s4. takeover

8/13/2019 S4. Takeover

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Takeovers


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Takeover means the acquisition of such number ofshares of an existing company as would enable theacquirer to obtain management control or consolidate

existing control over such a company.

In a takeover the entity of the amalgamating company isnot lost.

Both the company taking over and the company takenover continue to exist

The legal route to takeover is obtaining sanction from

SEBI in respect of offer document and under section108A and 372 of the Companies Act from theGovernment.

Consideration in the case of takeover is in terms of

cash/shares/or both


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Forms of Takeover


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Hostile Takeover

One where the board of directors of the target firmdisagrees to the offer of the acquirer to purchase theshares, but the acquirer continues to pursue it ormakes the offer by by-passing the target companysmanagement

Represents an offer made by the acquirer withoutinforming the target companys management abouttheir intention of acquiring stake in the company.


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A Tender Offer

Is an offer to buy the stock of the target firm eitherdirectly from the shareholders or through thesecondary market

Acquirer intends to buy the company's stock to thetarget firms board of directors

Proposal carries a clear indication that if the offer isturned down a tender offer shall be resorted to

Strategy expensive as the price payable is higher thanthe market price; also the stock price tends to rise inanticipation of a takeover


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A Proxy Fight

Here, the acquirer approaches the shareholders ofthe target firm with an objective of obtaining theright to vote for their shares

Hopes to secure enough proxies that would help ingaining control over the board of directors andreplace the incumbents management

Are a very expensive and difficult mode of takeoverfor the incumbent management team can use thetarget firm's funds to pay all the costs of presentingtheir case and obtaining votes


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Creeping Tender Offer

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


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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.


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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


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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


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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.


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Regulation of Takeover In IndiaRegulation of takeover means prevention of hostile takeover


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Substantial Acquisition

of

Shares and Takeovers


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When an acquirer,

acquiressubstantial quantity of shares or

voting rights of the target company,it results in

the Substantial Acquisition of

Shares.


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Principal Parties in Takeover process

The principal parties in the takeover processare the target company and the acquirer.

The target company must be a listed companyin which the acquirer seeks to take control bybuying the shares from the

existing shareholders promoters as well as

public.


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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


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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 byacquirer(s)

For the purpose of making an open offer by the

acquirer


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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, acquiresshares 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 targetcompany, is required to disclose the aggregate of his shareholding or voting rightsto the target company and the Stock Exchanges where the shares of the targetcompany are traded within 2 days of receipt of intimation of allotment of sharesor 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 makeyearly disclosures to the company in respect of his holdings as on the mentioneddate .

The target company is, in turn, required to pass on such information to all stockexchanges where the shares of target companyare listed, within 30 days from thefinancial year ending March 31 as well as the record date fixed for the purpose ofdividend declaration.


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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 existingshareholding would entitle him to more than 25% voting rights, can acquiresuch additional shares only after making a public announcement (PA) toacquire at least additional 26% of the voting capital of the target companyfrom 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 orvoting rights of a target company, can consolidate his holding up to 5% ofthe voting rights in any financial year ending 31st March.

However, any additional acquisition over and above 5% can be made onlyafter making a public announcement.


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(3) Consolidation of holding:

An acquirerwho is having 75% shares or

voting rights of target company, canacquire further shares or voting rights onlyafter making a public announcementspecifying the number of shares to beacquired through open offer from theshareholders of a target company


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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 targetcompany (Target) by buying up to 5% of the voting

capital of the company in one financial year.


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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 furthershares 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.


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Situation 2:Regulation 11 (2) of the Takeover Code stipulates a conditionwhere an Acquirer already holds 55% or more but less than 75% of theTargets shares or voting rights, and still intends to increase itsshareholding further. In such a scenario, the Acquirer is forbidden toacquire any additional shares in the Target without making a prior publicannouncement as stipulated in the Takeover Code.

In the aforesaid situations, SEBI mandates public announcements to bemade by the Acquirer which requires the Acquirer to make a public offerto the shareholders to acquire at least additional 20% of the voting capitalof the Target.

Such a requirement ensures that the shareholders of the Target areprovided an opportunity to exit in case of a takeover or substantialacquisition of shares.


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Public Announcement

A Public announcement is generally an announcement given in thenewspapers by the acquirer, primarily to disclose his intention toacquire a minimum of 26% of the voting capital of the targetcompanyfrom the existing shareholders by means of an open offer .

