An acquirer seeking to acquire a strategic stake in an Indian listed company faces certain unique challenges. On one hand, the proposed acquisition may trigger an obligation for the acquirer, under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (the “2011 Takeover Code”), to make an open offer to acquire at least 26% of the publicly held shareholding in the company. On the other hand, the acquirer would also need to take into account the possibility of competing offers being launched.
The terms “competing offer” or “competitive bid” are commonly understood to refer to offers that are made after an open offer has been announced but not completed, for the shares of the same target company and addressed to the same body of shareholders. The 2011 Takeover Code refers to such offers (together, somewhat confusingly, with the first announced open offer) as competing offers. For the purposes of this article, we have, where necessary to avoid confusion, referred to competing offers that are made in terms of Regulation 20(1) of the 2011 Takeover Code following the announcement of an initial mandatory or voluntary open offer as “following competing offers”.
For the acquirer, the possibility of a following competing offer being made makes it difficult to predict accurately the size of the acquirer’s post transaction stake in the target and his total acquisition cost. From the perspective of public shareholders, on the other hand, competitive situations offer a more favourable price determination as well as an opportunity to determine the controlling shareholder of the target. At the same time, there is a need to ensure that competing offers are run in a fair, transparent and equitable manner, so as to ensure an orderly resolution of a competitive situation.
The Takeover Regulations Advisory Committee (the “Achutan Committee”), constituted by the Securities and Exchange Board of India (the “SEBI”) in September 2009 considered the regulatory framework relating to competing offers in considerable detail, focussing in particular on issues such as timelines, offer sizes, reasonable obligations and restrictions to be placed on competing acquirers and the target company, revision of offers, withdrawal of competing offers, timelines for conducting the offer process in a competitive situation and inter se transfer of shares among bidders after completion of the competing offers. The 2011 Takeover Code incorporates a number of the Achutan Committee’s recommendations.
This article summarises and briefly analyses some of the key elements of the provisions of the 2011 Takeover Code that apply to competing open offer situations.
Timelines
- Making Competing Offers
The 2011 Takeover Code has modified the timelines for conducting an open offer. Table 1 provides a summary of the timelines for conducting an open offer under the new Takeover Code 2011, highlighting how the timelines can get modified in a competitive situation.
Regulation 20(5) of the 2011 Takeover Code prohibits the making of any open offer, or entering into a transaction that would trigger an obligation to make an open offer, later than 15 working days after the making of a detailed public statement by the acquirer who makes the first public announcement. This restriction continues until the expiry of the offer period for the first announced public offer. Under the previous version of the Takeover Code (the “1997 Takeover Code”), this restriction began after 21 days following public announcement of the first offer and applied only to announcing of following competing offers, but did not extend to entering into transactions which would trigger an open offer. This created a theoretical possibility that a competing acquirer could defeat the purpose of this restriction by triggering a mandatory open offer during the 21-day restricted period; the prospect of the mandatory open offer being opened following the closing of the first offer could then dampen enthusiasm for the first announced open offer.
- Opening and Closing of Offers
The timelines prescribed for competing offer situations under the 1997 Takeover Code were ambiguous in several respects, with a lack of clarity on how and when exactly competing offers were meant to open and close. The 2011 Takeover Code now provides that the timelines for all competing offers must be identical and the closing date for all competing offers must be the last date (in terms of Regulation 18(8)) for tendering shares in acceptance of the competing offer last made (Regulation 20(8)). As a matter of fact, this approach has been followed by the SEBI in practice even before the coming into force of the 2011 Takeover Regulations.
Size of Competing Offers
Competitive situations offer public shareholders a more favourable price determination as well as an opportunity to determine the controlling shareholder of the target. At the same time, there is a need to ensure that competing offers are run in a fair, transparent and equitable manner, so as to ensure an orderly resolution of a competitive situation
The size of a following competing offer must be such that the post-offer size of the stake of the competing acquirer and its “persons-acting-in-concert” (“PACs”) in the target (assuming full acceptance) would not be less than the stake that the acquirer making the first public announcement and its PACs would hold after the completion of its own open offer (assuming full acceptance) and the transaction, if any, that triggered this open offer (Regulation 20(2)). It is worth noting that the 1997 Takeover Code did not require the minimum size of a following competing offer to also take into account the shares being acquired through the transaction that triggered the original mandatory open offer.
Further, Regulation 20(3) of the 2011 Takeover Code provides that a following competing offer shall not be regarded as a voluntary open offer. In light of this provision, the size of a following competing offer needs to be at least 26% of all the shares in the target (whereas the size of a voluntary open could, in certain conditions, be as low as 10%).
Offer Price and Revision of Offers
Competing offers are subject to the same provisions of the 2011 Takeover Code regarding pricing that apply to other offers.
Regulation 20(9) allows acquirers who have made the first public announcement, as well as competing acquirers, to revise the terms of their offers as long as these revisions are favourable to the target shareholders. In terms of Regulation 20(9), read with Regulation 18(4), such revisions cannot be made after the third working day prior to the opening of the offer. Under the 1997 Takeover Code, a competing offer could be revised up to 7 working days prior to the date of closure of the offer.
Withdrawal of Acceptances
Given that, as explained in the previous section, revisions to a competing offer cannot now be made after the third working day prior to the opening of the offer, public shareholders in competitive situations now stand to be presented with the competing acquirers’ best possible bids even prior to the opening of the offer. In view of this, the right of tendering shareholders to withdraw acceptances that was contained in the 1997 Takeover Code has been done away with.
