There are certain considerations an overseas company (the acquirer) should take into account when structuring the acquisition of an Indian listed company (the target), followed by delisting and a potential minority squeeze-out. This discussion assumes that the target is engaged in activities under the “automatic route” and that the acquisition does not require the approval of the Reserve Bank of India or the government.
The acquisition of a listed company in India is not a straightforward process. Depending on certain thresholds, the acquirer will need to make a public offer for the acquisition of at least 20% of the issued share capital of the target under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, as amended (the takeover code). In practical terms, it may not be possible to acquire the entire issued share capital of the target.
Regulation 10 of the takeover code provides that no acquirer (alone or with others acting in concert) shall acquire shares or voting rights in a company that entitle it to 15% or more of the voting rights, unless such acquirer makes a public announcement to acquire shares in accordance with the takeover code. Regulation 12 of the takeover code also states that even if an entity acquires less than 15% of the shares, the takeover code may be triggered if the entity acquires “control” of the company (irrespective of whether there has been any acquisition of shares or voting rights).
The obligation to make a public announcement arises within four working days of the execution of the share purchase agreement. The purchase price will be determined with reference to the prevailing market price, even for those shares to be purchased in an off-market transaction, if the transaction involves the acquirer purchasing shares from a person resident in India.
The acquirer may acquire up to 75% (or 90%, in certain circumstances) of the target, and may need to make more than one public offer depending on the number of shares held by the selling promoters of the target. If the acquirer wants to go further and acquire more than 75%, it will need to delist the target and squeeze out the minority. This is easier said than done.
The promoters of a listed company may voluntarily delist a company in accordance with the SEBI (Delisting of Equity Shares) Guidelines, 2009, as amended (the delisting guidelines), if (i) the delisting has been approved by a special resolution of the shareholders of the company; (ii) the company has been listed for a minimum period of three years on any of the stock exchanges; and (iii) an exit opportunity has been given to the investors at an exit price determined in accordance with a book-building process.
The exit price is the price at which the maximum number of shares has been offered and may be higher than the market trading price. The acquirer is not obliged to accept the final exit price but, once it does so, must accept all offers up to and including that price (although not offers with higher prices). The offer price floor is calculated in accordance with the delisting guidelines; however, there is no ceiling on the price and this may constitute a considerable disincentive to a proposed delisting.
A minority squeeze-out presents even more of a challenge. Section 395 of the Companies Act, 1956, as amended (the Companies Act), does provide for a minority squeeze-out but in practical terms these provisions are difficult to implement, and consequently are rarely used, unlike in other jurisdictions such as the UK and US.
Under section 395, if a scheme or contract for the transfer of shares in the target to the acquirer has been approved by the holders of at least 90% of the value of those shares, the acquirer may within a specified period deliver a notice to a dissenting shareholder that it wishes to acquire his shares, and shall do so on the contract terms within a month of the notice, unless a court orders otherwise based on an application made by the dissenting shareholder. If the acquirer already holds more than 10% of the shares of the target, the holders that approve the scheme or contract must, in addition to holding at least 90% in value of the shares whose transfer is involved, comprise at least 75% in number of the holders of those shares.
Because of the difficulty in applying section 395, certain companies have tried to use a court-approved scheme of arrangement under sections 391 to 394 of the Companies Act, or a court-approved reduction of capital under section 101 of the Companies Act, to achieve a squeeze-out by buying back shares held by minority shareholders. The scheme of arrangement under sections 391 to 394, or a reduction of capital under section 101, must be approved by a special resolution of the shareholders of the target company and then by the court.
Such schemes have been approved by Bombay High Court. A court-approved reduction of capital under section 101 that required all non-promoter shareholders to participate in a share buy-back was recently upheld by the high court on the basis that the offer to the minority shareholders was fair and equitable.
Uday Walia is a partner at S&R Associates. S&R Associates provides legal services in the areas of M&A, securities laws, financings, foreign direct investment, regulatory matters, general corporate counselling and arbitration and litigation. S&R Associates’ office is located in New Delhi and it currently has 25 lawyers, including five partners.
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