An Acquirer may also make an offer for less than 20% of shares oftarget companyin case the acquireris already holding 75% or moreof voting rights/ shareholding in the target company and hasdeposited in the escrow account in cash a sum of 50% of theconsideration payable under the public offer.

The Acquirer is required to appoint a Merchant Banker registeredwith SEBI before making a PA and is also required to make the PAwithin four working days of the entering into an agreement to acquireshares, which has led to the triggering of the takeover, through suchMerchant Banker.


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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 theshareholders of the target company are aware of the exit opportunityavailable to them in case of a takeover / substantial acquisition of sharesof the target company.


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Procedure to be followed after the Public

Announcement

The acquirer is required to file a draft offer document with SEBI within 14days of the PA through its Merchant Banker, along with filing fees.

Along with the draft offer document, the Merchant Banker also has to submita due diligence certificate as well as certain registration details.

Then the acquirerthrough its Merchant Banker sends the offer document aswell as the blank acceptance form within 45 days from the date of PA, to allthe shareholders whose names appear in the register of the company on aparticular date .

The offer remains open for 30 days. The shareholders are required to sendtheir Share certificate(s) / related documents to the Registrar or MerchantBanker as specified in the PA and offer document .

The acquireris obligated to offer a minimum offer price as is required to bepaid by him to all those shareholders whose shares are accepted under theoffer, within 30 days from the closure of offer.


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Exemptions

The following transactions are however exempted from making an offer and are notrequired 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


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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 com panyare not frequently traded, then the offer price shall bedetermined 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.


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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 payableunder 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, bankguarantee in favor of the Merchant Banker or deposit of acceptable securities withappropriate margin with the Merchant Banker. The Merchant Banker is also required toconfirm 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 theescrow 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 onpro 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 acquirerwhich may include prosecution / barring the acquirerfrom entering the capital market for aperiod etc.


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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.


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Investigations and Actions by SEBI

1. Investigate complaints received from investors,intermediaries in regard to allegation of substantialacquisition of shares and takeovers.

2. Suomoto: upon its own knowledge or informationin the interest of securities market or investorsinterest for any breach of regulation

3. To ascertain compliance


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Penalties for Non-compliance

SEBI can forfeit the sum in escrow account

Initiate action for suspension or cancellation of registration ofan intermediary

Misstatements, concealments of material information fromshareholders, the acquirer or directors, the directors of targetcompany and merchant banker to the public offer and the

merchant banker engaged by the target company forindependent advice would be liable for action (criminalprosecution, monetary penalities and directions)


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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 andpayable to the shareholders as consideration for

acceptance received and accepted.

Person acquiring share has to make public

announcement.


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Continual Disclosure

Annual disclosure have to be made to a

company by any person who holds 15% ofshares or voting rights

Promoters and persons acting in concert have

also to make annual disclosures o the company.


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Bail-Out Takeovers

The provision applies to financially weak companies in

pursuance of a scheme of rehabilitation approved by publicfinancial institutions.

Financially weak companies are those with accumulated

losses at the end of previous financial year resulted incrossing of more than 50% but less than 100% of net income.

Rehabilitation scheme prepared by lead institution mayprovide

- Outright purchase of shares

- Exchange of shares

- A combination of both.


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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


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Takeover Defences


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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


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Targeted Repurchase

The target firm purchases back its own shares from anunfriendly bidder at a price well above market value

Numbers of shares re-purchased help target firm toregain controlling interest in the company by havingadequate shareholders votes to prevent the hostileacquisition

Targeted repurchase considered a success if thestrategy results in abandonment of the takeoverattempt

..


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Not necessary that the raider company may accept the price offered

Here the raider continues with its attempt of hostile takeover and thetarget generally combines the targeted repurchase offer with anotherstrategy

For Example: Setting up a holding company that receives all acquired

shares and starting the process of converting the same into employeestock ownership plan (ESOPs)

Defeats the very objective of pursuing a hostile takeover as raider leftwith no other option but to accept a market price for the shares under

their control

Refusal to accept this generates risk of the shares becoming worthless,once ESOP is approved by the regulatory authorities


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White mail

Is another strategy wherein the target companyissues large number of shares to a friendly party at aprice quite below the market price

Forces the acquiring company to purchase theseshares from the party to complete the takeover

Strategy discourages takeover by making the dealmore difficult and expensive as the corporate raider

is required to purchase shares from a party that isfriendly to the target company

..


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s4. takeover

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