Merger and Acquisition

A

abhishreshthaa

Abhijeet S
MERGER

Merger is defined as a combination of two or more companies into a single company.

Amalgamation

  • This type of merger involves combination of two or more companies, but after merger companies loses their individual identity & a new company comes into existence.

  • e.g: Brooke Bond India Ltd. with Lipton India ltd. resulted in the formation of a new company,Brooke Bond Lipton India ltd.

Absorption:

  • This type of merger involves combination of a small company with a large company. after the merger, the smaller company ceases to exist.

  • e.g: The merger of HDFC bank & TIMES bank. after merger, Times bank ceased to exist while the HDFC bank continued.


Types of merger

  • Vertical

  • Horizontal

  • Circular

  • Conglomerate

  • Reverse



Motives for Mergers

  • Expansion & Growth.

  • Entry into New Market.

  • Diversification.

  • Surplus Liquidity.

  • Tax Benefits.


M & A Process

  • Development of business plan.

  • Building the acquisition plan.

  • Search process.

  • Screen and priorities potential candidates

  • First contact

  • Negotiations

  • Due diligence

  • Developing the financing plan.

  • Closing.


Legal procedures


  • Review of the MOA & AOA of the Merging Companies. In particular, it should be checked whether:-
  • Power to merge exists. If such power is not there, amendment of the memorandum to include such powers should be made.


  • Objects of the transferee company includes power to carry on the businesses of the transferor company. If not, the objects of the transferee company should be amended.

  • Any restrictions existing under the AOA requiring any special procedure to be followed or approvals to be obtained.



Legal procedures


  • Intimation to stock exchanges

  • Approval of draft amalgamation proposal

  • Application to the high court

  • Dispatch of notice to shareholders and creditors

  • Holding of meeting

  • Petition to the courts for confirmation and passing of court orders

  • Filing the order with the registrar

  • Transfer of assets and liabilities

  • Issue of shares and debentures

  • Reasons for failure of M&A

  • Payment of high price

  • Failure to integrate operations

  • Poor business fit

  • Inadequate due diligence

  • Over leverage

  • Boardroom split



TAKE OVER

Take-over of a company would mean acquisition of controlling interest in it in the form of voting shares and usually replacing the top management in the process.


Acquirer

An acquirer means any individual/company/any other legal entity which intends to acquire or acquires substantial quantity of shares or voting rights of target company or acquires or agrees to acquire control over the target company.


It includes persons acting in concert (PAC) with the acquirer.


Target Company


A Target Company is a company whose shares are listed on any stock exchange and whose shares or voting rights are acquired/being acquired or whose control is taken over/being taken over by an acquirer.


Public Announcement

A public announcement is an announcement made in the newspapers by the acquirer primarily disclosing his intention to acquire shares of the target company from existing shareholders by means of an open offer.


Persons Acting in Concert


  • PACs are individual(s) /company(ies)/ any other legal entity(ies) who are acting together for a common objective or for a purpose of substantial acquisition of shares or voting rights or gaining control over the target company pursuant to an agreement or understanding whether formal or informal.


  • Mutual Funds with sponsors, and/or trustee, and/or investment management companies.


  • Foreign Institutional Investors (FIIs).
  • Portfolio Managers with their client(s) as acquirer.

  • Merchant Bankers with their clients as acquirer.



  • Disclosure of shareholding & control in a listed company

  • In case of person holding more than 5% shares shall disclosed within 2 month to the co.

  • Every co.shall within 2 month disclose to stock exchanges the share holding pattern

  • Promoter having control over co. shall disclose within 2 months, the no. & % of shares held by him to the co.


Acquisition of 5% & more on voting rights

  • Acquirer acquiring more than 5% of voting rights shall disclose to co. within 4 days of
  • Receipt of intimation of allotment
  • Acquisition of shares
  • Every co. within 7 days disclose to stock exchanges the list of no. of shares held by each such persons.



Continual disclosures


  • Every person who holds more than 15% shares shall 21 days from F. Y. March 31st disclosed to the co. his holdings.

  • Promoter within 21 days from F. Y. March 31st disclosed the no. & % of shares to the co.

  • Every co. within 30 days make yearly discloser to the stock exchange the changes in respect of the holdings.


Takeover Code 2002
  • Creeping Acquisition limit reduced to 5% w.e.f. Oct. 2002.

  • Any indirect acquisition of over 15% would trigger an open offer.

  • For determining the offer price, in addition to the existing 26 week criteria, the weekly average price of two weeks preceding the date of public announcement should also be taken.

  • Public announcement for global acquisition can be made within 3 mths from the date of acquisitions.

  • Automatic exemption granted to preferential allotment removed.

  • Concession given for acquirers to hold a stake 75% or above removed.

  • Disclosures at 5%, 10%, 14% and any 2% change over 15% levels are required to be made to the Target Company and stock exchange.

  • Shares holders allowed to withdraw tendered offer up to 3 days prior to closure of the offer.


  • Exemptions from the Takeover Code

  • allotment in pursuance of an application made to a public issue.

  • allotment pursuant to an application made by the shareholder for rights issue,

  • subject to such rights issue not resulting in change in control and management of the company;

  • preferential allotment of shares, subject to the condition that at least 75% of the shareholders of the company shall have approved the preferential allotment and that sufficient disclosures relating to the post-allotment shareholding pattern, offer price etc., have been made to the shareholders;

  • allotment to the underwriters pursuant to any underwriting agreement;

  • issue of American Depository Receipts and Global Depository Receipts or Foreign Currency Convertible Bonds, till such time as they are not converted into equity shares;

  • shares held by banks and financial institutions by way of security against loans

  • when there is a change in control and management of the company, the Takeover Code would still not apply if at least 51% of the shareholders of the company have approved the acquisition by the acquirer after being made aware that such acquisition would result in change in control and management.

