Earlier this month, the Ministry of Corporate Affairs (MCA) notified certain provisions under the Indian Companies Act dealing with “takeover offers” in respect of unlisted public and private companies. Briefly, the new rules enable a shareholder holding 75% or more of the share capital of an unlisted company, to make an offer to acquire the remaining shares of the company (presumably all, and not only a portion, of the balance shareholding) as part of an application to be filed with the National Company Law Tribunal (NCLT) for a compromise or arrangement. Much like SEBI’s takeover rules applicable to listed companies, the MCA rules also set out certain minimum pricing requirements for the offer (i.e., to be based on a valuation by a registered valuer taking into account the highest price at which any shares in the company were traded in the last 12 months as well as other parameters such as return on net worth, book value, earnings per share and PE multiple taking into account the industry average) as well as a certain minimum amount (i.e., 50% of the total consideration) to be placed by the acquirer in a separate bank account.
Unfortunately, the amendments stop at just that and do not provide any further details on either the modalities of such takeover offers or the timeframe within which any such offers should be implemented. Presumably, the intention is for the NCLT to decide on such details in the normal course, just as it would, say, in the context of any other scheme of arrangement. However, given the backlog of cases at the NCLT as also the possibility of objections (i.e., before the NCLT) and appeals (i.e., to the NCLAT and Supreme Court), this new route is unlikely to provide a definitive basis to “squeeze out” all the minority shareholders of an unlisted company. Since the rules expressly provide for any party aggrieved by such an offer to seek redressal from the NCLT, it would be left to the NCLT’s discretion to determine whether or not the offer is reasonable. Accordingly, in substance, the latest takeover route is unlikely to be very different from a selective reduction of share capital to squeeze out minority shareholders (i.e., which also involves having to obtain an NCLT approval) and accordingly any such takeover process is unlikely to definitively conclude in a finite timeframe that is necessary from an M&A perspective.
It is also relevant to note that the Companies Act has a separate provision which enables a shareholder holding 90% or more in an unlisted company to make an offer to acquire the balance shareholding in the company (again, subject to minimum pricing requirements) without NCLT approval. However, such provision has been interpreted in practice to be merely enabling in nature and not mandating the remaining shareholders to tender their shares to the majority shareholder.
In summary, the recently notified rules are unlikely to move the needle much in connection with the significant risks involving “take private” deals in India – even if an acquirer were to somehow navigate the complexities and uncertainties under SEBI’s delisting rules and have a company delisted, given the lack of a compulsory acquisition / squeeze out mechanism, the acquirer would still be left with the risk of having a sizable number of minority shareholders in the unlisted entity. Whilst the new rules provide a basis for the majority shareholder to directly make an offer to acquire the minority shareholders (i.e., as opposed to a selective capital reduction exercise, in which the majority shareholder is necessarily reliant on the target company having sufficient funds), the success of the exercise is still subject to the NCLT being convinced that the offer is reasonable as well as the risk of objections and appeals from the minority shareholders. Indeed, since the rules are also seemingly inapplicable in the context of share transfers through a contract or arrangement, in order to not subject themselves to the vagaries of an NCLT process, minority shareholders in unlisted companies may be incentivised to seek contractual veto rights in connection with the majority shareholders of such companies even initiating a takeover process under the new rules.
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