Acquisition of Company/Business – CS Professional Study Material

Chapter 2 Acquisition of Company/Business – Corporate Restructuring Insolvency Liquidation & Winding Up Notes is designed strictly as per the latest syllabus and exam pattern.

Acquisition of Company/Business – Corporate Restructuring Insolvency Liquidation & Winding Up Study Material

Question 1.
Draft a Board resolution for appointment of merchant banker by an acquirer company under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. (Dec 2012, 5 marks)
Answer:
“Resolved that pursuant to Regulation 12(1) of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 M/S _______ being Category -1 Merchant Banker be and is hereby appointed as Merchant Banker, on the terms and conditions as contained in the draft letter of appointment placed before the meeting duly initialled by the Chairman for the purpose of identification, for making public announcement of takeover offer in the newspapers, forward the same to SEBI and to target company and to draft, the letter of offer to be sent to shareholders of _______, target company and other incidental matters relating there to, in accordance with said Regulation.

Question 2.
Explain ‘open offer thresholds’ under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. (June 2013, 5 marks)
Answer:
‘Open offer thresholds’ under the SEBI (Substantial Acquisition of Shares & Take overs) Regulations, 2011 is as under:

Regulation 3 of SEBI (SAST) Regulations, 2011 covers the provisions related to open offer thresholds.
The following are the threshold limits for acquisition of shares/voting rights, beyond which an obligation to make an open offer is triggered:

(a) Acquisition of 25% or more shares/Voting rights: An acquirer who holds less than 25% shares/voting rights in a target company and agrees to acquire shares that will entitle him to exercise 25% or more shares/voting rights in a target company, then he will need to make an open offer before acquisition of such additional shares in a target company.

(b) Acquisition of more than 5% Shares or voting rights in a financial year: An acquirer who holds 25% or more but less than the maximum permissible non – public share holding in a target company, agrees to acquire more than 5% of the voting rights in any financial year, then he will need to make an open offer before acquisition of such additional shares in a target company.

Question 3.
(a) What do you mean by a mandatory bid and when is it necessary? Describe briefly. (June 2013) (5 marks)
(b) The SEBI (Substantial Acquisition of Shares and Takeovers) (Amendment) Regulations, 2017 provide some mechanism for automatic exemption from making ‘mandatory offer’ other than the inter se transfer among the promoters. Briefly state four such situations. (4 marks) Answer:
(a) Mandatory Bid: (Regulation 3)

Mandatory bid is one of the type of takeover bids.
Mandatory bid arises due to the regulatory requirement.
This type of bid requires acquirer to make bids for acquisition of certain levels of holdings.

Following are the cases when such requirement arises :

for acquiring 25% or more of the shares or voting rights of the company.
for acquiring additional shares or voting rights to th extent of 5% of the voting rights in any financial year beginning April 01, if such person already holds not less than 25% but not more than 75% or 90% of the shares or voting rights in a company as the case may be;
Note: The maximum permissible non – public shareholding in case of every listed company other than public sector company is 75% and in case of public sector company is 90%.
For acquiring control over a company.

Competitive Bid:

Competitive bid is the one which is made by a person other than the acquirer who has made the first public announcement.
- Such competitive offer can be made within 15 working days of the detailed public statement made by the original acquirer.
- As per Regulation 20 of the Takeover Code, the original acquirer can revise the terms and price upwards on receiving competitive bid.

(b) The following acquisitions shall be exempt from the obligation to make an open offer under regulation 3 and regulation 4 subject to fulfillment of the conditions stipulated therefor,—
(a) acquisition pursuant to /nfersetransfer of shares amongst qualifying persons; being,—
(i) immediate relatives;

(ii) persons named as promoters in the shareholding pattern filed by the target company in terms of the 23[listing regulations or as the case may be, the listing agreement] or these regulations for not less than three years prior to the proposed acquisition;

(iii) a company, its subsidiaries, its holding company, other subsidiaries of such holding company, persons holding not less than fifty percent of the equity shares of such company, other companies in which such persons hold not less than fifty percent of the equity shares, and their subsidiaries subject to control over such qualifying persons being exclusively held by the same persons; 24[E-xplanation: For the purpose of this sub-clause, the company shall include a body corporate, whether Indian or foreign.]

(iv) persons acting in concert for not less than three years prior to the proposed acquisition, and disclosed as such pursuant to filings under the 25[listing regulations or as the case may be, the listing agreement);

(v) shareholders of a target company who have been persons acting in concert for. a period of not less than three years prior to the proposed acquisition and are disclosed as such pursuant to filings under the 26[listing regulations or as the case may be, the listing agreement], and any company in which the entire equity share capital is owned by such shareholders in the same proportion as their holdings in the target company without any differential entitlement to exercise voting rights in such company

Provided that for purposes of availing of the exemption under this clause,—
(i) If the shares of the target company are frequently traded, the acquisition price per share shall not be higher by more than twenty-five per cent of the volume-weighted average market price for a period of sixty trading days preceding the date of issuance of notice for the proposed inter se transfer under sub-regulation (5), as traded on the stock exchange where the maximum volume of trading in the shares of the target company are recorded during such period, and if the shares of the target company are infrequently traded, the acquisition price shall not be higher by more than twenty-five percent of the price determined in terms of clause (e) of sub-regulation (2) of regulation 8; and

(ii) the transferor and the transferee shall have complied with applicable disclosure requirements set out in Chapter V.

(b) acquisition in the ordinary course of business by,—

an underwriter registered with the Board by way of allotment pursuant to an underwriting agreement
a stock broker registered with the Board on behalf of his client in exercise of lien over the shares purchased on behalf of the client
a merchant banker registered with the Board or a nominated investor in the process of market making or subscription to the unsubscribed portion of issue
any person acquiring shares pursuant to a scheme of safety net in terms of regulation 44 of the Securities and Exchange Board of India
a merchant banker registered with the Board acting as a stabilising agent or by the promoter or pre-issue shareholder in terms of Regulation 45 of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018;
by a registered market-maker of a stock exchange in respect of shares for which he is the market maker during the course of market making;
A Scheduled Commercial Bank, acting as an escrow agent; and (viii) invocation of pledge by Scheduled Commercial Banks or Public Financial Institutions as a pledgee.

(c) acquisitions at subsequent stages, by an acquirer who has made a public announcement of an open offerfor acquiring shares pursuant to an agreement of disinvestment, as contemplated in such agreement:

(d) acquisition pursuant to a resolution plan approved under section 31 of the Insolvency and Bankruptcy Code, 2016;

(e) acquisition pursuant to the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;

(f) acquisition pursuant to the provisions of the Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2018;

(g) acquisition by way of transmission, succession or inheritance;

(h) Acquisition of shares by the lenders pursuant to conversion of their debt as part of a debt restructuring scheme implemented in accordance with the guidelines specified by the Reserve Bank of India:

Question 4.
Enumerate the reasons inducing companies to go for international acquisitions. (Dec 2013, 5 marks)
Answer:
Cross border takeover
Cross border takeovers are takeovers beyond national territory. There has been a substantial increase in the quantum of funds flowing across nations in search of takeover candidates. The UK has been the most important foreign investor in the USA in recent years, with British companies making large acquisitions. With the advent of the single market, the European Union now represents the largest single market in the world. European as well as Japanese and American companies have sought to increase their market presence by acquisitions.

Companies go in for international acquisitions for a number of strategic or tactical reasons such as the following :

Growth orientation: To escape small home market, to extend markets served, to achieve economy of scale.
Access to inputs : To access raw materials to ensure consistent supply, to access technology, to access latest innovations, to access cheap and productive labour.
Exploit unique advantages: To exploit the company’s brands, reputation, design, production and management capabilities.
Defensive : To diversify across products and markets to reduce earnings volatility, to reduce dependence on exports, to avoid home country political and economic instability, to compete with foreign competitors in their own territory, to circumvent protective trade barriers in the host country.
Response to client needs : To provide home country clients with service for their overseas subsidiaries, e.g. banks and accountancy firms.
Opportunism: To exploit temporary advantages, e.g. a favourable exchange rate making foreign acquisitions cheap.

Question 5.
Discuss the legal issues concerning ‘poison pill devices’ as defence mechanism against hostile takeovers. (June 2014, 5 marks)
Answer:

Poison Pill is controversial but popular defense mechanism against hostile takeover bids.
These pills provide their holders with special rights exercisable only after a period of time following the occurrence of a triggering event such as tender offer for the control or the accumulation of a specified percentage of target shares.
These rights take several forms but all are difficult and costly to acquire control of the issuer or the target firm.
Usually the rights provided by the poison pill can be altered quickly by the board or redeemed by the company anytime after they become exercisable following the occurrence of the triggering event.
These provisions force the acquirer to negotiate directly with the target company’s board and allow some takeover bids to go through.
The legality of poison pills has been questioned in courts of law because they alter the relationship among the principals (Shareholders) without their approval by vote.
Proponents of the poison pill argue that poison pill do not prohibit all takeovers but enhance the ability of the Board of Directors to bargain for a “fair price”.
In most poison pills, the agents (Board of Directors) adopt rights plans which treat shareholders of the same class unequally in situation involving corporate control.
Thus poison pills have been vulnerable to Tribunal review.

Question 6.
(i) Mention the factors which make a company vulnerable to takeover bids. (Dec 2014) (5 marks)
(ii) What are the obligations of the committee of independent directors of the target company with regard to providing reasoned recommendations on the open offer being made by the acquirers? (5 marks)
Answer:
(i) Takeover Bid:

A takeover bid is a technique, which is adopted by a company for taking over control of the management and affairs of another company by acquiring its controlling shares.
It is an offer to the shareholders of a target company whose shares are not closely held, to buy their shares in the company at the offered price within the stipulated period of time.
It is addressed to the shareholders with a view to acquiring sufficient number of shares to give the offeror company, voting control of the target company.

Factors which make a company vulnerable to takeover bids:

Low stock price with relation to the replacement cost of assets or their potential earning power.
A highly liquid balance sheet with large amounts of excess cash, a valuable securities portfolio and significantly unused debt capacity;
Good cash flow in relation to current stock prices;
Subsidiaries and properties which could be sold off without significantly impairing cash flow; and
Relatively small stockholdings under the control of an incumbent management.

(ii)

A committee of independent directors shall be constituted by the board of directors of the target company upon receipt of the detailed public statement
A committee of independent directors shall provide reasoned recommendations on such open offer and the target company shall publish such recommendations.
Such committee shall be entitled to seek external professional advice at the expense of the target company.
Such recommendations shall be published in such form as may be specified, at least two working days before the commencement of the tendering period, in the same newspapers where the public announcement of the open offer was published.
Copy of the same shall be sent to:
1. the Board;
2. all the stock exchanges on which the shares of the target company are listed and the stock exchanges shall forthwith disseminate such information to the public; and
3. to the manager to the open offer and where there are competing offers, to the manager to the open offer for every competing offer.

