Final SIP Report Sagar Shah

A REPORT

ON

“Unraveling the Takeover Code”

By

SAGAR SHAH

For

A REPORT

ON

“UNRAVELING THE TAKEOVER CODE”

By

SAGAR SHAH (09BSHYD0714)

For

J M FINANCIAL

Date of submission: May 15, 2010

AUTHORISATION

This report is submitted in partial fulfillment of the requirements of MBA program

of IBS Hyderabad.

May 15, 2010 Sagar Shah

Submitted to:

Mr. Kanumuri Rambhushan Prof. D Satish

Executive Director – Mergers and Faculty Guide

Acquisition Restructuring Department, IBS - Hyderabad

J M Financial Consultants Private Limited

ACKNOWLEDGEMENT

I am extremely grateful to IBS Hyderabad for having prescribed this internship and project work

to me as a part of the academic requirement in the MBA course. The completion of this project

work has enabled me to gain invaluable knowledge.

I would like to thank Mr. Adi Patel – CEO, J M Financial Consultants Private Limited and Mr.

Ranganath Char – Managing Director, J M Financial Consultants Private Limited, who gave

me a wonderful opportunity to work, learn and grow in their esteemed organization.

I would like to express my gratitude towards Mr. Kanumuri Rambhushan – Executive

Director and his team, whose invaluable support and guidance has helped me to gain knowledge

of various aspects of investment banking and has given me an opportunity to sharpen my skill-

sets and become an efficient manager.

I would further like to thank Mr. Manoj Bhargava, Mr. Dennis Barsky and Mr. Peter

Wilkonson form Jones Day and Mr. Marcus Chow from Drew & Napier LLC both of them

being International Law Firms for their sincere efforts in guiding me with respect to implications

of foreign laws.

I would also like to express my gratitude towards Prof. D. Satish, who continually and

convincingly conveyed a spirit of excellence and excitement with regards to his support and

encouraged me to work optimally, which is one of the most essential prerequisite of an effective

manager.

I am also very grateful to my family and my friends for their enduring support.

At this juncture, I wish to appreciate the management and staff of J M Financial for providing the

entire state of the art infrastructure and resources, to enable me to complete and enrich my

project.

It has always been a sincere desire of every management student to get an opportunity to express

his views, skills, attitude and talent in which he is proficient. Internship is one such avenue

through which a student who aspires to be a future manager does something creative. This

project has given me a chance to get in touch with the practical aspects of management.

TABLE OF CONTENTS Executive Summary

1. Introduction ........................................................................................................................ 1

1.1. Objectives, Scope and Limitations of the Project..................................................................3

1.2. Methodology Adapted ...........................................................................................................3

2. Literature Reviews of Takeover Code.............................................................................. 4

3. Indian M&A........................................................................................................................ 9

3.1. Concept of Takeover............................................................................................................10

3.2. Legal Aspects of Takeover ..................................................................................................12

3.3. Objects of Takeover .............................................................................................................12

3.4. Kinds of Takeover................................................................................................................13

4. Structuring & Takeover................................................................................................... 15

4.1. Options of Takeover ............................................................................................................15

4.2. Consideration for Takeover .................................................................................................17

4.3. Trigger Provisions for Open Offer.......................................................................................18

4.4. The Initial Acquisition Process under Takeover Code ........................................................19

5. SEBI’s Informal Guidance Scheme ................................................................................ 21

6. Cases under SEBI’s Informal Guidance Scheme .......................................................... 22

6.1. Gulf Oil Corporation Limited ..............................................................................................22

6.2. Shriram Ownership Trust.....................................................................................................25

6.3. Britannia Industries Limited ................................................................................................28

6.4. Indian Overseas Bank ..........................................................................................................31

6.5. Williamson Financial Services Limited...............................................................................33

7. Comparison of Takeover Regulations ............................................................................ 37

8. Analysis and Recommendations...................................................................................... 49

9. Conclusion ......................................................................................................................... 61

10. References.......................................................................................................................... 64

Annexures

A. SEBI’s Substantial Acquisition of Shares and Takeover Regulations, 1997

B. Open Offer Timeline in India

C. Guide to UK’s – “The CODE”

D. Singapore’s Takeover Guide

EXECUTIVE SUMMARY

In the wake of financial turmoil in the recent past we have noticed that numerous listed companies

were off their highs and were trading at attractive valuations. These times are opportunity for the

promoters and acquirers to increase their stake or gain control in their listed companies. These times

are also used by competitors or companies scouting for good acquisition targets as valuations are

very attractive. Any acquisition, takeover or change in control of a listed Indian company attracts the

provision of SEBI’s Substantial Acquisition of Shares and Takeovers, Regulations 1997 (Takeover

Code /Takeover Regulations).

Takeover Code is implemented by SEBI to have a transparent and orderly framework for substantial

acquisition of shares of listed companies and thereby protect public investor interest and avoid any

undue advantage to acquirers. Even though Takeover Code has been amended several times since

inception, its provisions are not free of doubts leading to several non-compliances and penalties.

Thus, to have better interpretation of the regulation SEBI announced a proposal for Informal

Guidance called Securities and Exchange Board of India (Informal Guidance) Scheme, 2003. Under

this scheme corporates and advisors make a formal application to SEBI to seek guidance on the

interpretation of the specific provisions of SEBI Act, Rules, Regulations, and Circulars which have

bearing on the transactions.

Issues corporates generally face in pursuant to Takeover are relating to structure of the transaction or

price related issues. Structuring a transaction is the most critical aspect of M&A activity. Numerous

transactions fail not because the company acquiring does not have enough money to buy the target,

but owing to its structure not acceptable to regulatory bodies. Thus, it is very important to devise a

good structure. Acquirers have to ensure that the transaction is in compliance with the Code and

does not trigger any regulation which listed companies are subject to adhere.

The project is divided in two parts. The first part of the project will focus on various structuring

related issues corporates face which they have tried to resolve by seeking guidance under SEBI’s

Informal Guidance Scheme. The project has listed few cases on interpretation of Takeover Code. In

the second part of the report the project has tried to analyse various critics of Takeover Code through

study of various literature reviews and wherever possible have tried to recommend amendments to

the Takeover Code. Also, with India trying to keep up the pace with the global standards the project

has compared extant regulations in other developed jurisdiction like United Kingdom and Singapore

from where India has tried to adopt its Regulations.

1

1. INTRODUCTION

Mergers and acquisitions (M&A) have emerged as an important tool for growth for Indian

corporates in the last five years, with companies looking at acquiring companies not only in India

but also abroad. The Indian economy has witnessed rapid economic growth since the early nineties

when liberalization was first ushered in by the then Finance Minister Dr. Manmohan Singh. From

the Nehruvian style of socialist economy and a Hindu rate of growth, the Indian economy has come

a long way with the average growth rate of nearly 9% during the last five years. Even during the

recent economic crisis, the Indian economy showed remarkable resilience and is fast returning to its

high growth trajectory.

These impressive growth numbers are also reflected in terms of confidence of not only the Indian

entrepreneur but also the global investor in the Indian economy. Lot of foreign funds have been

infused and M&A activity has been on the upswing ever since the turn of the millennium. Also,

Cross border deals were the major driver of M&A action during last 3 calendar years accounting

about 65% of the total M&A activities in India. Of this the average inbound M&A transactions

were about 60%1 signifying large of inflow of funds in the country.

During the last quarter of CY 2009 and first quarter of CY 2010, witnessed strong signs of revival

in the Indian M&A market. A large number of announced transactions during the current year have

been outbound in nature, thus indicating that the appetite to explore the inorganic growth route is

back.

As we see the upswing in M&A activity, the process of mergers and acquisitions has gained

substantial importance in today's corporate world. This process is extensively used for restructuring

the business organizations. Financial organizations i.e. Investment Banks along with law clubs in

India and abroad are taking necessary initiatives to restructure the corporate sector of India by

adopting the mergers and acquisitions policies thereby understanding the complexities of the

various financing structure, proper due diligence procedures and managing cross-cultural HR issues

that are crucial for the success of a M&A deal. The increased competition in the global market is

one of the main reason that has prompted the Indian companies to go for mergers and acquisitions

as an important strategic choice.

1 www.mergermarket.com

2

Trends in Indian M&A in the recent past

In line with the global M&A activity, the years 2007 and early half of 2008 also saw the high point

in M&A activity in India. As seen in the chart below, the total volume of deals from India touched

the peak of US$ 67.3 billion in the year 2007 and in spite of a slowdown touched US$ 51.9 billion

in 2008. Some of the big ticket transactions of those years include Tata Steel’s acquisition of Corus

for over US$ 11 billion, Vodafone’s acquisition of Hutschison’s stake in Hutschison Essar for US $

11.1 billion, Daiichi Sankyo’s acquisition of Ranbaxy for US$ 4.7 billion, Tata Motors acquisition

of Jaguar Land Rover for US$ 2.3 billion, Hindalco’s acquisition of Novelis for US$ 5.7 billion and

ONGC’s acquisition of Imperial Energy for US$ 2.6 billion. In addition, the domestic deal

landscape also saw increased activity and landmark big-ticket deals like the merger of Centurion

Bank of Punjab with HDFC Bank of US$ 2.8 billion and the acquisition of Spice Communications

by Idea Cellular aggregating to US$ 2.5 billion2.

More recently the volume in 2009 further dropped by 63% to US$ 19.37 billion but since last

quarter of 2009 and first quarter of 2010, the deal space in India has again started witnessing

increased activity with landmark domestic transactions like the acquisition of stake in Wireless TT

Info Services Limited (subsidiary of Tata Teleservices Limited) by Quippo, the merger of Reliance

Petroleum with Reliance Industries and acquisition of Zain by Bharti Group. The total value of

deals upto April 2010 has touched to US$ 18.44 billion showing resurgence in Indian M&A

activity.

2 Bloomberg and www.mergermarket.com

India M&A Volumes

Source: Bloomberg and Merger Market.

4,648

36,694

19,370 18,438

4,661 8,073 9,746

51,808

67,295

39,194

240 323 306 333

730

979

726

76

1,119

592

0

20,000

40,000

60,000

80,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 CY 2010 uptoApril 2010

0

300

600

900

1,200

M&A Volume (USD MM) No. of Deals

3

1.1 Objectives, Scope and Limitations of the Project

Objective

The objective of the project is to see how various queries under informal guidance scheme have

been used in the past to assist in proper interpretation of the regulations and devise structures in

compliance with the Takeover Code. Also, the project has made an attempt to analyse various

critics of Takeover Code through study of various literature reviews and wherever possible have

tried to recommend amendments or improvements, in terms of disclosures and practices, under the

Takeover Code. The project has further analysed and compared regulations in terms of disclosures

and practices based on prevalent practices in United Kingdom and Singapore, so as to suggest

amendments to have a competitive edge and remain as one of the most attractive destinations to

invest funds which will boost the economy in the coming years.

Scope

1. The project scope includes all companies listed on stock exchanges of India.

2. The project also compares Indian Takeover Code vis-à-vis UK and Singapore.

Limitations

1. The data analysed is secondary in nature and is not sector specific.

2. Views presented and analysis is limited to Mergers and Acquisition for listed Indian company.

1.2 Methodology Adapted

We had started with analysis of various cases under informal guidance scheme from 2003 to 2009

sought by corporates to gain clarity on specific provisions that triggers Takeover Code.

1. Study and analyse SEBI’s (Substantial Acquisition of Shares and Takeovers) Regulations, 1997

2. Review of cases under Informal Guidance Scheme

3. Compared Indian Takeovers Regulations and provisions of same under international

regulations.

4. Recommendations based on analysis

5. Conclusion

4

2. LITERATURE REVIEWS OF TAKEOVER CODE

Justice P.N. Bhagawati Committee Report on Takeovers

Review of Takeover Code, 1994

Year of Publication: 1996

A Committee was set up by SEBI in November 1995, under the Chairmanship of Justice P.N.

Bhagwati, former Chief Justice of India, to review the Securities and Exchange Board of India

(Substantial Acquisition of Shares and Takeovers) Regulations, 1994. The terms of reference of

the Committee were:

• to examine the areas of deficiencies in the existing Regulations; and

• to suggest amendments in the Regulations with a view to strengthening the

Regulations and making them more fair, transparent and unambiguous and also

protecting the interest of investors and of all parties concerned in the acquisition

process.

The Committee meetings deliberated extensively on all the provisions of Regulations existing

then, and on the issues which came up before SEBI in the course of administration of the

Regulations, keeping in view the imminent scenario in the corporate sector following the

economic reforms. In order to gather the views of all the members of the Committee and to look

at the process of substantial acquisition of shares and takeovers closely from all viewpoints,

some members of the Committee prepared papers on specific topics in the Regulations for

Substantial Acquisition of Shares and Takeovers namely definitions, applicability of the

regulations, disclosures, the procedural details of an offer and penal provisions. The Committee

examined the principles and practices and the regulatory framework governing takeovers in 14

countries. The Committee had decided to submit a draft Report to SEBI and requested SEBI to

circulate it widely with a view to get public reaction and response. The Committee had also

noted that the Report had become a subject matter of intense debate among companies,

industrialists, chambers of commerce, professional bodies, academic circles, market

participants, investor associations and the media. The Report of the Committee was presented in

two parts. The first part contained the recommendations of the Committee based on which the

new Regulations had been framed which was given in the second part of the report. In a way the

regulations were re-written.

5

Report of the Reconvened Committee on Substantial Acquisition of Shares and Takeovers

under Chairmanship of Justice P. N. Bhagawati


After release of first set of regulations in 1997, SEBI had constituted the panel to review the

provisions of SEBI’s (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 in

June 1998. The committee constituted of representatives from chambers of commerce and

industry, investor associations, legal experts, merchant bankers, Institute of Chartered

Accountants of India and SEBI.

The prima-face of the formed committee was to suggest amendments in the Regulations with a

view to strengthening the Regulations and making them more fair, transparent and

unambiguous and also protecting the interest of investors and of all parties concerned in the

acquisition process. Some of the major amendments proposed by the panel in its draft report

were arming SEBI with powers to ensure disinvestment of shares acquired in breach of specific

sections of the regulations and stopping transfer of shares in cases where it feels a violation of

the takeover regulations is likely to take place. Among other key recommendations are those

ensuring greater disclosure at various levels of holdings by the acquirer, and a provision that the

acquirer would not undertake substantial asset stripping unless prior approval of the target

company’s shareholders is secured. The committee had also said banks and financial

institutions should be encouraged to finance takeovers. It also said an offer should always be for

20 per cent or above; but the offer may be subject to an acceptance level of less than 20 per

cent. These and several other important recommendations form part of the changes proposed by

the P. N. Bhagwati panel.

6

Working Paper: Comments on SEBI’s Draft Takeover Code

- By J. R. Varma, V. Raghunathan and M. C. Bhatt


Working Paper No. - 1010

In this paper the authors have made an attempt to comment on the contents of the Draft

Regulation for `Substantial Acquisition of Shares in Listed Companies’ of SEBI (Consultative

Paper 1). The authors broadly concurred with the guiding principles, thrust and coverage of the

proposed regulation. They wondered whether the open market purchase as outlined in the

proposal will fully protect the interests of the small shareholders. Accordingly, the paper argues

as to why open market purchases should not be allowed and why all acquirers wishing to

exceed the permissible holding must follow the procedure of open tender offers. Further, the

paper brings out the need for a specific regulation governing the possibilities of partial and two-

step takeovers. Reference is also made to relevant provisions of the UK and USA codes in this

regard. And finally, it is argued that with respect to takeover defences, the duties of an acquiree

need to be spelt out explicitly, especially in certain specific areas.

Article: Takeover Code

- By Suneera Nerissa Madhok


Since the initiation of the liberalization and globalization policies in India in July 1991, an

attempt is definitely being made by our policy makers to recast the institutional, organizational

and legal arrangements in line with those practiced in the established market economies. In

view of exploring the changing institutional framework in the context of economic reforms, the

objective of this paper is to examine the recent scenario in the private corporate sector in India

and to evaluate the position of corporate control mechanisms in relation to takeovers in India

and other parts of the world. In the course of analysis, the article reviews the various corporate

policies adopted or recommended in different countries over time and raises certain related

issues pertaining to and in contrast with the situation in international markets and the

international regulatory regime that might throw light on the on-going process of designing of

an appropriate regulatory framework for India in the post-liberalization regime.

7

Evolution of Takeover Code in India

Multinational Enterprises and M&A in India: Patterns and Implications

- Nagesh Kumar


Published in: Economic and Political Weekly, 35, 5 August 2000: 2851-8

Before 1990, an open offer was mandatory for acquiring 25 percent stake in a company. In

1990, this threshold was reduced to 10 percent of a company’s capital. However, in case of

Multinational Enterprise (MNE) related acquisitions, various regulations like FERA, MRTPA

were applied. In 1992, the government created the Securities and Exchange Board of India

(SEBI) with powers vested in it to regulate the Indian capital market and to protect investors

interests. SEBI also took over the functions of the Office of Capital Issues Controller. Besides

as a part of the package of reforms and policy liberalization, the government announced a New

Industrial Policy (NIP) in July 1991. In November 1994, SEBI issued Guidelines for

Substantial Acquisition of Shares and Takeovers, widely referred to as Takeover Code 1994.

However, the experience demonstrated that the Code had lacunas and loopholes to deal with the

complexity of the situation. Hence, a Committee chaired by Justice P.N. Bhagwati was

appointed in November 1995 to review the 1994 Takeover Code. The Committee's Report of

1996 formed the basis of a revised Takeover Code adopted by SEBI in February 1997. The

Code was still being reviewed by the reconstituted Bhagwati Committee. On the basis of its

recommendations, the government announced some more amendments to the Code in October

1998. In sum, the policy regime in the 1990s has greatly liberalized the possibility of industrial

restructuring and consolidation through M&As by removing restrictions under the Capital

Issues Control Act, MRTPA and the Companies Act. As a result the M&A’s have increasingly

been employed by Indian enterprises for restructuring and consolidate their operations. The new

FDI policy and abolition of FERA regulations also facilitate acquisitions by MNEs. Although

new regulations in the form of the SEBI’s Takeover Code have been evolved, their objective is

primarily to protect the interests of minority shareholders. The norms for pricing the issue were

meant to check the practice employed by some MNEs to increase stakes in their Indian affiliates

at prices much lower than the ruling market prices through preferential issues made in their

favour.

8

Research Paper: Indian Takeover Regulation – Under-reformed and Over-modified

- By Sandeep Parekh


Working Paper No. – 2009-11-06

The regulations have been amended nearly 20 times since inception, though the amendments

have mainly concentrated on areas which needed no amendment. At the same time a vast

number of obvious problems have not been rectified in the regulations. The large number of

amendments have also created requirement of a compulsory tender offer of such unnecessary

complexity as to make it virtually unintelligible to even a well qualified professional.

This paper argues that the complexity in the trigger points for disclosure and tender offer

introduced over the years lacks a philosophy, and most of the amendments can not only be

deleted but a very simple structure can be introduced making compliance of the regulations

straight forward and easy to understand by management of listed companies. Certain other areas

which need amendments have also been discussed. Chief amongst these are the provisions

relating to consolidation of holdings, conditional tender offers, hostility to hostile acquisitions,

definitional oddities, payment of control premium in the guise of non compete fees, treatment

of differential voting rights, treatment of Global Depository Receipts and disclosure

enhancements.

This paper does not try to portray a particular combination of numbers as the best possible set

of trigger points and compulsory acquisition numbers but advocates that whatever numbers are

adopted should not be changed for several decades. Arguments that state that the changing

economic condition requires constant changes with these numbers, it is argued is wrong.

Other Literatures Reviewed

Other literatures reviewed were Bear Acts and Regulations pertaining to Takeovers prevalent

in India, UK and Singapore.

1. SEBI’s (Substantial Acquisition of Shares and Takeover) Regulations, 19973 – Indian

Takeover Code

2. The City Code on Takeovers and Mergers (“The Code”)4 – UK Takeover Code

3. The Singapore Code on Takeovers and Mergers5 – Singapore Code

3 Refer Annexure (A) 4 Refer Annexure (C) 5 Refer Annexure (D)

9

3. INDIAN M&A

In India, the process of economic liberalisation and globalisation ushered in the early 1990's created

a highly competitive business environment, which motivated many companies to restructure their

corporate strategies. The restructuring process led to an unprecedented rise in strategies like

amalgamations, mergers including reverse mergers, demergers, takeovers and other strategic

alliances.

Indian M&A is broadly divided into Amalgamations and Acquisitions. Under Amalgamations there

is Merger and De-merger activity while Acquisition can be done through Asset or Share Purchase.

There are several misconceptions or misinterpretations of terms Mergers, Acquisitions and

Takeovers.

Merger means combining of two or more companies, generally by offering the stockholders of one

company securities in the acquiring company in exchange for the surrender of their stock. Mergers

and de-merger in India are governed by The Companies Act, 1956. These transactions are carried

out with the approval of High Court and can take upto 6 – 9 months to complete. However, these

transactions are mostly tax neutral thereby giving an additional advantage to both target company

and the merged company. As a part of restructuring of capital the acquiror issues new securities in

line with a share exchange ratio.

Indian M&A

Amalgamations

Merger De-Merger

Acquisition

Asset Purchase Stock Purchase

The Companies Act, 1956 Takeover Code, 1997

10

Acquisition and Takeover are somewhat similar in nature but still there is a fundamental difference

between the two. Acquisition is corporate action in which a company buys most of the target

company's ownership stakes in order to assume control of the target firm. Acquisitions are often

made as part of a company's growth strategy whereby it is more beneficial to takeover an existing

firm's operations and niche compared to expanding on its own. Acquisitions are often paid in cash,

the acquiring company's stock or a combination of both. Takeover is a subset of acquisition and is a

corporate action where an acquiring company makes a bid for an acquiree. If the target company is

publicly traded, the acquiring company will make an offer for part of the outstanding shares.

3.1. Concept of Takeover

Takeover implies acquisition of control of a company, which is already registered, through the

purchase in cash or exchange of shares. Takeovers usually take place when shares are acquired or

purchased from the shareholders of a company at a specified price to the extent of at least

controlling interest in order to gain control of that company. Takeover of management and control

of a business enterprise could take place in different modes. The management of a company may be

acquired by acquiring the majority stake in the share capital of a company. The acquisition could

take place through different methods. A person may acquire the voting shares of a listed company.

A company may acquire shares of an unlisted company through what is called the acquisition under

Section 395 of the Companies Act, 1956 where the shares of the company are closely held by a

small number of persons, a takeover may be effected by agreement with the holders of those shares.

However, where the shares of a company are widely held by the general public, it involves the

process as set out in the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations,

19976 (Takeover Code).

Takeover is a corporate device whereby one company acquires control over another company,

usually by purchasing all or a majority of its shares. Ordinarily, a larger company takes over a

smaller company. It must be noted that takeover of management is quite distinct from takeover of

possession for the purpose of sale of establishment. In the former case, the underlying view is to

rehabilitate the establishment by providing better management which is not so in the latter case.

The takeover strategy has been conceived to improve corporate value, achieve better productivity

and profitability by making optimum use of the available resources in the form of men, materials

and machines.

6 Refer Annexure (A), the important data points of the Takeover Code are listen in the annexure. The Takeover Code has been adopted from http://www.sebi.gov.in/Index.jsp?contentDisp=SubSection&sec_id=5&sub_sec_id=5

11

Emergence of concept of takeover

Corporate Sector is an attractive medium for carrying on business as it offers a lot of benefits.

Raising money from public has its own positive features and it helps setting up big projects. When

promoters of a company desire to expand, they take a quick view of the industrial and business

map. If they find there is any prospect, they will always yearn for capitalizing such opportunities.

Compared to the efforts required, cost and time needed in setting up a new business, it would make

sense to them to look at the possibilities of acquiring an existing entity. The idea could be

compared to buying a pre-owned house. Sometimes the house may be very costly but it will be

available as a ready to occupy unit though the buyer would do some minor repair works to suit his

taste. Much similar would be the acquisition of an industrial unit or a business enterprise owned by

a listed company though the size and adjustment requirements post acquisition would be huge.

Thus, every company would be a takeover target whether it is economically a sound one or

otherwise. While the possibility of takeover of a company through share acquisition is desirable for

achieving certain strategic objectives, there has to be well defined regulations so that the interests

of all concerned are not jeopardized by sudden takeover threats. In this perspective, if one were to

analyse, it would be clear that there has to be a systematic approach enabling and leading the

takeovers, while simultaneously providing adequate opportunity to the original promoters to

protect/counter such moves. Thus, while the acquirer should adopt a disciplined method with

proper disclosure of intentions so that not only the original promoters in command are protected but

also the investors. It would be in the interests of all concerned that the takeover is carried out in a

transparent manner. When adequate checks and balances are introduced and ensured, takeovers

become a good tool. That is the reason why regulations have been put in place and these regulations

require sufficient disclosures at every stage of acquisition. These regulations take so much care that

they cover not only direct acquisition of the acquirer but also includes acquisitions through relatives

and associates and group concerns.

The concept of takeover picked up and in the meantime the Securities and Exchange Board of India

(SEBI) also notified the Takeover Code in 1997, which laid down a procedure to be followed by an

acquirer for acquiring majority shares or controlling interest in another company. The Takeover

Code is not meant to ensure proper management of the business of companies or to provide

remedies in the event of mismanagement. Its main objective is to ensure equal opportunity to all

shareholders and offer protection to them, in the event of substantial acquisition of shares and

takeovers.

12

3.2. Legal Aspects of Takeover

The regulatory framework for controlling the takeover activities of a company consists of –

• SEBI's Takeover Code, 1997

• The Companies Act, 1956

• Listing Agreement

• The Monopolies and Restrictive Trade Practices Act, 1969

• The Foreign Exchange Management Act, 1999

• The Foreign Investment Promotion Board (FIPB) Regulations and Guidelines

• The Income Tax Act, 1961

Mergers, amalgamations, de-mergers, acquisitions of business units or divisions, are all governed

by The Companies Act while Acquisitions of shares in listed Indian companies is governed by

Takeover Code, 1997. The Companies Act and The Takeover Code work in very different ways

and impose very different sets of regulations on the merger and/or acquisition process within India.

