Open offers have proved to be a popular takeover mechanism. While most open offers made are by virtue of investors triggering one of the thresholds prescribed, in many cases, investors hope for significant tendering in order to achieve a higher percentage of shareholding, and therefore a higher degree of control over the target. This is especially true in cases where the triggering transaction (i.e., the transaction that attracts the obligation to make the open offer) does not provide the investor the intended shareholding in the target.
In this context, it is relevant to consider a method to acquire a guaranteed level of control over a target company, being a ‘conditional open offer’. Regulation 19 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Code”), permits acquirers to make an open offer that is conditional upon a minimum level of acceptance.
Conditional Open Offers
Conditional open offers are akin to standard open offers except that if the desired level of shares are not tendered by existing shareholders, the investor is not obligated to acquire any shares at all under the open offer. However, if the desired level of acceptance is not met, even the triggering transaction is not allowed to be completed. Effectively, a conditional open offer is an all or nothing commitment for the investor.
Such an offer provides a degree of certainty and comfort to investors seeking to obtain a substantial stake in the target. For instance, if the largest shareholder of a listed company holds less than a 30% stake, an investor looking to secure at least a majority vote at shareholding meetings may not be willing to enter at such a stake, especially since we have seen several instances where open offer tendering has been nominal. The same applies to instances where an existing shareholder is already holding over 25% and intends to increase its stake to 50% without an identified seller.
One would think that conditional open offers would be used more often, however, in the past 10 years, there has only been one conditional open offer . In 2014, Moody’s Singapore Pte. Ltd. made a successful conditional open offer to acquire 26.5% shareholding in ICRA Limited. This offer was conditional upon a minimum level of acceptance of 21.5% of the share capital, which condition was met.
This example elucidates the benefit of making a conditional open offer. Prior to making the offer, the Moody’s group already held a 28.5% stake. By electing to make an open offer conditional upon receiving a further 21.5%, the acquirer was able to secure that it would only be forced to complete its offer if it was guaranteed a majority stake.
Viability of Conditional Offers
Making a conditional open offer ensures that an acquirer meets its objective from the transaction. However, in spite of the benefits available to acquirers, market data suggests that this has not been a popular acquisition mechanism.
For conditional offers to be successful, the acquirer needs to get two key aspects right, out of which only one is in its control.
First is the nature of public shareholders. While there is always uncertainty on the level of tendering in open offers, it is even more so in widely held listed companies dominated by retail shareholders. Retail shareholders in India have a history of not participating in voting or tendering. Accordingly, conditional offers may be more suited for listed companies having sufficient institutional holding.
Second is the price. For a conditional offer to be successful, the price needs to be attractive enough to not only get public shareholders to tender, but to grab their attention to the offer. Even in Moody’s offer for ICRA Limited, the price was revised upwards by about 20% after the first announcement to attract interest from the public.
For as much certainty as a conditional offer provides an acquirer, such an offer makes it equally uncertain for sellers, since the triggering transaction would be terminated if the tendering condition is not met. A seller is likely to choose an acquirer who offers a deal without such a condition. This makes conditional offers in secondary transactions almost unviable, even without considering the costs of a failed deal that the acquirer itself would incur.
Conditional open offers are certainly a good option for investors looking at substantial stakes in a listed company where there are no substantial sellers, or for existing investors to consolidate their holding. Given that private equity investors are increasingly looking at holding higher shareholding in listed companies as opposed to previous minority deals, conditional offers are worth considering. The uncertainty of achieving the condition, and the premium price, are factors investors will have to keep in mind.
 SEBI has also recently acknowledged this in the Discussion Paper: Review of delisting framework pursuant to open offer dated June 25, 2021 and accessible at: https://www.sebi.gov.in/reports-and-statistics/reports/jun-2021/discussion-paper-on-review-of-delisting-framework-pursuant-to-open-offer_50688.html
Pranav Atit, Partner
Armaan Srinivasan, Associate