Question 7.
Amilo Exports Ltd., a listed company has opened an escrow account in connection with acquiring another company. The company wants your opinion for the release of amount from escrow account. Comment. (Dec 2014, 3 marks)
Answer:
Escrow Account:

Escrow Account means a bank account which is required to be opened by an acquirer who proposes to make public announcement of offer.
The Acquirer shall open an escrow account atleast two working days prior to the date of Detailed Public Statement.

Release of amount from Escrow Account:
As per Regulation 17(10), the amount lying in escrow account can be released in the following cases only:

In case of withdrawal of offer, the entire amount can be released only after certification by the managers to the open offer.
The amount deposited in special escrow account is transferred to special bank account opened with the Bankers to an issue; however the amount so transferred shall not exceed 90% of the cash deposit.
The balance 10% is released to the acquirer .on the expiry of 30 days from the completion of all obligations under thfe offer.
The entire amount to the acquirer on the expiry of 30 days from the completion of all obligations under the offer where the open offer is for exchange of shares or other secured instruments.
In the event of forfeiture of amount, the entire amount is distributed in the following manner:
5.1 One third of the amount to Target Company;
5.2 One third of the escrow account to the Investor Protection and Education Fund established under SEBI (Investor Protection and Education Fund) Regulations, 2009;
5.3 Residual one third is to be distributed to the shareholders who have tendered their shares in the offer.

Question 8.
In an open offer, the schedule of activities and the timelines of all competing offers shall be identical. Explain. (June 2015, 4 marks)
Answer:
Yes, In an open offer, the schedule of activities and the timelines of all the competing offers shall be identical. Regulation 20 of SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011.

Competitive offer is an offer made by a person, other than the acquirer who has made the first public announcement.
A competitive offer shall be made within 15 working days of the date of the Detailed Public Statement (DPS) made by the acquirer who has made the first PA.
If there is a competitive offer, the acquirer who has made the original public announcement can revise the terms of his open offer provided the revised terms are favorable to the shareholders of the target company.
Further, the bidders are entitled to make revision in the offer price up to one working days prior to the opening of the offer.
The schedule of activities and the offer opening and closing of all competing offers shall be carried out with identical timelines.

Question 9.
Comment on the following statements: (June 2015)
(i) In terms of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, ‘offer period’ and tendering period’ are one and the same. (3 marks)
(ii) The acquirer can opt out of the open offer process at any point of time by informing stock exchange wherein the shares of the target company are listed and furnishing a copy of the communication to the target company. (3 marks)
(iii) Revision of offer price can be made by the acquirer upward but that can be exercised only in the event of there being a competing offer. (3 marks)
(iv) Acquisition pursuant to a scheme made under section 18 of the Sick Industrial Companies (Special Provisions) Act, 1985 or any statutory modification thereto shall be automatically exempt from the obligation to make an open offer under Regulations 3 and 4 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 but not the acquisition made pursuant to the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. (3 marks)
(v) The acquisition of shares resulting from invocation of pledge by a public financial institution is exempt from open offer obligation. (3 marks)
Answer:
(i)

In terms of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011, ‘offer period’ and ‘tendering period’ are different.
The term ‘offer period’ pertains to the period starting from the date of the event triggering open offer till completion of payment of consideration to shareholders by the acquirer or withdrawal of the offer by the acquirer as the case may be.
The term ‘tendering period’ refers to the 10 working days period falling within the offer period, during which the eligible shareholders who wish to accept the open offer can tender their shares in the open offer.

(ii) According to Regulation 23 of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011, an open offer once made cannot be withdrawn except in the following circumstances:
Statutory approvals required for the open offer or for effecting the acquisitions attracting the obligation to make an open offer have been refused subject to such requirement for approvals having been specifically disclosed in the DPS and the letter of offer;

Any condition stipulated in the SPA attracting the obligation to make the open offer is not met for reasons outside the reasonable control of the acquirer, subject to such conditions having been specifically disclosed in the DPS and the letter of offer;

Provided that an acquirer shall not withdraw an open offer pursuant to a public announcement made under clause (g) of sub-regulation (2) of regulation 13, even if the proposed acquisition through the preferential issue is not successful

Sole acquirer being a natural person has died;

Such circumstances which in the opinion of SEBI merit withdrawal of open offer.

(iii) According to Regulation 18 of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011, irrespective of whether a competing offer has been made, an acquirer may make upward revisions to the offer price and subject to the other provisions of these regulations, to the number of shares sought to be acquired under the open offer, at any time prior to the commencement of the last one working days before the commencement of the tendering period.

Thus, revision of offer price can be made irrespective of whether a competing offer has been made.

(iv) The exemption include acquisition pursuant to a scheme made under section 18 of the Sick Industrial Companies (Special Provisions)
Act, 1985 and also acquisition pursuant to the provisions of the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002.

Thus, both acquisition pursuant to a scheme made under section 18 of the Sick Industrial Companies (Special Provisions) Act, 1985 as well as acquisition pursuant to the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 are exempt from the obligation to make an open offer under Regulation 3 and Regulation 4.

(v) Certain acquisitions shall be exempt from the obligation to make an open offer under Regulation 3 and Regulation 4.

The exemption include acquisition in the ordinary course of business by invocation of pledge by Scheduled Commercial Banks or Public Financial Institutions as a pledge.
Thus, the acquisition of shares resulting from invocation of pledge by a public financial institution is exempt from open offer obligation.

Question 10.
How is the open offer price for acquisition of shares of a listed target company whose shares are frequently traded determined? (June 2015, 5 marks)
Answer:
Regulation 8(2): If the target company’s shares are frequently traded then the open offer price for acquisition of shares under the minimum open offer shall be highest of the following;

Highest negotiated price per share under the share purchase agreement (“SPA”) triggering the offer;
Volume weighted average price of shares acquired by the acquirer during 52 weeks preceding the public announcement (“PA”);
Highest price paid for any acquisition by the acquirer during 26 weeks immediately preceding the PA;
Volume weighted average market price for sixty trading days preceding the PA.

Question 11.
‘Crown jewel’ strategy for prevention of takeover bids is not a successful tool in Indian context. Comment. (Dec 2015, 5 marks)
Answer:
The central theme in such a strategy is the divestiture of major operating unit most coveted by the bidder commonly known as the “crown jewel strategy”. Consequently, the hostile bidder is deprived of the primary intention behind the takeover bid.

Such a radical step may however be, self-destructive and unwise in the company’s interest.

However, the practice in India is not so flexible.

The Companies Act, 2013 lays down certain restrictions on the power of the Board. Vide Section 180 of Companies Act, 2013, the Board cannot sell the whole or substantially the whole of its undertakings without obtaining the permission of the company in a general meeting.

As per Regulation 26 of SEBI (Substantial Acquisition of Shares and Takeover) Regulation, 2011, once a public announcement of an open offer for acquiring shares of a target company has been made, the board of directors of such target company shall ensure that during the offer period the business of the target company is conducted in the ordinary course consistent with past practice.

During the offer period unless the approval of shareholder of the target company by way of a special resolution by postal ballot is obtained, the board of directors of either the target company or any of its subsidiaries shall not, – (a) alienate any material assets whetherby way of sale lease, encumbrance or otherwise or enter into any agreement therefor outside the ordinary course of business, (b) effect any material borrowing outside the ordinary course of business (c) issue or allot any authorised but unissued securities entitling the holder to voting rights, (d) enter into amend or terminate any material contracts to which the target company or any of its subsidiaries is a party, outside the ordinary course of business.

Question 12.
Comment on the following:
(i) In the event of forfeiture of the amount lying in the escrow account, the acquirer shall be paid one-third of the amount forfeited in terms of Regulation 17(10) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.
(ii) An offer in which the acquirer has stipulated a minimum level of acceptance is known as ‘conditional offer’. (June 2016, 3 marks each)
Answer:
(i) Regulation 17(10) In the event of forfeiture of amount, the entire amount is distributed in the following manner:

One third of the amount to Target Company;
One third of the escrow account to the Investor Protection and Education Fund established under SEBI (Investor Protection and Education Fund) Regulations, 2009;
Residual one third is to be distributed to the shareholders who have tendered their shares in the offer.

(ii)

An offer in which the acquirer has stipulated a minimum level of acceptance is known as a ‘conditional offer’.
‘Minimum level of acceptance’ implies minimum number of shares which the acquirer desires under the said conditional offer.
If the number of shares validly tendered in the conditional offer, are less than the minimum level of acceptance stipulated by the acquirer, then the acquirer is not bound to accept any shares under the offer.
In case of conditional offer, the acquirer and PACs with him shall not acquire, during the offer period, any shares in the target company except under the open offer and any underlying agreement for the sale of shares of the target company pursuant to which the open offer is made. Regulation 19

Question 13.
(a) Explain the term ‘persons acting in concert’ (PACs) with reference to SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. (June 2016) (5 marks)
(b) What does the term ‘crown jewel’ stand for, as a defence strategy in respect of a takeover bid? (5 marks)
Answer:
(a) Regulation 2(1 )(q): PACs are individual(s)/company(ies) or any other legal entity(ies) who, with a common objective or purpose of acquisition of shares or voting rights in, or exercise of control over the target company, pursuant to an agreement or understanding, formal or informal, directly or indirectly cooperate for acquisition of shares or voting rights in, or exercise of control over the target company.

SAST Regulations, 2011 define various categories of persons who are deemed to be acting in concert with other persons in the same category, unless the contrary is established. Few of them are as below –

a company, its holding company, subsidiary company and any company under the same management or control;
a company, its directors, and any person entrusted with the management of the company
directors Of companies referred to in item (i) and (ii) of this sub-clause and associates of such directors;
promoters and members of the promoter group;
immediate relatives
a mutual fund, its sponsor, trustees, trustee company, and asset management company;
a collective investment scheme and its collective investment management company, trustees and trustee company
a venture capital fund and its sponsor, trustees, trustee company and asset management company
a merchant banker and its client, who is an acquirer
a portfolio manager and its client, who is an acquirer
banks, financial advisors and stock brokers of the acquirer, or of any company which is a holding company or subsidiary of the acquire.

(b) The central theme in such a strategy is the divestiture of major operating unit most coveted by the bidder-commonly known as the “crown jewel strategy”. Consequently, the hostile bidder is deprived of the primary , intention behind the takeover bid. Thus, the above defense can only be used before the predator/ bidder makes the public announcement of its intention to takeover the target company.

