Substantial Acquisition Law

• Any reference to a “Company” is construed as a reference to a “Listed Company” throughout the chapter.

Applicability of Substantial Acquisition Law

• Unit covers sections from 107 to 126 of the Securities Act 2015

• Also covers Listed Companies (Substantial Acquisition of Voting Shares and Takeovers) Regulations, 2017

• Regulations have been spread throughout the unit at relevant places with proper reference

• Section 109 does not apply to:

• Right issues, except disposal by directors after decline by shareholders under the Companies Act 2017 Section 86(7)

• Shares allocated under underwriting arrangements

• Acquisition of shares by a financial institution as enforcement of securities

• Acquisition of shares by succession inheritance

• Schemes of mergers & reconstruction of companies

• Shares of unlisted companies

• Conversion option by Banks (20% outstanding Loan Balance)

• Privatization of unit or its management rights under the Privatization Commission Ordinance, 2000

• Transfer of voting shares to relatives without monetary consideration

• Scheme of rehabilitation of a Co approved by the Commission

• Acquisition pursuant to inter se transfer of shares amongst qualifying persons being:

  • Relatives
  • Persons named as promoters or sponsors in the memorandum of Association of target company holding not less than 25% of the equity securities of the target company
  • A company, its subsidiaries, its holding company, other subsidiaries of such holding company
  • Major shareholders (directly holding > 20% shares) of a target company collectively exercising management control for three years before the proposed acquisition

• Regulation 4 says that in these type of acquisitions: Acquirer shall, within 2 working days of acquisition, make a disclosure of the acquisition to the target company, the stock exchanges, and the Commission

Definitions

• Acquirer: Any person who directly/indirectly acquires/proceeded to acquire voting shares/control of target Co
• Target Co: A listed Co (or holding Co of a listed Co) whose voting shares/control is directly/indirectly acquired/intended to be acquired
• Public Offer: Public offer for acquisition of voting shares of a target Co; includes any competitive bid
• Offer Period: Date of public announcement to closure date of public offer/earlier withdrawal
• Public Announcement: Public announcement of intention to acquire/public offer for acquisition of voting shares; includes public announcement of competitive bid
• Persons acting in concern
• Individuals/entities working together to acquire certain amount of shares/control over a target company
• Cooperate with each other with a common purpose to acquire these shares/control over the target company
• May be working together officially/unofficially
• Can include different types of people/organizations

Persons Acting in Concert:

• Persons with common objective/purpose of acquisition of voting shares/voting rights/control over a target Co, co-operate for acquisition of shares/voting rights/control over the target Co through formal/informal agreement/understanding, directly/indirectly

• Persons falling within following categories are deemed to be persons acting in concert with other persons within same category, unless the contrary is established

  • Company/holding Co/subsidiary Co and any Co under same management/control
  • Co, its promoters/sponsors/directors, and any person entrusted with the management of the Co
  • Directors of companies in above point (A) and associates of such directors
  • Relatives of the acquirer/persons acting in concert with the acquirer
  • A securities manager and its client, who is an acquirer
  • Banks, financial advisors, securities brokers of the acquirer, or of any Co which is a holding Co/subsidiary of the acquirer, and where the acquirer is an individual, of the relative of such individual

• Above shall not apply to a bank whose sole role is that of providing normal commercial banking services/activities in relation to a public offer as per this Act

• "Associate” of a person means:

• Any relative of such person

• Trusts of which such person/relative is a trustee

• Partnership firm in which such person/relative is a partner

• Private Co in which person/relative is director/member

• Manager to the offer: Before public announcement, acquirer shall appoint a Bank/Financial Institution or member of Stock Exchange to act as so

• Relative: Spouse, real and half siblings and their children, lineal ascendants/descendants of a person

• Voting Shares

• Shares in the equity share capital of a target Co carrying voting rights

• Includes any security which entitles holder to obtain/exercise voting rights

• Shares also include all depository receipts carrying an entitlement to exercise voting rights in the target company

Acquisition of Substantial Shareholding

• An acquirer who acquires voting shares (taken with existing shares), which entitles to acquires more than 10% voting shares in a listed Co, shall disclose their shareholding to the Stock Exchange, that listed Co, and SECP
• Disclosure to be made within 2 working days of the acquisition/receipt of information of allotment
• If acquiring more shares but remain below 30%, is not liable to disclose if new acquisition is within 12 months

Additional acquisition (Sec 111 & 114)

• No person shall directly/indirectly acquire:

• Voting shares (with existing shares) entitling them to more than 30% of voting shares in a listed Co; or

• Control of a listed Co

• Must make a public announcement of the offer to acquire voting shares/control of listed Co

