The Legal Conundrum: Is A New Mandatory Offer Possible During An Existing One? – I

BY TANMAY DONERIA, FOURTH YEAR STUDENT AT RGNUL, PATIALA

This article is published in two parts, this is the Part I of the article.

I. Introduction: Understanding The Context And Conundrum

The Securities and Exchange Board of India (‘SEBI’) implemented the Substantial Acquisition of Shares and Takeover Regulations, 2011 (‘Takeover Regulations’) with the intent to provide exit options for the shareholders of public-listed companies, regulate the acquisition of direct/indirect control in a company and hostile takeovers. These regulations were implemented on the recommendations of the Takeover Regulations Advisory Committee (‘TRAC’). Before delving into the specifics, we need to understand certain provisions.

–       Understanding Key Provisions

Regulation 3(1) of the Takeover Regulations, provides that any acquirer who has breached the threshold of 25% voting rights in a public listed company (also known as the target company) shall make a public announcement for an open offer. This is also known as a “mandatory open offer”. The intent behind this provision is to facilitate/mandate the complete acquisition of the target company or allow the acquirer to gain control of the target company. Furthermore, it also provides an exit option for the shareholders, who are granted an opportunity to sell their shares and exit the target company in case they disagree with the acquirer holding a significant stake in the company. It is to be noted that an acquirer may also announce an open offer even before breaching the requisite threshold or even after completing the mandatory open offer, in order to acquire more shares or voting rights. Such an offer is known as a voluntary open offer in terms of Regulation 6. 

Pursuant to the public announcement due procedure is followed and an open offer is floated in the market. Thereafter, Regulation 20 provides an opportunity for other interested parties to raise competing open offers within 15 days from the date of publication of the open offer. Regulation 20(3), deems any voluntary open offer made within 15 days from the open offer to be a competing offer. The provision for competing offers is beneficial for the shareholders as well as the target company. From the perspective of the shareholders, this process allows them to get the best prices for their shares, and from the perspective of the target company, this allows them to bring in a friendly investor and resist the hostile takeover, also commonly known as the ‘white-knight defence’. Furthermore, to minimize confusion for the shareholders and prevent overlapping or simultaneous open offers in the target company Regulation 20(5), mandates that after the completion of the aforesaid 15 days, no person is “entitled to” make a public announcement for an open offer or “enter into” any transaction that will attract an obligation to make an open offer till the completion of the offer period.

Lastly, during this entire process Regulation 26, restricts the target company from entering any material transactions during the offer period outside the ordinary course of business without obtaining the consent of the shareholders through a special resolution. This ensures that no impediment arises during the acquisition process and the same is successfully completed. But there also exist certain exceptions that allow the target company to honour their obligations that were entered prior to the initiation of the acquisition process. The exception relevant to our discussion is found in Regulation 26(2)(c)(i), which permits the target company to issue or allot shares upon conversion of convertible securities issued prior to the announcement of the open offer. Having understood the legal provisions let us take a look at the problem being created by the interplay of these provisions.

–       Illustration of the Conundrum

Let us consider a situation, where the acquirer (ABC Ltd.), has breached the threshold of 25% of shares of the target company (TC Ltd.) and consequently, published a mandatory open offer under Regulation 3(1) after following the due procedure on 1.10.2024. Now other interested parties have 15 days i.e., time till 16.10.2024 to raise competing offers.

A third party (XYZ Ltd.) holds 23% of shares and certain convertible security, that was purchased a long time ago, entitling them to 3% of shares. Hence, upon conversion XYZ Ltd. will hold 26% of shares of TC Ltd. Herein, we shall consider, two situations i.e., firstly, when the conversion occurs during the period of 15 days, let’s say on 12.10.2024 and secondly, when the conversion occurs after the period of 15 days but before the completion of the offer period, let’s say on 18.10.2024 (more on these two situations later). In both situations, XYZ Ltd. holds more than 25% of shares, making them liable to announce a mandatory open offer under Regulation 3(1).

As noted, earlier Regulation 20 only permits competing offers within the period of 15 days when there is a subsisting open offer. Additionally, Regulation 20(3), only deems voluntary open offers as competing offers i.e., mandatory open offers are not covered within the ambit of this provision. Lastly, Regulation 20(5) specifically prohibits any person from making an open offer after the expiry of the 15 days till the completion of the offer period.

This gives rise to an absurd situation where XYZ Ltd. who is under a statutory obligation (under Regulation 3(1)) to make an open offer cannot fulfil such obligation as at the same time the regulations (under Regulation 20(5)) are themselves barring them from making an open offer. In other words, XYZ Ltd. is being statutorily barred from fulfilling a statutory obligation. Such a situation gives rise to multiple questions such as- is the third party liable to make an open offer, if it does not make an open offer will there be penalties for non-compliance and what are the possible recourses with the third party in such a situation?