New Rules for Takeover of Unlisted Companies by Vanshika Chauhan at LEXCLIQ

Section 230 of the Companies Act, 2013 (“Companies Act“) sets out the process for a scheme of arrangement between a company and its creditors and shareholders (“Scheme“). Such Schemes have to be approved by the National Company Law Tribunal (“NCLT“).

A Scheme can include a proposal for a merger or a demerger of a company, in which case the procedure in section 232 of the Companies Act would also have to be followed. Can a Scheme provide that a shareholder or any person will acquire the shares of other shareholders of the company? This issue was addressed when the Companies Act was enacted in 2013, and a provision1 was included which permitted a Scheme to include a takeover offer. The rules for such a takeover offer were to be notified. It is on February 3, 2020 that the Government of India notified the said provision and also prescribed rules in this regard by issuing the Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2020 (“Rules“) which amend the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016.

Applicable to unlisted companies:

The new Rules are applicable when a takeover offer is proposed to be made for acquiring shares of an unlisted company.

For listed companies, the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“SEBI Takeover Regulations“) are applicable which sets out the process for a takeover offer of shares of a listed company and, inter alia, requires an acquirer to make an open offer to acquire the shares of the company if the acquirer acquires shares of the company (whether by way of a primary infusion or a secondary acquisition) above a specified percentage.

The new Rules will not apply to any transfer or transmission of shares through a contract, arrangement or succession, as the case may be, or any transfer made in pursuance of any statutory or regulatory requirement. Hence a voluntary arrangement between parties for transfer of shares will continue to be governed by the agreed contractual terms between the parties.

Who can make a takeover offer:

Pursuant to the Rules, a shareholder of a company can make an application to NCLT for a takeover offer only if such shareholder along with any other shareholder holds at least three-fourth of the equity shares carrying voting rights or any securities, such as depository receipts, which entitles the holder thereof to exercise voting rights, in the company.

Thus, a takeover offer can only be made by an existing shareholder, unlike in case of listed companies where an open offer can be made by an acquirer proposing to acquire shares in the company which would entitle the acquirer and persons acting in concert to exercise 25% or more of the voting rights in the company.

What is a takeover offer – deciphering the scope:

‘Takeover offer’ is not specifically defined. However, the Rules provide that a shareholder (satisfying the threshold described above) can file an application for a takeover offer for acquiring any part of the remaining shares of the company. Hence, there seems to be flexibility for the acquiring shareholder regarding the number of additional shares that the shareholder can acquire as well as the shareholders from whom the additional shares can be acquired. However, since the term ‘shares’ has been defined in the Rules as equity shares and any securities carrying voting rights, it seems that a takeover offer cannot be for preference shares or non-voting shares. One can foresee this aspect being closely scrutinized by courts to decide whether the application of the restrictive definition of shares should be limited to calculating the holding of a shareholder who wishes to make a takeover offer or should it even extend to determining what kinds of shares such a shareholder can acquire.

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