Question 14.
‘General exemptions’ under Regulation 10 and ‘Exemption by board’ under Regulation 11 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 are one and the same. Comment. (June 2016, 5 marks)

Question 15.
Comment on the following:
(a) Poison pill defense is a strategy against hostile takeover. (Dec 2016) (3 marks)
(b) Open offer can be withdrawn under Regulation 23 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. (3 marks)
Answer:
(a) Poison Pills Defenses:
A poison pill is a tactic utilized by companies to prevent or discourage hostile takeovers. A company targeted for a takeover uses a poison pill strategy to make shares of the company’s stock look unattractive or less desirable to the acquiring firm.

There are two types of poison pills:
1, A “flip-in” permits shareholders, except for the acquirer, to purchase additional shares at a discount. This provides investors with instantaneous profits. Using this type of poison pill also dilutes shares held by the acquiring company, making the takeover attempt more expensive and more difficult.

2. A “flip-over’’ enables stockholders to purchase the acquirer’s shares after the merger at a discounted rate. For example, a shareholder may gain the right to buy the stock of its acquirer, in subsequent mergers, at a two-for-one rate.

Question 16.
(a) What are the obligations of the Committee of the Independent Directors of a target company in connection with providing reasonable recommendation on the open offer made by the acquirer? (June 2017) (5 marks)
(b) What is a “Voluntary Offer” as per Regulation 6 of Takeover Code 2011 ? (5 marks)
Answer:
(a) A committee of independent directors shall be constituted by the Board of the target company to provide reasoned recommendations on the open offer being made by the acquirer and the target company shall publish such recommendations.

The committee of independent directors (hereafter referred as committee) will be entitled to obtain external professional advice at the cost of the target company. The committee shall provide its reasoned recommendation on the open offer to the shareholders of the target company and such recommendation will be published in such form as may be specified, at least two working days before commencement of the tendering period, in the same newspapers where the public announcement of the open offer was published. Simultaneously, copies shall be sent to SEBI and the stock exchanges where the shares of the target company are listed and the stock exchanges shall forthwith disseminate such information to public.

The committee shall ensure that the copy containing reasoned recommendations is also sent to the manager for open offer and where there are competing offers, to the managers to the open offer for every competing offer.

(b) Voluntary Offer: As per Regulation 6 of SEBI SAST REGULATIONS, A voluntary open offer is an offer made by a person who himself or through or along with Persons acting in concert with him if any, holds 25% or more shares or voting rights in the target company, but less than the maximum permissible non-public shareholding limit, for such number of shares such that the aggregate of the shareholding of the acquirer after the offer shall not exceed the maximum permissible non public shareholding.

A voluntary offer cannot be made if the acquirer or PACs with him has acquired any shares of the target company in the 52 weeks prior to the voluntary offer without attracting the provisions of the regulations, to make a public announcement.
The acquirer is prohibited from acquiring any shares during the offer period other than through the acquisitions in the open offer.
The acquirer is also not entitled to acquire any shares for a period of 6 months, after completion of open offer except pursuant to another voluntary open offer.

Question 17.
(i) M/s Brite Instruments Pvt. Limited is acquiring M/s Sunshine Pvt. Limited. You are the Company Secretary of M/s Brite Instruments Pvt. Limited. Help your management (Board of Directors) to prepare a checklist in this regard. (June 2017) (5 marks)
(ii) In case of Takeover, what are the cases in which the amount is released from Escrow Account? (5 marks)
(iii) Scheme of Reconstruction pursuant to order of competent authority does not trigger, an open offer under SEBI (SAST) Regulations. Discuss the regulation citing the case laws. (5 marks)
Answer:
(i) To
The Board of Directors
M/s Brite Instruments Pvt. Ltd.
Mumbai

Dear Sir,

Subject-Check list for the legal compliances about the acquisition of M/S Sunshine Pvt. Ltd. (transferor company)

With reference to the above subject, I would like to address the board regarding the compliances of the company that is required to be completed for the acquisition of the subjected company as below:

Offer made to the transferor company.
Copy of notice for the general meeting along with a copy of Form CAA 14 circulated by the transferor company to its members.
Intimation received from the transferor company in respect of approval of the offer by the requisite majority of the shareholders of that company.
Notice as prescribed in Section 235 of the Companies Act, 2013 given by the company to dissenting shareholders of the transferor company for the purpose of acquiring their shares.
If there is any Tribunal order in favour of the dissenting shareholders of the transferor company, terms of the same has been complied with.
The company must ensure that the prescribed notice has been sent to those shareholders of the transferor company who have not assented to the transfer of the shares and that such shareholders have agreed to transfer their shares to the company.
To ensure that a copy of the notice has been sentto the dissenting shareholders of the transferor company and duly executed instrument(s) of transfer together with the value of the shares have been sent to the transferor company.

Thanking You
Yours faithfully
Yogi Srivastava
Company Secretary

(ii) As per Regulation 17(10) of SEBI [SAST] REGULATIONS, The amount lying in escrow account can be released in the following cases only:

In case of withdrawal of offer, the entire amount can be released only after certification by the managers to the open offer.
The amount deposited in special escrow account is transferred to special bank account opened with the Bankers to an issue; however, the amount so transferred shall not exceed 90% of the cash deposited in the escrow account.
The balance 10% in the escrow account is to be released to the acquirer on the expiry of thirty days from the completion of all obligations under the open offer.
The entire amount to the acquirer on the expiry of thirty days from the completion of all obligations under the offer where the open offer is for exchange of shares or other secured instruments.
In the event of forfeiture of amount, the entire amount is distributed in the following manner:
5.1 One third of the amount to Target Company;
5.2 One third of the escrow account to the Investor Protection and Education Fund established under SEBI (Investor Protection and Education Fund) Regulations, 2009;
5.3 Residual one third is to be distributed to the shareholders who have tendered their shares in the offer.

(iii) SEBI (SAST) (Amendment) Regulations, 2017 states that Acquisition Pursuant to a scheme of arrangement involving the target company as a transferor company or as a transferee company, or reconstruction of the target company, including amalgamation, merger or demerger, pursuant to an order of a Court/Tribunal or a competent authority under any law or regulation, Indian or foreign does not trigger open offer as required under SEBI (SAST) (Amendment) Regulations, 2017 even if the acquisition crosses the specified threshold limit for open offer.

In case of SPICE JET, the board of directors of the company at meeting took on record the proposal of the principal shareholder and Promoter, Mr. Kalanithi Maran and KAL Airways Private Limited to transfer the ownership, management and control of the Company to Mr. Ajay Singh (the Acquirer) pursuant to a ‘Scheme of Reconstruction and Revival for the takeover of ownership, management and control of Spice Jet Limited’, that was to be filed before the Competent Authority, the Ministry of Civil Aviation, Government of India the Company has on January 22,2015 received the approval of the Competent Authority, the Ministry of Civil Aviation, Government of India for the ‘Scheme of Reconstruction and Revival for the takeover of ownership, management and control of Spice Jet Limited’ by Mr. Ajay Singh in accordance with the application made by the Company.

Since the Ministry of Civil aviation, a Competent Authority approved the scheme of reconstruction, the acquirer Mr. Ajay Singh did not go through the open offer process as mandated under SEBI (SAST) (Amendment) Regulations, 2017, however he filed a report with the concerned stock exchange where the shares of the company is listed with in 4 working days from the acquisition, pursuant to the SEBI (SAST) (Amendment) Regulations, 2017.

Question 18.
“Scheme of Reconstruction pursuant to order of competent authority does not trigger open offer under SEBI (SAST) (Amendment) Regulations 2017.” Explain the regulation with reference to any event occurred since promulgation of said regulation in 2017 (Dec 2017, 5 marks)
Answer:
SEBI (SAST) (Amendment) Regulations, 2017 states that Acquisition Pursuant to a scheme of arrangement involving the target company as a transferor company or as a transferee company, or reconstruction of the target company, including amalgamation, merger or demerger, pursuant to an order of a court/tribunal or a competent authority under any law or regulation, Indian or foreign does not trigger open offer as required under Regulation 3 or Regulation 4 of SEBI (SAST) Regulations, 2017, even if the acquisition crosses the specified threshold limit for open offer.

Regulation 10(6) SEBI (SAST) (Amendment) Regulations, 2017 provides that in respect of any acquisition made pursuant to exemption provided for in SEBI (SAST) (Amendment) Regulations, 2017, the acquirer should file a report with the stock exchanges where the shares of the company are listed, in prescribed form not later than 4 working days from the acquisition and the stock exchange shall forthwith disseminate such information to the public.

Question 19.
What is a Voluntary Offer in acquiring shares in another company? State the restrictions in terms of SEBI (SAST) Regulations, 2011. (Dec 2017, 3 marks)
Answer:
Voluntary offer:
A voluntary open offer under Regulation 6, is an offer made by a person who himself or through or along with Persons acting in concert with him if any, holds 25% or more shares or voting rights in the target company, but less than the maximum permissible non-public shareholding limit, for such number of shares such that the aggregate of the shareholding of the acquirer after the offer shall not exceed the maximum permissible non public shareholding.

Restrictions on voluntary open offer:
A voluntary offer cannot be made if the acquirer or PACs with him has acquired any shares of the target company in the 52 weeks prior to the voluntary offer without attracting the provisions of the regulations, to make a public announcement.

The acquirer is prohibited from acquiring any shares during the offer period other than through the acquisitions in the open offer.

The acquirer is also not entitled to acquire any shares for a period of 6 months, after completion of open offer except pursuant to another voluntary open offer.

Question 20.
Briefly explain four major types of anti-takeover amendments. (Dec 2018, 5 marks)
Answer:
An increasingly used defense mechanism is anti-takeover amendments to the company’s constitution or articles of association, popularly called “shark repellents”. Thus, as with all amendments of the charter/articles of association of a company, the anti-takover amendments have to be voted on and approved by the shareholders. The practice consists of the companies changing the articles, regulations, bye-laws etc. to be less attractive to the corporate bidder.

There are four major types of anti-takeover amendments:
Super majority Amendments: These amendments require shareholder approval by at least two thirds vote and sometimes as much as 90% of the voting power of outstanding capital stock for all transactions involving change of control. In most existing cases, however, the super majority agreements have a board-out clause which provides the board with the power to determine when and if the super majority provisions will be in effect. Pure or inflexible super majority provisions would seriously limit the management’s scope of options and flexibility in takeover negotiations.

Fair-Price Amendments: These are super majority provisions with a board out clause and an additional clause waiving the super majority requirement if a fair-price is paid for the purchase of all the shares. The fair price is normally defined as the highest priced paid by the bidder during a specified period. Thus, fair-price amendments defend against two-tier tender offers that are not approved by the target’s board.

