In Pakistan, several key rules and laws govern mergers and acquisitions (M&A). The primary legislation is the Companies Act, 2017 (“Companies Act”) which provides the overarching framework for mergers and amalgamations.

Acquirors undertaking substantial acquisitions of voting shares or aiming for takeovers of listed companies are governed under the Securities Act, 2015 (the “Securities Act”) and the Listed Companies (Substantial Acquisition of Voting Shares and Takeovers) Regulations 2017  (the “Takeover Regulations”). The Public Offering Regulations, 2017 (and subsequent amendments) (“PO Regulations”), particularly Chapter VIA, lay down the specific rules for Special Purpose Acquisition Companies (SPACs), which are formed for the purpose of undertaking mergers or acquisitions. The provisions of the Pakistan Stock Exchange Limited Regulations (the “PSX Regulations”), notified under the Securities Act, are also applicable to mergers and acquisitions of listed companies in Pakistan

Competition aspects of M&A are regulated under the Competition Act, 2010 (“Competition Act”) and the Competition Merger Control Regulations, 2016 (“Merger Regulations”).  It is important to note that these laws may not apply to mergers and acquisitions of banking companies, which are governed under the Banking Companies Ordinance, 1962. Similarly, Insurance Ordinance, 2001 governs M&A for Insurance Companies.

In case of cross-border mergers and acquisitions, the Foreign Exchange Regulation Act, 1947, and the rules/ regulations made thereunder are also applicable. The parties must complete the transfer of shares/securities under special permission from the State Bank of Pakistan, the relevant regulatory authority.

The key regulatory authorities involved in M&A in Pakistan are:

• The Securities and Exchange Commission of Pakistan (SECP) plays a central role in overseeing mergers, amalgamations (for certain types of companies), takeovers, and SPACs. The SECP assesses schemes of arrangement, grants sanctions, and ensures compliance with relevant regulations.
• The Company Court (which is the Company Bench of the High Court having jurisdiction) under the 2017 Act, is involved in the sanctioning of schemes of arrangement for companies that are neither small-sized nor public sector companies wholly owned by the Federal Government. Applications for such schemes are filed under Section 279 of the Act.
• The Competition Commission of Pakistan (CCP) reviews mergers and acquisitions to assess their potential impact on competition. Parties to an intended merger may be required to obtain a No Objection Certificate (NOC) from the CCP.
• The Pakistan Stock Exchange (PSX) is relevant for listed companies involved in M&A. Listing of new shares after a merger and compliance with PSX Regulations during takeovers are important considerations.
• The State Bank of Pakistan (SBP) regulates share acquisitions of banking companies under the Banking Companies Ordinance 1962. The SBP also regulates the foreign exchange regime in Pakistan which may become relevant in cross border mergers and acquisitions.

The M&A market in Pakistan is experiencing significant growth, the government’s privatization agenda and efforts to attract Foreign Direct Investment (FDI) have played a crucial role in revitalizing the market. Political stability following the 2024 general elections, along with economic reforms and regulatory improvements, has strengthened investor’s confidence in Pakistan’s M&A market. The Competition Commission of Pakistan (CCP) has approved several mergers and acquisitions in 2024, bringing in Rs. 29.6 billion in FDI. As regulatory frameworks evolve and investor’s confidence grows, M&A activity is expected to remain strong, supporting economic expansion and corporate consolidation in Pakistan.

The major sectors where M&A activity has been observed are telecommunications, petroleum, pharmaceuticals, real estate, banking, and energy.

Global M&A activity significantly impacts subsidiaries of multinational companies in Pakistan, leading to direct or indirect changes in shareholding structures. Alongside global market trends, the government’s economic reforms plan including the privatization agenda, efforts to attract FDI, and changes in applicable tax policies will play a crucial role in shaping M&A activity in Pakistan.

In Pakistan, the acquisition of a publicly traded company can be effected through several key means, primarily governed by the Securities Act, Takeover Regulations and the Companies Act.

