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Takeover Code: Comparative Analysis Between India And The UK

The takeover code 2011 applies to direct or indirect acquisition of shares or voting rights in or control over any target company. It is necessary to have a takeover regulation to protect the rights of not only the stakeholders but the public and those affected by it. it is also necessary for protecting the rights of the target company and to protect them from getting exploited by the offeror company. The economic system of India and the UK is different.

In India, the policies and legislature are more focused on welfare for all along with growth whereas in the UK the focus is more on open market competition and growth of the market. So, this difference is also reflected in the provision for takeover code in the respective countries.

Takeover

The first question which arises is what is takeover? A takeover in lay man’s language means taking control of something. A takeover, in Cambridge Dictionary, has been defined as:
a situation in which a company gets control of another company by buying enough of its shares.[1]

In the words of M.A Weinberg, a takeover is defined as:
a transaction or a series of transactions whereby a person acquires control over the assets of a company, either directly by becoming the owner of those assets or indirectly by obtaining control of the management of the company.[2]

Types of takeovers
Takeovers can be categorised into 4 types:
  1. Agreed/ Friendly takeovers- where the board of the target company is in agreement with the acquirer for the takeover.[3]
  2. Contested/ Hostile takeovers- where the board of the target company is not consulted and a direct offer is given to shareholders without the knowledge of management.
  3. Backflip takeovers- where a bidding company becomes the subsidiary of the target company.
  4. Reverse takeovers- where an unlisted private company buys a listed public company.[4]

Takeovers may also be categorized as
  1. Horizontal: where the parties belong to the same or similar industry
  2. Vertical: where one party is either the customer or the supplier of the other.
  3. Conglomerate: where the parties are involved in different industries and intend to expand or diversify their operations.[5]

Purpose of takeover
A company undergoes takeover with the strategy to enhance the overall business abilities which include increasing market share, access economies of sale, secure better distribution, overcome barriers to entry to target markets, eliminate competition, etc.[6] It increases the overall efficiency and performance of the Company.

Companies also opt for acquisition once they do not have the resources to run the corporate and is facing losses. To safeguard the corporate and assets to travel vainly the corporate sells its shares to avoid losses.

Theorists argue that takeover also acts as an equilibrating process that reallocates ownership of assets and optimum utilization of resources, insofar as more competent management replaces inefficient management, ensuring profit maximisation and thus fostering the speculation of ‘survival of the fittest.[7]

How is a takeover different from a merger?
Takeover and merger are very similar incorporate action. They both make two separate companies into one entity. Nonetheless, there’s a difference between the two. The merger involves the approaching together of two separate companies and forming a single company whose value is more than its parts. On the opposite hand, a takeover or acquisition takes place when an even bigger company takes ownership of a smaller company.

The largest merger within the history was between Vodafone, a UK based company and Mannesmann, a German-owned industrial conglomerate which occurred within the year 2000 and was worth $180 billion.[8]

An example of acquisition or a takeover would be one of the highest takeovers within Indian history which is that of Corus, Europe’s second-largest steel company by Tata steel India’s biggest steel company, for the worth of $12.02 billion making India the 5th largest steel producer.[9]

Moreover, in India, The difference between the terms the merger and acquisition is that acquisition between public companies is governed by SEBI, while the merger is regulated under Sections 230-234 of the Companies Act,2013.

Role Of Takeover Regulation

Regulations for takeovers and acquisitions are necessary so that the method is administered in a well-defined and orderly manner following fairness and transparency. [10] The role however is greatly affected by government policies and regulation. The legislation would be different for countries that are inclined towards the advantage of the stakeholders whereas those supporting the speculation of laissez-faire will provide minimal take over control.

The UK policy seems to be dominated by industrial growth strategy and wants to encourage competition. In India, government intervention has largely to do with the expansion of the economy, and thus favour an investment approach, besides keeping a balance over competition and investor protection. Being a welfare state, India has strong socialist ideologies and there is a greater emphasis on the interest of other stakeholders, like the employees and the community at large.[11]

Takeover Regulations In India

Legislation
In the Companies Act, 2013 under Section 230 sub-section 11 provides that takeover offer shall be as per regulations framed by the Securities and Exchange Board. Based on this Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeover) Regulation, 2011 which is additionally referred to as the Takeover code, are made under the Securities and Exchange Board of India Act, 1992. Various amendments have been taking place in the takeover code since then and one is as recent as in June 2020. Other regulations interrelated with corporate activities include the Code of Civil Procedure, 1908, The Indian Trust Act, 1882, SEBI (Prohibition of Insider Trading) Regulation, 1992 and the Partnership Act, 1932, among others.

Evolution of the takeover code
The evolution of the Takeover Code began with the SEBI Act, 1992 which provided to mandatorily make regulation for the process of acquisition and takeovers. The resultant of this was the takeover Regulation of 1994. In November 1995, SEBI appointed a committee to review the takeover regulation, 1994 under the Chairmanship of Justice P.N Bhagwati. Upon the suggestion of this committee Substantial Acquisition of (Shares and Takeovers) Regulation,1997 was notified on February 20, 1997, repealing the code of 1994.