3.3. Objects of Takeover

In the wake of financial turmoil we have noticed that numerous listed companies were off their

highs and were trading at attractive valuations. These times are opportunity for the promoters and

acquirers to increase their stake to gain more control in these listed companies as they are trading at

heavy discounts. These times are also used by competitors or companies scouting for good

acquisition targets as valuations are very attractive. Thus, keeping in mind public interest and

avoiding an undue advantage to the acquirer the companies are required to adhere to regulations of

the Takeover Code and make information available to public investor. For example, Code define

and clearly state provisions or actions like open offer to public, minimum price for an open offer,

etc. to be undertaken in a situation where an acquirer intends to gain in control of unlisted holding

company with a substantial interest holding in its listed subsidiary.

The objects of a takeover may inter alia be –

1. Consolidation of Holdings

2. To increase market share

3. Avoid threat of Hostile Takeover

4. To gain control

5. To enhance economic value

13

6. To create shareholder value and wealth by optimum utilisation of the resources

7. 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

3.4. Kinds of Takeover

A. Legal Context

1. 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. This kind of

takeover is done through negotiations between two groups. Therefore, it is also called as

negotiated takeover. Most of the takeovers in India are Friendly Takeover. For example,

acquisition of Ranbaxy by Daiichi Sankyo, Vodafone’s acquisition of Hutschison stake, etc.

2. Hostile Takeover

In a Hostile Takeover 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, such acts of acquirer are known as 'hostile takeover'. Such

takeovers are hostile on the management and are thus called hostile takeover. Hostile takeovers

are generally not practiced in India. There are very few hostile takeovers as banks are also less

willing to back hostile bids with the loans that are usually needed to finance the takeover.

Kinds of Takeover

Legal Content Business Content

Friendly Hostile Bail-out Horizontal Vertical Conglomerat

14

3. Bail Out Takeover

Takeover of a financially sick company by a profit earning company to bailout the former is

known as bailout takeover. There are several advantages for a profit making company to

takeover a sick company. The price would be very attractive as creditors, mostly banks and

financial institutions having a charge on the industrial assets, would like to recover to the extent

possible. Banks and other lending financial institutions would evaluate various options and if

there is no other go except to sell the property, they will invite bids. Such a sale could take

place in the form by transfer of shares. While identifying a party (acquirer), lenders do evaluate

the bids received, the purchase price, the track record of the acquirer and the overall financial

position of the acquirer. Thus a bailout takeover takes place with the approval of the Financial

Institutions and banks.

B. Business Context

1. Horizontal Takeover

Horizontal takeover refers to acquisition of one company by another in the same industry. The

main purpose behind this kind of takeover is achieving the economies of scale or increasing the

market share. For example, takeover of Hutch by Vodafone.

2. Vertical Takeover

Vertical takeover refers to acquisition by one company of its suppliers or customers. The former

is known as backward integration and latter is known as forward integration. For example

takeover of Sona Steerings Ltd. by Maruti Udyog Ltd. is backward takeover. The main purpose

behind this kind of takeover is reduction in costs.

3. Conglomerate Takeover

Conglomerate takeover refers to acquisition of one company by another operating in totally

different industries. The main purpose of this kind of takeover is diversification.

15

4. STRUCTURING & TAKEOVER The common issues corporates face w.r.t. takeovers are generally relating to structure of the

transaction or price related issues on the valuations. Structuring a transaction is the most critical

aspect of M&A activity. A good structure is judged on the parameters of ease of its execution,

minimal tax implications, time-frame in which it can be implemented, effective funding with

minimum cost and implication of applicable regulations. For example, in a takeover or change in

control of a telecom listed company, apart from SEBI’s takeover related regulations the

transaction would be subject to follow TRAI (Telecom Regulatory Authority of India), DOT

(Department of Telecom) M&A guidelines and other government regulations. Acquirers have to

ensure that the transaction is in compliance with regulations and does not trigger any regulation.

Price related issues are generally negotiated and worked on by companies, investment banks, etc.

It is the structure which is the critical aspect, as structures don’t have models. Each company will

have a different structure suiting its needs and every structure has its own pros and cons. Thus,

one cannot generalize the structure executed by one company. This project is focusing on various

structuring related issues and how they are devised to ensure smooth and an efficient transaction.

4.1. Options of Takeover

Most of the corporate structures revolve around these options of increasing a stake or acquiring

control. Following are the options available for the acquirer to purchase shares in a listed

company:

Acquisition of Stock in Listed Company

Acquisition of Share from Promoters

Fresh Preferential Allotment

Tender/Open Offer Secondary Market Purchase

Off Market Block Deal Bulk Deal (1) Off Market (2) Block Deal (2) Bulk Deal

Note 1. Provided you time the deal 2. Through negotiation with investors other than promoters

16

1. Acquisition of Shares from promoters

If a person wants to acquire shares from promoter or persons acting in concert with him he

can do the same in three ways -

• Off-market transaction – An individual or a company can acquire shares from promoters

in an off market transaction at a negotiated price.

• Block deal – Also he can acquire shares through a block deal from the promoter

• Bulk deal – He can also purchase shares from stock markets like NSE, BSE, etc. during

market hours in a bulk deal. The deal has to be timed accurately such that the buy and sell

strike has to be given at the same time to avoid possibility of leakage in this method.

2. Fresh allotment

Preferential allotment is a way of infusing fresh equity in the business by issuing shares or

warrants to the specified entities at specific prices. Listed companies are required to adhere to

Chapter VII of “SEBI’s (Issue of Capital and Disclosure Requirements) Regulations, 2009”

guidelines and unlisted companies have to adhere to “Unlisted Public Companies (Preferential

Allotment) Rules, 2003".

3. Tender/Open Offer

Tender offer is an offer made directly to stockholders to purchase or trade for their securities.

A tender offer often contains various restrictions such as the minimum number of shares

required to be tendered for the offer to be effective or the maximum number of tendered

shares that will be accepted. These restrictions are covered in Takeover Code. A tender offer

may be made by a firm to its own shareholders to reduce the number of outstanding shares, or

it may be made by an outsider willing to gain control

4. Secondary Market Purchase

Secondary market is a market where existing securities are traded among investors through an

intermediary. Organized exchanges in India such as NSE, BSE, etc. facilitate the trading of

securities in the secondary market. If a person wants to acquire shares in secondary market he

can do the same in three ways-

• Off-market transaction – An individual or a company can acquire shares from a non-

promoter group in an off market transaction at a negotiated price.

• Block deal –He can acquire shares through a block deal from the non-promoter

• Bulk deal – He can also purchase shares during market hours through a bulk. The deal has

to be timed accurately such that the buy and sell strike has to be given at the same time to.

17

4.2. Consideration for Takeover

Selecting of the mode of payment of consideration for takeover should be made on the basis of

information received about the target company and the means available with the acquirer.

Consideration can be in two ways -

Consideration in the form of cash

Cash could be paid in exchange for the shares acquired. Shares could be acquired through a bid

made directly to the equity holders or through the stock market. The offeror company may also

consider issuing new shares for enabling the acquirer to get controlling stake such that the acquirer

is able to place its nominees on the Board of the target company to control the affairs of the

company.

Consideration in the form of Shares

In this method, consideration is paid by issuing to the shareholders of the target company the shares

of the acquirer company. In exchange for such shares the acquirer company will purchase the

shares of the target company. Under this broad scheme, various courses of action are available:

a. Share-for-share takeover bid in which the offeror company in exchange for shares of offeree

provides fully paid up shares on a stated basis. Apart from this, share-plus-cash or share-plus-

loan stock, convertible or non-convertible shares or loan stock with a cash option could be a

mode of consideration.

b. Combinations of various modes may be resorted to, for discharging the consideration. For

instance, acquisition by private deal of a block of shares from the existing Board of Directors or

larger controlling interest shareholders of the offeree company or acquisition of all or part of the

assets of the offeree company for shares of offeror company or reverse acquisition with offeree

company etc.

Thus, the decision about the proper mix of alternatives should be taken through expert advice,

having considered the relative quoted market prices of shares of offeror and offeree, their dividend

yield, gearing level, security cover, voting strength, net assets value, etc.

18

4.3. Trigger Provisions for Open Offer

Share acquisition in listed companies trigger Open Offer process in India, as per the SEBI

regulations. Issuance of a public announcement is a pre-requisite for proceeding with any

transaction under Regulation 10, 11 or 12. For Regulation 10 & 11, “Acquisition” means &

includes Direct acquisition in a listed company or Indirect acquisition by virtue of acquisition of

companies, whether listed or unlisted, whether in India or abroad Open Offer is mandatory under

any or combination of Regulation 10, 11 and 12.

Regulation 10 - Substantial Acquisition of Shares

• Open Offer under Regulation 10 needs to be made if the Acquiror along with the Person Acting

in Concert (PAC) decides to acquire, directly or indirectly, more than 15% of the shares

outstanding in a concerned target company

• Once an entity has acquired a 15% stake in target, individually or as part of a group, the entity

must make a tender offer for a minimum of 20% of the shares outstanding

Regulation 11(1) and 11(2) - Consolidation of Holdings

• Open Offer under Regulation 11(1) needs to be made by Acquirer along with PAC if:

Acquirer and PAC already hold greater than 15% but less than 55% of the Voting Capital of

Target Company and want to exceed the creeping limit of 5% in a financial year

• Open Offer under 11(2) to be made if

Acquirer and PAC already hold greater than 55% but less than 75% (or 90% as applicable)

of the Voting Capital of Target and want to acquire any additional shares

Provided that such acquirer may acquire additional voting rights entitling him upto 5%

voting rights in the target subject to the following:

– the acquisition is made through open market purchase or

– increase in the voting rights of the acquirer is pursuant to buy back of shares

Regulation 12 - Acquisition of Control

• Open Offer under Regulation 12 needs to be made by the Acquirer and PAC if they want to

acquire control over a Target Company.

• Offer needs to be made irrespective of -

Whether or not there has been any acquisition of shares or voting rights in a target company

Whether the control is acquired directly or indirectly.

• This regulation is not applicable if the change in control takes place pursuant to a special

resolution passed by the shareholders in a general meeting.

19

4.4. The Initial Acquisition Process under Takeover Code

• An Acquiror may begin purchasing stock without any requirement of a Tender Offer until a

15% ownership (all thresholds refer to Shares Outstanding) threshold.

• Once this is reached, or if control is acquired at a holding even below 15%, the Code requires

the holder to launch a Tender Offer for a minimum of a further 20% of the shares outstanding in

the Target

• Assuming full acceptance at this point, the Acquiror has a 35% stake in the Target and may do

one of several things:

Gain control: this would require the mandatory launching of another Tender Offer for a

minimum of a further 20% of the Target’s shares outstanding

Not gain control and simply retain his interest at 35%

Increase his stake by increments of less than 5% within a fiscal year to reach 55% - he

will not be required to make an open offer.

Increase his stake by increments more than 5% within the fiscal year: if so, he is again

required by the Code to launch another Tender Offer for at least 20% of the shares

outstanding

Begin a full merger/amalgamation process if he is keen on realizing synergies and

confident of shareholder / High Court approvals

Proceed with Merger/ Amalgamation

Increase Stake in 5% per year or less

Increase Stake at >5% per year increments

Status Quo Gain Control

Control Acquired No Control, but 15%

Mandatory Tender Offer Minimum 20%


35% Stake in Listed Company

Initial Ownership Stake in a Listed Company

Mandatory Tender Offer Minimum 20% of SO

Acquisition of >55% upto 75% Stake in a Listed

De-listing

90% Stake in a Listed Company



20

• Each of these Tender Offers may be for stakes larger than 20% at the Acquiror’s sole discretion.

The minimum price and size are regulated by The Takeover Code

Conditions of Minimum Offer price

It shall not be less than the highest of the following:

1. The Negotiated Price under an agreement, if any, triggering the code

2. Highest Price paid by the Acquirer during the 26-week period prior to the date of

public announcement for acquiring shares of Target Company, including by way of

allotment in a public or rights issue

3. The Price paid by the Acquirer under a preferential allotment at any time during

the 26- week period up to the date of closure of the offer

4. The Average of the weekly high and low of the closing prices of the shares of the

target company as quoted on the most frequently traded stock exchange during 26

weeks preceding the date of the public announcement

5. The Average of the daily high and low prices of the shares of the target company as

quoted on the most frequently traded stock exchange during 2 weeks preceding the

date of the public announcement

Conditions of Minimum Offer Size

The Public Offer shall be made to acquire a minimum of 20% of the voting capital of

the target company

o The offer can also be made conditional upon minimum level of acceptances from

the shareholders. In such a case, the acquirer will have to deposit in the escrow

account in cash a sum of 50% of the consideration payable under the public offer

and also agree to cancel the MOU. Such conditionality should be mentioned in the

Public Announcement

• If acquirer acquires 55% stake and acquires any additional share after that, he is again required

to launch another Tender Offer for a minimum of 20%, unless-

the acquisition is made through open market purchase or

increase in the voting rights of the acquirer is pursuant to buy back of shares

• Delisting Regulations state that it can delist the shares from trading on the stock exchange once

if an Acquiror controls greater than 75% or 90% of shares (whichever applicable).

Pricing of this Tender Offer is regulated by Delisting Regulations.

21

5. SEBI’S INFORMAL GUIDANCE SCHEME

Takeover Code has been amended several times, but still its provisions are not free of doubts and

corporates and advisors face issues relating to its practical implications. Thus, to have better

regulation and systematic development of the securities market, SEBI announced a proposal for

Informal Guidance called Securities and Exchange Board of India (Informal Guidance) Scheme,

2003. Under this scheme corporates and advisors makes a formal application to SEBI to seek

guidance on the interpretation of the specific provisions of SEBI Act, Rules, Regulations, and

Circulars which have bearing on the transactions. Under Informal Guidance SEBI does not provide

conclusive decisions, rather it only helps corporates and its advisory team to interpret the said act,

rules, regulations, and circulars. Also, it cannot be considered as an order of the board.

The Scheme provides that SEBI would give informal guidance in two forms:-

a) No action letter - In such a letter the concerned department of SEBI would indicate that the

said department may or may not recommend any action under any Act or rules, regulations,

guidelines, circulars or other legal provisions administered by SEBI.

b) Interpretive letter - The other category of letters that could be issued by a department of

SEBI would provide an interpretation of a specific provision of any Act, rules, regulations,

guidelines, circulars, etc. administered by SEBI. The interpretation would be given in the

context of a proposed transaction in securities or a specific factual situation.

Conditions for seeking informal guidance

a) One who seeks informal guidance will have to state that he is seeking informal guidance

under the said Scheme. He will have to mention that he is requesting for a no action letter or

an interpretive letter.

b) The request has to be accompanied with a fee of Rs.25, 000.

c) The request has to be addressed to the concerned department of SEBI. In other words,

before making a request under the Scheme, it would be advisable for the requestor to

ascertain the correct name of the department to which the request may be addressed.

d) It must be ensured that there is a clear description of the nature of request. All the material

facts and circumstances involved along with the necessary analysis should be mentioned. In

addition, applicable legal provisions need to cited affecting his request.

e) As per the Scheme, SEBI’s department will have to respond within a period of 60 days from

the date of the receipt of the request. It may even give a hearing to the requestor.

22

6. Cases Under SEBI’s INFORMAL GUIDANCE SCHEME

6.1. Gulf Oil Corporation Limited

Gulf Oil Corporation Limited (GOCL) had asked SEBI for an Interpretive letter under SEBI’s

Informal Guidance Scheme in June 2009 w.r.t. amalgamation of three companies.

Case Facts

• GOCL is an Indian Company engaged in manufacture of industrial explosives, lubricants,

contract mining and property development. Equity shares of GOCL are listed on NSE and

BSE.

• Gulf Oil International (Mauritius) Inc. (GOIMI) is the promoter of GOCL having 45.73%

shareholding.

• Helvetia Mauritius Ltd (Helvetia) and Swallow Enterprises Mauritius Limited (Swallow)

were overseas corporate bodies (OCBs) based in Mauritius, having shareholding in GOCL

to the extent of 2.67% and 0.63%, respectively.

• GOIMI, Helvetia and Swallow had approved on May 13, 2008 a proposal of amalgamation

under the laws of Mauritius. The amalgamation of the said OCBs with GOIMI was

proposed with retrospective effect from May 2008. The amalgamation was approved by the

Registrar of Companies, Republic of Mauritius on April 23, 2009.

• Accordingly, the beneficial ownership of shares of GOCL would transfer from OCBs to

GOIMI, resulting in an increase in shareholding of GOIMI in GOCL from 45.73% to

49.03% (an increase of 3.3%). Though the approval came into effect in April 2009 the

scheme is with effect from May 2008.

Pre-Amalgamation

GOCL

GOIMI Helvetia Swallow Others

45.73% 2.63% 0.67% 50.97%

23

• Even though the said OCBs have ceased to exist in Mauritius, the transfer of shares in India

has not been effected, as the application for the same has been filed with the Reserve Bank

of India. On receipt of RBI approval, the transfer will be effected in the records of GOCL.

• Under regulation 11 of the Takeover Code, an acquirer can consolidate his holdings by

further acquiring 5% in a financial year, till the holding reaches 75%. Whereas under

regulation 3(1) (i) nothing contained in regulation 10, 11 and 12 shall apply to acquisition of

shares pursuant to scheme of arrangement or reconstruction including amalgamation or

merger or de-merger under any law or regulation, India or foreign.

• The increase in shareholding of GOIMI in GOCL on account of amalgamation in Mauritius

is exempted under regulation 3 and permitted under Regulation 11 they have the option of

increasing their holding in GOCL by way of open market purchase, preferential allotment,

etc.

Query

• Whether the increase in shareholding of GOIMI on account of the amalgamation of the

three Mauritius based companies is exempted under Regulation 3?

• Whether GOIMI have the option of acquiring further 5% shareholding in GOCL during the

current financial year by the way of open market or by preferential allotment (5% of

increased capital in case of allotment of fresh shares) pursuant to Regulation 11, without

violating any of the applicable rules, regulations, or guidelines in 2009 -10?

Analysis

• As per regulation 11 of the Takeover Code – “No acquirer who, together with persons

acting in concert with him, has acquired, in accordance with the provisions of law, 15 per

cent or more but less than fifty five per cent (55%) of the shares or voting rights in a

Post-Amalgamation

GOCL

49.03%

GOIMI Others

50.97%

24

company, shall acquire, either by himself or through or with persons acting in concert with

him, additional shares or voting rights entitling him to exercise more than 5% of the voting

rights, in any financial year ending on 31st March unless such acquirer makes a public

announcement to acquire shares in accordance with the regulations.”

• Under the facts and circumstances represented, it is noted that the transaction described in

the request is covered under regulation 11 (1) and under this regulation the GOIMI can

consolidate by further acquiring upto 5% in a financial year.

• As per regulation 3 (1) (j) (ii) of the Takeover Code – “Nothing contained in regulation 10,

regulation 11 and regulation 12 of these regulations shall apply to the acquisition of shares

or voting rights pursuant to scheme of arrangement or reconstruction including

amalgamation or merger or demerger under any law or regulation, Indian or foreign”

• The exemption under regulation 3 is available from the open offer obligations of regulations

10, 11 and 12. When the acquisition is within the 5% limit as specified in regulation 11 (1),

the obligations under regulation 11 is not attracted and the question of availability of

exemption under regulation 3 does not arise. Therefore, the increase of 3.30% in the

shareholding of GOIMI being within the said 5% limit, regulation 11 (1) is not triggered by

the said acquisition.

• From the certificate of amalgamation dated April 23, 2009 issued by Registrar of

Companies of Republic of Mauritius, it is noted that the amalgamation has come into effect

from April 23, 2009. Therefore, if amalgamation is effective from April 23, 2009, the

increase of 3.3% will a1so be effective from the said date and not from May 2008 unless the

Registrar of Companies of Republic of Mauritius has provided otherwise with respect to the

effective date of such increase.

• Had the increase beyond 5% limit, it would have been exempted under regulation 3 (1) (j)

(ii) automatically. In that case, the acquirer would be entitled to acquire additional upto 5%

shares/voting rights in the target company in the same financial year without making public

announcement under regulation 11(1). With the same logic, if the GOIMI has acquired

3.3% through a scheme or merger or amalgamation contemplated under regulation 3 (1) (j)

(ii) of the Takeover Code it can increase its shareholding in GOCL by additional 5% within

this financial year without triggering regulation 11(1). Mode of acquisition is not relevant

under regulation 11(1).

25

6.2. Shriram Ownership Trust

Shriram City Union Finance Limited had requested for interpretative letter under the SEBI

(Informal Guidance) Scheme, 2003 on applicability of the provisions of SEBI Takeover Code.

Case Facts

• Shriram City Union Finance Limited (SCUF) the

Target Company is listed on the Bombay Stock

Exchange, National Stock Exchange and Madras

Stock Exchange.

• Shriram Enterprise Holding Private Limited

(SEHPL) and Shriram Financial Services

Holdings Private Limited (SFSHPL) hold

36.88% and 13.86% respectively of the share

capital of the Target Company.

• SEHPL is a 100% subsidiary of SFSHPL.

• Shriram Motor Finance (SMF), a partnership

firm is holding 99.88% of the equity shares of

the Shriram Financial Services Holding Private Limited (SFSHPL). Shri R. Thyagarajan

and Shri T. Jayaraman are equal partners of SMF, each holding 50% shares in SMF.

• Shriram Ownership Trust (the Transferee) is a

trust for the welfare of the employees of Shriram

Companies. The corpus fund of the trust as on

31.03.2007 as per last Audited Balance sheet is

Rs. 50 crores. It has not holding any shares/voting

rights in the Target Company directly at any time.

• Previously vide your letter 23.08.2007 you had

indicated that you wanted to be a partner of SMF

with 95% partner and the balance 5% with Shri R.

Thyagarajan. Thereafter you submitted a revised

proposal, proposing to acquirer 99.88% of equity

shares of SESHPL held by SMF.

• There is no direct holding by the transferee and

26

the transferor as the acquisition is an indirect acquisition.

• The Transferor, transferee, SFSHPL, SMHPL, the Target Company i.e. SCUF, all are

classified as group as defined in the Monopolies and Restrictive Trade practices Act.

• Such group have been shown as group in the last audited Annual Report of the Target

Company (for financial year ended 31.03.2007).

• The Transferee i.e. Shriram ownership Trust is not holding any share of the Target

Company. So compliance with Regulation 6, 7 and 8 of the Takeover Code does not arise.

• The Transferor i.e. Shriram Motor Finance is indirectly holding the shares of the Target

Company .So compliance with Regulation 6, 7 and 8 of the Takeover Code does not arise.

• The transferor and transferee fulfill all conditions subject to which the exemption under

regulations 3(1)(e)(i).

Query

Whether the acquisition of 99.88% shares of SFSHPL held by transferor to the transferee will

be exempted from the applicability of the regulation 10,11 and 12 of the Takeover Code as the

acquisition is claimed under regulation 3(1)(e)(i) of the Takeover Code.

Analysis

• As per Regulations 3(1)(e)(i) of takeover Regulation , an acquisition pursuant to interse

transfer among group is eligible for exemption for applicability of the regulations 10,11&

12 of the Takeover Code.

i. The acquirer and transferor shall be “ Group” coming within the definition of “group” as

defined in the MRTP act 1969

ii. Persons constituting such group have been shown as group in the last published annual

report of the Target Company.

iii. The transferor as well as the transferee ought to have complied with disclosure

requirement under Regulation 6, 7 and 8 of Takeover Code as may be applicable.

iv. Further, the acquirer (transferee) is also under obligation to comply with following

requirements –

o The transferee (acquirer) should inform the stock exchanges atleast 4 working days

in advance of the date of proposed acquisition in case of acquisition exceeding 5%

27

of the voting share capital of the target company in terms of Regulation 3(3) of the

Takeover Code.

o The Transferee (acquirer) shall file a report with SEBI in the specified format within

21 days of the date of acquisition along with requisite fees prescribed, in terms of

Regulations 3(4) and 3(5) of the Takeover Code.

• As per condition stated at point a (i) and (ii) both the transferor and transferee are defined as

“Group” as defined in the MRTP Act. Further such group has been shown as Group in the

last audited Annual Report of the Target Company.

• As regard to the point a (iii) the transferor and transferee does not directly hold any shares

of the Target Company .Therefore transferor and transferee will be deemed to be complying

with provision of Chapter II of the Takeover Code, if the promoter group (the person

belongs to group and holding equity shares in Target Company directly) complies with the

provisions of Chapter II of Takeover Code.

• In the instant case the exemption under Regulation 3(1) (e)(i) may be available to the

Transferee i.e. Shriram Ownership Trust if all other conditions as stated above are complied

with.

28

6.3. Britannia Industries Limited

J M Financial had sought interpretive letter on behalf of BIL on the availability of exemption in

terms of Regulation 3(1)(e)(iii) of the Takeover Code in respect of proposed indirect change in

control from joint control to sole control in Britannia Industries Limited (BIL/target company).

Case Facts

• Leila Lands Limited (LL), a Wadia group company and Britannia

Brands Limited (BBL), UK, Groupe Danone own 50% each in a Joint Venture SPV known

as ABI Holdings Limited (ABIH).

• ABIH owns 100% of Associated Biscuits

International Limited (ABIL) which along

with wholly owned subsidiaries hold 51% of

BIL. BIL is therefore, a subsidiary of

ABIL/ABIH.

• LL, BBL, ABIH, ABIL are all companies

incorporated outside India while Target

Company has been incorporated in India.

ABIL holds directly 45.1% and through

subsidiaries another 5.8% in Target

Company.

• There is a Shareholders Agreement entered

in September 1995 between LL Ltd. (Wadia

group companies and Mr. Nusli Wadia)

(collectively referred to as “Indian Group”),

BBL, Groupe Danone, Danone Holdings (UK) Limited, Danone Asia Pte Ltd (all belonging

to Groupe Danone, collectively referred to as foreign Group), ABIH and ABIL.

• The agreement provides that –

o ABIH’s business is to hold directly or indirectly shares in Target Company.

o The purpose of Agreement is to record and regulate their relationship.

o Both Indian Group and Foreign Group have a right to appoint equal number of directors

on ABIH and ABIL.