• Must make necessity disclosure to the Target Co and stock exchange before making public announcement

• No acquirer (who has acquired >30% but <50% of voting shares/control) shall acquire more voting shares/control unless they make a public announcement of offer

• Such acquirer is not required to make a fresh public announcement of the offer within 12 months from the previous announcement

• Acceptance period: The period commencing on the 48th day of the public announcement of offer and closing with the close of the public offer which shall not be later than the 54th day from the date of the public announcement of offer

• Date of public announcement: The date on which the public announcement is in newspapers

• Offer letter: The letter issued by the acquirer to the shareholders whose names appear on the register of members of the target company as on date of book closure, custodians of Global/American Depository Receipts, and holders of convertible securities (where period of conversion falls within the offer period) in pursuance of section 117, as per the specifications provided in Schedule

Eligibility

• Shareholder of target company as on date of book closure, is eligible to participate in the public offer

• All Global Depository Receipt and American Depository Receipt holder(s) are entitled to participate in public offer as on date of book closure

• Convertible security holders (where the period of conversion falls within the offer period)

• Minimum offer price, if shares of target company are frequently traded shares, price shall be highest amongst:

• Negotiated weighted average price under a share purchase agreement

• Total consideration paid including liabilities settled, personal liabilities of sellers, and consideration paid in cash/otherwise against purchased shares

• Highest price paid by acquirer etc for such stock during previous 180 days

• Weighted average share price as quoted on the stock exchange during previous 180 days

• (calculated as total value/total volume of Target Company in ready market. Only include days where shares of Target Company were traded)

• Weighted Average share price as quoted on stock exchange during 28 days preceding the date of public announcement of intention

• If shares of target company are not frequently traded shares (have not been traded for at least 80% of trading days during previous six months, average daily trading is less than higher of 0.5 percent of its free float/100,000 shares), price shall be highest amongst:

• Negotiated weighted average price under a share purchase agreement

• (includes total consideration paid in whatsoever manner, inducing liabilities settled whether taken over or not, personal liabilities of sellers and consideration paid either in cash or otherwise against the shares purchased)

• Highest price paid by acquirer etc for such shares during previous 180 days

• Price calculated based on net assets value carried out by a CA firm based on of audited financial data not older than 6 months from date of public announcement of offer. For fixed assets, CA firm shall obtain services of a valuer whose name appears on the list of panel of valuers maintained by Pakistan Banks' Association

Frequently Traded Shares Definition

• Shares of listed company meeting following criteria during 180 days before public announcement of public offer
• Shares have been traded for at least 80% of the trading days
• Average daily traded volume of the shares in the ready market is not less than 0.5% of its free float or 100,000 shares (whichever is higher)

Public Announcement of Offer

• A public announcement of offer shall be made by the acquirer through the manager to the offer within 180 days of making the public announcement of intention in the newspapers Acquirer
• Has the option to extend the time period for a maximum of 90 days under intimation to SECP and SE, before expiry of 180 days
• Must submit Notice of public announcement of offer through manager to the offer to target company for being placed before the board of directors of such company, the securities exchange and the Commission
• The securities exchange shall make available information about the public announcement of offer, on the same day by:
  • Placing the information on its website
  • Posting it on its notice board
  • Notification on the automated information system
• Announcement on the house of the securities exchange
• Public announcement of offer shall contain information as prescribed in schedule VII
• Notice of public announcement of offer shall be submitted to the Commission with the document prescribed in Schedule VIII along with a non-refundable fee of Rs.500,000/- to be deposited In the designated account of the Commission
• Public announcement of offer shall be published by target company within 2 working days of submission of notice of the public announcement of offer to the target company, the securities exchange and Commission, in English and Urdu in at least two daily newspapers having circulation in all provinces
• Commission to be submitted published copy of public announcement of offer, the target company {at its registered office) and the securities exchange, on the same day of its publication

Rules for Public Offer

• On 22nd day of public announcement of offer, Target Co shall announce book closure from 36th day of public announcement of offer. This determines eligibility of persons to receive offer letter, as per rules of Pakistan Stock Exchange
• Books shall remain closed for 7 days (36th day till the 42nd day of the public announcement)
• Target company shall provide an updated and certified list of its members to the acquirer on 43rd day
• Acquirer shall issue offer letters to the members and other eligible persons within 2 days of receiving the update
• Date of closure of public offer shall not be later than 54 days from the date of public announcement of offer
• If publishing an addendum/corrigendum to the public announcement (voluntary/on direction of SECP), the offer period shall re-commence from date of the publication of the addendum/corrigendum