One of the primary methods to effect the acquisition of a listed company is a tender offer (also known as a public offer) under the Securities Act. This is a formal offer made by an acquiror to the shareholders of a target company to purchase their shares at a specified price during a designated period. The key aspects include:

• Public Announcement of Intention (PAI): Before making a public offer, the acquiror must issue a PAI, disclosing their identity and future plans, including any intention to take the company private. This announcement is notified to the target company, the stock exchange, and the SECP.
• Minimum Offer Price: The public offer must be made at a price that is the highest amongst several criteria, including the highest price paid by the acquiror in the preceding 180 days, and weighted average share prices over different periods.
• Offer Period: The tender offer must remain open for a minimum of 20 business days. The closure date cannot be later than fifty-four days from the date of the public announcement of the public offer.
• Conditions and Obligations: The offer must be extended to all shareholders, and all purchases must be made at the best price offered. Buyers cannot purchase shares outside the tender offer during this period. If the offer is oversubscribed, the buyer must purchase shares on a pro-rata basis. The acquiror must also arrange the requisite security to fulfill their obligations under the public offer.
• Manager to the Offer (MTO): The acquiror must appoint an MTO, licensed by the Commission, to manage the offer process.

Another significant means is through a Scheme of Arrangement (SOA) under the Companies Act, which encompasses mergers and amalgamations. While often involving the combination of two or more companies, a scheme could also be utilized in situations where an acquiror, having potentially gained a significant stake through other means like a tender offer, proposes a merger to acquire the remaining shares. This process involves:

• Board Approval: The boards of the companies involved must approve the scheme.
• Court/Commission Sanction: Depending on the type and size of the companies, the scheme requires the sanction of either the Company Bench of the High Court or the Securities and Exchange Commission of Pakistan. This involves a petition or application, disclosure requirements, and meetings of members and/or creditors to approve the scheme by a majority representing three-fourths in value.
• Share Swap Ratio: In mergers, the share exchange ratio is typically determined by an independent firm of chartered accountants to ensure fairness to shareholders.

In Pakistan, listed companies must publicly provide key documents, such as financial statements, and disclose company-related information for a fee. Upon initiation of an acquisition, significant information about the target becomes publicly available primarily under the Takeover Regulations. This includes the acquiror’s Public Announcement of Intention (PAI), detailing information about the acquiror and the intended acquisition. The target company must also inform the SECP about firm intentions, rumours, or negotiations, which is then made public. Subsequently, a Public Announcement of Public Offer and an offer letter are issued. For SPACs, the prospectus and later an information circular about the target become public. Listed companies have ongoing obligations to disclose price-sensitive information under the Securities Act.

Crucially, the target company is obligated to provide the acquiror and the Manager to the Offer with all relevant and material information needed for due diligence under the Takeovers Regulations. This is reinforced in SPAC mergers requiring an information circular on the target and in schemes of arrangement necessitating disclosure of all material facts.

The level of detail generally depends on the size of the target company, the nature of the business, and the complexity of the transaction. The Takeovers Regulations mandate the target company to ensure the acquiror receives this information. This typically covers financial, operational, legal, contractual, regulatory and compliance matters, alongside details on shareholding, management, and valuation.

The key decision-making body in a target company is the board of directors, which has the authority to manage the company’s affairs and in some matters with the prior approval of the shareholders. Shareholders elect the board and have approval rights for major decisions, such as selling, leasing, or disposing of substantial company assets or subsidiaries, as required under Section 183(3) of the Companies Act. Specifically, shareholders must approve schemes of arrangement with a three-fourths majority.

In the context of Special Purpose Acquisition Companies (SPACs), a special resolution with a 75% majority of shareholders is required for the acquisition of a target company. Dissenting SPAC shareholders may be entitled to a refund. In a takeover, target company shareholders ultimately decide whether to accept the public offer.

Directors of a target company have several duties under the Companies Act, the Securities Act, and the Takeover Regulations. They must act in accordance with the company’s articles, in good faith, and in the best interests of the company and its shareholders. They are required to exercise due care, skill, diligence, and independent judgment while avoiding conflicts of interest. During an offer period, Section 119 of the Securities Act prohibits directors from selling or encumbering assets, issuing shares, or entering into material contracts. Additionally, they cannot appoint any individual linked to the acquiror as a director until the acquisition is completed. The Takeover Regulations further require directors to provide unbiased comments and recommendations on the public offer to the shareholders, facilitate the acquiror in verifying tendered securities, and, in case of conflicts of interest, establish an independent committee to assess the proposed public offer.