29

o Indian Group and Foreign Group are entitled to propose an equal number of persons for

appointment as directors of ABIH as representatives of ABIL.

• ABIL along with its subsidiaries is in a position to have an equal number of directors of

atleast three each representing Indian Group and Foreign Group on Target Company’s

board.

• Foreign Group has supplied from time to time know-how/technology and technical support

as was required by Target Company. Additionally, Target Company has been using

trademark which belongs to Foreign

Group.

• The requirement of holding shares for a

period of 3 years is satisfied as both

Groups have held shares under the current

structure for a period of over a decade.

• Danone Asia Pte Limited, Singapore

(belonging to the Foreign Group) owns

100% of BBL.

• The proposed transaction is the acquisition

of BBL (which holds 50% of ABIH) by

LL.

• Danone Asia Pte Ltd has held shares in

BBL for more than last 3 years.

• The proposed transfer would be from a foreign collaborator to a Qualifying Indian promoter

as provided in the exemption under Regulation 3(1)(e)(iii)(a). By acquiring BBL, LL would

along with its 50% direct holding in ABIH become the 100% beneficial shareholder of

ABIH.

Query

Whether the transfer of shares of BBL, currently, held by Danone Asia Pte Limited to LL

qualify for exemption under Regulation 3(1)(e)?

Analysis

• The proposed transaction will result in LL (belonging to Indian Group) gaining sole control

over ABIH (through BBL’s 50% and its own 50%) as against joint control previously

30

exercised along with Foreign Group. As a result, there will be a change in indirect control

(joint to sole) over Target Company also.

• As per Regulation 2(1)(c), any transfer of joint to sole control would not be deemed as a

change of control if the same is effected in accordance with Regulation 3(1)(e).

• Regulation 3(1)(e) covers exemption available to transfer amongst group companies,

relatives, qualifying promoters and a transfer between qualifying Indian promoters &

foreign collaborators.

• As per Reg. 3(1)(e)(iii)(a)/(b) of the Takeover Code, transfer of shares amongst promoters

and foreign collaborators or amongst Promoters is eligible for exemption from the

applicability of the regulations 10, 11 and 12 of the Regulations subject to the fulfillment of

the following conditions:

i. The transferee(s) or transferor(s) are qualifying promoters in terms of provisions of

Explanation to Regulation 3(1)(e)(iii)(b) of the Regulations or foreign collaborators;

ii. The acquirers collectively as well as transferors collectively have been holding shares

in the target company for a period of at least three years prior to the date of

acquisition;

iii. The provisions of Chapter II of the Regulations have been complied with by both the

acquirers and transferors;

iv. The inter se transfer price does not exceed 25% of the price determined in terms of

regulation 20(4) and 20(5) of the Regulations, as applicable.

• In terms of regulation 3(3) of the Regulations, the acquirers in case of such inter se transfer

should inform the stock exchanges at least 4 working days in advance of the date of

proposed acquisition in case of acquisition exceeding 5% of the voting share capital of the

target company.

• In terms of regulations 3(4) of the Regulations, such acquirer is also under obligation to file

a report with SEBI in the specified format within 21 days of the date of acquisition along

with requisite fees prescribed under regulation 3(5) of the Takeover Regulations.

31

6.4. Indian Overseas Bank

Indian Overseas Bank (IOB) had sought an interpretative letter from SEBI under the SEBI

(Informal Guidance) Scheme, 2003 on applicability of the provisions of SEBI Takeover Code

on acquisition of stake of an unlisted entity.

Case Facts

• The Indian Overseas Bank (IOB) a listed entity, is a Nationalised Bank governed by

provisions of The Banking Companies (Acquisition and Transfer of Undertakings) Act,

1970.

• Bharat Overseas Bank Ltd. (BhOB) an unlisted entity is a bank incorporated under the

Companies Act, 1956 and is governed by the Banking Regulations Act, 1949.

• IOB is holding 30% share in BhOB and the balance 70% shareholding in BhOB is held by

six other banks in the private sector.

• IOB is proposing to acquire the 70% shareholding of BhOB from these six private sector

banks.

• Thereafter, BhOB will become 100% owned subsidiary of IOB. All the six banks holding

the shares of BhOB have given their consent

to sell their shares to IOB.

• IOB has issued necessary notice to the stock

exchange under the listing agreement and got

the proposal for purchase of shares duly

approved by the Board of Directors.

• IOB is in the process of obtaining necessary approvals for the above transaction in terms of

section 19(2) of the Banking Regulation Act 1949 and other guidelines from the Reserve

Bank of India (RBI) / Govt. of India. On obtaining the approval from RBI/GOI, IOB would

32

acquire the above mentioned shares of BhOB and hold them in the investment portfolio of

the bank. In due course, on obtaining necessary clearance, including overseas regulators,

IOB would consider merger of the two entities, IOB and BhOB.

• In this process it is envisaged that there will not be any change in the share capital of IOB.

• Entire 70% share holding of BhOB held by 6 private banks is being acquired by cash

payment.

Query

• Whether the proposed acquisition of 70% of shares as mentioned above will trigger any of

the Regulations 3, 10, 11 & Takeover Regulations as amended from time to time and;

• Whether Chapter XIII of the SEBI (Disclosure and Investor Protection Guidelines), 2000 as

amended from time to time, will apply on the proposed acquisition.

Analysis

• SEBI’s Takeover Code is applicable to the acquisition of shares of a target company. In

terms of regulation 2(1)(o) of the Takeover Code ‘target company’ means a listed company

whose shares or voting rights or control is directly or indirectly acquired or is being

acquired. Further, as per Regulation 3(1)(k) of the Takeover Code, nothing contained in

Regulations 10, 11 and 12 shall apply to acquisition of shares in companies whose shares

are not listed on any stock exchange.

• In the case represented in your letters, the IOB is proposing to acquire shares of BhOB, an

unlisted entity. In view of the above, the provisions of the Takeover Code shall not apply to

the proposed acquisition of 70% shares of BhOB by IOB from six private sector banks.

• The provisions of Chapter III of SEBI (Disclosure and Investor Protection) Guidelines

2000, are applicable to preferential issue of equity shares/ fully convertible debentures/

partly convertible debentures or any other financial instruments which would be converted

into or exchanged with equity shares at a later date, by listed companies to any select group

of persons under section 81(1A) of the Companies Act, 1956 on private placement basis.

• In the present matter, the 70% share holding in BhOB (an unlisted entity) held by 6 private

sector Banks is proposed to be acquired by IOB against cash payment and there is no issue

of any shares by IOB to any person on a private placement basis. Therefore, the above

guidelines relating to the preferential allotment shall not apply to the proposed acquisition

of the shares of BhOB by IOB.

33

6.5. Williamson Financial Services Limited

Williamson Financial Services Limited had request for no-action letter under the SEBI

(Informal Guidance) Scheme, 2003 and SEBI (Substantial Acquisition of shares and Takeover)

Regulations, 1997 regarding elimination of holding companies having control in Williamson

Financial Services Limited.

Case Facts

• Williamson Financial Services Limited (WFSL/Target Company), formerly known as

Makum Tea Co. (India) Limited , is a company incorporated under Companies Act ,1956.

• The Target Company is listed on the Bombay Stock Exchange, Calcutta Stock Exchange

and the Guwahati Stock Exchange.

• The Makum (Assam) Tea Company Limited, a company incorporated under the laws of

England and Wales (Makum), and the Namdang Tea Company Limited, also a company

incorporated under the laws of England and Wales (Namdang) are promoters of the Target

Company. As on June 30 2008, Makum owns 1,130,050 shares in the Target Company

aggregating to 13.20% of its equity share capital and Namdang owns 1,243,450 shares in

the Target Company aggregating to 14.87% of its equity share capital.

• Makum has held the shares in the Target Company since September 28, 1995 and Namdang

has held shares in the Target Company since September 9, 1995.

• Makum has a total of 666,006 shares, of

which Twinswitsh Limited, a company

incorporate under the laws England and Wales

(Twinswitch), owns 666,004 shares and EFG

secretaries owns 2 shares . EFG Secretaries is

the Administrator of Makum and is acting in

concert with Twinswitch; therefore,

Twinswitch effectively controls 100% of

Makum.

• Namdang has total of 980,001 shares, of

which Twinswitsh owns 980,000 shares, and

EFG secretaries owns 1 share. EFG

Secretaries is the Administrator of Namdang

34

and is acting in concert with Twinswitch; therefore, Twinswitch effectively controls 100%

of Namdang.

• Twinswitsh has a total of 2 shares. Maknam Mcleod Limited, a company incorporate under

the laws England and Wales (Maknam Mcleod), owns 1 share and EFG secretaries owns 1

share in Twinswitch and is acting in concert with Maknam Mcleod; therefore, Maknam

Mcleod effectively controls 100% of Twinswitch.

• Maknam Mcleod has a total of 11,923,021 shares of which Williamson Maknam Limited

(WM) , a company incorporate under the laws jersey, owns 11,923,020 share and EFG

secretaries owns 1 share. EFG Secretaries is the Administrator of Maknam Mcleod and is

acting in concert with WM; therefore, WM

effectively controls 100% of Maknam

Mcleod.

• Thus, effectively, WM is ultimately the

holding company of the Target Company and

also controls the Target Company. However

it does not directly hold shares in the Target

Company.

• Makum, Namdang, Twinswitch and Maknam Mcleod are proposed to be wound up and the

shareholding of Makum and Namdang (Transferors) in the Target Company (Sale Shares) is

proposed to be transferred to WM (Transferee).

• The transferor and transferee have not been shown as group in the last published annual

report of the Target Company.

• The transferor and transferee have been in compliance with the provisions of Regulation 6

& 8 of the Takeover Code. The transferor and transferee have yet not made any disclosures

under Regulation 3(3) and Regulation 7 of the Takeover Code, and they will comply with

the said regulation, if they are able to proceed with transaction based on the guidance

received from SEBI, within stipulated time.

• Both the transferors are promoters of the Target Company and have been holding the sale

shares in the Target Company for more than 3 years. The transferee has not held shares in

the Target Company for 3 years directly. However, the entire holding structure illustrated in

the application has been existence for more than 3 years and transferee had been indirectly

holding shares and in control of the target company for more than 3 years.

35

Query

• Whether the proposed acquisition would be exempted under Regulation 3(1)(e)(i) or

Regulation 3(1)(e)(iii) of Takeover Code.

Analysis

• As per Regulations 3(1)(e)(i) of Takeover Code , an acquisition pursuant to interse transfer

among Group is eligible for exemption from applicability of the regulations 10,11& 12 of

the Takeover Code if following conditions are fulfilled:-

i. The acquirer and transferor are from “ group” coming within the definition of

“group” as defined in the MRTP Act, 1969

ii. Persons constituting such group have been shown as “group” in the last published

Annual Report of the Target Company.

iii. The transferor as well as the transferee ought to have complied with disclosure

requirement under Regulation 6, 7 & 8 of SEBI (SAST) Regulation 1997 as may be

applicable.

iv. The transferee should inform the stock exchanges atleast 4 working days in advance

of the date of proposed acquisition in case of acquisition exceeding 5% of the voting

share capital of the target company in terms of Regulation 3(3) of the Takeover

Code.

v. The Transferee shall file a report with SEBI in the specified format within 21 days

of the date of acquisition along with requisite fees prescribed, in terms of

Regulations 3(4) and 3(5) of the Takeover Code.

• The conditions mentioned at points (iv) & (v) above would be required to be complied with

if the transferee/transferor have satisfied the conditions at points (i) (iii) and are desirous of

seeking exemption from applicability of Regulations.

• It is observed that, both the transferor and transferee have not been shown as group in the

last published Annual Report of the target Company. Hence, they are not fulfilling the

condition (i) and (ii) stated above. Therefore, the proposed acquisition would not be eligible

for exemption under Regulation 3(1)(e)(i) of the Takeover Code.

• Further, as per Reg. 3(1)(e)(iii) of the Takeover Code, interse transfer of shares amongst

qualifying promoters and foreign collaborators or amongst qualifying promoters is eligible

for exemption from the applicability of the Regulations 10, 11 and 12 of the Regulations

subject to the fulfillment of the following conditions:-

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i. The transferee(s) and transferor(s) are qualifying promoters/foreign collaborators in

terms of provisions of explanation to regulation 3(1)(e)(iii)(b) of the Takeover Code.

ii. The transferees collectively as well as transferors collectively have been holding

shares in the target company for a period of atleast three years prior to the date of

acquisition.

iii. The provisions of Regulations 6, 7 and 8 have been complied within the specified

time-limit by both the transferees and transferors.

iv. The inter-se transfer price should not exceed 25% of the price determined in terms

of Regulation 20(4) and 20(5), as applicable.

v. The transferee should inform the stock exchanges atleast 4 working days in advance

of the date of proposed acquisition in case of acquisition exceeding 5% of the voting

share capital of the target company in terms of Takeover Regulation 3(3).

vi. The transferee shall file a report with the Board in the format specified, within 21

days of the date of acquisition along with requisite fees prescribed, in terms of

Regulations 3(4) and 3(5).

• The conditions mentioned at points (iv)-(vi) above would be required to be complied with if

the transferee/transferor have satisfied the conditions at points (i)-(iii).

• In the instant case, the transferors i.e. Makum, Namdang have direct and the transferee i.e.

WM have indirect control over the Target Company. The transferors directly and the

transferee indirectly had been holding shares in the Target Company for a period more than

3 years. Therefore, the transferors and transferee can be classified as qualifying promoters

and can be stated to have directly/indirectly held shares in the Target Company for a period

of minimum three years. Hence, they are fulfilling the condition (i) and (ii) stated.

• As regards the compliance with Chapter II of the Takeover Regulation, the same should

have been complied with by the transferors and the acquirer or any of their subsidiaries who

are directly holding shares in the Target Company. The transferors and the transferee are

and have been in compliance with disclosures required to be made under Regulation 6 and

Regulation 8 of the Takeover Regulation as applicable and shall make disclosures under

Regulation 3(3) and Regulation 7 of the Takeover Code within the stipulated time, if the

proposed transaction is completed.

• The transferee should also ensure that the acquisition price should not exceed 25% of the

price as determined under regulations 20(4) & 20(5) of the Takeover Code.

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7. COMPARISON OF TAKEOVER REGULATIONS

Introduction

Indian Takeover Code is much inline with the City Code on Takeovers & Mergers (the ‘Code’),

UK. This is owing to similar nature of promoter holding observed in UK as well as in India. A

majority of listed firms have a promoter holding of 35% or more. Among the BSE-500, the top 500

firms by market capitalization listed on BSE, 406 firms have promoter holdings in excess of 35%.

Among Nifty 50, 35 firms have shareholding of more than 35%7. Thus, it was advisable to adopt

UK Regulations. Also, regulations in Singapore are similar to that prevalent in UK.

Another set of rules pertaining to Takeover and Mergers are present in the USA. The rules and

regulations are completely different in USA. In USA there is no concept of mandatory open offer,

no triggers, no creeping acquisitions limits, etc. The M&A regulations in USA are governed by The

Federal Laws, The Delaware’s Act, The Williams Act and other state laws. The disclosures are

prescribed under The Williams Act, where they are suppose to disclose at acquisition of shares at

5% and 10% under Rule 13 g and 13 d respectively.

USA together with UK represents the two great powers and have most advanced judicial systems of

the world. Their collective history, social ties, and economic dependence make them partners on the

global stage. They are the centers of the world’s leading financial institutions and multinational

corporations. In many ways, USA and UK corporate governance systems are similar and

converging, and long-standing differences are disappearing as transatlantic co-operation and

governance codes expand. The behavior of acquiring companies and target companies are subject

to entirely different requirements under their respective laws. It has never adequately been

explained why the divergence in this one area of law has resisted, and indeed increased in the face

of, broader trends favoring assimilation.

Comparing Indian Regulations against the USA would not make much sense as there is not much

similarity between the two and USA has its own way of functioning. There would be very minimal

recommendations one can make while comparing Indian Takeover Code with the USA. Also, over

the years it is seen that Indian Takeover Code, since the time it’s into practice have always been

linked with the UK’s “The Code”. Thus, for the purpose of comparative study and to draw some

recommendations it would be useful to compare Indian Takeover Code as against the UK and

Singapore laws as both Indian and Singapore Code have been adopted from UK’s “The Code”. 7 As per Mint analysis published on March 9, 2010

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Comparison of Indian Takeover Code vis-à-vis UK’s “The Code” and Singapore’s

“Takeover Code on Mergers and Takeover” Sr. No.

Key Points India8 UK9 Singapore10

1 Regulation Description and Scope

The Takeover In India primarily attracts SEBI’s Substantial Acquisition of Shares and Takeover Regulations, 1997

The takeover activity in UK is primarily regulated by- The City Code on Takeovers & Mergers (The ‘Code’). The United Kingdom Listing Authority (UKLA)

The Takeover activity in Singapore primarily attracts The Singapore Code on Takeovers and Mergers and Securities Industry Council (SIC)

2 Applicability of Law

The Indian Takeover Code is applicable to all the listed companies on the stock exchange. It is also applicable to certain unlisted companies including a body corporate incorporated outside India to an extent where the acquisition results in the control of a listed company by the acquirer. It is not applicable to unlisted companies.

UK takeover regulation will govern all aspects of a bid if the target has its registered office in the UK and is admitted to trading on regulated market in the UK (in the Code, “UK” includes the Channel Islands and the Isle of Man) The Code also applies to unlisted public companies (or PLC’s) and Societas Europae which have their registered offices in the UK, the Channel Island or the Isle of Man, and to certain types of private company in this jurisdictions; chiefly where the equity share capital has, at any time during the 10 years prior to the offer, been to some degree publicly listed, offered or traded. If the securities of the target company are not listed on a regulated market within EEA (i.e. the company is unlisted or is listed in other nation), then the Code will still apply. If the company is domiciled outside the EEA

The Code applies to corporations with a primary listing of their equity securities and business trusts with a primary listing of their companies in Singapore. It further applies to unlisted public companies and unlisted registered business trusts with more than 50 shareholders or unit holders, as the case may be, and companies with net tangible assets of $5 million or more must also observe the letter and spirit of the General Principles and Rules, wherever this is possible and appropriate. The Code does not apply to takeovers or mergers of other unlisted public companies and unlisted business trusts, or private companies. The Code applies to all offerors, whether they are natural persons (be they resident in Singapore or not and whether citizens of Singapore or not),

8 The descriptions in the above comparison table have been interpreted form the SEBI’s Substantial Acquisition of Shares and Takeover Regulations, 1997. 9 The descriptions in the above comparison table have been description are interpreted form the The City Code on Takeovers & Mergers (The ‘Code’) – UK Takeover Code 10 The descriptions in the above comparison table have been description are interpreted form the The Singapore Code on Takeovers and Mergers – Singapore Takeover Code

39

but listed on a UK regulated market, the Code will not apply.

The UKLA Rules apply to companies listed on the Main Market of the LSE. Companies listed on other markets are subject to the rules applicable to those markets.

corporations or bodies unincorporated (be they incorporated or carrying on business in Singapore or not); and extends to acts done or omitted to be done in and outside Singapore.

3 Triggers for Open Offer

Substantial acquisition of shares and control



4 Trigger’s

Regulation 10 - Substantial Acquisition of Shares • Open Offer under

Regulation 10 needs to be made if the Acquiror along with the Person Acting in Concert (PAC) decides to acquire, directly or indirectly, more than 15% of the shares outstanding in a concerned target company

Regulation 11(1) and 11(2) -Consolidation of Holdings • Open Offer under

Regulation 11(1) needs to be made by Acquirer along with PAC if: Acquirer and PAC

already hold greater than 15% but less than 55% of the Voting Capital of Target Company and want to exceed the creeping limit of 5% in a financial year

• Open Offer under 11(2) to be made if Acquirer and PAC

already hold greater than 55% but less than 75% (or 90% as applicable) of the Voting Capital of Target and want to acquire any additional

Rule 9 – The Mandatory Offer and its Terms 9.1 When a Mandatory offer

is required and who is responsible for making it Except with the consent of the Panel, when:

a. any person acquires, whether by a series of transactions over a period of time or not, an interest in shares which (taken together with shares in which persons acting in concert with him are interested) carry 30% or more of the voting rights of a company; or

b. any person, together with persons acting in concert with him, is interested in shares which in the aggregate carry not less than 30% of the voting rights of a company but does not hold shares carrying more than 50% of such voting rights and such person, or any person acting in concert with him, acquires an interest in any other shares which increases the percentage of shares carrying voting rights in which he is interested

Rule 14 – Mandatory Offer 14.1 When mandatory offers are triggered Except with the Council’s consent, where:-

(a) any person acquires whether by a series of transactions over a period of time or not, shares which (taken together with shares held or acquired by persons acting in concert with him) carry 30% or more of the voting rights of a company; or

(b) any person who, together with persons acting in concert with him, holds not less than 30% but not more than 50% of the voting rights and such person, or any person acting in concert with him, acquires in any period of 6 months additional shares carrying more than 1% of the voting rights,

such person must extend offers immediately, on the basis set out in this Rule, to the holders of any class of share capital of the company which carries votes and in which such person, or

40

shares Provided that such

acquirer may acquire additional voting rights entitling him upto 5% voting rights in the target subject to the following: – the acquisition is

made through open market purchase or

– increase in the voting rights of the acquirer is pursuant to buy back of shares

Regulation 12 - Acquisition of Control • Open Offer under

Regulation 12 needs to be made by the Acquirer and PAC if they want to acquire control over a Target Company.

• Offer needs to be made irrespective of - Whether or not there

has been any acquisition of shares or voting rights in a target company

Whether the control is acquired directly or indirectly.

such person shall extend offers, on the basis set out in Rules 9.3, 9.4 and 9.5, to the holders of any class of equity share capital whether voting or non-voting and also to the holders of any other class of transferable securities carrying voting rights. Offers for different classes of equity share capital must be comparable; the Panel should be consulted in advance in such cases.

persons acting in concert with him, hold shares. In addition to such person, each of the principal members of the group of persons acting in concert with him may, according to the circumstances of the case, have the obligation to extend an offer.

5 Outcome of Trigger

Open Offer for minimum 20% shares The offer can also be made conditional upon minimum level of acceptances from the shareholders. In such a case, the acquirer will have to deposit in the escrow account in cash a sum of 50% of the consideration payable under the public offer and also agree to cancel the MOU. Such conditionality should be mentioned in the Public Announcement.

Conditional Open Offer for outstanding shares i.e. for entire 100% Under Rule 11.1 If more than 10% is acquired in 12 months under creeping acquisition, the acquirer is suppose to make cash offer for outstanding shares

Conditional Open Offer for outstanding shares i.e. for entire 100% Under Rule 17.1 If more than 10% is acquired in 12 months under creeping acquisition, the acquirer is suppose to make cash offer for outstanding shares

41

6 Creeping Acquisition

Upto 5% every financial year till 55% post that 5% can be acquired through open market purchase

Upto 1% voting control in any period of 12 months from consolidation between 30% to 50% thresholds.

Upto 1% voting control in any period of 6 months from consolidation between 30% to 50% thresholds.

7 Exemptions

Regulation 3 a. Allotment in pursuance

of an application made to a public issue.

b. Allotment pursuant to rights issue, i. to the extent of his

entitlement; and ii. up to the

percentage specified in Regulation 11

c. Allotment to the underwriters pursuant to an underwriting agreement

d. Inter- se transfer of shares amongst :- i. Group coming

within the definition of group as defined in the M R T PAct, 1969

ii. Relatives within the meaning of Section 6 of the Companies Act, 1956

iii. Qualifying Indian promoters and foreign collaborators who are shareholders;

iv. Qualifying Promoters

e. Acquisition of shares in the ordinary course of business by- i. a registered stock-

broker of a stock exchange on behalf of clients;

ii. a registered market maker of a stock exchange in respect of shares for which he is the market maker, during the

Dispensations from Rule 9 (“Whitewash”) 1. Vote of independent

shareholders on the issue of new securities When the issue of new securities as consideration for an acquisition or a cash subscription would otherwise result in an obligation to make a general offer under this Rule, the Panel will normally waive the obligation if there is an independent vote at a shareholders meeting.

2. Enforcement of security for a loan Where shares or other securities are charged as security for a loan and, as a result of enforcement, the lender would otherwise incur an obligation to make a general offer under this Rule, the Panel will not normally require an offer if sufficient interests in shares are disposed of within a limited period to persons unconnected with the lender, so that the percentage of shares carrying voting rights in which the lender, together with persons acting in concert with it, is interested is reduced to below 30% in a manner satisfactory to the Panel.

3. Rescue operations There are occasions when a company is in such a serious financial position that the only

Exemptions From Rule 14.1 When the issue of new securities as consideration for an acquisition, a cash subscription, or the taking of a scrip dividend would otherwise result in an obligation to make a general offer under this Rule, the SIC will normally waive the obligation if there is an independent vote at a shareholders’ meeting. The requirement for a general offer will also be waived in cases involving the underwriting of an issue of new shares, provided there has been an independent vote of shareholders and the underwriter puts in place clear and effective arrangements not to exercise the voting rights attached to those shares. The appropriate provisions of the Code apply to Whitewash proposals.A “whitewash” waiver has been granted in the following circumstances: (a) Rescue (“white knight”)

operation - where the Target Company is in a serious financial position and the rescue operation involves the issue of new shares in the Target Company to the rescuer which crosses the mandatory take-over threshold;

(b) Group restructuring exercise - where a scheme of reconstruction to be implemented involves

42

course of market making;

iii. by Public Financial Institutions on their own account;

iv. by banks and public financial institutions as pledgees

f. Acquisition of shares by way of transmission on succession or inheritance

g. Acquisition of shares by government companies within the meaning of Section 617 of the Companies Act, 1956 and statutory corporations

h. Pursuant to a scheme – i. framed under

Section 18 of the Sick Industrial Companies (Special Provisions) Act,1985;

ii. of arrangement or reconstruction including amalgamation or merger or demerger under any law or regulation, Indian or foreign

i. acquisition of shares in companies whose shares are not listed on any stock exchange

way it can be saved is by an urgent rescue operation which involves the issue of new shares without approval by a vote of independent shareholders or the acquisition of existing shares by the rescuer which would otherwise fall within the provisions of this Rule and normally require a general offer. The Panel may, however, waive the requirements of the Rule in such circumstances provided that either: (a) approval for the

rescue operation by a vote of independent shareholders is obtained as soon as possible after the rescue operation is carried out; or

(b) some other protection for independent shareholders is provided which the Panel considers satisfactory in the circumstances.