Acceptance of Public offer

• On the 46th day, the acquirer shall inform target company shareholders of the commencement of acceptance period through an advertisement published in the newspapers with the public announcement/competitive bid
• Advertisement shall be in the form prescribed under the Schedule X
• Target company shareholders may accept the public offer during the acceptance period by tendering shares physically to the manager to the offer or in a designated CDC account specified for the purpose in the public announcement of offer
• Convertible security holder intending to accept, shall convert their securities into shares and tender the same to the manager to the offer during acceptance period in the designated CDC account
• Global/American Depository Receipts holders shall upon the request of the respective holders, convert. the Global/American Depository Receipts into shares and tender the same to the manager to the offer during the acceptance period in the designated CDC account
• Manager to the offer shall confirm in writing receipt to the custodians of Global/American Depository Receipts holders, the shareholders of the target company, and convertible security holders who have tendered their shares to the manager to the offer as acceptance of the public announcement of offer

Mode of Payment

• Consideration for the voting shares to be acquired by the acquirer shall be payable in the form of:
• Wholly in cash; or
• In the form of any combination of following securities accompanied with a wholly cash alternative
  • shares of listed company owned by the acquirer/proposed further issuance of shares by the acquirer, or owned by any person acting in concert
    • The said company has been listed for at least 2 years before the date of announcement of offer
    • The said shares of such listed company are currently being traded at normal counter of securities exchange and are frequently traded shares
  • listed debt instruments owned/proposed to be issued by acquirer, or owned by any person acting in concert; or
  • government debt securities in the form of treasury bills and sukuks with remaining maturity of not more than 364 days owned/held by the acquirer/owned by any person acting in concert

Rules For Valuation

• Shares: Weighted average share price during 180 days preceding date of public announcement
• Government debt securities: Applicable PKRV rates at the end of the day preceding the date of the public announcement of public offer
• Listed debt instruments: Valuation method in laws for valuation of such instruments by the acquirer

Procedure for Payment

• Acquirer shall, within 2 days from date of closure of public offer, open a special bank account and deposit such sum that it would, with security, make up the entire sum due and payable to the shareholders
• If option of receiving consideration in the form of securities: offeror shall post/credit the non-cash consideration to securities account of person accepting takeover offer within 2 days of the date of closure of public offer

Number of Shares To Be Acquired

• Offer by acquirer shall be a "%age of Total Capital as SECP may prescribe
• If number of shares for sale by shareholders are more than shares offered to be acquire, acquirer shall accept shares on proportional basis with consultant of the offer
• Provided that acquisition shall not be less than minimum marketable lot or entire shares (if less than marketable lot)

Regulation 14

• Acquirer shall make a public announcement of offer to acquire at least 50% of remaining voting shares of the target company
• Public offer can be conditional on minimum level of acceptances (not more than 35% of the remaining voting shares)

Security To Be Furnished By The Acquirer

• Acquirer shall furnish security for performance of obligations
• Total consideration payable under public offer shall be calculated assuming full acceptances (regardless of whether consideration is payable in cash / otherwise)
• In case of an upward revision of offer upon a competitive bid or otherwise, the value of the security shall be increased in same proportion

Regulation 15

• Security shall be provided by acquirer on/before public announcement of offer, either as:
• Cash, deposited with a commercial bank with a minimum credit rating of “A” - (Escrow account operated by the manager to the offer)
• Treasury bills and short term sukuks with original maturity of 12 months or less with 5% margin or any other government debt securities with 10% margin
• Bank guarantee in favor of the manager to the offer from a commercial bank with a minimum rating of "A" and valid till all obligations of the acquirer are fulfilled as certified by the manager to the offer; or
• Margin trading system eligible shares with 30% haircut based on their current market value. - (Manager to offer shall mark to market the shares on a weekly basis, and any shortfall after mark to market shall be notified to acquirer in form of margin call and acquirer shall deposit the shortfall on same day)
• A combination thereof

Regulation 16

• Security shall be released by manager to offer within 7 working days after all payments to shareholders have been made/ (in case of withdrawal) upon certification by the manager to the offer about same
• In the event that Security is not released by manager to the offer within 7 days manager to the offer shall pay a surcharge @ 6 months KIBOR + 4%
• If acquirer defaults, manager to offer shall realize the security by withdrawal of cash, foreclosure of deposit, calling of bank guarantee/ sale of government securities and shares, with proceeds utilized to meet all obligations

Further Actions

• Procedure to Make Competitive Bid
• Any person, other than the acquirer who made the first public announcement, who wants to make a competitive bid (Higher than 1st), shall make a public announcement of their offer within 21 days of public announcement of the first offer, for acquisition of the same voting shares of the target Co
• Cannot be for less than number of voting shares for which the earlier public offer been made

