The year 2008 witnessed several global mergers and acquisitions, with Indian companies playing an active role. The trend is expected to continue during the slowdown with cash-rich companies on the lookout for easier targets. It makes it imperative, therefore, to investigate how public listed companies can be acquired.
Given the current economic uncertainty, the interest in mergers and acquisitions (M&A) will be high. Cash- rich companies get good targets at reasonable prices. Companies not doing well may also be on the lookout for stronger companies that they can be a part of. Two possibilities – a merger or an acquisition – emerge in such situations. While a merger refers to the combination of two entities through mutual negotiation to form a third company, an acquisition refers to acquiring a target company’s controlling interest or asset. The target company can dissolve and operate under the acquirer’s name. This article is about acquisition and that too specifically about the acquisition of a company listed on the stock exchanges in India. Acquisition, also called takeover, can be friendly or hostile, and is accomplished through a complex process.
Friendly vs Hostile Takeovers
There is no difference between the legal framework applicable to friendly and hostile acquisitions, says Mohit Saraf, Senior Partner, Luthra & Luthra, a reputed legal firm in India. “However sometimes, as a practical matter, certain regulations may not be relevant in the case of a hostile acquisition or in the case of a friendly acquisition.”
In a friendly takeover, there is an agreement to acquire shares either between the acquirer and the target company or between the acquirer and the incumbent promoters of the target company. This agreement is then followed by an open offer to the shareholders of the target company to acquire shares from them.
“Since the acquisition is a negotiated acquisition, the acquirer is generally given access to the books and premises of the target company to conduct a due diligence exercise,” Saraf says.
In a friendly acquisition, the acquirer is generally able to negotiate a set of representations and warranties from the company or the seller pertaining to various aspects of the target company. This is valuable, Saraf points out, as it acts as an insurance against any liabilities that may be uncovered in the future and that could not be known earlier from publicly available information.
In a hostile takeover, however, there is no agreement between the acquirer and the target company. Instead, the acquirer generally moves straight to an open offer to the public shareholders of the target company. This is because in a hostile takeover, the incumbent promoters of the target company are opposed to the takeover. Saraf says that sometimes in a hostile takeover, there may be one or more agreement to acquire shares between the acquirer and some shareholder of the target company who hold large chunks of shares in the target company. This was seen during the Emami-Zandu transaction, where there acquirer (Emami) had acquired shares of Zandu from the Vaidyas, who held a large block of shares and had then made an open offer for Zandu shares.
“Hostile acquisition is, however, laden with certain disadvantages. A hostile acquirer cannot conduct a due diligence exercise on the target company and its assets,” Saraf says.
| Alcan acquiring 20% in Indal |
| Sterlite Industries (SIL) made an open offer to purchase ten percent shares of Indian Aluminum Company (Indal) from the public offer in April 1998 (Takeover trigger at ten percent then). |
| SEBI came up with a ruling of public offer of not less than 20%. |
| Sterlite required increasing its public offer to 20%. |
| Indal, feeling vulnerable to a takeover threat from Sterlite, requested its foreign collaborator Alcan to come to its rescue. |
| Sterlite made a cash offer at Rs 115 per share and Alcan made a bid for Rs 175. |
| Sterlite revised it price to Rs 221 per share (Rs 131 cash and Rs 90 by way of preference share issue) and announced its intention to acquire 52%. |
| Financial institutions (FIs) held the key as they held 36% of the equity. |
| Sterlite’s bid was stumped by SEBI, which asked it to take fresh approval from its board for issuing preference issue of shares. FIs had no other choice but to accept Alcan’s offer of Rs 200 per share on the day of closure of the offer. |
| Indal, with the help of Alcan, was successful in warding off the hostile threat. |
There may be hidden liabilities that can deplete the valuation of the target company. A hostile acquirer does not receive any representations and warranties from the target company and its promoters in relation to the financial health and other matters.
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| SEBI’s takeover regulations are not as evolved as the UK’s City Takeover Code. SEBI’s takeover regulations do not cover a host of factual situations that can arise in their implementation. This means that SEBI officials have a wide margin of discretion in applying the regulations. Mohit Saraf |
Applicable legislations
While the acquisition of private companies is done under the provisions of the Companies Act 1956; the takeover of publicly listed companies involves compliance of other laws also.
TM Rustomjee, senior director, Deloitte Touche, India, says, “The Companies Act and securities laws, including SEBI’s Substantial Acquisition of Shares and Takeovers Regulation, 1997, require compliance for the acquisition of publicly listed companies.”
The term ‘takeover’ is not clearly defined under SEBI’s Substantial Acquisition of Shares and Takeovers Regulations, 1997, but it essentially envisages the concept of an acquirer taking over the control or management of a target company through the process of substantial acquisition of shares (also referred to as Takeover Code). This explains why the term ‘substantial acquisition of shares’ attains a vital importance in case of corporate restructuring through (merger or) acquisition. The Takeover Code has defined substantial quantity of shares or voting rights for two different purposes for an acquirer: 1) Threshold of disclosure to be made, and 2) Trigger point for making an open offer.
As per the Takeover Code under SEBI’s regulations, an “Acquirer” is any person who directly or indirectly acquires or agrees to acquire shares or voting rights in a target company, or extend control over the target company either by himself/herself or with any person acting in concert (PAC) with the acquirer. PAC, as pointed out by Mohit Saraf, has been defined by law as any person established to have the common objective of 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 by cooperating with the acquirer, directly or indirectly. The Takeover code, as discussed under SEBI’s Substantial Acquisition of Shares and Takeovers Regulations, 1997, has defined ‘control’ as: a) the right to appoint the majority of the directors, and b) to control the management or policy decisions.
Procedures
Friendly or hostile, the process of acquisition involves several activities. It starts generally with the acquirer appointing an advisor to assist. This can include, depending upon the size of the deal, a banker, solicitor, and a chartered accountant.
“Most acquirers would carry out a due diligence on the target company (even if listed), which could give crucial information about the financial position, legal status of the target’s operations and commercial aspects, which may not be available in the public domain,” Rustomjee says.
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