In the Indian financial markets, there have been many instances where a company acquires a stake in another company. Such acquisitions could either be hostile (without the consent or knowledge of the target company) or consensual (with the consent and knowledge of the target company).
One of the most popular ways through which companies consensually acquire a stake in other companies is through an open offer. Wondering what it is? Here is everything you need to know about the concept, including the meaning of an open offer and how it works in India.
What is an open offer?
According to the Securities and Exchange Board of India (SEBI), an open offer is an offer that an acquiring company makes to the target company’s shareholders to purchase that company’s shares at a specific price.
However, such an offer does not always have to be made by an acquiring company. Sometimes, non-promoter shareholders (including individuals) of a particular company may make an open offer inviting the other shareholders of the same company to sell their stake to them at a specific price.
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What conditions need to be satisfied to trigger an open offer?
An open offer is triggered if either of the following two conditions are met by the acquirer.
- The acquirer holds less than 25% of the total shares or voting rights in a company
In this case, an open offer is triggered if the share acquisition that the acquirer is planning in the target company increases their total shareholding to more than 25%.
For example, assume that Company A has a 20% stake in Company B. Company A plans to increase its stake in Company B. However, doing so will increase the total shareholding of Company A in Company B to 27%. In such a situation, Company A must mandatorily make an open offer to Company B’s shareholders.
- The acquirer holds more than 25% but less than 75% of the total shares or voting rights in a company
In this case, an open offer is triggered if the acquirer plans to acquire more than 5% of the target company’s total shares during a financial year.
For instance, assume that Company A has a 50% stake in Company B as of the end of FY23. In FY24, Company A plans to acquire an additional 6% stake in Company B. In this case, Company A must make an open offer to Company B’s shareholders.
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What is the objective of an open offer?
The primary objective of an open offer is to provide the existing shareholders with a way to exit the company on account of a substantial change in the shareholding pattern or even control.
Shareholders who are not in agreement with the possible change in control or management of the company could tender their shares to the acquirer making the open offer. This would provide them with a clean way to exit the company instead of having to sell their shares on the secondary market.
How does an open offer work?
Understanding how an open offer works may appear challenging. Here is a hypothetical example that can help.
Company A is in the business of manufacturing automotive components. The current market share price of the company is Rs. 500 per share. Company B is an automobile manufacturer looking to acquire a substantial stake of 30% in Company A. Such an acquisition would give Company B major control over Company A’s operations, which it could leverage to make its own operations more seamless and efficient.
In this case, Company B is mandatorily required to make an open offer to the shareholders of Company A, inviting them to sell their shares for Rs. 600 per share. Shareholders of Company A who are not in agreement with the substantial shift in the control and management of the company’s operations can use the open offer as an opportunity to sell their shares at Rs. 600 per share.
But what if Company B was only looking to acquire just 10% or 20% of Company A’s shares? In that case, Company B need not make an open offer to Company A’s shareholders. It could freely acquire the shares via other methods, such as through the secondary market.
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Key things to know about an open offer
Now that you are aware of the meaning of an open offer and how it works, let us look at a couple of key things you must know about this concept.
- Shareholders appearing on the target company’s register of members as of the record date are only eligible to participate in the open offer. However, in some cases, shareholders who acquire the target company’s shares after the said record date may be permitted to participate, provided they make a formal request with the registrar of the open offer.
- Open offers are usually open for a limited period. Shareholders interested in selling their stake to the acquirer must tender their shares by the due date specified in the offer document.
Conclusion
Open offers are a transparent way for an acquiring company to buy shares of the target company. Additionally, it also provides existing shareholders of the target company with a way to cleanly exit the company if they are dissatisfied with the shift in management or control. That said, it is important to remember that the target company’s shareholders do not need to tender their shares to the acquirer. In this case, they may simply choose not to participate in the open offer.
