Current Legal Provisions for M&A

7/29/2019 Current Legal Provisions for M&A

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Current Legal Provisions

for M&A


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Changes in the Legal Environment-1991-2001

amendments to the Monopolies and Restrictive Trade Practices Act 1969 (MRTPAct) in 1991 that dispensed with the need to obtain government approval foreffecting M&A transactions in certain large or dominant undertakings (the testfor dominance was based on the value of assets or the market share);

amendments to the Companies Act 1956 in 1996, providing for the freetransferability of shares, thus reducing the grounds on which the board ofdirectors of a company may refuse to register a transfer of shares;

progressive changes effected in the country's industrial licensing policy basedon the provisions of the Industries (Development and Regulation) Act 1951(ID&R Act) resulting in a reduction in the number of industries requiringlicences to less than 10. The strict licensing regime had resulted in the creationof inefficient and non-viable small industrial units in sectors that were subject tolicensing;

progressive changes effected in the government's foreign direct investment

(FDI) policy since 1991 government approval for FDI is now required only in ahandful of sectors, and in all other sectors a foreign investor can take part inFDI without obtaining approval from any authority, and subject to no limits;

introduction of the Depositories Act 1996 providing for the dematerialization ofshares in listed companies; and

framing of various regulations by the Securities and Exchange Board of India(SEBI), including the SEBI Substantial Acquisition of Shares and Takeovers

Regulations 1997 (Takeover Regulations) that govern substantial acquisitions ofshares in listed companies and takeovers of listed companies.


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Current legal and regulatory frameworkThe Companies Act

Mergers Mergers of companies can be effected only with the prior

approval of a three-quarters majority of the shareholdersof each of the companies participating in the merger,and only as sanctioned by the relevant court. The court,before sanctioning a scheme of merger, will take intoaccount the views of all interested parties, including thecreditors, government and employees.

Under the Companies Act, the transferee in a mergercan only be an Indian company whereas the transferor

can be a foreign company. However, the scheme of theCompanies Act and other applicable legal and regulatoryprovisions would clearly imply that cross border mergersinvolving Indian companies ae not feasible under thecurrent framework.


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Current legal and regulatory frameworkThe Companies Act

Acquisitions There are no provisions in the Companies Act that directly govern

acquisitions. However, there are some restrictions (sections 108A-108I ofthe Companies Act) that relate to the transfer of shares in certaincompanies if such transfers would result in the creation of a dominantundertaking (as defined under the MRTP Act), or an increase in the

dominance of a dominant undertaking, or where the transferor was holdingmore than 10% of the share capital of the company prior to such atransfer. Such transactions require the approval of the central government.

Where the acquirer is a company, and if the shares so acquired are inexcess of specified percentages of the paid-up share capital and freereserves of the acquirer, then the acquisition may only be made following aspecial resolution (special resolutions are resolutions passed by

shareholders holding three-quarters of the share capital who are presentand voting at a meeting) passed by the shareholders of the acquirer. Under sections 409 and 250, the Company Law Board (CLB a quasi-

judicial body constituted by the central government under the CompaniesAct for the administration of company law) may pass orders preventing achange in the board of directors of a company, or restrict transfer of sharesin a company that could prejudicially affect the affairs of a company. Theseare ways in which the existing management of a company may be able toresist a takeover attempt.


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The Takeover Regulations and the ListingAgreement

Mergers The Listing Agreement (an agreement entered into between a company whose shares are

listed on stock exchanges with the stock exchange) requires companies whose shares arelisted on stock exchanges to make relevant and timely disclosure of price-sensitiveinformation. Such information would include any decision taken by the company in relationto mergers.

Acquisitions The provisions of the Takeover Regulations apply in cases involving a substantial

acquisition of shares in a company whose shares are listed on stock exchanges. Further,the Takeover Regulations do not apply in cases like: (i) the allotment of shares in a publicissue of shares; (ii) the preferential allotment of shares made to any person in terms of anauthorization made by the shareholders passing a special resolution; and (iii) inter setransfers amongst Indian promoters and foreign collaborators. In addition, the SEBI maygrant an exemption from the provisions of the Takeover Regulations in certain cases,based on the facts of the case. Under the Takeover Regulations, there are someobligations on the part of the acquirer and the target company.