However, these regulations also turned out to be not enough with the increasing changes and complexities in the takeover market for which another advisory committee, named Takeover Advisory Committee under the Chairmanship of Mr C. Achuthan which was established in September 2009. On the recommendation of this committee, the current Takeover Regulation of 2011 came into effect repealing the 1997 code.[12]

Main provisions in the Indian takeover regulation
The objective of the Indian takeover code is to protect the interest of the small shareholder and making the entire acquisition process fair, equitable and transparent by making the incumbent management of the target company aware of the acquisition and ensure that the process does not distort the security market.

An offer or a bid is when one company makes a general offer to acquire the whole of the shares, or the whole of a class of shares, of another company either for cash, kind or a combination of both.[13] A mandatory offer or mandatory threshold is when a person obligated by law to make such a general offer after a statutory minimum number of shares is acquired. In India, the initial threshold limit was 15% which is now increased to 25% of the voting rights of the Target Company.

Takeover Regulation In UK

Legislation
The Companies Act, 1985 is the chief law governing the affairs of companies operating in the UK. Apart from this law being the chief law, the companies in the UK is also governed by the City Code on Takeovers & mergers, which is a body of rules framed and administered by the panel on Takeovers & Mergers.[14] Other statutes which also touch upon various aspects of corporate takeover activities include the Financial Services and Markets Act, 2000, Criminal Justice Act, 1993, Rules governing Substantial Acquisition of Shares, The Competition Act, 1998 and the Enterprise Act,2002.[15]

Evolution
The City Code on Takeovers and Mergers has been developed since 1968. Following the implementation of the Takeovers Directive (2004/25/EC) (the Directive) through Part 28 of the Companies Act 2006 (the Act), the rules set out in the Code have a statutory basis in relation to the United Kingdom and comply with the relevant requirements of the Directive.[16]

Main features of the takeover regulations
The takeover code in the UK is designed principally to ensure that shareholders in an offeree company are treated fairly and are not denied an opportunity to decide on the merits of a takeover and that shareholders in the offeree company of the same class are affordable equivalent treatment by an offeror.

In the UK the mandatory threshold limit is set at a higher 30%. Therefore, a person cannot acquire shares that entitle him to mote than 30% of the voting rights or, when he holds more than 30% but less than 50 %, shares which increase his percentage of voting rights without making a public offer under the City Code.

Conclusion
Takeovers are one of the key components of the capital markets and are part of the capital markets of the country. A country’s economic growth consists of the development of the capital markets as well. Thus, regulating the takeover code is necessary for the proper economic growth of the country.

Further, it could be observed that the regulations are in congruence with the country’s policy and beliefs. Whereas the UK favours a shareholder-oriented strategy in takeover regulations, the Indian approach seems to be a balance between state control ensuring fairness and value maximization of the stakeholders. Both of the countries discourage the board from adopting frustrating tactic to defeat a takeover bid, however, the diversity and frequency with which takeover defences are employed in the UK are far greater than that in India.

It is as per the economic growth and other legislations and policies related to the market and economy that the takeover code is shaped and is suitable for that particular economy. India’s takeover code is more focused on protecting the labour force and welfare while the UK’s takeover code is more focused on the capital market. It is suitable as in India the companies and industries use more labour-intensive process than that followed in the UK. Therefore, after taking into consideration all the points of the takeover code of both the countries it is difficult to say which one is better.

End-Notes:
  1. https://dictionary.cambridge.org/dictionary/english/takeover
  2. Seksaria, Janhavi, Analysis of the Definition of Control Under the Garb of the Subhkam Case (April 10, 2011). Available at: SSRN: https://ssrn.com/abstract=1809138 or http://dx.doi.org/10.2139/ssrn.1809138
  3. Fiduciary Duties in Takeovers. UK & India Laws: A Comparision, Joy Dey, LLM(ICG&FR) University of Warwick, UK, 2007-2008
  4. Takeovers | Definition, Types - Friendly, Hostile, Reverse, Backflip (efinancemanagement.com)
  5. Joy dey, supra note 15
  6. Takeovers | Business | tutor2u
  7. Michael C. Jensen, Takeovers: Their Causes and Consequences, Journal of Economic Perspectives, 1988 2(1): 21-48
  8. 13 Largest M&A Deals of All Times: Top Acquisition Examples (dealroom.net)
  9. The 10 Biggest Ever Merger & Acquisition Deals In India - iPleaders
  10. What are the Regulations of Takeovers by SEBI? (yourarticlelibrary.com)
  11. Supra 3
  12. Takeover Code Dissected.pdf (nishithdesai.com)
  13. Pennington (1969), at 160.
  14. John Armour & David A. Skeel, Jr., Who Writes the Rules for Hostile Takeovers, and Why?—The Peculiar Divergence of US and UK Takeover Regulation, ECGI Law Working Paper No.73/2006, September 2006. page 2.
[8]
[9]
[10]
[11]
[12]
[13]
[14]
[15] Supra 3
[16] The Takeover Code:: The Takeover Panel

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