS.
• An escrow arrangement is a contractual obligation wherein a third party receives and disburses money for the transacting parties.
• Banker to the issue carries out all activities of ensuring that funds are collected and transferred to the escrow accounts.

The escrow account can be in the following forms;

Cash

• Cash can be deposited with a scheduled commercial Bank.
• While opening the bank account the acquirer has to empower the appointed merchant banker to instruct the bank to issue a banker’s cheque or demand draft for the amount lying to the credit of the escrow account.

Bank guarantee

• Bank guarantee is to be in the favor of the Merchant banker and is to be kept valid for throughout the offer period and for additional thirty days pursuant to the completion of payment of consideration to the shareholders.
• The bank guarantee the amount is only returned by the merchant banker after the completion of all the obligations that are specified in the takeover code.

Deposit of securities

• The acquirer can deposit frequently traded and freely transferable equity shares with margins.
• At Least 1% of the amount has to be deposited in the form of cash as a part of the escrow account.
• The acquirer has to empower the merchant banker to realize the value of escrow account by sale. The manager to the offer has to make arrangements in case the amount in the escrow account is short.

• The security for the performance of the obligations should be equal to 25% of the consideration on the first five hundred crore rupees.
• If the acquirer is unable to fulfill the obligations the entire amount in the escrow account is forfeited, the distribution is as follows-

1. One-third of the amount is distributed to the target company.
2. One third to the Investor Protection and Education Fund.
3. One third amongst the shareholders who had accepted the open offer on a pro-rata basis.

Step 4: Detailed Public Statement Regarding Open Offer

• Within five working days pursuant to the public announcement, a Detailed Public Statement (DPS) has to be published by the acquirer through the manager to the open offer (merchant banker).
• The DPS is published in the newspapers with wide circulation where the maximum volume of trading in the shares of the target company is recorded during sixty trading days after the public announcement.
• The DPS should contain information that would enable shareholders to make an appropriate decision about the open offer.

Step 5: Recommendations by the BOD of the target company

• The Board of Directors consisting of a committee of independent directors of the target company have to provide reasoned backed recommendations on the open offer to the shareholders of the target company pursuant to the release of DPS.
• The recommendations have to be published in the same manner as a public announcement.

Step 6: Filing of the letter of offer with the Board

• The letter of offer is addressed to the shareholders of the target company. It contains details about the acquisition, certain disclosures and future plans of the acquirer.
• Prior to sending the same to the shareholders, the acquirer is obliged to file a draft of the letter of the offer through the manager of the offer and submit to the Board along with a non-refundable fee as specified in Regulation 16(1) of the code.
• In Premchand Shah and Others V. SEBI, it was held that a Merchant Banker is responsible for verification of contents of the letter of Offer and is required to submit a due diligence certificate prior to the opening of the issue.
• The Board passes its observations on the draft letter of offer. If there are no observations within fifteen working days of filing the draft it is deemed that the Board does not want any modifications.
• The board uploads the public announcement, detailed public statement and draft letter of the offer pursuant to its submission by the manager to the open offer.  
• The copy of the letter of offer has to be sent to the shareholders whose name appear on the list of a register of names of the target company.

Tendering Period

• As the name suggests, during the tendering period eligible shareholders who want to accept the open offer can tender their shares in the open offer.
• Regulation 18(8) states that the tendering period commences not later than twelve days from the date of receipt of comment from the board on the draft letter of offer.
• An advertisement has to issue one working day prior to the commencement of the tendering period. The advertisement should consist of the schedule of activities for the open offer, the status of the approvals, procedure for tendering acceptances.
• The advertisement has to be published in the newspaper where the DPS was published.

The Merchant Banker files a report with SEBI within fifteen working days from the expiry of the tendering period which confirms status if completion of the requirements of the open offer.

Step 7: Post offer Advertisement  

• Regulation 18(12) of the takeover code states that an acquirer has to issue a post-offer advertisement within five working days after the offer day. The post-offer advertisement includes details including the aggregate number of shares tendered, accepted, date of consideration.
• The advertisement has to be published in all newspaper in which DPS was published and sent to SEBI, all the stock exchanges on which the shares of the target company are listed and the target company at its registered office.

Step 8: Special Escrow Account

• For the payment of the amount to the shareholders, a special escrow account has to be opened by the acquirer.
• Further, he has to deposit the requisite amount and make the entire sum due and payable to the shareholders and empower the manager to offer to operate the special escrow account.
• The payment of consideration in form of cash, exchange or transfer of securities has to be completed within a period of ten working days of the expiry of tendering period.

Step 9: Acquisition of shares

• An acquirer can acquire shares of the target company through;
  • Preferential Issue
  • Stock Exchange Settlement Process
  • Bulk Deal or block deal
• Regulation 22 (2A) further constraints the acquirer from exercising voting rights on the shares that have to be kept in the escrow account.
• The procedure for the acquisition of shares should not take more than twenty-six weeks from the expiry of the offer period. Having said so, the acquisition cannot be completed until the expiration of the offer period.
• When cash is deposited in the escrow account as discussed earlier in the article, the acquirer can complete the acquisition of shares or voting rights after the expiry of 21 day period from the date of Detailed Public Statement.

Conclusion

Acquisitions change the shareholding patterns and voting rights in a company, an open offer is a solution for the shareholders who do not wish to continue as shareholders of the company. The whole procedure envisages appropriate disclosures and representations by the acquirer and a fair exit to the shareholders. It is an excellent display of how regulatory norms can encourage business transactions pari passu with incorporating principles of corporate governance.    

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