Controlling shareholders do not have specific obligations in the context of M&A transactions. However, under the Companies Act, they are required to act in good faith when exercising their voting rights at general meetings.

Employees and other stakeholders generally do not have mandatory consultation or approval rights in M&A transactions, except where employment contracts or laws specifically provide for such consultations. Creditors may have rights under specific contractual agreements or schemes of arrangement that require their approval. The privatisation of government companies through M&A requires approval from the Federal Cabinet. Similarly, M&A transactions within regulated sectors require approvals from relevant authorities, such as OGRA for the petroleum sector and PTA for the telecommunication sector.

The Securities Act imposes strict limitations on the use of conditionality. The most common condition allowed is a minimum level of acceptances. This means that the acquiror can reject all acceptances if they do not meet the specified threshold. However, the Takeover Regulations limit this to 35% of the remaining voting shares in the target company after the acquiror has already acquired 30% of the voting shares in the target company, ensuring that conditionality does not create undue uncertainty or disrupt market confidence.

To secure deal exclusivity, an acquiror can take several strategic steps to ensure that the target company does not engage with other potential buyers during the acquisition process. The most common approach is entering into an exclusivity agreement with the target company. However, Securities Act, imposes constraints on the exclusivity arrangements when the acquisition leads to a change in control or surpasses the prescribed thresholds under section 111 of the Act, by a binding provision of disclosure to the SECP. Under section 120 of the Securities Act, other bidders can make a higher offer within 21 days of the first public announcement, making it harder for an acquiror to secure exclusivity upfront. However, the acquiror can try to discourage competition by raising the offer price or increasing the number of voting shares anytime up to seven working days before the public offer closes. This gives the initial acquiror a chance to improve its bid if competitors emerge.

On the other hand, if the acquisition does not result in a change of control and does not trigger Section 111 thresholds, the acquiror has more room to negotiate exclusivity. In such cases, the acquiror and the target company can enter into an exclusivity and confidentiality agreement to facilitate due diligence.

Except for permissible exclusivity agreements, we are unaware of any other deal protection mechanisms available to acquirors. Unlike more sophisticated jurisdictions, it is unlikely in Pakistan for companies to insure/ underwrite the acquisition process.

Cash is the most common form of consideration in acquisitions. For listed companies, payment can be made entirely in cash or through certain prescribed securities with a cash alternative. The Takeover Regulations set a mechanism for determining the minimum offer price, and the acquiror must complete payment within two days of the public offer’s closure. In other companies, shares can be acquired through cash, in-kind payments, or share swaps based on mutual agreement. Moreover, in mergers share-swaps are the most common form of consideration.

These are provided in the Companies Act, Takeover Regulations and the Securities Act. Under Section 465(4) of the Companies Act, a company is required to inform the SECP of any change in more than 25% of shareholding or membership or voting rights.

Under Securities Act more detail can be found as to how much public disclosure is required at certain ownership levels by an acquiror. Pursuant to section 110 of the Securities Act, any acquiror who acquires voting shares, which, taken together with voting shares, if any, held by the acquiror, would entitle the acquiror to more than ten percent (10%) voting shares in a listed company, shall disclose the aggregate of its shareholding in that company to the target company, the PSX and the SECP within two (2) working days.

An acquiror may acquire additional voting shares within a period of twelve (12) months after acquisition of voting shares without making the aforementioned disclosure in case the total acquisition does not exceed an aggregate of thirty percent (30%); disclosure will again be required to be made within two (2) days after lapse of twelve (12) month period or if the aggregate shareholding will exceed thirty percent (30%);

As per the section 111 of the Securities Act, it is mandatory for a public offer to be made by an acquiror to acquire at least fifty percent (50%) of the remaining voting shares of the target company if the acquiror will:  acquire voting shares, which (taken together with voting shares, if any, held by such acquiror) would entitle such acquiror to more than thirty percent (30%) voting shares in a listed company; or  acquire additional voting shares in case the acquiror already holds more than thirty percent (30%) but less than fifty-one percent (51%) of the voting shares of a listed company provided that such acquiror shall not be required to make a fresh public offer within a period of twelve (12) months from the date of the previous public offer; or acquire control of a listed company.

Certain transactions are exempt from the requirement of making a public announcement and public offer requirements as stipulated in section 109 of the Securities Act.

