Current Legal Provisions for M&A

Changes in the Legal Environment1991-2001

amendments to the Monopolies and Restrictive Trade Practices Act 1969 (MRTP Act) in 1991 that dispensed with the need to obtain government approval for effecting M&A transactions in certain large or dominant undertakings (the test for dominance was based on the value of assets or the market share); amendments to the Companies Act 1956 in 1996, providing for the free transferability of shares, thus reducing the grounds on which the board of directors of a company may refuse to register a transfer of shares; progressive changes effected in the country's industrial licensing policy based on the provisions of the Industries (Development and Regulation) Act 1951 (ID&R Act) resulting in a reduction in the number of industries requiring licences to less than 10. The strict licensing regime had resulted in the creation of inefficient and non-viable small industrial units in sectors that were subject to licensing; progressive changes effected in the government's foreign direct investment (FDI) policy since 1991 government approval for FDI is now required only in a handful of sectors, and in all other sectors a foreign investor can take part in FDI without obtaining approval from any authority, and subject to no limits; introduction of the Depositories Act 1996 providing for the dematerialization of shares in listed companies; and framing of various regulations by the Securities and Exchange Board of India (SEBI), including the SEBI Substantial Acquisition of Shares and Takeovers Regulations 1997 (Takeover Regulations) that govern substantial acquisitions of shares in listed companies and takeovers of listed companies.

Current legal and regulatory framework

The Companies Act

Mergers Mergers of companies can be effected only with the prior approval of a three-quarters majority of the shareholders of each of the companies participating in the merger, and only as sanctioned by the relevant court. The court, before sanctioning a scheme of merger, will take into account the views of all interested parties, including the creditors, government and employees. Under the Companies Act, the transferee in a merger can only be an Indian company whereas the transferor can be a foreign company. However, the scheme of the Companies Act and other applicable legal and regulatory provisions would clearly imply that cross border mergers involving Indian companies ae not feasible under the current framework.

Current legal and regulatory framework

The Companies Act

Acquisitions There are no provisions in the Companies Act that directly govern acquisitions. However, there are some restrictions (sections 108A-108I of the Companies Act) that relate to the transfer of shares in certain companies if such transfers would result in the creation of a dominant undertaking (as defined under the MRTP Act), or an increase in the dominance of a dominant undertaking, or where the transferor was holding more than 10% of the share capital of the company prior to such a transfer. Such transactions require the approval of the central government. Where the acquirer is a company, and if the shares so acquired are in excess of specified percentages of the paid-up share capital and free reserves of the acquirer, then the acquisition may only be made following a special resolution (special resolutions are resolutions passed by shareholders holding three-quarters of the share capital who are present and voting at a meeting) passed by the shareholders of the acquirer. Under sections 409 and 250, the Company Law Board (CLB a quasijudicial body constituted by the central government under the Companies Act for the administration of company law) may pass orders preventing a change in the board of directors of a company, or restrict transfer of shares in a company that could prejudicially affect the affairs of a company. These are ways in which the existing management of a company may be able to resist a takeover attempt.

The Takeover Regulations and the Listing Agreement

Mergers The Listing Agreement (an agreement entered into between a company whose shares are listed on stock exchanges with the stock exchange) requires companies whose shares are listed on stock exchanges to make relevant and timely disclosure of price-sensitive information. Such information would include any decision taken by the company in relation to mergers. Acquisitions The provisions of the Takeover Regulations apply in cases involving a substantial acquisition of shares in a company whose shares are listed on stock exchanges. Further, the Takeover Regulations do not apply in cases like: (i) the allotment of shares in a public issue of shares; (ii) the preferential allotment of shares made to any person in terms of an authorization made by the shareholders passing a special resolution; and (iii) inter se transfers amongst Indian promoters and foreign collaborators. In addition, the SEBI may grant an exemption from the provisions of the Takeover Regulations in certain cases, based on the facts of the case. Under the Takeover Regulations, there are some obligations on the part of the acquirer and the target company. Obligations to disclose: any person who has acquired more than 5% of the shares or voting rights in a company must, within four days, disclose this fact to the target company and the target company must in turn disclose this to the stock exchanges. Every person holding more than 15% of the shares or voting rights must disclose this shareholding within 21 days of the end of March every year, and the target company must in turn disclose this to the stock exchanges. Similar obligations for the target company are also specified in the Listing Agreement. Obligations to make a public offer: no acquirer can acquire more than 15% of the shares or voting rights in a company unless it makes a public offer to acquire a minimum of 20% of the voting capital of the company. There are detailed provisions in the Takeover Regulations in relation to the contents of the public offer, specific timelines for the completion of various activities, and general obligations of the acquirer.

