Takeovers

The concept of Takeover

The term basically envisages the concept of an acquirer - taking over the control or - management of the target company When an acquirer, acquires substantial quantity of shares or voting rights of the target company, it results in the Substantial acquisition of Shares. Takeovers can assume three forms - Negotiated / friendly - Open market/ hostile - Bailout

 Takeover means the acquisition of such number of shares of an existing company as would enable the acquirer to obtain management control or consolidate existing control over such a company. In a takeover the entity of the amalgamating company is not lost.
Both the company taking over and the company taken over continue to exist The legal route to takeover is obtaining sanction from SEBI in respect of offer document and under section 108A and 372 of the Companies Act from the Government. Consideration in the case of takeover is in terms of cash/shares/or both

Forms of Takeover

Hostile Takeover
One where the board of directors of the target firm disagrees to the offer of the acquirer to purchase the shares, but the acquirer continues to pursue it or makes the offer by by-passing the target companys management

Represents an offer made by the acquirer without informing the target companys management about their intention of acquiring stake in the company.

A Tender Offer
Is an offer to buy the stock of the target firm either directly from the shareholders or through the secondary market Acquirer intends to buy the company's stock to the target firms board of directors Proposal carries a clear indication that if the offer is turned down a tender offer shall be resorted to

Strategy expensive as the price payable is higher than the market price; also the stock price tends to rise in anticipation of a takeover

A Proxy Fight
Here, the acquirer approaches the shareholders of the target firm with an objective of obtaining the right to vote for their shares Hopes to secure enough proxies that would help in gaining control over the board of directors and replace the incumbents management Are a very expensive and difficult mode of takeover for the incumbent management team can use the target firm's funds to pay all the costs of presenting their case and obtaining votes

Creeping Tender Offer

Involves purchasing enough stock from the open market to bring about a change in management.

Control
Control includes the right to appoint majority of the directors of the company or to control the management or policy decision individually or in concert by virtue of
- Shareholding - Management Rights - Shareholders agreement

- Voting agreement
- Or in any other manner.

Motives of target companies promoters

Exiting non profitable business Exiting non synergistic or non core business Generate cash flow for other business

Inability to withstand competition

Inability to achieve further growth Trade-off for survival

Typical characteristics of takeover candidate

Low market capitalisation vis a vis intrinsic value

Low market capitalisation vis a vis replacement cost of an assets

Low market capitalisation vis a vis book value Cash flow in excess of debt servicing requirement. Lowly geared companies Underperforming companies Unexploited brand potential Undervalued or saleable non operating assets Large off balance sheet assets

Weaknesses of Takeovers
Reduces competition and choice for consumers

Results in job cuts

Cultural differences lead to conflict Acquirer often burdened with hidden liabilities of the target entity Employees of the target company work in an environment of fear and uncertainty affecting motivational levels.

Regulation of Takeover In India

Regulation of takeover means prevention of hostile takeover

Substantial Acquisition of Shares and Takeovers

When an acquirer, acquires substantial quantity of shares or voting rights of the target company, it results in the Substantial Acquisition of Shares.

Principal Parties in Takeover process

The principal parties in the takeover process are the target company and the acquirer. The target company must be a listed company in which the acquirer seeks to take control by buying the shares from the
existing shareholders promoters as well as public.

Persons Acting in Concert

Persons acting in concert with other persons include
- A company or holding company or subsidiary - A company with any of its directors or any person which is entrusted

with the management of funds of the company

- Directors of the above company - Mutual funds with sponsors or trustee or asset management company - Foreign Institutional Investors (FII) with sub accounts - Merchant bankers with their clients as acquirer - Portfolio managers with their client as acquirer - Venture capital with their sponsors - Banks with their financial advisor - Investment companies with their director/ shareholder holding 2% of the paid up capital

Meaning of substantial quantity of shares or voting rights

There are two purposes for which this is used
For the purpose of disclosures to be made by acquirer(s) For the purpose of making an open offer by the acquirer

For the purpose of disclosures to be made by acquirer(s):

(1)5% or more shares or voting rights: A person who, 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% 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 2) More than 15% shares or voting rights: An acquirer who holds more than 15% shares or voting rights of the target company, shall within 21 days from the financial year ending March 31 make yearly disclosures to the company in respect of his holdings as on the mentioned date . The target company is, in turn, 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 dividend declaration.

