The Takeover Code-A comparison with the Past By- Saahen Sharma
The Takeover Code-A comparison with the
Past
Authored By- Saahen Sharma
A Takeover also referred to as an acquisition
is the process of a company, playing the role of an acquirer buying or bidding
for a significant amount of shares of the targeted or seller company. A
takeover is when the acquisition of shares takes place from the shareholders of
a company at a specified price to the extent of at least controlling interest to
gain majority control over the acquired company. Thus, when the acquirer takes
control of the target company, it is termed a successful takeover. To protect the
rights of the stakeholders, the public, and others affected by it, the
existence of a takeover code is necessary. The code safeguards the rights of
the target company and shields them from being oppressed by the buyer company[1].
Types of Takeovers
In terms of the ‘legal context’ there are two
main types of takeovers:
Friendly Takeover: It refers to a take-over in which one company agrees to be acquired and
taken over by change in its management and control via negotiations between the
existing promoters and the prospective investors in a friendly manner. Here the
board of directors of both companies approves of the said transaction and both
companies have a common motive and reasoning to affect the transaction. Also
referred to as a Negotiated Takeover, this takeover tends to fulfill and
benefit both the companies involved in the transaction. Usually, friendly
takeovers take place as per the provisions of section 395 of the Companies Act,
of 1956.[2]
Hostile Takeover: Hostile takeover is when one company unilaterally pushes for the
acquisition of shares of another company without it being in the knowledge of
the so-targeted company. An acquisition is also considered hostile when the acquisition
pursues the targeted company even after the target company’s board rejects the
offer or the bidder makes the offer directly after announcing its firm’s
intentions to make an offer.[3] In such cases, the
acquiring company collects a majority stake in the target company for an automatic
acquisition where the target company does not approve of the acquisition. This
is done generally, via tender offers, where a company purchase shares from the
existing/outstanding shareholders of the target company at a premium over and
above the current market.[4]
In terms of the ‘business context’, the takeover
is of three main types:
Horizontal Takeover: A horizontal takeover is when one company takes over another company in
the same industry. The objective behind such an acquisition is usually to achieve
the economics of scale or increase their market share by acquiring other
players.
Vertical Takeover: A vertical takeover refers to the takeover by one company of its
supplies or customers. The company acquiring the suppliers undergoes a backward
integration whereas the supplies/customers being acquired undergo forward
integration[5].
Such a merger is effected to increase the synergies and gain more control of
the supply chain process, ramping up the entire business. A vertical takeover
often results in reducing costs and increasing the productivity and efficiency
of the entire business[6].
Conglomerate Takeover: refers to the takeover of one company by another company operating in a
different industry. The main purpose of such a takeover tends to be the
diversification of the business functions. Two firms would enter such a merger
to increase market shares, diversify their businesses, cross-sell their
products and take advantage of the synergies that exist between the two
companies.[7]
Why is a Takeover Code Necessary?
The twentieth century began with the Indian
economy opening itself up to the world. With globalization, India had opened
its doors to overseas investors. The multinational conglomerates rushed into
India, and for the Indian players to compete with outside powers, the scale of
business had to be increased[8]. Mergers and Acquisitions
offered the best solution to corporates offering them the ability to multiply
their business in a small amount of time. This wave of M&A proved
beneficial but soon the outside powers with their ability to shed huge amounts
of wealth made it very easy for them to exploit the opportunity to the
prejudice of the retail investors. This created the need for regulation to
protect the interest of investors while developing the securities markets and
not sabotaging them[9].
Thus, with this mindset, in 1992, with the enactment of the SEBI Act, SEBI was
established as the regulatory body to promote the development of the securities
market in India while protecting the interests of the investors.
SEBI laid down the following grounds
reflecting the necessity of a Takeover Code[10]:
•
Full and
truthful discloses are to be made of all material information relating to the
open offer.
•
Keeping
the interest of retail investors in the capital is a top priority since they
are the driving force responsible for the development of the securities market.
•
Giving
investors an exit opportunity if they wish to not continue with the new
management.
•
The
process of acquisition shall be completed in a time-bound manner, and it should
be ensured that the acquirer has sufficient financial resources for the payment
of the acquisition price to the investors.
