Mergers and Acquisitions in Pakistan
The Competition Act, 2010 provides that where an undertaking intends to acquire shares or assets of another undertaking; or two or more undertakings intend to merge the whole or part of the business of one undertaking and meet the premerger thresholds prescribed in the Competition (Merger Control) Regulation, 2007 the concerned undertaking must seek a clearance from the Competition Commission.
Listed Companies (Substantial Acquisition of Voting Shares and Take Overs) Ordinance, 2002; AND Listed Companies (Substantial Acquisition of Voting Shares and Takeovers) Regulations, 2008.
The Listed Companies (Substantial Acquisition of Voting Shares and Take Overs) Ordinance, 2002 (“Takeover Ordinance”) and the Listed Companies (Substantial Acquisition of Voting Shares and Takeovers) Regulations, 2008 (the “Takeover Regulations”)
contain detailed provisions in relation to acquisition of shares of listed companies.
Where an acquirer intends to acquire more than 25 percent of the voting shares or control of the listed undertaking the acquirer is compulsorily required by the Takeover Ordinance to make a public announcement of offer to acquire at least 50% of the remaining voting shares of the company to be acquired. A few types of transactions are exempt from making public offer e.g. acquisition of shares through a scheme of financial institution does not require the acquirer to make a public offer.
The Companies Act, 2017 deals with the schemes of arrangements for mergers or demergers. The relevant sections are 279 to 285 of the Companies Act, 2017. These provisions inter.alia allow one or more companies to enter into compromise agreements/arrangements with its members or creditors in respect of a merger or demerger of the concerned companies. The scheme of arrangement lays out the particulars including issues of assets/property, liabilities and debts of the companies, share swaps ratios etc. the continuation of any legal proceedings and dissolution without winding up of one or more of the concerned entities. The compromise or arrangement shall be sanctioned by the Securities and Exchange Commission of Pakistan. The commission is also empowered under the Companies Act, 2017 to enforce compromises and arrangements.
Section 183(3) of the Companies Act, 2017 provides that the board of a company shall not, except with the consent of the shareholders in a general meeting, either specifically or by way of an authorization, sell, lease or otherwise dispose of the undertakings or a sizeable part thereof (unless the main business of the company comprises of such selling or leasing).
A common question is as to what documentation is required for implement the transactions of mergers and acquisitions. The above discussed laws state some requirement discussed under each head.
The transactions related to acquisition of shares are implemented by way of agreements or instruments. The Competition (Merger Control) Regulation, 2007 prescribe the premerger thresholds whereby a pre.merger application to the Competition Commission (as defined and established under Competition Act, 2010) is required to be submitted by the concerned undertaking. The form of such application is prescribed in the Schedule of Competition (Merger Control) Regulation, 2007 and shall be supported by the following documents:
The Listed Companies (Substantial Acquisition of Voting Shares and Take Overs) Ordinance, 2002 (“Takeover Ordinance”) requires a number of notices, undertaking and disclosures to the Stock Exchanges, Securities Exchange Commission of Pakistan (“SECP”) and the target company in case of an acquisition of substantial/major shares of a listed company. The significant filings/documents are specified here.in.below:
A compromise or arrangement with creditors and members in case of merging company are required to be sanctioned by the Securities and Exchange Commission of Pakistan. The relevant sections of Companies Act, 2017 dealing with scheme of arrangements and its sanctioning requirement are 279 to 282.
There are certain industry specific regulations in respect of mergers and acquisitions as given below:
Amalgamation of non.banking finance companies (“NBFCs”) are subject to approval by the Securities and Exchange Commission of Pakistan under section 282(L)(4) of the Companies Ordinance, 1984 (“Ordinance”). By way of comment it is stated that sections 282A to 282N of the Companies Ordinance, 1984 have not been repealed by Companies Act, 2017 and NBFCs are still dealt with under the Ordinance. Furthermore, unlike the general provisions where a majority representing 75% of the value of shares present at the meeting must approve of the merger, for the mergers of NBFCs, a majority representing two thirds in value of the shareholders of each NBFC, present either in person or by proxy, must approve of the scheme.
The Insurance Ordinance, 2000 requires a prior approval from SECP in case of acquisition of more than 10% shares in an insurance company, or, in the case of a non.life insurer of the whole or any part exceeding 10% of the business located in Pakistan of the insurer.
The insurance Ordinance further provides that the life insurance business of an insurer shall not be transferred to any person or transferred to or amalgamated with the life insurance business of any other insurer except in accordance with a scheme sanctioned by the Court having jurisdiction over one of the concerned parties.
Merger and acquisition of banking companies would also be governed by the Banking Companies Ordinance 1962 (“Ordinance”). Under the Ordinance, the State Bank of Pakistan regulates shares acquisitions of banking companies. For instance, in order to hold more than 5% of the voting shares in a banking company, the approval of State Bank of Pakistan is required. Another example is that any merger, amalgamation or acquisition of a banking company requires prior approval of State Bank of Pakistan.
Companies providing broadcast media and related distributions services are required to be licensed under the Pakistan Media Regulatory Authority Ordinance 2002 (“PMRA”). PMRA prohibits the grant of the license to companies owned, controlled or managed by foreign nationals or companies i.e. the foreign entities are prevented from acquiring the broadcast and media related organizations.
The parties are free to establish condition to the business combination that do not contravene the provision of Companies Act, 2017 in case of an unlisted company.
