TAKEOVER CODE

October 7, 2016

J. Sagar Associates
advocates & solicitors

Ahmedabad | Bengaluru | Chennai | Gurgaon | Hyderabad | Mumbai | New Delhi

Important Concepts

The Takeovers Code triggers when there is an acquisition of

shares or voting rights or control of a target (listed) company

Important concepts are-

person who acquires the shares or voting

rights or control over the target company

Acquirer

Shares

means shares in the equity share capital

carrying voting rights and includes any
security which entitles the holder to
exercise voting rights, also includes
depository
receipts
carrying
an
entitlement to exercise voting rights

Control

includes right to appoint majority of

directors or control the management or
policy decisions of the target company

Person
acting in
consent

person who directly or indirectly cooperates with the acquirer for acquisition
of shares or voting rights or control over
the target (listed) company
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Trigger off Limit

A. Shares or voting rights acquisition
Acquisition less than 25% (only certain
disclosures to be made at 5% and thereafter
at every change of 2% or more)

Acquisition of 25% or more

(also yearly disclosure to be made as of March
31 within 7 days)

No Trigger ()

Triggers ()

Additional acquisition when the acquirer

already holds between 25% and 75% or 90%, as the
case may be
Upto 5% in a financial year
No Trigger ()
More than 5% in a financial year
- Triggers ()
B. Acquisition of control
Acquisition of control irrespective of acquisition
or holding of shares or voting
rights
C.

Indirect acquisition of
shares or control

Triggers ()

Triggers ()
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Consequences of Trigger
Acquirer to make public announcement to
acquire additional shares at least 26% of the
total shares of the target (listed) company
from other shareholders (Open Offer)
In case the Open Offer results in breaching
the limit of maximum permissible non-public
shareholding, acquirer to bring down the nonpublic shareholding to the specified level (i.e.
back to 75% or 90%, as the case may be)
Offer Price to be determined in accordance
with parameters provided in the Takeovers
Code
Typical time period to complete the Open
Offer process 3-4 months
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Control under the Takeover Code

Takeover Code, 2011

SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011 (Takeover Code) aims at
protecting interest of the investors in securities of a
listed company
Provides an opportunity for the public shareholders to
exit where there is a substantial acquisition of shares
or voting rights or control over a listed company
including the consolidation of holdings by existing
shareholders
Requires an acquirer to make an offer to shareholders
of the target company prior to acquiring shares
exceeding stipulated thresholds
Contains provisions relating to open offer size and
price, time bound process for making an open offer,
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Concept of Control
Subjective and inclusive definition of control to include defacto and de-jure control. Defines control as follows:
control includes 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:
Provided that a director or officer of a target company shall
not be considered to be in control over such target
company, merely by virtue of holding such position
Control has two distinct and separate features, namely:
The right to appoint majority of directors (factual part)
The ability to control the management or policy decisions
(subjective part)
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Concept of Control
The right to control can accrue in any of the following
manner:
Through Shareholding
Through Management Rights
Through Investment / Shareholders Agreement
Voting Agreements
In other manner
Regulation 4 (Acquisition of Control) of Takeover Code
provides:
Irrespective of acquisition or holding of shares or voting
rights in a target company, no acquirer shall acquire,
directly or indirectly, control over such target company
unless the acquirer makes a public announcement of an
open offer for acquiring shares of such target company in
accordance with these regulations
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SEBI v. Subhkam Ventures (I)

Private Limited
The point of law that was being disputed: whether the rights such as the right to
nominate a director on the board of the company, the right to be present to
constitute quorum and the affirmative voting rights all of which is essentially
negative control rights constituted control for the purposes of the
takeover code
SEBIs position: the definition of control would include veto rights since such
negative control would effectively control the management and policy decisions
of a company
Differing from the SEBIs position, Securities Appellate Tribunal (SAT) in order
dated January 15, 2010 held: control meant positive control, that is, the
ability to cause a company to perform certain actions, and that it did not cover
rights constituting negative control, i.e. the right to prevent the company
from doing certain actions. The SEBI had appealed the aforesaid decision of SAT
before the Supreme Court.
Both SEBI and Subhkam Ventures reached an out of court settlement in the
matter and the Supreme Court passed an order disposing off the appeal. The
Supreme Courts order dated November 16, 2011 accepting the out of court
settlement between SEBI and the respondents, specifically states that the
question of law (i.e., whether negative control is control) remains open and that
the SAT decision would not be treated as precedent. This observation has far
reaching ramifications
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SEBIs discussion Paper on Brightline