  • Events requiring making of an Open Offer

  • Acquisition of or intention to acquire 15% or more shares.

  • Acquisition of or intention to acquire more than 5% shares in any period of 1 year by an acquirer holding between 15% and 75% shares.

  • Acquisition of or intention to acquire even a single share when the acquirer holds more than 75% shares.


Acquisitions exempt from the requirement of making an Open Offer


  • shares acquired through an amalgamation.

  • acquisition of assets of a company

  • inter se transfer amongst relatives and group companies.

  • Inter se transfer amongst promoters subject to certain conditions.

  • acquisition of shares through a preferential allotment.

  • acquisition of shares of an unlisted company unless this does not result in a change in control of a listed company.



Requirement of Escrow Account


  • It is in the interest of shareholders and serves as a good check on the acquirers, it needs careful consideration.
  • For consideration payable under Public Offer,

  • upto and including Rs.100 crores - 25%;

  • exceeding Rs.100 crores - 25% upto Rs.100 crores and 10% thereafter.

  • For offers which are subject to a minimum level of acceptance, and the acquirer does not want to acquire a minimum of 20%, then 50% of the consideration payable under the public offer in cash shall be deposited in the escrow amount.

  • The escrow account shall consist of, cash deposited with a scheduled commercial bank ; or
  • bank guarantee in favour of the merchant banker; or deposit of acceptable securities with appropriate margin, with the merchant banker; or cash, deposited with a scheduled commercial bank where drawal power is with Merchant Banker

  • It is in the interest of the shareholders and even of the company since creation of an escrow account discourages frivolous bids.

  • However, since the escrow account has to be created even before making of the announcement and has to be retained at least till the closure of the offer, it means blocking of funds entailing additional cost.



Withdrawal of Offer

  • No Public Offer, once made, can be withdrawn except for the following circumstances

  • the withdrawal is consequent upon any competetive bid the statutory approval(s) required are refused

  • the sole acquirer, being a natural person, has died such circumstances as in the opinion of SEBI merits withdrawal

  • In the event of withdrawal the acquirer or the Merchant Banker have to make a Public Announcement of the same in Newspapers in which the Offer Announcement was published with the reasons for withdrawal. Also SEBI, Target Company and Stock Exchanges need to be informed.



Upward Revision of the Offer

  • Irrespective of whether or not there is a Competitive Bid, the acquirer can make upward revisions in his offer in respect of the Price & No. of Shares to be Acquired at any time but 7 Days prior to the Closure of Offer.

  • Public Announcement in respect of Changes or amendments needs to be made in the newspaper in which original announcement was made. Also SEBI, Target Company and Stock Exchanges need to be informed.
  • Also the value of escrow account provided has to be increased.


Time Table for Takeovers

  • D-Day - 4 : Within 4 days of the acquirer deciding to acquire or enter into agreement to acquire or conversion of GDRs, into underlying shares, must make a Public Announcement.

  • D-Day - 2 : File copy of Public Announcement with SEBI, at least 2 days prior to Public Announcement.
  • Prior to the D-Day : Open an Escrow Account

  • D-Day: Public Announcement / Date of Offer

  • D-Day + 14 : Draft Letter of Offer must be filed with SEBI and be sent to the Target Company & each of the Stock Exchanges where shares of Target company are listed.

  • D-Day + 21 : Competitive Bid must be made.

  • D-Day + 30 : Specified Date. Offer must be made to Registered Share Holders on the Specified Date.

  • D-Day + 35 : Public Announcement for Revised Offer must be made within 14 days from Competitive Bid (i.e. (D-Day + 21) + 14 = D-Day + 35)

  • D-Day + 35 : Dispatch the Letter of Offer to Shareholders not earlier than 21 days of the Draft Letter of Offer being filed with SEBI.
  • (i.e. (D-Day + 14) + 21 = D-Day + 35)

  • D-Day + 37 : The Target Company must furnish the Acquirer within 7 Days of request of Acquirer or within 7 Days from the Specified Date whichever is earlier, a List of Shareholders, etc of persons whose application for Registration of Transfer of Shares is pending with the Target Company. (i.e. (D-Day + 30) + 7 = D-Day + 37)

  • D-Day + 45 : Letter of Offer must reach all Shareholders.

  • D-Day + 60 : The Date of Opening of Offer cannot be more than 60 Days and less than 30 Days.

  • D-Day + 83 : Revision to Offer by original Acquirer can be made at any time upto 7 Clear Working Days prior to the Date of Closure of the Offer. (i.e. (D-Day + (90) - 7 = D-Day + 83)

  • D-Day + 90 : Date of Closure. Offer must remain open for 30 days. Date of Closure shall be same for all offers, including Competitive Bid.

  • D-Day + 180 : If Public shareholding in Target Company falls to below 10% within 3 months from Date of Closure of Public Offer, the Acquirer must make an Offer to buy the outstanding shares remaining with the Shareholders at the same Offer Price. This may result in Delisting of the Company.

  • D-Day + 360 : Undertake an Offer to Disinvest through an Offer for Sale or by a fresh issue of Capital to the Public, which shall open within a period of 6 months (180 Days) from the Date of Closure of Public Offer, such number of Shares that will bring the Public Shareholding in the Company to minimum 25% or more than the voting capital of the Target Company.

  • D-Day + 120 : Acquirer must complete all procedures relating to the offer within a period of 30 Days from the Closure Date (i.e. (D-Day + 90) + 30 = D-Day + 120)
 
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