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LEGAL ISSUES AND TAKEOVER CODE. Presentation by Mohit Saraf Partner Luthra & Luthra Law Offices. Agenda. Overview of Takeover Regulations Salient Definitions Types of Takeovers Required Disclosures Takeover code Trigger Exempted Categories Takeover at a Global Level

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legal issues and takeover code
LEGAL ISSUES AND TAKEOVER CODE

Presentation by

Mohit Saraf

Partner

Luthra & Luthra

Law Offices

L&L/MDI

agenda
Agenda
  • Overview of Takeover Regulations
  • Salient Definitions
  • Types of Takeovers
  • Required Disclosures
  • Takeover code Trigger
  • Exempted Categories
  • Takeover at a Global Level
  • Takeover and Disinvestment
  • Advantages

L&L/MDI

overview of takeover regulations
Overview of Takeover Regulations
  • “Takeover” is a transaction whereby a person (individual, group of individuals 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 .
  • Takeover can be of a listed or an Unlisted company
  • In case of Takeover of an Unlisted and closely held company – Companies Act, 1956 to apply.
  • In case of Takeover of a listed company, the following legal framework to apply:

L&L/MDI

overview of takeover regulations cont d
Overview of Takeover Regulations (Cont’d.)
    • SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997 issued by the Securities and Exchange Board of India (SEBI);
    • Companies Act, 1956; and
    • Listing Agreement
  • “Take Over” – taking over the control of management
  • “Substantial acquisition of shares or voting Rights”- acquiring substantial quantity of shares or voting rights
  • SEBI Regulations for the first time introduced in 1994, but found inadequate to control hostile takeovers or regulate competitive offers and revision of offers.

L&L/MDI

overview of takeover regulations cont d5
Overview of Takeover Regulations (Cont’d.)
  • The Takeover Code came in for a fair amount of criticism due to the various loopholes which surfaced.
  • Example:
  • Torrent group and Bombay Dyeing
    • Under the 1994 Takeover Code - an acquisition resulting in the acquirer's share holding exceeding 10% - a public announcement to acquire at least 20% of their existing share holding to be made.
    • The Torrent group made an open offer to acquire 20% in Ahmedabad Electricity Company ("AEC") at Rs. 65 per share.

L&L/MDI

overview of takeover regulations cont d6
Overview of Takeover Regulations (Cont’d.)
  • This was followed by Bombay Dyeing's offer to acquire a majority stake in AEC at a price of Rs. 90 per share on an all or none basis.
  • SEBI rejected Bombay Dyeing's open offer on technical grounds as the bid was not made within the 14 day period following the public announcement by Torrent.
  • Torrent raised its offer price to Rs. 132 per share, but shareholders failed to respond in anticipation of a new bid by Bombay Dyeing. The Torrent offer flopped receiving only about 1% response.
  • Bombay Dyeing did not follow up with a revised bid as it felt that the revised price of Rs. 132 was too high.
  • AEC scrip flared up from Rs. 70 to a high of Rs. 170 in just a couple of months.

L&L/MDI

overview of takeover regulations cont d7
Overview of Takeover Regulations (Cont’d.)
  • The takeover of Damania Airways is an example of a company failing to deliver due to insufficient funds.
  • The Khemkas of the NEPC group, after acquiring management control in Damania Airways made an open offer to acquire 20% in the company at Rs. 19.60 per share.
  • The ruling price was then Rs. 15.50.
  • SEBI pressure forced Khemkas to revise price of open offer to Rs. 35.25
  • NEPC group unable to make payments to all the shareholders.

L&L/MDI

overview of takeover regulations cont d8
Overview of Takeover Regulations (Cont’d.)
    • SEBI issued show cause notice to NEPC for its failure to meet commitments to shareholders who responded to the open offer.
    • Current status: Khemkas have been barred from accessing the capital market for 5 years for violating the takeover regulations.
  • Bhagwati Committee appointed under the chairmanship of Justice P N Bhagwati for plugging loopholes. On the basis of recommendations suggested SEBI notified 1997 regulations.

