Individual Triggers for Takeover Offers

[The following guest post is contributed
by Jyoti Srivastava, who is a Manager at Vinod Kothari & Co.]
The
Securities and Exchange Board of India (SEBI) has framed regulations providing
for the acquisition of shares and takeover of listed companies known as
‘Takeover Code’ or SEBI (Substantial Acquisition of Shares) Regulations, 2011 (‘SAST Regulations, 2011’). The provisions
of the SAST Regulations, 2011 are triggered when there is an acquisition of
shares or voting power or control in a listed company, in excess of the
prescribed limits either directly or indirectly with a view to gain control
over the management of such a company.
The
post is an attempt to provide some practical insights into the thresholds
provided under Regulation 3 and the combinations thereof for provisions of SAST
Regulations, 2011 to become operative or not become operative.
Initial threshold limit for
triggering of an open offer
Regulation
3 of SAST Regulation, 2011 entails an acquirer to make an open offer to the
shareholders of the target company to provide an exit option to such
shareholders. The regulation refers to some threshold limits, which once
breached, will give rise to an obligation on the acquirer to make an open offer
to the shareholders of the target company.
The
following are the threshold limits under sub-regulation 1, 2 and 3 of Regulation
3 of SAST Regulations, 2011for acquisition of shares/voting rights, beyond
which an obligation to make an open offer is triggered:
Triggered
limit for Regulation 3(1)
: Pre-acquisition holding of acquirer is less than 25%
and post-acquisition
the holding becomes 25% or more.
Triggered
limit for Regulation 3(2)
:
Pre-acquisition holding of acquirer is 25% or more but does not
exceed 75% and post-acquisition during a
financial year the holding is increased by 5% or more.
Triggered
limit for Regulation 3(3):
Pre-acquisition individual
holding of a person
is 25%
or more and post-acquisition such individual holding is increased by 5% or more.
Hence,
from the aforesaid triggers, it is quite clear that the obligation to make an
open offer under sub-regulation 1 will be attracted in such circumstance when
an acquirer together with person acting in concert (PACs) acquires shares and
voting rights and thereby for the first time crosses the threshold limit of 25%
or more of the shares or voting rights in the target company.
Further,
the requirement of open offer under sub-regulation 2 follows when an acquirer
(which includes PACs as well), who is already holding 25% or more, but less
than 75% shares or voting rights in the target company and further acquires 5 %
or more of shares or voting rights within any financial year. The acquisition
under sub-regulation 2 is also known as ‘creeping acquisition’. For computing
acquisitions limits for creeping acquisition specified under Regulation 3(2),
gross acquisitions/ purchases shall be taken into account and any fall in
shareholding or voting rights whether owing to disposal of shares or dilution
of voting rights on account of fresh issue of shares by the target company
shall be ignored.
Regulation
3 (3) of the SAST Regulations, 2011 stipulates that:
For
the purposes of sub-regulation (1) and sub-regulation (2), acquisition of
shares by any person, such that the individual shareholding of such person
acquiring shares exceeds the stipulated
thresholds,
shall also be attracting the obligation to make an open offer
for acquiring shares of the target company irrespective of whether there is a
change in the aggregate shareholding with persons acting in concert.
Regulation
3(3) of SAST Regulations, 2011 expands the scope of Regulation 3(1) and
Regulation 3(2) to take within its ambit the situation where the stand-alone
increase in the holding of a “person”
is above the thresholds provided for in Regulation 3(1) and Regulation 3(2) whereas
the aggregate holding of the acquirer (which includes PACs as well) is well
within the threshold limits of Regulation 3(2).
In
this regard, it is appropriate to note that unlike Regulation 3(1) and (2), the
expression used in Regulation 3(3) is not an “acquirer” but a “person”. While
the expression ‘acquirer’ is properly defined under section 2(1)(a) of the SAST
Regulations, 2011 to include acquisitions by persons acting in concert (PACs)
as well, the expression ‘person’ used in Regulation 3(3) is not so defined.
Accordingly, in case of increase in holding of an individual beyond the thresholds
given in Regulation 3(1) and Regulation 3(2), the obligation to make an open offer
to the shareholders of the target company arises irrespective of the fact whether
there is a change in the aggregate shareholding with persons acting in concert
or not.
Analysis
While
going through the language of sub-regulation 3, a question comes to mind as to
whether at all the above interpretation is reasonable.
The
very intent of applying the SAST Regulations, 2011 is on substantial
acquisition of shares, voting rights or control. It is quite usual in the real
