Legal aspects of mergers and acquisition Acquisition is the combination of two companies where one corporation is completely absorbed by another corporation. The less important company loses its identity and becomes part of the more important corporation, which retains its identity. It may involve absorption or consolidation. Merger is also defined as amalgamation. Merger is the fusion of two or more existing companies. All assets, liabilities and the stock of one company stand transferred to Transferee Company in consideration of payment in the form of: I) Equity shares in the transferee company, II) Debentures in the transferee company, III) Cash, or IV) A mix of the above mode

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LEGAL & REGULATORY ASPECTS OF MERGERS & ACQUISITION
Subject: Corporate Law
Presented to: Prof. Anant Amdekar
GROUP MEMBERS:
Sr. No. Name Roll No.
1 Suchitra Bhagat MFM-17-02
2 Anamika Chavan MFM-17-04
3 Rohit Chidambaram MFM-17-25
4 Afzal Shah MFM-17-29
5 Jaffar Shaikh MFM-17-31
6 Mansi Veera MFM-17-39

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INTRODUCTION
Acquisition is the combination of two companies whereone corporation is completely
absorbed by another corporation. The less important company loses its identity and
becomes partof the moreimportant corporation, which retains its identity. Itmay
involve absorption or consolidation.
Merger is also defined as amalgamation. Merger is the fusion of two or moreexisting
companies. All assets, liabilities and the stock of one company stand transferred to
TransfereeCompany in consideration of payment in the form of:
I) Equity shares in the transfereecompany,
II) Debentures in the transfereecompany,
III) Cash, or
IV) A mix of the above mode
KEY WORDS
Voluntary Open Offer - a voluntary open offer is an offer made by a person who
himself or through persons acting in concert (PACs), if any, holds 25% or more shares
or voting rights in the target company but less than the maximum permissible non-
public shareholding limit (generally 75%).
The Takeover Regulations provide a distinct regime for acquirers to make Voluntary
Offers to public shareholders. A Voluntary Offer may be made by an existing
shareholder or an acquirer who holds no shares in the target company.
The launch of a Voluntary Offer is subject to the fulfilment of certain conditions.
Therefore, if any acquirer or PACs with such acquirer has acquired any shares or
voting rights of the target company without attracting a Mandatory Tender Offer in
the preceding 52 weeks, then such acquirer will not be permitted to launch a
Voluntary Offer. In addition, an acquirer who has launched a Voluntary Offer is not
permitted to acquire any shares of the target company during the offer period other
than under such tender offer. An acquirer who has launched a Voluntary Offer is also
not permitted to acquire shares of the target company for a period of 6 months after
the completion of the Voluntary Offer, except under another Voluntary Offer. This
does not prohibit the acquirer from launching a competing offer under the Takeover
Regulations.

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Creeping Acquisition - this regulation is meant for allowable acquisitions only for
those who already hold more than 25% shares or voting rights but less than 75%
shares or voting rights in the Target Company. Regulation 3(2) allows the persons
either by themselves or through PAC with them who are holding more than 25% but
less than 75% shares or voting rights in the Target Company to acquire further up to
5% shares or voting rights in the financial year ending 31st March. The allowable
acquisition of 5% is popularly known as 'Creeping Acquisition'.
Mandatory Open Offer / Compulsory Open Offer - in the mandatory open offer, the
acquirer has to give an open offer to the shareholders for acquisition of at least 26%
of the total shares of the Target Company.
Poison Pill - The poison pill technique, sometimes also known as a shareholder rights
plan, is a form of defence against a potential takeover. The Poison Pill is a structural
manoeuvredesigned to thwartattempted takeovers, wherethe target company seeks
to make it less desirable to potential acquirers.
Poison pill tactics may also be employed to soften the blow of a hostile takeover. As
often is the case in hostile acquisitions, the acquiring company will employ abusive
takeover tactics, or use its dominant position to put the target company in a very low
position. In these cases, poison pills may be utilized to force the acquirer into a
position to negotiate, instead of simply forcing acquisition on the target.
E.g. - In 2012 Netflix adopted a Poison Pill (shareholder rights plan) to fend off Karl
Icahn from a hostile takeover. Upon learning that Icahn acquired a 10% stake in the
company, Netflix immediately put on the defensive by swallowing a poison pill. In
doing so, they prevent Icahn from continuing to receive a higher stake in the
company, by making it costlier to do so. Any attempt to buy a large position of
ownership of Netflix without board approval would result in flooding the market with
new shares, making any stake attempt expensive.
Macaroni Defence - companies adopt a macaroni defence by issuing bonds that are
redeemable at a high price in the event of a change in control.
E.g. - Company ‘A’ wants to buy Company ‘B’. Company ‘B’ doesn't want to sell
because in the board's opinion Company ‘A’ makes terrible products and will run the
company's brand into the ground. To thwart the effort, Company ‘B’ issues $10 million
of bonds that are redeemable for 150% of par value if there is a change in control at
Company ‘B’. So, a person who buys a Company ‘B’ bond with a $1,000 face value
would have the right to redeem that bond for $1,500 if Company ‘A’ buys Company
‘B’. Company ‘A’, seeing this redemption as a cost on top of buying Company ‘B’,
backs off the deal.