Classified Boards: Another major type of anti-takeover amendments provides for a staggered, or classified, Board of Directors to delay effective transfer and control in a takeover. The much touted management rationale in proposing a classified board is to ensure continuity of policy and experience. In the United States, the legal position of such classified or staggered boards is quite flexible. An ideal example is when a nine-member board may be divided into 3 classes, with only three members standing for election to a three year term each, such being the modalities of the retirement by rotation.

Thus, a new majority shareholder would have to wait for at least two annual general meetings to gain control of the Board of Directors. In the Indian company law regime, the scope for such amendments is highly restricted. The provision of the Companies Act is designed to eradicate the mischief caused by perpetual managements. At an AGM only one-third of the directors of the company, whose offices are determinable by retirement, will retire. Therefore putting the example in the Indian context, in case of 9 directors, 3 can be made permanent directors by amending the articles i.e. one-third can be given permanent appointment.

Thus the acquirer would have to wait for atleast three annual general meetings before he gains control of the board. But this is subject to such remove a director before the expiration of his period of office. Thus any provision in the articles of the company or any agreement between a director and a company by which the director is rendered irremovable from office by an ordinary resolution would be void, being contrary to the Act. Therefore, to ensure domination of the board of the target management, there needs to be strength to defeat an ordinary resolution.

Authorization of Preferred Stock: Vide such provisions, the Board of Directors is authorized to create a new class of securities with special voting rights. This security, typically preferred stock, may be issued to a friendly party in a control contest. Thus, this device is a defense against hostile takeover bids, although historically it was used to provide the Board of Directors with flexibility in financing under changing economic conditions.

Question 21.
Identify the factors which make a company a desirable candidate for a takeover from the acquirer’s point of view. (Dec 2018, 3 marks)
Answer:
The factors which make a company vulnerable are:

Low stock price with relation to the replacement cost of assets or their potential earning power;
A highly liquid balance sheet with large amounts of excess cash, a valuable securities portfolio, and significantly unused debt capacity;
Good cash flow in relation to current stock prices;
Subsidiaries and properties which could be sold off without significantly impairing cash flow; and
Relatively small stockholdings under the control of an incumbent management.

A combination of these factors can simultaneously make a company an attractive proposition or investment opportunity and facilitate its financing. The company’s assets may act as collateral for an acquirer’s borrowings, and the target’s cash flows from operations and divestitures can be used to repay the loans.

Question 22.
Explain the major amendments introduced in SEBI (Substantial Acquisition of Shares Takeovers) Regulations, 2011 notified on September 21,2011, (June 2019, 5 marks)
Answer:
The major changes/amendmenfs introduced vide, the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 notified on 23rd September, 2011 were as under:

increase in trigger limit for open offer from 15% to 25%.
increase in statutory open offer size from 20% of share capital to 26% of total share capital of the company.
overhaul of exemptions from open offer.
Exemptions have been further categorized into the following broad heads:
(a) transactions, which trigger a statutory open offer due to substantial acquisition of shares/ voting rights, or due to change in control.
(b) transaction which trigger a statutory open offer due to acquisition of shares/voting rights exceeding prescribed thresholds, provided that there is no change in control.
Offer pricing: These regulations brought in the concept of Volume Weighted Average Market Price.
Creeping acquisition: These regulations provided that an acquirer could make a creeping acquisition of 5% annually (between April 1 to March 31 of next year) to reach 75% stake such that the minimum public shareholding of 25% is maintained. The manner of computation of the 5% creeping acquisition limit has also been clarified.
Non-compete fee: The provision of payment of non-compete was done away with.
Recommendation of independent directors on the open offer to be published in the newspapers in which the detailed public statement was given.

The Regulations, further sought to include the various SAT judgments, informal guidance given and the experience gained from implementing the Takeover Regulations since 1994. They further sought to align itself with the Takeover Regulations as they exist in the rest of the world.

Question 23.
Draft a checklist for a transferee company in the process of Takeover. (Dec 2019, 5 marks)
Answer:
Check-list for a transferee company in the takeover process is given as under:

Minutes of Board meeting containing consideration and approval of the 3 offer sent to the transferor company.
Offer of a scheme or contract sent to the transferor company.
Notice to dissenting shareholders if any, of the transferor company.
Notice to the remaining shareholders of the transferor company, who have not assented to the proposed acquisition, if any.
Form No: CAA14 received from the transferor company, which has been circulated to its members by that company.
Minutes of general meeting of the company containing approval of the shareholders to the offer of scheme or contract sent to the transferor company.
Court order, if any.
Register of Investments.
Duly filled in and executed instrument(s) of transfer for shares held by the dissenting shareholders.
Balance Sheets showing investments in the shares of the transferor company.

Question 24.
What are the kinds of Takeovers practiced in the business world? (Dec 2019, 3 marks)
Answer:
Takeovers may be broadly classified into three kinds:
(i) Friendly Takeover: Friendly takeover is with the consent of target company. In friendly takeover, there is an agreement between the management of two companies through negotiations and the takeover bid may be with the consent of majority or all shareholders of the target company

(ii) Hostile Takeover: When an acquirer company does not offer the target company the proposal to acquire its undertaking but silently and unilaterally pursues efforts to gain control against the wishes of existing management.

(iii) Bailout Takeover: Takeover of a financially sick company by a profit earning company to bailout the former is known as bailout takeover.

Question 25.
“It would be almost impossible to use the Packman Defence in India.” Comment. (Dec 2020, 3 marks)
Answer:
The Packman Defence: This strategy although unusual attempts to purchase the shares of the raider company. This is usually the scenario if the raider company is smaller than the target company and the target company has a substantial cash flow or liquidable asset.

Pack-Man defence is a strategy by the promoters of the target company to make a counter offer to existing shareholders that may demoralise the acquirer from the proposal.

Regulation 26 (2) of SEBI (SAST) Regulations, 2011 prohibits the target company to enter into any agreement other than in ordinary course of business during offer period except with the approval of shareholders through special resolution by way of postal ballot.

Hence in India with such Regulatory Bodies and regulations, it’s almost impossible to resort to Pack-man defence strategy.

Question 26.
Perform Transformers Ltd. is a listed company that contemplates taking over another Listed company. Could you suggest the legisiations/regulations need to be looked into indicating briefly, the compliances required in the matter? (Aug 2021, 5 marks)
Answer:
In cases of takeover exercise involving one or more listed companies one needs to look into Companies Act, 2013, Securities and Exchange Board of India (SEBI) (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (SAST) and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR) for proper compliances.

Regulation 31A (8) of LODR requires any public shareholder seeks to re-classify as promoter of other listed company needs to make an open offer as per SAST. However, neither of regulations shall apply to direct and indirect acquisition of shares or voting rights in, or control over a company listed without making a public issue, on the institutional trading platform of a recognised stock exchange.

As regards Companies Act, 2013, Section 186 shall apply to the acquisition of shares in a company for takeover. Legal requirements are detailed in Sections 235 and 236 for the purpose of takeover of unlisted company through transfer of undertaking.

Question 27.
Can any acquirer proceed to voluntarily delist the company post acquisition? If your answer is affirmative, state the Rules and Regulations applicable to such action along with main steps involved therein. If not, state the relevant provisions. (Dec 2021, 5 marks)
Answer:
As per regulation 5A(1) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, any acquirer who is desirous of delisting the company post acquisition due to a variety of reasons, may proceed to voluntarily delist the company under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 and SEBI (Delisting of Equity Shares) Regulations, 2009.

In the event, the acquirer makes a public announcement of an open offer for acquiring shares of a target company in terms of regulations 3, .4 or 5 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, acquirer may delist the company in accordance with the provisions of the SEBI (Delisting of Equity Shares) Regulations, 2009.

However, the acquirer shall have declared upfront his intention to so delist at the time of making the detailed public statement and a subsequent declaration of delisting for the purpose of the offer proposed to be made will not suffice.

The following main steps are involved: –

Acquirer to intimate the Board of Directors.
Board to consider the proposal for delisting.
Public announcement in case delisting offer fails.
File draft letter of offer with SEBI.
Minimum details in the tentative schedule of activity.
Competing Offer.
Withdrawal of shares tendered.
Option to tender shares in open offer.

Question 28.
“An acquirer made an open offer to acquire shares. He subsequently withdrew the offer.” Can he do so ? If yes, what are the circumstances under which he can do so ? What is the procedure to be followed ? (June 2022, 3 marks)

Question 29.
2013 – Dec [1] {C} (a)
“In modern business world, business captains aim to capture market share and establish their rein in the product/service line and thereby increase their profitability. For this, their approach remains different at different times. Sometimes, they resort to ‘friendly or hostile takeover route’ and sometimes take ‘amalgamation/merger route’, the latter route being a long drawn process due to various approvals involved including the approval from shareholders and creditors of both the companies. But their destination remains the same.”

In light of the above statement, answer the following :
(i) If the acquiring company or transferee company, as the case may be, is profitable and healthy one and target company or amalgamating company is losing one, which route is most advantageous from tax planning point of view?
(ii) What are the qualifying conditions to avail tax benefits for claiming accumulated losses?
(iii) What are the path breaker(s)/hindrance(s) in the success of a hostile takeover? Mention any three such reasons.
(iv) If the business captain has no liquid funds in hand, which option is preferable?
(v) In the long-term, which option is more stable and why? (Dec 20136, 3 marks each)
Answer:
(i) A company which has incurred losses in the past can carry forward such losses and offset them against future taxable profits and reduce tax liabilities. Such a company when merged with a company with large taxable profits would help to absorb the tax liability of the latter. Thus, if the acquiring company or transferee company, as the case may be is profitable and healthy one and target company or amalgamating company is losing one, amalgamation/merger route is advantageous from tax planning point of view.

(ii) Notwithstanding anything contained in Sub-section (1) of Sec 72A of Income Tax Act 1961, the accumulated loss shall not be set off or carried forward and the unabsorbed depreciation shall not be allowed in the assessment of the amalgamated company unless —
(a) the amalgamating company —

has been engaged in the business, in which the accumulated loss occurred or depreciation remains unabsorbed, for three or more years;
has held continuously as on the date of the amalgamation at least three-fourths of the book value of fixed assets held by it two years prior to the date of amalgamation;

(b) the amalgamated company —

holds continuously for a minimum period of five years from the date of amalgamation at least three-fourths of the book value of fixed assets of the amalgamating company acquired in a scheme of amalgamation;
continues the business of the amalgamating company for a minimum period of five years from the date of amalgamation;
fulfils such other conditions as may be prescribed to ensure the revival of the business of the amalgamating company or to ensure that the amalgamation is for genuine business purpose.