Obligations to disclose: any person who has acquired more than 5% of the shares orvoting rights in a company must, within four days, disclose this fact to the target companyand the target company must in turn disclose this to the stock exchanges. Every personholding more than 15% of the shares or voting rights must disclose this shareholdingwithin 21 days of the end of March every year, and the target company must in turndisclose this to the stock exchanges. Similar obligations for the target company are alsospecified in the Listing Agreement.

Obligations to make a public offer: no acquirer can acquire more than 15% of theshares or voting rights in a company unless it makes a public offer to acquire a minimum

of 20% of the voting capital of the company. There are detailed provisions in the TakeoverRegulations in relation to the contents of the public offer, specific timelines for thecom letion of various activities and eneral obli ations of the ac uirer.


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Some considerations in planning forM&A

Transaction costs

Mergers Since a scheme of merger will have to be sanctioned by the relevant court, legal costs forcompletion of the proceedings will be relevant.

Acquisitions In cases of acquisition of listed companies, provisions of the Takeover Regulations will have to be

complied with, which includes appointing a merchant banker and making the public offer. Theentire process of making and completing the public offer will have to be completed by theacquirer.

Tax considerations Mergers Complex tax considerations arise with mergers. Various benefits such as an exemption from tax

on capital gains, and allowances of carryforward benefits of unabsorbed expenses and losses arepossible only if the merger satisfies the conditions of being an amalgamation under the IncomeTax Act 1961 (the Income Tax Act does not use the term merger but uses the term"amalgamation". To qualify as an amalgamation, specified conditions have to be satisfied). Oneof the reasons for companies to choose a merger rather than an asset or business acquisitionis to reduce the incidence of stamp duties on the transfer of immovable assets; such dutiesusually range between 4% and 12% in the states where the property is situated. However, someof the states in India have made changes to the applicable stamp duty laws that provide for thestamping of an order of the court in mergers as a conveyance. In such cases, there will be anadditional stamp duty impact, based on the value of shares issued/assets acquired in a merger.

Acquisitions Tax considerations are relatively less in the case of acquisitions, since the major tax impact would

be in the nature of share transfer taxes at the rate of 0.5% of the consideration. From the pointof view of the sellers of shares, any capital gains on the sale of such shares will be subject to taxat a concessive rate (where the shares are held for at least 12 months prior to transfer) and at

normal rates in other cases. In the case of foreign investors, the actual incidence and rates ofduty will depend on the provisions of the applicable double taxation avoidance agreement. Incases of transfer in excess of 49% of the shareholding in certain companies (like clodely held


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Some considerations in planning forM&A

Legal and regulatory approvals

The legal and regulatory approvals required for effecting a M&A transactionare different. A complete and clear understanding of the applicable legaland regulatory framework must be made before a final decision is taken. Insome cases, these considerations determine whether one should go for amerger or an acquisition. For example, the hostile acquisition of an Indiancompany by a foreign one is also practically impossible.

Time considerations

Mergers Mergers can be effected only with the sanction of the court. It takes not

less than 6-9 months from the time of making an application to the courtuntil the final order of sanction is received from the court. Further, courtshave wide powers to effect changes in the scheme of merger. There arefurther uncertainties for example, any interested party such as employeesand the government may raise objections to the scheme, resulting in

further delays in implementing the scheme.Acquisitions In cases of acquisitions, though the timeline specified under the Takeover

Regulations will have to be complied with, completion is after acquisition ofthe initial 15% of shares by the acquirer. Further, since the TakeoverRegulations permit conditional offers, uncertainty as to whether theacquirer may not be able to acquire the minimum number of shares can beovercome.


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Meaning of substantial quantity of shares orvoting rights

(I) For the purpose of disclosures to be made byacquirer(s):(1) 5% or more shares or voting rights:A person who, along with persons acting in concert (PAC), if any,acquires shares or voting rights (which when taken together withhis existing holding) would entitle him to more than 5% or 10% or

14% shares or voting rights oftarget company, is required todisclose the aggregate of his shareholding or voting rights to thetarget companyand the Stock Exchanges where the shares of thetarget company are traded within 2 days of receipt of intimation ofallotment of shares or acquisition of shares.

2) More than 15% shares or voting rights:

An acquirerwho holds more than 15% shares or voting rights of thetarget company, shall within 21 days from the financial year endingMarch 31 make yearly disclosures to the company in respect of hisholdings as on the mentioned date.