Some considerations in planning for M&A Transaction costs

Mergers Since a scheme of merger will have to be sanctioned by the relevant court, legal costs for completion of the proceedings will be relevant. Acquisitions In cases of acquisition of listed companies, provisions of the Takeover Regulations will have to be complied with, which includes appointing a merchant banker and making the public offer. The entire process of making and completing the public offer will have to be completed by the acquirer.

Tax considerations

Mergers Complex tax considerations arise with mergers. Various benefits such as an exemption from tax on capital gains, and allowances of carryforward benefits of unabsorbed expenses and losses are possible only if the merger satisfies the conditions of being an amalgamation under the Income Tax Act 1961 (the Income Tax Act does not use the term merger but uses the term "amalgamation". To qualify as an amalgamation, specified conditions have to be satisfied). One of the reasons for companies to choose a merger rather than an asset or business acquisition is to reduce the incidence of stamp duties on the transfer of immovable assets; such duties usually range between 4% and 12% in the states where the property is situated. However, some of the states in India have made changes to the applicable stamp duty laws that provide for the stamping of an order of the court in mergers as a conveyance. In such cases, there will be an additional stamp duty impact, based on the value of shares issued/assets acquired in a merger. Acquisitions Tax considerations are relatively less in the case of acquisitions, since the major tax impact would be in the nature of share transfer taxes at the rate of 0.5% of the consideration. From the point of view of the sellers of shares, any capital gains on the sale of such shares will be subject to tax at a concessive rate (where the shares are held for at least 12 months prior to transfer) and at normal rates in other cases. In the case of foreign investors, the actual incidence and rates of duty will depend on the provisions of the applicable double taxation avoidance agreement. In cases of transfer in excess of 49% of the shareholding in certain companies (like clodely held

Some considerations in planning for M&A Legal and regulatory approvals

Time considerations

The legal and regulatory approvals required for effecting a M&A transaction are different. A complete and clear understanding of the applicable legal and regulatory framework must be made before a final decision is taken. In some cases, these considerations determine whether one should go for a merger or an acquisition. For example, the hostile acquisition of an Indian company by a foreign one is also practically impossible.

Mergers Mergers can be effected only with the sanction of the court. It takes not less than 6-9 months from the time of making an application to the court until the final order of sanction is received from the court. Further, courts have wide powers to effect changes in the scheme of merger. There are further uncertainties for example, any interested party such as employees and the government may raise objections to the scheme, resulting in further delays in implementing the scheme. Acquisitions In cases of acquisitions, though the timeline specified under the Takeover Regulations will have to be complied with, completion is after acquisition of the initial 15% of shares by the acquirer. Further, since the Takeover Regulations permit conditional offers, uncertainty as to whether the acquirer may not be able to acquire the minimum number of shares can be overcome.

Securities Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (Regulations) as amended in 2002.

The concept of Takeover-Although, the term Takeover has not been defined under the said Regulations, the term basically envisages the concept of an acquirer taking over the control or management of the target company. When an acquirer, acquires substantial quantity of shares or voting rights of the target company, it results in the Substantial acquisition of Shares.

Meaning of substantial quantity of shares or voting rights

(I) For the purpose of disclosures to be made by acquirer(s):

(1) 5% or more shares or voting rights: A person who, along with persons acting in concert (PAC), if any,
acquires shares or voting rights (which when taken together with his existing holding) would entitle him to more than 5% or 10% or 14% shares or voting rights of target company, is required to disclose the aggregate of his shareholding or voting rights to the target company and the Stock Exchanges where the shares of the target company are traded within 2 days of receipt of intimation of allotment of shares or acquisition of shares.

