TRAC Cracks the Takeover Code

The July 19 Report of the Takeover Regulations Advisory Committee is available here. While the policy implications of the proposed changes are likely to be discussed in great detail over the coming months [for now, see Thakur and this debate], I found the following black-letter changes interesting:

(1) Early Warning Threshold: Acquisitions beyond prescribed thresholds (5%, 10%, 14%, 54%, 74%) set off obligations to make disclosures. Three thresholds in particular, i.e. 5%, 10% and 14%, serve as early warnings against hostile acquirers. The committee’s recommendations make the warnings more prevalent. Their recommendations require that disclosures be made at 5 per cent, and for every acquisition of 2 per cent or more thereafter, i.e. potentially 10 warnings before the 25% trigger is crossed [see Proposed Regulation 28].

(2) Trigger Pushed: A tender offer must mandatorily be made when an acquirer gets to 15% or more. The committee has recommended that this trigger be pushed to 25%, enabling some shareholders like institutional investors to increase their stakes without making an all out tender offer [see Proposed Regulation 3(1)].

(3) Creeping Acquisition: When your shareholding in a corporation is 55% or more, you can’t acquire any additional shares without making a tender offer. The committee has recommended that up to 5% can be acquired in any year without making a tender offer [see Proposed Regulation 3(2)] [Note: this shelter is not available via the new “voluntary offer” route]

(4) Offer Size: The minimum size of the mandatory tender offer is 20%. The committee has recommended that the offer now be made for “all the shares held by all the other shareholders of the target…”, i.e. not exactly for “100%” as commentators have been couching it, but certainly the remaining 75%, assuming the acquirer holds 25% when the tender offer is made [see Proposed Regulation 7(1)].

(5) Alienation of Assets: The acquirer is required to furnish an undertaking that it will not alienate any “substantial asset” of the target without prior shareholder approval. The committee has recommended that the acquirer be permitted to declare its intention to alienate “material assets”. This may potentially increase the acquirer’s ability to finance the acquisition. [see Proposed Regulation 25(2)].

(6) Target Board Defensive Tactics/Obligations: The defensive actions that the target board can take are proposed to be further weakened in the face of hostile overtures: for example, ESOP based poison pills are proposed to be abolished [see Proposed Regulation 26 (f)]. Further, while the target board may today give “unbiased comments” to its shareholders once the tender offer is made, the committee has recommended that the target’s board ought to constitute a committee of independent directors to mandatorily provide recommendations to shareholders [see Proposed Regulation 26(6)-(7)]

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