[Aryan Puri is a 4th-year BBA., LL.B. (Hons.) student at MIT-World Peace University, Faculty of Law, Pune, and Priya Maharishi is a 5th-year B.A., LL.B. (Hons.) student at Jindal Global Law School, Sonipat]
On December 6, 2021, the Securities and Exchange Board of India (“SEBI”) amended the SEBI (Substantial Acquisition of Shares and Takeover) Regulation, 2011 (“Takeover Regulations”) to simplify the process of delisting of Indian companies. The amendments are based on the suggestions of the SEBI’s Primary Market Advisory Committee (“PMAC”). This post analyses the provision allowing for further delisting by the acquirer, and the failure of the delisting offer when the acquirer’s shareholding has exceeded the minimum public shareholding (“MPS”) threshold, i.e. 25% shareholding in the target company. Further, it examines the ‘release of shares’ to meet the MPS in case of failure under the SEBI (Delisting of Equity Shares) Regulations, 2021 (“Delisting Regulations”). The time limit and the methods required for the release are commercially unviable, which deters delisting and deal-making. The post recommends scaling down the acquired shares on a pro-rata basis from the triggering transaction document (“TTD”) and open offer as an efficient mechanism for releasing shares.
An Analysis of SEBI’s Amendments
The recent amendment (the “Amendment”) to the Takeover Regulations aims to allow the acquirer to make a combined delisting and takeover offer at a specified fixed price to attenuate the risk of price uncertainty. According to the Amendment, the acquirer can now delist the target company through an open offer. While making an open offer, the acquirer needs to disclose its intention to keep the target company listed or to delist it. Additionally, while making the public announcement, the acquirer needs to notify the open offer and the indicative price, including a suitable premium over and above the open offer price, which are applicable if the delisting offer is successful.
If the acquirer intends to remain listed, but breaches the MPS threshold in terms of the Securities Contract (Regulation) Rules, 1957 (“SCRR”), it may opt for proportionally scaling down of purchases made under the TTD and shares tendered under the open offer. This scaling down is to be carried out in such a manner that the MPS threshold is never crossed. Allowing the acquirer to scale down mitigates the issue of its having to sell down to reach the MPS threshold, thereby protecting the interests of both the acquirer and the public shareholders and significantly facilitating acquisitions of listed companies.
When the first delisting offer has failed, and the acquirer has crossed the MPS threshold, it now has an additional period of twelve months for making another attempt at delisting without having to reinstate the MPS. If the further delisting offer fails, the acquirer is given another additional 12 months to retreat to the MPS threshold again. This extra time limit mitigates the risk of potentially having to sell down. The extended timeline is a significant improvement when compared to the pre-amendment scenario, which led to financial losses to the acquirer owing to the time-bound nature of complying with the MPS requirements.
Relaxation vis-à-vis Further Delisting
Under the ‘pre-amendment’ Takeover Regulations, when a delisting offer is unsuccessful and the acquired shareholding exceeds the MPS threshold, the acquirer has to ensure that the MPS threshold is met within 12 months of such unsuccessful delisting offer. In addition, the acquirer would first have to ensure compliance with the SCRR and bring down its stake down to 75 per cent; only then would it be able to attempt a delisting offer again. Pursuant to the time-bound nature of this obligation and the grave penalties on the listed entity imposed on its contravention, the acquirer would often sell its shares at a discount, thereby losing money on the transaction. Hence, such directionally conflicting transactions end up impeding takeovers of listed companies.
