Takeover Code - an Overview
TAKEOVER CODE – AN OVERVIEW
MOHIT KUMAR YADAV
VTH YEAR BA.LLB
NEW LAW COLLEGE, BHARATI
VIDYAPEETH UNIVERSITY, PUNE
INTRODUCTION
What is meant by takeover??
Takeover implies acquisition of control, of a company by another company.
M.A. Weinberg has defined takeover as"a transaction or series whereby (individual, group ofindividuals or company) acquires control over the assets of the company, either directly by becoming the owner of those assets or indirectly by obtaining control of the management of the company"
The takeover may be effected – (a) by agreement between the acquirer and the controllers of the acquired company; (b) by purchase of shares on the stock exchange; or (c) by means of a takeover bid.
REGULATORY STATUTES
The regulatory framework for controlling the takeover activities of a company are governed by (1) companies act, 1956 (2) listing agreement (3) SEBI`s Take over code. As far as Companies Act is concerned, the provision of section 372A apply to the acquisition of shares through a company and sec 395 lays down the legal requirements for the purpose of takeover of an unlisted company through transfer of undertaking to another company. Section 395 requires the transferee company to acquire the shares of the dissentient share holders of the transferor company. Dissentient shareholders are the shareholders who post the scheme of arrangement being approved by the concerned high court under sec 391 – 394 of the companies act, are unwilling to transfer their shareholding in the transferor company. The takeover of a listed company is regulated by Clause 40A and 40B of the Listing Agreement which is entered between the company and the Stock Exchange where the shares of the said company are listed.
The securities and exchange board of India had earlier issued SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1994 which were repealed by SEBI (Substantial Acquisitions of Shares and Takeover) Regulations, 1997 issued on 20.02.1997 which is popularly known as Takeover Code.
DISCLOSURE TO BE MADE UNDER TAKEOVER CODE
Takeover Code consists of 47 regulations, basically these regulations stipulate the need for certain disclosure to be made from time to time by those who acquire shares or voting rights of a listed company and also by those who are promoters or those who have control over the management of a listed company.
Regulations 6, 7 and 8 in chapter II deals with the responsibility of the acquirer and the company concerned to make the disclosures at various stages.
Regulation 6 – The regulation requires a company and a certain number of shareholders to make disclosures in respect of their shareholding pattern and shareholding respectively. It's a one time disclosure in the life time of the company by the acquirer to the company and subsequently by the company to the stock Exchange where the shares of the said company are listed. Further, the regulation requires every acquirer holding more than 5% shares or voting rights in the company to disclose the same to the company. Subsequently the company shall disclose the shareholdings, names and addresses of the promoters and the persons having control over the company to the stock Exchange , it gives a clear picture to the shareholders as to who is taking charge of there assets.
Regulation 7 – It illustrates the provision wherein the acquirer has to make the disclosures at different levels of his shareholdings. If any acquirer along with ‘persons acting in concert ("PAC"), if any, acquires shares or voting rights (which when taken together with his existing holding) would entitle him to more than 5% or 10% or 14% or 54% or 74% shares or voting rights of target company, is required to disclose the aggregate of his shareholding or voting rights to the target company and the Stock Exchanges where the shares of the target company are traded within 2 days of receipt of intimation of allotment of shares or acquisition of shares.
Regulation 8 – This regulation deals with the provision about the yearly disclosures made by persons in control of the company who holds more than 15% shares or voting rights of the target company, within 21 days from the financial year ending March 31 to make yearly disclosures to the company in respect of his holdings as on the mentioned date.
The target company is subsequently required to pass on such information to all stock exchanges where the shares of target company are listed, within 30 days from the financial year ending March 31 as well as the record date fixed for the purpose of declaration of dividend.
MANDATORY PUBLIC ANNOUNCEMENT
Regulation 10, 11 and 12 of the Takeover Code sets out the provision that how an acquirer can substantially acquire shares, voting rights and control of the target company and it also makes it a pre – requisite for such an acquirer to make a mandatory public offer to acquire a minimum percentage of shares of the target company.
Regulation 10 - An acquirer who intends to acquire shares which along with his existing shareholding would entitle him 15% or more voting rights in that company is denied from acquiring such shares, unless he makes a public announcement to acquire shares of such company in accordance with the regulations.