4. Inadvertent mistake If, due to an inadvertent mistake, a person incurs an obligation to make an offer under this Rule, the Panel will not normally require an offer if sufficient interests in shares are disposed of within a limited period to persons unconnected with him, so that the percentage of shares carrying voting rights in which the person, together with persons acting in concert with

the transfer of one company’s controlling interest in the Target Company to another company (which is also controlled by the first-mentioned company) such that there is, in practice, no effective change in control of the Target Company at the ultimate holding company level;

(c) Foreclosure on security for a loan - Where a shareholding in a company is charged to a bank or lending institution on an arm’s length basis and in the ordinary course of its business as security for a loan, and, as a result of enforcement or foreclosure, the lender would otherwise incur an obligation to make a general offer under this Rule, the SIC will normally waive the requirement, provided that the security was not given at a time when the lender had reason to believe that enforcement or foreclosure was likely.

(d) Situations may arise where a person, or group of persons acting in concert, acquires 30% or more of the voting rights of a company at a time when another person, or group of persons acting in concert, already holds 30% or more of the voting rights of that company. In such a situation, the SIC will not normally waive the

43

him, is interested is reduced to below 30% in a manner satisfactory to the Panel.

5. Shares carrying 50% or more of the voting rights The Panel will consider waiving the requirement for a general offer under this Rule where:- (a) holders of shares

carrying 50% or more of the voting rights state in writing that they would not accept such an offer; or

(b) shares carrying 50% or more of the voting rights are already held by one other person.

6. Enfranchisement of non-voting shares There is no requirement to make a general offer under this Rule if a person interested in non-voting shares becomes upon enfranchisement of those shares interested in shares carrying 30% or more of the voting rights of a company, except where shares or interests in shares have been acquired at a time when the person had reason to believe that enfranchisement would take place.

requirement for that person or group of persons to make a general offer under this Rule unless:- (i) there is a single

person holding 50% or more of the voting rights of the company who provides a written confirmation to the SIC that he will not accept the offer which the purchaser would otherwise be obliged to make; or

(ii) the SIC is provided with written confirmation from the holders of 50% or more of the voting rights of that company that they would not accept the offer which the purchaser would be obliged to make.

8 Failure to comply

Regulation 45 – Penalties for non-compliance (1) Any person violating

any provisions of the regulations shall be liable for action in terms of the regulations and the Act.

(2) If the acquirer or any person acting in concert

If the Hearings Committee finds a breach of the Code or of a ruling of the Panel, it may: (i) issue a private

statement of censure; or

(ii) issue a public statement of censure;

If there appears to be a breach of the Code, the Secretary will summon the alleged offender to appear before the Council for a hearing. Every alleged offender will have the opportunity to answer allegations and to call

44

with him fails to carry out the obligations under the regulations, the entire or a part of the sum in the escrow account shall be liable to be forfeited and the acquirer or such a person shall also be liable for action in terms of the regulations and the Act.

(3) The board of directors of the target company failing to carry out the obligations under the regulations shall be liable for action in terms of the regulations and the Act.

(4) The Board may, for failure to carry out the requirements of the regulations by an intermediary, initiate action for suspension or cancellation of registration of an intermediary holding a certificate of registration under section 12 of the Act: Provided that no such certificate of registration shall be suspended or cancelled unless the procedure specified in the regulations applicable to such intermediary is complied with.

(5) For any mis-statement to the shareholders or for concealment of material information required to be disclosed to the shareholders, the acquirers or the directors where the acquirer is a body corporate, the directors

or (iii) suspend or withdraw

any exemption, approval or other special status which the Panel has granted to a person, or impose conditions on the continuing enjoyment of such exemption, approval or special status, in respect of all or part of the activities to which such exemption, approval or special status relates; or

(iv) report the offenders conduct to a United Kingdom or overseas regulatory authority or professional body (most notably the Financial Services Authority (FSA)) so that that authority or body can consider whether to take disciplinary or enforcement action (for example, the FSA has power to take certain actions against an authorised person or an approved person who fails to observe proper standards of market conduct, including the power to fine); or

(v) publish a Panel Statement indicating that the offender is someone who, in the Hearings Committees opinion, is not likely to comply with the Code. The rules of the FSA and certain professional bodies oblige their members, in certain circumstances, not to act for the person in question in a transaction subject to

witnesses. The Council may also summon witnesses. As a rule, the Council's proceedings are informal and parties appearing be fore the Council, whether for disciplinary or other purposes, should present their case in person and lodge written submissions in their own name. While alleged offenders and witnesses may consult their legal advisers during hearings before the Council, these advisers may not examine or cross-examine witnesses nor answer questions on behalf of their clients. If the Council finds that there has been a breach of the Code, it may have recourse to private reprimand or public censure or, in a flagrant case, to further action designed to deprive the offender temporarily or permanently of its ability to enjoy the facilities of the securities market. If the Council finds evidence to show that a criminal offence has taken place whether under the Companies Act, the Securities and Futures Act or under the criminal law, it will refer the matter to the appropriate authority.

45

of the target company, the merchant banker to the public offer and the merchant banker engaged by the target company for independent advice would be liable for action in terms of the regulations and the Act.

(6) The penalties referred to in sub-regulations (1) to (5) may include:-

a. criminal prosecution under section 24 of the Act;

b. monetary penalties under section 15H of the Act;

c. directions under the provisions of section 11B of the Act; 1

d. directions under section 11(4) of the Act;

e. cease and desist order in proceedings under section 11D of the Act;

f. adjudication proceedings under section 15HB of the Act

the Code, including a dealing in relevant securities requiring disclosure under Rule 8 (“cold shouldering”).

9 Open Offer Schedule

Its takes 9011 days to complete the Open Offer post the Public Announcement



10 Open Offer Price

Regulation 20 – Offer Price Conditions of Minimum Offer price It shall not be less than the highest of the following: 1. The Negotiated Price

under an agreement, if any, triggering the code

2. Highest Price paid by the Acquirer during the 26-week period prior to the date of public announcement for acquiring shares of

a. The price paid for any acquisition of an interest in shares will be determined as follows: i. in the case of a

purchase of shares, the price paid is the price at which the bargain between the purchaser (or, where applicable, his broker acting in an agency capacity) and the vendor (or principal trader) is struck;

The minimum offer price should be the highest of:-

(a) the highest price paid by the offeror and its concert parties for outright purchase of shares in the offeree company within 6 months of the offer and during the offer period. If voting rights have been acquired in exchange for listed securities, the price will normally be established by reference

11 As per Annexure (B)

46

Target Company, including by way of allotment in a public or rights issue

3. The Price paid by the Acquirer under a preferential allotment at any time during the 26- week period up to the date of closure of the offer

4. The Average of the weekly high and low of the closing prices of the shares of the target company as quoted on the most frequently traded stock exchange during 26 weeks preceding the date of the public announcement

5. The Average of the daily high and low prices of the shares of the target company as quoted on the most frequently traded stock exchange during 2 weeks preceding the date of the public announcement

The calculation of prices where the shares of the target company are infrequently traded, the offer price shall be determined by the acquirer and the merchant banker taking into account the following factors: (a) the negotiated price

under the agreement referred to in sub-regulation (1) of regulation 14;

(b) the highest price paid by the acquirer or persons acting in concert with him for acquisitions, if any,

ii. in the case of a call option which remains unexercised, the price paid will normally be treated as the middle market price of the shares which are the subject of the option at the time the option is entered into;

iii. in the case of a call option which has been exercised, the price paid will normally be treated as the amount paid on exercise of the option together with any amount paid by the option-holder on entering into the option;

iv. in the case of a written put option (whether exercised or not), the price paid will normally be treated as the amount paid or payable on exercise of the option less any amount paid by the option-holder on entering into the option; and

v. in the case of a derivative, the price paid will normally be treated as the initial reference price together with any fee paid on entering into the derivative.

In the case of an option or a derivative, however, if the option exercise price or derivative reference price is calculated by reference to the average price of a number of acquisitions by the counterparty of interests in underlying securities, the

to the volume weighted average traded price of the listed securities on the date of the acquisition. However, the Council reserves the right to set aside any inexplicably high or low traded prices;

(b) the highest price paid by the offeror and its concert parties for shares in the offeree company acquired through the exercise of instruments convertible into securities which carry voting rights within 6 months of the offer and during the offer period. The price paid for shares acquired through the exercise of such instruments is deemed to be:-

i. where the offeror and its concert parties have not acquired any such instruments within 6 months of the offer or during the offer period: the highest of the volume weighted average traded prices of shares of the offeree company on the days the conversion rights were exercised. The Council reserves the right to set aside any inexplicably high or low traded prices; or

ii. where the offeror and/or its concert parties have acquired such instruments within 6 months of the offer or during the offer period: the highest price paid by the offeror and its concert parties for such instruments, adjusted by

47

including by way of allotment in a public or rights or preferential issue during the twenty-six week period prior to the date of public announcement;

(c) other parameters including return on net worth, book value of the shares of the target company, earning per share, price earning multiple vis-a-vis the industry average: Provided that where considered necessary, the Board may require valuation of such infrequently traded shares by an independent merchant banker (other than the manager to the offer) or an independent chartered accountant of minimum ten years’ standing or a public financial institution.

price paid will normally be determined to be the highest price at which such acquisitions are actually made. Any stamp duty and broker’s commission payable should be excluded. Where a person acquired an interest in shares more than 12 months prior to the announcement of the offer made under Rule 9 as a result of any option, derivative or agreement to purchase and, either during the 12 months prior to such announcement or after the announcement and before the offer closes for acceptance, the person acquires any of the relevant shares, no obligation under this Rule will normally arise as a result of the acquisition of those shares. However, if the terms of the instrument have been varied in any way, or if the shares are acquired other than on the terms of the original instrument, the Panel should be consulted. b. If any interest in shares

has been acquired in exchange for securities which are admitted to trading, the price will normally be established by reference to the middle market price of the securities at the time of the acquisition.

c. If any interest in shares has been acquired by the conversion or exercise (as applicable) of securities convertible into, warrants in respect of, or options or other rights to subscribe for new shares, the price will

the conversion ratio. and

(c) the highest price paid by the offeror and its concert parties for shares in the offeree company acquired through the exercise of rights to subscribe for, and options in respect of, securities which carry voting rights within 6 months of the offer and during the offer period. The price paid for shares acquired through the exercise of such subscription rights or options is deemed to be:- (i) where the offeror and

its concert parties have not acquired any such subscription rights or options within 6 months of the offer or during the offer period: the higher of: the highest of the

volume weighted average traded prices of shares of the offeree company on the days such subscription rights or options were exercised. The Council reserves the right to set aside any inexplicably high or low traded prices; and

the exercise price of such subscription rights and options; or

(ii) where the offeror and/or its concert parties have acquired such subscription

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normally be established by reference to the middle market price of the shares in question at the close of business on the day on which the relevant notice was submitted. If, however, the convertible securities, warrants, options or other subscription rights were acquired either during the 12 months prior to the announcement of the offer made under Rule 9 or after the announcement and before the offer closes for acceptance, they will be treated as if they were purchases of the underlying shares at a price calculated by reference to the acquisition price and the relevant conversion or exercise terms.

The Panel should be consulted in advance if it is proposed to acquire the voting rights attaching to shares, or general control of them, and in the circumstances described in (b) and (c) above.

rights or options within 6 months of the offer or during the offer period: the highest price paid by the offeror and its concert parties for such subscription rights or options plus the exercise price of such subscription rights or options.

The Council should be consulted in advance in situations involving the exercise of instruments convertible into, rights to subscribe for and options in respect of securities which carry voting rights or where reference is to be drawn to volume weighted average traded prices. The prices paid for voting rights transferred between members of group acting in concert may be relevant where, for example, all voting rights held within a group are transferred to that member making the offer or where prices paid between members are materially above the market price.

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8. ANALYSIS AND RECOMMENDATIONS

In the above section of Comparison of Takeover Codes, we’ve noticed that Indian and Singapore

Takeover Code have been largely adopted form UK’s Takeover Code. This is owing to top

management consisting family successor in most of the cases. There are mainly family owned

business entities in India which is similar to that in the UK where a family member would be legal

heir and would takeover the business. For example, Investment bank Rothschild who has a rich

history in financing, dating back to 1769 named Nigel Higgins as its 1st chief executive outside the

family in 2010. The family ran the business for nearly 4 centuries. Similarly, in India corporates

like Tata’s and Birla’s also have had family member as successors over the years.

UK Takeover Code is very stringent and aims to safeguard minority interest to a great extent. UK

follows a very strict practice in terms of disclosures whereby they intend to make lot of information

public which helps investors to take a fair decision and avoid undue advantage to acquirers and the

target company. While we compare the regulations the important things to compare would be the

threshold for open offer, price of open offer, disclosures, etc. Globally, the threshold for open offer

is higher in most of the countries. For instance, the threshold for open offer in UK, Singapore,

Hong Kong and Russia is 30% and for Malaysia it is 33% and Norway 33.33%12. Thus, if we

were to compare Takeover regulations of countries across Asia and Europe they are parallel to that

of UK.

Another different approach for M&A is the Regulations prevalent in the USA. Takeover rules in

the USA are governed by Federal Laws, The Delaware Rules, The Williams Act and other state

laws. As seen in other countries there is no mandatory offer requirement or thresholds in USA laws.

Rather they insist upon tender offer for 100% of outstanding shares and do not insist on minimum

acquisition, thereby not protecting the minority’s interest. This shows that protecting minority

interest laws are much more robust in UK as compared to USA laws. USA insists on disclosures

when interest of an individual or acting in concert goes beyond 5% and 10% under Williams Act.

Indian M&A is coming of its age and has to soon adopt global standards to keep up the pace with

other developed nations. It is also one of the most attractive destinations for investments having

huge capital inflow since the turn of the millennium. The regulations have to take care of both the

scenarios. They have to be investor friendly and protect minority interest too. Thus, the regulations

need to be amended from time to time in order to be in line with the global standards. There has

12 As per Mint publication on March 9, 2010

50

been lot of debates and discussion in the past w.r.t. Takeover Regulations in India. The main points

of discussion have been applicability of regulations, disclosures levels, trigger/threshold levels for

share acquisition and control, open offer size, open offer price, open offer consideration, period of

open offer and disclosures in Public Announcement and Letter of Offer. Based on these points there

have been various panel discussions. Also, the P. N. Bhagawati Committee has been reviewing the

Takeover Code from time to time. With all the efforts in getting the right balance for healthy

takeovers, there is a scope of improvement and Indian Regulators have a tough task ahead to create

a balanced Takeover Code which helps the corporate regulatory environment to grow and evolve in

the near future.

The Takeover Code has been in existence since several decades within the listing agreement

between companies and stock exchanges. In 1994, a modern set of SEBI regulations replaced the

former provisions, and in 1997 the regulations were replaced by the current SEBI (Substantial

Acquisition of Shares and Takeovers) Regulations, 1997. The 1997 regulations have been amended

20 times over the past 13 years. A vast majority of these amendments kept modifying numbers in

trigger points for disclosure and compulsory tender offers contained in the regulations. For

instance, the concept of ‘creeping acquisition’ exemption was modified from 2% in 1997 to 5% in

1998 to 10% in 2001 to 5% in 2002 to a modified 5% in 2008. Subsequently, the numbers were

amended again and again. The amendment also brought in some unnecessary complexity and

certain improper treatments which militate against the philosophy of equity on which the

regulations were framed.

The Takeover Code needs to be amended as per the global trends. Secondly, a lot of interpretation

has taken place in the last ten years by SEBI, the takeover panel and the courts. Also, the economic

condition has changed drastically in the past decade. First and foremost just a composition of

corporate India in 1997 or around that period when the Code was originally formed and today it is

completely different. The levels of promoter holdings now are vastly different, their aspirations and

their financing needs are different. Also, there has been emergence of new asset class like private

equity and when the law was originally written, it did not have things like private equity in mind

and private equity today is very valuable source of capital for Indian market today.

SEBI has set-up Takeover Regulatory Advisory Committee (TRAC) in September 2009 to look

into changes that can be amended in the existing Takeover Code. The significant amendments

required are pertaining to issues like share acquisition triggers, minimum open offer size, creeping

acquisition, inter-se transfer between promoters, indirect acquisition (the chain principle) and

disclosures.

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Share acquisition triggers

Threshold levels for Consolidation of holdings/Share acquisition triggers haa been the most debated

topic under the Takeover Regulations. The current level of threshold are 15% and 55% where if an

acquirer breaches these levels then they are suppose to make an open offer. But the argument is

whether this number should be 15% and 55% or something else? Should we make it in line with

UK and other laws where the level for threshold ranges from 30% to 35%? This has been the most

talked about point in most of the discussions and debates. Is there any minor tweaking required or

should the regulation be rewritten?

The TRAC does need to review these threshold levels very carefully and amend them. Lot of

Takeover activities are dependent on these threshold levels. There actually has been no precedent

behind the 15% threshold. It was agreed by P. N. Bhagawati Committee in 1996 when they

reviewed the Takeover Regulations of 1994, where they agreed to retain the 10% threshold. Post

that the number was amended to 15% and has been constant. 15% was agreed upon particularly in

the context of promoter holdings in India being very low at that point of time. Tata and Birla Group

have had very low holdings in the past and high teens, low twenties and that stood as good level of

control then.

The reason why 15% should change today would be two fold. First the linkage between the

concept of substantial acquisition of shares and control should be established. The manner in which

the SEBI act itself postulates that it requires a regulation for two things; one substantial acquisition

of shares and takeovers or which would mean control. The association between these two is

unclear. Ordinarily one would never believe that 15% you can control a company but it’s because

of the social and the economic setting of India including the kind of examples mentioned above that

historically companies have been able to manage at that level. Second 15% does not hold good

today, in many of the companies even the Tata Group is now largely in the 25-30% category.

Today, nearly 80% of the listed companies of Nifty 50 and BSE – 500 have promoter holding of

greater than 35%13. So life has changed. But the most important issue at the heart of this is control

that has many facets.

Earlier the old code was written more to protect the minority but in 2009 and 2010 and going

forward, we will have to look at all the constituents of the market. We will have to look at the

majority, the minority, the promoters and other investors as well. It is only when we find the right

13 As per Mint publication on March 9, 2010

52

balance between all these three that we will have an efficient market. Thus, should the number be

30% going with global precedent or there should be some other number?

Recommendation

The trigger for share acquisition and control should be dealt in a different way. The triggers should

be dealt in accordance with the Companies Act, 1956 where any kind of transfer of share or

control should be the threshold for the trigger and the investors should be given an opportunity to

exit. According to Companies Act, 1956, to pass a special resolution of a company requires a

minimum of 75% of the shareholders consent. Thus, when an acquirer acquires more than 25%

control he can block the special resolution. Now this is a threat to investors and therefore they

should be given an option to exit. So the threshold of acquisition of share or control of 15%

should be raised to 25% + 1 share to trigger the takeover code.

Another threshold of 55% makes no real sense. It can be reduced to acquisition of share or

control of 50% + 1 share where the acquirer/promoter can control the management as they have the

right to the entire board. At this level, he can appoint the management of the company and can also

sell an undertaking of the company. Here the investors should be given a right to exit as it assumes

lot of threats in terms of the structure of the company.

Now coming to acquisition of shares, we can have more stringent disclosure rules as prevailing in

UK which are discussed in later part of the report. The acquisition of shares not necessarily assume

acquisition of control. Though in India it is observed where an acquirer acquires shares he generally

demands control too. Thus considering the climate in India, we can do with the same thresholds of

25% + 1 share and 50% + 1 share for acquisition of shares also. In case of private equity

investments it is observed that they are not interested in control and do not intend to run the

company. They just want stakes in the company and enjoy profits. But still they would not want the

existing management to take decisions which are not acceptable to them and so they demand “veto

rights” which gives power to stop changes, but not to adopt them. The influence that the veto

conveys to its holder is therefore directly proportional to the holder's conservatism. Thus, veto

rights also assume some sort of control and thus we can retain the levels of 25% + 1 share and 50%

+ 1 share in India in the near future.

Also, these levels will be close to the ones prevailing in other countries where the levels range from

30- 35%. These levels will not only boost the M&A activity but will also balance between all types

of investor class.

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Minimum Open Offer Size

After triggers for share acquisition and control another point of debate would be the minimum

number of shares to be acquired in an Open Offer once there is a trigger. Again as noted in the

comparison of Takeover Regulations that there is no concept of minimum number of shares

acquisition requirement in UK and Singapore. The rules and regulations there are quiet different

than the one prevailing in India. In UK and Singapore the acquirer is suppose to make an open offer

for all outstanding shares once they trigger acquisition of 30% of shares. This means if you were to

trigger their respective Codes you have to be ready for acquiring entire 100% stake if subscribed in

an Open Offer. But to protect this they have a clause in most of the open offers there where they

state that they will accept shares in Open Offer if the subscription is above 51% which effectively

give them entire control of the company. There is no concept of minimum requirement of open

offer in these countries as against in India we are suppose to make an Open Offer for 20% of the

outstanding shares on trigger of Takeover Code.

In the current scenario when the acquirer acquires 15% and triggers the Takeover Code they are

suppose to make an open offer for 20% of outstanding shares. Now when we calculate, post Open

Offer the acquirer has total shares and control of 35% (15% by share acquisition + 20% in an Open

Offer). Also, on trigger of 55% the acquirer is suppose to make another Open Offer of 20% which

takes acquirer to 75% and post that if as per delisting rules if you are required to maintain minimum

shareholding of 25% in public the acquirer cannot acquire any further shares unless he intends to

de-list the company. There is lot of speculation w.r.t. increase in Open Offer size, but it is also to be

noted that increase in Open Offer would warrant significant cash outflows for the acquirers which

inturn would discourage the takeover activity thereby reducing shareholders interest. Thus these too

need to be reviewed and can be amended to match international standards and be conducive so as to

have healthy M&A India.

Recommendations

In the current scenario when the acquirer acquires 35% control post trigger of 15% it does make a

significant difference as he now can block special resolution. Thus to protect minority interest the

requirement of mandatory open offer is must. But it does not seem to be attractive for promoters as

beyond 25% + 1 share they have similar nature of control to block special resolution. In case when

acquirer triggers 55% the entire balance shareholders should be given right to exit. Thus, the

acquirer should make an Open Offer for the entire 100% of shares and allow him to de-list the

54

company if he wishes. Also, it sounds acceptable because if an acquirer has acquired majority

control he should be willing to acquire the rest of the capital provided he has financing

arrangements in place. So the limit of mandatory Open Offer post threshold of 55% share should be

removed and acquirers should make Open Offer for entire outstanding shares which will protect

minority and promoters interest.

Beyond this if we were to take the above scenario for triggers at 25% + 1share and 50% +1 share

the Open Offer recommendations would also stand acceptable. At 25% + 1 share trigger if the

acquirer was to make an Open offer his control would reach 45% + 1 share at full acceptances. This

would make much more sense as the shareholders will get the same kind of exit that they are

getting today and will also create good balance. Also, another alternative to this could be that an

acquirer could be allowed to acquire shares upto less than 50% + 1 share where he does not intend

to take entire control of management and will make creeping acquisition beyond 25% + 1 share less

complicated. At 50% + 1 share we can have Open Offer for 100% of the outstanding shares and

provide complete exit for shareholders and this level the Open Offer would make much more sense

as that is one important threshold for control of management than the current level of 55%.

Even though these regulations would not be as tough as the one in UK and Singapore where the

acquirer on trigger of Code is suppose to make complete financial arrangement to purchase 100%

of outstanding shares, it will be more beneficial to Indian economy and also protect interest of all

classes of shareholders.

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Creeping Acquisition

Creeping Acquisition is the most critical aspect that trigger of Takeover Code. Therefore, Creeping

Acquisition is one of the major issues on which there has been a lot of debate and is of major

concern. Ample of request have been made to SEBI for allowing creeping acquisition to the

promoters or persons in control beyond the specified creeping acquisition limit, on the ground that

the Regulations should permit quicker consolidation of holdings especially in view of the changes

expected in the Indian economy owing to liberalization and globalisation.

In the current version of the Takeover Code, Regulation 10 states that a person having 10% control

cannot buy 5% without triggering the open offer, but a 20% or a 49% holder is exempt from the

open offer on acquiring upto 5%. This convoluted system allows creeping acquisition above 15%

but not between 10 and 15% levels of existing shareholding and thus is a harsh penalty imposed,

even though there are no major developments in terms of rights at 15%.

Also, under the current Takeover Regulations, acquisition of more than 5% of shares or voting

rights in any financial year when the acquirer holds 15% or more but less than 55% of the shares or

voting rights of the company concerned would also trigger the compulsory tender offer according

to Regulation 11(1) and exemption in acquisition of shares or control upto 5%, where the acquirer

already owns or controls between 55 to 75%, if the same is the result of buy back of shares by the

company or purchases are made through open market purchases as per Regulation 11(2) second

proviso. This exemption is subject to an upper holding limit of 75% in case of all companies

irrespective of minimum public shareholding requirement under the listing agreement.

Acquisition of even a single shares or voting right where holding is already 55% or beyond the

exemption above would trigger the tender offer according to Regulation 11(2). Where a person

already holds 60% and acquires further shares, and makes a tender offer which is fully subscribed

(i.e. 20%), the acquirer would be holding 80 % post open offer. In such a case, if the acquirer is

breaching the listing agreement which imposes a condition of public shareholding of a minimum of

25%, the acquirer must bring down his holding within a time period permitted by the exchange to

be again in compliance with its agreement. In the same facts where the listing agreement only

requires a minimum 10% public shareholding, the acquirer can continue to hold the 80%

shareholding. In another fact scenario of a company with a listing agreement for a minimum of

10% public shareholding, where a person is already in control of 76% voting equity, acquires

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further voting rights, and the tender offer for 20% takes his holding to 96%, he must again divest

his voting rights to below 90% levels within a period prescribed by the exchange.

