TAKEOVER CODE- BASIC CONCEPTS
By Abhinav Singh,
Restructuring in its literal sense means, “changing the basic structure of ”. Every company big or small has a basic capital structure as far as its share capital is concerned which is approved by its Memorandum of Association. This structure of a company cannot be changed before the company has actually gone through certain procedures of law. Restructuring of a company is generally of two types :
(i) Organic Restructuring
(ii) Non organic Restructuring
Organic restructuring- This generally refers to any internal change in the structure of the company, without the corporate entity undergoing any change. Some examples of such kind of restructuring are buy back of securities by a company, Employee Stock Option Plan (ESOP) by a company or Reduction of share capital of a company. All these kinds of restructuring have to be done by a company under different circumstances, sometimes they are to give value to their shareholders(as in the case of rights issue) or sometimes as an incentive to their employees ( as in issue of sweat equity) or sometimes as a defensive measure from hostile take overs( as in the case of buy back of securities).
Non organic restructuring- In case of this type restructuring there is an overall change in the corporate entity of the company. Unlike organic restructuring there is an element of third party involved in it. The foremost examples of this type of restructuring are Merger and amalgamation , de-merger , reorganization of a company. In the wake of India emerging as one of the fastest growing economies in the world, Mergers & Acquisitions (M&A) have become one of the most common type of restructuring. Every company big or small have jumped in the race of ongoing M&A feast that has been served in the Indian market in plenty.
Broadly speaking Takeover refers to the acquisition of one company by another company. In the words of M.A. Weinberg one of the pioneers in the formation of law and practice relating to takeovers, it has been defined as
“a transaction or a series of transactions whereby a person acquires control over the assets of a company, either directly by becoming the owner of those assets or indirectly by obtaining control of the management of the company. Where shares are closely held (i.e. by small number of persons), a takeover will generally be effected by agreement with the holders of the majority of the share capital of the company being acquired. Where the shares are held by the public generally the take over may be effected:
1) by agreement between the acquirers and the controllers of the acquired company.
2) by purchase of shares on the stock exchange.
3) by means of a takeover bid.
Takeovers are quite often taken as a prelude to the mergers. Corporates generally embark on acquisition of another company and then take steps to merge or amalgamate the acquired company or merge or amalgamate with the acquired companies and in the process also demerge certain undertakings. Takeover can be either friendly which is done by a mutual agreement between two companies or it can be hostile.
Basically speaking takeover is nothing but the acquisition of shares of one company by another company. The laws relating to takeovers in India where not very organized until the year 1994, calling it unorganized would rather be an understatement because laws relating to takeovers in India until 1994 hardly existed. Except for certain provisions of the Companies Act, 1956 ( Section 372, regarding intercorporate loans by companies and Section 395, regarding acquisition of the shares of dissentient shareholders) there was hardly anything solid enough to be called as organized takeover laws.
The guidelines of the Securities and Exchange board of India (Substantial acquisition of shares and takeover) 1994 was a maiden Indian attempt towards an organized set of laws for regulating takeovers in India. The need for changes in the regulation was felt just two years after its inception. A need was certain changes in the regulation had been felt and so a committee under the chairmanship of Justice P.N Bhagwati was constituted to review the regulations and suggest the necessary changes required under the act. The regulations were amended in 1997 and they finally were implementation. Since then the regulations have been known as, Securities and Exchange Board of India(Substantial Acquisition of Shares and Takeover)Guidelines, 1997 or TAKEOVER CODE. Since then many amendments have been made to the regulations.
The objective of the Takeover code is to regulate in an organized manner the substantial acquisition of shares and take overs of a company whose shares are quoted on a stock exchange i.e. listed company. In a limited sense these regulations also apply to certain unlisted companies including a body corporate incorporated outside India to an extent where the acquisition results in the control of a listed company by the acquirer.
Substantial Acquisition – The most important point to be understood is what would constitute substantial acquisition under these regulations? Substantial acquisition as such has not been defined under the regulations, nor has it been defined in any other related Acts. Nevertheless, if we read through regulations 10 and 11, the question as to what constitutes substantial acquisition is made relatively very clear. The following for the purpose of these regulation can be considered as substantial acquisition:
(a) Acquisition by a person or two or more persons acting together with common intention, 15% or more shares or voting rights of the target company
(b) Acquisition by a person or two or more persons acting together with common intention, who have already acquired 15% or more but less than 55% of share or voting rights, further acquire 5% or more of share capital or voting rights in the same financial year ending on 31st March.
