This article is written by Shreya Kalantri, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.com.
A takeover occurs when one company makes a successful bid to assume control of or acquire another. Takeovers can be done by purchasing a majority stake in the target firm. Takeovers are also commonly done through the merger and acquisition process. 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 whose shares are listed on a stock exchange which has been granted recognition under Securities Contracts Act,1956. A target company can be identified through various avenues like market research, trade expos, supply chain analysis, etc. A company takeover takes place either to expand the business, reduce competition or exercise tax benefits.
Fact to know
1. Difference between Acquisition and Takeover –
ACQUISITION- When one company acquires another company with the permission of its board of directors to do so then it is called acquisition. This happens due to various reasons like increasing the market value of the company’s share, providing financial or technical help to the company, etc.
Example : Hindustan Unilever Limited (HUL) acquired GSK Consumer Healthcare of GlaxoSmithKline (GSK).
TAKEOVER- When one company acquires another company without the permission of its board of directors then it is called takeover. Takeovers are generally performed by large companies to either remove competition or to expand.
Example : Larsen and Toubro’s (L&T) takeover Mindtree.
2. There are at present 23 recognised stock exchanges in India out of which two are National level stock exchange – The Bombay Stock Exchange (BSE) and National Stock Exchange of India limited (NSE) and other 21 are Regional level stock exchanges.
Background of study
The concept of takeover emerged in the late 19th century in countries like the UK and US when the first wave of mergers and acquisitions started. However in India the concept emerged only in the 20th century but the concept of hostile takeovers was still unknown.
A lot has changed in the world since 1997 when the Substantial Acquisition of Shares and Takeovers (SAST) was enacted. Later due to various global scenarios The Takeover Regulations came into effect on October 22 2011, repealing and replacing the Securities and Exchange Board of India (Substantial Acquisitions of Shares and Takeovers) Regulations, 1997 (1997 Takeover Regulations).
Fact to know
Takeover Regulations are applicable only for listed companies. If the company is not listed then the majority of the shareholders must have at least 75 percent stake in the company or else they can use section 236 or 230 of Companies Act 2013 to acquire the remaining shares.
Different types of takeover
1) FRIENDLY TAKEOVER- This type of takeover is made with the assent of the target company. There is an understanding marked between the administration of the two companies. It is a process where both the parties mutually agree to the terms and conditions of a takeover. Friendly takeover is managed with no trouble, contentions, and battles. An acquirer doesn’t need to do any plotting or make any methodologies against the target company. Friendly takeover takes place as per the provisions of Section 395 of the Companies Act, 1956.
Let us understand friendly takeover with the help of an example-
Ranbaxy Laboratories was started by Ranbir Singh and Gurbax Singh in 1937. They sold it to Bhai Mohan Singh in 1952, who had two sons Malvinder Singh and Shivinder Singh. The Singh brother’s had 34.8 % shares in the company. In June 2008 they sold it to Daiichi-Sanko, a Tokyo based pharmaceuticals company. Then through open offer Daiichi-Sanko acquired 63.4 % shares. They started to face loss from 2006-2008 as the major Board of Directors (BOD) and promoters left which depleted the quality of medicines after Daiichi-Sankyo bought Ranbaxy. A US company filed a case against Ranbaxy for providing low quality medicines and then on 7th April 2014 they sold it to Indian company Sun Pharma. This deal was a loss for Daiichi-Sanko as they sold the company for 4 billion dollar and bought it for 4.6 billion dollar from the Singh brothers.
2) HOSTILE TAKEOVER- Under this type of takeover, an acquirer doesn’t offer any proposition to or make any arrangements with the target company. Acquirer quietly seeks after a push to deal with the target company against the wish of the administration and renunciation of the investors of the target company. In this, the acquirer company does not obtain any prior assent of the target company and forcefully pursues the process of takeover.