L&L/MDI

salient definitions
Salient Definitions
  • Acquirer” has been defined as any person who directly or indirectly acquires or agrees to acquire:
    • shares or the voting rights in the target company; or
    • control over the target company

either by himself or with any person acting in concert with the acquirer

“Target Company” means a listed company whose shares or voting rights or control is directly or indirectly acquired.

L&L/MDI

salient definitions cont d
Salient Definitions (Cont’d.)
  • Control has been given an inclusive definition and includes:

a)the right to appoint the majority of the directors.

b) To control the management or policy decisions.

  • Persons acting in concert (“PAC”) has been defined as:

any person established to have, with the acquirer, the common objective of buying:

a substantial amount of shares; or

voting rights in a company; or

gaining control of a company

following an agreement or understanding (formal or informal) or by cooperating with the acquirer, directly or indirectly.

L&L/MDI

salient definitions cont d11
Salient Definitions (Cont’d.)
  • The concept of PAC assumes significance in the context of take overs:
    • acquisition made by the acquirer remains below the threshold limit
    • taken together with the voting rights of persons acting in concert, the threshold may exceed.
  • Example:
  • Bajoria – Bombay Dying Tussle.
  • PAC in case of Bajoria:

Mega Resources, Mega Stock, Hooghly Mills, Ms Pooja Bajoria, Ms Mohini Devi Bajoria, Ms Lata Devi Bajoria and Ms Meenakshi Jatia

L&L/MDI

salient definitions cont d12
Salient Definitions (Cont’d.)
  • Bajoria together with PAC acquired more than 15%.
  • Parking – Collusion were several different parties act in concert to buy equity.
  • Example:
  • Reliance

L&L/MDI

types of takeover cont d
Types of Takeover (Cont’d.)
  • Takeover bids may be classified as under:

1) Hostile takeover

2) Friendly takeover

3) Bailout takeover

  • Hostile takeover
      • The method of trying to take the control of the company without the knowledge of the existing management is known as “hostile takeover”.
      • Example:

- Bombay Dyeing and Manufacturing Co Ltd -Bajoria struggle

L&L/MDI

types of takeover cont d14
Types of Takeover (Cont’d.)
  • Bajoria together with people acting in concert acquired more than 5% of shares in Bombay Dyeing without making appropriate disclosures, required at the 5% level under the Takeover Regulations.
  • Complaint filed by Bombay Dyeing before SEBI and CLB.
  • Petition before CLB – praying for rectification of register of members in respect of all shares above 5%. Bajorias having validly transferred shares above 5% during pendency of petition - no rectification
  • SEBI –barred Bajoria, along with persons acting in concert, from accessing the capital market for one year with immediate effect.
  • CII, FICCI and Assocham –Introduction for Promoter friendly amendments
  • Creeping acquisition limit raised from 5% to 10% with effect from October 25, 2001

L&L/MDI

types of takeover cont d15
Types of Takeover (Cont’d.)
  • Tendency of Financial Institutions (FI) to help out Promoters in hostile takeovers
  • However, in Raasi Cements Limited (RCL) and India Cements Limited (ICL), FIs felt cheated.
  • ICL in its hostile bid for RCL made an open offer for RCL shares at Rs. 300 per share when the share price was at Rs. 100.
  • Promoters of RCL sold out its 32% stake to ICL in a negotiated deal during the term of the open offer at price ranging between Rs.200 to

Rs. 286 per share

  • ICL had full control of RCL without having to purchase single share from from the institutional investors.

L&L/MDI

types of takeover cont d16
Types of Takeover (Cont’d.)

- Friendly takeover

    • Management of a company may face serious financial problems or threats of hostile takeover
    • Unable to ward off the takeover attempt.
    • A friendly corporate body or group of companies may come to the rescue by buying shares of the company in the open market and/or by pumping resources to help the management.
  • Example:
  • Sterlite Industries Limited (“SIL”) – Indian Aluminum Company Limited (“Indal”).