It varies from depending on the type of company the target company is. Under Section 96 of the Securities Act, a listed company shall disclose to the public forthwith any price sensitive information relating to the company or its subsidiaries which has come to the company’s knowledge and which would be material to an investor’s investment decision that is necessary to enable the public to appraise the position of the company and its subsidiaries. Under the PSX all listed companies are required to disseminate all price sensitive information to the PSX and the SECP i.e. information regarding mergers, de-mergers, joint ventures, restructuring etc.

Under regulation 5(b) of the Takeover Regulations, a target company shall immediately, in writing inform the SECP and PSX in the following circumstances:

1. if a firm intention to acquire control or voting shares of the target is notified to the target company;
2. when negotiations or discussions are about to commence with a person(s) for acquiring control or voting shares of the target company;
3. when the target company is subject of rumor and speculation or there is an unusual movement in its share price or traded volume and there are reasonable grounds for concluding that it is the potential acquiror’s actions which has led to the situation; and
4. when a director, chief executive and/ or majority shareholder of a target company informs the target company that they individually or in concert with each other or their family members or associates are entering into negotiations for sale of their shareholding

Under regulation 7 of the Takeover Regulations a public announcement of offer shall be made by the acquiror through the manager to the offer within 180 days of making the public announcement of intention in the newspapers which can be extended for a further 90 days under intimation to the SECP.

Given that the public announcement of intention must be made before the due diligence is commenced in order to evaluate the share price of the target, the acquiror will have between six to nine months depending on whether an extension request is granted to complete the due diligence and make an public announcement of offer.

Although no single maximum period is explicitly stated in the Takeover Regulations, by combining the maximum timelines for the progression from the announcement of intention to the offer and then to the completion of procedures, the entire transaction could potentially take around one year. The Takeover Regulations outline a multi-stage process that can take a significant amount of time. An acquiror has up to 180 days (potentially extendable by 90 days) after the initial public announcement of intention to make a public announcement of offer. Following this, the public offer period cannot exceed 54 days, and the final procedures must be completed within 10 days after the offer closes, resulting in a potential total duration of around 1 year.

Regulations 7 and 13 of the Takeover Regulations sets the minimum offer price for acquiring shares in a target company, depending on whether the shares are frequently traded. Shares are considered frequently traded if they have been traded on at least 80% of trading days in the six months before the public offer announcement, with an average daily trading volume of at least 0.5% of its free float or 100,000 shares, whichever is higher. If the shares are frequently traded, the offer price must be the highest among the negotiated weighted average price in a share purchase agreement, the highest price paid by the acquiror in the six months before the offer, the weighted average share price over the last 180 or 28 days before the offer, or a price based on net asset value determined by a Chartered Accountant using audited financial data not older than six months. If the shares are not frequently traded, the offer price must be the highest among the negotiated weighted average price, the highest price paid by the acquiror in the last six months, or the price determined based on net asset value by a Chartered Accountant.

There is no specific provision in the Takeover Regulations or the Securities Act expressly addressing whether a target company can provide financial assistance. However, under Section 86 of the Companies Act, a public company or a private company that is a subsidiary of a public company is prohibited from providing financial assistance, whether directly or indirectly, for the purpose of or in connection with the purchase or subscription of its own shares or those of its holding company.

The governing law used for acquisitions depends on the parties involved. If the acquiror is a non-Pakistani entity, it is common to use the laws of England and Wales due to its well-established legal frameworks for commercial transactions. However, if all parties are Pakistani entities, then Pakistan law is typically used as the governing law for the acquisition agreements. Regardless of the chosen governing law, transactions involving Pakistani companies, especially listed companies, must comply with Pakistan’s regulatory framework, including the Companies Act, the Securities Act and the Takeover Regulations.

In the acquisition of a listed company, the buyer must submit certain public-facing documents as required by regulatory authorities. If the transaction meets the thresholds under the Merger Control Regulations, pre-merger approval from the CCP is mandatory before completing the acquisition. This involves submitting a pre-merger application along with supporting documents, including copies of all agreements or documents related to the merger (such as share purchase agreements or public bids), the most recent annual reports of all merging entities, and business plans for each merging party covering the current year and the past five years. If any submitted information is confidential, the CCP will only disclose a non-confidential version for public access.