(iii) Path Breaker(s)/Hindrance(s) in the success of hostile takeovers:
Pac-man Defense
Under this strategy target company attempts to purchase the shares of acquirer company, provided it has substantial cash flow or liquidable asset.

White Knight
This is seeking another company (called white knight company) seeking merger, for rescuing the target company.

Green Mail
This is repurchase of the stock by target company at a higher premium to avoid hostile takeovers.

Poison Pills
Creation of securities (which is also called poison pills)which provide their holders with special rights exercisable only after a period of time following the occurrences of triggering event.

Adjustments in Asset and Ownership Structure
it includes strategies such as securities being issued through private placements to parties friendly or in business alliance with management or to the management itself. Moreover, another method can be to repurchase publicly held shares to increase an already sizable management-allied block in place.

The “Crown Jewel” Strategy
The central theme in such a strategy is the divestiture of major operating unit most coveted by the bidder-commonly known as the “crown jewel strategy”. Consequently, the hostile bidder is deprived of the primary intention behind the takeover bid. Thus, the above defense can only be used before the predator/ bidder makes the public announcement of its intention to takeover the target company.

Targeted Share Repurchase or “Buyback”
This strategy is really one in which the target management uses up a part of the assets of the company on the one hand to increase its holding and on the other it disposes bf some of the assets that make the target company unattractive to the raider. The strategy therefore involves a creative use of buyback of shares to reinforce its control and detract a prospective raider.

“Golden Parachutes” *
Golden parachutes refer to the “separation” clauses of an employment contract that compensate managers who lose their jobs under a change-of-mariagement scenario. The provision usually calls for a lump-sum payment or payment over a specified period at full and partial rates of normal compensation..

Anti-takeover amendments or “shark repellants”
An increasingly used defense mechanism is anti-takeover amendments to the company’s constitution or articles of association, popularly called “shark repellants”. Thus, as with all amendments of the charter/articles of association of a company, the anti-takeover amendments have to be voted on and approved by the shareholders. The practice consists of the companies changing the articles, regulations, bye-laws etc. to be less attractive to the corporate bidder.

(iv) In both amalgamation and takeover routes the payment of consideration may be through issue of securities, which it the suitable option in case of paucity of liquid funds.

Regulation 9 of SEBI (SAST) Regulations, 2011 provides for mode of payment under open offer through (i) cash or (ii) by issue, exchange or transfer of listed equity shares and/or (iii) by issue, exchange or transfer of listed secured debt instruments and/or (iv) issue, exchange or transfer convertible debt instruments entitling listed equity shares of acquirer.

Similarly amalgamation can be funded through share swaps which may not involve cash payments.

(v) In the long term, amalgamation/merger option is preferable.

Question 30.
Target Company Ltd. (TCL) has paid-up share capital of 10,00,000 equity shares fully paid-up and the shares are listed with recognised stock exchange of the State where the company is registered. Hemant is holding 1,00,000 equity shares of TCL. However, after taking into account the equity shares held by his associates and persons acting in concert (PAC), the holding of equity shares has reached the threshold limit of 25%, i.e. 2,50,000 equity shares, which is a trigger point for making open offer. Hemant is in no mood to make an open offer and has stopped acquiring further equity shares from the market.

However, for expansion plans, the company has offered rights shares in the ratio of 1:2, i.e., 1 share for every 2 shares held. After success of rights issue, the enhanced equity share capital of the company shall be 15,00,000 equity shares of ₹ 10 each aggregating to ₹ 1.5 crore and Hemant along with PAC, etc., will have 3,75,000 equity shares, if they apply for rights entitlement only and no additional shares. Hemant along with PAC, etc., applies for the rights entitlement only. Hemant is confused and seeks your opinion as a Practicing Company Secretary regarding the following :

Whether Hemant would need to make open offer for applying in rights issue as he alongwith PAC, etc., has already touched the trigger point of 25% paid-up equity share capital of TCL? Give your advice quoting the relevant provisions of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. (Dec 2013, 6 marks)
Answer:
The following are the threshold limits for acquisition of shares/voting rights, beyond which an obligation to make an open offer is triggered.

According to Regulation 3 of the SEBI (SAST) (Amendment) Regulations, 2017.

Acquisition of 25% or more shares or voting rights: An acquirer, who (along with PACs, if any) holds less than 25% shares or voting rights in a target company and agrees to acquire shares or acquires shares which along with his/PAC’s existing shareholding would entitle him to exercise 25% or more shares or voting rights -in a target company, will need to make an open offer before acquiring such additional shares.

Acquisition of more than 5% shares or voting rights in a financial year: An acquirer who (along with PACs, if any) holds 25% or more but less than the maximum permissible non-public shareholding in a target company, can acquire additional shares in the target company as would entitle him to exercise more than 5% of the voting rights in any financial year ending March 31, only after making an open offer.

In given situation, Hemant along with persons acting in concert already hold 25% i.e. 2,50,000 equity shares out of 10,00,000 equity shares. Present event of issue of right shares by the target company is new event.

Clause (a) of sub-regulation (4) of Regulation 10 of the SEBI (SAST) (Amendment) Regulations, 2017 acquisition of shares by any shareholders of a target company up to his entitlement pursuant to a right issue is exempted from the obligation to make an open offer.

Since the acquisition of shares by any shareholder of a target company, upto his entitlement, pursuant to a right issue, is exempted from takeover obligations, under Regulation 10, the acquisition of rights shares by Hemant along with Persons Acting in Concert, will not trigger open offer obligations.

Question 31.
Palm Ltd. bought back some shares in compliance with section 68 of Companies Act, 2013. As a consequence, the shareholding of one shareholder, Vaibhav Ltd., increased from 24% to 27%, Palm Ltd. disclosed the changed shareholding pattern to the stock exchange. On receiving the information regarding increase in holding of Vaibhav Ltd. to 27%, SEBI has issued a show-cause notice to Vaibhav Ltd. for its failure to make a public offer under the SEBI (Substantial Acquisition of Shares and Takeovers) (Amendment) Regulations, 2017. Prepare a reply to the show- cause notice. (June 2014, 5 marks)
Answer :
Dear ……………..

This has reference to the show cause notice no ………. dated …………… issued to Vaibhav Limited for its failure to make a public offer under SEBl (SST)

Regulations (Amendment) 2017.
Regulation 10(3) of SEBl (SAST) (Amendment) Regulations, 2017 states that an increase in voting rights in a target company of any shareholder beyond the limit attracting an obligation to make an open offer under sub-regulation (1) of regulation 3, pursuant to buy-back of shares shall-be exempt from the obligation to make an open offer provided such shareholder reduces his shareholding such that his voting rights fall to below the threshold referred to in sub – regulation (1) of regulation 3 within 90 days from the date on which the voting rights so increase.

Further, regulation 10(4) of SEBl (SAST) (Amendment) Regulations, 2017 exempts certain acquisitions from the obligation to from the obligation to make an open offer under sub-regulation (2) of regulation 3. Regulation 10(4) (c) states as under:

1. increase in voting rights in a target company of any shareholder pursuant to buy-back of shares:
Provided that –

such shareholder has not voted in favour of the resolution authorising the buy-back of securities under section 68 of the Companies Act, 2013;
in the case of a shareholder resolution, voting is by way of postal ballot;
where a resolution of shareholders is not required for the buyback, such shareholder, in his capacity as a director or any other interested director has not voted in favour of the resolution of the board of directors of the target company authorising the buy-back of securities under section 68 of the Companies Act, 2013; and
the increase in voting rights does not result in an acquisition of control by such shareholder over the target company:

Provided further that where the aforesaid conditions are not met, in the event such shareholder reduces his shareholding such that his voting rights fall below the level at which the obligation to make an open offer would be attracted under sub-regulation(2) of regulation 3, within 90 days from the date on which the voting rights so increase, the shareholder shall be exempt from the obligation to make an open offer;

Reading Regulation 10(3) and 10(4)(c) together, Vaibhav Pharma Limited has not violated SEBl (SAST) (Amendment) Regulations, 2017. However the company would reduce the holding from 27% to 25% within 90 days from the date of acquisition through buy-back i.e ………………….. (date).

Thank you

Question 32.
Aspire Ltd. is the target company in respect of which an acquirer made an open offer for acquisition of shares and the open offer has commenced. Dreams Ltd. is the subsidiary of Aspire Ltd.

Dreams Ltd. signed the loan agreements with financial institutions for major capital expenditure for its expansion project and started withdrawing the loan amount during the open offer period. The said borrowings are clearly within the ordinary course of its business.

No approval was taken by Aspire Ltd. from its shareholders nor did Dreams Ltd. obtain the approval from its shareholders. The internal auditors have opined that the target company has violated the provisions of the SEBl (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 as no approval was obtained by the shareholders of the target company for the , borrowings effected. The statutory auditors have agreed with the views of the internal auditors and pointed out that the target company Aspire Ltd. has failed in its obligations that are required to be complied with during the offer period in terms of the SEBl (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 as approval of its members by way of special resolution through the mechanism of postal ballot was not obtained. Moreover, they maintained that Dreams Ltd. borrowed money for its expansion programme when the open offer of target company was on and therefore Dreams Ltd. violated the provisions of the SEBl (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

State in clear terms whether there is a violation of the provisions of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 by Aspire Ltd. or Dreams Ltd. (June 2015, 6 marks)
Answer:
In the given case, an open offer is made by an acquirer for acquisition of shares of Aspire Ltd. (Target Company).

Dream Ltd. is a subsidiary of Aspire Ltd. which has signed loan agreement with financial institutions and started withdrawing the loan amount during the open offer period.

The borrowings are clearly within the ordinary course of its business.

No approval was taken by Aspire Ltd. from its shareholders nor did Dreams Ltd. obtain the approval from its shareholders.

As per Regulation 26 of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011, during the offer period, unless the approval of shareholders of the target company by way of a special resolution by postal ballot is obtained, the Board of Directors of either the target company or any of its subsidiaries shall not make any material borrowings outside the ordinary course of business.

Since the borrowings are clearly within the ordinary course of its business, there is no violation of the provisions of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 by Aspire Ltd. or Dream Ltd.

Question 33.
Sameer, an acquirer along with persons acting in concert (PACs) is holding 23% shares in Purpleberry Ltd. (a BSE listed company). Now, he intends to acquire 3% additional equity shares in Purpleberry Ltd. through secondary market in the current financial year. He is acquiring less than 5% shares in the financial year and is of the view that he need not to make open offer to public. Give your opinion regarding the need to make an open offer to the public. (Dec 2015, 5 marks)
Answer:
An acquirer who holds less than 25% shares/voting rights in a target company and agrees to acquire shares that will entitle him to exercise 25% or more shares/voting rights in a target company, then he will need to make an open offer before acquisition of such additional shares in a target company.