world for shares and control to be acquired on a collusive basis by splitting
the holdings among several entities. Therefore, it is quite natural to say that
holdings of PACs must be aggregated.
Regulation
3(3) talks of a situation where the holding of an individual acquirer goes up,
though the holding of the promoter group does not. Such a situation mostly
arises in case a company comes up with fresh allotment of shares which is
picked by some acquirer, and not by others, thereby leading to a dilution in
the stake of the other entities in the group. Hence, the holding of a single
acquirer goes up by the threshold of 5%, while that of the group stays within
the limit of 5%.
Regulation
3(3) extends the scope of Regulation 3(2). However, the precondition for
applying Regulation 3(2) is that the acquirer must be holding 25% already. If,
in case of Regulation 3(3), we are moving on a stand-alone basis, taking the
acquisition of a single person, should we still apply the precondition for
Regulation 3(2) on a group basis? That is to say, will it not be a diabolical
interpretation to consider the group holdings for applying the condition of
Regulation 3(2), and then move to stand-alone holdings for the purpose of
computing the acquisition of 5%?
If
the acquisition of 5% is to be considered disregarding the group, then the
precondition for the acquisition, that is, 25% holding, must also be viewed on
a stand-alone basis only. It is a well-accepted canon of interpretation that
comparison is done between likes, and not dislikes.
Recently, SEBI vide its interpretative
letter dated March 1, 2016 under the SEBI (Informal Guidance) Scheme, 2003, in
the matter of Capital Trust Limited (“CTL”)
, has clarified the provisions
of Regulation 3(3) of the SAST Regulations, 2011. SEBI has rejected
the claim that the increase in individual shareholding or voting rights beyond
a prescribed threshold should not trigger an open offer if the aggregate
shareholding or voting rights of the acquirer and PACs do not exceed the
threshold applicable to such aggregate shareholding or voting rights.
Brief facts of the case
CTL is the target company and by virtue
of sale of shares of CTL by its corporate promoter, the shareholding of the
promoter group of CTL came down to 71.87% from 72.05%. However, pursuant to
conversion of warrants into equity shares of the Company, the shareholding of
the individual promoter in CTL increased from 30.03% to 38.26% i.e. around 8%.
SEBI’s
clarification
In the instant
case, SEBI has clarified that the shareholding of the individual promoter prior
to acquisition was 30.03% which is above the 25% limit as specified in
Regulation 3(2) of SAST Regulations, 2011 for triggering open offer
obligations. Further shares representing 8.23% of the paid up share capital of
the target company were acquired by the individual promoter, which also brings
the transaction within the ambit of Regulation 3(2) of the SAST Regulations,
2011. Regulation 3(3) of the SAST Regulations, 2011 will also be applicable to
the acquisition of shares representing 8.23% of the paid up share capital of
the target company. This is because sub-regulation 3 of Regulation 3 clearly
lay down that even where the change is in individual shareholding of the
acquirer, regardless of change in aggregate shareholding of PACs, the same will
attract the provisions of Regulation 3(2). Consequently, open offer obligation
as per the SAST Regulations, 2011 will have to be complied by such individual
acquirer.
In order to
arrange for an understanding of the above, we would discuss this with the help
of some examples given below:
Holding
Whether Regulation 3 applicable?
Rational
Individual
Individual
+
PACs
1% – 8%
26% – 30%
No
Holding of promoter group is not
exceeding the creeping acquisition limit and individual shareholding post-acquisition
is less than 25%.
21%-27%
30%-32%
Yes, Regulation
3(1)
Post-acquisition shareholding of
Individual is more than 25%.
0%-5%
25%-27%
No
Holding of promoter group is not
exceeding the creeping acquisition limit and individual shareholding post-acquisition
is less than 25%.
25%-32%
44%-48%
Yes,
Regulation 3  (3)
Individual shareholding exceeds the
creeping acquisition limit.
20%-21%
22%-25%
Yes,
Regulation 3 (1)
Post-acquisition shareholding of
promoter group is 25%.
20%-25%
26%-32%
Yes,
Regulation 3(1) and (2)
Post-acquisition shareholding of
individual is 25% and holding of promoter group is exceeding the creeping
acquisition limit.
Conclusion
Therefore,
in line with the above discussion, the interpretation of Regulation 3(3), in the
context of Regulation 3(1) and 3(2), will be as follows:
– If the person
on a stand-alone basis holds 25% or more of the shares or voting rights of the
target company;  and
– The increase in
holding of such person on stand-alone basis, is above 5%,
– Then the open
offer obligation will be triggered for such individual even if the acquisition,
together with the PACs, does not cross the threshold limits.


Jyoti Srivastava

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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