Conditionality
A competing offer can be made conditional as to a minimum level of acceptances only if the first announced open offer is also cordial as to a minimum level of acceptances.
| Key Stages in the Offer Process | Maximum Timelines under the 2011 |
| Agreement/decision to acquire (Trigger Event) | Day 0 |
| Public announcement of an open offer | Day 0 (same day as Trigger Event) |
| Publishing of detailed public statement | Day 5 (within 5 working days of publishing the public announcement) |
| Filing draft offer letter with SEBI | Day 10 (within 5 working days of publishing the detailed public statement) |
| Last date for announcing a competing offer | Day 20 (within 15 working days of the detailed public statement by the acquirer making the first public announcement) |
| Publishing of detailed public statement for a competing offer | Day 25 (within 5 working days of publishing the public announcement) |
| Filing draft offer letter for a competing offer with SEBI | Day 30 (within 5 working days of publishing the detailed public statement) |
| SEBI’s comments on the draft offer letter | If no competing offer: Day 25 (within 15 working days of receipt by SEBI) If there are competing offers: comments on letters for all competing offers to be released on the same day (by Day 45) |
| Sending of letter of offer to shareholders | If no competing offer: Day 32 (within 7 working days of receipt of SEBI’s comments or expiry of period within which SEBI is required to respond) If there are competing offers: Day 53 |
| Last date for upward revision of the offer price and number of shares to be acquired. | If no competing offer: Day 33 (prior to the commencement of the last 3 working days before the offer period starts) If there are competing offers: Day 53 |
| Recommendations of the target’s committee of independent directors | If no competing offer: Day 35 (at least 2 working days prior to the commencement of the offer period) If there are competing offers: Day 55 |
| Opening of offer | If no competing offer: Day 37 (within 12 working days of receiving SEBI’s comments) If there are competing offers: Day 57 |
| Closing of Offer and end of restriction on announcing other open offers or taking any new action that would trigger an open offer requirement | If no competing offer: Day 47 (offer should be open for 10 working days) If there are competing offers: Day 67 |
The Role of the Board
Unlike in certain other jurisdictions, the role of the board of an Indian target company is fairly circumscribed in a competitive situation. The target board has limited ability to act outside the ordinary course of business without shareholder approval by way of a special resolution. Further, Regulation 24(3) prohibits the induction of any new director on the board of the target company when competing offers are running and under Regulation 24(4), any director already on the board of the target who represents an acquirer cannot participate in discussions or vote on any resolutions relating to the open offer.
One aspect on which the target board has a role to play is in considering and providing recommendations on the offers, as is now required under Regulations 26(6) and 26(7) of the 2011 Takeover Code. Under these provisions, the board of the target is required to constitute a committee of independent directors which is required to provide reasoned recommendations to the target shareholders at least two working days prior to the commencement of the offer period. In addition, there is an obligation on the target board, under Regulation 26(9), to providing all competing acquirers with equal information and cooperation.
Transfers between Competing Acquirers
The Achutan Committee had recommended the incorporation of a provision in the new Takeover Code that would have allowed a successful bidder in a competitive situation to purchase the shares acquired by an unsuccessful bidder in the course of his competing offer without triggering another open offer, provided that this acquisition was completed within 21 days following expiry of the relevant offer period at a per share price not exceeding what the successful acquirer paid in his own open offer and that the acquisition did not cause the minimum public shareholding requirements to be breached in respect of the target company. This provision would have enabled easy exits for unsuccessful participants in competing bid situations. Although the SEBI board appears to have approved this provision in July 2011, this has not been included in the final version of the 2011 Takeover Code.
Other Issues
- Prohibitions on Open Offers in Certain Cases
In view of Regulation 20(7), making a following competing offer, or entering into a transaction which would trigger an obligation to make a following competing offer is not permitted, until after the expiry of the offer period, in the following cases:
- where the original open offer is for the acquisition of shares pursuant to a disinvestment in terms of Regulation 13(2)(d) (the term “disinvestment” is defined to mean the sale by the Central Government or any State Government or a government company of shares or voting rights in, or control over, a public sector undertaking); or
- where the open offer is pursuant to a relaxation granted by the SEBI pursuant to Regulation 11(2) from strict compliance with the various open offer obligations set out in Chapters III and IV (under Regulation 11(2), the SEBI may grant such a relaxation where the Central Government or a State Government or any regulatory authority has superseded and replaced the board of the target company or where it is otherwise satisfied that such a relaxation will be in the interests of the public, investors and the securities market).
- Voluntary Offers
Regulation 6(1) of the 2011 Takeover Code restricts an acquirer who has made a voluntary open offer from acquiring any shares other than under the open offer. This could lead to a somewhat asymmetrical situation for such an acquirer when faced with a competing bid as he would be unable to make any other share acquisitions during the course of the open offer, whereas no such restriction would apply to the makers of any following competing offers.
- Withdrawal of Offers
Regulation 25(4) of the 1997 Takeover Code, prior to an amendment in 2002, included an option for a previously announced offer to be withdrawn without the SEBI’s approval in the event that a competing offer was made. The Achutan Committee considered this but rejected it on the grounds that it would be best if the target shareholders could select the controlling acquirer from among competing acquirers.
Closing Thoughts
The last few years have seen an increasing number of high profile competing offer battles such as those for Great Offshore, Fame India and Orissa Sponge. In a number of these cases, the proceedings got protracted and became the subject of much discussion and controversy. While the reform of takeover regulations in India is likely to be an ongoing process, one hopes that the changes introduced in the 2011 Takeover Code will bring about a clearer and more equitable regime for the governing of competing offers.
Disclaimer – All the information and legal commentary provided in this article is for illustrative purposes only and should not be regarded or relied upon as legal advice. While the content provided is accurate as at the date of first publication, laws and regulations change frequently. Any reliance on the information contained in this write-up is solely at the user’s own risk.