In the given case Mr. Sameer is already holding 23% shares and intends to acquire 3% additional equity shares that would entitle him 26% and thus have to comply with open offer requirements.

Question 34.
The voting rights of Vaibhav Pharma Ltd. (VPL) which is one of the promoter company of Poorvi Adhesive Ltd. (PAL) has increased beyond 75% of the total paid-up capital of the company due to the buy-back of shares by PAL pursuant to Section 68. The Securities and Exchange Board of India issued a show cause notice to VPL alleging that they had to make a public announcement to acquire shares from the shareholders of the company and by not doing so they have violated provisions of the SEBI (Substantial Acquisition of Shares and Takeovers) (Amendment)Regulations, 2017. Keeping in view the provisions of the SEBI (Substantial Acquisition of Shares and Takeovers) (Amendment)Regulations, 2017, give your comments. (Dec 2015, 5 marks)
Answer:
As per Regulation 10(3), an increase in voting rights in a target company of any shareholder beyond the limit attracting an obligation to make an open offer under sub-regulation (1) of regulation 3, pursuant to buy-back of shares shall be exempt from the obligation to make an open offer provided such shareholder reduces his shareholding such that his voting rights fall to below the threshold referred to in sub-regulation (1) of regulation 3 within ninety days from the date on which the voting rights so increase. In case of HariDalmia Vs. SEBI, SAT has decided that if percentage increase in voting rights was not by reason of any act of appellant but was incidental i.e buy-back of shares, such passive increase would not attract open offer obligations. Hence, in the given case Vaibhav Pharma Ltd. is not obligated to comply with the requirement of open offer.

Question 35.
ABC Ltd. intends to delist its shares from Delhi Stock Exchange (DSE) for which it made required public announcement. Surewin Ltd., a substantial shareholder in the said Company made a counter offer. Advise Board with a short note in accordance with the relevant and applicable regulations of Securities Exchange Board of India (SEBI). (June 2018, 5 marks)
Answer:
Notwithstanding anything contained in these regulations, in the event the acquirer makes a public announcement of an open offer for acquiring shares of a target company in terms of regulations 3, 4 or 5, he may delist the company in accordance with provisions of the Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009. Provided that the acquirer shall have declared upfront his intention to so delist at the time of making the Detailed Public Statement and a subsequent declaration of delisting for the purpose of the offer proposed to be made under sub regulation (1) will not suffice.

Where a competing offer is made in terms of sub-regulation (1) of regulation 20,-
(a) the acquirer shall not be entitled to delist the company;
(b) the acquirer shall not be liable to pay interest to the shareholders on account of delay due to competing offer;
(c) the acquirer shall comply with all the applicable provisions of these regulations and make an announcement in this regard, within two working days from the date of public announcement made in terms of sub-regulation (1) of regulation 20, in all the newspapers in which the detailed public statement was made.

Question 36.
Progression Ltd. is a listed Company with a paid up capital of ₹ 200 crore divided into 20 crore shares of ₹ 10 each. R, S, T and U are the promoters of the said company holding 2 crore, 5.40 crore, 0.80 crore and 2.20 crore shares respectively.

The following situations occurred at different times:
Situation 1: T transfers 0.30 crore shares each to R and U ,
Situation 2: S transfers 0.22 crore shares to T
Situation 3: R transfers 0.20 crore shares each to T and U

As a Company Secretary, you need to advise on the required compliances, if any, under the Securities Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 for the above three situations respectively. (June 2018, 5 marks)
Answer:
In this case , R,ST and U are the promoters of the company. In all the 3 situations, there has been transfer of shares within promoters. They are covered in exemption under Regulation 10 from the obligation to make an open offer.

Exemption under Regulation10: The following acquisitions shall be exempt from the obligation to make an open offer under regulation 3 and regulation 4 subject to fulfillment of the conditions stipulated therefor,—

(a) acquisition pursuant to “inter se” transfer of shares amongst qualifying persons, being,—
(i) immediate relatives;
(ii) persons named as promoters in the shareholding pattern filed by the target company in terms of the ‘listing regulations or as the case may be, the listing agreement’ or these regulations for not less than three years prior to the proposed acquisition;

(ii) the transferor and the transferee shall have complied with applicable disclosure requirements set out in Chapter V of the SEBI (SAST) Regulations.

Question 37.
Secure Source Ltd., an Indian Company, is contemplating to take over Super Securers Pte. Ltd. of Singapore through a process of merger and its top Management seeks your advice. Suggest the required compliances. (Dec 2018, 5 marks)
Answer:
In exercise of the powers conferred by section 234 read with section 469 of the Companies Act, 2013, the Central Government, in consultation with the Reserve Bank of India, makes the rules to amend the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016. The process of merger or amalgamation of a foreign company with a company and vice versa is as under:

(1) (a) A foreign company incorporated outside India may merge with an Indian company after obtaining prior approval of Reserve Bank of India and after complying with the provisions of Sections 230 to 232 of the Companies Act and rules.

(2) (b) A company may merge with a foreign company incorporated in prescribed jurisdictions specified in Annexure B after obtaining prior approval of the Reserve Bank of India and after complying with provisions of Sections 230 to 232 of the Act and these rules.

(3) The transferee company shall ensure that valuation is conducted by valuers who are members of a recognised professional body in the jurisdiction of the transferee company and further that such valuation is in accordance with internationally accepted principles on accounting and valuation. A declaration to this effect shall be attached with the application made to Reserve Bank of India for obtaining its approval under clause (a) of this sub-rule.

(4) The concerned company shall file an application before the Tribunal as per provisions of Sections 230 to Sections 232 of the Act and these rules after obtaining approvals specified in sub-rule (1) and sub-rule (2), as the case may be.

Question 38.
The Paid up Equity Share Capital of Zumba Ltd. is 1,00,000 shares of ₹ 10 each as on 1^st April 2019. The promoters hold 37000 shares as on 1^st April 2018, which is 37% of the paid up capital. The promoters are three shareholders, Ram holding 21000 (21%), Shyam holding 12000 shares (12%) and Mohan holding 4000 shares (4%).

The Company makes a preferential allotment to its directors as follows: Ram 7000 shares and Mohan 1000 shares.

Define creeping acquisition and evaluate the requirement of public announcement in above case as per Securities and Exchange Board of India (Substantial Acquisition of Securities and Takeover) Regulations, 2011. (Dec 2020, 5 marks)
Answer:
Creeping acquisition refers to the process through which the acquirer together with “Person Acting in Concert (PAC) holding more than 25% but less than 75%, to gradually increase their stake in the target company by buying up to 5% of the voting rights of the company in one financial year.

In terms of Regulation 3(3) of SEBI (SAST) Regulations, if the individual shareholding of an acquirer after acquisition exceeds 25% or the creeping acquisition limit of 5% in a financial year in the target company, such acquirer needs to make public announcement of an open offer.

In the given case, combined Promoters’ holding after proposed acquisition is [(37000+8000) /10800Q]*1Q0 – 37% = 4.66% being less than the trigger 5%, there is no need for public announcement.

However, in case of Ram, post-acquisition is 28000/108000 = 25.92% that exceeds 25%. Therefore, Ram has triggered the code and under an obligation to make a public announcement.

In case of Mohan, there is no requirement as it does not cross either 5% or 25% of the capital of the target company. However, had there been acquisition by the promoters from dissenting shareholders as per exit offer in terms of Regulation 3(4), there need not be any public announcement.

Question 39.
Mega Motors Ltd., a car manufacturing Company proposes to takeover AXL Automotives, a component manufacturer. As a professional expert, come out with the objects Mega Motors Ltd. may have conceived to attain by this takeover. (Dec 2021, 5 marks)
Answer:
Mega Motors Limited may have conceived all or any of the following objects of takeover as given below:

To effect savings in overheads and other working expenses on the strength of combined resources;
To achieve product development through acquiring firms with compatible products and technological/manufacturing competence, which can be sold to the acquirer’s existing marketing areas, dealers and end users;
To diversify through acquiring companies with new product lines as well as new market areas, as one of the entry strategies to reduce some of the risks inherent in stepping out of the acquirer’s historical core competence;
To improve productivity and profitability by joint efforts of technical and other personnel of both companies as a consequence of unified control;
To create shareholder value and wealth by optimum utilisation of the resources of both companies;
To achieve economies of scale by mass production at economical costs;
To secure substantial facilities as available to a large company compared to smaller companies for raising additional capital, increasing market potential, expanding consumer base, buying raw materials at economical rates and for having own combined and improved research and development activities for continuous improvement of the products, so as to ensure a permanent market share in the industry;
To achieve market development by acquiring one or more companies in new geographical territories or segments, in which the activities of acquirer are absent or do not have a strong presence.

Question 40.
Max Ltd. proposes to takeover Mini Ltd. The Share Capital of Max Ltd. and Mini Ltd. comprises of 15,000 and 10,000 equity shares of ₹ 10 each and 5000 and 4000 10% preference shares of ₹ 100 each respectively.

The purchase consideration to be discharged is as under: .
(1) Equity shareholders of Mini Ltd. will be given 50 equity shares of ₹ 10 each of Max Ltd. fully paid in exchange for every 5 shares held in Mini Ltd.
(2) Issue of 10% preference shares of ₹ 100 each in the ratio of 4 preference shares of Max Ltd. for every 5 preference shares held in Mini Ltd.

In addition to share capital stated above, Max Ltd has 12% debentures of ₹ 100 each amounting to ₹ 5,00,000 and Mini Ltd has 13% debentures of 100 each amounting to ₹ 4,00,000. It was agreed to issue 12% debentures of ₹ 100 of Max Ltd. worth ₹ 5,00,000 to the debentureholders of Mini Ltd. Compute Purchase consideration and capital after takeover. Also comment upon treatment of debentureholders of Mini Limited during the above takeover. (Dec 2021, 5 marks)
Answer:
Computation of Purchase Consideration:

1.	Equity Shares	10,000 × (50/5) × 10	₹ 10,00,000
2.	10% Preference Shades	4,000 × (4/5) × 100	₹ 3,20,000
		Purchase Consideration	₹ 13,20,000

Computation of Capital of Max Limited after Takeover:

1.	Equity Share Capital	(15,000 shares + 1,00,000 shares) of ₹ 10 each	₹ 11,50,000
2.	10% Preference Share Capital	(5000 Preference shares + 3200 Preference Shares	₹ 8,20,000
		Capital of Max Limited after Takeover	₹ 19,7b,000

Treatment of debentures in purchase consideration: Issue of debentures will not form part of purchase consideration as these are issued to debenture holders. Further, Increased number of debentures are issued to debenture holders of Mini Ltd, as there is reduction in rate of interest on debentures.