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Escrow Account – a Merger and Acquisitions (“M&A”) holdback escrow, where a
portion of the purchase price of an acquisition is placed in a third party escrow
account to serve as security for the buyer, is a common element in structuring
business acquisitions, whether the transaction is an asset or stock sale, or a merger.
Both buyers and sellers benefit from holdback escrows. First, a holdback escrow can
serve as a bridge between differing views of value by allowing uncertainties that
might have created a valuation gap to play themselves out over the duration of the
escrow. Second, it allows for specifically targeted risk allocation, by assuring the
buyer access to indemnification payments for post-closing risks ranging from working
capital adjustments, to tax issues, to financial statements representations and
warranties. And third, it can servethe interests of the sellers if the holdback escrow is
negotiated to be the exclusive fund to which buyers can look for breaches of
representations and warranties; thereby creating a “cap” on indemnification liability.
Accordingly, well thought through holdback escrow provisions should be one of the
elements negotiated between buyers and sellers at the outset of a deal, even as early
as the letter of intent stage.
Reverse Merger - a reverse takeover or reverse merger takeover (reverse IPO) is the
acquisition of a public company by a private company so that the privatecompany can
bypass the lengthy and complex process of going public. The transaction typically
requires reorganization of capitalization of the acquiring company. Sometimes,
conversely, the private company is bought by the public listed company through an
asset swap and share issue.
Advantages and disadvantages of Mergers and Acquisition (M&A)
The advantage and disadvantages of merger and acquisition are depending of the new
company’s short term and long-term strategies and efforts. That is because of the
factors like market environment, Variations in business culture, acquirement costs
and changes to financial power surrounding the business captured. So, following are
some advantages and disadvantages of merger and acquisition (M&A) are:
Advantages
- The most common reason for firms to enter into merger and acquisition is to
merge their power and control over the markets.
- Another advantage is Synergy that is the magic power that allow for increased
value efficiencies of the new entity and it takes the shape of returns enrichment
and cost savings.

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- Economies of scale are formed by sharing the resources and services. Union of 2
firm’s leads in overall cost reduction giving a competitive advantage, that is
feasible as a result of raised buying power and longer production runs.
- Decrease of risk using innovative techniques of managing financial risk.
- To become competitive, firms have to be compelled to be peak of technological
developments and their dealing applications. By M&A of a small business with
unique technologies, a large company will retain or grow a competitive edge.
- The biggest advantage is tax benefits. Financial advantages might instigate
mergers and corporations will fully build use of tax- shields, increase monetary
leverage and utilize alternative tax benefits.
Disadvantages
- Loss of experienced workers aside from workers in leadership positions. This kind
of loss inevitably involves loss of business understand and on the other hand that
will be worrying to exchange or will exclusively get replaced at nice value.
- As a result of M&A, employees of the small merging firm may require exhaustive
re-skilling.
- Company will face major difficulties thanks to frictions and internal competition
that may occur among the staff of the united companies. There is conjointly risk of
getting surplus employees in some departments.
- Merging two firms that are doing similar activities may mean duplication and over
capability within the company that may need retrenchments.
- Increasein costs might result if the right management of modification and also the
implementation of the merger and acquisition dealing are delayed.
- The uncertainty with respect to the approval of the merger by proper assurances.
- In many events, the return of the share of the company that caused buyouts of
other company was less than the return of the sector as a whole.
Mergers and acquisitions are two of the most misunderstood words in the business
world. Both terms often refer to the joining of two companies, but there are key
differences involved in when to use them.
A merger occurs when two separate entities combine forces to create a new, joint
organization. Meanwhile, an acquisition refers to the takeover of one entity by
another. Mergers and acquisitions may be completed to expand a company’s reach or
gain market share in an attempt to create shareholder value.

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Types of Mergers
(1) Horizontal merger - two companies that are in direct competition and share the
same product lines and markets i.e. it results in the consolidation of firms that are
direct rivals.
E.g. The formation of Brook Bond Lipton India Ltd. through the merger of Lipton India
and Brook Bond,
Exxon and Mobil (oil and gas corporation),
Ford and Volvo, Volkswagen and Rolls Royce and Lamborghini (Automobile
Companies), etc.
(2) Vertical merger – this type of merger involves a customer and a company or a
supplier and company merger i.e. merger of firms that have actual or potential buyer-
seller relationship
E.g. cricket bat company merging with wood production company,
Disney Pixar (Disney an entertainment company and Pixar an animation film making
company),
Ford Bendix – Ford being an automobile company acquired Bendix who used to
manufacture automotive brake shoes and systems, vacuum tubes, aircraft brakes,
aircraft and automobile fuel control systems, radio, televisions and computers.
(3) Conglomerate merger- generally a merger between companies which do not have
any common business areas or no common relationship of any kind. Consolidated firm
may sell related products or share marketing and distribution channels or production
processes.
On a general analysis, it can be concluded that Horizontal mergers eliminate sellers
and hence reshape the market structure i.e. they have direct impact on seller
concentration whereas vertical and conglomerate mergers do not affect market
structures e.g. the seller concentration directly. They do not have anticompetitive
consequences.
The circumstances and reasons for every merger are different and these
circumstances impact the way the deal is dealt, approached, managed and executed.
However, the success of mergers depends on how well the deal makers can integrate
two companies while maintaining day-to-day operations. Each deal has its own flips
which are influenced by various extraneous factors such as human capital component
and the leadership. Much of it depends on the company’s leadership and the ability to
retain people who are key to company’s ongoing success. It is important, that both
the parties should be clear in their mind as to the motive of such acquisition.
Profits, intellectual property, costumer base are peripheral or central to the acquiring