Subsequently in 1994 SEBI came out with SEBI (Substantial
Acquisition of Shares and Takeover) Regulations, 1994. Then after undergoing
several amendments the Takeover Regulations Advisory Committee was constituted
by SEBI to review the older takeover regulations and suggest amendments keeping
the growing economy and the future in mind[11].
The committee further laid down the main
objectives that a new takeover regulation shall fulfill in addition to the
grounds laid down by SEBI in 1992, which were:
•
To
protect the interest of investors in the securities market, considering that
both the acquirer and the investor need a fair, equitable, and transparent
framework to protect their interests.
•
To
balance the conflicting objectives and interests of various shareholders during
a substantial acquisition of shares in listed companies.
•
To
provide the shareholders the opportunity to exit their investment when a
takeover of a target company takes place.
•
Ensure
that the affairs of the target company are conducted in the normal fashion of
things when a target company is the subject matter of an open offer.
•
To ensure
that transparent discloses of all material information is made available to
prospective investors.
•
To
provide for fair and effective competition among acquirers desiring of taking
over the same target company. And,
•
To ensure
that the acquirers fulfill their obligations under the Take-over Regulations by
making open offers.
After considering the public opinion the
report has been modified to form the SEBI(SAST) Regulations, 2011. [12]
Now via the medium of the paper, we shall
compare the New Takeover Code with the Old Code and analyze the said changes.
Some of the changes made are as below: -
1.
Increase
the Initial Threshold Limit from 15% to 25%: The Initial Threshold limit provided for
Open Offer obligations was increased from 15% to 25% of the voting rights of
the target company.
2.
Creeping
Acquisition Limit raised from 15%-55% to 25%-75%: Due to these new regulations, there exists a
single and clear creeping acquisition bracket. This acquisition limit was made
to be available to all persons holding 25% or more but up to 75%, that is the
maximum permissible limit a non-public holding shall be eligible to creeping
acquisition of 5% each FY.[13]
3.
Increasing
the Offer Size from 20% to 26%: The new regulations increased the offered size to just 26% from 20%.
The TRAC recommends that such a limit be increased to 100% but it has been a
better move to keep it at 26% keeping in mind the domestic acquirers on account
of the lack of proper bank funding options available in India.
4.
Open
Offer Trigger Point now based on Individual Holding: After the 2011 regulation, the individual
acquirer shareholding shall also be considered for determining the Open Offer Trigger
Points apart from only the consolidated promoter shareholding. Refer to Sec.3(3)
of the SEBI (SAST) Regulations, 2011. [14]
5.
Abolition
of Non-compete fees: TRAC’s
recommendation was accepted in the new regulations due to which now, any amount
paid to the Promoters/Sellers whether as non-compete fees or control premium
shall be added to the Offer Price. Thus, the new law aims to provide public
shareholders with offers at the highest prices.[15]
6.
The
new definition of Control introduced: The new law brings about a new definition of Control, where ‘Control’
now includes ‘the right to appoint a majority of the directors or to control
the management or policy decision exercisable by a person or persons acting
individually or in concert, directly or indirectly, including by their
shareholding, or management rights or shareholders agreements or voting
agreements; provided that a director shall not be considered to in control over
such target company merely by holding such position’.[16]
7.
No
Exemption in case of acquisition from other competing acquirers in the New
Takeover Code.
8.
Frequently
Traded Shares: The
trading turnover during the last 12 months preceding the month in which the
Public Announcement is made will now be considered for determining the
frequency of trading in shares. Additionally, the volume of trading for the
frequently traded companies has been increased from 5% to 10% for a more
realistic depiction.
9.
Change
in Control: Any
change in control of the listed company shall only be done after the Open
Offer. After the new regulation, the only route available for a change in
management and control is via the Open Offer to the shareholders of the Target
Company and the previous exemption of a change in control w/o the acquisition
of substantial shares by using a special resolution by the postal ballot
process has been withdrawn[17].
These are only some of the important
provisions that were added via the 2011 regulation. These regulations are
quintessential in changing the landscape of the corporate landscape in India.
