Takeover Code: A comprehensive Review

THE TAKEOVER CODE: A COMPREHENSIVE REVIEWSatyaRanjan Swain4th yr., B.A.LL.B (Hons.),School of Law, KIIT University, Bhubaneswar.E-mail:satyaranjankls@gmail.com.

ContentsIntroductionEvolution of the takeover code in IndiaPurpose and Scope of the codeSEBI Regulations and the Bhagwati Committee ReportsReport of the TRACComparison between the current regulations and the committee recommendationsJudicial Pronouncements:Daiichi Sankyo Company Ltd. v. JayaramChigurupati and Ors.Premier Limited caseOCL India Limited caseConclusion

IntroductionTakeover- a transaction or series of transactions whereby a person (individual, groups of individuals or company) acquires control over the assets of a company, either directly by becoming the owner of those assets or indirectly by obtaining control of the management of the company. Where shares are closely held (i.e. by a small number of persons), a takeover will generally be effected, by agreement with the holders of the majority of the share capital of the company being acquired. Where the shares are held by the public generally, the takeover may be effected, (1) by agreement between the acquirer and the controllers of the acquired company; (2) by purchase; or (3) by means of a ‘takeover bid’. - M.A. Weinberg

EvolutionClause 40, the listing agreementReduction of threshold limit by 10% in 1990Clause 40 A and 40 B, the listing agreementThe SEBI Act 1992The SEBI (Substantial Acquisition of Shares And Takeovers) Regulations, 1994The SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997  First Bhagwati Committee's report SEBI Substantial Acquisition of Shares and Takeovers (Second Amendment) Regulations, 2002  Second Bhagwati Committee's reportThe TRAC report

Purpose and Scope of the CodeTransperencyFairnessProtectionK.K. Modi v. SAT the code has been framed with a view to protect the interests of investors in securities and to promote development of and to regulate the securities market and for matters connected therewith or incidental thereto. Punjab State Industrial Corporation Ltd. v. SEBI  the code has a limited role and is not meant to ensure proper management of the business of companies or to provide remedies in the event of mismanagement. The main objective of the code is to ensure quality of treatment of opportunity to all shareholders and afford protection to them.

SEBI Regulations and the Bhagwati committee reportsRegulation 2 (b) defines “acquirer” asany person who, directly or indirectly, acquires or agrees to acquire shares or voting rights in the target company, or acquires or agrees to acquire control over the target company, either by himself or with any person acting in concert with the acquirer;

Person acting in concertRegulation 2(e) -persons who, for a common objective or purpose of substantial acquisition of shares or voting rights or gaining control over the target company, directly or indirectly co- operate by acquiring or agreeing to acquire shares or voting rights in or control over the target company. Paragraph 2 -deemed to be persons acting in concert, unless the contrary is established a company, its holding or subsidiary company or company under the same management either individually or together with each other;a company with any of its directors, or any person entrusted with the management of the funds of the company;directors of companies and their associates;mutual fund with sponsor or trustee or asset management company;foreign institutional investors with sub-account(s);merchant bankers with their client(s) as acquirer;portfolio managers with their client(s) as acquirer;venture capital funds with sponsors;banks with financial advisers, stock brokers of the acquirer, or any company which is a holding company, subsidiary or relative of the acquirerany investment company with any person who has an interest.

Chapter II -"Disclosures of Shareholding and Control in a Listed Company" Chapter III -"Substantial Acquisition of Shares or Voting Rights in and Acquisition of control over a Listed Company". Chapter III begins with Regulation 10 that makes it obligatory for an "acquirer" acquiring, in aggregate, 15% or more of the voting rights in a company, whether by acquisition of shares or voting rights, to make a public announcement to acquire shares of that company in accordance with the provisions of the Takeover Regulations.

Regulation 14(1)  time limit within which the public announcement stipulated in Regulation 10 is to be made. The public announcement shall be made by the merchant banker not later than four working days of entering into an agreement for acquisition of shares or voting rights or deciding to acquire shares or voting rights exceeding the respective percentage specified therein. Regulation 14(4)  indirect acquisition provides that a public announcement shall be made by the acquirer within three months of consummation of such acquisition or change in control or restructuring of the parent or the company holding shares of or control over the target company in India.In pursuance of the recommendation of the second Bhagwati Committee's report, Sub-Regulation (4) got inserted in regulation 14.

Report of the TRACSEBI constituted the Takeover Regulations Advisory Committee (TRAC) with the mandate to examine and review the Takeover Regulations of 1997 and to suggest suitable amendments.vide its order dated September 4, 2009TRAC submitted its report to SEBI on July 19, 2010 ObjectivesTo provide a fair, precise, unambiguous, equitable and transparent legal framework.To balance the conflicting objectives and interests of various stakeholders in the case of substantial acquisition of shares in, and takeovers of, listed companies.To ensure that fair and accurate disclosure of all material information relating to acquisition of shares is made.

Comparison- Open Offer Obligationthe Current RegulationsInitial Trigger 15 % Creeping Acquisition Trigger15 % -55 %- < 5% within a financial year w/o Open offer55%-75%- (A + PAC) -NO2nd proviso-YES, 5%,but not 75+%Control Triggerpublic announcement if acquires control, irrespective of share acquisitionpublic offer is not applicable if the shareholders approve the change in control by way of a Special Resolution. Voting through postal ballot is provided for.the Committee Recommendations25%Promoter-25 %+ 5% each year. Up to 75% w/o open offer special resolution by postal ballot process, has been withdrawnOnly route - open offer to the shareholders of the Target company.