An important point to be noted from the summary of regulations above is that not only the acquisition of shares but also the acquisition of voting rights would also constitute substantial acquisition. It is to be noted that voting rights of a shareholder are accompanied with the shares of the company. Until a person is a registered shareholder of a company he cannot have the voting rights, but there are cases when a person has paid the consideration for the share but an official instrument of share transfer has not been formulated, in such case a power of attorney to transfer the voting rights of the transferor can be formulated or the transferee may demand for a proxy from the transferor or he may make the transferee exercise the voting rights as he demands. Maybe this was the reason why acquisition of voting rights have been expressly mentioned in the regulations as far as substantial acquisition is concerned.
Few regulations that need a detailed study under the guidelines are given below-
Regulations regarding limits according to which shares shall be acquired:
The regulation for the minimum amount of shares to be acquired and a public announcement to be made in accordance with it are given under regulations 10,11 and 12.
a) Regulation 10- According to this regulation, no person either alone or with someone acting with the same intention shall acquire shares in a company that would enable the person or persons to practice more than 15% voting rights. The regulations further say that, this could only be done by a person who has made public announcement to acquire such shares in accordance with the regulations. In other words a person by himself or with a person acting with the same intention shall make a public offer to acquire a minimum of 20% of shares in accordance with the regulation.
b) Regulation 11- This regulation talks about an Acquisition by a person or two or more persons acting together with common intention, who have already acquired 15% or more but less than 55% of share or voting rights, which would enable them to exercise further 5% but not more voting rights in the same financial year ending on 31st March. Though this can be done if the acquirer makes a public offer to acquire such shares in accordance with the regulations. The regulation further talks about acquirers who already have 55% or more shares but less than 75% shares of the target company but intend to acquire more share, this can only be done if the acquirer makes a public announcement in this regard
c) Regulation 12- The regulations further say that, any control over the company shall not go into the hands of the acquirer irrespective of whether acquisition of shares or voting rights has taken place or not, until a public announcement to acquire such shares has been made in accordance with the regulations.
A Public announcement is generally an announcement given in the newspapers by the acquirer, primarily to disclose his intention to acquire a minimum of 20% of the voting capital of the target company from the existing shareholders by means of an open offer Another very important aspect of the Takeover Code, 1997 is the mandatory public offer to be made at various important stages of acquisition as prescribed by the Securities and Exchange Board of India in the regulations. Under the Takeover Code, 1997 a minimum threshold limit has been set, crossing which the acquirer has to make a compulsory public announcement.. Regulation 14 of the Code states that a mandatory offer to the public has to be made within four days from the date of the acquirer agreeing to acquire the shares of the company. The threshold limit under the regulations has been set at 15%. This means that as soon as a person acquires or agrees to acquire 15% or more of the shares of a company he shall make a mandatory public offer. The basic purpose of making it compulsory for the acquirer to make a public announcement was to allow the shareholder to have an exit opportunity in case of acquisition or stay in the target company. This can be done by identifying their interest by going through the additional disclosure made in the letter of offer.
The acquirer is required to appoint a merchant banker who is registered with SEBI before making the public offer. As mentioned above the public offer shall be made within four working days of the agreement to acquire shares.
There are certain other disclosures to be made in the public offer to acquire share. The letter of offer shall contain :
· The offer price
· Number of shares to be acquired from public
· Identity of acquirer
· Purpose of acquisition
· Change in control in the target company
· Plans of the acquirer regarding the target company, if any.
The draft letter of offer has to be sent to SEBI within 14 days of the public announcement along with the filing fees through the merchant banker. The merchant banker shall also produce a due diligence certificate. The offer document has to be sent to every shareholder with the acceptance form within 45 days of public announcement. The acceptance form shall be blank. The offer remains open for 30 days for the shareholders. It becomes obligatory for the acquirer to give a minimum offer price to the every shareholder who agrees to sell his share, within 30 days of closing of the offer
The regulations though not very old but have still proved to be very significant for the purpose of regulation of acquisition of shares. These regulations are a set of magnificently drafted rules. The credit for making the regulations so practical should be given to Justice P.N.Bhagwati committee.