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This article is written by Bhumika Saishri Panigrahi, pursuing Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.

Introduction 

When the first wave of mergers and acquisitions began in the late nineteenth century in countries such as the United States and the United Kingdom, the concept of takeover emerged. However, the concept of takeover did not emerge in India until the twentieth century, and even then, no one had heard of hostile takeovers. Swaraj Paul came up with this idea after attempting to acquire Escorts Ltd. and DCM Ltd. He was the first aggressive raider among Indian stock market raiders. Despite the fact that Paul’s attempts were unsuccessful due to incumbents’ use of technicalities of non-residential regulations to thwart him, the necessity for a Takeover Code arose. 

This need was heightened in the 1990s, when the government implemented a liberalisation and globalisation policy that accelerated the growth of the Indian economy and created a highly competitive business environment, prompting many companies to restructure their corporate strategies by incorporating mergers and acquisitions. 

Meanwhile, SEBI was founded as a body corporate in 1992 under the SEBI Act, 1992, with the key objectives of,

  1. Safeguard investors’ interests in the securities market; and
  2. To ensure that the securities market develops in a controlled manner.

While the ability to take over a company through share acquisition is desirable in today’s competitive business environment for achieving strategic corporate objectives, there must be clear regulations in place to ensure that the interests of all parties involved are not jeopardised by unexpected takeover threats. 

In view of the situation at the time, there was a significant desire for legislation to govern takeovers. Furthermore, SEBI enacted SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1994 in the exercise of powers conferred under Section 30 of the Act, which laid out a procedure to be followed by an acquirer for acquiring majority shares or controlling in another company, in order to ensure that the takeover process is carried out in a fair and transparent manner. 

Following that, the regulations were revised several times to reflect changing situations and demands in the corporate sector. SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997, replaced SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1994, and became the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997.  

SEBI established the Takeover Regulations Advisory Committee (TRAC) in September 2009, chaired by Mr C Achuthan, with the mission of examining and reviewing the SEBI (SAST) Regulations, 1997, and suggesting appropriate revisions as needed. Following that, in June 2010, the Committee released the TRAC Report, which proposed major changes to key issues such as the open offer triggering event, offer size, indirect acquisitions, exemptions from open offer obligations, offer price calculations, and competing offers, and which was then open to public comment. 

Meaning of takeover 

The term “takeover” refers to the purchase or exchange of shares to gain control of a company that is already registered. In order to seize control of a corporation, a takeover usually involves acquiring or purchasing the shares of the firm’s shareholders at a stipulated price to the degree of at least controlling interest.

As a result, when an “acquirer” takes control of the “target company,” it is referred to as a “takeover.” A major acquisition of shares occurs when an acquirer obtains a “substantial quantity of shares or voting rights” in the target company. 

Kinds of takeover 

Legal situation

There are two types of takeovers from a legal standpoint:

a. Cordial or negotiated takeover

Friendly takeover refers to the change in management and control of a firm through friendly negotiations between the existing promoters and prospective investors. As a result, it’s also known as a Negotiated Takeover. This type of takeover is used to achieve some similar goals for both parties. In most cases, a friendly takeover is carried out in accordance with Section 395 of the Companies Act, 1956. 

b. Hostile takeover 

A hostile takeover occurs when one company voluntarily pursues the acquisition of shares in another company without the target company’s knowledge, or when the target company’s board rejects the offer, or when the bidder makes an offer immediately after announcing its firm intention to make an offer. Most corporations have been obliged to resort to this type of takeover for one reason or another: to expand market share.

Perspective of business

In the perspective of business, there are three sorts of takeovers:

a. Horizontal takeover

When one company is acquired by another in the same industry. The major goal of this type of acquisition is to get economies of scale or to increase market share. For example, Jyothy Laboratories acquired Henkel, and iGate acquired Patni Computers.

b. Vertical takeover

A corporation’s suppliers or customers are taken over by another company. The former is referred to as backward integration, whereas the latter is referred to as forwarding integration. Take, for example, Maruti Udyog Ltd.’s acquisition of Sona Steerings Ltd.

c. Conglomerate takeover

A company is taken over by another corporation that operates in a completely different industry. The primary goal is the diversification of the business. 

Need of Takeover Code 

The upheaval of the entire commercial scenario marked the start of the twentieth century. India’s economy, which had previously been governed and regulated by the government, has been freed to take advantage of new global opportunities. With the declaration of a globalisation strategy, the Indian economy became more accessible to foreign investment. However, in order to compete on a global scale, the company’s size had to be enlarged. Given the time element required in grasping the opportunities made accessible by globalisation, mergers and acquisitions were the best choices open to corporations in this new scenario. 

