Download - Takeover Code Kirti Shah
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FOR PRIVATE CIRCULATION ONLY
Takeover Code A Perspective
Presented by
Kirti Shah
August 2010
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CONTENTS
Trigger for Open Offer
Competing & Voluntary Open Offers
Open Offer Others
Open Offer Pricing
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Indirect Acquisition Definition & Pricing
Minimum Public Shareholding
Open Offer - Option for Withdrawal
Exemptions to Make Open Offer
Disclaimer
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TRIGGER FOR OPEN OFFER
Initial Acquisition
Proposed Regulations:
Acquiring an aggregateof 25 % or more votingri hts
Existing Regulations:
Acquiring or agreeingto acquire shares orvotin ri hts exceedin
Our View:
Financial investors/PEcan invest upto 24.9%
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15% Increase in PIPEtransactions
Promoters to beef uptheir current stakes
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TRIGGER FOR OPEN OFFER
Creeping Acquisition
Proposed Regulations:
Acquirer holding 25% ormore voting rightsacquiring additional
Existing Regulations:
Acquirer holding 15% >55%, acquiring additionalvoting rights in excess of
Our View:
Consolidation of shareholding bypromoters / controlling
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voting rights in excess of
5% within FY
5% wit in FY
One-time allowance madefor acquirer holding 55% >75%
entities - simp i ie
Distinction betweendifferent promoterholding levels - doneaway with
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TRIGGER FOR OPEN OFFER
Control Acquisition
Proposed Regulations:
For acquisition of control,definition includesAbility" in addition to
Existing Regulations:
Definition includes onlyRight to appointmajority of directors /
Our View:
Control - take intoaccount due facts of thecase, not merely on the
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Right" to appoint
majority of directors /control the managementor policy decisions
Director / officer oftarget company not to beregarded as being incontrol merely by virtueof holding such position
control the managementor policy decisions
basis of principle
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Competing Offer
Proposed Regulation:Within 15 business days from original detailedpublic statement date
In case of competing offer acquirer can shiftto normal full sized offer
Com etin ac uirer can ac uire shares tendered
COMPETING & VOLUNTARY OPEN OFFER
Voluntary Open Offer
Proposed Regulation:
For acquisition representing at least 10 %
If shares acquired in preceding 52 weeks - noteligible to make voluntary open offer; alsobarred from acquisition for six months aftero en offer
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to original acquirer at the price offered by himto public within 21 business days from expiry ofoffer period
Existing Regulation:
Competing offer - within 21 calendar days fromoriginal public announcement date
Shares of competitive acquirer (includingexisting holding) not less than holding of firstbidder (including present offer)
In case of competing offer, increase offer sizeto full-sized open offer within 15 business days
Existing Regulation:
Acquirer can consolidate shareholding throughvoluntary open offers upto 20% or max
permissible acquisition; lower of the two
Our View:Extending the timeline for competing offer will giveopportunity to additional potential bidders
Our View: Consolidation of promoter holdings simplified; Creeping acquisition & voluntary open offer cantbe combined by promoters for consolidation
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OPEN OFFER - OTHERS
Proposed Regulation Existing Regulation
Size: Open offer to be for 100% of other shareholders Timeline:
Process expected to be completed within 57 Business Days
from date of Public Announcement
Agreement triggering open offer - to be completed within 26
weeks after offer eriod
Mandatorily required to makeminimum open offer for 20% of the
voting capital
Public announcement for open offer
- within 4 working days of acquiring
/ agreeing to acquire shares.
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Acquirer and persons acting in concert prohibited from acquiringshares of target during 26 weeks following open offer completion
Agreement attracting open offer - may be acted upon during
pendency if 100% of consideration payable is placed in escrow
Presently it takes around 95
calendar days to complete the open
offer
Our Views
Large support required from FDI & banking circles for acquisition funding Acquirers seriousness to increase
Option to exit for all shareholders, especially the minority shareholders
Timeliness for completing open offer- streamlined for speedy closure
Timelines put in place for completion of transaction triggering open offer
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Key Point Proposed Regulation Existing Regulation Observations
Minimum Price
Payable
The minimum offer price
payable continues to beregulated; & to be highest of:
Negotiated price as per agreement triggering openoffer;
Volume-weighted average
Frequently Traded Shares:
Min price payable includes the price under agreement foracquisition attracting the open
offer, any price paid byacquirer or persons acting in
concert during preceding 26
A level playing field will
be created for allshareholders as majority
of them will be offered
same exit price
Look-back period has
OPEN OFFER PRICING MINIMUM PRICE PAYABLE
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price paid by acquirer & persons acting in concert inpreceding 52 weeks;
Highest price paid by acquireror persons acting in concertduring preceding 26 weeks;
60 trading day volume
weighted average marketprice (for frequently tradedshares)
(Period would start a day beforedate of Public Announcement)
wee s oo ac perio ;
historical market averageprice of the shares for aproximate past period (2 weeks)
Infrequently Traded Shares:
Offer price based on financial
parameters viz. return on net
worth, industry P/E multiples,etc; apart from any price
actually paid by acquirer or
persons acting in concert during
preceding 26 weeks, or in
agreement triggering open offer
een expan e n a
to increase the 'fairness'of the offer price made
to shareholders
M&A deals expensive
due to proposed changes
in offer price calculation
Price of infrequently
traded shares needs
further special
consideration
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Key Point Proposed Regulation Existing Regulation Observations
Frequently Traded
Shares -
Definition
Shares which have a trading
volume of 10 % or more of the
total number of shares for 12
calendar months preceding the
month in which public
Shares which have
annualized trading volume
of 5% or more of the listed
share capital during 6
calendar months preceding
More stringent norms
for segregating