Recommendations

UK Takeover regulations have creeping acquisition limit of 1% every 12 months and Singapore has

1% every 6 months i.e. effectively 2% every 12 months. In Indian the current regulations w.r.t.

creeping acquisition provide enough opportunity for the promoters of the company and helps them

protect the interest of shareholders. Thus, the current triggers are in line with the current economic

scenario in India.

If we were to amend as per 25% + 1 share and 50% + 1 share then we could have creeping

acquisition limits as per the Singapore Takeover Code which allows creeping acquisition of 1%

every 6 months i.e. 2% in 12 months. Above 50% + 1 share we can delete creeping acquisition

trigger upto 75% shares where the promoter has right to pass special resolution.

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Inter-se transfer between promoters

Inter-se transfers of shares are currently exempted from triggering Open Offer. Inter-se transfer

means transfer of shares within the promoter group which includes group companies, relatives and

promoters. There may not be any cause for concern in respect of inter-se transfers amongst group

and relatives as the control continues to remain with the group. However, the issue assumes

significance when it involves inter-se transfers amongst promoter groups such as between a foreign

collaborator and an Indian promoter or between two groups of Indian promoters. In such cases,

there is bound to be perceptible change in control. These are generally practiced to facilitate entry

and exit of strategic partners, group restructuring etc. Quite often the foreign collaborators enter

and remain with the company till such time that technology transfer is complete and may want to

exit when their presence is no longer felt necessary.

A minimum holding of 5% for 3 years period has also been prescribed under the Regulations in

order to avail exemption in respect of acquisitions through inter-se transfers amongst two groups of

promoters. In the absence of any precise definition of the word “group”, the definition as given in

the MRTP Act is adopted in the current version of the Takeover Code, but the definition has

widened the scope of exemption and has also led to interpretation problems.

Recommendations

Over the years a number of companies have taken advantage of this clause to restructure the

business and exit under this regulation is generally at a higher price. In a study conducted under P.

N. Bhagawati Committee review in 2002 it was noted that approximately 46% cases of inter-se

transfers were at a price higher than market price, which benefited the shareholders with substantial

holding. Thus, the exemption pertaining to inter-se transfers should continue.

As far as the interpretation of “group” is concerned we have observed them in cases under Informal

Guidance Scheme where most of the queries are pertaining to the interpretation of group and

seeking exemption under them. Also, India is growing very fast and corporate restructuring remains

to be the significant element in the current scenario where there is constant consolidation of shares.

Thus, to have a better regulatory regime the Regulation must define its own scope of definition of

“group” and define it under Regulation 2 which will give a better clarity.

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The chain principle (Indirect acquisition)

Acquisition of shares in an unlisted company is exempt from the Takeover Code. However, it

provides that indirect acquisition, (i.e. acquisition of shares of an unlisted company which results in

the acquirer acquiring shares or voting rights or control over a listed company), is not exempted

from the applicability of the Takeover Code (irrespective of whether the acquirer or a target

company is an Indian company or a foreign company). The indirect acquisition could affect the

internal decision making and result in an ultimate acquisition of an Indian listed company. Thus, if

an acquirer acquirers shares in unlisted entity which has following effect on the target company it

should be required to make a Open Offer on trigger of the Code. The effect of the amendment

legislates the intention of triggering the Takeover Code even in a relation to a global acquisition

with an India arm.

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Disclosure requirements

Disclosure is one of the most critical aspect whereby the minority interest can be protected.

Disclosures increase transparency in the dealings of the acquirer apart from providing a warning

system to the existing management of the target company. Thus, there should be transparent and

purposeful dissemination of information. There are series of disclosures to be made as laid down in

regulation 6, 7 and 8.

Under Regulation 6 - Transitional provision any person, who holds more than 5% shares or

voting rights in any company, is expected to disclose his aggregate shareholding in that company,

to the company. Also, every company, whose shares are listed on a stock exchange shall within

three months of notification of these regulations, disclose to all the stock exchanges on which the

shares of the company are listed, the names and addresses of promoters and/or person(s) having

control over the company, and the number and percentage of shares or voting rights held by each

such person.

Regulation 7 - Acquisition of 5 per cent and more shares or voting rights of a company any

acquirer, who acquires shares or voting rights which would entitle him to more than 5%, 10%,

14%, 54% and 74% shares or voting rights in a company, in any manner whatsoever, shall disclose

at every stage the aggregate of his shareholding or voting rights in that company to the company

and to the stock exchanges where shares of the target company are listed.

Regulation 8 - Continual disclosures every person, including a person mentioned in regulation 6

who holds more than 15% shares or voting rights in any company, shall, within 21 days from the

financial year ending March 31, make yearly disclosures to the company, in respect of his holdings

as on 31st March. Every company whose shares are listed on a stock exchange, shall within 30 days

from the financial year ending March 31, as well as the record date of the company for the purposes

of declaration of dividend, make yearly disclosures to all the stock exchanges on which the shares

of the company are listed, the changes, if any, in respect of the holdings of the persons and also

holdings of promoters or person(s) having control over the company as on 31st March. Also,

disclosure w.r.t. pledged shares is governed under Regulation 8A

Recommendations

Disclosure practices in India are quiet stringent and tries to protect minority interest to a great

extent. But if we were to compare the disclosure practices prevalent in UK our practices are liberal.

60

In UK once the acquirer acquires initial 3% shares he is suppose to disclose it to the company.

Apart from that any further acquisition or sale of 1% shares the acquirer is suppose to make

disclosure. Thus there is a constant check on the acquirer acquiring the company and thereby tries

to alert management of the company. If we were to compare with the USA where disclosures are

given maximum importance, under The Williams Act the acquirer is suppose to make a disclosure

at 5% and 10% levels. At 10% levels the acquirer is asked his intention for purchasing the shares.

In India we can adopt USA standards and make stringent disclosures at 15% level where the

acquirer is suppose to disclose intention of the purchase, complete funding, etc. This would make

things more transparent and thereby protect interest of all. Also, at important levels like 10%, 14%,

24%, 50% and 74% shares or voting rights the acquirers should make a disclosure and the

regulation should be applicable for sale of shares too.

Other Recommendations

Some other recommendations that can be made are:

The scope of applicability of the Takeover Code should be widened. Currently, it is only

applicable to listed companies. It can be further extended to unlisted public companies, companies

having shareholders more than 50, companies having net tangible assets of more than US$ 5 billion

and so on which is much in line with Singapore Takeover Code. With Takeover Code up for

review, this will help bankers to find everything in one roof and not flip pages every now and then.

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9. CONCLUSION

International giants vying for a share in the Indian growth pie, global aspirations of Indian

corporates and consolidating domestic markets - the Indian M&A landscape has indeed come of

age. In this dynamic market, the regulatory framework, availability of proper infrastructure in

terms of financing arrangements and strong execution skills become critical assets in the M&A.

With resurgence seen in the CY Q4’ 09 and CY Q1’ 10in the Indian economy, we are in for

exciting times.

Need for re-look at the Takeover Code

With SEBI’s setting up the Takeover Regulatory Advisory Committee (TRAC) in September 2009

to look into suitable changes in the existing takeover regulations, the landscape of mergers and

acquisitions is expected to undergo a major change and level the field for both retail investors and

potential acquirers. Indian Takeover Code on the face of it currently, is very acquirer friendly, but

the reality seems to be other way round. For an acquisition there are number of things responsible,

the regulatory regime, the economic conditions, at times the structures are not acceptable to the

board, financing is not available and then a number of our foreign investment laws until recently

would have come in the way, the foreign acquirer would have to go through the FIPB approvals, so

there are a lot of other extraneous hurdles preventing a healthy M&A climate. Also, there are

illogical milestones along the way like 15% and 55% which needs a review. The weird thing is that

in our code, only two milestones which are relevant for control under the company law which is

26% and 51% is not even covered in the Takeover Code. On one hand we have companies act

acting as base talks of 26 and 51% and the Takeover Code doesn’t even mention them leading to a

huge divergence among them.

Series of amendments need to be made to the existing Takeover Code. India has to find a right

balanced regulations which benefits to all the class of investor categories. Trigger levels, Open

Offer, disclosures, etc all need a brief review and should be amended with proper precedents.

TRAC should try to bring much more clarity in terms of interpretation of the Takeover Code and

should try to offer highest protection to the interest of the retail investors who are the usual suspects

in the takeover battles. Even as deal-making should be encouraged, the regulations should look at

offering retail investors exit options beyond the scope of mandatory offers, and ensuring that they

are rewarded on par with the exiting promoters.

62

At the end the revised Code should be conducive for growth. It should facilitate healthy M&A and

help India to achieve economies of scale and scope. On the whole to have a better and efficient

corporate regulatory regime we must make amendments from time to time and keep up with global

standards.

Year 2010 - Key themes

Post the subprime crisis the global economy seems to be slowly but surely recovering from the

financial crisis. While we believe that we have not gone back to the era of irrational exuberance,

the confidence levels are reviving. This is clearly reflected in India where the corporate as well as

financing environment for deal making has improved considerably. Series of restructuring is being

executed in India and globally, whereby it has become really important to devise a good structure.

Another factor which has clearly worked to the advantage of Indian companies has been their

relatively lower leverage level, which has enabled them to avoid the deleveraging trade of the

developed world and straightaway engage in strategic/growth trades.

1) Robust domestic M&A activity: Domestic M&A activity is expected to remain robust

during 2010. In certain sectors such as telecom services, telecom infrastructure, consumer

and IT/ITES, consolidation themes could play out given high competition and pricing

pressures and larger players could make an attempt to consolidate. Financial services such

as banks and insurance are other interesting areas, however regulatory clarity needs to

emerge before deals could be undertaken in these sectors.

2) Outbound deals: Outbound deals are expected to come back in a significant way for the

following reasons: a) High competition in certain sectors domestically which makes it

imperative for Indian companies to look outward b) Attractive opportunities available at

Resurgence in Indian M&A Activity

Source: Bloomberg and Merger Market

4,510 3,383 2,738

8,740

17,610

0

5,000

10,000

15,000

20,000

Q1' 09 Q2' 09 Q3' 09 Q4' 09 Q1' 10

M&A Volume (USD MM)

63

reasonable valuations in the aftermath of the crisis, both in the developed and developing

world and c) Improved financing environment for outbound deals.

3) Inbound deals could be selective/opportunistic and structured: The major trends

expected for inbound M&A deals are: a) Opportunistic consolidations b) Acquirers from

newer geographies could emerge such as from Japan, Korea and other Asian countries as

against predominantly US/European companies earlier; and c) JV deals in auto/auto

components, insurance, AMCs, consumer sectors, telecom and engineering.

4) Significant premium for growth would be expected: Sellers have traditionally expected a

strategic premium for entry and/or growth in India. Acquirers would need to be careful not

to overpay, they would need to evaluate the valuation and entry premiums with a longer-

term perspective.

5) Continued significance of Private Equity: Private Equity will continue to play an

important role. After slowing down considerably during the global meltdown, Private

Equity is already making a comeback. Private equity investors have already invested US$

946 MM in 43 deals in the months of January and February 2010. In February 2010 alone,

Private Equity funds of nearly US$ 1.5 billion were raised that could be invested in Indian

opportunities14.

To sum up, Indian M&A landscape promises to be action-packe….with review being done of

Takeover Code and the momentum picking up, the stage is set for glimpse of new age of Indian

M&A..

14 Bloomberg and www.mergermarket.com

64

10. REFERENCES Bear Acts, Working papers and research reports

1. SEBI’s Substantial Acquisition of Shares and Takeovers, Regulations, 1997

2. Justice P. N. Bhagwati Committee Report on Takeovers; Review of Takeover Code, 1994

3. Report of the reconvened committee on Substantial Acquisition of Shares and Takeovers

under the chairmanship of Justice P. N. Bhagwati, May 2002

4. Working Paper 1010 – Comments on SEBI’s Draft Takeover Code – By J. R. Varma, V.

Raghunathan and M. C. Bhatt, 1992

5. Takeover Code by Suneera Nerissa Madhok, 2008

6. Evolution of Takeover Code in India; Multinational Enterprise and M&A in India: Patterns

and Implications – Nagesh Kumar (published in Economic and Political Weekly in August

2000)

7. Working Paper 2009-11-06 - Indian Takeover Regulation- Under Reformed and Over

Modified – Sandeep Parekh

8. The City Code on Takeovers and Mergers – UK’s Takeover Code

9. The Singapore Code on Takeover and Mergers – Singapore Takeover Code

10. Singapore Takeover Guide by Andrew M. Lim and Zahedah Abdul Rashid, Allen & Gledhill

LLP, Singapore

11. Internal research papers and presentations of J M Financial

12. SEBI (Informal Guidance) Scheme 2003

13. Informal Guidance letters seeked by companies from SEBI from 2003 – 2009

Books

ICSI book on Corporate Restructuring and Insolvency

Slaughter and May – Guide to Public Takeovers in Europe

News Papers and Magazines

1. The Economic Times

2. The Financial Express

3. Financial Times

4. The Economist

5. Business World

65

Websites

• www.sebi,gov.in

• www.takeovercode.com

• http://www.thetakeoverpanel.org.uk/wp-content/uploads/2008/11/code.pdf

• www.mas.gov.sg/.../The_Singapore_Code_on_Take_Overs_and_Mergers_1_April_2007.pdf

• www.moneycontrol.com

• http://thefirm.moneycontrol.com/news_details.php?autono=429244

• www.mergermarket.com

• www.bloomberg.com

• http://www.financialexpress.com/news/sebis-formal-scheme-for-informal-guidance/87694/

• www.taxguru.in/.../sebi-constituted-takeover-regulations-advisory-committee-trac-will-

review-takeover-code.html

• http://www.iimahd.ernet.in/~jrvarma/papers/WP1010.pdf

• http://www.articlesbase.com/regulatory-compliance-articles/takeover-code-547062.html

• http://www.ris.org.in/dp05_pap.PDF

• www.gulfoilcorp.com

• http://shriramcity.in/

• www.britannia.co.in

• www.iob.com

• www.williamsonfinancial.in

• www.livemint.com

• www.jonesday.com

• www.drewnapier.com

• www.law.uc.edu/CC/34ActRls/rule14d-1.htm

• www.iclg.co.uk

• www.nishithdesai.com

• www.investopedia.com

• www.rbi.org.in

• www.gti.org

• www.economist.com

• www.lawyersclubindia.com

• www.thomsonone.com

ANNEXURES

A. SEBI’s Substantial Acquisition of Shares and Takeover Regulations, 1997

This annexure gives description of key Regulations under SEBI’s Substantial Acquisition of

Shares and Takeover Regulations, 1997.

Regulation 1 and 2

Regulation 1 covers title and specifies the date from which the regulations shall come into

force.

Regulation 2 covers various definitions under these regulations. Some of the important

definitions covered are:

a. “acquirer” means any person who, directly or indirectly, acquires or agrees to acquire

shares or voting rights in the target company, or acquires or agrees to acquire control over

the target company, either by himself or with any person acting in concert with the

acquirer;

b. “control” shall include the right to appoint majority of the directors or to control the

management or policy decisions exercisable by a person or persons acting individually or

in concert, directly or indirectly, including by virtue of their shareholding or management

rights or shareholders agreements or voting agreements or in any other manner.

c. “person acting in concert” comprises, -

1. persons who, for a common objective or purpose of substantial acquisition of shares

or voting rights or gaining control over the target company, pursuant to an agreement

or understanding (formal or informal), directly or indirectly co-operate by acquiring

or agreeing to acquire shares or voting rights in the target company or control over the

target company,

2. without prejudice to the generality of this definition, the following persons will be

deemed to be persons acting in concert with other persons in the same category,

unless the contrary is established :

i. a company, its holding company, or subsidiary or such company or company

under the same management either individually or together with each other;

ii. a company with any of its directors, or any person entrusted with the

management of the funds of the company;

iii. directors of companies referred to in sub-clause (i) of clause (2) and their

associates;

iv. mutual fund with sponsor or trustee or asset management company;

v. foreign institutional investors with sub-account(s);

vi. merchant bankers with their client(s) as acquirer;

vii. portfolio managers with their client(s) as acquirer;

viii. venture capital funds with sponsors;

ix. banks with financial advisers, stock brokers of the acquirer, or any company

which is a holding company, subsidiary or relative of the acquirer:

Provided that sub-clause (ix) shall not apply to a bank whose sole relationship

with the acquirer or with any company, which is a holding company or a

subsidiary of the acquirer or with a relative of the acquirer, is by way of

providing normal commercial banking services or such activities in connection

with the offer such as confirming availability of funds, handling acceptances and

other registration work;

x. any investment company with any person who has an interest as director, fund

manager, trustee, or as a shareholder having not less than 2 per cent of the paid-

up capital of that company or with any other investment company in which such

person or his associate holds not less than 2 per cent of the paid-up capital of the

latter company.

h. ‘promoter’ means -

a. any person who is in control of the target company;

b. any person named as promoter in any offer document of the target company or any

shareholding pattern filed by the target company with the stock exchanges pursuant to

the Listing Agreement, whichever is later; and includes any person belonging to the

promoter group as mentioned in Explanation I:

Provided that a director or officer of the target company or any other person shall not

be a promoter, if he is acting as such merely in his professional capacity.

Explanation I: For the purpose of this clause, ‘promoter groups’ shall include:

a. in case promoter is a body corporate -

i. a subsidiary or holding company of that body corporate;

ii. any company in which the promoter holds 10 per cent or more of the equity

capital or which holds 10 per cent or more of the equity capital of the

promoter;

iii. any company in which a group of individuals or companies or combinations

thereof who holds 20 per cent or more of the equity capital in that company

also holds 20 per cent or more of the equity capital of the target company;

and

b. in case the promoter is an individual—

i. the spouse of that person, or any parent, brother, sister or child of that

person of his spouse;

ii. any company in which 10 per cent or more of the share capital is held by

the promoter or an immediate relative of the promoter or a firm or HUF in

which the promoter or any one or more of his immediate relative is a

member;

iii. any company in which a company specified in (i) above, holds 10 per cent

or more, of the share capital; and

iv. any HUF or firm in which the aggregate share of the promoter and his

immediate relatives is equal to or more than 10 per cent of the total.

Explanation II: Financial Institutions, Scheduled Banks, Foreign Institutional Investors

(FIIs) and Mutual Funds shall not be deemed to be a promoter or promoter group merely

by virtue of their shareholding. Provided that the Financial Institutions, Scheduled Banks

and Foreign Institutional Investors (FIIs) shall be treated as promoters or promoter group

for the subsidiaries or companies promoted by them or mutual funds sponsored by them.]

i. “public financial institution” means a public financial institution as defined in

section 4A of the Companies Act, 1956;

ii. 1[(ii) “Public Sector Undertaking” means a company in which the Central

Government or a State Government] holds 50% or more of its equity capital or is

in control of the company;]

o. “target company” means a listed company whose shares or voting rights or control is

directly or indirectly acquired or is being acquired;

Regulation 3

Applicability of the regulation

A reference to Regulation 3 is necessary to ascertain the acquisitions that are exempt from

compliance of requirements specified in Regulations 10, 11 and 12. Under Regulations 10, 11

and 12, the predominant requirement is the one relating to public announcement. The said

regulations require acquirers to make a public announcement of their intention to acquire and

when such regulations apply, public announcement should be made. Making public

announcement calls for a lot of efforts and details of disclosures to be made and elaborate

procedural aspects of such announcement have been discussed separately in this chapter.

Suffice to say that the need for making.' public announcement does not arise to cases covered

by Regulation 3 since to those cases nothing contained in Regulations 10,11 and 12 of these

regulations will apply. While these types of acquisitions may be exempt from the said

regulations, it is necessary to bear in mind that certain conditions are attached to each

category and only if conditions are fulfilled, exemptions could be availed, i.e.

a. allotment in pursuance of an application made to a public issue:

Provided that if such an allotment is made pursuant to a firm allotment in the public

issues, such allotment shall be exempt only if full disclosures are made in the

prospectus about the identity of the acquirer who has agreed to acquire the shares, the

purpose of acquisition, consequential changes in voting rights, shareholding pattern of

the company and in the board of directors of the company, if any, and whether such

allotment would result in change in control over the company;

b. allotment pursuant to an application made by the shareholder for rights issue,

i. to the extent of his entitlement; and

ii. up to the percentage specified in regulation 11

Provided that the limit mentioned in sub-clause (ii) will not apply to the acquisition

by any person, presently in control of the company and who has in the rights letter of

offer made disclosures that they intend to acquire additional shares beyond their

entitlement, if the issue is undersubscribed:

Provided further that this exemption shall not be available in case the acquisition of

securities results in the change of control of management;

c. This point is deleted in the Takeover Code.

d. allotment to the underwriters pursuant to any underwriting agreement;

e. inter se transfer of shares amongst -

i. group coming within the definition of group as defined in the Monopolies and

Restrictive Trade Practices Act, 1969 where persons constituting such group have

been shown as group in the last published Annual Report of the target company;

ii. relatives within the meaning of section 6 of the Companies Act, 1956;

iii. (a) Qualifying Indian promoters and foreign collaborators who are shareholders;

(b) Qualifying promoters:

Provided that the transferor(s) as well as the transferee(s) have been holding

shares in the target company for a period of at least three years prior to the

proposed acquisition.

Explanation: For the purpose of the exemption under sub-clause (iii) the term

“qualifying promoter” means -

. any person who is directly or indirectly in control of the company; or

a. any person named as promoter in any document for offer of securities to the

public or existing shareholders or in the shareholding pattern disclosed by the

company under the provisions of the Listing Agreement, whichever is later;

and includes:

a. where the qualifying promoter is an individual -

1. a relative of the qualifying promoter within the meaning of section 6

of the Companies Act, 1956;

2. any firm or company, directly or indirectly, controlled by the

qualifying promoter or a relative of the qualifying promoter or a firm

or Hindu undivided family in which the qualifying promoter or his

relative is a partner or a coparcener or a combination thereof:

Provided that, in case of a partnership firm, the share of the

qualifying promoter or his relative, as the case may be, in such firm

should not be less than fifty per cent (50%);

b. where the qualifying promoter is a body corporate, -

1. a subsidiary or holding company of that body; or

2. any firm or company, directly or indirectly, controlled by the

qualifying promoter of that body corporate or by his relative or a firm

or Hindu undivided family in which the qualifying promoter or his

relative is a partner or coparcener or a combination thereof:

Provided that, in case of a partnership firm, the share of such

qualifying promoter or his relative, as the case may be, in such firm

should not be less than fifty per cent (50%),

iv. the acquirer and persons acting in concert with him, where such transfer of

shares takes place three years after the date of closure of the public offer made

by them under these regulations.

Explanation –

1. The exemption under sub-clauses (iii) and (iv) shall not be available if inter se

transfer of shares is at a price exceeding 25% of the price as determined in

terms of sub-regulations (4) and (5) of regulation 20.

2. The benefit of availing exemption under this clause, from applicability of the

regulations for increasing shareholding or inter se transfer of shareholding

shall be subject to such transferor(s) and transferee(s) having complied with

regulation 6, regulation 7 and regulation 8;

f. acquisition of shares in the ordinary course of business by, -

i. a registered stock-broker of a stock exchange on behalf of clients;

ii. 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;

iii. by Public Financial Institutions on their own account;

iv. by banks and public financial institutions as pledgers;

v. the International Finance Corporation, Asian Development Bank, International

Bank for Reconstruction and Development, Commonwealth Development

Corporation and such other international financial institutions;

vi. a merchant banker or a promoter of the target company pursuant to a scheme of

safety net under the provisions of the Securities and Exchange Board of India

(Disclosure and Investor Protection) Guidelines, 2000 in excess of limit specified

in sub-regulation (1) of regulation 11;

vii. a merchant banker or nominated investor in the process of market making and

subscription by the nominated investor to the unsubscribed portion of issue, in

terms of Chapter XA of the Securities and Exchange Board of India (Issue of

Capital and Disclosure Requirements) Regulations, 2009:

Provided that benefit of exception provided in sub-clause (vii) shall not be

available if the acquisition of securities in the process of market making or

subscription to the unsubscribed portion of issue results in change in control over

the target company, directly or indirectly.

ff. acquisition of shares by a person in exchange of shares received under a public offer

made under these regulations;

g. acquisition of shares by way of transmission on succession or inheritance;

h. acquisition of shares by Government companies within the meaning of section 617 of

the Companies Act, 1956 and statutory corporations:

Provided that this exemption shall not be applicable if a Government company

acquires shares or voting rights or control of a listed Public Sector Undertaking

through the competitive bidding process of the Central Government or the State

Government as the case may be, for the purpose of disinvestment;

i. transfer of shares from State level financial institutions, including their subsidiaries, to

co-promoter(s) of the company or their successors or assignee(s) or an acquirer who

has substituted an erstwhile promoter pursuant to an agreement between such

financial institution and such co-promoter(s);

ia. transfer of shares from venture capital funds or foreign venture capital investors

registered

with the Board to promoters of a venture capital undertaking or venture capital

undertaking pursuant to an agreement between such venture capital fund or foreign

venture capital investors with such promoters or venture capital undertaking;

j. pursuant to a scheme:

i. framed under section 18 of the Sick Industrial Companies (Special Provisions)

Act, 1985;

ii. of arrangement or reconstruction including amalgamation or merger or demerger

under any law or regulation, Indian or foreign;

ja. change in control by takeover of management of the borrower target company by

the

the secured creditor or by restoration of management to the said target company by

the said secured creditor in terms of the Securitization and Reconstruction of

Financial Assets and Enforcement of Security Interest Act, 2002;

k. acquisition of shares in companies whose shares are not listed on any stock exchange.

Explanation - The exemption under clause (k) above shall not be applicable if by

virtue of acquisition or change of control of any unlisted company, whether in India

or abroad, the acquirer acquires shares or voting rights or control over a listed

company;

ka. acquisition of shares in terms of guidelines or regulations regarding delisting of

securities

specified or framed by the Board;

l. other cases as may be exempted from the applicability of Chapter III by the Board

under regulation 4.

1(A). For the removal of doubt, it is clarified that nothing contained in sub-regulation

1. shall affect the applicability of the listing requirements.

