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India- Navigating The Takeover Code For Listed Buy-Outs.

4 May, 2015

 

Acquisition of substantial shareholdings in listed companies in India is primarily governed by open offer regulations issued by the Securities Exchange Board of India (“SEBI”). The open offer regulations are codified in the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 (“Takeover Code”). The Takeover Code is interpreted by (i) SEBI’s informal guidances; (ii) orders of the Securities Appellate Tribunal (“SAT”) and (iii) general market practice.  SEBI’s informal guidances are fact-based responses issued by SEBI on a request by applicants. Typically here the applicant makes a case to SEBI for exemption from trigger of the Takeover Code with respect to a potential structure. While termed as “informal guidances”, the guidance issued is binding on the applicant.  SAT orders are issued upon appeal by entities against an action by SEBI and are appealable by way of regular court process. Notably, both SAT appellate orders and informal guidances are highly fact-based and affect only the relevant parties- unlike court judgments, they do not directly pronounce universal binding principles. Both informal guidances and SAT orders are placed in public domain by SEBI. By principles of administrative law, it is unlikely that the regulator (and the appellate authority) will take a materially different view in a similar fact composition and this makes the informal guidances and SAT orders a valuable source of reference.

 

A listed buy-out immediately invokes mandatory open offer provisions of the Takeover Code. Mandatory open offer provisions are triggered upon the following: (i) a proposed acquisition by the acquirer (along with persons acting in concert) of 25% or more of the target company; or ii) an increase in shareholding of more than 5% in a financial year of an acquirer which is already holding 25% of the shares in the target company; or (iii) acquisition of control. The term ‘control’ in India is famously nuanced- ‘control’ is not tested as much in a listed buy-out situation because the other trigger requirements are inevitably attracted. The Takeover Code has a threshold requirement of 26% of the total shares of the target, which have to be offered in a mandatory open offer.

 

In terms of key process and timing, the Takeover Code requires a merchant banker to be appointed prior to the public announcement (“PA”). From July 1, 2015, it will be mandatory (with limited exceptions) for the share tendering and settlement to take place through stock exchange. The timing of the public announcement depends on the mode of acquisition for the private (underlying) transaction that is triggering the mandatory open offer. For example where the open offer trigger is by a fresh issue of shares by the target company, the PA is required to be made on the date the board of directors of the target company authorizes this fresh issue. Where the trigger is by way of an agreement to sell and purchase shares, the PA is required to be made on the date of the agreement. When the trigger is by a mix of various routes then the PA is required to be made on the first and not the last such acquisition.

 

The PA date is significant because the threshold price for the open offer shares is set on the PA date, and the price calculation is in terms of the clear pricing norms in the Takeover Code.

 

In a listed buy-out, the mode of acquisitions is often a mix of the following: (i) a preferential issue i.e. a fresh issue of shares by the company; (ii) a transfer of shares by exiting substantial shareholders (by way of a share purchase agreement); and (iii) the shares tendered in the open offer.  Considering the statutory regulations regarding PA dates, the board resolution authorizing fresh issue of shares by the target company and the date of execution of the share purchase agreement are both on the same day.

 

The de jure as well as de facto control of the shares (i.e. (i) and (ii) above) does not transfer to the acquirers immediately- the transfer is concluded only at the end of the open offer period. The period can be accelerated by the acquirer depositing 100% of the open offer consideration amount in an escrow account- in this situation, the acquirer can complete acquisition of control twenty-one days from the date of the detailed public statement (approximately twenty-six days from the PA) (“100% Route”) If the timing for acquisition of control is not intended to be accelerated, there is still a base amount required to be deposited in the escrow account which is 25% of the open offer consideration. The escrow amount is higher for larger issues.

 

 A significant timing issue in a listed buy-out is procurement of regulatory approvals where the target is a regulated entity. For example, if the target company is an insurance company, an approval is required by approval by the Insurance Regulatory Development Authority of India (“IRDA”). The 100% Route is also subject to this requirement i.e. till the statutory approvals required for change in control of the target arrive, the control of the target company (as a result of the triggering underlying private transaction) is not permitted to change. Another important timing issue is the SEBI review process- the draft letter of offer is subject to review by SEBI and SEBI has a fair amount of flexibility in terms of the number, and timing of clarifications and observations it can seek.

 

The grounds on which the open offer can be withdrawn are very limited. For example, if the acquirer discovers financial irregularities in the target after the PA, the acquirer cannot withdraw the open offer. The Takeover Code does provide useful exceptions to this rule- for example, an open offer can be withdrawn if the agreement (if there is any) with respect to the triggering transaction contains a condition and the condition is disclosed in the detailed public statement and draft letter of offer. This provision did not exist in the earlier Takeover Code and such a situation notably arose in Nirma Industries Limited v. Securities and Exchange Board of India in 2010 [2013]178CompCas423(SC).  Another exception provided by the Takeover Code is where a statutory approval has been refused- an open offer can be withdrawn if a statutory approval (for example, of the IRDA in case of an insurance company) has been refused. It is important therefore to include various withdrawal scenarios (apart from statutory approvals) in the agreements governing the underlying transaction because otherwise the grounds for withdrawal may not be available if a situation commercially warranting a withdrawal does arise.

 

Where the underlying transaction is a share purchase agreement, the private transaction component of the buy-out has customary negotiations, as one would even for an unlisted company, such as the nature of representations and warranties and related indemnities. Adding to this, the share purchase agreement of a listed buy-out will have clauses which reflect mandatory anti-frustrating provisions of the Takeover Code- these clauses can be negotiated to be more but not less restrictive towards the target company. For example, the Takeover Code requires that, without a special resolution by postal ballot, i.e. a super-majority vote of its shareholders, a target company cannot (i) conduct business consistent with prior past practice during the open offer period including disposing of material assets; or (ii) issue securities (with limited exceptions) or incur material borrowings outside ordinary course of business.

 

Finally, in a cross-border listed buy-out, there are RBI pricing norms to be complied with (minimum pricing thresholds if the seller is a foreign entity and pricing ceilings if the seller is an Indian resident) as well as compliance with sectoral caps, if any, in the foreign investment regulations. Also, like in any mergers & acquisitions transaction, compliance with the Companies Act, 2013, competition laws and other related laws have to be adhered to.

 

The listed buy-out is essentially an acquisition in the unlisted space with added nuances of open offer requirements by SEBI, which affect contractual covenants of the underlying agreements as well as timing of the transactions. This makes listed buy-outs complex and interesting. 

 

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For further information, please contact:

 

Srishti Ojha, Verist Law

srishti.ojha@veristlaw.com

 

Shriyani Datta, Verist Law

shriyani.datta@veristlaw.com


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