When one needs an equipment to produce a product, he does not go about fabricating the equipment himself, but procures the one ready-made from a manufacturer. So also When you need a premises or building, it is open to you to buy the land and construct the super structure over the same, or you may choose to buy an existing building suitable for your purpose at the location of your choice. The second alternative is quicker and time saving.
This analogy holds in respect of business enterprises, both in terms of setting up a new venture or expanding an existing one. Instead of going through all the lengthy chores and hustle of passing through innumerable steps and stages one can acquire a running business and start operating it instantly. Similarly it takes several years for an existing business to grow in size and strength and expand through the process of internal growth. Business acquisitions can also be planned on a horizontal level to provide for quick expansion of existing enterprises through the process of merger. Here the acquisition is termed as merger. In a merger the entrepreneur gets the benefit of synergy. The addition of one with another results more than the combined strength of the two individual entities.
Post-liberalisation, Indian industry has witnessed a great increase in the number of corporate restructuring instances. The main reasons for the sudden impetus to M&A in India are the deshackling of the restrictive provisions of the MRTP and the new industrial licensing policy which led to delicensing. Moreover, increased competition has made it essential for Indian corporates to focus on core business and divest non-core ventures. Increasing pressure on margins has necessitated higher volumes of business leading to consolidation of capacities.
Consequently restructuring of existing Corporate ventures through mergers and acquisitions as a preferred route came commonly in vogue since the Nineties forced by the necessities of the era of global competition and rapid changes sweeping the business environment. Let us therefore analyse the different ways of corporate reconstruction, through mergers, acquisitions and takeovers to understand their individual methodologies.
A merger refers to a combination of two or more companies into a single company. This combination may be either through absorption or consolidation. In an absorption, one company absorbs another company, whereas under consolidation two or more companies combine to form a new company. In legal parlance, mergers are also referred to as amalgamations.
When a merger takes place between two companies in the same line of business, it is called horizontal merger. On the other hand a vertical merger is one in which the buyer expands backwards and merges with the company supplying raw material or expands forward in the direction of the ultimate consumer. When the merging companies are in totally unrelated lines of business, it is a case of conglomerate merger.
Both acquisitions and takeovers are more or less the same, when one company acquires another company. In an acquisitions it is done with the consent of the company to be acquired under a genuine contract, where as under takeover, no such consent of the Company to be taken over is secured. In both cases there is no merger or amalgamation and the two companies, acquiring company and the acquired company exists as separate entities. Thus weaker companies or smaller companies may opt to be acquired by bigger corporate entities, for better operational benefits. On the other hand a takeover involves the acquisition of a certain block of equity capital of a company, which enable the acquirer to exercise control over the affairs of the company. In theory, the acquirer must buy more than 50% of the paid up equity of the acquired company to enjoy complete control In practice, however, effective control can be exercised with a smaller holding usually between 10 to 40 percent, because the remaining shareholders scattered and ill-organized, are not likely to challenge the control of the acquirer
According to Charles A. Scharf, the element of willingness on the part of the buyer and seller distinguishes an acquisition from a takeover. If there exists willingness of the company being acquired, it is known as acquisition. If the willingness is absent, it is known as takeover. Both mergers and acquisitions result out of common interest of free contracting parties. But it is not so in the case of takeovers
In India, there is now a discernible trend among promoters and established corporate groups towards consolidation of market share, and diversification into new areas, albeit in a limited way through acquisition of companies, but in a more pronounced manner through mergers and amalgamations. The latter course is outside the purview of SEBI and constitutes a subject matter of the Companies Act, 1956, and the courts of law, and there are well laid down procedures for valuation of shares and protection of the rights of investors. This Report and the SEBI Regulations for Substantial Acquisition of Shares and Takeovers do not deal with the subject of mergers and amalgamations.
"In a market driven economy, where free competition should thrive without relying on the protective hand of bureaucratic intervention, it is important that such critical processes as substantial acquisition of shares and takeovers, which can significantly influence corporate growth and contribute to the wealth of the economy through rational allocation and optimal utilisation of resources, take place within the orderly framework of regulations and that such a framework should be one which comports with principles of fairness, transparency and equity, and above all with the need to protect the rights of the shareholders".1. The compulsory listing of shares after a public issue with the stock exchanges and the consequent anonymous on-line trading thereof by brokers operating through out the country, enabled predatory take over & substantial acquisitions of sound profit making concerns by manipulators and speculators. In order to discipline the process SEBI came to regulate such take over and substantial acquisitions of shares of a company in the process of trading through the stock exchanges.
Business take over thus came to be controlled. On 4th November 1994, SEBI announced a take-over code for the regulation of substantial acquisition of shares, aimed at ensuring better transparency and minimizing the occurrence of clandestine deals. In accordance with the regulations prescribed in the code, on any acquisition in a company which makes acquirer's aggregate shareholding exceed 15%, the acquirer is required to make a public offer. The take-over code covers three types of takeovers-negotiated takeovers, open market takeovers and bail-out takeovers.