L&L/MDI

types of takeover cont d17
Types of Takeover (Cont’d.)
  • SIL made an open offer to purchase 10% of the shares of Indal from the Public. (Takeover trigger at 10% then)
  • SEBI came up with ruling of public offer of not less than 20%.
  • SIL required to increase its public offer to 20%.
  • Indal, feeling vulnerable to a takeover threat from SIL, requested its foreign collaborator Alcan to come to its rescue.
  •  SIL made a cash offer at Rs. 115 per share and Alcan made a bid for Rs.175.

L&L/MDI

types of takeover cont d18
Types of Takeover (Cont’d.)
  • SIL thereafter announced its intention to acquire 52% and revised it price to Rs.221 per share.
  • In this case FIs were a key element holding 36% of the equity.
  • On the day of closure of the offer period, FIs struck a deal with Alcan for Rs. 200 per share.
  • Indal with the help of Alcan was succesful in wardinf of the hostile threat.

L&L/MDI

types of takeover cont d19
Types of Takeover (Cont’d.)
  • Bailout takeover

Taking over of the management of such weak companies for nurturing them back in normal activities by a company having expertise and resources is known as “Bailout takeover”

  • Example:

L&L/MDI

disclosure under takeover code
Disclosure under Takeover Code
  • 5% or more shares or voting rights:
    • An Acquirer, who along with the PAC, acquires shares or voting rights of a company which shareholding together with his existing shareholding exceeds 5% of shares or voting rights in a company
    • disclose his aggregate shareholding or voting rights within four working days of receipt of intimation of allotment or acquisition of shares or voting rights, as the case may be.
    • Such company shall disclose to all Stock Exchanges on which its shares are listed, the aggregate number of shares held by each of such person within 7 days of receipt of information.

L&L/MDI

disclosure under takeover code cont d
Disclosure under Takeover Code (Cont’d.)
  • More than 15% shares or voting rights
    • Any acquirer along with PAC holding more than 15% but less than 75% of shares or voting rights in a company shall disclose to the company upon acquiring a further:
      • 5%; or
      • 10%

of shares or voting rights during any period of 12 months.

L&L/MDI

disclosure under takeover code cont d22
Disclosure under Takeover Code(Cont’d.)
  • A promoter or every person having control of a company shall within 21 days from the financial year ending March 31, or /and as well as the record date for the purpose of declaration of dividends, disclose the number as well as percentage of shares or voting rights held by him along with PAC in that company to the Target Company.
  • Every listed company shall within 30 days from the end of financial year on March 31, as well the record date for declaration of dividends make disclosure to the stock exchange(s) with changes, if any, on which its shares are listed in respect of holding of persons mentioned above.

L&L/MDI

takeover code trigger
Takeover Code Trigger
  • The Takeover Code is triggered under the following circumstances:
  • 15% shares or voting rights:
    • Acquirer intending to acquire shares which along with his existing shareholding would entitle him to more than 15% voting rights
    • such additional shares can be acquired only through an open offer.
    • open offer for acquiring a minimum of 20% of the shares of a target company.
      • Exception:
      • If the Acquirer is already holding less than 75% or more of voting rights/shareholding; and
      • Has deposited in the escrow account 50% of the consideration in cash.

L&L/MDI

takeover code trigger cont d
Takeover Code Trigger (Cont’d)
  • Creeping Limit of 10%
  • Acquirer holding 15% or more but less than 75% of the shares or voting rights of the company
  • Can consolidate his holding upto10% in any period of 12 months.
  • Acquisition of shareholding beyond 10% through an open offer
  • Open offer for acquiring a minimum of 20% of the shares of the Target Company

L&L/MDI

takeover code trigger cont d25
Takeover Code Trigger (Cont’d)
  • Consolidation of holding
    • An Acquirer who is having 75% shares or voting rights of a target company
    • Can acquire additional shares through an open offer
  • Public Announcement (PA)/Open Offer
    • An open offer is made by a Public Announcement
    • Announcement given in the newspapers by Acquirer disclosing his intention to acquire a minimum of 20% shareholding from existing shareholders through an open offer
    • PA is made to ensure that the shareholders of the Target Company are aware of the exit opportunities available to them in case of a take over.

