regulations rules m & a
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8/7/2019 Regulations Rules M & A
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Rajkumar
HarshadaAjay P.
NeethuArchana
Dinesh
Soni
Applicable Indian legal provisions in
case of M&A
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Mergers can be defined to mean unification of two players into asingle entity.
Acquisitions are situations where one player buys out the other tocombine the bought entity with itself.
In all M&A refers to the aspect of corporate strategy, corporatefinance and management dealing with the buying, selling andcombining of different companies that can aid, finance, or help agrowing company in a given
It may be in form of a purchase, where one business buys anotherbusiness or a management buys out a business from its owners.
There is no specific process defined or cut out for carrying out mergersand acquisitions.
It is largely based on commercial decisions,
MERGERS AND ACQUISITIONS
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In India, merger and acquisition activities may beclassified either in the form amalgamations3 includingmerger and de-merger or as acquisitions which couldbe either asset or stock purchase or both.
Securities and Exchange Board of India Act, 1992(SEBI) governs acquisition of shares of an Indian listedcompany by another company.
Scheme of mergers, amalgamations etc. falls within
the jurisdiction of the Companies Act, 1956 andIndiancourts. Lastly, another important law involving M&A is
Foreign Exchange Management Act, 1999
Situation in India
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CLAUSES The Monopolistic and Restrictive Trade Practices (MRTP) Act,
1969, MRTP commission does not play a role in mergers and acquisitionsin the same manner in which it used to.
But, it does play a role in cases where it believes that a merger or a take-over would lead to restrictive trade practices
Regarding take-overs there were no comprehensive regulations to governthese activities until the new clauses 40A and 40B were incorporated inMay 1990 although both the companies Act (section 395) and the MRTPAct (section 24) had provisions for corporate take-overs.
According to this clause, any person who acquires 5% or more of theshares in a company must notify the stock exchange and when the
holdings cross 10%, a public offer to purchase shares must be made.However, this agreement was restricted to only listed companies and waseffective only when either of the parties in an acquisition was a listedcompany.
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The Requirements of the Takeover Code are substantially providedfor in the listing agreement between the Stock exchange and acompany listed on it.
While Clause 40A prescribes the disclosure requirements,
Clause 40A of the listing agreement entered into by a company withthe stock exchange on which its shares are listed, requires thecompany to maintain a public shareholding of at least 25% or 10%,as the case may be, on a continuous basis.
CLAUSE 40A
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If the public shareholding falls below the minimum level
pursuant to:
The issuance or transfer of shares
(i) in compliance with directions of any regulatory orstatutory authority, Or
(ii) in compliance with the Takeover Code, or
Reorganization of capital by a scheme of arrangement,
CLAUSE 40Au.CONTD
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If it happens below the minimum level then:
The stock exchange may provide additional time of 1 year (extendable
up to 2 years) to the company to comply with the minimum
requirements. In order to comply with the minimum public
shareholding requirements, the company must either, issue shares tothe public or offer shares of the promoters to the public.
If Still company fails to comply with the minimum
requirements, then
Its shares may be delisted by the stock exchange, and penal action
may also be taken against the company.
CLAUSE 40Au.CONTD
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CLAUSE 40 BClause 40B speaks of the public offer. One importantdistinction is the recognition of change of control ormanagement of the company irrespective of thecombined percentage of voting power of the acquireras a trigger point for the Public Offer. This is importantas in many widely held companies, acquisition of 10%of the shareholding is not needed to takeover thecompany.
The Company also agrees that it is a condition for
continuous listing that whenever a take over offer ismade to or by it whether voluntarily or compulsorily,the following requirements shall be fulfilled
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A public announcement of a take-over offer shall be madeboth by the offerer or company and the offeree company
when-(a) any person in his own name or in the name of any
other person acquires, whether by a series of transactions overa period of time or otherwise, securities which, whenaggregated with securities already held or acquired by suchperson, shall carry 10% or more of the total voting rights of theofferee company, or
(b) secure the control of management of a company, byacquiring or agreeing to acquire, irrespective of the percentage
of the voting capital, the securities of the Directors or othermembers, who by virtue of their shareholdings together withthe shareholdings of their relatives, nominees, family interestand group control or manage the company, or
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If the offer is made by a person other than the ultimateofferer the identity of such other person shall be
disclosed at the outset in the public announcement asalso in the notification to the Stock Exchange. The offer shall be placed, in the first instance before the
Board of directors of the offeree company and shallcontain the following particulars, namely
detailed terms of offer, identity of the offerer, details ofofferers existing holding in the offeree company, allconditions to which the offer is subject, and confirmationby the auditors of the offerer or that resources available tothe offerer or are sufficient to satisfy full acceptance of theoffer.
All the above information shall be made equallyavailable to all the shareholders (both
of the offerer company and the offeree company)
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The objective of the Takeover code is to regulate in an organizedmanner the substantial acquisition of shares and take over of acompany whose shares are quoted on a stock exchange i.e. listedcompany. In a limited sense these regulations also apply to certainunlisted companies including a body corporate incorporated outsideIndia to an extent where the acquisition results in the control of a
listed company by the acquirer.