The target companyis, in turn, required to pass on such informationto all stock exchanges where the shares oftarget companyarelisted, within 30 days from the financial year ending March 31 aswell as the record date fixed for the purpose of dividend declaration.


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Meaning of substantial quantity of shares orvoting rights

(II) For the purpose of making an open offer by the acquirer(1) 15% shares or voting rights:An acquirer who intends to acquire shares which along with his existing shareholdingwould entitle him to more than 15% voting rights, can acquire such additional sharesonly after making a public announcement (PA) to acquire at least additional 20% ofthe voting capital of the target company from the shareholders through an open offer.

(2) Creeping limit of 5%:An acquirer who is having 15% or more but less than 75% of shares or voting rightsof a target company, can consolidate his holding up to 5% of the voting rights in anyfinancial year ending 31st March. However, any additional acquisition over and above5% can be made only after making a public announcement. However in pursuance ofReg. 7(1A) any purchase or sale aggregating to 2% or more of the share capital ofthe target company are to be disclosed to the Target Company and the StockExchange where the shares of the Target company are listed within 2 days of suchpurchase or sale along with the aggregate shareholding after such acquisition /sale.An acquirer who has made a public offer and seeks to acquire further shares underReg. 11(1) shall not acquire such shares during the period of 6 months from the dateof closure of the public offer at a price higher than the offer price.

(3) Consolidation of holding:An acquirer who is having 75% shares or voting rights of target company, canacquire further shares or voting rights only after making a public announcementspecifying the number of shares to be acquired through open offer from theshareholders of a target company.


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Public Announcement A Public announcement is generally an announcement given in the newspapers by

the acquirer, primarily to disclose his intention to acquire a minimum of 20% of thevoting capital of the target companyfrom the existing shareholders by means of anopen offer.

However, an Acquirer may also make an offer for less than 20% of shares oftargetcompanyin case the acquireris already holding 75% or more of voting rights/shareholding in the target companyand has deposited in the escrow account in casha sum of 50% of the consideration payable under the public offer.

TheAcquireris required to appoint a Merchant Banker registered with SEBI before

making a PA and is also required to make the PA within four working days of theentering into an agreement to acquire shares, which has led to the triggering of thetakeover, through such Merchant Banker.

The other disclosures in this announcement would inter aliainclude: the offer price,

the number of shares to be acquired from the public, the identity of the acquirer, the purposes of acquisition,

the future plans of the acquirer, if any, regarding the target company, the change in control over the target company, if any the procedure to be followed by acquirerin accepting the shares tendered bythe shareholders and the period within which all the formalities pertaining to the offerwould be completed.

The basic objective behind the PA being made is to ensure that the shareholders ofthe target companyare aware of the exit opportunity available to them in case of atakeover / substantial acquisition of shares of the target company. They may, on the

basis of the disclosures contained therein and in the letter of offer, either continuewith the target companyor decide to exit from it.


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Procedure to be followed after the

Public Announcement In pursuance of the provisions of Reg. 18 of the said Regulations, the Acquirer is

required to file a draft Offer Document with SEBI within 14 days of the PA through itsMerchant Banker, along with filing fees of Rs.50,000/- per offer Document (payableby Bankers Cheque / Demand Draft). Along with the draft offer document, theMerchant Banker also has to submit a due diligence certificate as well as certainregistration details .

The filing of the draft offer document is a joint responsibility of both the Acquirer as

well as the Merchant Banker. Thereafter, the acquirerthrough its Merchant Banker sends the offer document as

well as the blank acceptance form within 45 days from the date of PA, to all theshareholders whose names appear in the register of the company on a particulardate.

The offer remains open for 30 days. The shareholders are required to send theirShare certificate(s) / related documents to the Registrar or Merchant Banker asspecified in the PA and offer document.

The acquireris obligated to offer a minimum offer price as is required to be paid byhim to all those shareholders whose shares are accepted under the offer, within 30days from the closure of offer.