Question 41.
Explain Regulation 10(2B) of Securitiesand Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011?
Answer:
Regulation 1 0(2B) provides that any acquisition of shares or voting rights or control of the target company by way of preferential issue in compliance with regulation 164A of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018 shall be exempt from the obligation to make an open offer under sub-regulation (1) of regulation 3 and regulation 4.

Explanation-The above exemption from open offer shall also apply to the target company with infrequently traded shares which ¡s compliant with the provisions of sub-regulations (2), (3), (4), (5),(6), (7) and (8) of regulation 164A of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018. The pricing of such infrequently traded shares shall be in terms of regulation 165 of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018

Question 42.
Explain the provisions related to Amendments in Regulation 26(6) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011?
Answer:
Upon receipt of the detailed public statement, the board of directors of the target company shall constitute a committee of independent directors to provide reasoned recommendations on such open offer, and the target company shall publish such recommendations.

Provided that such committee shall be entitled to seek external professional advice at the expense of the target company.

Provided further that while providing reasoned recommendations on the open offer proposal, the committee shall disclose the voting pattern of the meeting in which the open offer proposal was discussed.

Acquisition of Company/Business Notes

Acquisition of Company / Business Objects of takeover

To effect savings in overheads and other working expenses on the strength of combined resources
To achieve product development
To diversify through acquiring companies with new product lines
To improve productivity and profitability by joint efforts of technical and other personnel of both companies as a consequence of unified control
To create shareholder value and wealth by optimum utilisation of the resources of both companies
To achieve economies of scale by mass production at economical costs
To achieve market development by acquiring one or more companies in new geographical territories or segments

Kinds of Takeover
Friendly Takeover: Friendly takeover is with the consent of taken over company. In friendly takeover, there is an agreement, between the management of two companies through negotiations and the takeover bid may be with the consent of majority or all shareholders of the target company.

Hostile Takeover: When an acquirer company does not offer the target company the proposal to acquire its undertaking but silently and unilaterally pursues efforts to gain control against the wishes of existing management.

Bailout Takeover: Takeover of a financially sick company by a profit earning company to bail out the former is known as bailout takeover.

Major amendments notified by SEBI (Substantial Acquisition of Shares and Takeovers) Regulations,2011

Increase in trigger limit for open offer from 15% to 25%
Increase in statutory open offer size from 20% of share capital to 26% of total share capital of the Company
The new regulations brought in the concept of Volume Weighted Average Market Price.
Creeping acquisition: The New Regulations provided that an acquirer could make a creeping acquisition of 5% annually (between April 1 to March 31 of next year) to reach 75% stake such that the minimum public shareholding of 25% is maintained.
Non Compete Fee: The provision of payment of non compete was done away with.
Recommendation of independent directors on the open offer to be published in the newspapers in which the detailed public statement was given.

Legal aspects of Takeover
The legislations/regulations that mainly govern takeover are as under:

Companies Act, 2013
SEBI (Substantial Acquisition Of Shares and Takeovers) Regulations, 2011 (The Regulations)
SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

Takeover of Unlisted Companies
Section 236 of the Companies Act contains a compulsory acquisition mode for the transferee company to acquire the shares of minority shareholders of Transferor Company.

Where the scheme has been approved by the holders of not less than nine tenth (90%) in value of the shares of the transferor company whose transfer is involved, the transferee company, may, give notice to any dissenting shareholders that transferee company desires to acquire their shares. The scheme shall be binding on all the shareholders of the transferor company (including dissenting shareholders), unless the Tribunal orders otherwise (i.e. that the scheme shall not be binding on all shareholders).

The transferee company shall give notice to the minority dissenting shareholders and express its desire to acquire their shares within a period of 4 months after making an offer as envisaged under Section 235 of the Act.

Takeover of listed Companies
Takeover of companies whose securities are listed on one or more recognized stock exchanges in India is regulated by the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers)Regulations, 2011.

Trigger Points under Takeover Regulations
By trigger points, we mean the threshold levels upon reaching which, an acquirer, either on its own individual account or along with Persons Acting in Concert (PAC) acquiring shares or voting rights in a target company is required to make a public announcement for an open offer and comply with the other provisions of the Takeover Code with regard to an open offer.

Open offer thresholds
Regulation 3(1)
Substantial acquisition of shares or voting rights As per Regulation 3(1) of the SEBI (SAST) Regulations, 2011, any acquirer can acquire shares or voting rights in a target company, which when taken together with the shares or voting rights held by him either individually or along with Persons Acting in Concert (PACs) with him entitles him / them to exercise 25% or more of the voting rights in such a target company, only after making a public announcement of an open offer in accordance with the provisions of the SAST Regulations.

Regulation 3(2)
No acquirer, who together with persons acting in concert with him, has scared and noids in accordance with these regulations shares or voting rights in a target company entitling them to exercise twenty-five per cent or more of the voting rights in the target company but less than the maximum permissible non-public shareholding, shall acquire within any financial year additional shares or voting rights in such target company entitling them to exercise more than five per cent of the voting rights, unless the acquirer makes a public announcement of an open offer for acquiring shares of such target company in accordance with these regulations:

Provided that the acquisition beyond five per cent but up to ten per cent of the voting rights in the target company shall be permitted for the financial year 2020-21 only in respect of acquisition by a promoter pursuant to preferential issue of equity shares by the target company.

Provided that such acquirer shall not be entitled to acquire or enter into any agreement to acquire shares or voting rights exceeding such number of shares as would take the aggregate shareholding pursuant to the acquisition above the maximum permissible non -public shareholding.

Provided further that, acquisition pursuant to a resolution plan approved under section 31 of the Insolvency and Bankruptcy Code, 2016 [No. 31 of 2016] shall be exempt from the obligation under the proviso to the sub-regulation (2) of regulation 3.

Regulation 3(3)
As per the provisions of Regulation 3(3) of the SEBI Takeover Regulations, when any pt ‘on or entity acquires shares, if the individual shareholding of such an acquirer post such acquisition exceeds the threshold limit of 25% as laid down in Regulation 3(1) of the Takeover Regulations or the creeping acquisition limit as laid down in Regulation 3(2) of the Takeover Regulations, that person or individual or entity would be under an obligation to make a public announcement of an open offer

Regulation 4: Acquisition of control
As per the provisions of Regulation 4 of the SEBI Takeover Regulations, 2011, an acquirer shall make a public announcement of an open offer for acquiring shares of a company, in case he / she acquires control of the target company either directly or indirectly. This is irrespective of the fact whether the acquisition of control is accompanied by acquisition or holding of shares or voting rights of the target company.

Delisting and Takeover Regulations
As per regulation 5A(1) of the SEBI Takeover Regulations, 2011 any acquirer who is desirous of delisting the company post the acquisition of the company due to a variety of reasons, may proceed to voluntarily delist the company under the SEBI Takeover Regulations, 2011 and the SEBI (Delisting of Equity Shares) Regulations, 2009.

Voluntary Offer: Regulation 6
Any acquirer who either by himself or along with persons acting in concert with him hold shares or voting rights in the target company which entitles him to exercise 25% or more but less than the maximum permissible non-public shareholding, which is normally 75% of the total paid up capital of the company/ voting rights of the company, such an acquirer is entitled to voluntarily make a public announcement for an open offer for acquiring shares in accordance with the Takeover Regulations. This is termed as voluntary offer and can be made without triggering / attracting the provisions of Regulation 3, 4 and 6 of the Takeover Regulations.

Procedure tor Making and Open Offer
Manager to the open offer – The Acquirer shall before making a public nnnouncement, appoint a merchant banker registered with the Board, who is not an associate of the acquirer, as the manager to the open offer. Public Announcement – The public announcement of the open offer for acquify shares required under the Takeover Regulations shall be made by the acquirer through manager to the open offer.

Timing of the Public Announcement – The Public Announcement shall be made on the date of agreeing to acquire shares or voting rights in, or control over the target company.

Offer Price – The open offer for acquiring the shares under regulations 3,4, 5 or 6 of the Takeover Regulations, shall be made at a price which shall not be lower than the price arrived at in accordance with the provisions laid down in Regulation 8(2) or Regulation 8(3), as the case may be Detailed Public Statement – Every acquirer shall after giving a Public Announcement, publish a detailed public statement through the manager to the open offer Letter of Offer – The Acquirer through the merchant banker shall within five working days from the date of the detailed public statement made file with SEBI a draft of the letter of offer containing such information as may be specified along with a non-refundable fee, by way of a banker’s cheque or demand draft payable in Mumbai in favour of Securities and Exchange Board of India.

Escrow Account – The acquirer, shall not later than two working days prior to the date of the detailed public statement of the open offer for acquiring shares, create an escrow account towards security for performance of his obligations and deposit in escrow account such aggregate amount as required under regulations

Withdrawal of offer
An open offer for acquiring shares once made shall not be withdrawn except under any of the following circumstances,-
• statutory approvals required for the open offer or for effecting the acquisitions attracting the obligation to make an open offer under these regulations having been finally refused

• the acquirer, being a natural person, has died

• any condition stipulated in the agreement for acquisition attracting the obligation to make the open offer is not met for reasons outside the reasonable Control of the acquirer
Provided that an acquirer shall not withdraw an open offer pursuant to a public announcement made under clause (g) of sub-regulation (2) of regulation 13, even if the proposed acquisition through the preferential
issue is not successful

• such circumstances as in the opinion of the Board, merit withdrawal

Conditional Offer
An acquirer may make an open offer conditional as to the minimum level of acceptance. Provided that where the open offer is pursuant to an agreement, such agreement shall contain a condition to the effect that in the event the desired level of acceptance of the open offer is not received the acquirer shall not acquire any shares under the open offer and the agreement attracting the obligation to make the open offer shall stand rescinded.

Competing offers
When a public announcement for acquiring shares of a target company in an open offer is made, any person, other than the acquirer who has made such public announcement, shall be entitled to make a public announcement of an open offer within fifteen working days of the date of the detailed public statement made by the acquirer who has made the first public announcement. The competing open offer shall be for such number of shares which, when taken together with shares held by such acquirer along with persons acting in concert with him, shall be at least equal to the holding of the acquirer who has made the first public announcement, including the number of shares proposed to be acquired by him under the offer and any underlying agreement for the sale of shares of the target company pursuant to which the open offer is made.

