September 10 2003 New Takeover Legislation Enacted Kabraji & Talibuddin | Corporate Finance/M&A - Pakistan Corporate Finance/M&A Interpretation Transactions Not Covered Launching an Offer General Obligations of Offeror Commission's Role On October 29 2002 the Pakistani president promulgated the Listed Companies (Substantial Acquisition of Voting Shares and Take-overs) Ordinance 2002 to provide fair and equal treatment to all investors, as well as a transparent and efficient system for the substantial acquisition of voting shares and takeovers of listed companies and related matters. InterpretationThe interpretation section of the act provides the following definitions of its key terms: 'Offeror' means any party which, directly or indirectly, acquires or has proceeded to acquire voting shares in the target company, or acquires or has proceeded to acquire control of the target company, either by itself or through any party acting in concert; 'Commission' means the Securities and Exchange Commission established under the Securities and Exchange Commission of Pakistan Act 1997; 'Control' includes the right to appoint the majority of directors or to control management or policy decisions, exercisable by a person individually or through any person acting in concert, directly or indirectly, whether by virtue of a shareholding, management right, shareholders agreement, voting agreement or otherwise; 'Financial institution' means an institution other than a bank as defined in the Banking Companies Ordinance 1962, which is recognized as such by the commission either specifically or generally, and includes such other institutions or companies as are classified by the federal government as financial institutions; 'Listed company' means a company or a body corporate whose voting shares are listed on a stock exchange; 'Manager of the offer' means a manager appointed under Section 7; 'Offer period' means the period from the date of the public announcement of a public offer to the date of closure of or withdrawal from the public offer; 'Person acting in concert' means a person who cooperates with the offeror to acquire voting shares or control of the target company; 'Prescribed' means prescribed by rules made under the ordinance; 'Public announcement' means a public announcement of offer or intent to be made under Section 5, Section 6 or Section 8 of the ordinance, as the case may be, and includes any announcement of any competitive bid for the acquisition of voting shares of a target company; 'Public offer' means a public offer for the acquisition of voting shares of a target company, and includes any competitive bid or bids made for this purpose; 'Relative' means spouses and lineal ascendants and descendents; 'Voting shares' are the shares in the share capital of a listed company that carry voting rights; and 'Target company' means a listed company the voting shares of or control over which is directly or indirectly acquired or intended to be acquired.Transactions Not CoveredThe Listed Companies Takeovers Ordinance 2002 does not apply to the following transactions: the acquisition of voting shares in the ordinary course of business by banks and financial institutions as enforcement of security; the acquisition of voting shares by succession or inheritance; the transfer of voting shares from financial institutions, including their subsidiaries, to co-promoters of the company pursuant to an agreement between the financial institution and such co-promoters, provided proper disclosure has been made in the prospectus at the time of issue; a scheme of arrangement or reconstruction including amalgamation, merger or demerger under any law in force; the acquisition of voting shares in companies whose voting shares are not listed on any stock exchange; the exercise of an option by a bank or a financial institution in pursuance of a conversion option; the sale of shares as a result of privatization of a unit or its management rights within the meaning of the Privatization Commission Ordinance 2000; and the sale of shares as a result of any negotiations that were ongoing at the time the ordinance came into force, provided that the negotiations are finalized and agreement reached within 30 days of its entry into force. Launching an OfferDisclosure of shareholding in a listed company Any offeror who acquires voting shares which (taken together with any voting shares already held by the offeror) would entitle the offeror to more than 10% of the voting shares in a listed company, must disclose the aggregate of its shareholding to that company and to the stock exchange on which the voting shares of that company are listed. Substantial acquisition of voting shares and acquisition of control of a listed company A party is not permitted, directly or indirectly, to acquire (i) voting shares which (taken together with voting shares already held by such person) would entitle such person to more than 25% of the voting shares in a listed company, or (ii) control of a listed company, unless such person makes a public announcement of its offer to acquire the voting shares or control of such company in accordance with the terms of the ordinance.Appointment of manager to the offer Before making any public announcement the offeror must appoint a bank, financial institution or member of a stock exchange, which is not an associate or affiliate of the offeror or target company, as manager to the offer. The manager to the offer will be deemed as the agent of the offeror.Timing of public announcement Before acquiring voting shares above the 25% threshold, the offeror must notify the commission and immediately make a public announcement of this intention. However, where the offeror acquires global depositary receipts or American depositary receipts which, when taken together with any voting shares already held by the offeror, would entitle the offeror to voting shares exceeding the 25% threshold, the public announcement must be made no later than two working days before the offeror acquires voting shares on such securities upon conversion or exercise of option.Public announcement The public announcement must be published in at