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company, the motive will determine the risk profile of such M&A. Generally, before
the onset of any deal, due diligence is conducted so as to gauze the risks involved, the
quantum of assets and liabilities that are acquired etc.
E.g. Merger of Walt Disney Company and The American Broadcasting Company.
(4) Inbound Mergers and Acquisitions - an inbound merger or acquisition is a
transaction in which a foreign company merges with or acquires a domestic company.
When the inbound company is in the India and is being acquired by or is merging with
a foreign company, both companies will benefit from experienced legal guidance,
particularly in the arena of compliance with the Securities and Exchange Commission
(SEC) requirements and other government regulations. At the same time, however,
the India government offers incentives for foreign investment in India companies.
E.g. The largest inbound M&A deal by value announced during 2011 was Vodafone's
March 2011 buyout of the Essar Group's stake in mobile phone services firm,
Vodafone Essar, for $5.46 billion. The second largest was the acquisition of Intelenet,
a BPO firm by UK's Serco Group for nearly $630 million.
(5) Outbound Mergers and Acquisitions - in an outbound merger or acquisition, a
domestic company purchases or merges with one in another country. An Indian
company entering into an outbound merger or acquiring a foreign company will
require significant guidance with regard to legal and compliance issues in the other
country, as well as any restrictions, reporting requirements or other regulation the
Indian government places on pre-merger interactions.
Depending upon the target country, India businesses seeking to merge with or acquire
a foreign company may face significant obstacles in the conduct of due diligence.
(6) Friendly Takeover - a "friendly takeover," also called an "acquisition," occurs when
the acquiring company informs the target company's board of directors that it plans
to purchase a controlling interest. The board of directors then votes on the proposed
buyout. If the board believes the stock purchase would benefit the current
stockholders, they vote in favor of the sale. The acquiring company then takes control
of the target company's operations and may or may not choose to keep the target
company's board of directors in place.
(7) Hostile Takeover - a "hostile takeover" happens when the target company's board
of directors votes down the stock sale to the acquiring company. Agents of the
acquiring company then attempt to purchase the target company's stock from other
sources, gain a controlling interest and force out the board members who voted
against the acquisition. When this happens, the acquiring company will aggressively

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go after shares of the target firm, while the target's board of directors prepares to
fight for survival.
(8) Reverse Merger - A reverse takeover or reverse merger takeover (reverse IPO) is
the acquisition of a public company by a private company so that the private company
can bypass the lengthy and complex process of going public. The transaction typically
requires reorganization of capitalization of the acquiring company. Sometimes,
conversely, the private company is bought by the public listed company through an
asset swap and share issue.
E.g. - Hardcastle Restaurant (McDonald's) with Westlife development
Types of Acquisitions
Leverage Buy Out
An acquisition is where one company takes control of another by purchasing its assets
or the majority of its shares. There are five main types of acquisitions:
A leveraged buyout is the acquisition of another company using a significant amount
of borrowed money to meet the cost of acquisition. The assets of the company being
acquired are often used as collateral for the loans, along with the assets of the
acquiring company.
Value creating – Value creating is where a company acquires another company,
improves its performance and then sells it again for a profit.
Consolidating – This is where a company acquires another company to remove
competition from an over-supplied market.
Accelerating –Accelerating is when a larger company acquires a smaller company and
uses its greater resources to accelerate market access for the smaller company’s
products.
Resource acquiring – This is where a company acquires other companies to gain
resources, skills, intellectual property, technologies or market positioning they need,
because it is more cost effective than developing their own.
Speculating – Speculating is when a larger company acquires a smaller company with
a new product, with the aim of cashing in on its future growth potential.
Reasons for LBOs
LBOs are conducted for three main reasons. The first is to take a public company
private; the second is to spin-off a portion of an existing business by selling it; and the
third is to transfer private property, as is the case with a change in small business
ownership. However, it is usually a requirement that the acquired company or entity,
in each scenario, is profitable and growing.