Although this new weapon in the corporate arsenal proved to be advantageous, predators with large amounts of discretionary income quickly took advantage of the opportunity, to the detriment of retail investors. This necessitated some regulation to protect investors’ interests and ensure that the process of takeovers and mergers is used to develop rather than destroy the securities market. SEBI was founded as a regulatory agency in 1992, with the passing of the SEBI Act, to encourage the growth of the securities market and to protect the interests of investors in the securities market. It also has the authority to enact regulations to achieve the aforementioned goals. 

As a result, SEBI formed a committee led by P.N. Bhagwati to investigate the impact of takeovers and mergers on the securities market and recommend legislation to govern them. The committee noted in its report that a Takeover Code is required for the following reasons:

  1. The level of trust that retail investors have in the capital market is a critical determinant of its growth. As a result, their interests must be safeguarded.
  2. If the investors do not wish to continue with the new management, they will be provided with an exit option.
  3. To make an educated decision, all significant facts relating to the open offer must be fully disclosed and truthfully disclosed.
  4. Acquisitions and mergers must be completed within a certain amount of time.
  5. At the earliest opportunity, all material transactions must be disclosed.

Following that, the regulations were revised several times to reflect changing situations and demands in the corporate sector. SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1994 were published in 1994. SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997 replaced SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1994, and was renamed SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997. 

Following that, SEBI established the Takeover Regulations Advisory Committee (TRAC) in September 2009, chaired by Mr C Achuthan, with the mission of examining and reviewing the SEBI Takeover Regulations of 1997 and suggesting appropriate revisions as needed. In June 2010, the Committee released the TRAC Report, which proposed significant changes to key issues such as the open offer trigger, offer size, indirect acquisitions, exemptions from open offer obligations, offer price calculations, and competing offers. The report was then open for public comment. 

The Proposed Takeover Regulations had the following goals: 

  1. To provide a transparent legal framework for facilitating takeover activities; 
  2. To protect the interests of investors in securities and the securities market, taking into account that both the acquirer and other shareholders or investors require a fair, equitable, and transparent framework to protect their interests; and
  3. To provide a fair, equitable, and transparent framework for facilitating takeover activities. 
  4. To allow each shareholder to exit his or her investment in the target firm in the event of a significant acquisition of shares in or takeover of the target company.
  5. To provide acquirers with a clear legal framework in which to acquire shares in or control of the target company and make an open offer;
  6. To ensure that the target company’s affairs are conducted in the ordinary course when it is the subject of an open offer;
  7. To ensure that personnel in charge of disclosing material information to various stakeholders do so in a fair and truthful manner so that they can make informed judgments; 
  8. To ensure that only those acquirers who are capable of really fulfilling their duties under the Takeover Regulations make open offers; and 
  9. To regulate and provide for fair and effective competition among acquirers desirous of taking over the same target firm.

After taking into account public feedback and further discussion, the report was revised to its current form, with the SEBI (SAST) Regulations, 2011 replacing the SEBI (SAST) Regulations, 1997. 

Comparison and analysis of the new Takeover Code

In accordance with the notification of September 23, 2011, SEBI, the market regulator, has announced the much-anticipated SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (hereafter referred to as “SEBI (SAST) Regulations, 2011”), which would replace the previous Takeover (SAST) Regulations, 1997. The new Regulations will take effect 30 days after their publication in the Official Gazette, i.e., from October 22, 2011, any acquisition or sale of shares in a listed company will be governed by the SEBI (SAST) Regulations, 2011. 

1. Raising the initial threshold limit from 15% to 25%

The initial threshold limit for open offer obligations has been enhanced from 15 per cent to 25 per cent of the target company’s voting rights. Since the SEBI (SAST) Regulations, 2011, will take effect on October 22, 2011, this is the last chance for all promoters with less than 25% but more than 20% to fall into the creeping acquisition bracket. Otherwise, even the companies’ present promoters will have to make a bid to combine their holdings.

2. Creeping acquisition limit raised from 15% to 55% to 25% to 75%

Now there will be a single and distinct creeping acquisition bracket. This will be available to anyone with a 25% or greater non-public ownership, but only up to 75%, i.e. the maximum allowable non-public holding, will be eligible for a creeping acquisition of 5% each financial year.