Additionally, if the acquisition is conducted through a scheme of amalgamation under the Companies Act, the buyer must file a petition with the SECP or the High Court (depending on the company’s size). This petition must include all necessary supporting documents. A public notice may also be required, typically through advertisement, to call a meeting of shareholders or creditors. This notice must contain or specify where to access a statement outlining the terms of the compromise or arrangement and explaining its effects.

The formalities are evident in Companies Act and the PSX Regulations as the transfer of shares in a listed company is handled electronically through the Central Depository Company (CDC), which manages share settlements on the PSX. Upon transfer, the board of directors of the target company approves the transaction, and the company’s share register is updated accordingly. Since listed shares are held in book-entry form, no physical endorsement of share certificates or execution of transfer instruments is required, making the process paperless.

Regarding stamp duty, traditional share transfer deeds for unlisted companies are subject to provincial stamp duty as per the applicable stamp laws of each province. However, for listed shares, which are transferred electronically without physical documentation, stamp duty is generally not applicable. That said, recent amendments to provincial stamp laws may impose stamp duty on electronic share transfers, depending on the specific regulations in each province or Islamabad Capital Territory. Additionally, the acquiror may be liable under the Income Tax Ordinance, 2001 to make applicable deductions from the consideration payable to the target’s shareholders.

If the buyer is a non-resident, compliance with foreign exchange regulations is required to ensure the repatriation of dividends and disinvestment proceeds.

Hostile transactions are rare in Pakistan as there is a concentrated ownership structure of most listed companies, where largely there are family-owned businesses that hold significant stakes which makes hostile acquisitions challenging. The disclosure requirements under the Securities Act, read with the Takeover Regulations also curtail the likelihood of hostile acquisitions.

The directors of a target company, being mindful of their obligations as per the Companies Act, have limited options to defend itself against a hostile takeover, primarily ensuring that the acquiror complies with all legal requirements. Defensive strategies like the “poison pill” or the “crown jewel” are difficult to implement due to Pakistan’s regulatory framework. However, if the acquiror violates any applicable laws, the director of a target company can take action by notifying the SECP and the CCP, or other relevant regulators. Additionally, the company may challenge the acquiror’s actions in court to protect its interests.

Under Section 111 of the Securities Act, an acquiror is required to make a mandatory public offer to acquire voting shares of a listed company under the following circumstances:

1. If the acquiror, through a single transaction or series of transactions, acquires voting shares that, when combined with shares already held, exceed 30% of the total voting shares of the listed company; or
2. If the acquiror already holds more than 30% but less than 51% of the voting shares and seeks to acquire additional shares. However, a fresh public offer is not required if the acquisition occurs within 12 months of the last public offer; or
3. If the acquisition results in the acquiror gaining control of the listed company.

The mandatory public offer must be made for at least 50% of the remaining voting shares of the target company.

The minority shareholders are protected under the Companies Act, the Takeover Regulations, and the PSX Regulations. Takeover Regulations mandate equal treatment for all shareholders of the target company, ensuring that shareholders of the same class are treated uniformly. Additionally, they emphasize that control rights must be exercised in good faith, and any form of oppression against minority or non-controlling shareholders is strictly prohibited.

The Companies Act provides protections for minority shareholders, including the right to seek winding up of the company by the court if the company’s business is conducted in a manner that is oppressive to minority members.

Under Section 285 of the Companies Act compulsory acquisition of minority stakes can be effected under specific conditions. Compulsory acquisition becomes available when a scheme or contract for the transfer of shares in a company (transferor) to another company (transferee) has been approved by at least 90% in value of the shareholders whose shares are being transferred (excluding those already held by the transferee or its nominee at the time of the offer).

Once this 90% approval threshold is met, the transferee company has 60 days after the initial 120-day offer period to notify any dissenting shareholders of its intention to acquire their shares compulsorily. Upon such notification, the transferee is obligated to acquire these minority shares on the same terms as those offered to the approving shareholders.

However, dissenting shareholders have the right to apply to the Commission within 30 days of receiving the notice to seek an order preventing the compulsory acquisition. Furthermore, this compulsory acquisition provision does not apply if the transferee company already holds more than 10% of the shares of the same class in the transferor company at the time of the offer. This mechanism aims to streamline mergers and acquisitions after a significant majority of shareholders have agreed to the transaction.