The Amendment aims to make acquiring a listed company convenient and plausible. Under regulation 5A(6) of the Amendment, if the delisting offer is unsuccessful but the shareholding of the acquirer exceeds the MPS limit, the acquirer may make another attempt to delist the target company during 12 months from the date of completion of the open offer. This time, the acquirer needs to meet the delisting threshold of 90% under regulation 21 of the Delisting Regulations and acquire 50 per cent of the residual public shareholding. If the delisting offer is still unsuccessful, the MPS threshold in the target company should be complied with within 12 months. After the Amendment, this extra time limit provided to the acquirer affords them comparatively enough opportunity to successfully delist a company and veer away from potentially selling down the acquired shareholding to comply with the MPS threshold. Assume that the acquirer is able to acquire 86% shareholding in the target company, which would breach the 25% MPS threshold and fail in acquiring 90% shareholding in the target company. Under the erstwhile regulations, following such failed delisting offer, the acquirer would have had to release 11% shareholding before making another delisting offer. However, in terms of the Amendment, the acquirer now has an additional 12 months period to acquire the remaining 4% and successfully delist the target company. The issue arises when one considers the method to reach the MPS.
The Frustration of Delisting Offer
Reading the Delisting Regulations with regulation 5A(6)(c) mandates the acquirer to release the acquired shares to meet the MPS threshold. According to regulation 22(2)(a) of the Delisting Regulations, the tendered shares shall be released when the delisting regulation fails. However, the regulation only states when the shares tendered are to be released, but not the mechanism for the same. Nevertheless, SEBI released a circular under the SCRR stating the methods at the disposal of the listed company to reinstate the MPS (“SEBI’s methods”). Here, it is the obligation of the listed company to reach the MPS threshold and not that of the acquirer.
The acquirer aims to meet the MPS threshold when the delisting offer fails or where it has shown the intention to keep the target company listed. SEBI’s methods require complete dependence on the company by the acquirer to reduce the shareholding and meet the MPS threshold. The failure of the delisting offer results in the yo-yo model of first acquiring the above MPS and then being required to release the shares, which is a deterrent to the deal-making and delisting process. Also, the acquirer has merely 12 months to meet the MPS threshold. Therefore, the option of scaling down the purchase of shares should also be provided to the acquirer if the delisting offer fails.
The Amendment allows the acquirer to opt for a new method to achieve the MPS by the acquirer under regulation 7(4). According to the regulation, when the acquirer exceeds the MPS threshold, it has the option to scale down the shareholding acquired on a pro-rata basis from the TTD and the shares acquired from open offer, thereby having the effect that the MPS threshold is not crossed. According to the PMAC, enabling the acquirer to proportionally scale down its shareholding and not requiring them to sell-down balances the interest of the public and the acquirer where the law provides for separate delisting threshold and MPS. It added that the suggestion is made considering the principle of equity as the party to the TTD, and the public would have similar levels of acceptance of their respective shareholding in the company. However, this brainchild of SEBI is only available to the acquirer if it intends to retain the listing of the target company.
Therefore, the process of release of shares in 12 months is theoretically attractive but commercially challenging. Here, the pressure is on the acquirer to follow the SEBI’s methods for reinstating the MPS within 12 months. If the acquirer can proportionally scale down the shareholding, the acquisition can be designed in a way where the MPS is automatically reinstated. As per the TTD, the acquisition of the sum of shares can be subjected to the acquirer conducting a successful delisting offer. If the acquirer fails, the shareholding in the TTD can be scaled down, binding the other contracting party. It can enter into a share purchase agreement with a third party for the sale of excess shares. Additionally, the acquirer can offer to sell for the acquired shares or sell the shares acquired through an open offer to the public. This strategy allows for a convenient and efficient route to the acquirer when faced with a time crunch to bring the acquired shareholding in consonance with MPS when the delisting offer fails.
Substantial acquisition of shares of a listed company impacts the stakeholders, such as the acquirer, the target company, and the public shareholders. It is crucial that the legal structure governing multi-faceted transactions are straightforward and explicit and that a balance is struck such that all parties benefit from the transaction. This long-overdue amendment aims to make acquisitions of listed entities more equitable and practicable. However, the failure of the delisting offer results in a problematic method of release of shares within a time crunch to the acquirer. Therefore, the option of scaling down the shares should be provided to the acquirer to enable efficiency and balance the rights of the stakeholders.
– Aryan Puri & Priya Maharishi