The Takeover Code does not get triggered when the acquirer has acquired 15% or more of shares unless those shares are attached with 15% or more voting rights. Hence, it is possible to acquire 15% or more shares of a company, but if this 15% or more shares are not coupled with the 15% or more voting rights then the acquirer will not be required to make a public offer.
Creeping limit of 5%
Regulation 11- This regulation talks about an Acquisition by an acquirer along with person acting in concert, 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 shares, this can only be done if the acquirer makes a public announcement in this regard. It is very important to understand as to, who can be categorized under the definition of a PAC. Regulation 2(1) (e) is divided into two parts and postulates that a person to be acting in concert, must have a commonality of objectives and a community of interests which could be acquisition of shares or voting rights or gaining control over the company, the other part of the regulation gives the category of persons who will be deemed to be acting in concert for example: - merchant bankers with their clients as acquirer, venture capital funds with sponsors Etc.
Regulation 12- Under this regulation mandatory pubic offer has to be made by the acquirer if he wishes to acquire the control over the target company, irrespective of whether shares are acquired by him or not i.e. the acquirer cannot acquire control over the target company unless he makes the public announcement for acquiring such shares and acquires such shares from the public.
Control of the company is defined under sec 2 (c) of the Takeover code as:-
It includes the right to appoint directly or indirectly or by virtue of agreements or in any other manner majority of directors on the Board of the target company or to control management or policy decisions affecting the target company. However, in case where there are two or more persons in control over the target company the cesser of any one of such persons from such control shall not be deemed to be a change in control of management nor shall any change in the nature and quantum of control amongst them constitute change in control of management provided this transfer is done in terms of Regulation 3(1) (e). Also if consequent upon change in control of the target company in accordance with regulation 3, the control acquired is equal to or less than the control exercised by person (s) prior to such acquisition of control, such control shall not be deemed to be a change in control.
Exemptions
Even there are transaction where the mandatory public offer is not required to be made these exemptions are given in regulation 3 of the code which are as follows :-
(a) allotments in pursuance of an application made to a public issue;
(b) allotment pursuant to an application made by the shareholder for rights issue
(i) To the extent of his entitlement and
(ii) Up to the percentage specified in regulation 11
(c) allotment to underwriter pursuant to any underwriting agreement;
(d) inter se transfer of shares amongst :-
(i) Group where persons constituting the group have been shown as group in the last
published annual report of the target company
(ii) Relatives
(iii) Indian promoters and foreign collaborators who are share holders
(iv) Promoters
(e) Acquisition of shares in ordinary course of business by;
(i) Registered Stock brokers on behalf of clients;
(ii) Registered Market makers;
(iii) Public financial institutions on their own account;
(iv) Banks & Financial Institutions as pledgees;
(f) Acquisition of shares by a person in exchange of shares received under a public offer
(g) Acquisition of shares by Govt. companies within the meaning of sec 617 of companies
act, 1956 and statutory corporations.
(h) Acquisition pursuant to a scheme framed under section 18 of SICA 1985;
of arrangement/ restructuring including amalgamation or merger or de-merger under
(I) Acquisition of shares in companies whose shares are not listed;
However, if by virtue of acquisition of shares of unlisted company, the acquirer acquires shares or voting rights (over the limits specified) in the listed company, acquirer is required to make an open offer in accordance with the Regulations. Of shares by way of transmission on succession or by inheritance
PUBLIC ANNOUNCEMENT
A public announcement is an announcement made in the newspapers by the acquirer primarily disclosing his intention to acquire shares of the target company from existing shareholders by means of an open offer. Regulation 10 has set the threshold limit as 15% crossing which the acquirer has to make a PA. The Acquirer is required to make PA through the Merchant Banker(who is registered with SEBI), within four working days of the entering into an agreement to acquire shares or deciding to acquire shares/ voting rights of target company or after any such change or changes as would result in change in control over the target company. The prime objective of PA is to ensure that the shareholders of the target company are timely aware of an exit opportunity available to them through ensuing open offer
The disclosures in the announcement include the offer price, number of shares to be acquired from the public, identity of acquirer, purpose of acquisition, future plans of acquirer, if any, regarding the target company, change in control over the target company, if any, the procedure to be followed by acquirer in accepting the shares tendered by the shareholders and the period within which all the formalities pertaining to the offer would be completed.
