In
Indian capital markets and M&A transactions (especially in relation to
listed company takeovers), a lot depends on the market practice, a term heavily
used by lawyers and bankers assisting the companies in a specific acquisition
deal.
Many a
times while advising a client on aspects of a takeover transaction from the
point of view of obtaining approval from Securities and Exchange Board of India
(SEBI) (technically there is no approval granted by SEBI, it issues an
observation letter for the takeover process in relation to disclosures made and
other compliances), the lawyers look at past precedents i.e., past successful
takeover transactions which were approved by SEBI.
In this
piece, I would like to capture some of the peculiar or some-what different
transaction structures adopted by the parties to an acquisition transaction,
where after review SEBI has granted approval for the takeover process under the
SEBI Takeover Code. I have selected 6 important deals undertaken by reasonably
decent bankers in India.
I.
Acquisition of Astec Lifesciences
Limited by Godrej Agrovet Limited (Merchant Banker: Kotak Mahindra]
1.
Additional
Equity Shares:
In terms of the SPA, the Acquirer has the option to additionally acquire upto
9,79,055 Equity Shares from the Sellers for a price of INR 190 for each
additional Equity Share, if after the Offer the Acquirer does not hold 50.32%
of the Voting Share Capital
Takeaways:
SEBI is fine with the call option available to the acquirer in the event the
acquirer is not able to acquire minimum number of shares it seeks to acquire.
2.
Downward
adjustment:
The price agreed to be paid by the Acquirer to the Sellers is INR 190 (Rupees
One Hundred Ninety) per Sale Share, which price is subject to downward
adjustments (if applicable) in accordance with the terms of the SPA, including
but not limited to a reduction of INR 20,00,00,000 (Rupees Twenty Crore) from
the Sale Consideration if the sale of ACCPL is not completed within 270 (Two
Hundred Seventy) days from August 28, 2015 (i.e. date of execution of the SPA).
ACCPL is a wholly owned subsidiary of the Target Company and as a condition to
the transactions contemplated under the SPA the shares of ACCPL held by the
Target Company will be sold within 270 days from August 28, 2015 (i.e., date of
execution of the SPA).
Takeaways:
SEBI is fine with the price adjustment clause amongst the sellers and the buyers
in case of the SPA. However, such readjusted sale price is independent of the
price offered to the shareholders (under Regulation 8 of the SEBI Takeover Code).
3.
Non-compete
fees: The
Sale Consideration to be paid by the Acquirer to the Sellers also includes an
aggregate non-compete fee of INR 50,00,000 (Rupees Fifty Lacs).
Takeaways:
The consideration of Rs. 50 Lakhs appears to be less considering the stakes
involved in the transaction. Perhaps, the amount negotiated for the offer price
had taken into consideration/ factored-in the non-compete payment involved in
this transaction. Additionally, the amount for non-compete here is a show-case
amount intended to lessen the stamp duty burden and also an instrument to
capture all the typical provisions involed for non-compete such as time period,
area of operation, relevant product and geographic market etc.
4.
Reps
& Warranties and Indemnity:
In this context, the Sellers have set aside a certain sum of money in an escrow
account which may be drawn on by the Acquirer upon (a) suffering any losses
from the breach or inaccuracy of the representations and warranties, and (b)
occurrence of certain identified events.
Takeaways:
This is a typical clause in a M&A SPA agreement. However, the time period
of keeping the money in escrow account is important, which could vary from 12
months to 18 months post-closing depending on the transaction. SEBI is fine
with such clauses as this does not have an impact on shareholders who are
tendering the shares in the open offer.
5.
Continuing Shareholding of Mr. Ashok Hiremath: Mr. Ashok V. Hiremath
will continue to hold 10% of Voting Share Capital assuming the Acquirer does not
acquire the Additional Equity Sharesin the Target Company,and subject to other terms of the SPA for a
period of two (2) years from the completion of the acquisition of the Sale
Shares, in accordance with the SPA and will continue as a Promoter of the
Target Company.
Takeaways: This is matter of private agreement between the
parties.
6.
Sellers
not to acquire Equity Shares under the creeping acquisition method: The Sellers have agreed that (a)
till two (2) years from the completion of the acquisition of the
Sale Shares in accordance with the SPA, or (b) till the time the
Sellers cease to be classified as 'promoters' as per the SEBI
(ICDR) Regulations, the Sellers or their affiliates will not acquire
any shares of the Target Company without the prior written approval
of the Acquirer.
Takeaways: This is matter of private agreement between the
parties.
7.
Tag
Along Right: For
a period of upto two (2) years from the completion of the acquisition of the
Sale Shares in accordance with the SPA, if the Acquirer intends to sell any
equity shares of the Target Company, then Mr. Ashok V. Hiremath will have the
right to 'tag along' and sell the equity shares of the Target Company
held by him along with the Acquirer, in accordance with the terms of the SPA.
Takeaways: This is matter of private agreement between the
parties.
8.
In this transaction the
price per share offered to public shareholders was more than as was negotiated
between the acquirer and the sellers under the SPA.
II.
Acquisition of ADI Finchem
Limited by FIH Mauritius Investments (Merchant Banker: ICICI Securities]
1.