3. Individual acquirer shareholding to determine open offer trigger points 

In addition to consolidated promoter shareholding, individual acquirer shareholding will now be taken into account when establishing Open Offer Trigger Points. (SEBI (SAST) Regulations, Regulation 3(3), 2011). 

4. Expanded offer size from 20% to 26%

Rather than just a 100% TRAC Recommendation, the offer size is merely increased to 26%. Due to the absence of appropriate bank funding options in India, it is a beneficial step from the perspective of local acquirers. 

5. New provisions in case of increase in shareholding beyond maximum permissible non-public shareholding

Obligation on the acquirer to reduce non-public shareholding to the level specified and within the time allowed under Securities Contract (Regulation) Rules, 1957; Ineligibility to make a voluntary delisting offer under SEBI (Delisting of Equity Shares) Regulations.

6. No non-compete fees 

SEBI has agreed to the TRAC Recommendation that the non-compete charge or control premium be abolished. Any sum paid to the promoters/sellers as consideration, non-compete fee, control premium, or otherwise will be added to the offer price, and public shareholders will be allocated the highest of these offers.

7. The term “control” has been redefined

The new Regulation includes a new definition of control that is comparable to the TRAC Report’s suggestion, with the exception that the word “ability” has been omitted. 

8. Change in control

Any change in control of the listed company must occur only after the open offer has been completed. The exemption from the open offer that was available in the case of a change in control without the acquisition of substantial shares through a special resolution by postal ballot process has been removed, and the only way to change management and control now is through the target company’s open offer to its shareholders. This is in contrast to Regulation 12 of the SEBI (SAST) Regulations, 1997, which allows for a change in control to be accomplished through a special resolution voted by postal ballot. 

In the new Takeover Code, there is no exemption for acquisitions from other competing acquirers. 

9. Frequently traded shares

The trading turnover during the 12 months before the month in which the public announcement is issued will be used to determine the frequency of trading in shares. To create a more realistic impression, the amount of trading for regularly traded companies was increased from 5% to 10%.

10. New terminologies were introduced

  1. “Enterprise Value” is the value computed by subtracting total cash and cash equivalents from a company’s market capitalization plus debt, minority interest, and preferred shares. 
  2. The product of the number of equity shares traded on a stock exchange and the price of each equity share divided by the total number of equity shares traded on the stock exchange is known as the “volume-weighted average market price.”
  3. The product of the number of stock shares acquired and the price of each such equity share divided by the total number of equity shares bought is known as the “volume-weighted average price.”
  4. The number of shares at the beginning of a period, adjusted for shares cancelled, bought back, or issued over the term, multiplied by a time-weighting factor, is referred to as the “weighted average number of total shares.” 
  5. New formats for PA, LOO, and Disclosures, as well as Exemptions, the Board of Directors’ recommendation on the Open Offer, and so on, have been introduced.
  6. Detailed rules for Voluntary Open Offer: The SEBI (SAST) Regulations, 2011 deal with the idea of voluntary open offers separately. 
  1. Eligibility: Before making the Voluntary Open Offer, the acquirer and the PAC must own 25% or more of the target company’s shares or voting rights, according to the qualifying criteria. 
  2. Condition: After the open offer, their total shareholding does not exceed the maximum allowable non-public holdings. 
  3. Restriction: Acquirers and PACs are likewise subject to restrictions when using the Voluntary Open Offer rules, and they will be unable to buy shares of the target firm for the next six months unless they announce another voluntary offer or make competing offers. 
  4. Indirect acquisitions: The new regulations define comprehensive provisions relating to indirect acquisitions, which is a welcome development as there was a lot of misunderstanding before. The new regulations clarify which instances will be considered indirect acquisition.
  5. Recommendation of the target company’s Board of Directors on the open offer: The Board of the target company’s recommendation on the offer has been made mandatory, and such recommendations must be published at least two working days before the start of the tendering period in the same newspapers where the public announcement of the open offer was published, with a copy sent to SEBI at the same time. 
  6. When submitting the original letter of offer, make a revision to the SEBI fees.
  7. The provisions relating to open offer exemption have been changed.
  8. Other adverse consequences: The format of shareholding declaration as provided under Clause 35 of the Listing Agreement in respect of the following has been replaced concurrently with the amendment to the SEBI (SAST) Regulations, 2011.
  9. Statement of securities held by persons in the category “Promoter and Promoter Group,” comprising shares, warrants, and convertible securities:
  • Statement of securities (including shares, warrants, and convertible securities) held by persons in the “Public” category who own more than 1% of the total number of shares;
  • Statement of securities (including shares, warrants, and convertible securities) held by persons (including PAC) belonging to the category “Public” and holding more than 5% of the company’s total number of shares. 

