What Is The Takeover Code? The Ultimate Blueprint

What Is Corporate Restructuring?

• Corporate restructuring is an important strategic corporate action which is undertaken in order to restructure a sick or loss making company with the ultimate objective of bringing it to a position of stability, sustainability and enhanced profitability.
• It refers to significant changes made to the organisational structure, the operational/core business activities, ownership and the overall financial structure of the company.
• Corporate restructuring is primarily undertaken with the goal of improving the company’s efficiency, profitability, enhancing competitiveness, strategic focus & alignment, excellence execution, focusing on the core operational activities and making sure that the company performs at its best with a stable and secure financial position.
• Corporate restructuring involves strategic changes undertaken with the ultimate aim of improving the overall performance and value of the company. It includes various type of corporate reconstruction activities like, financial reconstructuring, operational restructuring, strategic restructuring, organisational restructuring, mergers and acquisitions.
• Corporate restructuring is one of the proven and efficient ways of bringing a company back to a stable financial position by making certain changes either internally or externally within the company.
• Corporate restructuring refers primarily to the process of reorganising a company’s assets and operations in order to improve its financial and operational performance.

What Is A Takeover?

• Takeover refers to the acquisition of control over company by another company generally through acquiring a majority stake in the company’s shares. Takeovers can occur for various reasons like strategic expansion, gaining access to new markets, technology innovations, increasing considerable market share or eliminating competition by strategically acquiring the company.
• Takeover code is typically enforced by a regulatory body or securities exchange which is primarily designed with the motive to ensure that any change of control of a public company is conducted in a fair and transparent manner which protects the interest of all stakeholders including the shareholders, employees, customers, etc. Takeover code is basically a code of conduct which public listed companies must follow when a change of control takes place within the company.
• The takeover code is a set of rules and regulations that govern the process of acquiring control of publicly traded companies. The takeover code is typically enforced by a regulatory body or securities exchange primarily designed with the motive that any change of control of a public company is conducted in a fair and transparent manner, thereby, protecting the interest of all the stakeholders like the shareholders, employees, customers and the management.

Acquiring Company:

• The acquirer is the one that initiates the transaction while the target firm is the sought-after company.
• In a business acquisition, the acquiring company is the one that initiates the transaction to gain control of another company, which is known as the target company. 
• Initiates the acquisition process. 
• Gains control over the target company through the acquisition. 
• May choose to retain or lay off the target company’s staff. 
• The acquired company ceases to exist in its previous name and operates under the name of the acquiring company, unless the acquired company retains its original name in some cases. 

Target Company:

• The company that is being acquired or bought by another company. 
• In business, a “target company” refers to a company that is considered for potential acquisition or takeover by another company.
• May or may not agree to be acquired, with some going to extreme lengths to avoid it. 
• The acquiring company buys the shares or the assets of the target company. 
• The target company may retain its original name in some cases.
• The target company is also known as the acquired company in the process of acquisition.

Takeover Code:

• Takeover code is typically enforced by a regulatory body or securities exchange which is primarily designed with the motive to ensure that any change of control of a public company is conducted in a fair and transparent manner which protects the interest of all stakeholders including the shareholders, employees, customers, etc. Takeover code is basically a code of conduct which public listed companies must follow when a change of control takes place within the company.
• The takeover code is a set of rules and regulations that govern the process of acquiring control of publicly traded companies. The takeover code is typically enforced by a regulatory body or securities exchange primarily designed with the motive that any change of control of a public company is conducted in a fair and transparent manner, thereby, protecting the interest of all the stakeholders like the shareholders, employees, customers and the management.

The specifics of take over code can vary by jurisdiction, but some common features include:

Mandatory Offer Rules:

• The takeover code as specified by a regulatory body or stock exchange typically requires the potential acquirers to make a public offer to acquire a majority of the shares of the target company once it has acquired a certain percentage of the company’s share. The mandatory offer rules are designed to protect the shareholders and to ensure that all the shareholders get an equal opportunity to sell their shares at a fair price.
• All the shareholders and potential investors must have the information about the change of control taking place and the potential acquirer has to offer the existing shareholders the opportunity to sell their shares at a fair price. The primary objectives of this mandatory offer rule is that no shareholder should be in a position that he/she did not get the information about the change of control and enough time to sell off the shares.

Disclosure Requirements:

• The takeover code mandatorily requires the potential acquires to make certain disclosures about their intentions and plans in regards to the target company. This primarily includes all the documentations and information about the acquirer’s way of financing, the terms and conditions of the proposed offer and any plans to restructure or reorganised the target company.
• The regulatory body or securities exchange ask for a mandatory complete disclosure of the acquiring company’s future plan of actions, vission & mission and the long term economic objectives in regards to the target company. The shareholders of the target company have the complete right to know what the acquiring company is planning and its future course of action in regards to the changes of share capital and various other financial corporate restructuring.