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E.g. In 2007, Blackstone Group purchased Hilton Hotels for $26 billion in an LBO,
financed through $5.5 billion in cash and $20.5 billion in debt.
M&A Strategies
1) Dawn Strategy - during a dawn raid, an investor acquires a substantial number of
shares in a company first thing in the morning, just as the stock market is opening
for business. Becausethe bidding company builds a substantial stake in its target at
the prevailing stock market price, any takeover costs are likely to be significantly
lower than they would have been had the acquiring company made an
announcement of intention prior to acquiring a position in a target.
2) Bear Hug - A bear hug is an offer made by one company to buy the shares of
another for a much higher per-share price than what that company is worth in the
market. A bear hug offer is usually made when there is doubt that the target
company's management or shareholders are willing to sell.
The name "bear hug" reflects the persuasiveness of the offering company's overly
generous offer to the target company. By offering a price far in excess of the target
company's current value, the offering party can usually obtain an agreement. The
target company's management is essentially forced to accept such a generous
offer because it is legally obligated to look out for the best interests of its
shareholders.
A bear hug can be interpreted as a hostile takeover attempt by the company
making the offer, as it is designed to put the target company in a position where it
is unable to refuse being acquired. Unlike some other forms of hostile takeovers, a
bear hug often leaves shareholders in a positive financial situation. The acquiring
company may offer additional incentives to the target company to increase the
likelihood that it will take the offer.
3) Saturday Night Special - A Saturday Night Special is now an obsolete takeover
strategy where one company attempted a takeover of another company by making
a sudden public tender offer, usually over the weekend. This merger and
acquisition (M&A) technique was popular in the early 1970s when the Williams Act
required only seven calendar days between the time that a tender was publicly
announced and its deadline. Catching the target company off guard and over the
weekend, effectively reducing its time for a response, often afforded the acquiring
company an advantage.
Defense Tactics
Crown Jewels - Firms often sell major assets when faced with a takeover threat (Ross
et al. 2005). Instead of publicizing hidden values, the firm should eliminate those

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values. Rather than making the firm beautiful and the firm’s market value high, the
firm should make it seem as ugly, poor and worthless as possible. Crown jewels, that
are the firm’s most valuable assets, rep- resent the largest reason that companies
become takeover targets (Arbel & Woods, 1988, p. Although, a defensive tactic for a
target firm is to sell its most valuable line of business or division, which is referred to
as the crown jewels. Once this business has been divested, the proceeds can be used
to repurchase stock or to pay an extraordinary dividend. Once the crown jewels have
been divested the hostile acquirer may withdraw its bid (Weston,
Pac-Man - This defensive tactic is named after the popular game in which the hunted
becomes the hunter. In the game, and also in real life, the objective is to eat the
attacker to avoid being eaten yourself. This defence is carried out by purchase in the
attacker firm, either in the open marketor through a good offer. If your firm is able to
acquire enough shares, you might be able to secure a position in the attackers’ board
of directors, and therefore gain a valuable inside position or even a vote (Arbel &
Woods, 1988; Weston, Siu & Johnson, 2001). A Pac-Man defence is an extremely
aggressive and rarely used defensive tactic; in this defence, the target company offers
versus and launches its own acquisition attempt on the potential acquirer. An
example of this is if company A begins an unfriendly takeover attempt of company B.
To prevent these advances company B, launch its own acquisition attempt of
company A. This defensive tactic is also effective when the original acquirer is
smaller than the original target company, therefore providing the original target the
opportunity to finance a potential deal. This sort of defence is extremely risky. Ittones
down the antitrust defences that could be offered by the original target company. The
Pac-Man defensive tactic basically suggests that the target company’s board and
management are in favour of the acquisition, but that they disagree about which
company should be in control (Weston, 2001).
Parachutes - Parachutes are employee’s agreements that are triggered when a
change in control takes place (Weston, 2001). Parachutes are guarantees that
incumbent management will receive certain benefits if a firm is taken over and the
executive are fired or their jobs are eliminated (Hanly, 1992). According to Weston
(2001), the purpose is to give the firm’s managers and employees with peace of mind
during acquisition discussions and the changeover. It helps the firm keep key
employees who may feel threatened by a possible acquisition. The manager also gets
help by the parachutes to deal with personal concerns while acting in the best
interest of the stockholder. The present board and management team set up the
parachutes that become effective when a possible acquirer exceeds a particular
percentage of ownership in the firm. Parachutes may be establishing without the
agreement of stockholders and may be annulled in the case of a friendly takeover
(Weston, 2001). Parachutes can comein three differentvariants; the golden, the silver
and a tin parachute. The first mentioned, golden parachute, is designed for the firm’s