2) More than 15% shares or voting rights: An acquirer who holds more than 15% shares or voting rights of the target company, shall within 21 days from the financial year ending

March 31 make yearly disclosures to the company in respect of his holdings as on the mentioned date. The target company is, in turn, required to pass on such information to all stock exchanges where the shares of target company are listed, within 30 days from the financial year ending March 31 as well as the record date fixed for the purpose of dividend declaration.

Meaning of substantial quantity of shares or voting rights

(II) For the purpose of making an open offer by the acquirer (1) 15% shares or voting rights: An acquirer who intends to acquire shares which along with his existing shareholding would entitle him to more than 15% voting rights, can acquire such additional shares only after making a public announcement (PA) to acquire at least additional 20% of the voting capital of the target company from the shareholders through an open offer . (2) Creeping limit of 5%: An acquirer who is having 15% or more but less than 75% of shares or voting rights of a target company, can consolidate his holding up to 5% of the voting rights in any financial year ending 31st March. However, any additional acquisition over and above 5% can be made only after making a public announcement. However in pursuance of Reg. 7(1A) any purchase or sale aggregating to 2% or more of the share capital of the target company are to be disclosed to the Target Company and the Stock Exchange where the shares of the Target company are listed within 2 days of such purchase or sale along with the aggregate shareholding after such acquisition /sale. An acquirer who has made a public offer and seeks to acquire further shares under Reg. 11(1) shall not acquire such shares during the period of 6 months from the date of closure of the public offer at a price higher than the offer price. (3) Consolidation of holding: An acquirer who is having 75% shares or voting rights of target company, can acquire further shares or voting rights only after making a public announcement specifying the number of shares to be acquired through open offer from the shareholders of a target company.

Public Announcement

A Public announcement is generally an announcement given in the newspapers by the acquirer, primarily to disclose his intention to acquire a minimum of 20% of the voting capital of the target company from the existing shareholders by means of an open offer. However, an Acquirer may also make an offer for less than 20% of shares of target company in case the acquirer is already holding 75% or more of voting rights/ shareholding in the target company and has deposited in the escrow account in cash a sum of 50% of the consideration payable under the public offer. The Acquirer is required to appoint a Merchant Banker registered with SEBI before making a PA and is also required to make the PA within four working days of the entering into an agreement to acquire shares, which has led to the triggering of the takeover, through such Merchant Banker. The other disclosures in this announcement would inter alia include: the offer price, the number of shares to be acquired from the public, the identity of the acquirer, the purposes of acquisition, the future plans of the acquirer, if any, regarding the target company, the change in control over the target company, if any the procedure to be followed by acquirer in accepting the shares tendered by the shareholders and the period within which all the formalities pertaining to the offer would be completed. The basic objective behind the PA being made is to ensure that the shareholders of the target company are aware of the exit opportunity available to them in case of a takeover / substantial acquisition of shares of the target company. They may, on the basis of the disclosures contained therein and in the letter of offer, either continue with the target company or decide to exit from it.

Procedure to be followed after the Public Announcement

In pursuance of the provisions of Reg. 18 of the said Regulations, the Acquirer is required to file a draft Offer Document with SEBI within 14 days of the PA through its Merchant Banker, along with filing fees of Rs.50,000/- per offer Document (payable by Bankers Cheque / Demand Draft). Along with the draft offer document, the Merchant Banker also has to submit a due diligence certificate as well as certain registration details . The filing of the draft offer document is a joint responsibility of both the Acquirer as well as the Merchant Banker. Thereafter, the acquirer through its Merchant Banker sends the offer document as well as the blank acceptance form within 45 days from the date of PA, to all the shareholders whose names appear in the register of the company on a particular date. The offer remains open for 30 days. The shareholders are required to send their Share certificate(s) / related documents to the Registrar or Merchant Banker as specified in the PA and offer document. The acquirer is obligated to offer a minimum offer price as is required to be paid by him to all those shareholders whose shares are accepted under the offer, within 30 days from the closure of offer.