least one issue of a daily newspaper published in English and one in Urdu which is circulated in the province or provinces in which is situated the stock exchange on which the target company is listed. The public announcement must contain such information as may be prescribed and a copy of it must be submitted to: the commission; all stock exchanges on which the voting shares of the target company are listed, for placement on the notice board and the automated information system thereof; and the target company at its registered office, for placement before the board of directors by the manager to the offer at least two working days before its issuance.Number of voting shares to be acquired A public offer must be made for such percentage as the offeror decides. Where the number of voting shares offered for sale by the shareholders exceeds this percentage, the offeror will, in consultation with the manager to the offer, accept the offers received on a proportional basis, provided that acquisition of voting shares from a shareholder will not be less than the minimum marketable lot or the entire holding, if it is less than the marketable lot.General Obligations of OfferorThe offeror must meet the following general obligations: Within two working days of the public announcement, the offeror must send a copy of the proposed offer letter to the target company at its registered office address, to all stock exchanges in which the voting shares of the company are listed and to the commission. The offeror must ensure that the offer letter is also sent to all shareholders of the target company whose names appear on the register of members of the company on the date specified in the public announcement. If the public announcement is made under an agreement to acquire voting shares or control of the target company, the offer letter must be sent to those shareholders who are not party to the agreement. A copy of the offer letter must be sent to (i) the custodians of global depositary receipts or American depositary receipts to enable such persons to participate in the open offer, if they are entitled to do so, and (ii) the convertible security holders, where the period of conversion falls within the offer period. The date of acceptance of a public offer must be not later than 60 days after the date of public announcement. If the offeror is a company, the public announcement, brochure, circular, offer letter or any other advertisement or publicity material issued to shareholders in connection with a public offer must state that the directors accept responsibility for the information contained in such documents. If any of the directors desires to exempt himself from responsibility for the information in such documents, that director is required to issue a statement to that effect together with the reasons for this. Where a public offer is made conditional on a minimum level of acceptance, the offeror may accept or reject the acceptances if together they do not reach the minimum level stipulated. On or before the date of issue of the public announcement, the offeror must provide security as described in the ordinance. The offeror must ensure that firm financial arrangements for the fulfilment of its obligations under the public offer and suitable disclosures in this regard have been made in the public announcement. Within 30 days of the date of closure of the public offer, the offeror must have completed all procedures relating to the public offer, including payment of consideration to the shareholders who have accepted the public offer and have opened a special account. If the offeror is unable to pay these shareholders before the expiry of this period because it has not yet received the requisite statutory approvals, the commission may, if satisfied that this was not due to any wilful default, neglect or failure of the offeror diligently to pursue the applications for such approvals, grant an extension of time for a period not exceeding 30 days in total. In the event a public offer is withdrawn, the offeror must not make any offer to acquire voting shares of the target company for 12 months from the date of public announcement of the withdrawal of public offer. In the event of non-fulfilment of any obligations under the specific provisions of the ordinance, the offeror must not make any offer to acquire voting shares of any listed company for a period of 12 months from the date of closure of public offer. If the offeror has not stated its intention to dispose of the undertaking or a sizeable part thereof, except in the ordinary course of business of the target, the offeror will be prohibited from disposing of the undertaking or a sizeable part thereof for a period of two years from the date of acquisition of control.The board of directors of the target company, during the offer period, must not: sell, transfer or otherwise dispose of, or enter into an agreement for the sale, transfer or disposal of the undertaking, or a sizeable part thereof, except for a sale or disposal of assets in the ordinary course of business of the company or its subsidiaries; encumber any asset of the company or its subsidiary; issue any rights or bonus voting shares; or enter into any material contract regarding the company.Before the public announcement is made, the manager of the offer will: ensure that firm arrangements for funds and money for payment through verifiable means to fulfil the obligations under the public offer have been made; furnish the commission with a due diligence certificate along with a copy of the proposed offer letter; ensure that the proposed public announcement and offer letter are filed with the commission and the target company, and are also sent to the stock exchange on which the voting shares of the target company are listed; ensure compliance with the provisions of the ordinance and any other laws or rules which may apply; upon fulfilment of the necessary obligations by the offeror, request the bank with which the security has been deposited to release the balance amount to the offeror; and send a report to the commission within 45 days of the date of closure of the public offer or earlier