Exemption from Open offer – General Exemption

Regulation 10(1)(a)
Acquisition pursuant to inter se transfer of shares amongst qualifying persons, being,—
(i) immediate relatives;

(ii) persons named as promoters in the share holding pattern filed by the target company in terms of the listing regulations or as the case may be, the listing agreement or these regulations for not less than three years prior to the proposed acquisition;

(iii) a company, its subsidiaries, its holding company, other subsidiaries of such holding company, persons holding not less than fifty per cent of the equity shares of such company, other companies in which such persons hold not less than fifty per cent of the equity shares, and their subsidiaries subject to control over such qualifying persons being exclusively held by the same persons;

(iv) persons acting in concert for not less than three years prior to the proposed acquisition, and disclosed as such pursuant to filings under the listing regulations or as the case may be, the listing agreement; agreement;

(v) shareholders of a target company who have been persons acting in concert for a period of not less than three years prior to the proposed acquisition and are disclosed as such pursuant to filings under the listing [listing regulations or as the case may be, the listing agreement, and any company in which the entire equity share capital is owned by such shareholders in the same proportion as their holdings in the target company without any differential entitlement to exercise voting rights in such company.

Regulation 10(1)(b)
Any acquisition in the ordinary course of business by—
(i) an underwriter registered with the Board by way of allotment pursuant to an underwriting agreement in terms of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018;

(ii) a stock broker registered with the Board on behalf of his client in exercise of lien over the shares purchased on behalf of the client under the bye-laws of the stock exchange where such stockbroker is a member;

(iii) a merchant banker registered with the Board or a nominated investor in the process of market making or subscription to the unsubscribed portion of issue in terms of Chapter X B of the Securities anc Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018;

(iv) any person acquiring shares pursuant to a scheme of safety net in terms of regulation 44 of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018;

(v) a merchant banker registered with the Board acting as a stabilising agent or by the promoter or pre-issue shareholder in terms o regulation 45 of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018; (This is normally done when the company opts for a Green Shoe Option in a Public issue of securities made in accordance with the SEBI (ICDR) Regulations, 2018.)

(vi) by a registered market-maker of a stock exchange in respect of shares for which he is the market maker during the course of market making;

(vii) a Scheduled Commercial Bank, acting as an escrow agent; and

(viii) invocation of pledge by Scheduled Commercial Banks or Public Financial Institutions as a pledgee.

Regulation 10(1)(c)
Acquisitions at subsequent stages, by an acquirer who has made a public announcement of an open offer for acquiring shares pursuant to an agreement of disinvestment, as contemplated in such agreement

Regulation 10(1)(d)
Acquisition pursuant to a scheme:
(i) made under section 18 of the Sick Industrial Companies (Special Provisions) Act, 1985

(ii) of arrangement involving the target company as a transferor company or as a transferee company, or reconstruction of the target company, including amalgamation, merger or demerger, pursuant to an order of a court or a competent authority under any law or regulation, Indian or foreign.

Regulation 10(1)(da)
Acquisition pursuant to a resolution plan approved under Section 31 of te Insolvency and Bankruptcy Code 2016.

Regulation 10(1)(e)
Any acquisition pursuant to the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

Regulation 10(1)(f)
Any acquisition pursuant to the delisting offer made under the provisions of the Securities and Exchange
Board of India (Delisting of Equity Shares) Regulations. 2009

Regulation 10(1)(g)
Any acquisition by way of transmission, succession or inheritance, would be exempted from applicability of the provisions of Regulation 3 and Regulation 4 with regard to making a public announcement for an open offer.

Regulation 10(1)(i)
Conversion of debt into equity under Strategic Debt Restructuring Scheme

Regulation 10(2)
The acquisition of shares of a target company, not involving a change of control over such target company, pursuant to a scheme of corporate debt restructuring in terms of the Corporate Debt Restructuring Scheme notified by the Reserve Bank of India

Regulation 10(3)
An increase in voting rights in a target company of any shareholder beyond the limit attracting an obligation to make an open offer under sub-regulation (1) of regulation 3, pursuant to buy-back of shares shall be exempt from the obligation to make an open offer

Regulation 10(4)
acquisition of shares by any shareholder of a target company, upto his entitlement, pursuant to a rights issue.

Exemption from Open offer – Specific Exemption
If the proposed transaction is not automatically exempted under the various categories mentioned in Regulation 10 discussed in the preceding paragraphs above and the acquirers are of the opinion that the transaction that they propose to enter into requires an exemption, the Acquirer must make an application to SEBI seeking exemption.

Under this regulation SEBI has powers to grant exemption from the strict compliance of procedural requirement in Chapter III and IV in the interest of investors in securities and the securities market.

Obligations of the Acquirer of the Target Company

The acquirer shall before making the public announcement of an open offer for acquiring shares under the SEBI Takeover Regulations, make firm financial arrangements for fulfilling the payment obligations under the open offer.
The acquirer shall also ensure that he is in a position to implement the open offer, subject to any statutory approvals for the open offer that may be necessary.
The acquirer, as per the standard format of the Letter of Offer is required to declare his intention not to alienate any of the material assets of the target company of any of its subsidiaries by way of a sale, lease, encumbrance, except in the ordinary course of business.
The acquirer shall ensure that the contents of the public announcement, the detailed public statement, the letter of offer and the post-offer advertisement are true, fair and adequate in all material aspects
The acquirer and persons acting in concert with him shall not sell shares of the target company held by them, during the offer period.

Obligations of the Target Company
Once a public announcement has been made, the Board of Directors of the target company shall ensure that the business of the target company is conducted in the ordinary course of business during the offer period.

During the offer period, unless the approval of shareholders of the target company by way of a special resolution by postal ballot is obtained, the board of directors of either the target company or any of its subsidiaries shall not alienate any material assets whether by way of sale, lease, encumbrance or otherwise or enter into any agreement for the same the ordinary course of business.

The Target Company shall not enter into any material borrowing which is not in the ordinary course of business.

The Target Company shall not issue or allot any authorised but unissued securities entitling the holder to voting rights.

The target company cannot implement any buy-back of shares or effect any other change to the capital structure of the target company.

The target company is not permitted to enter into, amend or terminate any material contracts

The target company shall furnish to the acquirer within two working days from the identified date, a list of shareholders as per the register of members of the target company containing names, addresses, shareholding and folio number, in electronic form, wherever available, and a list of persons whose applications, if any, for registration of transfer of shares are pending with the target company.

Upon receipt of the detailed public statement, the board of directors of the target company shall constitute a committee of independent directors to provide reasoned recommendations on such open offer, and t, .e target company shall publish such recommendations.

The board of directors of the target company shall facilitate the acquirer in verification of shares tendered in acceptance of the open offer.

Obligations of the Merchant Banker to the Open Offer

The Manager to the open offer shall ensure that the acquirer is able to implement the open offer
The manager to the open offer shall ensure that the contents of the public announcement, the detailed public statement and the letter of offer and the post offer advertisement are true, fair and adequate in all material aspects
The Manager to the Open offer furnishes to SEBI a Due Diligence certificate along with the Draft Letter of Offer filed with SEBI
The Manager to the open offer shall exercise diligence, care and professional judgment to ensure compliance with the Takeover Regulations.
The Manager to the open offer shall not deal on his own account in the shares of the target company during the offer period.

Takeover Bids
“Takeover bid” is an offer to the shareholders of a company, who are not the promoters of the company or the sellers of the shares under an agreement, to buy their shares in the company at the offered price within the stipulated period of time. It is addressed to the shareholders with a view to acquiring sufficient number of shares to give the Offer or Company, voting control of the target company.

A takeover bid is a technique, which is adopted by a company for taking over control of the management and affairs of another company by acquiring its controlling shares.

Type of takeover bids
A takeover bid may be a “friendly takeover bid” or a “hostile takeover bid Mandatory Bid

The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011, require acquirers to make bids for acquisition of certain level of holdings subject to certain conditions. A takeover bid is required to be made by way of a public announcement issued to the stock exchanges, followed by a Detailed Public Statement in the newspapers. Such requirements arise in the following cases:

(a) for acquisition of 25% or more of the shares or voting rights;
(b) for acquiring additional shares or voting rights to the extent of 5% of the voting rights in any financial year beginning April 01, if such person already holds not less than 25% but not more than 75% or 90% of the shares or voting rights in a company as the case may be;
(c) for acquiring control over a company.

Defense Strategies to Takeover Bids
The “Crown Jewel” Strategy – The central iheme in this strategy is to divest the most coveted asset by the bidder, commonly known as the “crown jewel”. Consequently the hostile bidder is deprived of the primary intention behind the takeover bid. A variation of the crown jewel strategy is the more radical “scorched earth approach”, vide which approach, the target sells off not only the crown jewel, but also properties to diminish its worth.

The Packman Defence – This strategy although unusual attempts to purchase the shares of the raider company. This is usually the scenario if the raider company is smaller than the target company and the target company has a substantial cash flow or liquidable asset.

Targeted Share Repurchase or “Buy-back” – This strategy is one in which the management of the target company uses up a part of the assets of the company on the one hand to increase its holding and on their hand it disposes of some of the assets that make the target company unattractive to the raider.

Golden Parachutes – These are separation clauses of an employment contract that compensate managers who lose their jobs under a change of management scenario. The provision usually calls for a lump-sum payment or payment over a specified period at full and partial rates of normal compensation. Target Companies invoke this provision and pay off a huge compensation to large number of employees so as to make themselves unattractive to the raider.

Anti takeover amendments or “shark repellants”
This practice consists of changing the articles of associations, regulations, bye-laws, etc. to be less attractive to the raider / hostile bidder. This again may not work out in India as any change to the Articles of Association or the Memorandum of Association would require approval of the shareholders.

Super majority Amendments – These amendments require shareholder approval by at least 2/3rds vote and sometimes as much as 90% of the voting power of outstanding capital for all transactions involving change of control.

Classified Boards – Another type of anti-takeover amendments provides for a staggered or classified board of directors to delay effective transfer and control in a takeover.

Authorisation of Preferred Stock – The Board is authorised to create a new class of securities with special voting rights. This security, typically preferred stock may be issued to a friendly party in a control context. This is referred to as issuance of Shares with Differential Voting Rights, which is subject to restrictions under the Companies Act, 2013 and SEBI (ICDR) Regulations, 2018 and hence has been rendered unattractive over a period of time.

Poison Pill Defenses – These pills provide their holders with special rights exercisable only after a period of time following the occurrence of a triggering event. These rights take several forms but all are difficult and costly to acquire control of the issuer or the target company.

Acquisition of Company/Business – Corporate Restructuring Insolvency Liquidation & Winding Up Study Material

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