Exemptions

The following transactions are however exempted from making an offer and are not required to be reported to SEBI: allotment to underwriter pursuant to any underwriting agreement; acquisition of shares in ordinary course of business by; Regd. Stock brokers on behalf of clients; Regd. Market makers; Public financial institutions on their own account; banks & FIs as pledges; Acquisition of shares by way of transmission on succession or by inheritance; acquisition of shares by Govt. companies; acquisition pursuant to a scheme framed under section 18 of SICA 1985; of arrangement/ restructuring including amalgamation or merger or de-merger under any law or Regulation Indian or Foreign; Acquisition of shares in companies whose shares are not listed; However, if by virtue of acquisition of shares of unlisted company, the acquirer acquires shares or voting rights (over the limits specified) in the listed company, acquirer is required to make an open offer in accordance with the Regulations

Minimum Offer Price and Payments made

It is not the duty of SEBI to approve the offer price, however it ensures that all the relevant parameters are taken in to consideration for fixing the offer price and that the justification for the same is disclosed in the offer document. The offer price shall be the highest of: Negotiated price under the agreement, which triggered the open offer. Price paid by the acquirer or PAC with him for acquisition if any, including by way of public rights/ preferential issue during the 26-week period prior to the date of the PA Average of weekly high & low of the closing prices of shares as quoted on the Stock exchanges, where shares of Target company are most frequently traded during 26 weeks prior to the date of the Public Announcement In case the shares of target company are not frequently traded, then the offer price shall be determined by reliance on the following parameters, viz: the negotiated price under the agreement, highest price paid by the acquirer or PAC with him for acquisition if any, including by way of public rights/ preferential issue during the 26week period prior to the date of the PA and other parameters including return on net worth, book value of the shares of the target company, earning per share, price earning multiple vis a vis the industry average. Acquirers are required to complete the payment of consideration to shareholders who have accepted the offer within 30 days from the date of closure of the offer. In case the delay in payment is on account of non-receipt of statutory approvals and if the same is not due to willful default or neglect on part of the acquirer, the acquirers would be liable to pay interest to the shareholders for the delayed period in accordance with Regulations. Acquirer(s) are however not to be made accountable for postal delays. If the delay in payment of consideration is not due to the above reasons, it would be treated as a violation of the Regulations.

Safeguards incorporated so as to ensure that the Shareholders get their payments

Before making the Public Announcement the acquirer has to create an escrow account having 25% of total consideration payable under the offer of size Rs. 100 crores (Additional 10% if offer size more than 100 crores). The Escrow could be in the form of cash deposited with a scheduled commercial bank, bank guarantee in favor of the Merchant Banker or deposit of acceptable securities with appropriate margin with the Merchant Banker. The Merchant Banker is also required to confirm that firm financial arrangements are in place for fulfilling the offer obligations. In case, the acquirer fails to make payment, Merchant Banker has a right to forfeit the escrow account and distribute the proceeds in the following way: 1/3 of amount to target company 1/3 to regional Stock Exchanges, for credit to investor protection fund etc. 1/3 to be distributed on pro rata basis among the shareholders who have accepted the offer. The Merchant Banker advised by SEBI is required to ensure that the rejected documents which are kept in the custody of the Registrar / Merchant Banker are sent back to the shareholder through Registered Post. Besides forfeiture of escrow account, SEBI can take separate action against the acquirer which may include prosecution / barring the acquirer from entering the capital market for a period etc.

Penalties

The Regulations have laid down the general obligations of the acquirer, target company and the Merchant Banker. For failure to carry out these obligations as well as for failure / non-compliance of other provisions of the Regulations, Reg. 45 provides for penalties. Any person violating any provisions of the Regulations shall be liable for action in terms of the Regulations and the SEBI Act. If the acquirer or any person acting in concert with him, fails to carry out the obligations under the Regulations, the entire or part of the sum in the escrow amount shall be liable to be forfeited and the acquirer or such a person shall also be liable for action in terms of the Regulations and the Act. The board of directors of the target company failing to carry out the obligations under the Regulations shall be liable for action in terms of the Regulations and SEBI Act. The Board may, for failure to carry out the requirements of the Regulations by an intermediary, initiate action for suspension or cancellation of registration of an intermediary holding a certificate of registration under section 12 of the Act. Provided that no such certificate of registration shall be suspended or cancelled unless the procedure specified in the Regulations applicable to such intermediary is complied with.