Offer SizeOn acquisitions resulting in triggering regulations 10, 11 and 12, the acquirer is mandatorily required to make an open offer for a minimum of 20%of the voting capital.Allow all public shareholders to obtain a complete exit whenever an open offer is made. Therefore any open offer under the Proposed Takeover Regulations would be for 100%

Exemption from open offer obligationsApplications for exeption are referred to a “takeover panel” for its recommendations. SEBI considers the recommendations received and passes an appropriate order. SEBI would continue to have the power to grant exemption. However, the requirement of making a mandatory reference to a Panel by SEBI before granting an exemption has been done away with and such requirement has now been made discretionary.

Withdrawal of open offer No open offer shall be withdrawn except- (a) the statutory approval(s) required have been refused;(b) the sole acquirer, being a natural person, has died; (c) such circumstances as in the opinion of SEBI merits withdrawal+ an open offer may be withdrawn where any condition stipulated in the agreement for acquisition attracting the obligation to make the open offer is not met

Obligations of the Target Company The target company shall not, during the offer period sell, transfer, encumber or otherwise dispose of assets of the company or its subsidiaries or enter into any material contracts. - with the consent of the shareholders through a special resolution and the same rule would apply to the subsidiaries of the target company.

Obligations of the Merchant BankerThe merchant banker shall ensure compliance of the Takeover Regulations and any other laws or rules as may be applicable in this regard. The merchant banker would be expected to demonstrate the application of due skill, care and diligence in the discharge of professional duties cast on him and the obligations of the merchant banker ought to be construed accordingly.

Recommendation by the independent directorsThe board of directors of the target company may, send their unbiased comments and recommendations on the offer(s) to the shareholders. The independent directors of the target company ought to make a reasoned recommendation on the open offer and for such recommendation, the board of the target company ought to appoint a committee of independent directors.

Disclosure ObligationsAny acquirer who crosses the specified thresholds, have to disclose at every stage his aggregate shareholding or voting right to the company concerned and to the stock exchanges.Promoter or majority shareholder is under obligation to annually disclose to the company and the concerned stock exchange. The acquirer, promoter or shareholders shall be asked to disclose their acquisition on periodic as well as transaction specific basis, upon crossing the limits specified therein, to the Stock Exchange.

Judicial PronouncementsDaiichi Sankyo Company Ltd. v. JayaramChigurupati and Ors.Issues:Whether Daiichi Sankyo and Ranbaxy could be considered as 'person acting in concert'?Decision:The definition of a "person acting in concert" requires something more than the mere relationship of a parent company and a subsidiary company. “…two or more persons may join hands together with the shared common objective or purpose of any kind but so long as the common object and purpose is not of substantial acquisition of shares of a target company they would not comprise "persons acting in concert".The idea of "persons acting in concert" is not about a fortuitous relationship coming into existence by accident or chance. The relationship can come into being only by design.The appeals were allowed.

Premier Limited caseIssue: Whether the Noticee can be considered as Acquirer as defined in Regulation 2(1)(b) of the SEBI (SAST) Regulations, 1997? Whether the Noticee is required to make Public Announcement under Regulation 11(1) and 12 of the SEBI (SAST) Regulations, 1997? Decision: Acceptance of the gift of share certificates and transfer deeds by the entity amounts to agreeing to acquire shares and the entity is an acquirer under the Regulation. But the shares which has been gifted by the transferors still stand in its name, so, it can be concluded that the transferee/noticee is not entitled to exercise voting rights and thus had not triggered Regulation 11(1). Thus the matter is disposed off.

OCL India Limited caseIssues:What course of action should the appellant follow where the increase in shareholding is pursuant to buy back by the Target Company and there is no active acquisition by the appellants? Decision:SAT stated that the appellants would have made an application for exemption from the applicability of provision of Regulation 11. SAT dispose of the appeal with a direction to the Board to consider the appellant’s application for exemption in accordance with law.

ConclusionEnsuring certainty and uniformity, while adhering to the principle of equity, can be alleged as the legislative essay if we roll back to the Takeover jurisprudence in India. SEBI regulations, numerous amendments, committee reports, case laws are the evidence of this endeavor. The constitution of TRAC was another land mark set about in this regard...the report is not just to ‘overturn’ but is an “OVERTAKE” of the TAKEOVER code.

Increasing the initial trigger from 15% to 25% will enable some shareholders (like institutional investors) to increase their stakes without making an all out tender offer. The recommendations require that disclosures be made at 5%, and for every acquisition of 2% or more thereafter (i.e. potentially 10 warnings before the 25% trigger is crossed) which will make the warnings more rampant. The proposal to make an open offer for acquiring ALL the shares of the target company will create financial constraints on the acquirers. In order to maintain uniformity in the decision making process, it would be proper to continue with the existing procedure of referring all cases to the Takeover Panel rather than giving discretion to the SEBI.Moreover, before accepting the proposed regulation, it is sine qua non to harmonize other SEBI regulations.

ques., comments, criticisms & observations..???

Takeover Code: A comprehensive Review

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