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most high-ranking management team, like the top 10 to 30 managers. Under this type
of plan, a substantial lump sum payment is paid to a manager who is ended following
an acquisition Weston, 2001). The presence of golden parachutes is prevention to
hostile takeovers, because such benefits make it more expensive to purchase a firm
(Arbel & Woods, 1988, p 33). The second mention is the silver parachute is a much
wider of protection to a large number of employees and may also include middle
managers. The terms of a silver parachuteoften cover equal to six months or one year
of payment (Weston, 2001). Since the silver parachute is a large number of middle
managers and employees these parachutes cost more than golden parachutes (Arbel
& Woods, 1988) The last variant is a tin parachute may be put into practice, which
covers an even wider circle of employees or even all employees. This program
provides limited payment and may be structured as payment equal to one or two
weeks of payment for every year of service (Weston, 2001). This parachute is broad-
based and are even more effective than silver or gold parachutes in prevent firms in
hostile takeovers (Arbel & Woods, 1988).
Litigation - After a hostile takeover bid has been received, the target company can
challenge the acquisition through litigation. Litigation is started by the target company
based on the antitrust effects of the acquisition, missing material information in
SEC3 filings or other securities law insult. The target sues for a temporary order to
forbid the bidder frompurchasing any moreshares of the target’s stock until the court
has an opportunity to decide on the case (Weston, 2001).
Shark repellent - Any tactic that makes the firm less attractive to a potential
unfriendly offer is called a shark repellent (Ross et al. 2005). Firms that are making a
public offering usually include a range of shark repellent, which are requirements that
intended to guard against hostile takeover attempts. While planned to stop outside
takeovers, shark repellent requirements can also
limit the flexibility of a firm’s shareholders to funding a stop to a buyer or get a
control premium not shared with other stockholders. This is an example of rights
plans, also called poison pills, that makes it harder for a shareholder to sells shares
(Dolbeck, 2004). According to Brealey et al. (2004, p. 602), a firm often will influence
shareholders to agree to shark
repellent, and an example can be that any merger must be approved by a
supermajority of 80 percent of the shares rather than the normal 50 percent.
White Knight - A white knight is an individual or company that acquires a corporation
on the verge of being taken over by an unfriendly bidder/acquirer, otherwise known
as a black knight. Although the target company does not remain independent,
acquisition by a white knight is still preferred to a hostile takeover. Unlike a hostile
takeover, current management typically remains in place in a white knight scenario,
and investors receive better compensation for their shares.

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Antitakeover Charter Amendments
One category of defensive tactics is referred to as antitakeover amendments to a
firm’s corporate charter2 (Weston, 2001, p. 230). According to Ross et al. (2005) the
corporate charter establishes the situations that allow a takeover. Firms frequently
improve corporate charters to make acquisition more difficult. An acquirer does not
necessarily have to gain control of a target firm after acquiring more than 50 percent
of its stocks (Grin blatt & Tit-man, 2002).
An example is supermajority voting amendments that require two-thirds, sometimes
as much as 90%, of the shareholders of record must agree before a change in control
can be put into practice (Grin blatt& Titman, 2002; Ross et al., 2005; Weston, 2001).
Firms can make it more difficult to be acquired by requiring 80% support by the
shareholders (Ross et al., 2005). According to Weston (2001), in most supermajority
voting amendments, the board has the right of decision in the supermajority rule. This
way the board has flexibility to benefit from the supermajority condition in the case of
an unfriendly takeover and to not enforce it in the case of a friendly acquirer.
Repurchase Standstill Agreements
A targeted repurchasemay be arranged by the managers to prevent a takeover effort.
In a targeted repurchase, a firm buys back its own stock from a possible bidder,
typically at a substantial premium. These premiums can be thought of as payments to
possible bidders to delay or stop unfriendly takeover attempts (Ross et al., 2005). The
criticism of this sort of payment, often is an acceptation of a greenmail payment.
According to Weston (2001), a greenmailis a performanceof “paying off” anyonewho
acquires a big block of the company’s stocks and increases threats of acquisition. To
lighten those threats, a company cans imply pay that individual a premium over what
he/she paid when collecting the company’s stock. This sort of technique can be used
in a hostile takeover situation (Weston, 2001). In addition, managers of target firms
may at the same time negotiate standstill agreements, which are contracts where the
bidding firm agrees to limit its assets of another firm. These agreements usually lead
to cancellation of takeover effort, and the message of such agreement has had a
negative effect on stock price (Ross et al., 2005).
Greenmail
As mentioned above, greenmail is a performanceof “paying off” anyone who acquires
a large block of the company’s stock and increases threats of acquisitions (Weston,
2001). In practice, greenmail is about buying back shares at a higher market price in
order to block a hostile takeover (Hanly, 1992). Stock prices generally drop when firms
pay greenmail to large shareholders who are trying to take over the firm (Grinbltt &
Titman, 2002). Greenmail means that shares are repurchased by the target at a price
which makes the bidder happy to agree to leave the target alone. This price does not
always makethe target’s shareholder happy (Brealey& Myers, 1996). However, paying

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greenmail may be a way to prevent the productive with less than desired effects, and
it could also result in other possible acquirers stepping in to receive their greenmail as
well. But on the other hand, it can be a very expensive method (Weston, 2001).
Salient Provisions of SEBI Takeover Code, 2011
The Securities and Exchange Board of India (“SEBI”) had been mulling over reviewing
and amending the existing SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 1997 (“Takeover Code of 1997”) for quite some time now. A Takeover
Regulations Advisory Committee was constituted under the chairmanship of Mr. C.
Achuthan (“Achuthan Committee”) in September 2009 to review the Takeover Code
of 1997 and give its suggestions. The Achuthan Committee provided its suggestions in
its report which was submitted to SEBI in July 2010. After taking into account the
suggestions of the Achuthan Committee and feedback from the interest groups and
general public on such suggestions, the SEBI finally notified the SEBI (Substantial
Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Code of 2011”) on
23 September 2011. The Takeover Code of 2011 will be effective from 22 October
2011.
The Takeover Code of 2011 adheres to the framework and principles of the Takeover
Code of 1997 but the changes it brings about are significant. Some of the most
important amendments are discussed below:
1. Initial threshold limit for triggering of an open offer
Under the Takeover Code of 1997, an acquirer was mandated to make an open offer if
he, alone or through persons acting in concert, were acquiring 15% or more of voting
right in the target company. This threshold of 15% has been increased to 25% under
the Takeover Code of 2011.
Therefore, now the strategic investors, including private equity funds and minority
foreign investors, will be able to increase their shareholding in listed companies up to
24.99% and will have greater say in the management of the company. An acquirer
holding 24.99% shares will have a better chance to block any decision of the company
which requires a special resolution to be passed. The promoters of listed companies
with low shareholding will undoubtedly be concerned about any acquirer miss
utilizing it.
However, at the same time, this will help the listed companies to get more
investments without triggering the open offer requirement as early as 15%, therefore
making the process more attractive and cost effective.
2. Creeping acquisition
The Takeover Code of 1997 recognized creeping acquisition at two levels – from 15%
to 55% and from 55% to the maximum permissible limit of 75%. Acquirers holding
from 15% to 55% shares were allowed to purchase additional shares or voting rights

