presentation takeover

8/2/2019 Presentation Takeover

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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

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Takeover is a transaction whereby a person (individual, group of

individuals or company) acquires control over the assets of the companyeither:

- 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 CompaniesAct, 1956 to apply.

In case of Takeover of a listed company, the following legal framework to

apply:

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- SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997issued by the Securities and Exchange Board of India (SEBI);

- Companies Act, 1956; and

- Listing Agreement

TakeOver taking over the control of management

Substantial acquisition of shares or voting Rights- acquiringsubstantial quantity of shares or voting rights

SEBI Regulations for the first time introduced in 1994, but foundinadequate to control hostile takeovers or regulate competitive offersand revision of offers.

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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'sshare 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 AhmedabadElectricity Company ("AEC") at Rs. 65 per share.

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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 wasnot 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 torespond in anticipation of a new bid by Bombay Dyeing. The Torrent offer floppedreceiving only about 1% response.

Bombay Dyeing did not follow up with a revised bid as it felt that the revised priceof Rs. 132 was too high.

AEC scrip flared up from Rs. 70 to a high of Rs. 170 in just a couple of months.

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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 inDamania 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.

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SEBI issued show cause notice to NEPC for its failure to meetcommitments to shareholders who responded to the open offer.

Current status: Khemkas have been barred from accessing the capitalmarket for 5 years for violating the takeover regulations.

Bhagwati Committee appointed under the chairmanship of JusticeP N Bhagwati for plugging loopholes. On the basis ofrecommendations suggested SEBI notified 1997 regulations.

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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

TargetCompany means a listed company whose shares or voting rightsor control is directly or indirectly acquired.

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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 objectiveof 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 bycooperating with the acquirer, directly or indirectly.

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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 MsMeenakshi Jatia

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Bajoria together with PAC acquired more than 15%.

Parking Collusion were several different parties act in concert tobuy equity.

Example: Reliance

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Takeover bids may be classified as under:

1) Hostile takeover2) Friendly takeover3) Bailout takeover

Hostile takeover

The method of trying to take the control of the company withoutthe knowledge of the existing management is known as hostiletakeover.

Example:

- Bombay Dyeing and Manufacturing Co Ltd -Bajoria struggle

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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 transferredshares above 5% during pendency of petition - no rectification

SEBIbarred Bajoria, along with persons acting in concert, fromaccessing the capital market for one year with immediate effect.

CII, FICCI and AssochamIntroduction for Promoter friendlyamendments

Creeping acquisition limit raised from 5% to 10% with effect fromOctober 25, 2001

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Tendency of Financial Institutions (FI) to help out Promoters in hostiletakeovers

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. 300per share when the share price was at Rs. 100.

Promoters of RCL sold out its 32% stake to ICL in a negotiated deal duringthe 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 fromfrom the institutional investors.

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- Friendly takeoverManagement 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 therescue by buying shares of the company in the open marketand/or by pumping resources to help the management.

Example:

Sterlite Industries Limited (SIL) Indian Aluminum CompanyLimited (Indal).

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SIL made an open offer to purchase 10% of the shares of Indal from thePublic. (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 itsforeign collaborator Alcan to come to its rescue.

SIL made a cash offer at Rs. 115 per share and Alcan made a bid forRs.175.

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SIL thereafter announced its intention to acquire 52% and revisedit 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 withAlcan for Rs. 200 per share.

Indal with the help of Alcan was succesful in wardinf of the hostilethreat.

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- Bailout takeover

Taking over of the management of such weak companies fornurturing them back in normal activities by a company havingexpertise and resources is known as Bailouttakeover

- Example:

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5% or more shares or voting rights:

An Acquirer, who along with the PAC, acquires shares or voting rights ofa company which shareholding together with his existing shareholdingexceeds 5% of shares or voting rights in a company

disclose his aggregate shareholding or voting rights within four workingdays of receipt of intimation of allotment or acquisition of shares or votingrights, as the case may be.

Such company shall disclose to all Stock Exchanges on which its sharesare listed, the aggregate number of shares held by each of such personwithin 7 days of receipt of information.

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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 companyupon acquiring a further:

5%; or

10%

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

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A promoter or every person having control of a company shall within21 days from the financial year ending March 31, or /and as well asthe record date for the purpose of declaration of dividends, disclose

the number as well as percentage of shares or voting rights held byhim along with PAC in that company to the Target Company.

Every listed company shall within 30 days from the end of financialyear on March 31, as well the record date for declaration ofdividends make disclosure to the stock exchange(s) with changes, ifany, on which its shares are listed in respect of holding of personsmentioned above.