L&L/MDI

takeover code trigger cont d26
Takeover Code Trigger (Cont’d)
  • Competitive Offer
    • Any third person other than the acquirer who has made the first public announcement can make a competitive bid or a counter offer;
    • within 21 days of the public announcement of the first offer.
    • Upon the public announcement of this competitive bid, the original acquirer shall have the option to either revise the original offer or withdraw it.

L&L/MDI

exempted categories
Exempted Categories
  • The public offer provisions of the Takeover Code will not be apply in the following cases:
    • Allotment in pursuance of an application made to a public issue;
    • Allotment pursuant to an application made by the shareholder for rights issue, subject to such rights issue not resulting in change in control and management of the company;
    • Sick company;
    • Preferential allotment of shares, subject to the condition that at least 75% of the shareholders of the company shall have approved the preferential allotment and that sufficient disclosures relating to the post-allotment shareholding pattern, offer price etc., have been made to the shareholders;

L&L/MDI

exempted categories cont d
Exempted Categories (Cont’d.)
  • Allotment to the underwriters pursuant to any underwriting agreement;
  • Issue of American Depository Receipts and Global Depository Receipts or Foreign Currency Convertible Bonds, till such time as they are not converted into equity shares;
  • Shares held by banks and financial institutions by way of security against loans;

L&L/MDI

takeover code at a global level
Takeover Code at a Global Level
  • Global level arrangements - whether it attracts Takeover Code
  • Under 1994 takeover code
  • Example:
    • Sesa Goa-Mitsui
    • In 1996, Mitsui of Japan acquired the parent company of Sesa-Goa India Limited.
    • As a result of this acquisition Mitsui indirectly became the single largest shareholder of Sesa-Goa.
    • Mitsui applied to SEBI stating that the Take over code should not be triggered as the change in control of Sesa-Goa was a result of acquisition of its parent

L&L/MDI

takeover code at a global level cont d
Takeover Code at a Global Level (Cont’d.)
    • Mitsui applied to SEBI stating that the Takeover Code should not be triggered since the change in control of Sesa-Goa was a result of its acquisition of Sesa-Goa's parent.
    • Case evaluated under the 1994 takeover code
    • Ministry of Finance ruled that under the 1994 takeover code, SEBI had no jurisdiction over the developments abroad and therefore could not pass sentence on something that happened outside its jurisdiction and thereby

no open offer was required.

  • Last three years:
    • With respect to transactions taking place outside India (Global Level arrangements), quite a few cases have been decided with regard to global-level developments.

L&L/MDI

takeover code at a global level cont d31
Takeover Code at a Global Level (Cont’d.)
  • Examples:
  • Schenectady International Inc.
    • Schenectady International Inc. of USA (the "acquirer"), the acquirer filed an application with SEBI seeking exemption from the application of public offer provisions of the Takeover Code for its acquisition of 51% of the equity capital of Dr. Beck & Co. (India) Limited (the "target").
    • The Takeover Panel rejected the above application and accordingly SEBI ordered the acquirer to make open offer for 20% to the public.
  • Bausch & Lomb acquisition by Luxottica

L&L/MDI

takeover code at a global level cont d32
Takeover Code at a Global Level (Cont’d.)
  • In global acquisition in April 1999, the Luxottica group had acquired the sunglasses business of Bausch & Lomb (B&L), USA, for $640 million.
  • The takeover of the Indian Operations of (B&L) also followed.
  • B&L, USA had a 44% stake in B&L India
  • When global deal took place, the control of B&L, India went to Luxottica.
  • The deal resulted in change of management of B&L, India
  • No open offer was made.
  • SEBI is probing into a possible violation of the provisions of the takeover code by Luxottica Spa while acquiring B&L of India last year

L&L/MDI

takeover code at a global level cont d33
Takeover Code at a Global Level (Cont’d.)
  • B.P. Amoco plc (Acquirer) and Burmah Castrol plc. (B.C)
    • B.P. Amoco Plc. (Acquirer) and Burmah Castrol plc.(B.C), companies incorporated in U.K entered into an Agreement.
    • Castrol India Limited (CIL) and Foseco (India) Limited (FIL) (“Target Companies”) are indirect subsidiaries of B>C
    • B.C indirectly has a 51% holding of shares in CIL and a 58% holding of shares in FIL.
    • Acquirer made an application to SEBI to seek an exemption from making a public offer of 20% in respect of shares of Target Companies. 