The regulators orders on matters regarding the application of the exception
have swung from allowance to denial.
It is essential to analyze the circumstances that trigger the Takeover Code,
making a public announcement mandatory. This essentially happens in two
situations; when there is an acquisition of shares beyond a threshold limit,or when there is a change in control over the management of the target
company. Regulations 10 and 11 address the issue of acquiring shares, while
Regulation 12 deals with acquiring control.
SEBI TAKEOVER CODE
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ACQUISITION OF SHARES
Acquisition of shares by the acquirer would alsoinclude acquisition by those acting in concert, if any,with the acquirer.
Regulation 10 and 11 provide different limits on theacquisition of shares and, when those thresholdsare exceeded, a public announcement becomesessential. Given the lengthy process of a public
announcement and its consequential impact on thetiming of any transaction, many companies explorethe necessity of making an announcement at all.
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REGULATION 10 UNDER SEBI
Regulation 10 describes a substantial acquisition of sharesfor which a public announcement becomes a pre-requisite. Under this regulation, any acquisition of sharesby an acquirer enabling it to exercise more than 15%voting rights in the target company requires a prior publicannouncement stating the intention to acquire shares inthe target company.
i.e. acquisition of 15% or more of shares of a company listed on stockexchanges in India would attract SEBI Takeover Code and such investor isrequired to follow the route of Public offer.Please Note :- In case of fresh acquisition under regulation
10, a public announcement is to be made by the merchantbanker of acquirer within four working days of enteringinto an agreement for acquisition of shares or deciding toacquire shares exceeding 15% of the target company.
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REGULATION 11
Regulation 11 deals with the consolidation of holdings, and istargeted at two situations
Firstly, where an acquirer holds shares between 15% and 55% and wishes
to acquire further shares in the same company and,
Secondly, where an acquirer has acquired 55% or more but less than 75%
of a companys shares or voting rights, and still intends to increase itsshareholding further.
In the First Scenario, for an acquisition of more than 5% of the shares, a prior
public announcement is required. Thus, if a shareholder holds 51% of the
shares and wants to acquire another 4%, Regulation 11 will not be attracted.
In the second scenario, an acquirer is forbidden to acquire any additionalshares in the company without a prior public announcement.
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The explanation for Regulation 11 has clarified that, forthe purposes of Regulations 10 and 11, acquisition
means and includes:
(i) direct acquisition in a listed company to which the
takeover regulations apply, and
(ii) indirect acquisition by virtue of the acquisition of
companies,
whether listed or unlisted, in India or abroad.
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ACQUIRING CONTROL OVER MANAGEMENTLawmakers have very clearly segregated shareholding from control over
management. A person with a majority stake may not necessarily have control over
the management of a company.
The difference between the two may be found in the definition of
control in the Takeover Code itself.
The term control has been defined under Regulation 2(1)(c),
although the definition is not exhaustive but inclusive in nature.
It includes the right to appoint majority of the directors or to
control 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.
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REGULATION 12 Regulation 12 deals with gaining control over the
target company, irrespective of whether any shares orvoting rights are acquired. In such a case, unless anacquirer makes a public announcement to acquireshares, he cannot acquire control over themanagement of the target company.
Under this regulation, an acquirer shall be one whoacquires, directly or indirectly, control of the targetcompany, by virtue of the acquisition of companies,whether listed or unlisted and whether in India or
abroad. No matter how control is acquired, it shall leadto a public announcement resulting in an open offer toacquire shares in accordance with the regulation.
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International transactions involving merger/takeover of acompany having a substantial shareholding in an Indian listed
company requires acquirer of such company to make a public
offer to the shareholders of the Indian listed company also.
Regulation 12 of the Takeover Code further provides thatirrespective 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 Takeover Code.
REGULATION 12uuCONTD
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For the purpose of this Regulation, the term acquisitionincludes direct or indirect acquisition of control of thetarget company by virtue of acquisition of companies,whether listed or unlisted and whether in India or abroad.
However the requirement under Regulation 12 does notapply to a change in control which takes place pursuant to aspecial resolution passed by the shareholders in a generalmeeting.
Therefore, if 3/4ths of shareholders present and voting at ameeting approve the change of control, then therequirement to make a public offer under Regulation 12would not be triggered.
REGULATION 12uuCONTD
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Under regulation 12 of takeover code, a public
announcement is made in the newspapers by
the merchant banker of the acquirer within
three months of consummation of such
merger/acquisition or change in control or
restructuring of the parent company holding
shares or control over the target company inIndia and
REGULATION 12uuCONTD
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CONCLUSION
Conclusion:
The legal and financial reforms by the
government of India since the early 1990's have
resulted in substantial growth of the Indian
economy. With the liberalized policies the practice
of mergers and acquisitions has attained
considerable significance in the contemporarycorporate scenario in India which is broadly used
for reorganizing the business entities.
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