LETTER OF OFFER
Regulation 18- prescribes the requirement of submitting a draft of the letter of offer to the SEBI and the procedure for issue of modification instructions by the SEBI. Basically, letter of offer is a document addressed to the shareholders of the target company containing disclosures of the acquirer/ PACs, target company, their financials, justification of the offer price, the offer price, number of shares to be acquired from the public, purpose of acquisition, future plans of acquirer, if any, regarding the target company, change in control over the target company , if any, the procedure to be followed by acquirer in accepting the shares tendered by the shareholders and the period within which all the formalities pertaining to the offer would be completed. This letter of offer should be submitted to the board by the acquirer within 14 days of announcement along with a fee of rs50, 000/- and the same has to be dispatched to the share holders not earlier than 21 days from its submission to the board.
OFFER PRICE
Regulation 20 – talks about the offer price and its mode of payment and also provides with parameters which are essential to be followed by the acquirer/MB for fixing the offer price and that justification for the same is to be disclosed in the letter of offer. The relevant parameters are:
a. negotiated price under the agreement which triggered the open offer.
b. highest price paid by acquirer or persons acting in concert with him for any acquisitions, including by way of allotment in public or rights or preferential issue during the 26 week period prior to the date of the PA.
c. average of weekly high & low of the closing prices of shares as quoted on the Stock Exchanges, where shares of target company are most frequently traded during 26 weeks or average of the daily high and low prices of shares during the 2 weeks prior to the date of the PA, whichever is higher.
In case the shares of target company are not frequently traded then clause (a) and (b) would remain same only clause (c) stated above would differ i.e. parameters including return on net worth, book value of the shares of the target company, earning per share, price earning multiple vis-a- vis the industry average: but where the board considers it necessary it may require valuation of such infrequently traded shares by an independent merchant banker or an independent chartered accountant of minimum ten years standing or a public financial institution.
CONCLUSION
This code plays a vital role for protecting the investors interest as it gives an exit opportunity to them if they do not want to continue with the new management and it is after this code, the substantial acquisition of shares and takeovers of companies are regulated in a more organized manner and further this code gives the opportunity to companies to survive freely, without any fear of hostile takeovers.
MOHIT KUMAR YADAV
VTH YEAR BA.LLB
NEW LAW COLLEGE, BHARATI
VIDYAPEETH UNIVERSITY, PUNE
INTRODUCTION
What is meant by takeover??
Takeover implies acquisition of control, of a company by another company.
M.A. Weinberg has defined takeover as"a transaction or series whereby (individual, group ofindividuals or company) acquires control over the assets of the company, either directly by becoming the owner of those assets or indirectly by obtaining control of the management of the company"
The takeover may be effected – (a) by agreement between the acquirer and the controllers of the acquired company; (b) by purchase of shares on the stock exchange; or (c) by means of a takeover bid.
REGULATORY STATUTES
The regulatory framework for controlling the takeover activities of a company are governed by (1) companies act, 1956 (2) listing agreement (3) SEBI`s Take over code. As far as Companies Act is concerned, the provision of section 372A apply to the acquisition of shares through a company and sec 395 lays down the legal requirements for the purpose of takeover of an unlisted company through transfer of undertaking to another company. Section 395 requires the transferee company to acquire the shares of the dissentient share holders of the transferor company. Dissentient shareholders are the shareholders who post the scheme of arrangement being approved by the concerned high court under sec 391 – 394 of the companies act, are unwilling to transfer their shareholding in the transferor company. The takeover of a listed company is regulated by Clause 40A and 40B of the Listing Agreement which is entered between the company and the Stock Exchange where the shares of the said company are listed.
The securities and exchange board of India had earlier issued SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1994 which were repealed by SEBI (Substantial Acquisitions of Shares and Takeover) Regulations, 1997 issued on 20.02.1997 which is popularly known as Takeover Code.
DISCLOSURE TO BE MADE UNDER TAKEOVER CODE
Takeover Code consists of 47 regulations, basically these regulations stipulate the need for certain disclosure to be made from time to time by those who acquire shares or voting rights of a listed company and also by those who are promoters or those who have control over the management of a listed company.
Regulations 6, 7 and 8 in chapter II deals with the responsibility of the acquirer and the company concerned to make the disclosures at various stages.