Tests for Acquisition of Control
SEBI desires to provide for bright lines for control
SEBI has studied the position on control in various countries
some countries have the test based on actual voting rights and
while some other have similar test as in India
Two Options are suggested in the discussion paper:
Framework for Protective Rights
- basic principle should be that veto rights should be protective
in nature rather than participative in nature
- List of Protective Rights has been provided only an indicative
list
- The investor bestowed with the protective rights must invest at
least 10%
- Investor with such rights will continue to be a public
shareholder
- The protective rights are granted subject to approval of the
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shareholders (majority or minority shareholders)

SEBIs discussion Paper on Brightline

Tests for Acquisition of Control

Adopting a numerical threshold

- Excess of 25% as the threshold level
for triggering of control irrespective of
whether such holding gives de facto
control
- Right to appoint majority of nonindependent
directors
may
be
considers to be in control of the
company
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Triggering of Open Offer

The process of open offer starts from the date of happening of triggering
event itself
The triggering event, amongst others, may be:

signing of any of the definitive agreement discussed earlier; or

actual acquisition of shares from the market or passing of resolution

for allotment of shares on preferential basis; or

passing of resolution for acquisition of control over a Company

As soon as the intention of acquirer to acquire the shares of target

company beyond the threshold limits mentioned in the Takeover Code, or
such other act which leads to acquisition of control, is expressed
unequivocally, the requirement to make an offer to public gets triggered

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Tentative Timelines

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Public Announcement
The date of public announcement depends on the nature of acquisition
Some of the details that have to be provided in the public announcement
are as follows:

name and identity of the acquirer and the persons acting in concert

name and identity of the sellers, if any

nature of the proposed acquisition, such as purchase of shares or

allotment of shares

the consideration for the proposed acquisition that attracted the

obligation to make an open offer for acquiring shares, and the price
per share, if any

the offer price and mode of payment of consideration

offer size and conditions as to minimum levels of acceptance, if any

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Public Statement
Pursuant to the public announcement, a detailed public statement needs
to be published by the acquirer through the manager to the open offer
within 5 working days of the public announcement
Public statement is to be made:

in all editions of at least one each of an English national daily, Hindi

national daily and a regional daily with wide circulation, at the place
where the registered office of the target company is situated; and

one regional daily where the stock exchange where the maximum
volume of trading in the shares of the target company are recorded
during the 60 days preceding the public announcement

The detailed public statement should contain such information as may be

specified in order to enable shareholders to make an informed decision
with reference to the open offer
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Letter of Offer
Within 5 days of the publication of the detailed public statement, the
manager to the open offer is required to furnish to SEBI a due diligence
certificate along with the draft letter of offer
Within 15 days of the submission of the draft letter of offer to SEBI, in the
event SEBI does not give comments, it is to be assumed that SEBI does not
have any comments to offer
The letter of offer is required to be sent to all the shareholders of the
target company whose names appear on the register of members of target
company on the identified date within 7 working days from the receipt of
comments from SEBI, or where no comments are received, within 7
working days from the expiry of the period stipulated above
The purpose of identified date is to determine the names of the
shareholders to whom the letter of offer would be sent and an exit
opportunity would be provided
The tendering period starts not later than 12 working days from date of
receipt of comments from the SEBI (if any)
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Thank You
lalit@jsalaw.com

Disclaimer:
This presentation has been compiled for general information and does not constitute professional
or legal opinion. Readers should obtain appropriate professional advice.