2011 SEBI (SAST) Regulations Analysis

Making an open offer

  1. Any acquisition of shares or voting rights in the target company by the acquirer and PAC that gives them a combined voting power of 25% or more.
  2. Any acquisition of shares or voting rights in a financial year that exceeds the authorised creeping limit of 5%. This situation occurs when the acquirer and PAC have acquired and hold shares or voting rights in the target company that entitle them to exercise 25% or more but less than the maximum permissible non-public shareholding, and then acquire more than 5% shares or voting rights in the same financial year.
  3. Acquisition of shares by any person such that the individual shareholding of the person purchasing shares surpasses specified criteria, regardless of whether the PAC’s aggregate shareholding changes.
  4. For pricing, timing, and other open offer compliances/requirements, an indirect acquisition of shares or voting rights requiring an open offer would be treated as a direct acquisition, where the proportionate net assets or sales turnover or market capitalization of the target company as a percentage of the consolidated net asset or sales turnover or enterprise value for the target company. 
  5. Any voluntary offer size revisions made by the buyer within 15 working days of the rival offer’s PA. 

Control of the situation

Any acquisition of control of Target Company by an acquirer, whether direct or indirect, regardless of the acquisition or ownership of shares or voting rights. Acquisition of shares or control through indirect means Acquisition of shares or voting rights in, or control over, any company or other entity that would allow any person or PAC to exercise or direct the exercise of such percentage of voting rights in, or control over a target company, which would otherwise trigger an open offer obligation, is considered an indirect acquisition of shares or voting rights in, or control over that company. 

What is a voluntary offer?

An acquirer who, with PAC, possesses shares or voting rights in a target company entitling them to exercise 25% or more but less than the maximum allowable non-public shareholding, shall be able to make a PA of an open offer for acquiring shares freely. The following are some of the requirements that apply to a voluntary offer:

  1. The minimum offer size is 10% of the target company’s total shares; 
  2. After the open offer, the acquirer and PAC’s combined holdings cannot exceed the maximum allowable non-public shareholding; 
  3. A voluntary offer cannot be made if an acquirer or PAC has acquired shares of the target company in the previous 52 weeks without being required to make an open offer;
  4. During the voluntary offer period, such acquirer shall not be entitled to acquire any shares other than under the open offer; 
  5. An acquirer and PAC who has made a voluntary offer shall not be entitled to acquire any shares other than under the open offer.

What is known as a trigger open offer?

  • Direct purchase of shares, voting rights, or control of the target company,
  • Indirect purchase of shares, voting rights, or control of the target company,
  • Voluntary minimum offer.

What is the minimum open offer size? 

  • As of the tenth working day after the tendering period ended, 26% of the target company’s total shares had been sold. 
  • 10 per cent of the target company’s total shares In such instances, the post-acquisition holding must not exceed the maximum allowable non-public shareholding. 

Other conditions and observations

  • If the acquirer’s and PAC’s post-open-offer shareholding exceeds the maximum allowable non-public shareholding, it must be lowered within one year;
  • It will be ineligible to make a voluntary delisting offer under the SEBI Delisting Regulations for a period of 12 months after the offer period has ended. 

Any open offer for the sale of target company shares shall be offered to all shareholders of the target company, other than the acquirer, PAC, and the parties to any underlying agreement, including persons deemed to be PAC with such parties. 

The highest of the following shall be the minimum open offer price: 

1. In the event of a direct or presumed direct acquisition of shares, voting rights, or control of the target firm.

  • The target company’s highest negotiated price per share under the agreement that drew the open offer.
  • The volume-weighted average price paid or due by the acquirer or PAC for acquisitions made in the 52 weeks before the PA date.
  • The acquirer’s or PAC’s highest price paid or payable for any acquisition during the 26 weeks preceding the PA date.
  • Where shares are commonly traded, the target company’s volume-weighted average market price during the 60 trading days immediately preceding the PA date. 
  • Where shares are infrequently traded, the price decided by the acquirer and manager to open offer, taking into account valuation characteristics such as book value, comparable trading multiples, and other parameters common to the valuation of such companies’ shares. 
  • In the case of a Deemed Direct Acquisition, where the target company’s net asset value, sales turnover, or market capitalization is greater than 15% of the consolidated net asset value, sales turnover, or enterprise value of the entity or business being acquired as of the most recent audited annual financial statements, the acquirer computes the target company’s per-share value.

