Mergers and Acquisitions

Know the Process of Company Takeover

Businesses today undergo various structural modifications to sustain their existence in the market. One of the preferable strategy used by companies to expand their market base include Takeover of Company.  Scroll down to check some of the essential aspects of Company takeover.

What is Company Takeover?

Takeover takes place when a company makes bid to take control of or seeks to acquire another by purchasing the majority stake in the target company. The company that makes the bid is known as acquirer, and the company that seeks to take ownership of it is known as the target company.

Usually, large corporations conducts takeover for a smaller one. It can be done voluntarily by a joint agreement between the two companies.

What is the need for Company Takeover?

The company takeover is usually beneficial in the following ways:

• Increases the size of the business;
• Reduces market competition;
• Provides various tax benefits;
• Helps in achieving product development, market improvement of the target company;
• Helps in expanding the existing product line.

Laws governing Takeover of Company

The following laws govern takeover of company:

• Section 230 (11) of Companies Act 2013

Every form of Compromise & Arrangement is covered under this.

• Section 250 (3) of Companies Act 2013

As per the provisions of this section, NCLT can ask any company administrator for acquisition of management of that company.

• Section 261 of the Companies Act 2013

As per the provisions of this section, NCLT authorizes the administrator of the appointed company to prepare the scheme of rehabilitation & revival, comprising of the takeover of a sick entity by solvent company.

• SEBI (Substantial Acquisition of Shares & Takeover) Regulations 2011

The provisions of the SEBI (Substantial Acquisition of Shares & Takeover) Regulations 2011 govern the acquisition process of a listed company.

Types of Company Takeover

Some of the different types of Company Takeover are as follows:

• Reverse Takeover

When a private limited company lists its equity shares on a stock exchange but doesn’t undergo the IPO process, it undertakes the Reverse Takeover process. Under this, a private limited company acquires the shares of a public listed company.

• Bail out Takeover

In this, a profit making company acquires a sick entity and bails it out from the process of liquidation.

• Friendly takeover

Friendly takeover is when the acquirer/bidder company gets the consent of target firm before going through the course of acquisition. It is a process where both parties agree to the conditions of the takeover.

• Hostile Takeover

This is opposite to the friendly takeover. Under this, the acquirer company doesn’t take the prior permission from the target company and forcefully takes over.

• Backflip Takeover

In this, the acquirer company voluntarily becomes the subsidiary of the bidder/target company.

Procedure

The process for Company takeover is discussed below:

• Pass the board resolution

The directors of the bidder company must pass a board resolution in order to approve the bidding process for the shares of the target company.

• File Application to the Commission

Secondly, the firm should file an application with the commission for the takeover bid approval. The application must be filed with the following attachments:

1. Takeover Bid;
2. NOC;
3. Information Memorandum.

• Registration of the proposed takeover

When the approval is obtained, the acquirer company should file an application to register the proposed bid with the commission.

• Takeover Bid

Once the registration is obtained, the bidder firm needs to send the takeover bid to the target firm.

• Convene Board Meeting

The target company should convene a board meeting in order to accept that 90% of the shareholding is subject to acquisition.

• File Takeover Report

The bidder firm should file a takeover report with the commission in 7 days time from the completion of the takeover.

Checklist

The following steps are involved in evaluating a decision for Takeover:

• Planning

Firstly the acquirer company should analyze the industry by conducting a review of the objective of the acquisition in context of the SWOT^[1]. It also involves going through factors such as management quality, capital structure and market size.

• Candidates Screening

The company should search and shortlist suitable candidates for takeover.

• Financial Evaluation

Then comes financial evaluation. The following points must be considered in this:

1. Cash flows;
2. Maximum price payable for takeover;
3. Method of financing the takeover.

Conclusion

Company Takeover is the most preferred growth oriented strategy. The parties involved are called as Acquirer Company and Target Company. There are various types of takeover, as discussed above. It can be beneficial exercise for companies seeking to Increases the size of the business, and it also helps in achieving product development, market improvement of the target company.

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