2. Nothing contained in regulation 10, regulation 11 and regulation 12 of these

regulations shall apply to the acquisition of Global Depository Receipts or

American Depository Receipts unless the holders thereof, -

1. become entitled to exercise voting rights, in any manner whatsoever, on the

underlying shares; or

2. exchange such Depository Receipts with the underlying shares carrying voting

rights

Other Conditions Governing the Exemptions

• In respect of acquisitions under clauses (e), (h) and (i) of sub-regulation (1), the stock

exchanges where the shares of the company are listed shall, for information of the

public, be notified of the details of the proposed transactions at least 4 working days

in advance of the date of the proposed acquisition, in case of acquisition exceeding 5

per cent of the voting share capital of the company.

• In respect of acquisitions under clauses (a), (b), (e) and (i) of sub-regulation (1), the

acquirer shall, within 21 days of the date of acquisition, submit a report along with

supporting documents to the Board giving all details in respect of acquisitions which

(taken together with shares or voting rights, if any, held by him or by persons acting

in concert with him) would entitle such person to exercise 15 per cent or more of the

voting rights in a company.

Explanation - For the purposes of sub-regulations (3) and (4), the relevant date in case

of securities which are convertible into shares shall be the date of conversion of such

securities.

• The acquirer shall, along with the report referred to under sub-regulation (4), pay a fee

of Rs twenty five thousand rupees to the Board, either by a banker’s cheque or

demand draft in favour of the Securities and Exchange Board of India, payable at

Mumbai.

Regulation 4 and 5

Regulation 4 describes the takeover panel and Regulation 5 describes the powers of the

takeover panel.

Regulation 6, 7, 8 and 9

Regulation 6 - Transitional provision.

1. Any person, who holds more than five per cent shares or voting rights in any

company, shall within two months of notification of these regulations disclose his

aggregate shareholding in that company, to the company.

2. Every company whose shares are held by the persons referred to in sub-regulation (1)

shall, within three months from the date of notification of these regulations, disclose

to all the stock exchanges on which the shares of the company are listed, the

aggregate number of shares held by each person.

3. A promoter or any person having control over a company shall within two months of

notification of these regulations disclose the number and percentage of shares or

voting rights held by him and by person(s) acting in concert with him in that

company, to the company.

4. Every company, whose shares are listed on a stock exchange shall within three

months of notification of these regulations, disclose to all the stock exchanges on

which the shares of the company are listed, the names and addresses of promoters

and/or person(s) having control over the company, and the number and percentage of

shares or voting rights held by each such person.

Regulation 7 - Acquisition of 5 per cent and more shares or voting rights of a company.

1) Any acquirer, who acquires shares or voting rights which (taken together with shares

or voting rights, if any, held by him) would entitle him to more than five per cent or

ten per cent or fourteen per cent or fifty four per cent or seventy four per cent shares

or voting rights in a company, in any manner whatsoever, shall disclose at every stage

the aggregate of his shareholding or voting rights in that company to the company and

to the stock exchanges where shares of the target company are listed.

1A) Any acquirer who has acquired shares or voting rights of a company under sub-

regulation (1) of regulation 11 or under second proviso to sub-regulation (2) of

regulation 11 shall disclose purchase or sale aggregating two per cent or more of the

share capital of the target company to the target company, and the stock exchanges

where shares of the target company are listed within two days of such purchase or sale

along with the aggregate shareholding after such acquisition or sale.

Explanation.—For the purposes of sub-regulations (1) and (1A), the term ‘acquirer’

shall include a pledgee, other than a bank or a financial institution and such pledgee

shall make disclosure to the target company and the stock exchange within two days

of creation of pledge.

2) The disclosures mentioned in [sub-regulations (1) and (1A) shall be made within two

days of-

a. the receipt of intimation of allotment of shares; or

b. the acquisition of shares or voting rights, as the case may be.

2A) The stock exchange shall immediately display the information received from the

acquirer under sub-regulations (1) and (1A) on the trading screen, the notice board

and also on its website.

3) Every company, whose shares are acquired in a manner referred to in sub-regulations

(1) and (1A), shall disclose to all the stock exchanges on which the shares of the said

company are listed the aggregate number of shares held by each of such persons

referred above within seven days of receipt of information under sub-regulations (1)

and (1A).

Regulation 8 - Continual disclosures.

(1) Every person, including a person mentioned in regulation 6 who holds more than fifteen

per cent shares or voting rights in any company, shall, within 21 days from the financial

year ending March 31, make yearly disclosures to the company, in respect of his

holdings as on 31st March.

(2) A promoter or every person having control over a company shall, within 21 days from

the financial year ending March 31, as well as the record date of the company for the

purposes of declaration of dividend, disclose the number and percentage of shares or

voting rights held by him and by persons acting in concert with him, in that company to

the company.

(3) Every company whose shares are listed on a stock exchange, shall within 30 days from

the financial year ending March 31, as well as the record date of the company for the

purposes of declaration of dividend, make yearly disclosures to all the stock exchanges

on which the shares of the company are listed, the changes, if any, in respect of the

holdings of the persons referred to under sub-regulation (1) and also holdings of

promoters or person(s) having control over the company as on 31st March.

(4) Every company whose shares are listed on a stock exchange shall maintain a register in

the specified format to record the information received under sub-regulation (3) of

regulation 6, sub-regulation (1) of regulation 7 and sub-regulation (2) of regulation 8.

8A. Disclosure of pledged shares

(1) A promoter or every person forming part of the promoter group of any company shall,

within seven working days of commencement of Securities and Exchange Board of

India (Substantial Acquisition of Shares and Takeovers) (Amendment) Regulations,

2009, disclose details of shares of that company pledged by him, if any, to that company.


within 7 working days from the date of creation of pledge on shares of that company

held by him, inform the details of such pledge of shares to that company.


within 7 working days from the date of invocation of pledge on shares of that company

pledged by him, inform the details of invocation of such pledge to that company.

Explanation: For the purposes of sub-regulations (1), (2) and (3) the term “promoter”

and “promoter group” shall have the same meaning as is assigned to them under Clause

40A of the Listing Agreement.

(4) The company shall disclose the information received under sub regulations (1), (2) and

(3) to all the stock exchanges, on which the shares of company are listed, within 7

working days of the receipt thereof, if, during any quarter ending March, June,

September and December of any year-

a) aggregate number of pledged shares of a promoter or every person forming part of

promoter group taken together with shares already pledged during that quarter by such

promoter or persons exceeds twenty five thousand; or

b) aggregate of total pledged shares of the promoter or every person forming part of

promoter group along with the shares already pledged during that quarter by such

promoter or persons exceeds one per cent. of total shareholding or voting rights of the

company, whichever is lower.

Regulation 9 - Power to call for information.

The stock exchanges and the company shall furnish to the Board information with regard to

the disclosures made under regulations 6, 7 and 8 as and when required by the Board.

Regulation 10

Acquisition of fifteen per cent or more of the shares or voting rights of any company.

No acquirer shall acquire shares or voting rights which (taken together with shares or voting

rights, if any, held by him or by persons acting in concert with him), entitle such acquirer to

exercise fifteen per cent or more of the voting rights in a company, unless such acquirer

makes a public announcement to acquire shares of such company in accordance with the

regulations:

Regulation 11

Consolidation of holdings.

1. No acquirer who, together with persons acting in concert with him, has acquired, in

accordance with the provisions of law, 15 per cent or more but less than fifty five per cent

(55%) of the shares or voting rights in a company, shall acquire, either by himself or

through or with persons acting in concert with him, additional shares or voting rights

entitling him to exercise more than 5% of the voting rights, with post acquisition

shareholding or voting rights not exceeding fifty five per cent., in any financial year

ending on 31st March unless such acquirer makes a public announcement to acquire

shares in accordance with the regulations.

2. No acquirer, who together with persons acting in concert with him holds, fifty-five per

cent (55%) or more but less than seventy-five per cent (75%) of the shares or voting

rights in a target company, shall acquire either by himself or through or with persons

acting in concert with him any additional shares entitling him to exercise voting rights or

voting rights therein, unless he makes a public announcement to acquire shares in

accordance with these Regulations

Provided that in a case where the target company had obtained listing of its shares of

making an offer of at least ten per cent (10%) of issue size to the public in terms of clause

(b) of sub-rule (2) of rule 19 of the Securities Contracts (Regulation) Rules, 1957, or in

terms of any relaxation granted from strict enforcement of the said rule, this sub-

regulation shall apply as if for the words and figures ‘seventy five per cent (75%)’, the

words and figures ‘ninety per cent (90%)’ were substituted.

Provided further that such acquirer may, notwithstanding the acquisition made under

regulation 10 or sub-regulation (1) of regulation 11, without making a public

announcement under these Regulations, acquire, either by himself or through or with

persons acting in concert with him, additional shares or voting rights entitling him upto

five per cent. (5%) voting rights in the target company subject to the following -

i. the acquisition is made through open market purchase in normal segment on the

stock exchange but not through bulk deal /block deal/ negotiated deal/ preferential

allotment; or the increase in the Shareholding or voting rights of the acquirer is

pursuant to a buy back of shares by the target company;

ii. the post acquisition shareholding of the acquirer together with persons acting in

concert with him shall not increase beyond seventy five per cent.(75%).

2A. Where an acquirer who (together with persons acting in concert with him) holds fifty five

per

cent (55%) or more but less than seventy five per cent (75%) of the shares or voting rights

in a target company, is desirous of consolidating his holding while ensuring that the

public shareholding in the target company does not fall below the minimum level

permitted by the Listing Agreement, he may do so by making a public announcement in

accordance with these regulations:

Provided that in a case where the target company had obtained listing of its shares by

making an offer of at least ten per cent (10%) of issue size to the public in terms of clause

(b) of sub-rule (2) of rule 19 of the Securities Contracts (Regulation) Rules, 1957, or in

terms of any relaxation granted from strict enforcement of the said rule, this sub-

regulation shall apply as if for the words and figures ‘seventy five per cent (75%)’, the

words and figures ‘ninety per cent (90%)’ were substituted.

3. Notwithstanding anything contained in regulations 10, 11 and 12, in case of disinvestment

of a Public Sector Undertaking, an acquirer who together with persons acting in concert

with him, has made a public announcement, shall not be required to make another public

announcement at the subsequent stage of further acquisition of shares or voting rights or

control of the Public Sector Undertaking provided:—

i. both the acquirer and the seller are the same at all the stages of acquisition, and

ii. disclosures regarding all the stages of acquisition, if any, are made in the letter of

offer issued in terms of regulation 18 and in the first public announcement.]

Explanation.—For the purposes of regulation 10 and regulation 11, acquisition shall mean

and include -

a. direct acquisition in a listed company to which the regulations apply;

b. indirect acquisition by virtue of acquisition of companies, whether listed or unlisted,

whether in India or abroad.

Regulation 12

Irrespective of whether or not there has been any acquisition of shares or voting rights in a

company, no acquirer shall acquire control over the target company, unless such person

makes a public announcement to acquire shares and acquires such shares in accordance with

the regulations

Provided that nothing contained herein shall apply to any change in control which takes

place in pursuance to a special resolution passed by the shareholders in a general meeting:

Provided further that for passing of the special resolution facility of voting through postal

ballot as specified under the Companies (Passing of the Resolutions by Postal Ballot) Rules,

2001 shall also be provided.

Explanation - For the purposes of this regulation, acquisition shall include direct or indirect

acquisition of control of target company by virtue of acquisition of companies, whether listed

or unlisted and whether in India or abroad.

Regulation 13 - 29

Regulations 13 to 29 contain several important procedural matters in relation to making a

public announcement. The following are the regulatory requirements contained in

Regulations 13 to 29:

13. Appointment of merchant banker

14. Timing of the public announcement of offer

15. Public announcement of offer

16. Contents of the public announcement of offer

17. Brochures, advertising material, etc.

18. Submission of letter of offer to the board

19. Specified date

20. Offer price

20A. Acquisition price under creeping acquisition

21. Minimum number of shares to be acquired

21A. Offer conditional upon level of acceptance

22. General obligations of the acquirer

23. General obligations of the board of directors of the target company

24. General obligations of the merchant banker

25. Competitive bid

26. Upward revision of offer

27. Withdrawal of offer

28. Provision of escrow

29. Payment of consideration

Regulation 30 to 37 30. Bail out takeovers.

31. Manner of acquisition of shares.

32. Manner of evaluation of bids.

33. Person acquiring shares to make an offer.

34. Person acquiring shares to make public announcement.

35. Competitive bid.

36. Exemption from the operations of Chapter III.

37. Acquisition of shares by a State level public financial institution.

Regulation 38 to 47

38. Board’s right to investigate.

39. Notice before investigation.

40. Obligations on investigation by the Board.

41. Submission of report to the Board.

42. Communication of findings.

43. Appointment of auditor.

44. Directions by the Board.

44A. Manner of service of summons and notices issued by the Board.

45. Penalties for non-compliance.

46. Appeal to the Central Government.

47. Repeal and saving.

B. Open Offer Timeline in India

SEBI Takeover Code allows 4 working days from the decision date/trigger date to make the

Public Announcement. However, it is advisable to make Public Announcement earlier to

minimize price risk. The timeline below is subject to relevant approvals such as from RBI

and the SEBI clearance process which happens in parallel.

Sr. No Time Action

1 T - 1 Board resolution authorizing the acquisition/trigger date

2 T

Public Announcement (PA) to be published in leading news

papers and copy of the same to be submitted to SEBI, Stock

Exchanges and Target

3 T + 14

Draft Letter of Offer (DOLF) and due diligence certificate to

be filed with SEBI, Stock Exchanges and Target

(Not later than 14 days from the PA)

4 T + 35 SEBI to provide comments on DOLF

(If any, within 21 days of DOLF submission)

5 T + 45 Final printed Letter of Offer (LOF) to SEBI and to be

dispatched to shareholders

6 T + 55 Opening of Open Offer

(Not later than 55 days from the date of PA)

7 T + 68 Revision of Price, if any (last date)

(Upto 7 working days prior to the offer closing)

8 T + 75 Close of Open Offer

(Offer to remain open for 20 days)

9 T + 90

Completion of all formalities including payment of

consideration

(Not later than 15 days from the date of closing)

C. GUIDE TO UK’s – “The CODE”

This annexure gives a brief description of Regulatory Regime Governing Takeovers of UK

Public Companies. Following are the contents:

Contents A. Introduction to The CODE and The Panel

B. Initial Considerations

C. Stake building and dealings in the Target Shares

D. Terms of the offer

E. Documentation

F. Timetable

G. Other Regulations

Appendix 1: Stake building Thresholds

Appendix 2: Offer Timetable

A. INTRODUCTION TO THE CODE AND THE PANEL

• The Panel

The Code is issued and administered by the Panel on Takeovers and Mergers (the “Panel”), an

independent body made up of representatives of financial institutions and professional

associations. The Takeover Panel Executive oversees the day to day application of the Code.

Jones Day has seconded lawyers to the Executive and their experience has provided the firm with

an invaluable insight into the regulation of UK takeovers.

• Application of the Code

The Code applies to offers (including for companies incorporated in the UK, Channel Islands or

Isle of Man, offers implemented by way of a “scheme of arrangement”15) for all public companies

and societas europaeias which are either listed on a regulated market (for example the London

main market, which does not include the AIM market of the London Stock Exchange) or resident,

in the UK, the Channel Islands or the Isle of Man16. Residence for these purposes generally

requires a company to be incorporated in the UK, Channel Islands or Isle of Man and to have its

place of central management in one of those jurisdictions. It is therefore the nature of the target,

rather than the offeror, that is relevant.

Certain takeover transactions will be subject to the dual jurisdiction of the Panel and an overseas

takeover regulator because the jurisdiction in which the Company is listed is different to the place

in which it is incorporated. In those circumstances, responsibility for regulating any takeover will

be shared by the takeover authorities in two jurisdictions. It should be noted that the shared

jurisdiction regime will not apply to AIM companies (for the reason that AIM is not a regulated

market).

• Status of the Panel and the Code, and sanctions for non-compliance

Status

Since 6 April 2007, Code has had a statutory footing in relation to all takeovers of companies

which fall within the jurisdiction of the Takeover Code.

15 Schemes of arrangement, as an alternative to a standard offer 16 The Code also applies to offers for certain private companies, for example, companies whose shares have been

“marketed” to the public in the 10 years preceding the bid.

The Code stipulates a number of general principles, which essentially set good standards of

commercial behaviour to ensure the fair treatment of shareholders. These are then developed

further in more specific rules designed to apply, and give effect to, those principles. It is not

framed with the precision of a statute and the Code makes it clear that it is the “spirit”, rather than

simply the letter, of the Code that is important and that the general principles will apply in any

situation not expressly covered by the detailed rules. Consultation with the Panel in any cases of

doubt is strongly encouraged, and the Panel has some flexibility to modify or relax the effect of

the precise wording of the rules if it considers it appropriate to do so. The Panel draws from a

body of (in large part unpublished) precedents in determining the precise application of the Code,

and modifies its approach to take into account different situations.

The Code’s flexibility has resulted in the Code itself, and the Panel’s application of it, being

frequently amended in response to developing practices. An in depth and up to date understanding

of current practice and the Panel’s current approach to the relevant issues is crucial in determining

how any particular takeover will be regulated.

Sanctions for non-compliance

The main sanctions available to the Panel are:-

(i) compliance rulings which the Panel may make if it is satisfied that there is a reasonable

likelihood that a person will contravene the Code or a ruling of the Panel or that a person

has contravened the Code or a ruling;

(ii) compensation rulings pursuant to which the Panel would be able to require the payment of

compensation to target company shareholders (and former shareholders) for breaches of

certain rules;

(iii) applying to the Court to secure compliance with the Code or a ruling of the Panel. A

breach of any Court order could constitute a contempt of court;

(iv) the Panel may issue a private reprimand or public censure in respect of a party in breach;

(v) cold shouldering pursuant to which the Financial Services Authority (the "FSA") and

certain professional bodies would oblige their members, in certain circumstances, not to

act for the person in question in a transaction subject to the Code if it has reasonable

grounds for believing that such person is not complying, or is not likely to comply, with

the Code.

In addition to the FSA, the Panel co-operates closely with other regulatory authorities, such as the

London Stock Exchange, and in the event of a breach, the Panel may report that fact to those in

authority over the relevant party in breach which could result in disciplinary action being taken

against him. An individual may also find that, by reason of his breach, he is not regarded as a

suitable person to be a director of a company listed in the UK and anyone who commits a serious

breach of the Code might find that advisers in the City of London, or other parts of the UK, are

not willing to do business with them.

A notable example of a company being forced to comply with a Panel ruling at significant cost

was in 1989 when Guinness was required to pay approximately £75 million to former Distillers

shareholders following a breach of the Code.

B. INITIAL CONSIDERATIONS

• Secrecy

The Code emphasises the vital importance of maintaining absolute secrecy before an

announcement of a bid. All steps must be taken to minimise the accidental leak of confidential

information17.

One consequence of extending information concerning an offer to more than a very restricted

number of people may be that a premature announcement could be required (see section headed

“Announcements” below).

• Independent advice

The board of the target must obtain competent independent advice on any offer and the substance

of such advice must be made known to its shareholders.

• Duties of target directors

The directors of the target company should not put their own personal interests before the general

interests of the company’s shareholders. This principle is enshrined in the Takeover Code and

English company law.

The Takeover Code requires that the board of an offeree company must act in the interests of the

company as a whole and must not deny the holders of securities the opportunity to decide on the

merits of a bid.

17 Rule 2.1 of the Code

The Companies Act 2006 and common law impose many duties and obligations on directors to

act in the interests of the company and its members which apply in an offer period in the same

way as they do at other times. For example, under the Companies Act 2006, directors are

required to:

(i) promote the success of the company for the benefit of its members;

(ii) exercise reasonable care, skill and diligence;

(iii) act within the powers conferred by the company’s constitution; and

(iv) exercise independent judgment.

In promoting the success of the company, directors should have regard to, among other matters:

(i) the likely consequences of any decision in the long term;

(ii) the interests of the company’s employees;

(iii) the need to foster the company’s business relationships with suppliers, customers and

others;

(iv) the impact of the company’s operations on the community and the environment;

(v) the desirability of the company maintaining a reputation for high standards of business

conduct; and

(vi) the need to act fairly as between members of the company.

Where there is a divergence of views amongst board members or between the board and the target’s

independent adviser as to the merits of an offer or a recommendation of an offer being made, the

Takeover Code requires that the divergence of views be drawn to shareholders’ attention and that an

explanation be given, including arguments for acceptance or rejection, emphasising the important

factors.

• Due diligence

It is common, in recommended situations, for the offeror to conduct a due diligence exercise on the

target prior to announcing a bid. There are two major implications of this which ought to be borne in

mind. First, if unpublished price sensitive information about the target (“PSI”) is supplied to the

offeror, the offeror will, in all likelihood, be unable to acquire target shares in the market (by reason

of insider dealing and market abuse regulations). However, in the absence of other PSI, a potential

bidder is allowed to stakebuild in the target company. In other words, the knowledge that it is

intending to make a bid does not constitute PSI for the bidder.

Secondly, the Code provides18 that information supplied by the target to an offeror must also be

supplied to any other offeror or potential offeror, even if less welcome. The principle behind this rule

is to ensure that there is a level playing field as between competing offerors. It is this requirement

which may make the target reluctant to provide the offeror with extensive due diligence information,

particularly any of a commercially sensitive nature.

• Inducement fees

An offeror will often incur significant expense in making a bid which may not succeed for various

reasons, including by virtue of a competing bid being made. Target shareholders may well, therefore,

receive enhanced value under a competing offer by reason of the work undertaken by the original

offeror. It is common to mitigate the effects on the original offeror of this eventuality by entering into

an agreement with the target under which the original offeror will be entitled to receive from the

target an “inducement fee” which is meant to serve as an inducement to proceed with the offer and

becomes payable if certain specified events occur which mean that the offer fails, e.g. the

recommendation by the target board of a higher competing offer or the withdrawal or modification of

any recommendation already given. Under the Code, this inducement fee may not, in broad terms,

exceed 1% of the fully diluted value of the target company calculated by reference to the offer price,

in respect of convertibles and options taking into account only 1% of the difference between the

takeover offer price and exercise price of "in the money" convertibles. Under the Takeover Code,

there is no limit to the number of such inducement fee agreements that a target company may enter

into. However, the UK Listing Rules contain restrictions for companies listed on the main list and the

fiduciary duties of the offeree directors might also operate to restrict the number of such

arrangements.

• Irrevocable undertakings

A strategic decision which an offeror will need to make prior to announcing the bid is whether to seek

irrevocable undertakings from shareholders in the target to accept the offer. While this will obviously

give the offeror a certain degree of comfort before the announcement is made, there are important

issues to consider. First, an approach to a target shareholder before details of an offer have been made

public will almost certainly prevent that shareholder from dealing in target shares on the market until

an announcement of the offer is made19, and can therefore be very unwelcome. Secondly, the Panel

18 Rule 20.2 19 Rule 4 of the Code

ought generally to be consulted before any irrevocable undertakings are sought (primarily where

private individuals or small corporates are being approached). The Panel will wish to be satisfied that

those being approached will be given the opportunity to be advised of the nature of an irrevocable

undertaking and to obtain independent advice. There is no guarantee that those approached will be

willing to give an irrevocable commitment to accept the offer since it not possible for special terms to

be agreed with any particular shareholder20 and a shareholder might not wish to be restricted from

accepting another offer. To address the latter point, shareholders who do agree to give irrevocable

undertaking might require that the undertaking should fall away in the event of a higher competing

offer (a so-called soft undertaking).

• Announcements

Early announcements are generally required, in particular, if the target becomes the subject of rumour

and speculation or there is an untoward movement in the target’s share price21 or discussions

concerning the offer are about to be extended to include more than a very restricted number of people,

an immediate announcement will normally be required as to whether a bid is under consideration or

not. In many circumstances, a brief announcement that talks are taking place, without naming the

offeror, will satisfy the Code’s requirements in this respect.

Once the parties are ready to announce a firm intention to make a bid, a more detailed announcement

will be required22. Such an announcement normally imposes an obligation upon the offeror to proceed

with the formal offer unless the posting of the offer is subject to a specific pre-condition which is not

met or there are exceptional circumstances which justify a decision not to proceed. The offeror’s

financial advisor also has a responsibility to ensure that the announcement of a firm intention to make

an offer is only made when the offeror has every reason to believe that it will be able to implement

the offer and, in particular, has sufficient cash available to satisfy full acceptance of the cash element

of the offer.

20 Rule 16 of the Code 21 A movement of approximately 10% or an abrupt price rise of a smaller percentage (say, 5% in a single day)

should be regarded as untoward for these purposes, but it may be necessary to consult the Panel even before these thresholds are reached.

22 Rule 2.5 of the Code lists the matters which must be included in an announcement of a firm intention to make an offer and, in particular, stipulates that the announcement must specify all terms and conditions to which the offer will be subject.

C. STAKEBUILDING AND DEALINGS IN THE TARGET SHARES

• Restrictions on stake building

Perhaps the most important question for the offeror when planning its bid is whether or not to build a

stake in the target company before the offer is announced, whether by buying shares in the market or

from individuals. The most significant provisions restricting the acquisition of target shares are as

follows:

(i) Rule 5.1 of the Code prohibits (subject to certain exceptions) the acquisition by any person and

anyone acting in concert with him of (a) an interest in shares (whether comprising actual shares or

derivatives referenced to the shares and including by way of irrevocable undertakings to accept an

offer) taking their combined interest to 30% or more of shares carrying voting rights, or (b) if

that person and anyone acting in concert with him holds an interest (whether comprising actual

shares or derivatives referenced to the shares and including by way of irrevocable undertakings to

accept an offer) in 30% or more but does not hold actual shares (as opposed to derivatives)

carrying more than 50% of the voting rights, any interest in shares which would increase his or

their percentage holding of shares carrying voting rights. There are exceptions in the case of inter

alia (a) an acquisition from a single shareholder; and (b) acquisitions made immediately prior to

and expressed to be conditional on the announcement of a firm intention to make a recommended

offer.

It should be noted that an acquisition pursuant to one of the exceptions to Rule 5.1 would almost

certainly give rise to an obligation to make a mandatory offer under Rule 9 of the Code (see

section headed “Consequences of stakebuilding” below).