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Exemptions

The following transactions are however exempted from making an offer andare not required to be reported to SEBI: allotment to underwriter pursuant to any underwriting agreement; acquisition of shares in ordinary course of business by; Regd. Stock brokers on behalf of clients; Regd. Market makers;

Public financial institutions on their own account; banks & FIs as pledges; Acquisition of shares by way of transmission on succession or byinheritance; acquisition of shares by Govt. companies; acquisition pursuant to a scheme framed under section 18 of SICA1985; of arrangement/ restructuring including amalgamation or merger or

de-merger under any law or Regulation Indian or Foreign; Acquisition of shares in companies whose shares are not listed; However, if by virtue of acquisition of shares of unlisted company, theacquireracquires shares or voting rights (over the limits specified) in thelisted company, acquireris required to make an open offer in accordancewith the Regulations


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Minimum Offer Price and Payments made It is not the duty of SEBI to approve the offer price, however it ensures that all the

relevant parameters are taken in to consideration for fixing the offer price and thatthe justification for the same is disclosed in the offer document. The offer price shallbe the highest of:- Negotiated price under the agreement, which triggered the open offer.- Price paid by the acquirer or PAC with him for acquisition if any, including by wayof public rights/ preferential issue during the 26-week period prior to the date of thePA- Average of weekly high & low of the closing prices of shares as quoted on the

Stock exchanges, where shares of Target company are most frequently traded during26 weeks prior to the date of the Public Announcement

In case the shares oftarget companyare not frequently traded, then the offer priceshall be determined by reliance on the following parameters, viz: the negotiated priceunder the agreement, highest price paid by the acquirer or PAC with him foracquisition if any, including by way of public rights/ preferential issue during the 26-week period prior to the date of the PA and other parameters including return on networth, book value of the shares of the target company, earning per share, price

earning multiple vis a visthe industry average. Acquirersare required to complete the payment of consideration to shareholders who

have accepted the offer within 30 days from the date of closure of the offer. In casethe delay in payment is on account of non-receipt of statutory approvals and if thesame is not due to willful default or neglect on part of the acquirer, the acquirerswould be liable to pay interest to the shareholders for the delayed period inaccordance with Regulations.Acquirer(s) are however not to be made accountablefor postal delays.

If the delay in payment of consideration is not due to the above reasons, it would betreated as a violation of the Regulations.


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Safeguards incorporated so as to ensure that

the Shareholders get their payments Before making the Public Announcement the acquirerhas to create an

escrow account having 25% of total consideration payable under the offerof size Rs. 100 crores (Additional 10% if offer size more than 100 crores).

The Escrow could be in the form of cash deposited with a scheduledcommercial bank, bank guarantee in favor of the Merchant Banker ordeposit of acceptable securities with appropriate margin with the Merchant

Banker. The Merchant Banker is also required to confirm that firm financialarrangements are in place for fulfilling the offer obligations. In case, theacquirerfails to make payment, Merchant Banker has a right to forfeit theescrow account and distribute the proceeds in the following way:

1/3 of amount to target company 1/3 to regional Stock Exchanges, for credit to investor protection fund etc.

1/3 to be distributed on pro ratabasis among the shareholders who haveaccepted the offer.

The Merchant Banker advised by SEBI is required to ensure that therejected documents which are kept in the custody of the Registrar /Merchant Banker are sent back to the shareholder through Registered Post.

Besides forfeiture of escrow account, SEBI can take separate action againstthe acquirerwhich may include prosecution / barring the acquirerfromentering the capital market for a period etc.


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Penalties

The Regulations have laid down the general obligations of the acquirer,target companyand the Merchant Banker. For failure to carry out theseobligations as well as for failure / non-compliance of other provisions of theRegulations, Reg. 45 provides for penalties. Any person violating anyprovisions of the Regulations shall be liable for action in terms of theRegulations and the SEBI Act.

If the acquireror any person acting in concert with him, fails to carry outthe obligations under the Regulations, the entire or part of the sum in theescrow amount shall be liable to be forfeited and the acquireror such aperson shall also be liable for action in terms of the Regulations and theAct.

The board of directors of the target companyfailing to carry out theobligations under the Regulations shall be liable for action in terms of theRegulations and SEBI Act.

The Board may, for failure to carry out the requirements of the Regulationsby an intermediary, initiate action for suspension or cancellation ofregistration of an intermediary holding a certificate of registration undersection 12 of the Act.

Provided that no such certificate of registration shall be suspended or

cancelled unless the procedure specified in the Regulations applicable tosuch intermediary is complied with.


