Brief Overview OF Takeover CODE PDF

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BRIEF OVERVIEW OF TAKEOVER CODE Meaning of Takeover Takeovers and acquisitions are common occurrences in the business world. In some cases, the terms takeover and acquisition are used interchangeably, but each has a slightly different connotation. A takeover is a special form of acquisition that occurs when a company takes control of another company without the acquired firm’s agreement. Takeovers that occur without permission are commonly called hostile takeovers. Acquisitions, also referred to as friendly takeovers, occur when the acquiring company has the permission of the target company’s Board of directors to purchase and takeover the company. Acquisition refers to the process of acquiring a company at a price called the acquisition price or acquisition premium. The price is paid in terms of cash or acquiring company's shares or both. As the motive is to takeover of other business, the acquiring company offers to buy the shares at a very high premium, that is, the gaining difference between the offer price and the market price of the share. This entices the shareholders and they sell their stake to earn quick money. This way the acquiring company gets the majority stake and takes over the ownership control of the target company. An acquisition involves purchase of one entity by another (usually, a smaller firm by a larger one). A new company does not emerge from an acquisition; rather, the acquired company, or target firm, is often consumed and ceases to exist, and its assets become part of the acquiring company. Acquiring an existing business enables a company to speed up its expansion process because they do not have to start from the very scratch. The target company is already established and has all the processes in place. The acquiring company simply has to focus on merging the business with its own and move ahead with its growth strategies. Objects of Takeover The objects of a takeover may inter alia include: (i) To effect savings in overheads and other working expenses on the strength of combined resources;

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(ii) To achieve product development through acquiring firms with compatible products and technological/manufacturing competence, which can be sold to the acquirer’s existing marketing areas, dealers and end users; (iii) To diversify through acquiring companies with new product lines as well as new market areas, as one of the entry strategies to reduce some of the risks inherent in stepping out of the acquirer’s historical core competence; (iv) To improve productivity and profitability by joint efforts of technical and other personnel of both companies as a consequence of unified control; (v) To create shareholder value and wealth by optimum utilisation of the resources of both companies; (vi) To achieve economies of scale by mass production at economical costs; (vii) To secure substantial facilities as available to a large company compared to smaller companies for raising additional capital, increasing market potential, expanding consumer base, buying raw materials at economical rates and for having own combined and improved research and development activities for continuous improvement of the products, so as to ensure a permanent market share in the industry; (viii) To achieve market development by acquiring one or more companies in new geographical territories or segments, in which the activities of acquirer are absent or do not have a strong presence. Kinds of Takeover Takeovers may be broadly classified into three kinds: (i)Friendly Takeover: Friendly takeover is with the consent of taken over company. In friendly takeover, there is an agreement between the management of two companies through negotiations and the takeover bid may be with the consent of majority or all shareholders of the target company. This kind of takeover is done through negotiations between two groups. Therefore, it is also called negotiated takeover. Ranbaxy-Daiichi Sankyo 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

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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. (ii) Hostile Takeover: When an acquirer company does not offer the target company the proposal to acquire its undertaking but silently and unilaterally pursues efforts to gain control against the wishes of existing management. 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.

(iii) Bailout Takeover: Takeover of a financially sick company by a profit earning company to bail out the former is known as bailout takeover. There are several advantages for a profit making company to takeover a sick company. The price would be very attractive as creditors, mostly banks and financial institutions having a charge on the industrial assets, would like to recover to the extent possible.

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Development of Takeover Regulations The SEBI Act, 1992 empowered SEBI to make substantial acquisition of shares and takeovers a regulated activity for the first time. SEBI notified the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1994 in November 1994. Being statutory in nature, violation of any of the provisions attracted several penalties. SEBI could initiate criminal prosecution under Section 24 of the SEBI Act, 1992, issue directions under the SEBI Act and could direct any person not to dispose off any securities acquired in violation of the regulations or direct him to sell shares acquired in violation of the Regulations or take action against the intermediary registered with SEBI. The SEBI Act, 1992 also empowered SEBI to initiate adjudications and to impose fines as penalties for certain violations of the Regulations. SEBI acquired necessary expertise and insight into the complexities of a Takeover after implementing the same for 2 years and thereafter formed a Committee under the Chairmanship of Justice Bhagwati. The terms of reference of the Committee were: • to examine the areas of deficiencies in the existing regulations; and • to suggest amendments in the Regulations with a view to strengthen the Regulations and make them more fair, transparent and unambiguous and also protect the interest of investors and all parties concerned in the acquisition process. The Committee submitted its report in January 1997 and the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 were notified on February 20, 1997. These Regulations primarily dealt with the issues such as consolidation of holdings, conditional offers, change in control, formation of a Takeover Panel, competitive offers and defined substantial quantity for the purpose of making a disclosure and for the purpose of making an open offer. Takeovers were for the first time regulated in India in full swing. However the various provisions were again subject to different interpretations and some of the provisions could not give the intended results. Legal aspects of Takeover The legislations/regulations that mainly govern takeover are as under: 1. Companies Act, 2013

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2. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (The Regulations) 3. SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 As far as Companies Act, 2013 is concerned, the provisions of Section 186 apply to the acquisition of shares through a company. Section 235 and 236 of the Companies Act, 2013 lays down legal requirements for purpose of takeover of an unlisted company through transfer of undertaking to another company. SEBI (SAST) Regulations, 2011 lays down the procedure to be followed by an acquirer for acquiring majority shares or controlling interest in another company. 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 1. Appointment of Merchant Banker

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2. Trigger Event (Share Purchase Agreement/ Resolution for allotment of Securities/ Acquisition of Shares beyond Threshold) 3. Submission of Public Announcement 4. Escrow Account For takeover transaction 5. Publication of Detailed Public Statement 6. Public Announcement of Open Offer 7. Recommendation by the BOD of the target company 8. Filing of Letter of Offer with the SEBI 9. Incorporation of Observations of SEBI 10. Dispatch of Offer Document/ Letter of Offer to shareholders 11. Opening of Offer 12. Post offer advertisement 13. Settlement through Special Escrow Account 14. Acquisition of shares and submission of Post Offer Monitoring report The Takeover Regulations deal with three types of tender offers 1. 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. 2. 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, 6

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. 3. 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 1. 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.

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2. 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.

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If the acquirer is an indian listed company and the target company is also indian listed company then these laws will be applicable.

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If the acquirer is a foreign listed company but the target company is indian then these laws will be applicable.

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If the acquirer is an indian listed company but the target company is a foreign listed company then these laws will not be applicable.

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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.

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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.

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To balance the conflicting objectives and interests of various stakeholders in the context of substantial acquisition of shares and takeovers of listed companies.

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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.

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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.

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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).

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To manage and accommodate reasonable and compelling competition among acquirers burning of assuming control over a similar objective organization.

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To guarantee that only those acquirers who are prepared to do really satisfying their commitments under the Takeover Guidelines make MTOs.

FURTHER READING https://taxguru.in/sebi/sebi-takeover-code.html

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