Acquisition of Shares and Takeovers – Key Concepts Explained

Acquisition of Shares and Takeovers: An acquisition of shares and takeovers happens when one company buys and takes control of another company. This is a crucial part of mergers and acquisitions (M&A), a corporate law or finance career that deals with buying, selling, and combining companies.

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Acquisition of Shares and Takeovers Overview

• Regulations by SEBI (Securities and Exchange Board of India) govern the acquisition process to protect shareholders' interests and ensure compliance with legal requirements.
• An "Acquirer" is anyone who, directly or indirectly, acquires or agrees to purchase shares or voting rights in control over a target company, either alone or with others.
• "Acquisition" refers to directly or indirectly agreeing to buy (or buying) shares or voting rights in, or gaining more control over, a target company.
• "Control" means having the authority to appoint most directors or manage a company's policies. Simply being a director or officer of the company doesn't automatically mean you have control over it.

• Any acquirer gaining control over a target company must publicly announce an open offer to acquire shares of that target company.

• The regulation helps prevent hostile takeovers, where a company is taken over without the board's approval or knowledge. Such actions can harm public shareholders. This regulation ensures that all stakeholders are treated fairly.

The Applicability of Acquisition of Shares and Takeovers Regulations, 2011

Who Must Follow the Rules?

• This includes both direct and indirect acquisitions.
• The regulations ensure that major acquisitions are conducted transparently and fairly.

Who is Exempt from the Rules?

• Not all acquisitions are covered by these regulations.
• The rules do not apply to companies listed on the Innovators Growth Platform of a recognized stock exchange without a public issue.
• This exemption encourages innovation and growth by reducing regulatory constraints for entrepreneurial ventures.

What are the Types of Acquisition?

• Horizontal Acquisition: When a company buys another company that offers similar products or services. Example: Facebook bought Instagram in 2012 for $1 billion.
• Vertical Acquisition: When a company buys another company that makes a product in its supply chain. Example: A streaming network buying a film production company.
• Congeneric acquisition: When a company buys another offering of different products or services but targets the same customer base. Example: A streaming network purchasing a smart TV manufacturer.
• Conglomerate Acquisition: A company buys another company from a completely different industry. Example: A streaming network buying a crayon company.

Who is a Person Acting in Concert (PAC)?

• Company Relationships: Company relationships refer to connections involving a company, its parent company, subsidiaries, or any entities managed under the same authority.
• Management and Directors: Directors and those managing related companies.
• Promoters: Promoters and their group members.
• Family: Immediate relatives of those involved.
• Financial Entities: Mutual funds, their trustees, asset management companies, etc.
• Investment Entities: Venture capital funds, alternative investment funds, etc.
• Financial Service Providers: Banks, financial advisors, and stockbrokers of the acquirer.
• Others: Investment companies or funds where a person holds significant capital.

Benefits of Acquisition of Shares and Takeovers

• Increase Market Share: Acquiring another company is a fast way to enter new markets. For example, a grocery chain on the East Coast can expand to the West Coast by buying a chain there.
• Lower Costs: Acquisitions can achieve economies of scale, like buying in bulk, which reduces production costs.
• Reduce Competition: Buying a competitor means gaining customers and reducing market competition.

Disadvantages of Acquisition of Shares and Takeovers

• Acquisitions involve complex negotiations, investigations, and reviews, which can take several months or even years to finalize.
• Acquirers must pay for the target company using cash, stock, or borrowed funds (leveraged buyout). Legal fees and tax implications also make it an expensive process.
• Despite using various valuation methods, determining the exact value of a company can take time and effort. Market and economic conditions can affect valuations, leading to potential mispricing and inherent risks in every transaction.