Charting The Disclosure Landscape In An Open Offer Process - A Perspective

Amid all the buzz around listed companies and growing frenzy in the capital market, there is a surge in M&A activities in the listed space in India, where open offer process is becoming the nucleus of such transactions. In this article, we intend to highlight some practical nuances of managing an open offer process with a specific focus on compliance with disclosure-related requirements.

Open offer - Triggering of compliances:

A takeover of a listed company is governed by the provisions of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeover) Regulations, 2011, as amended ("SEBI SAST Regulations").

Under the SEBI SAST Regulations, an open offer is triggered when an acquirer, acting individually or along with persons acting in concert with the acquirer ("PACs"), acquires or agrees to acquire, directly or indirectly: (a) 25% or more shares or voting rights in; or (b) control of, a target listed company.

In an open offer, an acquirer has to make an offer to the public shareholders of the target company to purchase shares held them in target company, as per the mechanism and timelines under the SEBI SAST Regulations. Broadly, an open offer process involves four stages: (a) pre-offer filings of offer documents with stock exchanges, the Securities and Exchange Board of India ("SEBI"), and the target company, and advertisements in newspapers; (b) receipt of final comments and approval from the SEBI on the offer documents upon completion of its scrutiny; (c) opening of the open offer, i.e., commencement of tendering period for the public shareholders after issuance of letter of offer; and (d) closing of open offer, i.e., completion of payments to the public shareholders who have tendered their shares in the open offer, and purchase of shares by the acquirer.

Disclosure requirements and challenges:

Once an open offer is triggered, the acquirer has to file, submit, and publish certain offer documents and advertisements such as the: (a) public announcement; (b) detailed public statement; and (c) draft letter of offer, with the stock exchanges, the SEBI, and the target company. In these documents, various disclosures from, and information about, the acquirer (and PACs, if any), the sellers, and the target company, are required to be provided. Further, SEBI may seek additional information from the relevant parties upon scrutiny of the documents.

Certain key details that have to be disclosed pertain to: (a) the acquirer (and PACs, if any), including, shareholding pattern, management, financial information, financial arrangements for the open offer, intermediaries engaged, risk factors, and its experience to operate the target company proposed to be acquired; (b) the sellers and the target company, including, the shareholding pattern, and corporate and financial information; (c) the underlying transaction, including, details of subscription and/ or purchase of shares (including number and price), and the terms and conditions of the underlying transaction; and (d) the open offer, including, the purpose of the offer, offer period, offer size, offer price (including valuation methodology), tendering process, and other conditions pertaining to the open offer.

Navigating disclosure requirements in the open offer can be challenging for the parties, considering that there are various conditions and procedural requirements to be satisfied for the open offer process. Some of these challenges have been highlighted below:

In case the underlying transaction involves multiple stages or layers, determining the trigger date for open offer may be difficult or confusing. This becomes complicated since, once the transaction structure is disclosed in the offer documents, the terms of the underlying transaction cannot be altered until the closure of the open offer process.

Considering that the acquirer has to strictly adhere to the timelines for the open offer process, it may be challenging for the acquirer to co-ordinate with all intermediaries, and other parties to ensure that all documents, disclosures, declarations, and undertakings, are prepared and finalised accurately and timely as per law.

Information access to the acquirer, about the sellers and the target company, may be generally restricted as certain information may not be publicly available. It may be challenging for the acquirer to gather adequate and reliable information and accurately cover the same in the offer documents, as this will involve extensive co-ordination and co-operation between the relevant parties.

The acquirer has to disclose certain commercially sensitive information and data to the public, pertaining to their management and business and operations, and the underlying transaction, and it may be challenging to avoid leakage or unnecessary disclosure of such information.

Practical steps to mitigate the challenges:

The parties, especially the acquirer, may consider adopting proactive steps as discussed below to ensure that the hurdles in respect of disclosure requirements are minimised.

The transaction structure of the underlying transaction should be finalised upfront, by factoring all scenarios, to minimise the trigger points for the open offer. If an underlying transaction involves multiple stages or layers, then, depending on commercial feasibility, the transaction can be structured in a composite manner, to avoid multiple trigger events. The trigger date should be clearly identified, basis the principal transaction and the other transactions (if any) should be inter-linked to the principal transaction.

If the consummation of an underlying transaction requires any approval (statutory or otherwise), the transaction structure should factor in such timelines for obtaining the approvals, since once an open offer is triggered, the acquirer has to strictly adhere to the timelines under the SEBI SAST Regulations.

The acquirer should, in coordination with its advisors and intermediaries, identify and collate all information, data and documents, required to be disclosed in the open offer documents, sufficiently in advance. The acquirer should, in its diligence on the target entity, specifically focus on disclosures required under the SEBI SAST Regulations and obtain necessary undertakings and declarations from the sellers and the target company.

The drafts of open offer documents should be prepared simultaneously with the finalisation of the definitive documents for the underlying transaction, to ensure that any information gaps are identified and resolved well in advance. A consolidated data tracker can be put in place to ensure that the data collation process is streamlined.

The acquirer should take adequate precautions and implement robust internal systems to avoid leakage of commercially sensitive information, including confidential information pertaining to the target company and the underlying transaction, which are not legally required to be disclosed.

The acquirer should maintain a list of permitted representatives and advisors, to whom information are to be disclosed, and ensure non-disclosure agreements are in place with such representatives and advisors. The internal teams of the acquirer and the target company should be aligned to ensure control over data disclosure and access.

Conclusion:

The underlying objective of the SEBI SAST Regulations is to strike a balance between enabling corporate transactions and protecting the interests of public shareholders. While, detailed disclosure requirements pose significant challenges for parties in transactions, these challenges can be effectively addressed through efficient planning, proactive and structured data collation, and seamless coordination amongst the relevant parties and advisors. An organised approach will reduce execution risks and regulatory scrutiny and facilitate an efficient closure of transactions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.