Let us understand hostile takeover with the help of an example-
Mindtree and Larsen and Toubro (L&tT)
Mindtree is a software service firm started in the year 1999. A major stake of shareholdings of the company was with the investors out of which V.G.Siddhartha was one of the first investors in the company and had a major stake of 20.41% but in the year 2019, he sold his entire shares to L&T to cut down his debt. LnT already had some more percentage of shares in the company and after getting shares from V.G.Siddhartha their total shares reached to 29%. Then the government gave them an open offer and they acquired 31% more shares through open offer. L&T gave Rs 975 to V.G.Siddhartha and 980 to the public. L&T totally acquired 60.6% shares in the company. Mindtree founders planned for a buy back offer to block L&T as they felt that L&T did not have compliance/corporate governance and there was a disconnect between what management wants and what shareholders want, but they failed. India’s first hostile takeover in an IT company was successful. 3 co-founders of Mindtree quit after L&T bought the controlling stake. L&T said that Mindtree will run as a separate entity, distinct from L&T infotech and L&T technology services.
3) REVERSE TAKEOVER- In Reverse Takeover, a private company decides to acquire a public listed company to become qualified to list its shares at a perceived stock exchange without undergoing the process of Initial Public Offer.Reverse mergers are quite common in US but in India it is not that recognised or executed. Example- ICICI merged with its arm ICICI bank in 2002.
4) BAILOUT TAKEOVER- In Bailout Takeover, a benefit procuring company gains a debilitated company to bail it out from the cycle of liquidation. This takeover is governed as per the provisions of Sick Industrial Companies (special provisions) Act, 1985.
5) HORIZONTAL TAKEOVER- In Horizontal takeover, one company takes over another company of the same industry. The principle reason behind this sort of takeover is accomplishing the economies of scale or expanding the piece of the overall industry. Example- Patni Computers by iGate.
Process involved in takeover of a company
The Takeover regulations have been made to protect the investors and provide a fair working environment. The Securities and Exchange Board of India (substantial acquisitions of shares and Takeovers) Regulations, 2011 governs the mergers and acquisitions transactions which involve acquisition of a substantial stake in a publicly listed company. SEBI is the market regulatory for public listed companies. When a company acquires 5% or more of another listed company (target company) then it has to make a disclosure of all its holdings within 2 days of acquisition of shares. When a company acquires 5% or more shares of the target company then it is called as substantial acquisitions of shares.
When the acquirer company acquires 25% shares or more they have to give an open offer to the shareholders of the company for another 26% shares so that they can get 51% or more shares and they can takeover the company, they can acquire only 75% shares of the company as the rest 25% is public shareholding and further proposes to acquire additional shares or voting rights which enables them to exercise more than 5% of voting rights in a financial year and the acquiring company has to make an open offer in this case too. An Open Offer is made to the Public shareholders of Target Company pursuant to a Trigger event as prescribed in regulations to provide them an Exit Opportunity in case the Public shareholders are not willing to continue with the Company or upcoming Management pursuant to Takeover Offer.
Steps involved in an open offer
- Appointment of Merchant Banker
- Trigger Event (Share Purchase Agreement/ Resolution for allotment of Securities/ Acquisition of Shares beyond Threshold)
- Submission of Public Announcement
- Escrow Account For takeover transaction
- Publication of Detailed Public Statement
- Public Announcement of Open Offer
- Recommendation by the BOD of the target company
- Filing of Letter of Offer with the SEBI
- Incorporation of Observations of SEBI
- Dispatch of Offer Document/ Letter of Offer to shareholders
- Opening of Offer
- Post offer advertisement
- Settlement through Special Escrow Account
- Acquisition of shares and submission of Post Offer Monitoring report
The Takeover Regulations deal with three types of tender offers
- Mandatory Tender Offers:
The Takeover Regulations prescribe certain circumstances where an acquirer is obligated to make a Mandatory Tender Offer to the shareholders of the target company to acquire at least 26% of the shares of the target company.
- Voluntary Tender Offers:
The Takeover Regulations provide a particular system to acquirers to make Voluntary Offers to public investors. A Voluntary Offer might be made by a current investor or an acquirer who holds no shares in the target company.
The dispatch of a Voluntary Offer is dependent upon the satisfaction of specific conditions. Hence, if any acquirer or PACs with such acquirer has gained any offers or casting a ballot privileges of the target company without pulling in a Mandatory Tender Offer in the first 52 weeks, at that point such acquirer won’t be allowed to dispatch a Voluntary Offer. Likewise, an acquirer who has launched a Voluntary Offer is not permitted to acquire any shares of the target company during the offer period other than under such tender offer.
