This article is written by Prince Pathak, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.com.

Introduction

Merger and Acquisition (M&A) in today’s business has created a significant impact. M&A offers new opportunities, generates value and also helps to increase the market share value. Therefore, M&A could become a profitable business for any company. Takeover is also part of M&A strategy; it is a process when one company makes a bid to assume control of another company in other words, successfully taking control of one company by another company is known as a takeover. M&A deals could become so exhausting and complex if someone fails to understand the nitty-gritty behind the proposed transaction. In this article, the author tries to decipher the importance of acquisition/takeover in a business world and also focuses on the obligation of the target Company in takeover transactions.

Objective and types of takeover

The very purpose of the acquiring company in the takeover process is to acquire the majority shares of the target company and control the ownership of a target company whereas, target company’s shareholders can enjoy quick money by selling their shares to the acquiring money. In the process of acquisition, the acquiring company gets the ownership right on the target company’s assets and the target company shall cease to exist. Above all, acquirers with the help of takeover or acquisition can eliminate their competitors and can easily move ahead with the already established business. 

The term takeover and acquisition can also be used interchangeably. Nevertheless, acquisition and takeover are used in different scenarios. Takeover usually gives negative connotation and it occurs without the permission of Target Company also known as hostile takeover. However, acquisition also known as friendly takeover usually occurs when the acquirer has the agreement with the target company’s board of directors to purchase the target company. Hence, we can say that takeovers may be classified in two categories and they are friendly takeover and hostile takeover. Bailout takeover is another third type of takeover in which a profit earning large company tries to bailout the sick or dying company. The takeover process of the company must be complied with the SEBI (Securities exchange board of India) Substantial Acquisition of shares and Takeover regulations. 

Obligations

While making the takeover transactions, the target and acquiring company must follow their certain obligations to complete the takeover transaction. The chapter IV of the Sebi takeover regulations deals with the obligations part for both acquirer and Target Company, regulation 25 and regulation 26 deals specifically on the obligations of the acquirer and Target Company. In the following paragraphs we would try to understand the obligations of the target company and acquirer company while performing the takeover transactions in very detail. 

Obligations of the acquirer

Acquirer, prior to making the public announcement, shall ensure that firm financial arrangement has been made for fulfilling the payment obligations. Acquirer Company is required not to alienate any material assets of the target company or any of its subsidiaries outside the ordinary course of business for a period of two years unless the acquirer has declared an intention in public statement to alienate the property of Target Company. Target company’s material assets can also be approved by a special resolution passed by the shareholders through a postal ballot.

Acquirer must ensure that the contents of all the announcements and disclosure made in relation to the open offer are fair, true and not misleading. It should keep in check that the contents that have been disclosed are based on reliable sources. 

Acquirer and PAC (Person acting in concert), in the offer period, shall not sell shares of the target company and they will be jointly or severally liable for the non-fulfillment of the obligations under the takeover regulations.

Obligations of the target company 

Regulation 26- Obligations of the target company- Sebi has provided the obligations of the target company that must be fulfilled and non-compliance of such obligations also attracts penal actions.

• Ordinary course of business during offer period-Regulation 26(1)- The first sub regulation deals with the smooth function of business of the target company even when the public announcement has been made. It should be the duty of the board of directors of the target company to maintain the ordinary course of business even in such a period. 
• Non-alienation and voting right -Regulation 26(2)-

1. This is one of the most crucial obligations that target companies should keep in mind. During the offer period there is an obligation on the target company or any of its subsidiaries that it shall not alienate any material assets by way of sale, lease and encumbrance. Also, the target company shall not enter into any contractual relationship unless approved by the shareholders of a target company through postal ballot. However, in case of hostile takeover wherein the target company sells off its most attractive assets to a friendly third party to do away with the threat of takeover, would not be able to adopt this defence because the regulation cast an obligation on the Board of Directors not to enter into any agreement or sale. 
2. Target Company shall not enter into any material borrowing and prohibited from issuing fresh shares. The target company and its subsidiaries may issue or allot shares upon convertible securities issued prior to the public announcement of the open offer and also when a document has already been filed with the ROC or a record date has already been announced before the open offer is announced. Target corporation is forbidden from allocating a new share issue during the offer, to which would entitle the holder to voting rights but in a hostile bid for Nirman Kalindee Rail, Ltd., the Board of Directors of Jupiter Metal Ltd. accepted the preferential allocation of 24.9 percent of Texmaco’s stake, which was a white knight to fight the hostile takeover by Jupiter Metal. 
3. Target company cannot implement any buy-back of shares or effect any other change to the capital structure of the company once a public announcement has been made.
4. Target company also cannot enter into, amend or terminate any material contracts to which the target company or any of its subsidiaries is a party.

• Voting by Target Company (Regulation 26(3)) – With respect to the matters mentioned above in Regulation 26(2), the target company and its subsidiaries in any general meeting of the target company’s subsidiary, will be required to vote in accordance to the procedure as under special resolution passed by the shareholders of the target company.
•  No Record Date (Regulation 26(4)) – Target company shall be prohibited from fixing any record date for a corporate action on or before the 3rd working day of the start of the tendering period till the end of such tendering period.
• List of shareholders and pending applications ((Regulation 26(5))- Target company has to hand over documents related to list of shareholders containing addresses & names and pending applications for registration of transfer of shares lists to the acquirer within two working days from the identified date. However, acquirer shall indemnify the target company the cost incurred in providing the above mentioned lists.
• Independent Director’s recommendation ((Regulation 26(6)) : After the receipt of the detailed public statement, the target company’s board of directors shall constitute a committee of independent directors to provide reasoned recommendations on such open offer, and the target company shall publish such recommendations. 
• Publication of recommendation (Regulation 26(7)) – The target company must publish the recommendations received from the committee at least two working days before the commencement of tendering period. The publication so made, should be in the same newspapers as that of announcement of open offer, copy of the publication of the report should be provided to the following:

1. Board of directors,
2. Where the shares of the target company are listed and stock exchanges,
3. Manager of the open offer, manager to open offer to every competing offer, if any.

• Verification of Shares (Regulation 26(8))- The board of directors of the target company shall facilitate the acquirer in verification of shares tendered in acceptance of the open offer. 
• Information in competing offers (Regulation 26(9)) –The board of directors of a company has an obligation to make available any information and the cooperation needed in the process to the acquirer to all acquirers making competing offers.
• Registration of Transfer of Shares (Regulation 26(10))- Upon fulfillment by the acquirer, of the conditions required under these regulations, the board of directors of the target company shall without any delay register the transfer of shares acquired by the acquirer in physical form, whether under the agreement or from open market purchases, or pursuant to the open offer.

Further, it is no now requirement under Regulation 31A to ensure that reclassification of the acquirer as the new promoter is done only after the approval of the shareholders by a special resolution and existing promoters do not hold more than 10% of the share capital of the target company. Hence, both acquirer and target must perform their obligations as mentioned in regulation 25 and 26 of the Sebi Takeover Code, 2011. 

Conclusion

It is also significant to note that there is a vast difference between doing the acquisition/takeover transactions and actually making them work, hence we should always seek advice from the professional lawyers on these types of transactions. Acquiring companies and Target Company must fulfill their obligations on their part. These regulations would also be relevant if any hostile takeover move has been made on the target company. As we know that, the concept of takeover/acquisition is an intricate task and for this purpose SEBI has provided various majors and guidelines that must be implemented at any cost for smooth functioning of corporate governance in a country.