Fair Treatment of Shareholders:

• The takeover code typically requires acquirers to treat all shareholders fairly, equitably and ensure that they receive a fair price for their shares. This typically includes provisions for protecting shareholders such as requiring a higher offer price for their shares or ensuring that they are not excluded from the offer.
• The takeover code has come into existence fairly with the motive of protection of the interests of the shareholders and giving them the chance to sell off their shares at a fair price or a higher offer price.

Timeline And Procedures:

• The takeover code sets out specific set of timelines and procedures for the offer process which includes deadlines for submitting offers and responding to counter offers as well as the rules for the conduct of negotiations and announcement of the offer.
• The corporate world works aroud time, all the legal compliance, due diligence, fair treatment of shareholders, advancing of offers and negotiating with the target company has to be done in a given period of time.

SEBI Guidelines For Takeovers:

The Securities and Exchange Board of India (SEBI) has established guidelines and regulations for takeovers to ensure transparency, fairness and protection of the interest of shareholders and stakeholders of the company. The key regulations governing takeovers in India are outlined in the SEBI (Substantial Acquisition of Shares and Takeovers) regulation 2011 commonly referred to as a SEBI takeover code.

The Securities and Exchange Board of India (SEBI) takeover code refers to the regulations implemented by the SEBI governing the acquisition of shares of a public listed company. The takeover code aims to ensure fairness, transparency and protection of the interests of the shareholders during corporate takeovers or acquisitions.

Some Key Provisions And Guidelines Under The SEBI Takeover Code:

The Securities and Exchange Board of India (SEBI) is the key regulator of the capital markets and financial structure of the country, it plays an integral role in formulating various rules and regulations, policies, corporate codes of conduct and fiscal frameworks for the corporate sector.

Threshold For Open Offer:

The SEBI takeover code mandates that an entity acquiring shares for voting rights in a listed company beyond certain threshold requirments must make an open offer to acquire shares from public shareholders. As per the last update, the trigger thresholds are set at 25%, 50% and 75% of the voting rights of the target company.

Open Offer Price:

Regulations stipulate the pricing criteria for the open offer, ensuring that shareholders are offered a fair price for their shares. The open offer price must not be less than the highest price paid by the shareholders for acquiring the shares during the specified period preceding the public announcement of the public offer.

Open Offer Process:

The code outlines the process for making an open offer, including the pricing, timing and procedures for the due diligence and communication with the shareholders.

Disclosure Requirements:

The Securities and Exchange Board of India (SEBI) mandates timely disclosure of information in regards to share acquisitions and takeovers. There should be a complete disclosure of all relevant facts and the future plan of action/ furtherance of business which the acquiring company is going to perform post acquisition. Entities acquiring shares exceeding certain thresholds are required to disclose their shareholding and intentions to the stock exchange and SEBI.

Fair Treatment of Shareholders:

The SEBI takeover code emphasizes fair treatment of shareholders which ensures that all the shareholders are treated equitably during the takeover procedure. They have the complete information in regards to the acquisition procedure and are granted enough time and opportunity to sell their shares at a fair price.

Prohibition of Insider Trading:

Insider trading is a form of trading, whereby, the persons involved in the internal management know about the confidential price sensitive information unknown to others regarding the corporate action and its corresponding effect on the stock exchange, based on this information they take trades accordingly in the stock exchange. The regulations prohibit insider trading and require parties involved in the takeover to adhere to strict confidentiality norms to prevent the misuse of unpublished price sensitive information.

Insider trading primarily refers to buying or selling (trading) a security or financial instrument, in breach of a fiduciary duty or other relationship of trust and confidence, on the basis of material, nonpublic information about the security.

It prohibits the management from using the confidential facts in regards to the corporate action about the price sensitive information which can be used manipulatively in the stock exchange.

Regulation of Creeping Acquisition:

Creeping Acquisition refers to the gradual acquisition of shares by entity without triggering the open offer requirements. This kind of acquisition is an acquisition where the acquiring company aims to acquire a significant percentage of stake in the target company by gradually acquiring it without triggering the threshold requirements, thereby, using a tricky approach.

The SEBI takeover code imposes restrictions on creeping acquisition to prevent entities from gradually acquiring control without making an open offer to shareholders.

Regulation of Substantial Acquisition of Shares and Takeovers (SAST) Committee:

The Securities and Exchange Board of India (SEBI) has constituted the SAST committee to oversee and regulate the takeovers taking place in India. The committee, Substantial Acquisition of Shares and Takeover (SAST) has come into force for interpreting the SEBI takeover code, granting exemptions and addressing issues related to the takeovers.

