CORPORATE RESTRUCTURING – TAKEOVERS

 

TAKEOVERS

When an “acquirer” takes over the control of the “target company”, it is termed as takeover. Takeovers usually take place when shares are acquired or purchased from the shareholders of accompany at a specified price to be extent of at least controlling interest in order to gain control of that company. Takeover implies acquisition of control of accompany, which is already registered, through the purchase or exchange of shares. Those companies whose shares are under quoted on the stock market are under quoted on the stock market are under a constant threat of takeover.

 

 

Kinds of Takeover    

1.Friendly takeovers

Before a bidder makes an offer for another company, it usually first informs the company's board of directors. In an ideal world, if the board feels that accepting the offer serves shareholders better than rejecting it, it recommends the offer be accepted by the shareholders.

In a private company, because the shareholders and the board are usually the same people or closely connected with one another, private acquisitions are usually friendly. If the shareholders agree to sell the company, then the board is usually of the same mind or sufficiently under the orders of the equity shareholders to cooperate with the bidder.

 

2.Hostile takeovers

A hostile takeover allows a suitor to take over a target company whose management is unwilling to agree to a merger or takeover. A takeover is considered "hostile" if the target company's board rejects the offer, but the bidder continues to pursue it, or the bidder makes the offer directly after having announced its firm intention to make an offer.

 

3. Reverse takeovers (Bail out Takeover)

 Takeover of a financially weak company not being a sick industrial company by a profit earning company to bail out the former is known as Bail out Takeover.

 A reverse takeover is a type of takeover where a private company acquires a public company. This is usually done at the instigation of the larger, private company, the purpose being for the private company to effectively float itself while avoiding some of the expense and time involved in a conventional IPO.

 

Objects of Takeover

  1.    To effect savings in overheads and other working expenses on the strength of combined resources.

  2.    To achieve product development

  3.    To diversify through acquiring companies with new product lines.

  4.    To improve productivity and profitability by joint efforts of technical and other personnel of both the companies.

  5.    To create shareholder value and wealth by optimum utilization of both companies resources

  6.    To eliminate competition.

  7.    To keep hostile takeover at bay.

  8.    To achieve economy of numbers by mass production at economical costs.

  9.    To secure advantage of vertical combination

 10.   To secure substantial facilities

 11.   To increase market share.

 12.   To achieve market development by acquiring one or more companies in new geographical territories or segments.

 

Takeover Bids

A type of corporate action in which an acquiring company makes an offer to the target company's shareholders to buy the target company's shares in order to gain control of the business. Takeover bids can either be friendly or hostile.

 

Consideration for Takeover –

 1. Consideration in the form of cash – Cash could be paid in exchange for the shares acquired. Shares could be acquired through a bid made directly to the equity holders or through the stock market.

 2. Consideration in the form of shares – In this method, consideration is paid by issuing to the shareholders of the target company the shares of the acquirer company. In exchange for such shares the acquirer company will purchase the shares of the target company. It includes Share for share takeover bid in which the offeror company in exchange for shares of offeree provides fully paid up shares on a stated basis or Reverse Bid and Combination of various modes.

3. Acquisition through a new company – A new company may be formed by acquiring shares in target companies and the shares of the new company may be issued to the shareholders of both the target companies, in consideration for acquisition for acquisition of shares capital or undertakings in whole or in part.

4. Acquisition of minority held shares of a company – The offeror, if already holds 50% or more of issue capital in the offeree company can plan to acquire the balance equity of the offeree subject to applicable legal compliances.

 

Legal Aspects of Takeover –

The provisions of Section 395 of the Companies Act lay down legal requirements for purpose of takeover of an unlisted company through transfer of undertaking to another company. The takeover of a listed company is regulated by Clause 40A and 40B of the Listing Agreement.

Where a scheme or contract involving the transfer of shares of the transferor company  to the transferee company within four months after the making of the offer in that behalf by the transferee company, been approved by the holders of not less than nine-­tenths in value of the shares whose transfer is involved (other than shares already held at the date of the offer by, or by a nominee for, the transferee company or its subsidiary), the transferee company may, at any time within two months after the expiry of the said four months, give notice in the prescribed manner to any dissenting shareholder, that it desires to acquire his shares; and when such a notice is given, the transferee company shall, unless, on an application made by the dissenting shareholder within one month from the date on which the notice was given, the Tribunal thinks fit to order otherwise, be entitled and bound to acquire those shares on the terms on which, under the scheme or contract, the shares of the approving shareholders are to be transferred to the transferee company.

