The recently introduced Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“New Takeover Code”) has brought about a number of changes to the existing rules and regulations governing the acquisition of shares of listed Indian companies and their takeovers.
While the broad construct continues to remain the same under the new regime, one of the most significant changes is the threshold for triggering mandatory public offers. Under the New Takeover Code if an acquirer acquires 25% or more of the voting rights in a Target Company, reckoned with the voting rights already held by such acquirer and persons acting in concert with it, the acquirer is obligated to undertake a mandatory public offer. This threshold has been increased from 15% under the erstwhile takeover regulations. Consequently, it is now easier become easier for minority shareholders (such as private equity investors) to acquire more meaningful stakes in public company transactions, without having to undergo an open offer process. As under the old regime, the acquisition of control independently triggers the open offer obligation.
Unlike several other jurisdictions, in India, the size of the open offer is limited to 26% (increased from 20%) of the voting rights of the target company. In other words, the acquirer is not obligated to make an offer for the entire outstanding capital of the company. Interestingly, under the draft regulations, there was a proposal to increase the offer size to 100%. However, the Indian regulators have a preference for companies to remain listed and therefore, this proposal was done away with. This preference is also seen in a couple of other changes in the New Takeover Code whereby if an acquirer, after the open offer process, crosses 75% (which is the maximum permissible non-public shareholding limit for continuous listing), the acquirer is obligated to sell down the excess within a period of one year. The acquirer is in fact prohibited from launching a delisting or “go private” transaction for a period of one year from the completion of the offer. This is one provision which has come under some criticism as strategic or buy out investors believe that the obligation to sell down is commercially unviable and also limits their ability to take listed companies private in such transactions. This has also resulted in scenarios where selling promoters are often asked to scale down the shares being sold by them if the open offer results in the acquirer exceeding 75%, thereby preventing from a complete exit.
As regards consolidation, the New Takeover Code continues with the concept of “creeping acquisitions” where persons holding 25% and above and permitted to acquire upto 5% of the voting rights in any financial year. A positive change however is that the New Takeover Code has enhanced the overall ceiling for such creeping acquisitions from 55% to 75%. This change has enabled promoters to consolidate their shareholding in the target companies. Additionally, a holder of 25% or more of the voting rights of the concerned company can make a “voluntary” open offer to consolidate its shareholding. The voluntary open offer must be for a minimum of 10% of the voting rights and, unlike a mandatory open offer, can be scaled down if the resulting ownership could exceed 75%. Voluntary open offers are however not available to persons who have acquired shares during the fifty two weeks preceding the offer in any manner other than through a mandatory open offer. Further, during the offer period of a voluntary offer, the acquirer is not permitted to acquire any shares outside the offer. This is however distinct from a mandatory open offer where an acquirer is permitted to acquire shares during the pendency of the open offer, subject to certain restrictions.
Another important change which has been introduced under the New Takeover Code is the ability to withdraw the offer on account of non-fulfillment of conditions under the underlying transaction document which are outside the reasonable control of the acquirer. This is a fairly significant shift from the earlier provisions which only permitted withdrawal on account of non-receipt of statutory or regulatory approvals. In theory now, open offers could be withdrawn on account of material adverse change clauses. However, this remains to be tested.
Other changes include an obligation on the board of directors of the target company to give a recommendation on the open offer received by the shareholders. Further, payment of non-compete fees or any other form of additional payment to the sellers has now been prohibited and the public shareholders will consequently be offered the same price. Control premiums are therefore not allowed in open offer situations. There have been other procedural changes which have been implemented, including in relation to indirect acquisitions and pricing calculations.
Given the fact that the regulations are fairly nascent, the practices and nuances continue to evolve with every new deal.
This article has been written for Finance Monthly Magazine and is merely being reproduced on Lexology