Penalties

For any mis-statement to the shareholders or for concealment of material information required to be disclosed to the shareholders, the acquirers or the directors where he acquirer is a body corporate, the directors of the target company, the merchant banker to the public offer and the merchant banker engaged by the target company for independent advice would be liable for action in terms of the Regulations and the SEBI Act. The penalties referred to in sub-regulation (1) to (5) may include criminal prosecution under section 24 of the SEBI Act; monetary penalties under section 15 H of the SEBI Act; directions under the provisions of Section 11B of the SEBI Act. Regulations have laid down the penalties for non-compliance. These penalties may include forfeiture of the escrow account, directing the person concerned to sell the shares acquired in violation of the regulations, directing the person concerned not to further deal in securities, monetary penalties, prosecution etc., which may even extend to the barring of the acquirer from entering and participating in the Capital Market. Action can also be initiated for suspension, cancellation of registration against an intermediary such as the Merchant Banker to the offer.

New Take over code

Effective from 22nd October 2011

INTRODUCTION

The Securities and Exchange Board of India (SEBI) introduced the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 ("Takeover Code, 1997") to regulate the acquisition of shares and voting rights in public listed companies in India

MEANING OF TAKEOVER

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. Where shares are closely held (i.e. by small number of persons), a takeover will generally be effected by agreement with the holders of the majority of the share capital of the company being acquired. Where the shares are held by the public generally the take over may be effected: 1) by agreement between the acquirers and the controllers of the acquired company. 2) by purchase of shares on the stock exchange. 3) by means of a takeover bid

APPLICABILITY
APPLICABILITY direct or indirect acquisition of shares or voting rights in or control over any target company.

PREFERENCE SHARES
Takeover code 1997 excluded Preference shares from the definition of shares vide 2002 amendment. Now in amendment 2011, the same has been included any security which entitles the holder to voting rights

The Takeover Code, 2011 defines acquisition as directly or indirectly, acquiring or agreeing to acquire shares or voting rights in, or control over, a target company (Acquisition).

MAJOR CHANGES

1. The point at which the open offer is triggered has been changed from the earlier 15% to 26%. 2. The size of the open offer has been increased from 20% to 25%. 3. Non-compete fees which were paid earlier to promoters is now not permitted

Difference between New take over code and old code

open offer trigger above 25% Open offer size increase to 26% Creeping Acquisition 5% allowed to promoters up to 75% Scrapping of Non compete fees to promoters

Open offer trigger above 15% Open offer size 20% Creeping acquisition allowed 5% for promoters holding between 15-55% Non compete fees for promoters Allowed

deemed to be acting in concert

funds of the company. Take over code 2011 widens scope to

Takeover Code, 1997 included a company with any of its directors, or any person entrusted with the management of the

such persons as may be entrusted with the management of the company

Promoter allowed voluntary open offer up to 10% to increase holding 57 days to complete open offer

Promoter not allowed voluntary open offer

Voluntary offer

A concept of voluntary offer has introduced in Take over code 2011

Advantages to investor

Minorities shareholders get fair share in open offer Companies get 51% holding in the new company Promoters get voluntary open offer to increase the holding Board recommendation made compulsory for open offer

Promoters would get Non compete fees NO exemption in case of acquisition from other competing acquired Changes of control only after open offer Frequently traded shares increase from 5 % to 10 % for more realistic picture

OFFER SIZE
Take over code 1997 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 closure of the public offer. Take over code 2011 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.

OFFER PERIOD

The Takeover Code, 2011 provides that the offer period starts on the date of entering into an agreement to acquire shares, voting rights in, or control over a Target Company requiring a public announcement, or the date of the public announcement, whichever is earlier and ends on the date on which the payment of consideration to shareholders who have accepted the open offer is made.

