SUBSTANTIAL ACQUISITION OF

SHARES AND TAKEOVERS

REGULATION, 2011
- T H E TA K E O V E R C O D E

Helen Mary Varghese

LL.M Ph.D
 INTRODUCTION

• Corporate restructuring • Acquisition: where one co. acquires

- financial, operational, and managerial synergies - shares

- voting rights
- profit maximization
- control
- efficiency
of another co.
- monopoly • Acquirer company
- economies of scale • Target company

- market entry • TAKEOVER when control is acquired by

the acquirer.
- tax benefits
 WHAT IS TAKEOVER?

• The process in which one company acquires or assumes control of another through purchasing a
majority stake or the entire company.

• usually initiated by larger companies seeking to gain control of smaller ones for :

- expanding their market share

- diversifying their business operations.

• the acquirer usually purchases a controlling stake, typically 51% or more of the shares in the
target company.
 TYPES OF TAKEOVER

1. Friendly

2. Hostile: L&T acquisition of Mindtree through CCD’s VG Sidhartha

3. Reverse: Godrej soaps with Gujarat Godrej Innovative Chemical Ltd. which was a
loss making co.

4. Backflip: Walmart - Flipkart

 WHY A TAKEOVER CODE?

• to ensure that shareholders in an offeree company are treated fairly

• not denied an opportunity to decide on the merits of a takeover and

• shareholders in the offeree company of the same class are afforded equivalent treatment by an
offeror.

• orderly framework within which takeovers are conducted

• to promote, in conjunction with other regulatory regimes, the integrity of the financial market

- Paragraph 2(a) of the City Takeover Code, United Kingdom

 TAKEOVER CODE

SEBI Act, 1992: SEBI to 2001: review of the 1997

Substantial Acquisition of Code was carried out by
regulate substantial
Shares and Takeovers Justice P.N. Bhagwati
acquisition of shares and
Regulations, 1997 committee
takeovers

2009: constituted the

Takeover Regulations
Takeover Regulations, 1995: Justice P.N. Advisory Committee
1994 Bhagwati committee – (“TRAC”) under the
report in 1997 chairmanship of Mr. C.
Achuthan

Takeover Code, 2011

repealing 1997 Code
• Takeover Code and has attempted to
- strike a balance between the interests of various stakeholders, including the acquirers,
shareholders, and the target company
- protecting the interests of public shareholders in takeover situations
- ensure a transparent legal framework for takeovers
- ensure target co. carries on its business
- comply with disclosure obligations
- fair and effective competition
- ensure good corporate governance
- ensure that the acquirer is fulfilling the obligations wrt the takeover.
 APPLICABILITY

1. Listed Company
2. Any person controlling the listed company
3. Any person holding a substantial stake in the listed company
 CONTROL

• R. 2( e)

• includes the right to appoint the majority of the directors or to control the management or policy
decisions by virtue of their shareholding or management rights or shareholders agreements or
voting agreements or in any other manner:
 MAXIMUM PERMISSIBLE NON-PUBLIC
SHAREHOLDING

• R. 2(o)
• such percentage shareholding in the target company excluding the
minimum public shareholding required under the Securities Contracts
(Regulation) Rules, 1957
 PERSONS ACTING IN CONCERT

• R. 2(q)
• persons who, with a common objective or purpose of acquisition of
shares or voting rights in or exercising control over a target company

• a company, its holding company, subsidiary
company;
• a company, its directors, and any person entrusted
with the management of the company;
• promoters and members of the promoter group;
• immediate relatives;
• a mutual fund, its sponsor, trustees, trustee
company, and asset management company;
• a collective investment scheme and its collective
investment management company, trustees and trustee
company;
• venture capital fund and its sponsor, trustees,
trustee
company and asset management company;
• an alternative investment fund and its sponsor,
trustees, trustee company and manager;
• a merchant banker and its client, who is an
acquirer;
• a portfolio manager and its client, who is an
acquirer;
• banks, financial advisors and stock brokers of
the acquirer
• TYPES OF ACQUISITION:
1. Direct
2. Indirect

DIRECT ACQUISITION:
• Initial Threshold
• Creeping Acquisition
• Change in Control
 OPEN OFFER

• An open offer is an offer made by the acquirer to the shareholders of the target company, inviting them to
tender their shares in the target company at a particular price - to provide an exit option to the shareholders
of the target company on account of the change in control

• Initial Threshold: Acquisitions resulting in entitlement of 25% or more of voting rights trigger open
offer obligations
• Creeping Acquisition: After the Initial Threshold, acquisition of voting rights exceeding 5% in any FY
trigger open offer obligations --- up to 75%
• Gross acquisition shall be taken into consideration; not the net acquisition
• Voluntary open offer: R. 7

• an acquirer, who together with PACs, holding at least 25% or more of the voting right in the target
company but less than the maximum permissible non-public shareholding, to make a public
announcement of an open offer for acquiring shares of the target company.

• The acquirer is required to make a voluntary open offer for at least such number of shares as would
entitle the acquirer to exercise an additional 10% of the total shares of the target company

• Mandatory open offer = At least 26% of the shareholding of the target company
 WHEN DOES A VOLUNTARY OFFER
BECOME A MANDATORY OFFER?

• If, during a voluntary offer, a competing offer is made, the acquirer making the voluntary offer is
entitled to increase the number of shares for which the open offer was

• In such a situation, the open offer changes from being a voluntary one to a mandatory open offer
under Regulation 3(2).

• In such cases, offer size must then be a minimum of 26% of the shareholding of the target
company as is required for a mandatory open offer
 COMPETING OFFERS

• Takeover Code permits a third person to make an open offer to acquire the shares of the target company when the
acquirer’s open offer is subsisting

1. There has to be a subsisting public announcement of an open offer by an acquirer under the Takeover Code.

2. Any person other than the original acquirer who has made the subsisting open offer can make the competing offer.

3. The Takeover Code does not impose any restriction on the number of competing offers provided all the offers are
made within the timeframe prescribed.

4. Competing offer can be conditional as to the minimum level of acceptances only if the original open offer
conditional as to the minimum level of acceptances
Timing of competing offer
• Has to be made within 15 working days from the public announcement of the original open offer.
• No person can make a public announcement of an open offer for acquiring shares, after fifteen working days
from the date of public announcement of an open offer under the Takeover Code till the expiry of the offer
period for such open offer.
• Offer size

• • Competing offer shall be for such number of shares which, shall be at least equal to the aggregate
holding of the acquirer who has made the first public announcement.

• • In case of a competing offer, the subsisting mandatory offer’s size can be increased up to 3 working
days prior to the commencement of the tendering period In case of a competing offer, the subsisting
voluntary offer’s size can be increased within a period of fifteen working days from the public
announcement of a competing offer
OPEN OFFER PROCESS