Regulation 6 – The regulation requires a company and a certain number of shareholders to make disclosures in respect of their shareholding pattern and shareholding respectively. It's a one time disclosure in the life time of the company by the acquirer to the company and subsequently by the company to the stock Exchange where the shares of the said company are listed. Further, the regulation requires every acquirer holding more than 5% shares or voting rights in the company to disclose the same to the company. Subsequently the company shall disclose the shareholdings, names and addresses of the promoters and the persons having control over the company to the stock Exchange , it gives a clear picture to the shareholders as to who is taking charge of there assets.
Regulation 7 – It illustrates the provision wherein the acquirer has to make the disclosures at different levels of his shareholdings. If any acquirer along with ‘persons acting in concert ("PAC"), if any, acquires shares or voting rights (which when taken together with his existing holding) would entitle him to more than 5% or 10% or 14% or 54% or 74% shares or voting rights of target company, is required to disclose the aggregate of his shareholding or voting rights to the target company and the Stock Exchanges where the shares of the target company are traded within 2 days of receipt of intimation of allotment of shares or acquisition of shares.
Regulation 8 – This regulation deals with the provision about the yearly disclosures made by persons in control of the company who holds more than 15% shares or voting rights of the target company, within 21 days from the financial year ending March 31 to make yearly disclosures to the company in respect of his holdings as on the mentioned date.
The target company is subsequently required to pass on such information to all stock exchanges where the shares of target company are listed, within 30 days from the financial year ending March 31 as well as the record date fixed for the purpose of declaration of dividend.
MANDATORY PUBLIC ANNOUNCEMENT
Regulation 10, 11 and 12 of the Takeover Code sets out the provision that how an acquirer can substantially acquire shares, voting rights and control of the target company and it also makes it a pre – requisite for such an acquirer to make a mandatory public offer to acquire a minimum percentage of shares of the target company.
Regulation 10 - An acquirer who intends to acquire shares which along with his existing shareholding would entitle him 15% or more voting rights in that company is denied from acquiring such shares, unless he makes a public announcement to acquire shares of such company in accordance with the regulations.
The Takeover Code does not get triggered when the acquirer has acquired 15% or more of shares unless those shares are attached with 15% or more voting rights. Hence, it is possible to acquire 15% or more shares of a company, but if this 15% or more shares are not coupled with the 15% or more voting rights then the acquirer will not be required to make a public offer.
Creeping limit of 5%
Regulation 11- This regulation talks about an Acquisition by an acquirer along with person acting in concert, 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 shares, this can only be done if the acquirer makes a public announcement in this regard. It is very important to understand as to, who can be categorized under the definition of a PAC. Regulation 2(1) (e) is divided into two parts and postulates that a person to be acting in concert, must have a commonality of objectives and a community of interests which could be acquisition of shares or voting rights or gaining control over the company, the other part of the regulation gives the category of persons who will be deemed to be acting in concert for example: - merchant bankers with their clients as acquirer, venture capital funds with sponsors Etc.
Regulation 12- Under this regulation mandatory pubic offer has to be made by the acquirer if he wishes to acquire the control over the target company, irrespective of whether shares are acquired by him or not i.e. the acquirer cannot acquire control over the target company unless he makes the public announcement for acquiring such shares and acquires such shares from the public.
Control of the company is defined under sec 2 (c) of the Takeover code as:-
It includes the right to appoint directly or indirectly or by virtue of agreements or in any other manner majority of directors on the Board of the target company or to control management or policy decisions affecting the target company. However, in case where there are two or more persons in control over the target company the cesser of any one of such persons from such control shall not be deemed to be a change in control of management nor shall any change in the nature and quantum of control amongst them constitute change in control of management provided this transfer is done in terms of Regulation 3(1) (e). Also if consequent upon change in control of the target company in accordance with regulation 3, the control acquired is equal to or less than the control exercised by person (s) prior to such acquisition of control, such control shall not be deemed to be a change in control.
