Takeover is a type of corporate action in which one company acquires another company by purchasing a controlling interest in its shares or assets. Takeovers can occur through a friendly negotiation between the two companies, or through an unsolicited offer made by the acquiring company.
The main objectives of takeovers are often to gain access to new markets, customers, products or technologies, to achieve economies of scale, or to eliminate competition. Takeovers can be beneficial for both the acquiring company and the target company, as well as for their shareholders, employees, and other stakeholders. However, takeovers can also have negative effects, such as job losses, cultural clashes, or disruptions to business operations.
Takeovers can take several forms:
- Friendly Takeover:
Friendly takeover occurs when the target company agrees to be acquired by the acquiring company. This type of takeover can be beneficial for both parties, as it allows for a smooth transition and the opportunity to negotiate favorable terms.
- Hostile Takeover:
Hostile takeover occurs when the target company does not agree to be acquired by the acquiring company, but the acquiring company continues to pursue the acquisition through an unsolicited offer or other means. Hostile takeovers can be contentious and may require legal or regulatory intervention to resolve.
- Leveraged buyout:
Leveraged buyout occurs when a group of investors, often including the management of the target company, uses borrowed money to acquire the target company. This type of takeover can be risky, as the debt used to finance the acquisition can be substantial.
- Reverse Takeover:
Reverse takeover occurs when a private company acquires a public company, often to gain access to the public company’s listing on a stock exchange. This type of takeover can be beneficial for the private company, as it can provide a quicker and less expensive way to go public.
Regulatory framework for takeovers in India is governed by the Securities and Exchange Board of India (SEBI) Takeover Regulations, which were first introduced in 1997 and have been updated several times since then. The regulations aim to provide a framework for fair and transparent takeovers of listed companies in India, and to protect the interests of shareholders and other stakeholders.
Provisions of the SEBI Takeover Regulations:
- Mandatory offer:
If an acquirer acquires 25% or more of the voting rights of a listed company, they are required to make a mandatory offer to acquire an additional 26% of the voting rights from public shareholders.
- Open offer:
If an acquirer acquires between 25% and 75% of the voting rights of a listed company, they may make an open offer to acquire additional shares from public shareholders. The open offer must be made at a price that is fair and reasonable, as determined by an independent valuer.
- Disclosure Requirements:
Both the acquirer and the target company are required to make various disclosures to the stock exchanges and SEBI during the takeover process, including information about their shareholdings, intentions, and financial position.
- Prohibition on insider Trading:
SEBI Takeover Regulations prohibit insider trading and other unfair trading practices during the takeover process.
- Exemptions:
Certain exemptions from the mandatory offer and open offer requirements may be available in certain circumstances, such as when the acquisition is made through a preferential allotment or when the acquirer is a financial institution or a government entity.
- Monitoring and enforcement:
SEBI monitors compliance with the Takeover Regulations and has the power to investigate and penalize violations.
Other Regulatory Provisions:
1. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
The Securities and Exchange Board of India (SEBI) regulates takeovers in India through the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. These regulations ensure that any person or group acquiring 25% or more of a listed company’s voting rights must make a public offer to acquire additional shares from other shareholders. Key aspects of these regulations include:
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Open Offer: A mandatory offer to acquire shares from existing shareholders when a person acquires a substantial stake.
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Disclosure Requirements: Timely and adequate disclosure of acquisition details to protect minority shareholders.
2. Public Announcement Requirement
The acquirer is required to make a public announcement once the acquisition reaches a specified threshold (often 25%) of the voting shares. This announcement must include the offer details, price, rationale, and a clear timeline. The announcement ensures transparency and gives shareholders an opportunity to assess the offer.
3. Takeover Price Determination
The takeover price for shares offered to the target company’s shareholders is determined based on regulations that ensure fairness. The price must not be lower than the highest price paid by the acquirer for shares during a specified period, usually 26 weeks, prior to the offer.
4. Minimum Offer Size
The acquirer is required to make an offer for a minimum percentage of the target company’s shares, typically around 26%. This ensures that the acquirer does not gain control without offering a significant share of ownership to other shareholders.
5. Role of Independent Directors
Independent directors of the target company must form an opinion on the offer and provide a recommendation to shareholders on whether they should accept or reject the offer. This helps shareholders make informed decisions based on a neutral assessment of the offer’s impact.
6. SEBI’s Role in Monitoring
SEBI plays a central role in ensuring that the takeover process is carried out fairly. It monitors the process and can intervene in cases of non-compliance, unfair practices, or violations of takeover regulations. SEBI can also investigate the source of funds, the pricing of shares, and the timeliness of disclosures.
7. Exemption from Open Offer
Certain conditions may lead to an exemption from the mandatory open offer requirement. These exemptions may include acquisitions through rights issues, preferential allotments, or where the acquisition occurs in the ordinary course of business, such as a corporate restructuring.
8. Offer Period and Procedure
The offer period during which shareholders can accept or reject the offer is typically set at 10 to 20 days, depending on the jurisdiction. The acquirer must follow a prescribed procedure, including appointing an independent evaluator to determine the fair value of the offer.
9. Takeover Panel or Tribunal
In certain cases, disputes related to takeovers are referred to a regulatory panel or tribunal. In India, SEBI may intervene in cases of disputes or unfair practices. The panel may resolve issues related to pricing, the fairness of the offer, or regulatory non-compliance.
10. Post-Takeover Obligations
After successfully acquiring control of a company, the acquirer must meet post-acquisition obligations. These may include maintaining financial disclosures, integrating the target company into the acquirer’s operations, and ensuring compliance with governance standards. In some cases, the acquirer may be required to submit to regulatory scrutiny post-acquisition.
11. Hostile Takeovers and Defensive Strategies
In cases of hostile takeovers, the target company can adopt defensive measures, such as a poison pill strategy or the white knight defense, to protect itself from an unwanted acquisition. However, these strategies are also regulated to prevent abuse or market manipulation.
12. FEMA Regulations for Foreign Acquisitions
In India, foreign investors acquiring control in an Indian company must comply with the Foreign Exchange Management Act (FEMA) regulations. These regulations govern the ownership limits, repatriation of profits, and foreign investment guidelines that affect the acquisition of shares in Indian companies.
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