 

 

Checkpoint for Takeover

Transferor Company:

1. The offer of a Transferee Company to acquire shares of a Transferor company should be received from the transferee company.
2. It should have been duly approved by the Board of Directors at a duly convened and held meeting.
3. Offer received from the transferee company along with other documents, particulars, etc. should have been circulated to members of the company.
4. The consent letter must be filed with the registrar of companies before issuing to the members of the company.
5. The scheme of contract for transfer of shares of the company to the transferee company has been approved by the shareholders of not less than 9/10^th in value of shares within the stipulated period of four months. If proviso to Sub – section (1) of Section 395 is attracted, the number of such approving shareholders should comprise of not less than three-fourths in number of the holders of those shares sought to be transferred.
6. Comply with any order of the Tribunal if any dissenting shareholders had approached the Tribunal against the transfer and if the Tribunal passed any order contrary to the proposed transfer.
7. The transferee company should have been registered as holder of the transferred shares and the consideration received for the shares has been deposited in a separate bank account to be held in trust for the dissenting shareholders.

 

Transferee Company:

1. Offer made to the transferor company.
2. Copy of notice for the general meeting along with a copy of E- form circulated by the transferor company to its members.
3. Intimation received from the transferor company in respect of approval of the offer by the requisite majority of the shareholders of the company.
4. Notice as prescribed in Section 395 of the Companies Act, 1956 given by the company to dissenting shareholders of the transferor company for the purpose of acquiring their shares.
5. If there is any Tribunal order in favour of the dissenting shareholders of the transferor company, terms of the same has been compiled with.
6. If sub section (2) of Section 395 is attracted, the company must ensure that the prescribed notice has been sent to those shareholders of the transferor company who have not assented to the transfer of the shares and that such shareholders have agreed to transfer their shares to the company.

To ensure that a copy of the notice has been sent to the dissenting shareholders of the Transferor Company and duly executed instrument(s) of the transfer together with the value of the shares have been sent to the transferor company.

 

Financial and Accounting Aspects of Takeover -  

 1.    Holding company’s books of account – If the consideration for the acquired shares has been paid in cash only, the Cash Account will be credited and the Investments Account will be debited.

If only paid shares have been allotted by the acquiring company to the shareholders of the target company, whose shares have been acquired, in exchange for their shares, then the Share Capital Account will be credited and the Investments Account will be debited.

After the consideration has been paid partly in cash and partly in the form of fully paid shares, then for the cash portion, Cash Account will be credited and the Investment Account will be debited and for the fully paid shares portion. Share Capital Account will be credited and the Investment Account will be debited.

Besides, the books of account, the acquiring or the holding company shall also maintain a Register of Investment in accordance with the provisions of Section 372A(5) of the Companies Act.

 2.    Subsidiary company’s books of account - There will be no accounting entry in the books of account of the subsidiary company or Target Company.

However, in the register of members of the subsidiary company, the transfer of shares of the shareholders, whose shares have been acquired by the holding company, shall be registered as soon as the relevant instruments of transfer along with the relevant share certificates have been received and the registration of their transfer. The share certificates shall be sent to the holding company after making due endorsement of the transfer under the authentication of the authorized signatory of the subsidiary company.

 

 

Anti – Takeover Amendments or “Shark Repellants”

An increasing used defense mechanism is anti – takeover amendments to the company’s constitution or articles of association, popularly called “Shark Repellants” The practice consist of the companies changing the articles, regulation, bye- laws, etc. to be less attractive to the corporate bidder.

 Anti-takeover amendments generally impose new conditions on the transfer of managerial control of the firm through a merger, tender offer, or by replacement of the Board of Directors.

 

Types of Anti – Takeover Amendments

 1.    Supermajority Amendments require shareholders’ approval by at least two votes and sometimes as such as 90% of the voting power of outstanding capital stock for all transactions involving change of control.

2.     Fair – Price Amendments are supermajority provisions with a board out clause and an additional clause waiving the supermajority requirement if a fair – price is paid for the purchase of all the shares. The fair price is normally defined as the highest priced paid by the bidder during a specified period. Thus, fair price amendments defend against two –tier tender offers that are not approved by the target’s board.

3.     Classified Boards – Another major type of anti – takeover amendments provides for a staggered, or classified, Board of Directors to delay effective transfer and control in a takeover.

4.     Authorization of Preferred Stock – The Board of Directors is authorized to create a new class of securities with special voting rights. This security, typically preferred stock, may be issued to a friendly party in a control contest. Thus, this device is a defense against hostile takeover bids, although historically it was used to provide the Board of Directors with flexibility in financing under changing economic conditions.

 

Refusal to Register Transfer of Shares

Refusal by Board of Directors to register a transfer is an important strategy to avert a takeover.

 

Poison Pill Defenses – It is a popular defense mechanism against hostile takeover bids is the creation of securities called “poison pills”. These pills provide their holders with special rights exercisable only after a period of time following the occurrence of a triggering event such as a tender offer for the control or the accumulation of a specified percentage of target shares.