It is prudent for a company to devise relevant defences from the very incorporation of business and keep away predators
The ongoing attempt by L& T Infotech, to buy a controlling stake in Mindtree, has been met with stiff resistance by its founders and employees. L&T has already bought 20.3 per cent stake in Mindtree by paying over its long-term investor, VG Siddhartha of Café Coffee Day. As required by the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, the infrastructure giant has already announced an open offer to buy 31 per cent stake, in addition to picking up 15 per cent of the shares through an open market purchase, making a stake of 66.32 per cent in Mindtree.
A ‘hostile takeover’ is the acquisition of one company, known as the target firm, by another, which is called the ‘acquirer’ and the acquisition is accomplished by going directly to the company’s shareholders or fighting to replace management to get the acquisition approved. This is different from a friendly takeover, which is a proposal where a target company’s management and board of directors agree to a merger or acquisition by another firm. Since liberalisation, India has seen numerous friendly takeovers but hostile acquisitions have been few and far between.
In the 1980s, London-based NRI, Swaraj Paul, sought to control the management of two Indian companies, Escorts Limited and DCM (Delhi Cloth Mills) Limited, by picking up their shares from the stock market. Though Paul failed to fulfill his dream of controlling Escorts and DCM, he was successful in highlighting how particular families were exercising managerial control over large corporate entities despite holding a minuscule proportion of the concerned company’s shares. Paul finally retracted his bid. While he was ultimately unsuccessful, Paul’s hostile threat sent shockwaves through the otherwise complacent Indian business world.
This was followed by India Cements Limited (ICL) in its hostile bid for Raasi Cements Limited (RCL) in 1988, where ICL made an open offer for RCL shares at Rs 300 per share at the time when the share price on the stock exchange, Mumbai (BSE), was around Rs 100. The Indian FIs, that were protecting the promoters, felt cheated as they sold their stakes, leaving the FIs high and dry till they were bought out by ICL in an open offer. The effort by ICL to buy out Raasi was for its crown jewel, Shri Vishnu Cement. Raju, the promoter of Raasi, transferred 39.5 per cent of Shri Vishnu Cement to a group of nine investment companies, in violation of the takeover code and the transfer was considered invalid. Finally, ICL sold the shares of Shri Vishnu Cement by the associate companies of Raju.
In a third example, in October 2000, Abhishek Dalmia made an open offer to acquire 45 per cent of the share capital in Gesco Corporation at Rs 23 per share. This transaction entered into a drama of hostile takeover until the promoters of Gesco corporation and the Dalmia group announced they had reached an amicable settlement in the battle for Gesco, with the former buying out Dalmias’ 10.5 per cent stake at Rs 54 per share for a total consideration of Rs 16 crore. The Gesco Corporation takeover drama showed that a bidder, with admittedly poor financial resources, could talk up a share only to exit later with a huge profit via a negotiated deal. In 2008, Emami acquired 23.6 per cent stake from Vaidyas, who are the co-founders of Zandu, at Rs 6,900 per share. The Parikhs, who have been managing the company’s operations for years, also parted with 20 per cent stake after trying to save the firm for four months. Emami paid Rs 750 crore to acquire 72 per cent stake in the firm.
There are numerous ways which are followed by the acquiring companies for a hostile takeover: Toehold acquisition, which is a purchase of the target’s shares on an open market; tender offer, where an acquirer offers the target’s shareholders a buyout option at a premium over the market price; and proxy fight, a solicitation of the shareholders’ proxies to vote for insurgent directors. Having decided to acquire a target, the acquire usually deals with either of the two main corporate constituencies of the target: Management or shareholders.A possibility or threat of a hostile takeover causes the target’s board to adopt and implement anti-takeover defences.
Stock re-purchase is a transaction by the target of its own-issued shares from its shareholders. This is an effective defence strategy that has registers success.
Poison pill is a distribution to the target’s shareholders of the rights to purchase shares of the target or the merging acquire at a substantially reduced price. What triggers an execution of these rights is an acquisition by an acquirer of a certain percentage of the target’s shareholding. If exercised, these rights can considerably dilute the acquirer’s shareholding in the target and can thus deter a takeover. The poison pill is one of the most powerful defences against hostile takeovers.
Shark repellents are certain provisions in the target’s charter or by-laws deterring an acquirer’s desirability of a hostile takeover. This defence typically involves a supermajority vote requirement regarding a merger of the target with its majority shareholder. This defence also includes other takeover deterrent provisions in the target’s certificate of incorporation or bylaws.
Golden parachutes are additional compensation to the target’s top management in case of termination of its employment following a successful hostile acquisition. Since these reimbursements decrease the target’s assets, this defence reduces the amount the acquirer is willing to pay for the target’s shares. This defence may thus harm shareholders. It, however, effectively deters hostile takeovers.
Staggered board is a board in which only a certain number of directors, usually one-third, is re-elected annually. It is a powerful anti-takeover defence, which might be stronger than is commonly recognised. For the reason of being too strong and reducing returns to the target’s shareholders, the latter happened to resist this type of defence.
Greenmail is a buyout by the target of its own shares from the hostile acquire with a premium over the market price, which results in the acquire's agreement not to pursue obtaining control of the target in the near future.
Standstill agreement is an undertaking by the acquirer not to grab any more shares of the target within certain period of time. A standstill agreement is an additional defence that usually accompanies the greenmail described above.
Leveraged recapitalisation is a series of transactions designed to affect the equity and debt structure of a corporation. Recapitalisation usually involves such transactions as sale of assets, issuance of debt and distribution of dividends.
Leveraged buyout is a purchase of the target by the management with the use of debt financing. This defence burdens the target with the debt. In such a case, the management becomes a bidder and competes with a hostile acquire for control over the target.
Crown jewels are options under which a favoured party can buy a key part of the target at a price that may be less than its market value.
White knight is a strategic merger that does not involve a change of control and relieves the target’s management of the responsibility to seek best price.
White squire is given by the target to a friendly party of a certain ownership in the target. This defence is effective against acquisition by the hostile party of the target by “freezing out” minority shareholders.
Scorched earth is a self-tender offer by the target that burdens the target with debt.
Lockups are defensive mechanisms in friendly mergers and acquisitions designed to deter hostile bids.
Pacman is a target’s tender offer for the acquire’s shares.
Change of control provisions is the target’s contractual arrangement with third parties that burden the target in the case of a change in its control.
Finally, ‘Just say no’ is a simple approach that enables the board simply to reject a proposal of any potential acquirer who would fail to prove that his acquisition strategy matches that of the target. Like all strategies, some defence strategies are more effective than others and not all are successful all the time. A golden parachute may decrease the price that the acquirer would be willing to pay for the target but it may not necessarily stop the hostile acquisition.
On the other hand, a poison pill can easily lose its effect if the acquire wins a proxy fight for the target and then redeems the pill. Therefore, it is prudent that a company should consider devising relevant anti-takeover defences from the very incorporation of business.
(The writer is Assistant Professor, Amity University)