Acquirer Options after Public Announcement of Competitive Bid

• Make another announcement
  • Revise the public offer; or
  • Withdraw from the public offer with the prior approval of SECP
• If no such announcement is made within 7 days of public announcement of competitive bid, the earlier offer on the original terms shall be valid and binding on acquirer until the closure of last sustaining public offer

Regulations

• Competitive bids have to be made within 21 days of the public announcement of the first offer
• The competitive bid shall be announced in the same way they announced the first offer, and in the same newspapers
• A copy of public announcement of competitive bid must be submitted through manager to the offer, to SECP, the original acquirer, target company for notification as prescribed
• The public announcement of a competitive bid shall contain information prescribed in Schedule VII

Acquirer Options

• Revise public offer in respect to the price of offered shares and the amount of shares

• Withdraw the public offer

• Earlier offer on original terms shall continue to be valid

• Date of closing of public offer shall be extended to date of closure of public offer under last subsisting competitive bid(s)

Upward Revision

• Whether or not there is a competitive bid
• Acquirer who has made public announcement (who hasn't withdrawn their public offer), can make an upward revision of offer in respect to the price/amount of voting shares to be acquired at any time within 7 working days prior to closure of the subsisting public offer without changing the terms
• Any upward revision of offer shall involve making a public announcement in all local newspapers from origin of the public announcement in respect to those changes
• Also inform SECP, the securities exchange and the target company at its registered office simultaneously and increase the value of the security accordingly

Withdrawal of Public Offer (Sec 122)

• If Withdrawal is a consequence of competitive bid, or the sole acquirer (natural person) has died/declared unsound
• In prescribed circumstances, a public offer can be withdrawn

Regulations

• If acquirer is a company which has gone into liquidation/declared a bankrupt
• If the acquirer is an individual and has been declared as an undischarged insolvent/has applied to be adjudicated as insolvent before the completion of acquisition
• If the acquirer has been declared in default by court of competent jurisdiction of repayments of loans
• Shares tendered must be returned to shareholders within 3 days after the announcement, with the manager releasing the security deposit to the acquirer/court

Miscellaneous - Obligations of the Acquirer

General Obligations of the acquirer as in Reg # 24 Acquirer

• Shall announce its public announcement of offer, with careful & responsible consideration.
• Acquirer and Manager to Offer must be satisfied that it can + will be able to implement takeover offer in full
• At the time of the public announcement of offer, make sure the identities of all persons are disclosed to the public and target company
• The identities include those making arrangements for funding requirements
• If director/acquirer is a public company faced with conflict of interest as a result of proposed acquisition make sure an independent committee assesses the plan
• Has to send copy of proposal letter to the target security exchange and to SECP
• A director can get exemption from responsibility if they give a statement with reasons in public announcement
• People with interest in said company must not participate in matters relating to the said bid including any preparation
• Make sure that you have the necessary security as provided under Act and regulations Make sure firm financial arrangements have been made public with all suitable disclosures
• Has 10 days from when the offer closes to sort payment to shareholders and all procedures for the act
• As the acquirer all acts must be done in with good faith/best interest to the shareholders, the company, with consideration for the long term

Managers Responsibilities

• Any change in manager must be immediately put out to the SECP to company(the manager can be held liable for not doing so during their post) Everyone must be treated fairly, especially shareholders who must be treated the same Don't be oppressive, do not be unfair to non-controlling shareholders
• The manager is the agent of the company, they must check that: The acquirer does have any dues to other parties
• The acquirer must be able to implement the offer
• If its possible make a public announcement in accordance to the Act
• Make sure the contents are based on reliable resources with sources in notes To be formatted in schedule 11 and provided for SECP the above.
• Is there a filing process with SECP and the target company
• If the above is caused they may let the SECP know

Obligations of the Target Company

• Does not sell or transfer the company
• Issue any right or bonus shares, they or the board cannot
• Does not appoint additional directors to fill vacancies
• Facilitate the transfer of the name of the acquirer to shares The above must be facilitated if it is acquired at over 30% votes and must call notice etc

Reg # 25. General obligations of the parties in the process

Target:

• Target must let the acquirer and operator have all the documentation, the security holders as well(name,shareholding)
• If the acquirer needs information from the company they need it to prepare
• If the process for acquisition went successfully at a number specified
• The company must adhere to these guidelines in the exchange by informing them of the change, the SECP and a detail of speculation if acquired
• In short:
• Report of acquirer's potential control
• Lack of support from action
• Action the acquirer took