(ii) If the offeror possesses unpublished price sensitive information relating to the target, then insider

dealing and market abuse regulation and the rules of the Takeover Code will mean that it is likely

to be prevented from acquiring shares in the market.

• Consequences of stakebuilding

In addition to certain disclosure requirements, certain purchases of target shares may have adverse

consequences for the offeror.

(i) Under Rule 9 (perhaps the most well known provision of the Code), if a person and persons

acting in concert with him acquire an interest (whether comprising actual shares or long

derivatives referenced to the shares) in shares carrying 30% or more of the voting rights in the

target, he and/or they will normally be required to make a mandatory offer for the rest of the

equity shares of the target23 at the highest price paid by him or them for any interest in shares of

the same class in the twelve months preceding the announcement of that offer. This will also

apply if that person, and persons acting in concert with him, hold an interest (whether comprising

actual shares or long derivatives referenced to the shares) in shares carrying 30% or more but do

not hold more than 50% of the actual voting shares (as opposed to derivatives) of the

company, acquires any additional interest in shares which increases his or their percentage

holding of the voting rights.

(ii) Rule 6 of the Code provides that an offer may not be made on less favourable terms than the

highest price paid by the offeror or its concert parties for an interest (whether comprising actual

shares or derivatives referenced to the shares) in any target shares during the 3 months prior to

announcement of the offer and during the offer period24.

(iii)Rule 11 provides that if the offeror and its concert parties purchase for cash interests (whether

comprising actual shares or derivatives referenced to the shares) in respect of 10% or more of

any class of target shares carrying voting rights during the offer period and in the 12 months prior

to its commencement, the offeror will have to make its offer in cash (or provide a full cash

alternative) at not less than the highest price paid for those interests by the offeror or its concert

parties in that 12 month period. There are similar provisions under Rule 11 requiring a full share

exchange offer where interests in shares carrying 10 per cent or more of the target's voting rights

have been acquired in exchange for the offeror’s shares prior to the offer period. This is so as to

ensure that all shareholders are treated equally and have the opportunity to receive the same

consideration.

(iv) The provisions enabling an offeror to acquire compulsorily the minority25 can only be triggered if

contracts have been entered into to acquire, or acceptances are received from target shareholders

in respect of 90% or more of the target shares to which the offer relates and 90% or more of the

voting rights carried by the shares. In relation to companies listed on the London main market,

there is an additional hurdle in that 90% or more of the target's voting rights must have been

assented to the offer as well. Purchases of shares by the offeror before the offer is made will not

count towards the 90% threshold and will make it more difficult to take advantage of these

23 This mandatory offer may usually only be made conditional on the offeror obtaining acceptances of his offer

which result in him holding shares carrying over 50%. 24 The “offer period” commences when an announcement is made of a proposed or possible offer (with or without

detailed terms) and ends on the later of the date when the offer becomes or is declared unconditional as to acceptances and 21 days after the posting of the offer.

25 These provisions are contained in the sections 974 to 991 of the Companies Act 2006.

provisions because the offeror is then required to secure 90% of the remainder of the target

shares.

Set out at Appendix 1 is a summary of some of the key consequences of acquiring shares

representing various percentages of target’s share capital.

• Dealings

Because of the price sensitive nature of a potential offer, the Code prohibits dealings (before any

announcement) in the securities of the target by any person (other than the offeror) who is privy to

confidential price sensitive information concerning an offer or contemplated offer26. However, in

the absence of other price sensitive information relating to the target (“PSI”), a potential bidder is

allowed to stakebuild in the target company, in other words, the knowledge that it is intending to

make a bid does not constitute PSI for the bidder.

Also, to assist in the maintenance of an orderly market, provide transparency and prevent price

manipulation, not only does the Code restrict an offeror’s ability to sell securities of the target but

it also requires concert parties of the offeror, for example, its advisers and directors, as well as

shareholders holding 1% or more of the target to disclose subscriptions and dealings in, and the

entering into, and in some cases the unwinding, of derivative contracts and share borrowing or

lending transactions referenced to, securities of the target. Such disclosures must be made

publicly or privately to the Panel depending upon the identity of the person dealing and will also

be required in respect of subscriptions and dealings in, and the entering into of derivative

contracts referenced to, securities of the offeror if the offer contains a paper element. If the

offeror or offeree obtains irrevocable commitments from shareholders during the offer period to

accept or, as the case may be, reject the offer, details of those commitments must be publicly

disclosed in a similar manner.

When the offeror, the offeree company or a person acting in concert with an offeror or the offeree

company enters into a dealing arrangement during the offer period, that person must make an

immediate announcement, giving all relevant details of the dealing arrangement. A dealing

arrangement includes, in addition to indemnity or option arrangements, any agreement or

understanding, formal or informal, of whatever nature relating to securities of the offeror (if the

26 This is in addition to general insider dealing and market abuse restrictions.

offer is a securities exchange offer) or offeree and which may be an inducement to deal or refrain

from dealing, whether or not any dealing takes place.

• Opening Position Disclosure

In addition to dealing disclosures, an Opening Position Disclosure must be made by offeree

companies and offerors in respect of their respective holding of relevant securities and those of

their respective concert parties and persons who are interested in 1% or more of relevant

securities of the offeree and, in the case of a share exchange offer, the offeror.

The disclosure must contain, inter alia, details of interests and short positions in, or rights to

subscribe for, any relevant securities of the person making the disclosure and its concert parties, if

applicable. A person acting in concert with the bidder or target does not need to make an

Opening Position Disclosure itself. Instead, details of the that person's positions should be

included in the Opening Position Disclosure made by the relevant party to the offer with which he

is acting in concert.

The offeree and the offeror must also assist the Panel in identifying persons who are interested in

1% or more of any class of relevant securities of the offeree and a paper offeror (as the case may

be).

An Opening Position Disclosure must also contain details of any irrevocable commitment or letter

of intent procured by a party to the offer or its concert parties before the commencement of the

offer period.

D. TERMS OF THE OFFER

• Equality of treatment

All shareholders of the same class in a target must be treated similarly by an offeror. In practice,

variations may be permitted in relation to overseas shareholders to accommodate local laws.

An offeror, generally, may not deal in the shares of the target (or enter into arrangements with a

target shareholder) on favourable terms which are not being extended to all shareholders27.

• Conditions

An offer will generally be subject to a number of conditions. The following are the key

requirements which have an impact on the inclusion of, and reliance upon, offer conditions:

(i) An offer for voting equity share capital must be conditional on the offeror acquiring or

agreeing to acquire more than 50% of the voting rights of target. It is normal, however, to

make an offer conditional upon the acquisition of 90% of the target’s shares for which the

offer is made in order to enable the offeror to acquire any outstanding shares

compulsorily. This condition normally includes a right for the offeror to waive down the

requirement to a lower percentage (which must exceed 50%).

(ii) An offer must not normally be subject to conditions which depend solely on subjective

judgements by directors of the offeror or the fulfilment of which is in their hands. An

element of subjectivity is, however, normally allowed in conditions involving regulatory

approvals and official authorisations.

(iii) An offeror will not be able to invoke any condition so as to cause the offer to lapse unless

the circumstances giving rise to the right to invoke the condition are of material

significance to the offeror in the context of the offer.28

(iv) If relevant, the offer must contain a term that it will lapse if there is a reference to the

Competition Commission or if the European Commission initiates Phase II proceedings or

makes a referral to a competent authority in the UK under Article 9.1 of the EC Merger

Regulation and there follows a reference to the Competition Commission.

27 Rule 16 28 This does not apply to the acceptance condition and the typical UK and EC anti-trust conditions.

E. DOCUMENTATION

The Code provides that documents issued in the course of a bid must be prepared to the highest

standards of accuracy and that the information given must be adequately and fairly presented. The

directors of the offeror will be required formally to accept responsibility for all documents issued

to shareholders or advertisements published by the offeror.

In addition to the specific content requirements of the Code, a general duty of disclosure is

imposed: shareholders must be given sufficient information and time to enable them to reach a

properly informed decision as to the merits or de-merits of an offer.

F. TIMETABLE

From the date of announcement of the offer, a bid will be governed by a strict timetable laid down

by the Code. A specimen timetable (and comparison with that which would apply in the case of a

scheme of arrangement (see below)) is contained in Appendix 2 to this paper.

G. OTHER LAWS AND REGULATIONS

The requirements and implications of other laws and regulations which may apply in the context

of a takeover are outside the scope of this paper. However, set out below are a few of these

regulations which are most likely to be of relevance.

• The Financial Services and Markets Act 2000

This contains provisions prohibiting “market abuse” and regulating the use of “financial

promotions”. Broadly speaking, this comprises documentation issued in connection with a bid

will constitute “financial promotions” and, subject to certain exemptions, might need to be issued

or approved by a person authorised under the Financial Services and Markets Act 2000. One of

these exemptions is where a person acquires more than 50% of the voting shares of a body

corporate and, for this reason, documents issued in connection with takeover offers are usually

exempt from this requirement.

• The Criminal Justice Act 1993

This prohibits insider dealing in securities on a public market.

• The Companies Act 2006

Financial Assistance

It is unlawful for a public company to give financial assistance for the acquisition of shares in

itself or in its holding company. Therefore, an offeror will not generally be able to finance the bid

out of the cash resources of the target group, to secure debt financing on the assets of the target

group, or for the target group to repay any such debt financing unless and until the company has

been re-registered as a private company.

• The Disclosure and Transparency Rules

Disclosure of Interests in Shares

Part 22 of the Companies Act 2006 and the Disclosure and Transparency Rules include various

requirements to disclose certain interests in the issued shares of a public company, and changes to

those interests. Details of these requirements are set out in Appendix 1.

APPENDIX 1: STAKEBUILDING IN UK PUBLIC COMPANIES - KEY THRESHOLDS

Note 1: exemptions from certain Takeover Code rules set out below apply in the case of "exempt principal traders" and

certain "recognised intermediaries" who are acting in a client serving capacity.

Note2: references to “CA06” are to the Companies Act 2006, to “DTR” are to the Disclosure and Transparency Rules, to

the "Code" are to the Takeover Code; and to "R" are to Rules of the Takeover Code.

Percentage of shares/interests in shares or voting rights in target

Consequence

Any amount May be required to disclose upon request by the company concerned (S793 CA06). Where a company is in an offer period, any dealings by an offeror or offeree company or any of their concert parties in relevant securities of the offeree or, in the case of a securities exchange offer, the offeror must be publicly disclosed by noon on the business day following the transaction (R8.1, Code). See also paragraph 4 below.

Any amount during target offer period

If purchased for cash, any offer must be in cash or accompanied by a cash alternative (R11.1, Code). If purchased for shares, any offer must include a share alternative (R11.2, Code). This does not generally apply if the purchase consideration consisted of restricted securities.

Any amount in 3 months prior to or during target offer period

Offer must be on terms no less favourable (R6, Code). If purchased for shares, may also need to offer shares (see section 8 below).

Shorting companies undertaking rights issues: net short position of 0.25% or more of the issued shares achieved via short selling or by any instruments giving rise to an equivalent economic interest

Position must be publicly disclosed by 3:30pm the following business day if the stock in question is quoted on a prescribed market (e.g. Full List and AIM).

Shorting UK financial services companies: net short position of 0.25% of the issued shares achieved via short selling or by any instruments giving rise to an equivalent economic interest

Position must be publicly disclosed by 3:30pm the following business day the stock in question is quoted on a prescribed market (e.g. Full List and AIM). Each increase of 0.1% and thereafter any decrease of 0.1% must also be disclosed. Disclosure also required when decrease below 0.25%. Obligation ceases once short position below 0.25%.

1% of any class Where a company is in an offer period, any dealings by any person who holds an interest in 1% of the relevant securities of the offeree or, in the case of a securities exchange offer, of the offeror, or any dealings which would take that person's aggregate interest to 1% or more of the offeree or, if relevant, the offeror, must be publicly disclosed by 3.30 p.m. (London time) on the business day following date of transaction (R8.3, Code).

3% gross long position in shares admitted to trading (e.g. on LSE, AIM or PLUS) (for UK issuer – different rules apply for non-UK issuers) – exemption for intermediaries acting in client serving capacity

Whether or not the target is in an offer period, obligation under DTR5 to disclose interest to the target within 2 trading days of dealing (4 trading days for non-UK issuer). Thereafter, movements in a person's holding of a percentage point or more, or the holding falling by a percentage point or more or ceasing to be at least 3%, must be disclosed. Holdings are rounded down to the nearest whole percentage point for this purpose. Holdings of derivatives, e.g. CfDs and financial instruments having a similar economic effect, must be aggregated with holdings of shares and other financial instruments referenced to traded shares. Until 31 December 2009 may report on either a nominal or delta-adjusted basis; following that on delta-adjusted basis.

10% or more Power to requisition the convening of extraordinary general meetings. Interest in shares with 10% or more of voting rights of any class in the 12 months prior to target offer period

If purchased for cash, any offer must be in cash or accompanied by a full cash alternative (R11.1, Code). This does not generally apply if the purchase consideration consisted of restricted securities. See also section 2 above relating to purchases during target offer period.

Interest in shares with 10% or more of voting rights of any class in the 3 months prior to target offer period

If purchased in exchange for securities, any offer must be a securities exchange offer accompanied by a full cash alternative or vice versa (R11.2, Code). This does not generally apply if the purchase consideration consisted of restricted securities. See also section 2 above relating to purchases during target offer period.

25% Power to block special resolutions. Interest in shares with 30% or more of voting rights OR Interest in shares with 30% or more of voting rights BUT holding of actual shares with not more than 50% of voting rights

May be prohibited from dealing subject to exceptions (R5, Code). Possible requirement to make an offer for outstanding shares of target which must be in cash or accompanied by a full cash alternative (R9, Code).

Holding of actual shares of more than 50%

Subsidiary and legal control. Buying freedom under Code.

Aggregate holding of shares and acceptances of offer of more than 50%

Offer capable of becoming unconditional as to acceptances (R10, Code). Dealing disclosure requirements of Code generally cease to be applicable when an offer is declared unconditional as to acceptances.

75% Power to pass special resolutions. UK tax grouping possible. Stamp duty relief may be available for transactions between the members of the enlarged group (S42, Finance Act 1930).

90% Minorities may be entitled to require their holdings to be bought out. This test is applied to each class of shares separately.

90% of the shares subject to the offer and 90% of the voting rights

Power compulsorily to purchase minorities. This test is applied to each class of shares separately. Shares acquired before offer is made will not count towards the 90%, however shares acquired after offer is made will generally count towards this.

95% of issued shares Power to hold shareholder meetings on less than statutory notice if a majority in number of shareholders consents.

APPENDIX 2: OFFER - SPECIMEN TIMETABLE

Day Offer

PD-7 Announcement of the offer. (This may be at any time in 28 days before PD)

PD† (a) Post offer document

(b) File prospectus

PD+21

(a) First closing date (Rule 31.1)

(b) Listing granted

(c) First day for offer to be declared unconditional as to acceptances (if done,

offer period ends)

PD+42

(a) Final day for offer to be declared fully unconditional if acceptance condition

fulfilled on PD+21 (Rule 31.7)

(b) Right of withdrawal of acceptances if the offer has not become unconditional

as to acceptances (Rule 34)

PD+46 Last day for posting increased terms or a revision of the offer (Rule 32.1)

PD+60

(a) 1pm: last time for receipt of acceptances and purchases of target shares (Rule

31.6)

(b) By 5pm: bidder must announce whether the offer is unconditional as to

acceptances or has lapsed (Rule 31.6). If offer lapses offeror unable to re-bid

for 12 months (Rule 31.5). Offer period ends

PD+81 Final day for the offer to be declared fully unconditional if acceptance condition

fulfilled on PD+60

PD+95 Final day for dispatch of consideration (14 days after offer becomes fully

unconditional) (Rule 31.8)

D. SINGAPORE TAKEOVER GUIDE

This annexure gives a brief description of Takeovers in Singapore Public Companies. This extract has

been taken from Singapore Takeover Guide by Andrew M. Lim and Zahedah Abdul Rashid from

Allen & Gledhill LLP, Singapore and Regulatory Requirements summary of Drew & Napier LLC,

Singapore. Following are the contents:

Introduction

The Singapore legal system is based on the common law system, where case precedents and statutory

provisions exist side by side. Singapore obtained its independence in 1965 and the Companies Act

was passed in 1967. The Companies Act of 1967 was based on the Malaysian model, which in turn

was based on the Australian model at that time, which was itself derived from the then Companies Act

of the United Kingdom. Over the years, the Companies Act, Chapter 50 of Singapore (the

“Companies Act”), has evolved uniquely from its predecessors. The take-over and corporate fund-

raising provisions of the Companies Act have been transposed to the Securities and Futures Act,

Chapter 289 of Singapore (the “SFA”), which came into effect fully on 1 October 2002.

The Companies Act continues to contain general corporate legislation including provisions relating to

the incorporation, management, administration and winding-up of companies. Two basic types of

companies are provided for under the Companies Act, namely, the private company and the public

company. A company is a private company where its memorandum or articles of association contains

a restriction on the right to transfer shares and a limitation on the number of members to not more than

50. A public company is a company that is not a private company. Public companies include

companies limited by guarantee and companies limited by shares which are incorporated as public

companies and which may or may not be listed on a stock exchange. Many public companies

incorporated in Singapore are listed on the Singapore Exchange Securities Trading Limited (the

“SGX”), and all companies listed on the SGX are necessarily public companies. The SGX is currently

the only securities exchange in Singapore.

The focus of the discussion in this Guide will revolve around the requirements relating to a take-over

offer of a listed Singapore public company These requirements are currently set out in the SFA, the

Singapore Code on Takeovers and Mergers (the “Takeover Code”), the Companies Act and the SGX

Listing Manual (the “Listing Manual”).

This Guide should not be relied on in place of detailed advice about any specific transaction.

Legal and Regulatory Framework

The Singapore legal and regulatory framework allows a number of ways to effect corporate

acquisitions and mergers, and the choice as to which route to take largely depends on the kind of

company involved. Where a public listed company is being acquired or taken over, such activity is

regulated. Public take-over offers generally involve the acquisition of shares in a listed public

company by an acquiring entity so that the target company becomes a subsidiary of the acquiring

entity. In the acquisition of shares in private companies, these transactions are generally unregulated.

Apart from the acquisition of s hares, an entity intent on acquiring the business of another may effect

this by the acquisition of assets and liabilities rather than shares.

Securities and Futures Act and Companies Act

Part VIII of the SFA contains legislative provisions relating to take-over offers. Section 138 of the

SFA provides for the establishment of an advisory body known as the Securities Industry Council (the

“SIC”). The SIC is the regulator which oversees the Takeover Code and is part of, the Monetary

Authority of Singapore (the “MAS”). Section 140 lists the offences relating to take-over offers. It is

an offence for a person to give notice or publicly announce that he intends to make a take-over offer if

he has no intention to make one. It is also an offence to make a take-over offer if a person has no

reasonable or probable grounds for believing that he will be able to perform his obligations pursuant to

the offer being accepted or approved.

The Companies Act is also relevant in the context of corporate acquisitions and mergers. Section 210

of the Companies Act provides for schemes of arrangement, which is one of the methods used to

privatise a Singapore incorporated listed company, Singapore incorporated companies can also use the

amalgamation process in Section 215A to 215J of the Companies Act to facilitate the combination of

companies. Section 215 of the Companies Act governs the compulsory acquisition of the shares of

minority shareholders once an offerer has acquired 90 per cent of the target’s shares through a take-

over offer (excluding the shares held by the offerer). Shares held by the offerer include shares held by

a nominee on behalf of the offerer, as well as shares held by either a related corporation of the offerer

or a nominee of that related corporation. Under the Companies Act, a related corporation is a

subsidiary, holding company or a fellow subsidiary.

The Companies Act also contains provisions relating to financial assistance in Sections 76 and 76A.

Currently, the financial assistance provisions restrict a company incorporated in Singapore from

providing financial assistance, whether directly or indirectly, to any person in the acquisition or

proposed acquisition of shares in that company or the holding company of that company. The

provisions relating to financial assistance are widely drafted. For instance, if a party seeking to acquire

shares in a target company procures the target company to charge its assets to refinance a loan taken

by the offerer to acquire the target company, this may constitute financial assistance.

Financial assistance is, however, a restricted but not a prohibited activity under the Companies Act. It

is possible to “whitewash” financial assistance, where the company obtains its shareholders’ approval

by a special resolution and complies with the procedures set out in Sections 76(10) to 76(14) of the

Companies Act, which include the filing of certain prescribed forms with the Registrar of Companies

and Businesses (the “Registrar”), publishing a notice of intention to give financial assistance in a daily

newspaper and permitting objections to be made by shareholders, debenture-holders, creditors and the

Registrar. A special resolution requires the approval of a majority of not less than 75 per cent of

shareholders present and voting at a general meeting for which not less than 21 days’ prior notice has

been given. Where the company is a subsidiary of a listed corporation, or a subsidiary whose ultimate

holding company, is incorporated in Singapore, the listed corporation or ultimate holding company is

also required to obtain its shareholders’ approval for giving the financial assistance. Financial

assistance may also be given in other circumstances including where the amount of financial assistance

is not more than ten per cent of the company’s paid-up capital and reserves or where the resolution to

provide the financial assistance receives the unanimous approval of all shareholders of the company.

Takeover Code and the SIC

The Takeover Code applies to the acquisition of voting control of public companies. It applies to

corporations (including corporations not incorporated under Singapore law) with a primary listing of

their equity securities in Singapore and business trusts with a primary listing of their units in

Singapore. While the Takeover Code was drafted with listed public companies and listed registered

business trusts in mind, unlisted public companies and unlisted registered business trusts with more

than 50 shareholders or unit holders, as the case may be, and net tangible assets of US$5 million or

more must also observe, wherever possible and appropriate, the letter and spirit of the Take-over Code

as set out in its General Principles and Rules. The Take-over Code does not apply to takeovers or

mergers of other unlisted public companies and unlisted business trusts, or private companies. With

respect to foreign-incorporated companies and foreign-registered business trusts, the Take-over Code

applies only to those with a primary listing in Singapore.

The Takeover Code applies to all offerers, whether they are natural persons or not, be they resident in

Singapore or not and whether citizens of Singapore or not, and whether they are corporations or bodies

unincorporated, be they incorporated or carrying on business in Singapore or not. The Takeover Code

also extends to acts done or omitted to be done in and outside Singapore.

The Takeover Code is administered and enforced by the SIC. The SIC is provided with discretion to

waive the application of the Takeover Code in relation to Singapore-incorporated companies or

Singapore-registered business trusts with a primary listing overseas, and unlisted public companies and

unlisted registered business trusts with more than 50 shareholders or unitholders, as the case may be,

and more than US$5 million of net tangible assets. Such discretion allows the SIC to waive the Take-

over Code where the costs of compliance outweigh the benefits.

The SIC is made up of representatives from the government, the MAS and the private sector. The day-

to-day business of the SIC is conducted by a professionally-staffed full time Secretariat. The MAS is a

statutory board formed under the Monetary Authority of Singapore Act, Chapter 186 of Singapore, and

is the de facto central bank of Singapore, as well as the integrated regulator of the banking, insurance,

financial, securities and futures industries.

The Takeover Code contains General Principles, Rules and Notes. Nonetheless, the Takeover Code

notes that it is impracticable to devise rules in sufficient detail to cover all circumstances that can arise

in take-over and merger transactions. Therefore, both the letter and spirit of the Takeover Code must

be observed, especially in circumstances not explicitly covered by any Rules. The SIC may, pursuant

to Section 139 of the SFA, also issue rulings on the interpretation of the General Principles and the

Rules in the Takeover Code and lay down the practice to be followed by the parties in a take-over offer

or a matter connected therewith. In the course of a takeover, it is not unusual to require rulings from

the SIC. The SFA provides that such rulings or practice issued by the SIC shall be final and not be

capable of being challenged in any court.

The SIC is available at all times for confidential consultation on points of interpretation of the

Takeover Code. When there is any doubt as to whether a proposed course of conduct in a take-over

offer accords with the General Principles or Rules of the Takeover Code, it is advisable for the parties

or their advisers to consult the SIC in advance, as such confidential consultation minimises the risk of

breaches of the Takeover Code.

The parties to a take-over are primarily responsible for ensuring observance of the provisions of the

Take-over Code. If there appears to be a breach of the Takeover Code, the SIC may summon the

alleged offenders to appear before the SIC for a hearing, where every alleged offender will have the

opportunity to answer allegations and to call witnesses. The SFA provides the SIC with powers to

investigate any acts of misconduct in relation to or connected with a transaction involving a takeover

or merger transaction, where it has reason to believe that any party or any financial adviser is in breach

of the Takeover Code. In this respect, the SIC is empowered to make enquiries, summon persons to

give evidence on oath or affirmation, or to produce any document or material necessary for the

purpose of the enquiry.

Although the Take-over Code does not have the force of law and does not give rise to criminal

proceedings, its breach may result in the imposition of sanctions by the SIC. Sanctions which the SIC

may impose include private reprimands, public censure and, where the breach is flagrant, further

action designed to deprive the offender temporarily or permanently of its ability to enjoy the facilities

of the securities market.

If the SIC finds evidence to show that a criminal offence has been committed under the Companies

Act, the SFA or any relevant criminal law, it will recommend to the Attorney General, the

prosecutorial authority in Singapore, that the alleged offender be prosecuted. It is noted that the SFA

sets out the criminal offence of insider trading and prohibits a person with inside information from

dealing in the shares of a target company.

Listing Manual and the SGX

Where either the acquiring company or the target company is a company listed on the SGX, the

Listing Manual applies. This is so by virtue of the listing contract between the listed company and the

SGX. In summary, the Listing Manual contains rules regulating the general affairs of listed companies

and therefore its provisions have to be taken into account if either the acquiring company or the target

company is listed on the SGX.

The listing rules set out in the Listing Manual are not statutory in nature; they are made by the SGX,

subject to the approval of the MAS as required under the SFA. The SFA also empowers the SGX to

apply to the court for a court order to enforce compliance with the listing rules, though this power has

been rarely, if ever, used. In practice, ready observance of the Listing Manual is advised as failure to

comply therewith may lead to a reprimand by the SGX, and at worst, a de-listing. Furthermore, the

SFA provides that a company listed on the SGX must not intentionally, recklessly or negligently fail to

notify the SGX of information on specified events or matters, as they occur or arise, which are

required to be disclosed under the listing rules for the purpose of making information available to the

market.