2. If the target company’s shares, voting rights, or control are acquired in an indirect manner. 

  • Under the agreement attracting open offers, the highest negotiated price per share of the target company, if any.
  • The volume-weighted average price paid or payable by the acquirer or PAC for any acquisition in the 52 weeks immediately preceding the earlier of;
    • The date on which the primary acquisition is contracted; and 
    • The date on which the intention or decision to make a primary acquisition is announced in the public domain.
  • The highest price paid or payable by the acquirer or PAC for any acquisition during the 26 weeks before the earlier of; 
    • The date on which the principal acquisition is negotiated; and 
    • The date on which the intention or decision to make the primary acquisition is publicly revealed. 
  • Where shares are frequently traded, the volume-weighted average market price for the 60 trading days immediately preceding the earlier of: 
    • The date on which the primary acquisition is contracted; and 
    • The date on which the intention or decision to make the primary acquisition is announced in the public domain.
  • If any of the characteristics cannot be computed, the minimum offer price shall be set by the acquirer and manager of the open offer using valuation metrics such as book value, similar trading multiples, and other parameters that are customary for valuing shares of such companies.
  • When the target company’s net asset value, sales turnover, or market capitalization is greater than 15% of the consolidated net asset value, sales turnover, or enterprise value of the entity or business being acquired as of the most recent audited annual financial statements, the acquirer computes the target company’s per-share value. 
  • The acquirer’s or PAC’s highest price paid or payable for any acquisition during the earlier of; 
    • The date on which the primary acquisition is contracted; 
    • The date on which the acquirer’s or PAC’s intention or decision to make a primary acquisition is announced in the public domain; or 
    • The date of PA under SAST 2011. 

Three types of tender bids covered by the Takeover Regulations

1. Tender offers that must be accepted

The takeover regulations stipulate that in certain instances, an acquirer must issue a mandatory tender offer to the target company’s shareholders in order to purchase at least 26 per cent of the target company’s shares.

2. Offers of voluntary tenders

  • Mandatory tender offers

The Takeover Regulations give acquirers a specific framework for making voluntary offers to public investors. A present investor or an acquirer with no shares in the target company may make a voluntary offer. 

  • Voluntary tender offer 

The acceptance of a voluntary offer is contingent on the fulfilment of certain requirements. As a result, if any acquirer or PACs associated with such acquirers have obtained any offers or voting privileges from the target company without submitting a mandatory tender offer within the first 52 weeks, such acquirer will not be permitted to submit a voluntary offer. Similarly, throughout the offer period, an acquirer who has launched a voluntary offer is not entitled to buy any shares of the target firm other than those offered in the tender offer. 

  • Competing offers

Within 15 business days of the original tender offer, a competing bid must be submitted. A competing offer can be made by anybody (whether or not they are a present investor), and it is not subject to the limits that apply to voluntary offers. There is a prohibition on a competing acquirer making an offer or entering into an agreement that could trigger a mandatory tender offer after the 15-day period has expired and until the first offer has ended. As a result, time is of the essence. Following the announcement of a competing offer, the two competing offers are regarded equally, and the target company is required to provide similar levels of information. 

The target firm cannot favour one acquirer over the other(s) or delegate such acquirer’s preferred employees to the aim organization’s senior management team, pending the completion of the competing offers. If the first delicate offer is also contingent, a competitive offer can be limited to a basic level of acknowledgement. The ‘losing’ competing acquirer is prohibited from selling the shares acquired under the competing offer to the winning bidder. As a result, every person who makes a competing offer will remain a stakeholder in the target firm, whether or not his competing offer succeeds.

3. Other laws that govern Takeover Code 

  • The Companies Act, 2013 

Section 261 of the Companies Act, 2013 deals with the formulation of a scheme of rehabilitation and revival, which may include the purchase of a sick firm by a solvent company with NCLT approval. Section 230 (11) deals with all types of agreements and compromises. NCLT has the authority under Section 250 (3) to order any company administrator to take over the assets and control of such a firm.

  • The Competition Act, 2002 

This act oversees and regulates transactions in India that have an anti-competitive effect. 

Under what circumstances will these laws apply?

  1. The target company must be publicly traded.
  2. These laws will apply if the acquirer is an Indian listed business and the target firm is likewise an Indian listed company.
  3. These laws will apply if the acquirer is a foreign listed business but the target is an Indian company.
  4. These laws will not apply if the acquirer is an Indian listed business and the target company is a foreign listed company.
  5. These laws will not apply if the acquired and target companies are both foreign publicly traded companies. 

References


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