Securities and Exchange Board of India (SEBI or Board) finally met on 28 July, 2011 and took major decisions on the takeover regulations, which may impact takeover activities in times to come in India.
In this post, I would deal briefly with the decisions of SEBI on Takeover regulations. Most of the recommendations of the Takeover Regulations Advisory Committee (TRAC) are accepted by the Board. As per the press release PR No. 119/2011 dated 28 July, 2011, the Board took note of and decided the following:
(a) Initial trigger threshold increased to 25% from existing 15%.
Takeaways of transactional lawyer
This is a welcome move for the industry. Listed Indian corporates may tap-in more funds from strategic investors like Private Equity firms, foreign institutional investor, foreign venture capital investors, and of course Indian investors etc. without there being any need for open offer to acquire further 20% (now 26%) shares of the company. SEBI in its wisdom increased the triggering limit to 25%- this I believe has to do with the changing times in emerging markets coupled with the prevalent view that strategic investors having no potential or willingness to further acquire equity in the company as they are not interested in control or day to day affairs of the company. In times to come, I view a lot of investment happening in the listed companies where new shares would be issued to the strategic investors (in form of qualified institutional placement, rights issues, preferential allotment of shares etc).
(b) There shall be no separate provision for non-compete fees and all shareholders shall be given exit at the same price.
Takeaways of transactional lawyer
Indian promoters exiting the business would hate this. This decision is in-effect would null the verdicts of the Securities Appellate Tribunal (SAT) in the cases of E-Lands Fashion China Holdings v. SEBI (SAT 2011) and Tata Tea Limited v. SEBI (SAT 2008). Recently, SEBI was also very slow on giving approvals to the takeover offers in cases where a non-compete fee clause was existing in a share purchase agreement (SPA) which was triggering the open offer. Transactional lawyers drafting the SPAs should take note of the above and delete the non-compete fee clause and if not, they may be prepared with their litigation counter-parts to challenge this policy move before the court of law, but I believe Indian courts do not give any opinion where Government’s policy is involved.
(c) In cases of competitive offers, the successful bidder can acquire shares of other bidders after the offer period without attracting open offer obligations.
Takeaways of transactional lawyer
This would certainly ease the takeover process, however it is not clear how this policy move would apply as in is there any time period or is it left open ended after the offer period has passed. Under the present takeover code, the successful bidder can buy the shares of other bidders-there is no limitation on this. Under the TRAC recommendation, within twenty-one business days from expiry of the offer period, any competing acquirer would be free to negotiate and acquire the shares tendered to the other competing acquirer, at the same price that was offered by him to the public. I hope this would be clarified when SEBI comes out with draft new takeover regulations for public comments.
(d) Voluntary offers have been introduce subject to certain conditions.
(e) A recommendation on the offer by the Board of Target Company has been made mandatory.
Takeaways of transactional lawyer
This move shows the graduation of maturity level in the Indian capital markets. This is in line with the practices followed in US and the EU. We might see the emergence of white knights and other takeover market practices prevalent in the US or the EU.
(f) Existing definition of control shall be retained as it is.
Takeaways of transactional lawyer
Verdict of SAT is very clear on this. Transactional lawyers should read and apply the holding in cased of Subhkam Ventures (I) Pvt. Ltd v. SEBI (SAT, 2010).
(g) The minimum offer size shall be increased from the exiting 20% of the total issued capital to 26% of the total issued capital.
Takeaways of transactional lawyer
This is in line with initial triggering event at 25%, so under the proposed takeover regulations, pursuant to successful open offer and assuming that the existing shareholders tenders the shares upto 26%, this will lead to acquisition of 51%, therefore making the target company a subsidiary of the acquirer fulfilling the requirements of section 4 of the Companies Act, 1956 (Companies Act). Under the Companies Act, any equity holding greater than 25% gives a right to block a ‘special resolution’, however this is a type of indirect control or negative control, with 51% equity shareholdings the acquirer would exercise the majority stake in the target company. This is also in line with the definition of ‘control’ under section 5 of the Competition Act, 2002.
(h) The Board did not accept the recommendation of TRAC to provide for delisting pursuant to an offer and proportionate acceptance.
Certainly, in times to come there is going be a lot of in-bound acquisition deals and these changes in takeover regulations may in short run as well as long run propel the acquisition activities of listed companies in India.
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