ACQUISITION OF STARTUPS: LISTED AND NON-LISTED
By Shruti Agrawal July 26, 2016
Startups are a very trendy way of starting one’s own business. The Indian government has framed multiple policies to promote startups in India. However, these new policies have also made it easier for angel investor to exit. These liberal policies have resulted in the relaxed acquisition of startups. They have resulted in a frequent change of ownership.
In India, there are different regulations for listed and non-listed companies. Listed companies are governed by SEBI regulations. In this blog, I have discussed the acquisition process of listed and non-listed companies.
Modes of Acquisition
A company which wants to acquire (acquirer) the other company (Target Company) in two ways- firstly, the acquirer can acquire the Target Company by occupying its majority share or secondly by acquiring its assets. Taking over by share includes right over assets and obligation to pay the liability. However, when acquirer takeover a target company by occupying its assets then he has the option of not being obliged by liability. Tata Motors acquiring Jaguar land Rover is one of the recent examples of acquiring the ownership with limited liability through asset acquisition. In further sections, I have discussed the acquisition through shares in detail.
If the target company is a private company or a non-listed company, then the acquirer have to follow a simple procedure. First, the acquirer must conduct a DD- Due Diligence- to check the actual owner of the shares. One can refer to the register of Members to check the real ownership of the shares.
After identifying the real owner an individual should negotiate the price of shares with the shareholder. Depending on the negotiation between the acquirer and the shareholders, Share Purchase Agreement would be drafted. This agreement is a contract which can be embedded with conditions precedent and subsequent to the deal.
Then the board of target company has a board meeting and shareholder agreement is signed. The acquirer is then registered as a member and his share is recorded in register of members. The share certificates are then endorsed. Minutes of meeting is recorded and transfer of share must be clearly stated in those documents. This is known as ‘closing the deal’.
The acquirer can obtain majority shares and can have a controlling power in the company. An acquirer would have the controlling interest if he has majority shares of around 51% or more. Then he will have the power to pass any ordinary resolution. To have the power of passing a special resolution, he will need to have 2/3rd or more shares.
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-
- 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.
- 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.
Refer to the above chart to understand the steps of takeover code.
Concluding this blog, it has become a very common practice to acquire a startup business. However, acquiring a listed startup can be more complexed than acquiring a non-listed startup. So, if the angel investors are planning to quit the startup and to hand it over to someone else, it is advisable that the startup company is not listed. SEBI regulations are applicable to safeguard the interest of the shareholders. If a company is non-listed these regulations won’t be applicable. Thus, making the acquisition process easier.
- Doing Business in India - An Overview, (http://www.jsalaw.com/pdf/doing-business-in-india.pdf) (last seen 22nd July, 2016)
- Kirti Sharma, 5 Things Every Startup Must Know About SEBI’s New Rules For IPO, (http://www.indianweb2.com/2015/06/26/5-things-every-startup-must-know-about-sebis-new-rules-for-ipo/) (last seen 22nd July, 2016)
- Start – Ups: What You Need To Know, (http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Papers/Start_-_Ups_What_You_Need_To_Know.pdf) (last seen 22nd July, 2016)
- Mergers & Acquisitions in India, (http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Papers/Mergers___Acquisitions_in_India.pdf) (last seen 22nd July, 2016)
- Picture Credit: Profesor Arjay Majumdar, O.P. Jindal Global University
Shruti Agrawal (Jindal Global Law School, 4th year)
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