The increase in threshold level is bound to
increase the level of activity in listed companies by private equities and
strategic investors and will move towards more material stakes. This will
further increase the room for foreign collaborators and partners to increase
their shareholding without indulging in inefficient and expensive takeover
regulations and companies will be able to raise capital more cost-effectively.
This regulation has and will continue to
increase the PE/foreign partners coming to India resulting in a much-needed
boost to the FDI. [18]
Further, the 24.99% threshold allows
acquirers to block a special resolution in target companies and the possibility
of acquiring almost 25% without triggering an open offer would allow acquirers
to get a board position in target campaigns leading to a greater say in the
company’s operations. Minority public shareholders holding significant stakes
in target companies will also gain more power and prominence. This would allow
the long-term acquirers to acquire up to 24.99% and then have the option to
negotiate with these significant minority shareholders to join hands or trigger
an open offer for the takeover of the target company[19]. Thus, such off-market
transactions at the higher-than-normal market valuation for these kinds of
strategic buyouts have been encouraged and are bound to increase.
The step of increasing the open offer
threshold limit to 25% changes the landscape for promoters significantly. The
new regulation facilitates consolidation of promoter shareholding to the
maximum permissible level of 75% which would now incentivize promoters to
increase their shareholding substantially[20]. Furthermore, with the
increase in initial threshold and the increase in open offer size to 25% and
26%, the acquirer can gain a simple majority of 51%. This has been effective in
welcoming M&A transactions since the option of having a simple majority is
more attractive than depending on other shareholders to pass simple corporate
law resolutions[21].
Additionally, the concept of voluntary offer
for a 10% stake introduced by the regulation, which allows holding more than 5%
by substantial shareholders provides flexibility to substantial shareholders
holding 25% or more stakes to increase their shareholding w/o being in an
obligation to make the offer for an additional 26% stake, thus reducing the
overall outflow from the consolidation.
These revised norms will facilitate the
change in the dynamics of M&A in India. However, these regulations also
cause the cost of acquisitions to rise since earlier after the 15% trigger the
acquirer would seek another 20% and hold 35% in total in the target company.
Now, the cost would be higher since the acquirer needs to hold 51% after the
open offer. Thus, it has not been surprising for promoters to allot convertible
warrants to themselves, especially in companies where promoter holding is thin. [22] Yet the regulation is
good news for smaller investors as the regulation removes non-compete fees and
largely serves the purpose of protecting the interest of the minority
shareholders.
[2] Gupta, Yogesh.
“SEBI Takeover Code- Detailed Analysis.”
[3]
Ibid
[6] Kenton, Will.
“Vertical Merger.” Investopedia,
Investopedia, 22 July 2022, www.investopedia.com/terms/v/verticalmerger.asp.
[7] Kenton, Will.
“Conglomerate Merger.” Investopedia,
Investopedia, 19 May 2021, www.investopedia.com/terms/c/conlgomeratemerger.asp.
[8]
Gupta, Yogesh. “SEBI Takeover Code- Detailed
Analysis.”
[9]
Takeovers in India – An
overview, by Vijay Sambamurthi & Siddharth Shah
[10] Report of The Committee On Unemployment, May 1973,
Govt. Of India Min.Of Labour & Rehabilitation (Deptt. Of Labour &
Employment)
[11]
Ibid
[12] SEBI. “Report of
the Takeover Regulations Advisory Committee.” SEBI, n.d.
[13]
Corporate Governance Structure,
Mergers and Takeovers in India in the Post Liberalization Regime-Proposals and
Policies, by Nandita Das Gupta
[14] SEBI.
“Discussion Paper on ‘Brightline Tests for Acquisition of ‘Control ...”
Accessed November 2, 2022. Https://www.sebi.gov.in/sebi_data/attachdocs/1457945258522.pdf.
[15]
ibid
[16]
Ibid
[18]
Corporate Governance Structure,
Mergers and Takeovers in India in the Post Liberalization Regime-Proposals and
Policies, by Nandita Das Gupta
[19]
Gupta, Yogesh. “SEBI Takeover Code- Detailed
Analysis.”
[20]
Ibid
[21]
Ibid