As
per the terms of the SPA, the Sellers have the ability to undertake inter-se
transfer amongst themselves after the execution date of the SPA i.e.
November 4, 2015, provided that such Sellers complete such transfer within 30
(Thirty) days from the date of execution of the SPA i.e. November 4, 2015
Takeaways:
The stage between the signing and closing of the agreement is addressed here.
Under Regulation 10 of the SEBI Takeover Code, inter-se transfer of shares amongst
the promoters is exempted from making an open offer. Such an eventuality is
addressed here. SEBI appears to be fine with the inter group or inter se
transfer of shares amongst the promoters for the purposes of internal
restructuring before selling the shares as per the terms of the open offer.
III.
Acquisition of Igarshi Motors India
Limited by Igarhsi Electric Works Limited, MAPE (PAC 1), Alpha FDI Holdings
(PAC 2), TCGF-I (PAC 3), IEW HK (PAC 4)AGILE (PAC 5) (Merchant Banker: Religare
Investment banking]
1.
The Public Announcement at paragraph 3, stated that PAC 4 is
not acting in concert with the Acquirer or MAGPL for the purpose of the Offer,
but subsequently, PAC 4 has joined as a person acting in concert with the
Acquirer and other PACs for the purpose of the Offer.
2.
Pursuant to the completion of the underlying transaction under the
SPA, PAC 5 has joined as a person acting in concert with the Acquirer and other
PACs for the Offer
Takeaways: The above two disclosures suggests that post initial public
announcement for the takeover, the acquirers can name one or more person acting
in concert in the following documents such as detailed public statements,
letter of offer or for that matter in a addendum issued after the public announcement
is made as to the inclusion of new PACs.
IV.
Acquisition of IIFL by FIH
Investments, HWIC Asia Fund (PAC 1), I Investments (PAC 2), FIH Private
Investments (PAC 3) [Merchant Banker: ICICI Securities]
1.
The
offer was subject to approval by SEBI (Mutual Fund Division) and the Cabinet
Committee on Economic Affairs
2.
The
Offer is not made pursuant to any transaction
3.
The
Offer to the Equity Shareholders of the Target Company is being made pursuant
to Regulation 3(1) of the SEBI (SAST) Regulations involving substantial
acquisition of the Equity Shares without any change in control/ management of
the Target Company. The Acquirer and PAC do not intend to control the
management of the Target Company or induct additional directors representing
the Acquirer and/or the PAC on the board of the Target Company. There will be
no change in the promoters of the Target Company.
Takeaways:
The acquirers are making a disclosure that they are merely sleeping partners
with no control rights. Even though, the acquirer is a white knight or fear
that somebody in future will take over the company, it is a good idea to
acquire as much share as possible and disclose to the SEBI that they are not in
control but just the strategic investor.
4.
The Acquirer and PAC have provided the following undertakings to
SEBI (separately referred to as “Undertaking” and jointly as “Undertakings”)
in respect of the Offer by way of letter dated October 01, 2015 (“Reply
Letter”):
i.
The Acquirer and PAC shall not exercise voting rights on
resolutions placed before Equity Shareholders of the Target Company in relation
to such number of Equity Shares held by the Acquirer and the PACs that
represent more than 25% (Twenty Five percent) of the paid up equity share
capital of the Target Company at the time of voting on the relevant resolution;
and
ii.
The Acquirer and PAC shall not acquire additional Equity Shares
after the completion of the Offer to exceed the Aggregate Fairfax Threshold,
including by way of a creeping acquisition of upto 5% (Five percent) of the
equity share capital under Regulation 3(2) of the SEBI (SAST) Regulations,
unless the Acquirer and PAC make an open offer or obtain the prior consent of
SEBI for such acquisition.
Takeaways:
This is an interesting piece of undertaking. Perhaps this undertaking may be
given by the acquirer and the PAC after SEBI had specifically demanded it from
them.
V.
Acquisition of McNally Bharat
Engineering Limited by EMC Limited [Merchant Banker: ICICI Securities]
1.
This offer was pursuant to
preferential allotment of equity shares
VI.
Acquisition of Tasty Bite Eatables Limited by Kagome
Co. Ltd (Acquirer), Preferred Brands
Foods (India) Private Limited (PAC) [Merchant Banker: ICICI Securities]
1.
This
Offer is made by the Acquirer and the PAC to all Eligible Shareholders, to
acquire up to 6,61,490 (six lakhs sixty one thousand four hundred and ninety)
Equity Shares, representing 25.78% shares of the target company.
Takeaways:
This was a case where the public shareholding (i.e., shareholding other than
the acquirers and PACs), was 25.78% and under the SEBI Takeover Code, the
minimum shares to be acquired is 26% as per Regulation 7 of the SEBI Takeover
Code. Further in terms of Regulation 7(4), if the acquirer acquires shares so
as to result in public shareholding less than 25%, then in terms of SCRR the
acquirer is required to shred out the extra shareholding so as to keep the
minimum public shareholding upto 25%. In this case, as per the post-offer
report, the number of shares acquired were 300 shares i.e., 0.01% shares of the
target company.