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Penalties

For any mis-statement to the shareholders or for concealment of materialinformation required to be disclosed to the shareholders, the acquirers orthe directors where he acquireris a body corporate, the directors of thetarget company, the merchant banker to the public offer and the merchantbanker engaged by the target companyfor independent advice would beliable for action in terms of the Regulations and the SEBI Act.

The penalties referred to in sub-regulation (1) to (5) may include - criminal prosecution under section 24 of the SEBI Act; monetary penalties under section 15 H of the SEBI Act; directions under the provisions of Section 11B of the SEBI Act. Regulations have laid down the penalties for non-compliance. These

penalties may include forfeiture of the escrow account, directing the personconcerned to sell the shares acquired in violation of the regulations,

directing the person concerned not to further deal in securities, monetarypenalties, prosecution etc., which may even extend to the barring of theacquirerfrom entering and participating in the Capital Market.

Action can also be initiated for suspension, cancellation of registrationagainst an intermediary such as the Merchant Banker to the offer.


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New Take over code

Effective from 22nd October 2011


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INTRODUCTION

The Securities and Exchange Board ofIndia (SEBI) introduced the SEBI(Substantial Acquisition of Shares

and Takeovers) Regulations, 1997("Takeover Code, 1997") to regulatethe acquisition of shares and voting

rights in public listed companies inIndia


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MEANING OF TAKEOVER

a transaction or a series of transactions whereby a person acquirescontrol over the assets of a company, either directly by becomingthe owner of those assets or indirectly by obtaining control of themanagement of the company. Where shares are closely held (i.e. bysmall number of persons), a takeover will generally be effected by

agreement with the holders of the majority of the share capital ofthe company being acquired. Where the shares are held by thepublic generally the take over may be effected:

1) by agreement between the acquirers and the controllers ofthe acquired company.

2) by purchase of shares on the stock exchange.

3) by means of a takeover bid


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APPLICABILITY

APPLICABILITY

direct or indirect acquisition of shares orvoting rights in or control over any targetcompany.


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PREFERENCE SHARES

Takeover code 1997 excluded Preferenceshares from the definition of shares vide2002 amendment.

Now in amendment 2011, the same hasbeen included any security which entitlesthe holder to voting rights


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The Takeover Code, 2011 definesacquisition as directly or indirectly,acquiring or agreeing to acquire shares or

voting rights in, or control over, a targetcompany (Acquisition).


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MAJOR CHANGES

1. The point at which the open offer istriggered has been changed from theearlier 15% to 26%. 2. The size of the

open offer has been increased from 20%to 25%. 3. Non-compete fees which werepaid earlier to promoters is now not

permitted


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Difference between New take overcode and old code

open offer triggerabove 25%

Open offer size

increase to 26% Creeping Acquisition

5% allowed topromoters up to 75%

Scrapping of Noncompete fees topromoters

Open offer triggerabove 15%

Open offer size 20%

Creeping acquisitionallowed 5% forpromoters holdingbetween 15-55%

Non compete fees forpromoters Allowed


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deemed to be acting in concert

Takeover Code, 1997 included a companywith any of its directors, or any personentrusted with the management of the

funds of the company.

Take over code 2011 widensscope tosuch persons as may be entrusted with

the management of the company


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Promoter allowedvoluntary open offerup to 10% to increase

holding 57 days to complete

open offer

Promoter not allowedvoluntary open offer


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Voluntary offer

A concept of voluntary offer hasintroduced in Take over code 2011


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Advantages to investor

Minorities shareholdersget fair share in openoffer

Companies get 51%

holding in the newcompany

Promoters get voluntaryopen offer to increase theholding

Board recommendation

made compulsory foropen offer

Promoters would get Noncompete fees

NO exemption in case ofacquisition from other

competing acquired

Changes of control onlyafter open offer

Frequently traded shares

increase from 5 % to 10% for more realisticpicture


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OFFER SIZE

Take over code 1997 to make an open offer, tooffer for a minimum of 20% of the votingcapital of the Target Company as on expiration

of 15 days after the closure of the public offer. Take over code 2011 an acquirer to place an

offer for at least 26% of the total shares of theTarget Company, as on the 10th working day

from the closure of the tendering period.


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OFFER PERIOD

The Takeover Code, 2011 provides that the offerperiod starts on the date of entering into anagreement to acquire shares, voting rights in, or

control over a Target Company requiring apublic announcement, or the date of the publicannouncement, whichever is earlier and ends onthe date on which the payment of consideration

to shareholders who have accepted the openoffer is made.