For the purpose of making an open offer by the acquirer

1) 15% shares or voting rights: An acquirer who intends to acquire shares which along with his existing shareholding would entitle him to more than 25% voting rights, can acquire such additional shares only after making a public announcement (PA) to acquire at least additional 26% of the voting capital of the target company from the shareholders through an open offer [ (2) Creeping limit of 5%: An acquirer who is having 15% or more but less than 75% of shares or voting rights of a target company, can consolidate his holding up to 5% of the voting rights in any financial year ending 31st March. However, any additional acquisition over and above 5% can be made only after making a public announcement.

What is Creeping Acquisition?

Creeping acquisition governed by Regulation 11 of the Takeover Code refers to the process through which the acquirer together with persons acting in concert (Acquirer) increase their stake in the target company (Target) by buying up to 5% of the voting capital of the company in one financial year.

 Regulation 11 deals with consolidation of holdings in the Target, and is targeted at the following two situations. Situation 1: Regulation 11 (1) of the Takeover Code stipulates a condition where an Acquirer holds shares between 15% and 55% and wishes to acquire further shares in the Target. In such a situation, for an acquisition of more than 5% of the shares or voting rights of the Target, public announcement will be required. Accordingly, for example, if an Acquirer holds 50% of the shares and proposes to acquire another 4%, Regulation 11 (1) will not be attracted.

 Situation 2: Regulation 11 (2) of the Takeover Code stipulates a condition where an Acquirer already holds 55% or more but less than 75% of the Targets shares or voting rights, and still intends to increase its shareholding further. In such a scenario, the Acquirer is forbidden to acquire any additional shares in the Target without making a prior public announcement as stipulated in the Takeover Code. In the aforesaid situations, SEBI mandates public announcements to be made by the Acquirer which requires the Acquirer to make a public offer to the shareholders to acquire at least additional 20% of the voting capital of the Target. Such a requirement ensures that the shareholders of the Target are provided an opportunity to exit in case of a takeover or substantial acquisition of shares.

Public Announcement
A Public announcement is generally an announcement given in the newspapers by the acquirer, primarily to disclose his intention to acquire a minimum of 26% of the voting capital of the target company from the existing shareholders by means of an open offer . An Acquirer may also make an offer for less than 20% of shares of target company in case the acquirer is already holding 75% or more of voting rights/ shareholding in the target company and has deposited in the escrow account in cash a sum of 50% of the consideration payable under the public offer. The Acquirer is required to appoint a Merchant Banker registered with SEBI before making a PA and is also required to make the PA within four working days of the entering into an agreement to acquire shares, which has led to the triggering of the takeover, through such Merchant Banker.

 The disclosures in this announcement would include

- the offer price, - the number of shares to be acquired from the public, - the identity of the acquirer, - the purposes of acquisition, - the future plans of the acquirer, if any, regarding the target company, - the 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.

The basic objective behind the PA being made is to ensure that the shareholders of the target company are aware of the exit opportunity available to them in case of a takeover / substantial acquisition of shares of the target company.

Procedure to be followed after the Public Announcement

The acquirer is required to file a draft offer document with SEBI within 14 days of the PA through its Merchant Banker, along with filing fees. Along with the draft offer document, the Merchant Banker also has to submit a due diligence certificate as well as certain registration details. Then the acquirer through its Merchant Banker sends the offer document as well as the blank acceptance form within 45 days from the date of PA, to all the shareholders whose names appear in the register of the company on a particular date . The offer remains open for 30 days. The shareholders are required to send their Share certificate(s) / related documents to the Registrar or Merchant Banker as specified in the PA and offer document . The acquirer is obligated to offer a minimum offer price as is required to be paid by him to all those shareholders whose shares are accepted under the offer, within 30 days from the closure of offer.

Exemptions
The following transactions are however exempted from making an offer and are not required to be reported to SEBI allotment to underwriter pursuant to any underwriting agreement; acquisition of shares in ordinary course of business by;

Regd. Stock brokers on behalf of clients;

Regd. Market makers; Public financial institutions on their own account; banks & FIs as pledges; Acquisition of shares by way of transmission on succession or by inheritance; acquisition of shares by Govt. companies; acquisition pursuant to a scheme framed under section 18 of SICA 1985;

of arrangement/ restructuring including amalgamation or merger or de-merger

under any law or Regulation Indian or Foreign; Acquisition of shares in companies whose shares are not listed

Minimum Offer Price and Payments made

The offer price shall be the highest of
Negotiated price under the agreement, which triggered the open offer. Price paid by the acquirer or PAC with him for acquisition if any, including by way of public rights/ preferential issue during the 26-week period prior to the date of the

PA
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 prior to the date of the Public Announcement In case the shares of target company are not frequently traded, then the offer price shall be determined by reliance on the following parameters, - the negotiated price under the agreement, - highest price paid by the acquirer or PAC with him for acquisition if any, including by way of public rights/ preferential issue during the 26-week period prior to the date of the PA and - other 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.