infrequently traded
companies
OPEN OFFER PRICING OTHERS
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announcement is made the month in which public
announcement is made
Non-compete fee Provision has been done awaywith; & all payments made videsuch ancillary / collateral
agreements to be taken into
consideration while calculating
negotiated price above
If the non-compete fees
paid are in excess of 25%
of the open offer price,
then the open offer price
will have to be increased
to that extent
This will bring about
parity in compensation
to all classes of
shareholders; will also
reduce abuse of non-
compete clause
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INDIRECT ACQUISITION
Proposed Regulation Existing Regulation
If the indirectly acquired target company is predominant
part of business of parent company being acquired or
accounts for more than 80 % of its NAV, sales turnover or
the deal value to be treated as direct acquisition
In this case, acquirer to specify value of stake in the Indian
Presently, indirect acquisitions are not
treated separately on the basis of size
of the businesses indirectly bought and
their relative importance to the overall
acquisition
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In all other cases, the public announcement can be madewithin 4 business days of such date, and a detailed public
statement to be issued within 5 business days of
consummation of the primary acquisition
owever, open o er s s requ re o
be made when there is direct orindirect change of control of the target
company irrespective of any direct
acquisition of shares of the target
company
Our Views
This becomes especially important in terms of acquiring holding companies / shell companies, wherein the
acquirer is more interested in the acquisition of the underlying associate/ subsidiary
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Key Point Proposed Regulation Existing Regulation Observations
Minimum Price
Payable
To compute offer price for
indirect acquisitions, inaddition to above parameters,
any higher price paid during
the period between
contracting of the primary
transaction and public
Currently no differentiation
between direct and indirectacquisitions; the same offer
pricing formula is used
In practice, offer price is
computed as of the date of
announcement of rimar
Clearer guidelines in
terms of identifying andpricing of indirect
acquisitions would lead
to greater transparency
in terms of offer to be
made to indirect targets
OPEN OFFER PRICING INDIRECT ACQUISITIONS
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announcemen - a so o e
considered
Offer price - to increase at 10%
p.a., calculated on a pro-rata
basis for the period from the
date of the primary
transaction being announced in
public domain until date ofdetailed public statement.
Such revised offer price to be
payable to all shareholders
tendering their shares in the
open offer
acquisition and as of the dateof public announcement for
target company, whichever is
higher
s are o ers
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MINIMUM PUBLIC SHAREHOLDING
Proposed Regulation
Intention to delist the target company canbe declared by acquirer at the time of openoffer itself
In this case, shareholders not participating inthe open offer and holders of equity-linkedinstruments can tender their shares at same
Existing Regulation
Pursuant to the open offer, if publicshareholding level falls below theminimum level as per ListingAgreement, acquirer to sell-down theirholding or make another offer under
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price subsequently
Acquirer who has not stated his intention todelist or having post-offer shareholdingbetween 75% and 90% - to bring shareholdingto 75% so as to comply with minimum publicshareholding requirement by either: (i)proportionately reducing the number ofshares acquired in the open offer and underthe triggering agreement; or (ii) increasingpublic shareholding to 25% within 12 months
specified time period
Takeover Code A Broad Perspective
Our View: As acquirer can declare upfront intent to
delist target post open offer, entireprocedure is streamlined, saving time
Proportionate reduction of shareholdingthrough original acquisition and in theopen offer would also be in the acquirersinterest vis--vis selling down his holdingsubsequently
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OPEN OFFER OPTION FOR WITHDRAWAL
Proposed Regulation Existing Regulation
In addition to existing grounds, an open offer
may be withdrawn, if conditions stipulated in the
agreement triggering open offer - not met for
reasons outside control of acquirer, thereby
rescinding the agreement; and reasonable
No open offer once made shall be
withdrawn except under followingcircumstances:
Statutory approvals - refused
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disclosures made for the same n ea o e so e acqu rer
Circumstances where SEBIopines withdrawal
Our Views Circumstances under which open offer can be withdrawn have been broadened, thus protecting the
acquirer under genuine adverse circumstances
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EXEMPTION TO MAKE AN OPEN OFFER
Proposed Regulation Existing Regulation
CDR schemes prescribed by RBI exempted, if authorisedby special resolution & no change in control over target
Definition of people acquiring shares in commercial courseof business includes underwriters and excludes PublicFinancial Institutions
Currently 14 categories of transactionsexempted from making open offer
In other cases, special approval seeking
exemption from SEBI
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by the company - now exempt Increase in shareholding beyond trigger limit, by way of
buyback by the company - now exempt
Voting rights arising out of non-payment of dividend on
preference shares - to not attract open offer obligation
Our Views:
Acquisition of shares by parties in commercial course of business - clarified in a more explicit manner
Certain areas where SEBIs approval was always required e.g. CDR schemes, banker acquiring pledged
shares, etc have now been explicitly exempted
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DISCLAIMER
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This document has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. This publication
cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without
obtaining specific professional advice. Please contact BDO Consulting Pvt. Ltd. to discuss these matters in the context of your particular
circumstances. BDO Consulting Pvt. Ltd., its partners, employees and agents do not accept or assume any liability or duty of care for any loss
arising from any action taken or not taken by anyone in reliance on the information in this document or for any decision based on it.
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Takeover Code A Broad Perspective