Cost increases for the corporate to take over If the indirectly acquired target company is a predominant part of the business or entity being acquired, the takeover code would treat such indirect acquisition as a direct acquisition for all purposes.

Offer price paid would be highest among 4 prices that are as follows negotiated price volume weighted average price over the last 52 weeks prior to the public announcement the highest price payable or paid in the last 26 weeks before the public announcement, the volume weighted average price of 60 trading days prior to the public announcement.

Differences in US and UK Takeover Laws: Anti-Takeover Defenses

In the United States, tender offers are regulated under the Williams Act amendments to the Securities and Exchange Act of 1934. That regulation is considered relatively shareholder-friendly. However the treatment of target managers responsibilities in the face of an unwanted takeover bid is unfriendly to shareholders. Managers of a target company are permitted to use a wide variety of defenses to keep those bids at bay. The most remarkable of the defenses is the poison pill or shareholder rights plan, which is designed to dilute a hostile bidders stake massively if the bidder acquires more than a specified percentage of target stock usually 1015 percent. The managers of a company that has both a poison pill and a staggered board of directors have almost complete discretion to resist an unwanted takeover bid. In contrast, UK takeover regulation has a strikingly shareholder-oriented cast. The most startling difference comes in the context of takeover defenses. Unlike their U.S. brethren, UK managers are not permitted to take any frustrating action without shareholder consent once a takeover bid has materialized. Poison pills are strictly forbidden, as are any other defenses, such as buying or selling stock to interfere with a bid or agreeing to a lock-up provision with a favored bidder, that would have the effect of impeding target shareholders ability to decide on the merits of a takeover offer.

The no frustrating action principle of the UKs Takeover Code only becomes relevant when a bid is on the horizon. Thus, managers seeking to entrench themselves theoretically could take advantage of less stringent ex ante regulation to embed takeover defenses well before any bid comes to light. Such embedded defenses range from the fairly transparent, such as the issuance of dual-class voting stock, adopting a staggered board appointment procedure, or the use of golden shares or generous golden parachute provisions for managers, to the more deeply embedded, such as provisions in bond issues or licensing agreements that provide for acceleration or termination if there is a change of control. Yet, other aspects of UK law and practice including rules that prevent effective staggered boards mean that embedded defenses are not observed on anything like the scale that they are in the United States. To summarize then, U.S. takeover regulation seems significantly less shareholder-oriented than its UK counterpart, especially in the treatment of defensive managerial tactics.

Differences in US and UK Takeover Laws: Embedded Anti-Takeover Defenses

The Result

Differences in US and UK Takeover Laws: Divergent modes of regulation

U.S. takeover regulation is the domain of courts and regulators. The tender offer itself is regulated principally by the Securities and Exchange Commission, which assesses compliance with the disclosure and process rules. Managers response to a takeover bid, by contrast, is regulated primarily by state courts, which usually means Delawares Chancery judges and Supreme Court. When a takeover bidder believes that the targets managers are improperly resisting its bid, the bidder generally files suit in the Delaware Chancery Court. The suit argues that the target managers have breached their fiduciary duties and that the managers should be forced to remove their defenses so that the takeover can be considered by the targets shareholders. The key players in the drama are lawyers and judges.

Differences in US and UK Takeover Laws: Divergent modes of regulation

In UK the lawyers largely disappear. When a hostile bidder launches a takeover effort and believes that the targets managers are interfering with the bid, the bidder lodges a protest with the Takeover Panel. Originally housed in the Bank of England, the Takeover Panel is now located in the London Stock Exchange building. The Takeover Panel which includes representatives from the Stock Exchange, the Bank of England, the major merchant banks, and institutional investors administers a set of rules known as the City Code on Takeovers and Mergers. Both the Panel and the Code were, until very recently, entirely selfregulatory. Although, as part of the UKs implementation of the EUs Takeover Directive, they have now been given a statutory underpinning, this has been designed with the express objective of maintaining the characteristic features of the Panels approach, which is based on self-regulation.