In respect of listed companies, the Regulation No. 14 of the Listed Companies (Substantial Acquisition of Voting Shares and Takeovers) Regulations, 2008 require the interested acquirer to make a public offer conditional upon a minimum level of acceptance from the tendering shareholders. The acquirer can impose a minimum level of acceptance of not more than 35% (thirty five percent) of the remaining voting shares of the target company. Conditional financing for a listed company is unlikely under the Listed Companies (Substantial Acquisition of Voting Shares and Take Overs) Ordinance, 2002. Before proceeding with a public announcement of offer, a potential acquirer must appoint a manager to the offer. The manager to the offer is required by law to ensure that before the public announcement of offer is made, the acquirer has made firm arrangements for funds for payments to shareholders under the public offer.
Scheme of arrangement. Section 281(1)(a) of the Companies Act, 2017 requires directors and chief executives to disclose to affected creditors and shareholders, the directors and chief executive’s material interest in the merger.
Listed Companies (Substantial Acquisition of Voting Shares and Take Overs) Ordinance, 2002
Section 14 of the Listed Companies (Substantial Acquisition of Voting Shares and Take Overs) Ordinance, 2002 restricts the board of directors of the target company from taking certain actions during the offer period. During such period the directors in the board of target company may not:
Section 13(2) of the Listed Companies (Substantial Acquisition of Voting Shares and Take Overs) Ordinance, 2002 restricts shareholders of the target company to participate in a share purchase agreement with the acquirer during the offer period. Moreover, the controlling shareholders have a duty of good faith to minority shareholders.
There is no specific law dealing with break.up fees in Pakistan. The Contract Act, 1872 allows compensation for any loss or damage caused by the breach that naturally arise in the usual course of business. However, in Pakistan the remote or indirect loss sustained by the reason of a breach is not compensated. The parties may agree to amounts of liquidated damages which would be payable upon termination of the transaction by the target company. However, the clauses pertaining to liquidated damages may not be enforced by the Courts in cases where such clauses impose liquidated damages by way of a penalty and not as a genuine pre.estimation of the actual loss that will be suffered by the acquirer
Minority shareholders can be squeezed out only in limited circumstances. Relevant law dealing with the issue is Section 285 of the Companies Act, 2017. Where a scheme or contract involving the transfer of shares or any class of shares in any company (the “transferor company”) to another company (the “transferee company”) has, within one hundred and twenty days after the making of the offer on that basis by the transferee company, been approved by the holders of not less than nine.tenths in value of the shares whose transfer is involved (other than shares already held at the date of the offer by, or by a nominee for, the transferee company or its subsidiary) the transferee company may, at any time within sixty days after the expiry of said one hundred and twenty days, give notice in the prescribed manner to any dissenting shareholder that it desires to acquire his or her shares. When such a notice is given the transferee company shall, unless, on an application made by the dissenting shareholder within 30 days from the date on which the notice was given, the court thinks fit to order otherwise, be entitled and bound to acquire those shares on the terms on which, under the scheme or contract, the shares of the approving shareholders are to be transferred to the transferee company. The squeezed out provisions are subject to certain additional conditions prescribed in the Companies Act, 2017.
Under Competition Act, 2010, an organization needs to obtain a clearance from the Competition Commission before proceeding with a merger. The Section 11(3) of the Competition Act, 2010 requires that the concerned undertakings shall submit a pre.merger application to the Competition Commission as soon as they agree in principle or sign a non.binding letter of intent to proceed with the merger. Upon submission of application, the Competition Commission will conduct its first phase of review. Within 30 days of receipt of application, the Competition Commission shall issue an order for allowing the merger or initiate a second phase of review which might require the merging entities to provide such information as considered necessary by the Competition Commission. In such a case the Competition Commission shall within 90 days of the receipt of requested information, make an order either to allow or reject the merger.
The Listed Companies (Substantial Acquisition of Voting Shares and Take Overs) Ordinance, 2002 lays down certain requirements and timelines regarding the public offer for acquisition of shares of a listed company. The public announcement of offer is required to be published by acquirer within 180 days of publishing a notice regarding its intention to acquire voting shares. The acquirer’s offer statutorily expires on the 60th day of the publication of the public announcement of offer. The acquirer is required to make payment for the tendered shares within 30 days of expiry of acceptance period (60 days from the announcement of public offer).
A scheme of arrangement is required to be devised for merger or amalgamation under the Companies Act, 2017 which is required to sanctioned by Securities and Exchange Commission of Pakistan.
Transactions involving foreign exchange and cross.border transfer of securities are also governed by the Foreign Exchange Regulation Act, 1947 (“FERA”). Section 18(1) of FERA prohibits a person resident in Pakistan from doing any act whereby a company which is controlled by persons resident in Pakistan ceases to be controlled. The SBP has not granted any general permission for such transactions as such any transaction involving a change of control of a company from a resident person to a non.resident person requires the special permission of the SBP.
Section 13(1) of FERA restricts, except with the general or special permission of the State bank of Pakistan, inter alia, the transfer of securities (including shares) to or in favor of a person resident outside Pakistan. Chapter XX of the Foreign Exchange Manual provides a general exemption from restrictions under section 13(1) in relation to transfer and export of securities on a repatriation basis provided the issue price or purchase price is paid in foreign exchange through normal banking channels, the purchase price is not less than the price quoted in the stock exchanges of the country or in the case of an unlisted company not less than the break.up value of the shares as certified by a practicing chartered accountant.