The Listing Manual sets out the continuing listing requirements and corporate disclosure policy which

a listed company has to comply with. A listed company is required to keep the SGX, its shareholders

and other holders of its listed securities informed of all material information relating to it, and this

includes, of course, any information in relation to a takeover, merger or acquisition. A listed company

intending to make an acquisition or a listed company who is the target of an offer will have to make

the necessary disclosures. The information to be disclosed has to be factual, clear and succinct, and

contain sufficient quantitative information to allow investors to evaluate its relative importance to the

activities of the listed company. This includes information pertaining to the particulars of the

transaction, its rationale, any consideration payable, any analysis of financial impact, the conditions for

the trans action and the disclosure of any conflicts of interest.

The Listing Manual is also relevant where a listed offerer offers new shares as consideration in its

takeover offer. Where the target company is a listed company, the Listing Manual contains provisions

relating to reverse takeovers (see the discussion on reverse takeovers). The approval of the SGX is

required in a reverse take-over for the transaction itself as well as for the listing of new shares in the

target company.

Competition Act

The Competition Act, Chapter 50B of Singapore (the “Competition Act”), prohibits mergers that have

resulted, or may be expected to result, in a substantial lessening of competition within any market of

goods or services in Singapore.

From 1 July 2007, a person who is unsure whether a merger is prohibited by the Competition Act may

apply to the Competition Commission of Singapore (the “CCS”) for a decision on whether the merger

if carried into effect will infringe the provisions of the Competition Act.

Statutory Shareholding Restrictions in Specific Industries

Other statutes relating to particular industries also govern take-over activity in Singapore insofar as

they limit or require prior regulatory approval for share ownership in companies engaged in those

industries. Those industries are generally industries perceived to be critical to national interests, for

instance, banking, finance, insurance and media.

Examples of such statutes include the Banking Act, Chapter 19 of Singapore; the Finance Companies

Act, Chapter 108 of Singapore; the Insurance Act, Chapter 142 of Singapore; the Newspaper and

Printing Presses Act, Chapter 206 of Singapore; and the Telecommunications Act, Chapter 323 of

Singapore.

Mandatory Takeovers

Under Rule 14.1 of the Code, a take-over bid is mandatory if the following thresholds are crossed:

(a) any person acquires whether by a series of transactions over a period of time or not, shares which

(taken together with shares held or acquired by persons acting in concert with him) carry 30% or

more of the voting rights of a company; or

(b) any person who, together with persons acting in concert with him, holds not less than 30% but not

more than 50% of the voting rights and such person, or any person acting in concert with him,

acquires in any period of 6 months additional shares carrying more than 1% of the voting rights.

such person must extend offers immediately, on the basis set out in this Rule, to the holders of any

class of share capital of the company which carries votes and in which such person, or persons acting

in concert with him, hold shares.

In addition to such person, each of the principal members of the group of persons acting in concert

with him may, according to the circumstances of the case, have the obligation to extend an offer.

Exemptions From Rule 14.1

When the issue of new securities as consideration for an acquisition, a cash subscription, or the taking

of a scrip dividend would otherwise result in an obligation to make a general offer under this Rule, the

SIC will normally waive the obligation if there is an independent vote at a shareholders’ meeting. For

this purpose, “independent vote” means a vote by shareholders who are not involved in, or interested

in, the transaction in question. The requirement for a general offer will also be waived in cases

involving the underwriting of an issue of new shares, provided there has been an independent vote of

shareholders and the underwriter puts in place clear and effective arrangements not to exercise the

voting rights attached to those shares. If an underwriter incurs an obligation under this Rule

unexpectedly, for example as a result of an inability to sub-underwrite all or part of his liability, the

SIC should be consulted.

The appropriate provisions of the Code apply to Whitewash proposals. Full details of the potential

holding of voting rights must be disclosed in the document sent to shareholders relating to the issue of

the new securities. The document must also include competent independent advice on the proposals

the shareholders are being asked to approve, together with a statement that the SIC has agreed to waive

any consequent obligation under this Rule to make a general offer. Voting on the resolution must be by

way of a poll.

The SIC must be consulted and a draft document submitted at an early stage. The document must not

be despatched until the SIC has confirmed that it has no further comments thereon.

When a person or group of persons acting in concert may, as a result of such arrangements, come to

control more than 49% of the voting rights of the company (and so have the freedom to move to 50%

or more without incurring an obligation under this Rule), specific and prominent reference to the

possibility must be contained in the document and to the fact that the controlling shareholders will be

able to exercise their control and increase their overall shareholding without incurring any further

obligation under this Rule to make a general offer.

Notwithstanding the fact that the issue of new securities is made conditional upon the prior approval

by independent vote of a majority of the shareholders at a general meeting of the company: -

(a) the SIC will not normally waive an obligation under this Rule if the person to whom the new

securities are to be issued or any persons acting in concert with him have acquired voting rights in

the company in the 6 months prior to the announcement of the proposal but subsequent to

negotiations, discussions or the reaching of understandings or agreements with the directors of the

company in relation to the proposed issue of new securities;

(b) a waiver will be invalidated if any acquisitions are made in the period between the announcement

of the proposal and the shareholders’ meeting.

Following the meeting at which the proposals are considered by shareholders, an announcement must

be made by the Offeree company giving the result of the meeting and the number and percentage of

voting rights attaching to the shares to which the potential controlling shareholders have become

entitled as a result.

Where the final controlling shareholding is dependent on the results of underwriting, the Offeree

company must make an announcement following the issue of new securities stating the number of

shares and percentage of voting rights held by the controlling shareholders at that time.

A “whitewash” waiver has been granted in the following circumstances:

(a) Rescue (“white knight”) operation - where the Target Company is in a serious financial

position and the rescue operation involves the issue of new shares in the Target Company to

the rescuer which crosses the mandatory take-over threshold;

(b) Group restructuring exercise - where a scheme of reconstruction to be implemented involves

the transfer of one company’s controlling interest in the Target Company to another company

(which is also controlled by the first-mentioned company) such that there is, in practice, no

effective change in control of the Target Company at the ultimate holding company level;

(c) Foreclosure on security for a loan - Where a shareholding in a company is charged to a bank

or lending institution on an arm’s length basis and in the ordinary course of its business as

security for a loan, and, as a result of enforcement or foreclosure, the lender would otherwise

incur an obligation to make a general offer under this Rule, the SIC will normally waive the

requirement, provided that the security was not given at a time when the lender had reason to

believe that enforcement or foreclosure was likely. In any case where arrangements are to be

made involving a transfer of voting rights to the lender, but which do not amount to

enforcement or foreclosure of the security, The SIC will wish to be satisfied that such

arrangements are necessary to preserve the lender’s security and will also take into account

the provisions above. When following enforcement or foreclosure a lender wishes to sell all

or part of his shareholding, the provisions of this Rule apply to the purchaser.

Although a receiver, liquidator or administrator of a company is not required to make an offer

when he takes control of a holding of 30% or more of the voting rights of another company,

the provisions of Rule 14 apply to a purchaser from such a person.

(d) Situations may arise where a person, or group of persons acting in concert, acquires 30% or

more of the voting rights of a company at a time when another person, or group of persons

acting in concert, already holds 30% or more of the voting rights of that company. In such a

situation, the SIC will not normally waive the requirement for that person or group of persons

to make a general offer under this Rule unless:-

(iii) there is a single person holding 50% or more of the voting rights of the company who

provides a written confirmation to the SIC that he will not accept the offer which the

purchaser would otherwise be obliged to make; or

(ii) the SIC is provided with written confirmation from the holders of 50% or more of the

voting rights of that company that they would not accept the offer which the purchaser

would be obliged to make.

Waivers under this Rule are subject to the following:-

1. the purchaser and persons acting in concert with him are not to acquire voting rights

via nominees or procure other persons to acquire voting rights on their behalf for the

purpose of giving the written confirmation;

2. the purchaser and persons acting in concert with him are not to offer any

consideration, promise or inducement in return for undertakings by holders of voting

rights that they will not accept the offer which the purchaser would otherwise be

obliged to make;

3. holders of voting rights are given the full facts, in particular, their giving up their right

to a general offer to be made by the purchaser at not less than the highest price paid by

the purchaser or any person acting in concert with him for voting rights in the

company during the offer period and within the 6 months prior to the commencement

of the offer;

4. the purchaser to produce evidence to satisfy the SIC that those shareholders who have

undertaken not to accept the offer are indeed the beneficial owners of such shares; and

5. the undertakings are procured just before the purchaser raises his shareholding to 30%.

(d) Placing and top-up transactions: A waiver from the obligation to make a general offer under

this Rule will normally be granted where a shareholder, who together with persons acting in

concert with him holds 50% or less of the voting rights of a company, places part of his

holding with one or more independent persons and then, as soon as is practicable, subscribes

for up to such additional shares as he requires to maintain the percentage interest in the

Offeree company which he held prior to the placement, at a price substantially equivalent to

the placing price after taking account of expenses incurred in the transaction. Such a waiver is

required even if the placing and top-up are to be effected simultaneously whether by way of

placing and subscription agreements that are inter-conditional or otherwise.

The placing shareholder will be deemed, for this purpose, to have a percentage holding equal to the

lowest percentage holding which he had in the 6 month period prior to or immediately after the

placing and top-up transaction. A waiver from the obligation to make a general offer under this Rule

will not be required where a shareholder, who together with persons acting in concert with him holds

more than 50% of the voting rights of a company, just after carrying out a placing and top-up

transaction as described above. However, the SIC will require confirmation from the financial adviser

or placement agent of the controlling shareholder of the identity of the placee or placees and whether

they are independent.

Concert Parties

Persons acting in concert comprise individuals or companies who, pursuant to an agreement or

understanding (whether formal or informal), co-operate, through the acquisition by any of them of

shares in a company, to obtain or consolidate control of that company.

Under the Code, the following persons are presumed to be acting in concert with each other unless

the contrary can be shown:

(a) the following companies:-

(i) a company;

(ii) the parent company of (i);

(iii)the subsidiaries of (i);

(iv) the fellow subsidiaries of (i);

(v) the associated companies of any of (i), (ii), (iii) or (iv) ; and

(vi) companies whose associated companies include any of (i), (ii), (iii), (iv) or (v);

(b) a company and its directors (together with their close relatives and related trusts as well as

companies controlled by any of the directors, their close relatives and related trusts);

(c) a company with any of its pension funds and employee share schemes;

(d) a person with any investment company, unit trust or other fund whose investment such

person manages on a discretionary basis, but only in respect of the investment account which

such person manages;

(e) a financial or other professional adviser, including a stockbroker, with its client in respect of

the shareholdings of:-

(i) the adviser and persons controlling, controlled by or under the same control as the

adviser; and

(ii) all the funds which the financial adviser manages on a discretionary basis, where the

shareholdings of the financial adviser and any of those funds in the client total 10% or

more of the client’s equity share capital;

(f) directors of a company (together with their close relatives, related trusts and companies

controlled by any of such directors, their close relatives and related trusts) which is subject to

an offer or where the directors have reason to believe a bona fide offer for their company

maybe imminent

(g) partners; and

(h) the following persons and entitles:-

(i) an individual;

(ii) the close relatives of (i);

(iii) the related trusts of (i);

(iv) any person who is accustomed to act in accordance with the instructions of (i); and

(v) companies controlled by any of (i), (ii), (iii) or (iv).

The Chain Principle

Occasionally, a person or group of persons acting in concert to acquire statutory control of a company

(which need not be a company to which the Code applies) will thereby acquire or consolidate

effective control, as defined in the Code, of a second company because the first company itself holds,

either directly or indirectly through intermediate companies, a controlling interest in the second

company, or holds voting rights which, when aggregated with those already held by the person or

group, secure or consolidate effective control of the second company. The SIC will not normally

require an offer to be made under this Rule in these circumstances unless the second company

constitutes or contributes significantly to the first company in the following aspects:-

(i) assets;

(ii) market capitalisation (where the first and second companies are listed);

(iii) sales; or

(iv) earnings.

Where the first company is unlisted, the pro-rated book NTA or market value of shares in the second

company held by the unlisted first company is compared against the first company's book NTA. If

the second company is unlisted, the pro-rated book NTA of the second company is compared against

the first company's:-

(i) book NTA; or

(ii) market capitalisation.

The SIC should be consulted in all cases which may come within the scope of this Note to establish

whether, in the circumstances, any obligation arises under this Rule.

Conditions Imposed In A Mandatory Bid

Under Rule 14.2, except with the SIC’s consent:-

(a) offers made under this Rule must be conditional upon, and only, the offeror having received

acceptances in respect of voting rights which, together with voting rights acquired or agreed to

be acquired before or during the offer, will result in the Offeror and any person acting in

concert with it holding more than 50% of the voting rights; and

(b) no acquisition of voting rights which would give rise to a requirement for an offer under this

Rule may be made if the making or implementation of such offer would or might be

dependent on the passing of a resolution at any meeting of shareholders of the Offeror or upon

any other conditions, consents or arrangements (including the approval of a foreign regulatory

authority e.g. Monopolies and Mergers Commission).

An Offeror is, however permitted to attach conditions to a share acquisition agreement or a put and

call option agreement which, on fulfillment of the conditions precedent, would trigger a mandatory

bid obligation under this Rule, subject to the following:-

(a) the pre-conditions should be stated clearly in the conditional agreements or put and call

agreements;

(b) the pre-conditions should be objective and reasonable;

(c) the conditional agreements or put and call agreements must specify a reasonable period for

the fulfillment of the pre-conditions failing which the offer will lapse; and

(d) no condition should be invoked to cause a conditional agreement or a put and call agreement

to lapse unless:-

(i) the Offeror has demonstrated reasonable efforts to fulfil the conditions within the time

period specified; and

(iv) the circumstances that give rise to the right to invoke the conditions are material in the

context of the proposed transaction.

Immediately upon entering into such an agreement, the potential Offeror must make an

announcement stating the terms of the offer, the identity of the potential Offeror, the conditions to be

fulfilled before the offer is made, and the time period for the fulfilment of these pre-conditions failing

which the offer will lapse.

Consideration

Under Rule 14.3 of the Code,

(a) Offers made under this Rule must, in respect of each class of equity share capital involved, be

in cash or be accompanied by a cash alternative at not less than the highest price paid by the

Offeror or any person acting in concert with it for voting rights of the Offeree company during

the offer period and within 6 months prior to its commencement. Where any such shares have

been acquired for a consideration other than cash, General Principle 3 may be relevant and the

SIC should be consulted. The SIC should be consulted as to the offer to be made for any class

of share capital in respect of which no acquisitions have taken place within the preceding 6

months or when there is more than one class of equity share capital involved.

(b) The SIC's consent is required if the Offeror considers that the highest price should not apply

in a particular case.

Appropriate Offers to Holders of Convertibles

Under Rule 19 of the Code, the following applies to an Offeree company with outstanding

instruments convertible into, rights to subscribe for and options in respect of securities being offered

for or which carry voting rights:

(a) Where an offer is made for equity share capital and the Offeree company has instruments

convertible into, rights to subscribe for and options in respect of securities being offered for or

which carry voting rights (hereinafter referred to as “stocks”) outstanding, the Offeror must

make an appropriate offer or proposal to the holders of the stocks (hereinafter referred to as

"stockholders"). Equality of treatment is required.

(b) The board of the Offeree company must obtain competent independent advice on any offer or

proposal to the stockholders and disclose the substance of such advice to its stockholders

together with the board's views on the offer or proposal.

(c) Whenever practicable the Offeror should despatch the offer or proposal to stockholders at the

same time that it posts the offer document to shareholders. If this is not practicable, the

Offeror should inform the SIC and despatch the offer or proposal as soon as possible

thereafter.

(d) The offer or proposal to stockholders required by this Rule should not be made conditional on

any particular level of acceptances unless the share offer itself is conditional on the stock offer

achieving that level of acceptances. The offer or proposal to stockholders required by this

Rule may be carried out by way of a scheme to be considered by a stockholders' meeting.

Voluntary Offer and Its Terms

Under Rule 15, a voluntary offer is a take-over offer for the voting shares of a company made by a

person when he has not incurred an obligation to make a general offer for the company under Rule

14.1. A voluntary offer must be conditional upon the Offeror receiving acceptances in respect of

voting rights which, together with voting rights acquired or agreed to be acquired before or during the

offer, will result in the Offeror and person acting in concert with it holding more than 50% of the

voting rights. In addition, a voluntary offer must not be made subject to conditions whose fulfilment

depends on the subjective interpretation or judgement by the Offeror or lies in the Offeror's hands.

Normal conditions, such as level of acceptance, approval of shareholders for the issue of new shares

and the Securities Exchange's approval for listing, may be attached without reference to the SIC. SIC

should be consulted where other conditions would be attached.

Offers made under the Rule 15.2 of the Code must, in respect of each class of equity share capital

involved, be in cash or securities or a combination thereof at not less than the highest price paid by

the Offeror or any person acting in concert with it for voting rights of the Offeree company during the

offer period and within 3 months prior to its commencement.

Announcement of Intention to Make an Offer

Approach

The offer should be put forward in the first instance to the board of the Offeree company or to its

advisers29.

Identity of Offeror30

If the offer or an approach with a view to putting forward an offer is not made by the ultimate Offeror

or potential Offeror, the identity of the ultimate or potential Offeror must be disclosed at the outset to

the board of the Offeree company.

Implementation of the offer31

A board which is approached is entitled to be satisfied that the Offeror will be in a position to

implement the offer in full.

Secrecy Before Announcements32

There must be absolute secrecy before an announcement. All persons privy to confidential

information, particularly relating to an offer or contemplated offer, must treat that information as

secret and may pass it to another person only if it is necessary to do so and if that person is made

aware of the need for secrecy. No person who is privy to such information should make any

recommendation to any other person as to dealing in the relevant securities. All such persons must

conduct themselves so as to minimise the risk of an accidental leak of information.

Offer Timetable

The Takeover Code sets out a timetable for takeovers to protect the management of the target

company from being indefinitely distracted by dealing with a bid and to limit mark et uncertainty

about the fate of the target company.

The offer document should normally be posted not earlier than 14 days but not later than 21 days

from the date of the offer announcement. The target company then has 14 days after the posting of

29 Rule 1.1 of the Code 30 Rule 1.2 of the Code 31 Rule 1.3 of the Code 32 Rule 2 of the Code

the offer document to post an offeree document to its shareholders. An offer must initially be open for

at least 28 days after the date on which the offer document is posted.

The offer may, with the consent of the SIC, be extended for up to 60 days following the day on which

the offer document was posted. An extension beyond 60 days will normally only be granted by the

SIC if there is a competing bid.

The following table sets out an indicative take-over timetable:

Sr. No. Time Action

1 T Offerer announces intention to make offer for target

company.

2 Around T + 1 Target company releases holding announcement.

3 Around T + 2 Target company appoints independent financial adviser

on offer.

4

T+ 21 or earlier (but not

earlier than 14 days and not

later than 21 days after the

announcement

Offerer posts offer document to shareholders of target

company an lodges the same with the SGX and the SIC.

5 T + 35 or earlier (not later

than 14 days after (4))

Target company posts offeree document to its

shareholders, containing advice of the independent

financial adviser and recommendation of the target

company’s directors on the offer and lodges the same

with the SGX and the SIC

6 T + 49 (not earlier than 28 days

after (4)) Offer c loses, unless extended

7 T + 81 (60 days from (4)) Latest closing date of offer

Suspension

Clause 926 provides that: "A listed issuer shall ensure that at least 10% of a class of its listed

securities is at all times held by the public. If the percentage of securities held in public hands falls

below 10%, the listed issuer shall as soon as practicable announce that fact and the Exchange has the

right to suspend trading of the securities.

The Exchange may allow the listed issuer a period of 3 months or such longer period as the

Exchange may agree, to raise the percentage of securities in public hands to at least 10%. The listed

issuer may be delisted if it fails to restore the percentage of securities in public hands to at least 10%

after the grace period.

Although SGX may delist the Company after the 3-month grace period if the free float is not restored

to the 10% level, it will be reluctant to do so as the flak from the minority shareholders will be

directed at SGX. As such, SGX will be interested to know the Company's position on voluntary

delisting.

De-Listing from SGX-ST

Clause 208(2) provides that the SGX-ST may agree to an application by a listed issuer to delist from

the SGX-ST if:

(a) The listed issuer convenes a general meeting to obtain shareholders' approval for the

delisting;

(b) The resolution to delist the company has been approved by a majority of at least 75% in

nominal value of the shares held by the shareholders present and voting, on a poll, either in

person or by proxy at the meeting. (The listed issuer's directors and controlling shareholder

need not abstain from voting on the resolution);

(c) The resolution has not been voted against by 10% or more in nominal value of the shares

held by the shareholders present and voting, on a poll, either in person or by proxy at the

meeting;

(d) A reasonable exit alternative, which should normally be in cash, should be offered to (i) the

listed issuer's shareholders and (ii) holders of any other classes of listed securities to be

delisted. This provision will not apply to the holders of securities which are unlisted at the

time; and

(e) The listed issuer should normally appoint an independent financial adviser to advise on the

exit offer.

Clause 208(2) applies to listed issuers (whether incorporated in Singapore or elsewhere) which are

obliged to comply with the SGX-ST's continuing listing requirements.

The Listing Manual does not stipulate the length of the exit alternative offer or the procedure for a

making such an offer.

However, the terms of the exit offer and the procedure would be based on reasonableness (seeing

that the Listing Manual speaks of a "reasonable" alternative exit offer). The terms of the offer and

the procedure would have to be submitted to SGX for prior approval, who would then consider if

these are reasonable.

From a recent circular by a Singapore hotel listed company for delisting from the SGX library, the

duration of the exit offer is 20 days. It is also noted that the consideration in that case is shares,

rather than cash, although p.8 of the circular acknowledges that the exit alternative "should normally

be in cash".

General Principles

1. It is impracticable to devise rules in sufficient detail to cover all circumstances which can

arise in take-over or merger transactions. Thus, persons engaged in such transactions must

observe both the spirit and the precise wording of the General Principles and Rules. The

General Principles and the spirit of the Code will apply in areas not explicitly covered by any

Rule.

2. While the boards of an Offeror and an Offeree comapny and their respective advisers and

associates have a primary duty to act in the best interests of their respective shareholders, the

General Principles and Rules will inevitably impinge on the freedom of action of boards and

persons involved in take-over or merger transaction.

3. An Offeror must treat all shareholders of the same class in an Offeree company equally.

4. Rights of control must be exercised in good faith and oppression of the minority in wholly

unacceptable.

5. Where effective control of a company is acquired or consolidated by a person, or persons

acting in concert, a general offer to all other shareholders is normally required.

6. An Offeror should announce an offer only after the most careful consideration. Before taking

any action which may lead to an obligation to make a general offer, a person and his financial

advisers should be satisfied that he can and will continue to be able to implement the offer in

full.

7. If the board of an Offeree company has received a bona fide or has reason to believe that a

bona fide offer is imminent, it must not, without the approval of its shareholders in general

meeting, take any action on the affairs of the Offeree company that could effectively result in

any bona fide offer being frustrated or the shareholders being denied an opportunity to decide

on its merits.

8. An Offeree board which receives an offer or is approached with a view to an offer being

made, should, in the interests of its shareholders, seek competent independent advice.

9. In the course of a take-over or merger transaction, or when such transaction is in

contemplation, the Offeror, the Offeree company and their respective advisers must not give

information to some shareholders that is not made available to all shareholders. This principle

does not apply to the provision of information in confidence by the Offeree company to a

bona fide potential Offeror or vice versa.

10. Shareholders should be given sufficient information, advice and time to enable them to reach

an informed decision on an offer. No relevant information should be witheld from them.

11. Any document or advertisement addresses to shareholders containing information, opinions

or recommendations from the board of an Offeror or Offeree company or its advisers, should,

as with a prospectus, meet the highest standards of care and accuracy. Profit forecasts require

special care.

12. All parties to a take-over or merger transaction should make full and promt disclosure of all

relevant information and use every endeavour to prevent the creation of a false market in the

shares of an Offeror or Offeree company. Parties to such transactions must take care not to

make statements which may mislead shareholders or the market.

13. Directors of an Offeror or an Offeree company should, in advising their shareholders, have

regard to the interests of shareholders as a whole, and not to their own interests or those

derived from personal or family relationships. Shareholders of companies which are

effectively controlled by their directors must accept that the attitude of their board on any

offer will be decisive. There may be good reasons for the board rejecting an offer or

preferring the lower of two offers. The board must carefully examine its reasons for doing so

and be prepared to explain its decision to shareholders.

Shareholders and dealings

The Offeror, its directors and persons associated with them must take particular care with regard to

their shareholdings, and dealings in shares, in the Target Company.

Rule 2 of the Code provides that no dealings at all in the shares of the Target Company by any

person other than the Offeror or its agent, who is privy to any confidential price sensitive information

concerning the Offer, may take place before the announcement of the Offer. Such persons would

also be precluded from dealing by Section 103 of the SIA. In addition, such persons should not pass

such information on to other persons or recommend that they deal in shares in the Target Company.

Rule12 of the Code requires parties to a take-over and their associates to disclose dealings in shares

of the Offeror or the Target Company in accordance with that Rule, not later than 12.00 noon on the

dealing day following the date of the relevant transaction.

Under Practice Note 11.2 of the Code, except with the consent of the SIC, the Offeror and parties

acting in concert with it, may not dispose of shares in the Target Company during the offer period

before the Offer has become or has been declared unconditional as to acceptances.

Thereafter if any such person wishes to dispose of shares in the Target Company, the intention must

have been disclosed in the Offer Document and 24 hours' advance notice by public announcement

must be given before the sale.

Notification of substantial shareholdings

Under Section 82 of the Act a person who is a substantial shareholder must give notice to the

company of his interest within 2 days after becoming a substantial shareholder. Any changes in the

interest of a substantial shareholder must likewise be notified within 2 days (Section 83 of the Act).

Final SIP Report Sagar Shah

Documents

Transcript of Final SIP Report Sagar Shah