Safeguards incorporated so as to ensure that the Shareholders get their payments

The acquirer has to create an escrow account having 25% of total consideration payable under the offer of size Rs. 100 crores (Additional 10% if offer size more than 100 crores) . The Escrow could be in the form of cash deposited with a scheduled commercial bank, bank guarantee in favor of the Merchant Banker or deposit of acceptable securities with appropriate margin with the Merchant Banker. The Merchant Banker is also required to confirm that firm financial arrangements are in place for fulfilling the offer obligations. In case, the acquirer fails to make payment, Merchant Banker has a right to forfeit the escrow account and distribute the proceeds in the following way. 1/3 of amount to target company 1/3 to regional Stock Exchanges, for credit to investor protection fund etc. 1/3 to be distributed on pro rata basis among the shareholders who have accepted the offer.

The Merchant Banker advised by SEBI is required to ensure that the rejected
documents which are kept in the custody of the Registrar / Merchant Banker are sent back to the shareholder through Registered Post.

Besides forfeiture of escrow account, SEBI can take separate action against the acquirer which may include prosecution / barring the acquirer from entering the capital market for a period etc.

Escrow Account
An escrow account has to be opened by way of security for public offer for performance by the acquirer. He has to deposit (25%) up to Rs 100 crore exceeding Rs 100 crores 25% on first Rs 100 crore + 10% thereafter If the offer is subject to a minimum level of acceptance, then the account should have 50% of the size of public offer.

The escrow account may be in form of cash, bank guarantee in

favour of merchant banker or deposit of securities SEBI can forfeit the escrow account for non fulfillment of obligations.

Investigations and Actions by SEBI

1. Investigate complaints received from investors, intermediaries in regard to allegation of substantial acquisition of shares and takeovers. 2. Suomoto: upon its own knowledge or information in the interest of securities market or investors interest for any breach of regulation 3. To ascertain compliance

Penalties for Non-compliance

SEBI can forfeit the sum in escrow account

Initiate action for suspension or cancellation of registration of an intermediary Misstatements, concealments of material information from shareholders, the acquirer or directors, the directors of target company and merchant banker to the public offer and the merchant banker engaged by the target company for independent advice would be liable for action (criminal prosecution, monetary penalities and directions)

Payment of Consideration
Within 21 days of closure of offer the acquirer has to deposit with a banker to an issue such sum together with 90% paying in the escrow account to make up the entire sum due and payable to the shareholders as consideration for acceptance received and accepted. Person acquiring share has to make public announcement.

Continual Disclosure
Annual disclosure have to be made to a company by any person who holds 15% of shares or voting rights Promoters and persons acting in concert have also to make annual disclosures o the company.

Bail-Out Takeovers
The provision applies to financially weak companies in pursuance of a scheme of rehabilitation approved by public financial institutions. Financially weak companies are those with accumulated losses at the end of previous financial year resulted in crossing of more than 50% but less than 100% of net income. Rehabilitation scheme prepared by lead institution may provide
- Outright purchase of shares - Exchange of shares - A combination of both.

Bail-Out Takeovers
Manner of acquisition: invite offer from three parties Evaluation of Bid Persons acquiring shares: to make offer at a price determined by mutual negotiation Auditors can be appointed by SEBI

Takeover Defences

 Crown Jewels-sells its highly profitable/attractive business/division

Blank cheque- preferential allotment to promoters or friendly shareholders

Shark repellant- amendment of charter Poison pill- negative financial result leading to value erosion

People pill- current management team threatens to quit

Pacman- promoters acquire sizeable holding in the acquirer Green mail friendly investors accumulate large stock to raise market price White Knight- friendly company takes over target company, foiling the bid of the
raider

Grey Knight- friendly company acquires the raider itself Golden Parachute- contractual guarantee of fairly large sum of compensation Buy back of Shares

White Knight
Is a situation where a target faces a hostile takeover attempt from a company and is struggling to avoid the same At the moment another company makes a friendly takeover offer to the target company in order to help the target successfully avoid the hostile takeover bid Friendly takeover offer is to save the target from the hostile attempt and the company making a friendly offer called a white knight

White mail
Is another strategy wherein the target company issues large number of shares to a friendly party at a price quite below the market price Forces the acquiring company to purchase these shares from the party to complete the takeover Strategy discourages takeover by making the deal more difficult and expensive as the corporate raider is required to purchase shares from a party that is friendly to the target company ..