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Cost increases for the corporate to take over

If the indirectly acquired target company is a

predominant part of the business or entity beingacquired, the takeover code would treat suchindirect acquisition as a direct acquisition for allpurposes.


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Offer price paid would be highest among 4 prices thatare as follows

negotiated price

volume weighted average price over the last 52 weeksprior to the public announcement

the highest price payable or paid in the last 26 weeksbefore the public announcement,

the volume weighted average price of 60 trading daysprior to the public announcement.


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Differences in US and UK TakeoverLaws: Anti-Takeover Defenses

In the United States, tender offers are regulated under the Williams Act amendmentsto the Securities and Exchange Act of 1934.

That regulation is considered relatively shareholder-friendly. However the treatment of target managers responsibilities in the face of an

unwanted takeover bid is unfriendly to shareholders. Managers of a target company are permitted to use a wide variety of defenses to

keep those bids at bay.

The most remarkable of the defenses is the poison pill or shareholder rights plan,which is designed to dilute a hostile bidders stake massively if the bidder acquiresmore than a specified percentage of target stock usually 1015 percent.

The managers of a company that has both a poison pill and a staggered board ofdirectors have almost complete discretion to resist an unwanted takeover bid.

In contrast, UK takeover regulation has a strikingly shareholder-oriented cast. Themost startling difference comes in the context of takeover defenses.

Unlike their U.S. brethren, UK managers are not permitted to take any frustratingaction without shareholder consent once a takeover bid has materialized. Poison pills are strictly forbidden, as are any other defenses, such as buying or selling

stock to interfere with a bid or agreeing to a lock-up provision with a favored bidder,that would have the effect of impeding target shareholders ability to decide on themerits of a takeover offer.

Differences in US and UK Takeover


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Differences in US and UK TakeoverLaws: Embedded Anti-Takeover

Defenses The no frustrating action principle of the UKs Takeover Code only

becomes relevant when a bid is on the horizon. Thus, managers seeking to entrench themselves theoretically could take

advantage of less stringent ex anteregulation to embed takeoverdefenses well before any bid comes to light.

Such embedded defenses range from the fairly transparent, such as the

issuance of dual-class voting stock, adopting a staggered boardappointment procedure, or the use of golden shares or generous goldenparachute provisions for managers, to the more deeply embedded, such asprovisions in bond issues or licensing agreements that provide foracceleration or termination if there is a change of control.

Yet, other aspects of UK law and practice including rules that preventeffective staggered boards mean that embedded defenses are not

observed on anything like the scale that they are in the United States. To summarize then, U.S. takeover regulation seems significantly lessshareholder-oriented than its UK counterpart, especially in the treatment ofdefensive managerial tactics.


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Differences in US and UK TakeoverLaws: Divergent modes of regulation

U.S. takeover regulation is the domain of courts and regulators. The tender offer itself is regulated principally by the Securities and

Exchange Commission, which assesses compliance with thedisclosure and process rules.

Managers response to a takeover bid, by contrast, is regulatedprimarily by state courts, which usually means Delawares Chanceryjudges and Supreme Court.

When a takeover bidder believes that the targets managers areimproperly resisting its bid, the bidder generally files suit in theDelaware Chancery Court.

The suit argues that the target managers have breached theirfiduciary duties and that the managers should be forced to remove

their defenses so that the takeover can be considered by thetargets shareholders.

The key players in the drama are lawyers and judges.


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Differences in US and UK TakeoverLaws: Divergent modes of regulation

In UK the lawyers largely disappear. When a hostile bidder launchesa takeover effort and believes that the targets managers areinterfering with the bid, the bidder lodges a protest with theTakeover Panel.

Originally housed in the Bank of England, the Takeover Panel is nowlocated in the London Stock Exchange building. The Takeover Panel

which includes representatives from the Stock Exchange, theBank of England, the major merchant banks, and institutionalinvestors administers a set of rules known as the City Code onTakeovers and Mergers.

Both the Panel and the Code were, until very recently, entirely self-regulatory.

Although, as part of the UKs implementation of the EUs TakeoverDirective, they have now been given a statutory underpinning, thishas been designed with the express objective of maintaining thecharacteristic features of the Panels approach, which is based onself-regulation.