Differences in US and UK Takeover Laws: Takeover Panel Oversight

First, the Panel addresses takeover issues in real time, imposing little or no delay on the takeover effort. In contrast, the Delaware courts take weeks and sometimes months. Second, lawyers play relatively little role in Takeover Panel oversight. The Panels members come from the principal shareholder and financial groups, and the staff consists primarily of business and financial experts rather than lawyers. The more flexible approach arguably reduces costs; litigation is an expensive way of resolving disputes. Approximately one-third of hostile takeovers in the United States are litigated; in contrast, hostile bids are almost never litigated in the UK, where a significant proportion of the regulatory issues are resolved by no more than a telephone call to the Panel Executive. In contrast to the services of litigation lawyers, the Panel does not charge for the issuance of such guidance. Rather, its operations are funded by a fee charged in relation to formal offers, a small levy paid on significant dealings in shares on the London Stock Exchange, and by sales of the Takeover Code. Given the differences in the use of litigation, leading U.S. firms with an M&A-oriented practice generate significantly more revenue per lawyer and profit per partner than do their UK counterparts. However, diversified shareholders, who stand to participate equally on the winning and losing sides of transactions, would surely prefer to minimize the transaction costs of regulating takeovers.

Differences in US and UK Takeover Laws: Takeover Panel Oversight

The final difference between the U.S. and UK modes of takeover regulation is that the flexibility of the Panels approach allows it to adjust its regulatory responses both to the particular parties before it and to the changing dynamics of business within the City of London. The Code Committee of the Takeover Panel meets several times a year to discuss the operation of the market, assess recent developments, and determine whether any amendments to the Takeover Code are necessary in response. In contrast, U.S. courts make rules in a way that is essentially reactive: changes in the marketplace lead to litigation, following which, the courts pronounce upon acceptable behavior.

Differences in US and UK Takeover Laws: Summary

In summary, the U.S. approach gives target managers discretion to defend a bid, whereas the UK gives the decision to shareholders. The principal decision-makers in the United States are Congress and the Delaware courts. In the UK, by contrast, informal regulation by the Takeover Panel takes center stage. While neither approach is clearly superior substantively, the UK process seems quicker, cheaper, and more proactive in response to market developments.

Lessons for Emerging Countries

Reformers have too often assumed that top-down, mandatory regulation, together with the courts, is the only way to regulate corporate transactions in emerging economies. But the success of the UKs Takeover Panel suggests that this assumption is seriously flawed. The U.S. approach requires an effective governmental regulator together with an efficient court system. In many emerging economies, one or both of those elements are missing. In some, the parties that are most directly affected by corporate regulation large shareholders, banks, and exchanges are located in close proximity to one another. And they have a direct financial stake in the success of the regulatory framework. In this context, informal self-regulation might prove more effective than the U.S. combination of formal statutes and courts. The UK strategy will not invariably be the best, any more than the approach in the United States. But reformers and lawmakers should keep in mind that there are at least two ways to regulate takeovers, not just one.

German Takeover Law: Basic Goals

According to the legislative report issued at the adoption of the Takeover Act, the Act is designed to provide the following: - Guidelines for a fair and orderly takeover process, without promoting or inhibiting takeovers; - An improved distribution of information and increased transparency for security holders and employees affected by a takeover; - Stronger legal rights for minority shareholders; and - A procedure that meets international standards. The Takeover Act protects both the employees of the target company and its security holders solely through the disclosure of information and other forms of transparency. The Act does not attempt to protect other stakeholders of the target company, nor does it address questions of competition law. The basic principles of the Takeover Act are those of the City Code: equal treatment of shareholders, transparency and information; acting in the best interest of the target company; a duty to complete the transaction without delay; and the prevention of market manipulation.