14. 14
of up to 5% per financial year without making a public announcement of an open
offer. Acquirers holding from 55% to 75% shares were required to make such public
announcement for any additional purchase of shares. However, in the latter case, up
to 5% additional shares could be purchased without making a public announcement if
the acquisition was made through open market purchase on stock exchanges or due
to buyback of shares by the listed company.
The Takeover Code of 2011 makes the position simpler. Now, any acquirer, holding
more 25% or more but less than the maximum permissible limit can purchase
additional shares or voting rights of up to 5% every financial year, without requiring to
make a public announcement for open offer. The Takeover Code of 2011 also lays
down the manner of determination of the quantum of acquisition of such additional
voting rights.
This would be beneficial for the investors as well as the promoters, and more so for
the latter, who can increase their shareholding in the company without necessarily
purchasing shares from the stock market.
3. Indirect acquisition
The Takeover Code of 2011 clearly lays down a structure to deal with indirect
acquisition, an issue which was not adequately dealt with in the earlier version of the
Takeover Code. Simplistically put, it states that any acquisition of shareor control over
a company that would enable a person and persons acting in concert with him to
exercise such percentage of voting rights or control over the company which would
have otherwise necessitated a public announcement for open offer, shall be
considered an indirect acquisition of voting rights or control of the company.
It also states that wherever,
a) The proportionate net asset value of the target company as a percentage of the
consolidated net asset value of the entity or business being acquired;
b) The proportionate sales turnover of the target company as a percentage of the
consolidated sales turnover of the entity or business being acquired; or
c) The proportionatemarket capitalization of the target company as a percentage of
the enterprise value for the entity or business being acquired;
is more than 80% on the basis of the latest audited annual financial statements, such
indirect acquisition shall be regarded as a direct acquisition of the target company and
all the obligations relating to timing, pricing and other compliance requirements for
the open offer would be same as that of a direct acquisition.
4. Voluntary offer
A concept of voluntary offer has been introduced in the Takeover Code of 2011, by
which an acquirer who holds more than 25% but less than the maximum permissible
limit, shall be entitled to voluntarily make a public announcement of an open offer for
acquiring additional shares subject to their aggregate shareholding after completion
of the open offer not exceeding the maximum permissible non-public shareholding.

15. 15
Such voluntary offer would be for acquisition of at least such number of shares as
would entitle the acquirer to exercise an additional 10% of the total shares of the
target company.
This would facilitate the substantial shareholders and promoters to consolidate their
shareholding in a company.
5. Size of the open offer
The Takeover Code of 1997 required an acquirer, obligated to make an open offer, to
offer for a minimum of 20% of the ‘voting capital of the target company’ as on
‘expiration of 15 days after the closureof the public offer’. The Takeover Code of 2011
now mandates an acquirer to place an offer for at least 26% of the ‘total shares of the
target company’, as on the ‘10th working day from the closure of the tendering
period’.
The increase in the size of the open offer from 20% to 26%, along with increase in the
initial threshold from15% to 25%, creates a unique situation under the Takeover Code
of 2011. An acquirer with 15% shareholding and increasing it by another 20% through
an open offer would have only got a 35% shareholding in the target company under
the Takeover Code of 1997. However, now an acquirer with a 25% shareholding and
increasing it by another 26% through the open offer under the Takeover Code of 2011
can accrue 51% shareholding and thereby attain simple majority in the target
company.
These well thought out figures clearly shows the intention of the regulator to
incentivize investors acquiring stakes in a company by giving them an opportunity of
attaining simple majority in a company.
6. Important exemptions from the requirement of open offer
Inter-se transfer – The Takeover Code of 1997 used to recognize inter-se transfer of
shares amongst the following groups –
a) group coming within the definition of group as defined in the Monopolies and
Restrictive Trade Practices Act, 1969
b) Relatives within the meaning of section 6 of the Companies Act, 1956
c) Qualifying Indian promoters and foreign collaborators who are shareholders, etc.
The categorization of such groups has been amended in the Takeover Code of 2011
and transfer between the following qualifying persons has been termed as inter-se
transfer:
a) Immediate relatives
b) Promoters, as evidenced by the shareholding pattern filed by the target company
not less than 3 years prior to the proposed acquisition;
c) A company, its subsidiaries, its holding company, other subsidiaries of such holding
company, persons holding not less than 50% of the equity shares of such company,
etc.

