Conditional offer

An acquirer may be buying a company only because it expects to end up with a certain stake. If too few shareholders tender, it would be left paying for a large block from the promoters without the control it wanted. A conditional offer lets it say so upfront: this offer, and the deal behind it, go ahead only if at least a stated number of shares are tendered.

The price of that flexibility is paid in cash. Because the offer might never complete, the takeover code requires a much larger cash escrow than for an unconditional offer, and it forbids the acquirer from buying shares on the side while the outcome is open.

Making it (Chapter 7). An acquirer may make an open offer conditional as to a minimum level of acceptance, provided the offer is made after the agreement, and the agreement contains a condition that if the desired level is not received, the acquirer shall not acquire any shares under the open offer and the agreement attracting the obligation shall stand rescinded. The public announcement discloses the offer size and conditions as to minimum level of acceptances.

While it runs. The acquirer and PACs shall not acquire any shares in the target during the offer period except under the open offer and the underlying agreement.

Escrow — in cash (Chapter 7). Where an open offer is conditional on a minimum level of acceptance:

Cash in escrow = higher of (100% of consideration for the minimum level of acceptance,
                            50% of the consideration payable under the offer)

Compare an unconditional offer: 25% of the first Rs 500 crore plus 10% of the balance, which may be held as cash, bank guarantee or securities (with at least 1% of total consideration in cash).

Pricing. Where the offer is subject to minimum acceptance, the acquirer may indicate a lower price for acquiring all acceptances despite the acceptance falling short of the indicated minimum — but that lower price may not be less than the price determined under the regulations.

Competition. Unless the first open offer was conditional, no competing offer may be conditional.

Withdrawal. An open offer may be withdrawn if a condition in the agreement is not met for reasons outside the acquirer's reasonable control and the agreement is rescinded — provided that condition was specifically disclosed in the detailed public statement and letter of offer. The announcement of withdrawal is made through the manager to the open offer within two working days. The withdrawal route is not available for an offer triggered by a preferential issue, even if that issue fails.

Conditional offer escrow (cash) = max( 100% × Price × Minimum acceptance shares,
                                      50% × Price × Total offer shares )

Unconditional offer escrow       = 25% × first Rs 500 crore + 10% × balance

Illustrative figures. An acquirer offers to buy 2.6 crore shares at Rs 200, conditional on a minimum acceptance of 1 crore shares.

Total consideration          = 2.6 crore × Rs 200 = Rs 520 crore
Minimum-acceptance value     = 1.0 crore × Rs 200 = Rs 200 crore

100% of minimum acceptance   = Rs 200 crore
50% of total consideration   = Rs 260 crore
Cash escrow required         = Rs 260 crore (the higher)

The same offer made unconditionally:

25% × Rs 500 crore + 10% × Rs 20 crore = Rs 125 crore + Rs 2 crore = Rs 127 crore

— and that Rs 127 crore could be mostly a bank guarantee, with only 1% × Rs 520 crore = Rs 5.2 crore in cash. The condition has more than doubled the escrow and turned it all into cash.

Outcome 1 — 1.4 crore shares tendered. The minimum is met; the acquirer buys all 1.4 crore and completes the agreement.

Outcome 2 — only 80 lakh shares tendered. The minimum is missed. The acquirer buys nothing under the offer and the share purchase agreement stands rescinded — which is why that clause had to be in the agreement from the start.

Meanwhile. On the second day of the offer period the acquirer's treasury proposes buying 10 lakh shares on the exchange to help reach the minimum. That is prohibited: during a conditional offer, no acquisition except under the offer and the agreement.

Chapter 7 (Other Merchant Banking Activities – Mergers, Acquisitions & Takeovers), 15% of the paper, has a section "Conditional Offer and Procedure" and puts the conditional escrow rule in the escrow table.

Expect the escrow computation — the higher of 100% of the minimum-acceptance consideration and 50% of the total — and the rule that a competing offer can be conditional only if the first one was.

• Conditional escrow is always cash — no bank guarantee, no securities for this part.
• It is the higher of the two amounts, not the lower and not the sum.
• The agreement must be rescinded if the minimum is not reached — a conditional offer with an agreement that survives failure does not meet the rule.
• The offer must be made after the agreement.
• No side purchases during the offer period.
• A lower price for all acceptances may be indicated, but never below the regulatory minimum price.
• Competing offers inherit conditionality only if the first offer was conditional.