Takeovers: Concept, Regulation and Defences

By | February 27, 2021
Takeovers Concept

Concept of Takeovers

A takeover bid is a direct or indirect acquisition of shares carrying voting rights in a company with a view to gaining control over the management of the company. These takeovers take place either through friendly negotiations or in a hostile way. A well-accepted and established strategy for corporate growth is the takeover of businesses.

There is a trend among promoters and established corporations in India towards market share consolidation and diversification into new areas through company acquisitions and more pronounced through mergers, amalgamations, and takeovers.

Takeover Regulations in India

The Securities Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations 2011 (the ‘Takeover Regulations’) provide for the regulation of takeovers of listed companies in India.

In accordance with the Equity Listing Agreement, the applicable minimum level of public shareholding required to be maintained by a listed company is determined Securities Contracts (Regulation) Rules, 1957 (the ‘SCRR’) (which is executed by the listed company at every stock exchange on which its equity shares are listed).

The SCRR and the Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009 (the ‘Delisting Regulations’) govern the delisting of listed securities. The acquisition of shares through a compulsory squeeze-out process is set out in Section 236 of the Companies Act, 2013, pursuant to a successful delisting (which is pending notification).

SCRR takeover Regulations and Delisting Regulations are administered primarily by the Securities and Exchange Board of India (‘SEBI’), which is the Indian securities market regulator and has a mandate to regulate the Indian securities markets and has been established under the Securities and Exchange Board of India Act, 1992, as a statutory authority.).

Takeover Regulations govern any acquisition, direct or indirect, of the shares or voting rights of the. Compliance under the Equity Listing Agreement is checked and directed under the management of SEBI by the important stock exchanges.

On October 22, 2011, the Takeover Regulations came into power, cancelling and supplanting the Regulations of the Securities and Exchange Board of India (Substantial Acquisitions of Shares and Takeovers), 1997 (‘Takeover Regulations 1997’ target company, or any acquisition, direct or indirect, of control of the target company. Any acquisition of securities entitling the holder to exercise voting rights in the target company (including the underlying shares of depository receipts entitled to exercise voting rights in the receipts)

Takeover Regulations include various types of tender offers for which separate (but sometimes overlapping) regulations and practices are prescribed. The Takeover Regulations also laid down certain exempted transactions which do not attract compulsory tender offer obligations and the conditions under which such exemptions would be applicable.

Cases of Takeovers in India

  1. Vodafone-Hutchison Essar: In 2007, by acquiring a 52 per cent stake in Hutchison Essar Ltd., Vodafone, the world’s largest telecom company in terms of revenue, entered the Indian telecom market. For about $10 billion, Vodafone bought a 52 per cent interest in Hutchison Essar.[1]
  2. Hindalco-Novelis: Hindalco Industries Ltd. is a subsidiary of the Aditya Birla Group and Novelis is a world leader in the production of flat-rolled aluminium products. The Hindalco Company acquired the Canadian Company Novelis for $6 billion making the combined entity the world’s largest producer in rolled aluminium.[2]
  3. Walmart-Flipkart: Walmarts acquisition of Flipkart pocked its entry into the Indian Markets. Walmart won the bidding war against Amazon and went onto acquire a 77% stake in Flipkart for $16 billion. Following the deal, eBay and Softbank sold their stake in Flipkart. The deal resulted in the expansion of Flipkart’s logistics and supply chain network. Flipkart itself had earlier acquired several companies in the eCommerce space like Myntra, Jabong, PhonePe, and eBay. [3]

Types of takeover Strategies

  1. Friendly Takeovers

The friendly takeover takes place with Target Company’s consent. In the context of a friendly takeover, an agreement exists between the management of two companies through negotiations and the takeover bid may be made with the consent of the majority of the target company’s shareholders. Through negotiations between two groups, this kind of takeover is done. Consequently, it is also known as the agreed takeover.

  1. Hostile Takeover

If an acquiring company does not offer the target company the proposal to acquire its undertaking, but quietly and unilaterally pursues efforts to gain control over the wishes of existing management, such acquiring acts are referred to as ‘hostile takeover.’ These takeovers are hostile to the leadership and are therefore called hostile takeovers.