Exemptions
Even there are transaction where the mandatory public offer is not required to be made these exemptions are given in regulation 3 of the code which are as follows :-
(a) allotments in pursuance of an application made to a public issue;
(b) allotment pursuant to an application made by the shareholder for rights issue
(i) To the extent of his entitlement and
(ii) Up to the percentage specified in regulation 11
(c) allotment to underwriter pursuant to any underwriting agreement;
(d) inter se transfer of shares amongst :-
(i) Group where persons constituting the group have been shown as group in the last
published annual report of the target company
(ii) Relatives
(iii) Indian promoters and foreign collaborators who are share holders
(iv) Promoters
(e) Acquisition of shares in ordinary course of business by;
(i) Registered Stock brokers on behalf of clients;
(ii) Registered Market makers;
(iii) Public financial institutions on their own account;
(iv) Banks & Financial Institutions as pledgees;
(f) Acquisition of shares by a person in exchange of shares received under a public offer
(g) Acquisition of shares by Govt. companies within the meaning of sec 617 of companies
act, 1956 and statutory corporations.
(h) Acquisition pursuant to a scheme framed under section 18 of SICA 1985;
of arrangement/ restructuring including amalgamation or merger or de-merger under
(I) Acquisition of shares in companies whose shares are not listed;
However, if by virtue of acquisition of shares of unlisted company, the acquirer acquires shares or voting rights (over the limits specified) in the listed company, acquirer is required to make an open offer in accordance with the Regulations. Of shares by way of transmission on succession or by inheritance
PUBLIC ANNOUNCEMENT
A public announcement is an announcement made in the newspapers by the acquirer primarily disclosing his intention to acquire shares of the target company from existing shareholders by means of an open offer. Regulation 10 has set the threshold limit as 15% crossing which the acquirer has to make a PA. The Acquirer is required to make PA through the Merchant Banker(who is registered with SEBI), within four working days of the entering into an agreement to acquire shares or deciding to acquire shares/ voting rights of target company or after any such change or changes as would result in change in control over the target company. The prime objective of PA is to ensure that the shareholders of the target company are timely aware of an exit opportunity available to them through ensuing open offer
The disclosures in the announcement include the offer price, number of shares to be acquired from the public, identity of acquirer, purpose of acquisition, future plans of acquirer, if any, regarding the target company, change in control over the target company, if any, the procedure to be followed by acquirer in accepting the shares tendered by the shareholders and the period within which all the formalities pertaining to the offer would be completed.
LETTER OF OFFER
Regulation 18- prescribes the requirement of submitting a draft of the letter of offer to the SEBI and the procedure for issue of modification instructions by the SEBI. Basically, letter of offer is a document addressed to the shareholders of the target company containing disclosures of the acquirer/ PACs, target company, their financials, justification of the offer price, the offer price, number of shares to be acquired from the public, purpose of acquisition, future plans of acquirer, if any, regarding the target company, change in control over the target company , if any, the procedure to be followed by acquirer in accepting the shares tendered by the shareholders and the period within which all the formalities pertaining to the offer would be completed. This letter of offer should be submitted to the board by the acquirer within 14 days of announcement along with a fee of rs50, 000/- and the same has to be dispatched to the share holders not earlier than 21 days from its submission to the board.
OFFER PRICE
Regulation 20 – talks about the offer price and its mode of payment and also provides with parameters which are essential to be followed by the acquirer/MB for fixing the offer price and that justification for the same is to be disclosed in the letter of offer. The relevant parameters are:
a. negotiated price under the agreement which triggered the open offer.
b. highest price paid by acquirer or persons acting in concert with him for any acquisitions, including by way of allotment in public or rights or preferential issue during the 26 week period prior to the date of the PA.
c. average of weekly high & low of the closing prices of shares as quoted on the Stock Exchanges, where shares of target company are most frequently traded during 26 weeks or average of the daily high and low prices of shares during the 2 weeks prior to the date of the PA, whichever is higher.
In case the shares of target company are not frequently traded then clause (a) and (b) would remain same only clause (c) stated above would differ i.e. parameters including return on net worth, book value of the shares of the target company, earning per share, price earning multiple vis-a- vis the industry average: but where the board considers it necessary it may require valuation of such infrequently traded shares by an independent merchant banker or an independent chartered accountant of minimum ten years standing or a public financial institution.
CONCLUSION
This code plays a vital role for protecting the investors interest as it gives an exit opportunity to them if they do not want to continue with the new management and it is after this code, the substantial acquisition of shares and takeovers of companies are regulated in a more organized manner and further this code gives the opportunity to companies to survive freely, without any fear of hostile takeovers.
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