takeover code kirti shah

8/8/2019 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

Takeover Code A Broad PerspectivePage 2

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%


15% Increase in PIPEtransactions

Promoters to beef uptheir current stakes


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Creeping Acquisition


Acquirer holding 25% ormore voting rightsacquiring additional


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

Takeover Code A Broad Perspective


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Control Acquisition


For acquisition of control,definition includesAbility" in addition to


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


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


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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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


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


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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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


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


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


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


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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