Framework to waive open offers needed

This is necessary to ensure that the entire activity is within the bounds of fairness and objectivity

As capital turns scarce and listed companies face the brunt of the anticipated recessionary trends, mergers and acquisitions will become a vital means of consolidating businesses and staying afloat. Companies that need funds may have to be taken over. Without having to raise funds, companies may have to change ownership to survive operationally.

When it comes to listed companies, regulation mandating an open offer to acquire shares from the shareholders would get attracted. That would require more capital. It could potentially lead to plans to save a listed company seem daunting, and the person who is willing to take it over, staying away. Not getting a bail-out, the company may fail, which could hurt shareholders even more.  

There is a simple solution to this problem. An open offer to shareholders is an important statutory right that need not be taken away. Yet, if it is an expensive proposition, the company may go bust without anyone taking it over. The answer lies in letting shareholders choose for themselves instead of relying on the regulator to use powers to exempt. Shareholders may prefer to see the company saved and waive their right to an open offer. What we need is to give them a framework to exercise their right to give up their right.

Numerous shareholder decisions entail a special majority under securities regulations. One could consider an even higher threshold of a positive vote from shareholders to give up an open offer. Market participants are sensible people and a non-paternalistic approach would achieve the larger good — of protecting their statutory right to an open offer and yet putting them in charge of signing off their right for the larger good of the listed company, which would in turn benefit them with a higher share price in the market. They could always sell their shares in the market if they wish to exit, and gain from the potential improvement in share prices of a company that has been bailed out, as compared with a company that is without a suitor.

A waiver of the open offer could require the approval of say, three-fourths of the shares other than those held by controlling shareholders, or say, a different threshold of 90 per cent of all the shares. If the controlling shareholders are merely getting diluted and are continuing as shareholders, they too can be said to have skin in the game, and are not getting anything privately from the takeover. If shareholders waive the open offer, the transaction could go through without an open offer and if shareholders refuse to waive it, the transaction may either be shelved altogether or be undertaken with an open offer to the shareholders.

Conceptually, an owner of a legal right, would invariably have a right to waive it or part with it for consideration. That is how entitlements in a rights issue are sold. That is how benefits arising out of shares can be sold in a participatory note without voting rights. That is how voting rights in shares or a right to enjoy a property can be sold through a power of attorney. When it comes to an open offer that is a public right enjoyed by a wider mass of shareholders, a legislative framework in the regulations to lay down the norms for such a waiver would be necessary to ensure that the entire activity is within the bounds of fairness and objectivity.

An empirical study will show that responses to most open offers is academic. Shareholders are happier selling in the market and getting money within two days instead of tendering in an open offer and getting funds in hand, weeks later. Unless some bonanza of a price difference is achieved due to disputes over fair value (typically in shares of companies that are indirectly acquired and are infrequently traded), open offers tend to be academic.  
 

The capital market regulator must conduct a study of the open offers made in the past three years, and bear in mind that in the next year or two, acquisitions and takeovers would be a vital area of activity to bail out enterprises on the verge of failure. A framework for opting out of as a collective from an open offer could give the requisite booster. Laws that protect the meek and the weak (like labour laws) have inherent provisions against contracting out of statutory rights. Even those laws are lightly being suspended — that warrants a separate column. For now, a framework for shareholders to excuse an acquirer from making an open offer by a large majority vote, is an idea whose time has come.

The author is an advocate and independent counsel; Twitter: @SomasekharS