An acquirer who has launched a Voluntary Offer is also not permitted to acquire shares of the target company for a period of 6 months after the completion of the Voluntary Offer, except under another Voluntary Offer. This does not prohibit the acquirer from launching a competing offer under the Takeover Regulations.
- Competing Offers:
A competing offer is required to be made within 15 business days of the original tender offer. A contending offer might be made by any individual (i.e., regardless of whether it be a current investor or not) without being subject to the restrictions applicable to Voluntary Offers. There is a restriction on a competing acquirer making an offer or going into an understanding that could trigger a Mandatory Tender Offer whenever after the expiry of the said 15 business days and until finish of the first offer. Therefore, time is of the pith. Once a competing offer has been launched, the two competing offers are treated on par and the target company would have to extend equal levels of information and support to each competing acquirer. The Target company can’t support one acquirer over the other(s) or delegate such acquirer’s chosen people on the top managerial staff of the objective organisation, forthcoming finishing of the contending offers. A competitive offer can be restrictive upon a base degree of acknowledgment just if the first delicate offer is additionally contingent. The ‘losing’ competing acquirer is not permitted to sell the shares acquired by him under the competing offer to the winner of the competing bid. Therefore, any person making a competing offer will continue to be a shareholder in the target company, regardless of whether his competing offer has fizzled.
Other laws governing takeover code in India
- THE COMPANIES ACT, 2013 – Section 261 of Companies Act, 2013 deals with preparation of scheme of rehabilitation and revival, including the takeover of a sick company by a solvent company with the authorisation given by NCLT to the company administrator. Section 230 (11) deals with every form of compromise and arrangement. Section 250 (3) states that NCLT has the power to direct any company administrator to take over the assets and management of that company.
- THE COMPETITION ACT OF 2002 – This act governs and regulates those transactions which have an adverse effect on competition in India.
Under which condition will these laws be applicable
- The target company must be a listed company.
- If the acquirer is an indian listed company and the target company is also indian listed company then these laws will be applicable.
- If the acquirer is a foreign listed company but the target company is indian then these laws will be applicable.
- If the acquirer is an indian listed company but the target company is a foreign listed company then these laws will not be applicable.
- If the acquired and the target company are foreign listed companies then these laws will not be applicable.
Fundamental objective of these laws
- To give transparent and straightforward lawful structure to encouraging takeover exercises.
- To protect the interest of the shareholders in securities and securities market, considering that the acquirer and different investors need a reasonable, fair and straightforward structure to secure their inclinations.
- To balance the conflicting objectives and interests of various stakeholders in the context of substantial acquisition of shares and takeovers of listed companies.
- To provide each shareholder an opportunity to exit its investment in the target company when a substantial acquisition of shares or takeover of a target company takes place.
- To guarantee that reasonable and exact revelation of all material data is made by people answerable for making them to various shareholders to empower them to settle on educated choices.
- To ensure that the affairs of the target company are conducted in the ordinary course when a target company is the subject matter of an Mandatory Tender Offer (MTO).
- To manage and accommodate reasonable and compelling competition among acquirers burning of assuming control over a similar objective organization.
- To guarantee that only those acquirers who are prepared to do really satisfying their commitments under the Takeover Guidelines make MTOs.
Takeovers haven’t been prohibited anywhere within the code nor has it been discouraged. The whole intention of the Indian law makers has been to forestall the premiums of investors and speculators during such acts. However, while doing this the policy makers adopted a really protective policy which successively made hostile takeovers resemble a feared apparition. This over protectionism wasn’t favoured by major economy players within the world owing to the recent trends of globalisation and opening up of domestic markets for international players. So to cater to the needs of changing society the policy makers have come up with a new Takeover Code which would be implemented by 2011 in all probabilities. We have also seen different types of takeovers and how important takeover and acquisitions are for the increasing Indian economy but in the right way.
- https://swaritadvisors.com/learning/7-steps-to-takeover-a-company-in-india/, by Savy Midha (October 6th 2019).
- Available at TAX GURU: https://taxguru.in/sebi/sebi-takeover-code.html, A project work in corporate laws, SEBI TAKEOVER CODE.
- Available at Swarit Advisors: https://swaritadvisors.com/company-takeover.
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