withdrawal thereof.The procedures for making a competing bid include the following: Any party that wishes to make a competing bid must publicly announce its offer for the same number of voting shares of the target company as the original offer within 21 days of the public announcement of the first offer; Following the public announcement of a competitive bid, the original offeror has the opportunity to make a further announcement (i) revising the public offer, or (ii) withdrawing the public offer, with the prior approval of the commission. If no such announcement is made within 10 days of the public announcement of the competitive bid, the original offer will continue to be valid and binding on the offeror. However, the date of closing of such public offer will be extended to the date of closure as under the last remaining competing bid. The date of closure of all bids will be that under the last remaining competitive bid. All remaining competing bids shall close on the same date.Upward revision of offer Irrespective of whether a competing bid is made, the initial offeror may upwardly revise its offer in respect of the offer price and the number of voting shares to be acquired, at any time up to seven working days prior to the date of the closure of public offer, under the following conditions: A public announcement must be made in respect of such changes or amendments in all the newspapers in which the earlier public announcement was published; The commission, the stock exchange on which the voting shares of the target company are listed and the registered office of the target company must be informed at the same time as the public announcement is published; and The value of the security provided must be increased.Withdrawal of public offer A public offer may be withdrawn: if the withdrawal is consequent upon any competitive bid; if the sole offeror is natural person and dies; or in such other circumstances as may be prescribed.In the event of withdrawal of the public offer under, the offeror or the manager must (i) make a public announcement in all the newspapers in which the public announcement was published indicating the reasons for withdrawal of the public offer; and (ii) inform the commission, the relevant stock exchange and the target company at the same time as the public announcement is made.Security to be furnished by the offeror The offeror is required to furnish security for performance of its obligations on such terms and conditions as may be prescribed. The total consideration payable under the public offer will be calculated assuming full acceptance, irrespective of whether consideration for the public offer is payable in cash.If there is any upward revision of the offer, the value of the security will be increased. The security will be released in such manner as may be prescribed.Commission's RoleInquiry The commission may appoint one or more persons as inquiry officer or officers to undertake an inquiry for any of the following purposes: to inquire into complaints received from investors holding not less than one-tenth of the total voting powers in a target company on any matters involving substantial acquisitions of voting shares and takeovers; to investigate, upon its own initiative and in the interests of the securities market or investors, any breach of the provisions of the ordinance; and to ascertain whether the provisions of the ordinance are being complied with.The offeror, seller, target company and manager to the offer under inquiry, and every director, officer and employee of the participants, must provide the inquiry officer with such books, accounts, securities records and other documents in their custody or control, and furnish the inquiry officer with such statements and information as he may require, within such reasonable period as he may specify.The inquiry officer will, as soon as possible, following completion of the enquiry, submit his report to the commission. The commission will communicate the findings to the offeror, seller, target company and manager to the offer. On receipt of the reply from the offeror, seller, target company or manager to the offer, the commission may direct any of these to take such measures as it may deem necessary in the interest of the securities market and for due compliance with the provisions of this ordinance.Directions The commission may, in the interests of the securities market, give such directions as it deems necessary, including: directing the person concerned not to deal further in securities; prohibiting the person concerned from disposing of any of the securities acquired in violation of the ordinance; directing the person concerned to sell voting shares acquired in violation of the ordinance; and taking such action against the person concerned as may be necessary.Penalties The penalties for non-compliance include the following: In the event of withdrawal of a public offer, except as provided under the ordinance, or contravention of any provision of the ordinance, the offeror and any person acting in concert shall be debarred from making offers for the following three years; If the board of directors or management of the target company contravene any provision of the ordinance, the directors, chief executive and company secretary will be disqualified from holding any such office in a listed company for the following two years; and If any person (i) fails to furnish any document, paper or information which it is required to furnish by or under the ordinance, (ii) fails to comply with any order or direction of the commission made or issued under the ordinance, or (iii) contravenes or otherwise fails to comply with the provisions of the ordinance, and if satisfied that the failure or contravention was wilful, the commission may impose a fine of up to PRs1 million and a further PRs10,000 for every day the failure or contravention continues. Any sum directed to be paid will be recoverable as an arrears of land revenue. For further information on this topic please contact Kairas N Kabraji at Kabraji & Talibuddin by telephone (+92 21 583 8874) or by fax (+92 21 583 8871) or by email ([email protected]).