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Differences in US and UK TakeoverLaws: Takeover Panel Oversight

First, the Panel addresses takeover issues in real time, imposing little or no delay onthe takeover effort. In contrast, the Delaware courts take weeks and sometimesmonths.

Second, lawyers play relatively little role in Takeover Panel oversight. The Panelsmembers come from the principal shareholder and financial groups, and the staffconsists primarily of business and financial experts rather than lawyers. The moreflexible approach arguably reduces costs; litigation is an expensive way of resolvingdisputes.

Approximately one-third of hostile takeovers in the United States are litigated; incontrast, hostile bids are almost never litigated in the UK, where a significantproportion of the regulatory issues are resolved by no more than a telephone call tothe Panel Executive.

In contrast to the services of litigation lawyers, the Panel does not charge for theissuance of such guidance. Rather, its operations are funded by a fee charged inrelation to formal offers, a small levy paid on significant dealings in shares on the

London Stock Exchange, and by sales of the Takeover Code. Given the differences in the use of litigation, leading U.S. firms with an M&A-oriented

practice generate significantly more revenue per lawyer and profit per partner thando their UK counterparts.

However, diversified shareholders, who stand to participate equally on the winningand losing sides of transactions, would surely prefer to minimize the transaction costsof regulating takeovers.


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Differences in US and UK TakeoverLaws: Takeover Panel Oversight

The final difference between the U.S. and UK modes oftakeover regulation is that the flexibility of the Panelsapproach allows it to adjust its regulatory responsesboth to the particular parties before it and to thechanging dynamics of business within the City of

London. The Code Committee of the Takeover Panel meets

several times a year to discuss the operation of themarket, assess recent developments, and determinewhether any amendments to the Takeover Code are

necessary in response. In contrast, U.S. courts make rules in a way that is

essentially reactive: changes in the marketplace lead tolitigation, following which, the courts pronounce uponacceptable behavior.


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Differences in US and UK TakeoverLaws: Summary

In summary, the U.S. approach gives targetmanagers discretion to defend a bid, whereasthe UK gives the decision to shareholders.

The principal decision-makers in the UnitedStates are Congress and the Delaware courts. Inthe UK, by contrast, informal regulation by theTakeover Panel takes center stage.

While neither approach is clearly superiorsubstantively, the UK process seems quicker,cheaper, and more proactive in response tomarket developments.


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Lessons for Emerging Countries

Reformers have too often assumed that top-down, mandatory regulation,together with the courts, is the only way to regulate corporate transactionsin emerging economies.

But the success of the UKs Takeover Panel suggests that this assumption isseriously flawed. The U.S. approach requires an effective governmentalregulator together with an efficient court system.

In many emerging economies, one or both of those elements are missing.In some, the parties that are most directly affected by corporate regulation large shareholders, banks, and exchanges are located in closeproximity to one another. And they have a direct financial stake in thesuccess of the regulatory framework.

In this context, informal self-regulation might prove more effective than theU.S. combination of formal statutes and courts. The UK strategy will notinvariably be the best, any more than the approach in the United States.

But reformers and lawmakers should keep in mind that there are at leasttwo ways to regulate takeovers, not just one.


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German Takeover Law: Basic Goals

According to the legislative report issued at the adoption of the TakeoverAct, the Act is designed to provide the following:- Guidelines for a fair and orderly takeover process, without promoting orinhibiting takeovers;- An improved distribution of information and increased transparency forsecurity holders and employees affected by a takeover;

- Stronger legal rights for minority shareholders; and- A procedure that meets international standards. The Takeover Act protects both the employees of the target company and

its security holders solely through the disclosure of information and otherforms of transparency.

The Act does not attempt to protect other stakeholders of the targetcompany, nor does it address questions of competition law.

The basic principles of the Takeover Act are those of the City Code: equaltreatment of shareholders, transparency and information; acting in the bestinterest of the target company; a duty to complete the transaction withoutdelay; and the prevention of market manipulation.

k h dd


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German Takeover Law: The BiddingProcess

The bidding process under the Takeover Act is modelled on the City Code and closelytracks the EC Takeover Directive. If a bidder decides to launch a takeover bid, he must provide notice thereof to the

markets pursuant to 10 of the Act. This sets the clock ticking. Within four weeks after this notice, the bidder must provide the Federal Agency for

the Supervision of Financial Services (Bundesanstalt fur Finanzdienstleistungsaufsicht-BaFin) in Frankfurt am Main with an offer document ( 14(1) Takeover Act).