Exemptions:

Certain exemptions may be provided under the takeover code in specific circumstances and situations, in case of acquisitions through preferential allotment, mergers or acquisitions under the court approved resolution plans.

Regulatory Oversight:

SEBI oversees complaints with the takeover code and has the authority to investigate further for violations and impose penalties for the non compliance on the companies.

These SEBI guidelines for the takeover and corporate actions aim to foster transparency, protect the interest of the shareholders ensuring orderly conduct in the securities market while the takeover procedures take place in India. It is essential for entities involved in takeovers or any other corporate action to adhere to these regulations to avoid regulatory scrutiny and ensure compliance to the specific laws.

Procedures For Takeover Code:

Preliminary Due Diligence:

The acquiring company conducts preliminary due diligence to assess the target company’s financial conditions, operational activities, its current book value, the fair value of its assets and liabilities and the contracts it is currently dealing with, these relevant aspects significantly help the acquiring company in better evaluation of the potential risks and rewards associated to this corporate action.

Strategic Planning:

Formulating and executing the acquiring company’s strategic plan for the takeover procedure, the first and foremost is identifying the objectives of the acquisition, evaluation of potential synergy, estimating offer price and various financing options.

Announcement:

The acquiring company may publicly announce its intention to acquire the target company as specified by the SEBI takeover code. This announcement may be made through press releases, regulatory filings or other official channels as specified by the applicable rules and regulations.

Negotiation And Agreement:

• Here comes into picture the actual negotiation and agreement which takes place between the acquiring and target company. The acquiring company agrees to engage in negotiations with the target company’s management, the Board of Directors to reach an agreement on the terms and conditions of the takeover. This primarily involves discussions regarding the offer price, complete disclosure norms, the structure of the deal, post merger management, taking into account important financial ratios and various other key aspects post merger to instill fiscal discipline within the company and its management.
• Acquisition basically involves the acquiring company giving the target company’s shareholders certain specific pre agreed number of shares in the new company as per the exchange ratio based on some mutually agreed upon basis. These shares are calculated/estimated as per the exchange ratio or swap ratio either on EPS (Earnings Per Share), MPS (Market Price Per Share) or any other base as decided and mutually agreed upon by the companies.

Due Diligence By Target Company:

The target company refers to the company which is being acquired by the acquiring company, the target company may conduct due diligence on the acquiring company to access the credibility, financial stability, the strategic effect post acquisition. This evaluation helps the target company to make sure if the proposed transaction and negotiation take place in a favourable term, results in fair value aquisition and ultimately maximum shareholder value creation.

Regulatory Approval:

Corporate actions typically need regulatory approvals in order to proceed further, the proposed take over maybe subject to regulatory approval from the government authorities or regulatory bodies depending on the jurisdiction and industry involved. This basically includes antitrust review, competition clearance, foreign investment approvals or any other regulatory authority considerations.

Shareholder Approval:

Shareholders are ultimate owners of the company they have the complete right to advance their opinions. A takeover requires approval from the shareholders of both the acquiring and target companies involved. It may be obtained through a vote at a special meeting or written consent as required by applicable laws and regulations.

Open Offer:

As per the SEBI takeover code, if the acquisition triggers the mandatory open offer threshold limits it is required for the acquiring company to mandatorily give an open offer under the relevant takeover regulations. They acquiring company has to make a public offer to purchase shares from the target company’s shareholders at the specified fair offer price and other conditions.

Closing And Integration:

• Once all the necessary approvals, legal compliance, due diligence, documentations have been done and the conditions precedent to the transactions have been satisfied, the takeover is finalized through the execution of agreements and transfer of ownership.
• Post acquisition, the acquiring company typically begins the process of integrating the operational systems, the internal management of the target company into its own organisation. This procedure at times can be time consuming as the business has to put in much efforts into the integration of various departments, operational activities, legal compliance, strategic alignment of the resources, controlling costs, building cost efficient business systems, framing successsful financially viable business models to make the business procedures well defined and smooth, defining the ,core business objectives & its core value proposition and the management of controllership in finance, hence it is not able to focus on its core business activities.

It’s important to make sure that each takeover transaction is unique and the specific procedures and requirements may vary depending upon factors such as the size of the transaction the business, the legal and regulatory framework environment involved, the preferences of the parties, the size of their share capital.

All these procedures are quite complex and require accurate decision making from both the Acquiring and Target companies’ point of view in order to fulfill the core basic business objective of creating maximum value to the shareholders.