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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 targetcompany.

Exception:

If the Acquirer is already holding less than 75% or more of votingrights/shareholding; and

Has deposited in the escrow account 50% of the consideration in cash.

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Creeping Limit of 10%

- Acquirer holding 15% or more but less than 75% of the shares or votingrights 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 TargetCompany

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Competitive Offer

Any third person other than the acquirer who has made the first publicannouncement 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 originalacquirer shall have the option to either revise the original offer orwithdraw it.

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The public offer provisions of the Takeover Code will not be apply in thefollowing 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 managementof the company;

Sick company;

Preferential allotment of shares, subject to the condition that at least 75% ofthe shareholders of the company shall have approved the preferential allotmentand that sufficient disclosures relating to the post-allotment shareholdingpattern, offer price etc., have been made to the shareholders;

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- Allotment to the underwriters pursuant to any underwriting agreement;

- Issue of American Depository Receipts and Global Depository Receiptsor 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 againstloans;

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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 IndiaLimited.

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 triggeredas the change in control of Sesa-Goa was a result of acquisition of its parent

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Mitsui applied to SEBI stating that the Takeover Code should not be triggeredsince the change in control of Sesa-Goa was a result of its acquisition ofSesa-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 passsentence 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 Levelarrangements), quite a few cases have been decided with regard toglobal-level developments.

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Examples:

Schenectady International Inc.

Schenectady International Inc. of USA (the "acquirer"), the acquirer filed anapplication with SEBI seeking exemption from the application of public offerprovisions of the Takeover Code for its acquisition of 51% of the equity capital ofDr. Beck & Co. (India) Limited (the "target").

The Takeover Panel rejected the above application and accordingly SEBI orderedthe acquirer to make open offer for 20% to the public.

Bausch & Lomb acquisition by Luxottica

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In global acquisition in April 1999, the Luxottica group had acquired thesunglasses 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 toLuxottica.

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 thetakeover code by Luxottica Spa while acquiring B&L of India lastyear

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B.P. Amoco plc (Acquirer) and Burmah Castrol plc. (B.C)

B.P. Amoco Plc. (Acquirer) and Burmah Castrol plc.(B.C), companiesincorporated 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 ofshares 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.

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The matter forwarded to the Takeover Panel and the panelrecommended exemption subject to the condition that shareholders ofIndian Target companies passing special resolutions at their respectivemeetings permitting voting through postal ballot thereat ratifying thechange in control.

Take over of a foreign parent would trigger the Takeover code

Special exemptions under the Regulations for mereger whether carried inIndia or Abroad

To be examined on a case to case basis whether merger or takeover

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The Takeover Code amended twice

Restrictions specified under Takeover Code not to apply of takeover of aPSU:

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 ofthe share capital or voting rights of a PSU along with his existingshareholding, 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.

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appointment of any representative of the acquirer or any personhaving an interest in the acquirer as additional director or asdirector to fill in any casual vacancy on its board after the PAhas been made.

The shares acquired by the acquirer both under the agreementand/or from the open market can be transferred in the name ofthe acquirer and changes in the board of director as would givethe acquirer representation on the board or control over the

company may be done, only after the merchant banker certifiesthat all the obligations of the acquirer under the Takeover Codehave been fulfilled.

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An acquirer required to make a PA not later than 4 working days of thedate of execution of Share Purchase Agreement or ShareholdersAgreement with the Central Government.

No further PA is required at the subsequent stage of further acquisitionof shares if following conditions are satisfied:

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

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

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No public announcement for a competitive bid can be made:

after the public announcement has been made by the acquirer pursuantto entering of the Share Purchase or Shareholders Agreement with the

Central Government for acquisition of shares or voting rights or control ofthe public sector undertaking.

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The management becomes more accountable.

Promoters of Indian companies have never been answerable to smallshareholders for their business practices. Even if they had minority holdingsand indulged in mismanagement, Indian promoters didn't contend withthreats of losing control.

A powerful corrective mechanism

In a mismanaged business, the minority shareholder suffers more than themanagement. The management lives off expense accounts while profitserode, 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 itsown stake. It may have to share powers by allowing minority shareholdersonto the board and thus create greater transparency.

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The share price automatically climbs. This climb in share prices has alreadyoccurred in Bombay Dyeing, GE Shipping, and East India Hotels, forinstance.

The rising share price gives minority shareholders an exit option at higherprices as well, as an option of siding with potentially better management inthe event of an actual takeover bid.

presentation takeover

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