process of buying a listed company

The process of acquiring a listed company is little more complicated than unlisted company. It is because SEBI regulations govern the takeover of the listed company. The main objective of SEBI regulations is to ensure that the members of the listed company are aware of the potential change in ownership and, also, to ensure the members who want to quit are given a reasonable opportunity to quit.

As per the SEBI Takeover Code 1997, Regulation 3, 4, and 5, an acquirer must make an offer of purchasing the shares of the existing shareholders to give them an opportunity for exiting the company. The obligation of compulsory open offer arises in following two situations-

1. Initial Trigger – If by acquiring the new shares or the existing shares, the acquirer gets 25% or more controlling interest, voting rights or acquisition of shares then the acquirer must make the open offer to the existing shareholders. The limit is set at 25% share because it gives a sufficient power to the acquirer to refuse any special resolution.
2. Creeping Acquisition- If the acquirer has more than 25% share, but which is less than 75%, then if the acquirer, acquires 5% or more shares then the acquirer need to make the public offer. This regulation does not apply in a situation where the acquisition is for 4.99% or less. An acquirer cannot obtain more than 75% share of the public company because as per SEBI regulation 25% of shares has to remain with the public.

The process of acquiring a listed company is very similar to acquiring non-listed company. Firstly, there are negotiations between the acquirer and the target company. MoU is signed. The acquirer carries out due diligence to satisfy all the queries regarding the company and to check the ownership of the shares. The companies fulfill all the precedent conditions of the contract like approval of existing shareholders, directors, etc.

Share Purchase Agreement is signed between the acquirer and the target company in case new shares are issued. If the acquirer is buying the shares from the existing shareholders then the shares are transferred to the acquirer.

Along with this, the acquirer needs to make a public announcement about the acquisition. They need to then make an open offer to the existing shareholders stating the risk factors, terms and condition, and other relevant information. The Draft Letter of Open Offer needs to be filed with SEBI. This is made public once it is approved by SEBI.

The shareholders who want to quit the company would accept this offer of purchase and would sell their share to the acquirer. This obligation comes under Takeover code of SEBI.