German Takeover Law: The Bidding

Process

The bidding process under the Takeover Act is modelled on the City Code and closely tracks the EC Takeover Directive. If a bidder decides to launch a takeover bid, he must provide notice thereof to the markets pursuant to 10 of the Act. This sets the clock ticking. Within four weeks after this notice, the bidder must provide the Federal Agency for the Supervision of Financial Services (Bundesanstalt fur Finanzdienstleistungsaufsicht - BaFin) in Frankfurt am Main with an offer document ( 14(1) Takeover Act). BaFin checks the offer document to make sure it contains the information required by 11(2) of the Takeover Act and the provisions of the Takeover Act Bid Regulation, as well as for any prima facie violations of the Takeover Act. If BaFin either approves the bid or fails to refuse it within ten working days, the bidder must publish the offer documents and promptly thereafter provide the management board of the target company with a copy ( 14(2) and (4), Takeover Act). Pursuant to 27 of the Takeover Act, the management and supervisory boards of the target company have to issue a reasoned comment {begriindete Stellungnahme) on the bid. The acceptance period also begins with the publication of the offer document, and may not be less than four weeks or longer than ten weeks ( 16(1) Takeover Act). During the course of the offer, the bidder is required to publish the total number of securities of the target company that he and persons acting in concert with him own ( 23(1) Takeover Act). In the case of a successful takeover bid, the shareholders of the target company who did not accept the bid have an additional two weeks after the bid's close to accept it ( 16(2) Takeover Act).

Mandatory Bids and Squeeze Outs

In addition, 35 of the Takeover Act provides that any person who obtains 'control (at least 30 per cent of voting rights, 29(2)) of a listed public company must offer to purchase the remaining shares at an adequate price. The necessity of such a mandatory bid provision has been hotly debated in Germany because German corporate law provides significant protection to minority shareholders in both de facto and de jure corporate groups. Nevertheless, it is now recognized that mandatory bids are the European standard and thus cannot be eliminated. At the same time as the Takeover Act went into effect, the Stock Corporation Act (Aktiengesetz) was amended to allow the squeeze out of minority shareholders that collectively hold less than five per cent of a corporation's capital, and this applies to all stock corporations, not just those that are listed on a securities exchange.

Hostile Takeovers: pre-bid

impediments

Restrictions on the transferability of shares are still possible but not very common in public listed companies. Germany has also eliminated most barriers to the exertion of control in the general meeting. Voting caps remain in place in only a few companies, for example, Volkswagen AG, and it remains to be seen just how long these will be able to hold out. Maximum and multiple voting rights were eliminated in 1998. It should also be noted that one has to acquire 75 per cent of the voting rights of a German stock corporation in order to exercise complete control over the company, and that non-voting preference shares are still quite widespread. German company law contains immanent barriers to the exertion of control over the board of directors of a stock corporation. For example, there is the two-tier board in which half of the seats in the supervisory board are held by employee representatives. This is not a takeover-specific problem, but is a general characteristic of German company law that a bidder must consider when deciding whether to acquire a German company. Neither the two-tier board nor the co-determination framework, however, are insurmountable barriers to a hostile takeover. Theoretically the Takeover Act allows shareholders' resolutions adopted before a takeover begins to approve defensive measures that the management board may then employ in the case of a hostile bid ( 33(2) Takeover Act). One might think of something like a conditional capital increase without pre-emptive rights that cost of which is to be bome by the bidder.

Hostile Takeovers: post-bid

impediments

33(1) of the Takeover Act generally prohibits the management board of a target company from taking any actions after publication of the decision to launch a bid that could prevent such bid from being successful. There are exceptions to this general rule. The Takeover Act allows the management board to take actions that a prudent and diligent manager of a company (ordentlicher und gewissenhafter Geschdftsleiter) not affected by a takeover bid would have taken, and also to search for a 'white knight' to make a competing bid. The management and supervisory boards still have a duty to act in the best interests of the company even in the context of a takeover bid. Exactly how the contours of this exception are laid out is open to debate and has not yet been tested in practice. However, it is safe to say that a management board that adorns its employment contracts with change of control clauses triggering 'golden parachutes', employs a scorched earth defense, or sells the company's 'crown jewels' in order to halt a takeover would violate the law and soon receive a visit from the local public prosecutor. Permissible tactics would include a Pacman defense and litigation against the bidder on theories of regulatory or competition law violations.