BaFin checks the offer document to make sure it contains the information required by 11(2) of the Takeover Act and the provisions of the Takeover Act Bid Regulation, aswell as for any primafacie violations of the Takeover Act.

If BaFin either approves the bid or fails to refuse it within ten working days, thebidder must publish the offer documents and promptly thereafter provide themanagement board of the target company with a copy ( 14(2) and (4), TakeoverAct).

Pursuant to 27 of the Takeover Act, the management and supervisory boards of

the target company have to issue a reasoned comment {begriindete Stellungnahme)on the bid. The acceptance period also begins with the publication of the offer document, and

may not be less than four weeks or longer than ten weeks ( 16(1) Takeover Act).During the course of the offer, the bidder is required to publish the total number ofsecurities of the target company that he and persons acting in concert with him own( 23(1) Takeover Act).

In the case of a successful takeover bid, the shareholders of the target company who

did not accept the bid have an additional two weeks after the bid's close to accept it( 16(2) Takeover Act).


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Mandatory Bids and Squeeze Outs

In addition, 35 of the Takeover Act provides that any person whoobtains 'control (at least 30 per cent of voting rights, 29(2)) of alisted public company must offer to purchase the remaining sharesat an adequate price.

The necessity of such a mandatory bid provision has been hotlydebated in Germany because German corporate law provides

significant protection to minority shareholders in both de facto andde jure corporate groups. Nevertheless, it is now recognized that mandatory bids are the

European standard and thus cannot be eliminated. At the same time as the Takeover Act went into effect, the Stock

Corporation Act (Aktiengesetz)was amended to allow the squeeze

out of minority shareholders that collectively hold less than five percent of a corporation's capital, and this applies to all stockcorporations, not just those that are listed on a securities exchange.

H il T k bid


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Hostile Takeovers:pre-bidimpediments

Restrictions on the transferability of shares are still possible but not very common inpublic listed companies. Germany has also eliminated most barriers to the exertion ofcontrol in the general meeting.

Voting caps remain in place in only a few companies, for example, Volkswagen AG,and it remains to be seen just how long these will be able to hold out. Maximum andmultiple voting rights were eliminated in 1998.

It should also be noted that one has to acquire 75 per cent of the voting rights of a

German stock corporation in order to exercise complete control over the company,and that non-voting preference shares are still quite widespread. German company law contains immanent barriers to the exertion of control over the

board of directors of a stock corporation. For example, there is the two-tier board inwhich half of the seats in the supervisory board are held by employeerepresentatives.

This is not a takeover-specific problem, but is a general characteristic of Germancompany law that a bidder must consider when deciding whether to acquire a

German company. Neither the two-tier board nor the co-determination framework, however, are

insurmountable barriers to a hostile takeover. Theoretically the Takeover Act allows shareholders' resolutions adopted before a

takeover begins to approve defensive measures that the management board maythen employ in the case of a hostile bid ( 33(2) Takeover Act).

One might think of something like a conditional capital increase without pre-emptiverights that cost of which is to be bome by the bidder.

H til T k t bid


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Hostile Takeovers:post-bidimpediments

33(1) of the Takeover Act generally prohibits the management board of atarget company from taking any actions after publication of the decision tolaunch a bid that could prevent such bid from being successful.

There are exceptions to this general rule. The Takeover Act allows themanagement board to take actions that a prudent and diligent manager ofa company (ordentlicher und gewissenhafter Geschdftsleiter)not affectedby a takeover bid would have taken, and also to search for a 'white knight'

to make a competing bid. The management and supervisory boards still have a duty to act in the best

interests of the company even in the context of a takeover bid. Exactly howthe contours of this exception are laid out is open to debate and has not yetbeen tested in practice.

However, it is safe to say that a management board that adorns itsemployment contracts with change of control clauses triggering 'goldenparachutes', employs a scorched earth defense, or sells the company's'crown jewels' in order to halt a takeover would violate the law and soonreceive a visit from the local public prosecutor.

Permissible tactics would include a Pacman defense and litigation againstthe bidder on theories of regulatory or competition law violations.

Date post:	14-Apr-2018
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