16. 16
d) persons acting in concert for not less than 3 years prior to the proposed acquisition,
and disclosed as such pursuant to filings under the listing agreement.
To avail exemption from the requirements of open offer under the Takeover Code of
2011, the following conditions will have to be fulfilled with respect to an inter-se
transfer:
– If the shares of the target company are frequently traded – the acquisition price
per share shall not be higher by more than 25% of the volume-weighted average
market price for a period of 60 trading days preceding the date of issuance of notice
for such inter-se transfer
– If the shares of the target company are infrequently traded, the acquisition price
shall not be higher by more than 25% of the price determined by taking into account
valuation parameters including, book value, comparable trading multiples, etc.
Rights issue – The Takeover Code of 2011 continues to provide exemption from the
requirement of open offer to increase in shareholding due to rights issue, but subject
to fulfillment of two conditions:
(a) The acquirer cannot renounce its entitlements under such rights issue; and
(b) The price at which rights issue is made cannot be higher than the price of the
target company prior to such rights issue.
Scheme of arrangement – The Takeover Code of 1997 had a blanket exemption on the
requirement of making an open offer during acquisition of shares or control through a
scheme of arrangement or reconstruction. However, the Takeover Code of 2011
makes a distinction between where the target company itself is a transferor or a
transferee company in such a scheme and where the target company itself is not a
party to the scheme but is getting affected nevertheless due to involvement of the
parent shareholders of the target company. In the latter case, exemption from the
requirement of making an open offer would only be provided if
(a) The cash component is 25% or less of the total consideration paid under the
scheme, and
(b) Postrestructuring, the persons holding the entire voting rights before the scheme
will have to continue to hold 33% or more voting rights of the combined entity.
Buyback of shares –The Takeover Code of 1997 did not provide for any exemption for
increase in voting rights of a shareholder dueto buybacks. TheTakeover Code of 2011
however provides for exemption for such increase.
In a situation where the acquirer’s initial shareholding was less than 25% and
exceeded the 25% threshold, thereby necessitating an open offer, as a consequence
of the buyback, The Takeover Code of 2011 provides a period of 90 days during which
the acquirer may dilute his stake below 25% without requiring an open offer.
Whereas, an acquirer’s initial shareholding was more than 25% and the increase in
shareholding due to buyback is beyond the permissible creeping acquisition limit of
5% per financial year, the acquirer can still get an exemption from making an open
offer, subject to the following:

17. 17
(a) Such acquirer had not voted in favor of the resolution authorizing the buy-back of
securities under section 77A of the Companies Act, 1956;
(b) In the case of a shareholder resolution, voting was by way of postal ballot;
(c) The increase in voting rights did not result in an acquisition of control by such
acquirer over the target company
In case the above conditions are not fulfilled, the acquirer may, within 90 days from
the date of increase, dilute his stake so that his voting rights fall below the threshold
which would require an open offer.
7. Other important changes
Following are few other important amendments that have been brought about in the
Takeover Code of 2011:
Definition of ‘share’ – The Takeover Code of 1997 excluded ‘preference shares’ from
the definition of ‘shares’ vide an amendment of 2002. However, this exclusion has
been removed in the Takeover Code of 2011 and therefore now ‘shares’ would
include, without any restriction, any security which entitles the holder to voting rights.
Non-compete fees – As per the Takeover Code of 1997, any payment made to the
promoters of a target company up to a maximum limit of 25% of the offer price was
exempted from being taken into account while calculating the offer price. However,
as per the Takeover Code of 2011, pricepaid for shares of a company shall include any
price for the shares / voting rights / control over the company, whether stated in the
agreement or any incidental agreement, and includes ‘control premium’, ‘non-
compete fees’, etc.
Responsibility of the board of directors and independent directors– The general
obligations of the board of directors of a target company under the Takeover Code of
1997 had given a discretionary option to the board to send their recommendations on
the open offer to the shareholders and for the purpose the board could seek the
opinion of an independent merchant banker or a committee of independent directors.
The Takeover Code of 2011, however, makes it mandatory for the board of directors
of the target company to constitute a committee of independent directors (who are
entitled to seek external professional advice on the same) to provide written
reasoned recommendations on such open offer, which the target company is required
to publish.
Conclusion
The Takeover Code of 2011 is a timely and progressive regulation that would facilitate
investments and attract investors. Even though SEBI has not implemented all the
suggestions of the Achuthan Committee, it has still taken into consideration some of
the major issues that had been plaguing the industry till now. It has tried to maintain a
balance between the concerns of the investors as well as that of the promoters.