  1. Bailout Takeover

A bail-out takeover is known as the takeover of a financially sick company by a profit-making company to bail out the former from liquidation. For a profit-making business to take over a sick business, there are several benefits.

The price would be very attractive because creditors, mainly banks and financial institutions that have an industrial asset charge, would like to recover as much as possible.

Takeover Defences In India

  1. Shark Repellant

In this approach, the company amends its constitution, i.e. the Association Article (AoA), to make the acquisition almost impossible for the acquirer. In order to avoid taking over, certain provisions are added to the company’s AoA. Bypassing a special resolution, shareholders have absolute power under the Companies Act, 2013 to amend the AoA.

  1. Poison Pill

The company issues the securities in this strategy with special rights excisable only on the occurrence of a triggering event. Such securities give existing shareholders special rights to purchase additional stock at a discounted price on that triggering event, say 20% acquisition. The poison pill is not a fully-proof method against a hostile takeover, as the acquisition is still not impossible. The strategy has been analyzed to be promoting inequality among shareholders.

  1. Crown Jewel

To make the target unattractive to the acquirer, the company sells off the core assets. Under Section 180 of the Companies Act, 2013, however, a company cannot sell its undertaking without the prior consent of special majority shareholders at a general meeting.

Crown Jewel isn’t the best technique to expel the acquirer as the market estimation of the business falls drastically. Likewise, the buyer of the resource is in a superior situation to negotiate the cost and can undoubtedly figure out how to hold it to the base. Normally, the fund of the company is utilized to repurchase the offers to expand the public shareholding however as a business chooses to sell the center resources of the organization, the value soar.

       4. White Knight

In the white Knight, the organization goes to another amicable organization to be procured. The white ruler is an extreme and last guard methodology. It is finished with the view that the board or the advertiser may repurchase the organization from the well-disposed acquirer later.

       5. Pacman Defense

The organization attempts to repurchase the hostile acquirer. Pacman is found in the most uncommon of most extraordinary cases like this, by and large, incorporates two prime variables

  1. both the organizations are close to as large; and
  2. both organizations work in similar areas.

Cadbury utilized Pacman against Kraft’s hostile takeover.

      6. Golden Parachute

A golden parachute comprises generous advantages given to top chiefs if the organization is taken over by another firm and the heads are ended because of the consolidation or takeover. Golden parachute clauses are available in the work contracts like some other business-related clauses.[4]

The clauses bring about heavy compensation to the executives in case of the end of their positions coming about out of a hostile takeover. Such a methodology makes it less worthwhile for the predator to proceed with the acquisition.

        7. Greenmail

Greenmail is a defense in which the Target Company buys its own shares back at a premium from the Acquirer. This revival of undivided-right in hostile takeovers has been triggered by L&T’s open offer to purchase a controlling stake in the multinational information technology company, Mindtree.[5]

L&T began an open offer for an acquisition of 31 percent of the voting share capital of Mindtree, a development which has been met with vehement protests from the promoters of Mindtree, who insist that this will result in value destruction for the shareholders. Initially, L&T executed a Share Purchase Agreement with Mr. V G Siddhartha and his related entities, to acquire a 20.32 per cent stake in Mindtree at a price of Rs. 980 per share.

Conclusion

Takeover code is additionally being refreshed now and again and all the revisions have been the correct way. The economy of scale is likewise a factor that is answerable for less hostile takeovers in India. Indeed, even without a decent law-making body, an organization has plenty of techniques to guard against a hostile takeover. Not just before the attempt even after an attempt an organization can secure itself. In any case, it is upon the organization to pick the correct technique fitting the construction of the organization.


[1] Ravi Prakash Vyas and Sonam Gupta, Hutch Vodafone Merger-An issue of tax planning, Legal Services India

[2] Prusty, Sadananda. (2012). Hindalco v. Novelis: A Case on Acquisition. India: Acquiring its Way to a Global Footprint,. 10.1057/9780230363533_7.

[3] Aron Almeida, 5 Biggest Mergers and Acquisitions in India!, TradeBrains

[4] Anon, 2015. GoldenParachute. Investopedia.Available here

[5] Ashima Ohan, Hostile Takeovers in India


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