A Merger & Acquisition (M&A) transaction involving an overseas entity with substantial direct or indirect interest in an Indian listed company (ListCo) falls within the labyrinth of the Indian Takeover Regulations. As such, an overseas transaction resulting in an indirect acquisition of (i) voting rights beyond certain prescribed thresholds (as explained below) of ListCo, or (ii) control over ListCo, triggers an obligation on part of the overseas acquirer to make a mandatory tender offer to acquire shares from the public shareholders of ListCo – such mandatory tender offer is commonly referred to as an ‘indirect tender offer’.
In this Quick Overview, we discuss the (often misunderstood) calculation mechanism for triggers of an indirect tender offer, and certain commercial matters worth considering at the time of structuring the overseas transaction. Particularly for in-house legal counsel and international legal advisors, the ripple effects of an M&A transaction in various jurisdictions (where the target has a direct or indirect presence) is crucial and needs to be well understood at an early stage of the deal.
Triggers for an Indirect Tender Offer
An indirect tender offer is triggered when an acquirer, together with persons acting in concert (PAC) with such acquirer, directly or indirectly acquires control over a holding company of ListCo (whether by way of acquisition of shares or otherwise), which in turn, directly or indirectly, exercises voting rights in excess of 25% of ListCo and/or exercises control over ListCo. In such cases, while the shares of ListCo are not directly transferred, its effective ownership (and control) changes hands.
The key determinant in calculating whether an indirect tender offer will be triggered or not, is the ultimate ability of the acquirer (together with PAC) to exercise voting rights or control over ListCo. This aspect of determining the trigger in an indirect tender offer is often misconstrued, and confused with the simpler but incorrect method of calculating the pro rata voting rights. In the illustrations below, we’ve explained the correct calculation methods:
- Illustration 1: X holds 40% shares and voting rights of ListCo. If Y acquires majority stake (for example, 51%) and /or control over X, then Y will be required to make an indirect tender offer for shares of ListCo. This is on account of Y having indirectly acquired the ability to exercise voting rights (as majority / controlling stakeholder) over the entire 40% voting rights (which exceeds the trigger threshold of 25%) held by X in ListCo.
- Illustration 2: X holds 60% shares and voting rights of ListCo. If Y acquires minority stake (for example, 49%) and no control over X, then Y will not be required to make an indirect tender offer for shares of ListCo. This is on account of Y not having indirectly acquired the ability to exercise voting rights (as minority / non-controlling stakeholder) over the 60% voting rights held by X in ListCo.
- It is important to note that the above calculations are not done on a pro-rata basis – for instance, in illustration 2: Y’s acquisition of 49% stake in X would not lead to Y being entitled to exercise 29.4% (49% of 60%) of voting rights in ListCo.
The nature of tender offer (direct or indirect) may have a substantial impact on the overall deal structure. We discuss below a few key considerations in relation to an indirect tender offer.
- Timing of tender offer: in case of an indirect tender offer, the acquirer has the option (exercisable at its discretion) to proceed with the tender offer post completion of the overseas transaction (which triggers the obligation to make the indirect tender offer). If such option is exercised, the acquirer would be required to make a public announcement of the indirect tender offer at the time of entering into transaction documents for the overseas transaction (this could be considered step 1), and follow that up with publishing a detailed public statement post completion of the overseas transaction (publishing of the detailed public statement could be considered step 2). There is no cap on time period between step 1 and step 2. This is different from a direct tender offer where the tender process cannot be paused until completion of the overseas transaction which triggers the tender offer, and accordingly there would be a maximum permissible time period of five working days between step 1 and step 2. This key difference affords an acquirer certain strategic advances, such as (i) flexibility in deployment of funds for the tender offer, and (ii) reduction in administrative hassle at the time of completion of the overseas transaction.
- Interest: the benefit of additional time available (at the acquirer’s discretion) under an indirect tender offer comes at a monetary cost. In case of a gap of more than five working days between step 1 and step 2, the acquirer would be obligated to pay an additional interest component (@ 10% per annum) to the shareholders of ListCo who tender their shares in the indirect tender offer, payable for the actual time period elapsed between step 1 and step 2. In cases of substantial delays between step 1 and step 2 (for instance, on account of overseas regulatory approvals), the interest component may add up substantial additional acquisition cost for the overall transaction. This aspect requires an effective cost benefit analysis of various legal and commercial considerations in deciding the deal structure.
- Walkaway right: a key benefit of an indirect tender offer is the ability of the acquirer to walk away from the obligation to continue and complete the indirect tender offer process in case the overseas transaction which triggers the indirect tender offer is not consummated. This is different from a direct tender offer, which once triggered, is not subject to completion of the overseas transaction. Such additional protection in an indirect tender offer is immensely helpful in hedging the risk of a failed overseas transaction.
- Deemed direct: in certain circumstances, an indirect tender offer is deemed as a matter of legal fiction, to be a direct tender offer. In such a scenario, all obligations and timelines applicable to a direct tender offer automatically become applicable to an indirect tender offer. This is a crucial assessment to be conducted ideally at a preliminary structuring stage.
In summary, public M&A transactions are highly complex with various nuanced deal considerations. Such transactions are also extremely time sensitive and require an early legal and commercial assessment, preferably at the initial structuring stages of the underlying transaction (even if such transaction has no direct connection with ListCo).