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The author is Vaidehi Marathe, a third year student at National Law University, Odisha
When RMS Titanic began her maiden voyage on April 15, 1912, many had called her the unsinkable ship. All the infrastructure of the ship was state-of-the-art, the on-route weather was clear and the safety precautions were fairly undertaken. However, due to unforeseen circumstances, the ship sank. Recently, an M&A deal in India figuratively resembled this unfortunate incident.
In November 2022, major newspapers headlined a significant deal between American Investment Mogul Blackstone (Acquirer) and Indian technology company R Systems (Target). This deal was noteworthy, considering the humongous financial resources involved and its novel nature as the first composite offer deal in the history of Indian M&A. However, it failed to meet its idealistic expectations and Blackstone was forced to withdraw its bold move, a lesson served for many.
This article attempts to delve deep into the deal, exploring the origins of the legal provision allowing it. After establishing clarity on the legal provision, this article aims to analyse the failure of this idealistic and novel deal and the lessons that were to be learnt. The last part of the article will comprise an advisory for the existing regime, and what changes it can incorporate to accommodate the composite offer deals envisioned under the Takeover Code.
Examining Regulation 5A of the Takeover Code:
Earlier, if an acquirer (along with Persons Acting in Control, as the case may be) was to seek delisting of a company, it would have to go through the normal procedure provided by the Takeover Code i.e., seek a vote by the board and the shareholders on whether to go ahead with the acquisition, execute the Share Purchase Agreement, announce an open offer for the public shareholders, wait for the tendering process, comply with all the concurrent legal procedures in India and finally close the deal.
After the acquisition process is completed, the acquirer (along with Persons Acting in Control, as the case may be) would have to wait till the end of the cooling-off period and start a fresh delisting process. This entire endeavour would be expensive and time-consuming for the acquirer, as most acquirers, especially those having associations abroad have a strict timeline and urgency to take control.
A relief to this resource-intensive process was brought through an amendment to the Regulations in 2021 where Regulation 5A was added to the Takeover Code to offer flexibility to acquirers by way of a “composite offer”. This would mean that the acquirer can pursue both the acquisition and delisting of the company at the same time. There would be two simultaneous offers given by the Acquirer, an open offer (a traditional offer for the existing shareholders to exit) and a delisting offer (for delisting the company from the stock exchanges by way of tendering shares). The public was then given a choice between either of them, to protect their interests as well. In case the delisting offer failed, the open offer still stood and the acquirer was free to go ahead with it. It was a balancing act considering the divergent interests of the public and the acquirer. It gave a prospective right to the acquirer to delist the company without prior acquisition of shares.
However, to effectuate this provision, Regulation 21 (a) of the Delisting Regulations mandates that the acquirer must be able to obtain the interest of 90% of the issued/paid-up capital of the company through the Share Purchase Agreement and the tendering processes. If this number is not met, then the delisting fails.
A First-of-its-kind Deal:
Even though Regulation 5A was added in 2021, Blackstone (acting through its subsidiary BCP Asia II TOPCO II Pt. Ltd) was the first company to pursue this bold deal through a composite offer, with the offer of acquisition made on 16th November 2022 and the completion of acquisition done by 10th May 2023. Several underlying reasons for this lack of response from the M&A market would be regulatory uncertainty, higher risk, shareholder apprehension, etc (discussed in detail below).
In Financial Year (FY) – 2022, The shareholding pattern of the Target consisted of the Promoters holding 6,11,29,969 shares (51.67% stake), and the public holding 5,71,73,476 shares (48.33% stake). One interesting thing to note is, that amongst the public shareholders, a certain individual who also is a Significant Beneficial Owner held 4,20,38,375 shares (35.53% stake).
The Acquirer first executed an SPA with the promoters which triggered the open offer mechanism under Regulations 3(1) and 4 of the Takeover Code. After publicly announcing the offer, the Acquirer then undertook voting from the shareholders, which came out affirmative with the majority being in favour of delisting the Target. The Regulations provided for two prices for the Acquirer to provide the public shareholders for the composite offer. The first is the price fixed under Regulation 8 of the Takeover Code, and in this case, it was INR 245 per share. The second price is called the indicative price which is given by an acquirer to induce the public shareholders into tendering their shares. To serve its purpose of inducing the public, the indicative price is offered with a premium, which in this case was INR 246 per share (later increased to 262 per share). In case the delisting offer at the indicative price of INR 246 per share fails, the Acquirer may proceed with the open offer at the fixed price of INR 245 per share.
Analysing the Failure
Despite the initial shareholder vote being affirmative for delisting and the Acquirer desperately revising its indicative offer price through corrigenda, the tendering process was a failure. The Acquirer required 38.33% Public shares to reach its target of 90% (as required by the Delisting Regulations). However, the shareholders who tendered their shares under the indicative price were only 11.45%. Since the delisting failed, the public shareholders were given a chance to withdraw their tenders before them being acquired at the fixed price. This resulted in even more fallout, and in the end, the Acquirer was able to acquire only 0.26% of the total issued capital from the public.
There can be several possible reasons for this diminishing public interest:
Firstly, the public shareholders could be waiting for a price inflation in the indicative price. Even though the indicative price entered was revised once, the lack of public participation implied that the shareholders were waiting for the price to inflate even further. Finally, when the corrigendum came which fixed the price to INR 262, they were disappointed and chose not to go ahead with the tender.
Secondly, the repetitive corrigenda led to public distrust or confusion in the company. Seeing the premium component being increased to such a higher price may invoke a sense of commercial suspicion against the Acquirer. Even though revisions to the indicative price are legal and provided for by the SEBI, they cause volatility and uncertainty which affects the decision-making of the shareholders.
Thirdly and most importantly, the shareholders could be awaiting another delisting attempt, as it is beneficial for them. Regulation 5A (6) of the Takeover Code provides for a subsequent delisting attempt, if the maximum non-public shareholding is exceeded by the Acquirer for one year after the initial delisting attempt is unsuccessful. The sub-regulation also provides for the indicative price of the subsequent attempt to be higher than the original delisting indicative price. This provision is beneficial for the shareholders, as the shareholders having adept knowledge of the laws will expect other public shareholders to tender their shares while they await the next attempt for a higher price. If the Significant Beneficial Owner individual (who held around 35% of the Target from the pool of public shareholders) was one of these public shareholders awaiting a subsequent delisting, then it is a hit-and-miss for the Acquirer, since this one individual tendering his shares would mean a significant amount of stakeholding for it.
Concluding Remarks
The reasons mentioned above can be resolved by amending the existing regime and providing deal certainty to the shareholders. The current scheme of SEBI allows for the revisions of price according to the reverse book-building process. If this is amended and the revisions to the offer price/delisting price are restricted, a certain level of price certainty will be achieved. The Consultation paper released by SEBI in August 2023 briefly touched upon this idea. However, the most important solution to shareholder disloyalty (as seen in this case) is to keep the price fixed for both delisting attempts. This would mean that even in the subsequent delisting sought by the company, the indicative price would be the same and the shareholders would have to make their commercial decision in the first delisting attempt itself. A smooth and certain outcome is expected if the regulator adopts such mechanisms.