Conditional open offers serve as a highly effective mechanism for investors seeking to acquire a substantial stake in a publicly listed company, particularly in cases where the initial underlying agreement triggering the open offer lacks a substantial stake in the company. Upon attaining a minimum of 25% ownership in a publicly listed entity, an investor triggers a mandatory open offer requirement under the SEBI Takeover Code. In the conventional framework of an open offer, the acquirer is bound by obligation to complete the purchase of shares should the public shareholders opt to sell them, with no discretion to decline the transaction.

Nevertheless, there exists an exception known as a Conditional Open Offer. Under this circumstance, an investor acquires a minimum of 25% ownership in a publicly listed entity, thereby triggering the open offer procedure. However, the investor stipulates a condition wherein, if a predetermined threshold of shares is not tendered, they shall abstain from acquiring any shares during the open offer, along with abstaining from the underlying transaction that instigated the open offer. Essentially, a conditional offer represents a transaction of an all-or-nothing nature.

Regulatory framework
Under Regulation 19 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, commonly referred to as the 'Takeover Code', acquirers are permitted to issue an open offer that is conditional upon attaining a specified minimum acceptance level from public shareholders. This provision affords the acquirer the prerogative to withdraw from the transaction should the stipulated conditions remain unfulfilled.

Case study: Aditya Birla Fashion and Retail Limited's (ABFRL) acquisition in TCNS Clothing Company Ltd

Conditional open offers have only been used twice in the past 10 years. In 2014, Moody's Singapore executed a conditional open offer to acquire a 26.5% interest in ICRA Limited. The acquisition was conditional upon a minimum acceptance level of 21.5%. Importantly, the Moody Group already held a 28.5% stake in ICRA Limited. The offer proved successful as the as the stipulated condition was met. This case exemplifies the benefits of a conditional open offer, as Moody's strategic condition facilitated the acquisition of a substantial interest in ICRA Limited, thereby securing control.

In May 2023, Aditya Birla Fashion and Retail Ltd. (ABFRL) acquired a substantial 51% stake in TCNS Clothing Co. Ltd. The transaction was structured as follows: first, the acquisition of the promoter's stake through a Share Purchase Agreement (SPA) and a conditional public open offer; subsequently, a merger between the two companies. The deal, valued at INR 7,000 Crores, stands as one of the largest transactions in the Indian fashion industry.

Objective of the transaction
The primary objective of this transaction for ABFRL was to secure a controlling 51% stake in TCNS Clothing Company Ltd., thereby consolidating its position, or opting to discontinue the transaction entirely. The conditional open offer mechanism served as a pivotal factor in this process, facilitating what is commonly referred to as an 'all-or-nothing' transaction. Through the merger with TCNS, ABFRL is poised to augment its range of ethnic wear offerings, synergizing with its distinguished portfolio of brands spanning various segments within the Indian fashion landscape.

Structure of the transaction
In the instance of TCNS, the promoters held approximately 31% of the shares, while the acquirer had no existing stake. The remaining 69% was held by the public.

In ABFRL's endeavor to attain a 51% ownership stake, they executed a share purchase agreement outlining their intent to acquire a 22% shareholding from the current promoters. Upon the execution of this agreement, which delineated the specified percentage range, they initiated an open offer. This open offer, comprising 29% of the company's total shares in this instance, was contingent upon the condition that a minimum tendering of 20% must be achieved.

In The Present Scenario, Three Distinct Situations Arise:

• Tendering Below 20%: Should the tendering rate fall below the 20% threshold, the acquirer maintains the right to terminate the entire transaction.
• Tendering at 20%: In this circumstance, the acquirer would acquire the 20% stake from the public. Additionally, the acquirer possesses the capability to procure an additional 31% from the current promoters, thus achieving a total shareholding of 51%.
• Full Tendering at 29%: If the tendering reaches the full 29%, the acquirer secures 29% from the public and obtains an additional 22% from the promoters, once again resulting in a controlling interest of 51%.

In this scenario, complete tendering transpired, leading to a 29% acquisition in favor of the acquirer. As a result, the acquirer procured 29% from the public and an additional 22% from the promoters, thus attaining a comprehensive ownership of 51%. This meticulously structured arrangement guarantees the attainment of a minimum 51% ownership, and any outcome below this threshold affords the acquirer the discretion to entirely withdraw from the transaction.

Key aspects of a Conditional Open Offer:

• Pricing
  Share prices are susceptible to fluctuations throughout the duration of the offer period, potentially influencing shareholders' decision-making processes. This volatility may instill uncertainty among investors regarding the extent of tendering they can anticipate from shareholders. ABFRL extended a conditional open offer for a 29% stake at ₹503 per share, a price exceeding the volume-weighted average of ₹485 by approximately ₹18. In a conditional offer, it is imperative that the offer price be established at a premium. This incentivizes public shareholders to tender their shares, thereby enhancing the prospects of a successful acquisition.
   
• Market fluctuations and shareholder sentiment
  Market fluctuations serve as a barometer for shareholder sentiment, directly impacting the outcome of a conditional open offer. Initially, assessing the current market price is pivotal as it provides essential context for making well-informed decisions. Additionally, comprehending the market's perception of the transaction is crucial, as market sentiment profoundly influences the offer's result. While market fluctuations may furnish valuable insights into shareholder sentiment, they also introduce challenges for acquirers in navigating the intricacies of conditional open offers.

Conclusion
Despite conditional open offers being a potentially effective mechanism, they come with inherent challenges. Unlike traditional open offers, conditional offers provide an exit route if the desired acceptance level is not met. Acquirers must meticulously assess the market dynamics, regulatory requirements and adopt a systematic approach to mitigate risks. Conditional open offers, when strategically structured, can be leveraged effectively in corporate acquisitions.

Written By: Disha Waghela