Definition of Takeovers & Substantial acquisition of shares as per SEBI Regulations
When an "acquirer" takes over the control of the "target company", it is termed as Takeover. When an acquirer acquires "substantial quantity of shares or voting rights" of the Target Company, it results into substantial acquisition of shares. The term "Substantial" which is used in this context has been clarified subsequently.
Definition of Important Constituent Parties & Other Concepts involved in Take over & substantial acquisitions
An Acquirer: means and includes persons acting in concert (PAC) with him i.e. any individual/company/any other legal entity which intends to acquire or acquires substantial quantity of shares or voting rights of target company or acquires or agrees to acquire control over the target company.
PACs are individual(s) /company(ies)/ any other legal entity(ies) who are acting together for a common objective or for a purpose of substantial acquisition of shares or voting rights or gaining control over the target company pursuant to an agreement or understanding whether formal or informal. Acting in concert would imply co-operation, co-ordination for acquisition of voting rights or control. This co-operation/ co-ordinated approach may either be direct or indirect.
The concept of PAC assumes significance in the context of substantial acquisition of shares since it is possible for an acquirer to acquire shares or voting rights in a company "in concert" with any other person in such a manner that the acquisition made by them may remain individually below the threshold limit but may collectively exceed the threshold limit.
Unless the contrary is established certain entities are deemed to be persons acting in concert like companies with its holding company or subsidiary company, mutual funds with its sponsor / trustee/ Asset management company, etc.
A Target company is a listed company i.e. whose shares are listed on any stock exchange and whose shares or voting rights are acquired/ being acquired or whose control is taken over/being taken over by an acquirer.
Substantial quantity of shares or voting rights : The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 has defined substantial quantity of shares or voting rights distinctly for two different purposes
Threshold of disclosure to be made by acquirer(s):
5% and more shares or voting rights: A person who, alongwith PAC, if any, (collectively referred to as "Acquirer" hereinafter) acquires shares or voting rights (which when taken together with his existing holding) would entitle him to more than 5% or 10% or 14% shares or voting rights of target company, is required to disclose at every stage the aggregate of his shareholding to the target company and the Stock Exchanges within 2 days of acquisition or receipt of intimation of allotment of shares.
Any person who holds more than 15% but less than 75% shares or voting rights of target company, and who purchases or sells shares aggregating to 2% or more shall within 2 days disclose such purchase/ sale along with the aggregate of his shareholding to the target company and the Stock Exchanges.
Any person who holds more than 15% shares or voting rights of target company and a promoter and person having control over the target company, shall within 21 days from the financial year ending March 31 as well as the record date fixed for the purpose of dividend declaration, disclose every year his aggregate shareholding to the target company.
The Target company, in turn, is required to inform all the stock exchanges where the shares of target company are listed, every year within 30 days from the financial year ending March 31 as well as the record date fixed for the purpose of dividend declaration.
Trigger point for making an open offer by an acquire
15% shares or voting rights:
An acquirer who intends to acquire shares which alongwith his existing shareholding would entitle him to exercise 15% or more voting rights, can acquire such additional shares only after making a public announcement (PA) to acquire at least additional 20% of the voting capital of target company from the shareholders through an open offer.
Creeping acquisition limit:
An acquirer who holds 15% or more but less than 75% of shares or voting rights of a target company, can acquire such additional shares as would entitle him to exercise more than 5% of the voting rights in any financial year ending March 31 only after making a public announcement to acquire at least additional 20% shares of target company from the shareholders through an open offer.
Definition of "Control" as per the Regulations
Control includes the right to appoint directly or indirectly or by virtue of agreements or in any other manner majority of directors on the Board of the target company or to control management or policy decisions affecting the target company. However, in case there are two or more persons in control over the target company the cesser of any one of such persons from such control shall not be deemed to be a change in control of management nor shall any change in the nature and quantum of control amongst them constitute change in control of management provided this transfer is done in terms of Reg. 3(1)(e). Also if consequent upon change in control of the target company in accordance with regulation 3, the control acquired is equal to or less than the control exercised by person (s) prior to such acquisition of control, such control shall not be deemed to be a change in control.
Public Announcement & Disclosures to be made thereunder
A public announcement is an announcement made in the newspapers by the acquirer primarily disclosing his intention to acquire shares of the target company from existing shareholders by means of an open offer. The disclosures in the announcement include the offer price, number of shares to be acquired from the public, identity of acquirer, purpose of acquisition, future plans of acquirer, if any, regarding the target company, change in control over the target company, if any, the procedure to be followed by acquirer in accepting the shares tendered by the shareholders and the period within which all the formalities pertaining to the offer would be completed. The Public Announcement is made to ensure that the shareholders of the target company are aware of an exit opportunity available to them.