L&L/MDI

takeover code at a global level cont d34
Takeover Code at a Global Level (Cont’d.)
    • The matter forwarded to the Takeover Panel and the panel recommended exemption subject to the condition that shareholders of Indian Target companies passing special resolutions at their respective meetings permitting voting through postal ballot thereat ratifying the change in control. 
  • Take over of a foreign parent would trigger the Takeover code
  • Special exemptions under the Regulations for mereger whether carried in India or Abroad
  • To be examined on a case to case basis whether merger or takeover

L&L/MDI

takeover code and disinvestment
Takeover Code and Disinvestment
  • The Takeover Code amended twice
  • Restrictions specified under Takeover Code not to apply of takeover of a PSU:
    • prohibition, during the offer period, on the acquirer or PAC to be appointed on the board of directors of the target company;
    • Agreement for sale of shares, which entitles the acquirer 15% or more of the share capital or voting rights of a PSU along with his existing shareholding, shall contain a clause to the effect that in case of non-compliance of any provisions of the Takeover Code, the agreement for such sale shall not be acted upon by the seller and the acquirer.

L&L/MDI

takeover code and disinvestment cont
Takeover Code and Disinvestment Cont.
  • appointment of any representative of the acquirer or any person having an interest in the acquirer as additional director or as director to fill in any casual vacancy on its board after the PA has been made.
  • The shares acquired by the acquirer both under the agreement and/or from the open market can be transferred in the name of the acquirer and changes in the board of director as would give the acquirer representation on the board or control over the company may be done, only after the merchant banker certifies that all the obligations of the acquirer under the Takeover Code have been fulfilled.

L&L/MDI

takeover code and disinvestment cont37
Takeover Code and Disinvestment Cont.
  • An acquirer required to make a PA not later than 4 working days of the date of execution of Share Purchase Agreement or Shareholders Agreement with the Central Government.
  • No further PA is required at the subsequent stage of further acquisition of shares if following conditions are satisfied:

 a) both the acquirer and the seller are the same in all the stages of acquisition; and

b) has made the disclosure regarding all the stages of acquisition in the letter of offer sent to the Securities Exchange Board of India and the shareholders of such public sector undertaking.

L&L/MDI

takeover code and disinvestment cont d
Takeover Code and Disinvestment (Cont’d).
  • No public announcement for a competitive bid can be made:
    • after the public announcement has been made by the acquirer pursuant to entering of the Share Purchase or Shareholders Agreement with the Central Government for acquisition of shares or voting rights or control of the public sector undertaking.

L&L/MDI

advantages
Advantages
  • The management becomes more accountable.
    • Promoters of Indian companies have never been answerable to small shareholders for their business practices. Even if they had minority holdings and indulged in mismanagement, Indian promoters didn't contend with threats of losing control.
  • A powerful corrective mechanism
    • In a mismanaged business, the minority shareholder suffers more than the management. The management lives off expense accounts while profits erode, dividends dwindle, and share price falls.
  • The management performs because of fear of being replaced.
    • The management may also be forced to make an open offer to increase its own stake. It may have to share powers by allowing minority shareholders onto the board and thus create greater transparency.

L&L/MDI

advantages cont d
Advantages (Cont’d)
  • The share price automatically climbs. This climb in share prices has already occurred in Bombay Dyeing, GE Shipping, and East India Hotels, for instance.
  • The rising share price gives minority shareholders an exit option at higher prices as well, as an option of siding with potentially better management in the event of an actual takeover bid.

L&L/MDI

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