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Salient Provisions of the Companies Act, 2013 including Fast Track MergerProvisions
The Companies Act, 2013 (2013 Act) has seen the light of day and replaced the 1956
Act with some sweeping changes including those in relation to mergers and
acquisitions (M&A).
The new Act has been lauded by corporate organizations for its business-friendly
corporate regulations, enhanced disclosure norms and providing protection to
investors and minorities, among other factors, thereby making M&A smooth and
efficient. Its recognition of interse shareholder rights takes the law one step forward
to an investor-friendly regime. The 2013 Act seeks to simplify the overall process of
acquisitions, mergers and restructuring, facilitate domestic and cross-border mergers
and acquisitions, and thereby, make Indian firms relatively more attractive to PE
investors.
The term ‘merger’ is not defined under the Companies Act, 1956 (“CA 1956”), and
under Income Tax Act, 1961 (“ITA”). However, the Companies Act, 2013 (“CA 2013”)
without strictly defining the term explains the concept. A ‘merger’ is a combination of
two or more entities into one; the desired effect being not just the accumulation of
assets and liabilities of the distinct entities, but organization of such entity into one
business.
Fast Track Mergers and Amalgamation
Section 233 of the Companies Act, 2013 (CA 2013) dealing with "Merger or
Amalgamation of Certain Companies" has also come into force with effect from 15th
December, 2016. In contrastto the Companies Act, 1956, this is a new provision under
CA 2013 which deals with out of court/tribunal, fast tracked merger or amalgamation
of certain companies’ subject to conditions prescribed.
The detailed framework and the procedure of the Fast Track mergers and
amalgamation has been provided under Section 233 of CA 2013 read with Rule 25 of
the CAA Rules.
Salient features of Fast Track Mergers/Amalgamations
Applicability
In terms of Section 233(1) of CA 2013, a scheme of merger or amalgamation under the
said provisions may be entered into between:
- two or more small companies
- a holding company & its wholly owned subsidiary company
- other class of prescribed companies

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The approvalof the abovescheme will not require mandatory approvalof NCLT unless
the companies concerned opts for.
Eligibility for compromise or arrangement
The above-mentioned class of companies would also be eligible for out of
Court/Tribunal process of compromise or arrangement in terms of Section 233(12) of
CA 2013. Such compromise or arrangement could be:
between a company and its creditors or any class of them; or
between a company and its members or any class of them.
Conditions
The eligible class of company or companies as mentioned herein above are required
to fulfil the following conditions for Fast Track Mergers & Amalgamations under
Section 233:
To invite objections and suggestions from the ROC and Official Liquidator on the
proposed scheme;
To consider the objections and suggestions, if any;
To file declaration of solvency before the ROC; and
To get the scheme approved by the shareholders and creditors
Necessary Approvals for Fast Track Mergers & Amalgamations
Approvals of the following concerns are required for fast Track Mergers &
Amalgamations:
Shareholders;
Creditors;
The Central Government (powers delegated to Regional Director vide MCA
notification7 dated 19/12/2016);
ROC; and
The Official Liquidator

20. 20
It is pertinent to note that if the ROC and the Official Liquidator concerned does not
have any objections or suggestions to the scheme, the Central Government (Regional
Director) shall register the scheme and issue a confirmation thereof to the companies.
Importance of Due Diligence in success and failure of M&A
What is Due Diligence?
Due diligence is a process of verification, investigation, or audit of a potential deal or
investment opportunity to confirm all facts, financial information, and to verify
anything else that was brought up during an M&A deal or investment process. Due
diligence is completed before a deal closes to provide the buyer with an assurance of
what they’re getting.
Reasons for Due Diligence
There are several reasons why due diligence is conducted:
To confirm and verify information that was brought up during the deal or investment
process
To identify potential defects in the deal or investment opportunity and thus avoid a
bad business transaction
To obtain information that would be useful in valuing the deal
To make sure that the deal or investment opportunity complies with the investment
or deal criteria
Due diligence helps investors and companies understand the nature of a deal, the
risks involved, and whether the deal fits with their portfolio. Essentially, undergoing
due diligence is like doing “homework” on a potential deal and is essential to
informed investment decisions.
Importance of Due Diligence
Transactions that undergo a due diligence process offer higher chances of success.
Due diligence contributes to making informed decisions by enhancing the quality of
information available to decision makers.
Conclusion
In a nutshell the provisions of Section 233 provide a simplified procedure for the
merger & amalgamation including any scheme of compromise & arrangement for
certain specified companies. The modus operandi of this section is no mandatory
approval from NCLT and dissolution of transferor companies without process of
winding up on registration of the scheme for the specified companies. It is a new
provision which was introduced in the Companies Act, 2013 as no such provision was

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there in the previous Companies Act, 1956. This route of Fast Track Merger &
Amalgamation provides extensive relief to such companies from following the
meticulous and complex procedure of merger & amalgamation involving approval of
NCLT. As there are significant interest of third parties and general public in mergers
between holding and its wholly owned subsidiary company, the fast track mergers &
Amalgamation scheme is relevant and a boon for the corporate sector. The small
companies are also get benefitted by saving time and cost as well. The NCLT will also
become less burdened. This is a much-needed step taken by the Government in order
to promote ease of doing business in India and for the overall benefit of the
industries.
CASE STUDY
https://timesofindia.indiatimes.com/deals/-ma/flipkart-completes-ebay-india-
acquisition/articleshow/59857446.cms
https://www.businesstoday.in/current/corporate/flipkart-ebay-india-merger-
snapdeal-kunal-bahl/story/257509.html