Introduction and Overview
What is a Hostile Takeover?
According to Black’s Law Dictionary, a hostile takeover is defined as “A takeover that is resisted by the target corporation’s board of directors.” In simple words, when a company wishes to buy the target company and without the willingness of the target company, it is called a hostile takeover. In a hostile takeover, the target company is been acquired or attempted to be acquired.
Let us take an example to understand this better: “A ltd” has the following shareholding pattern: promoter group (35%); public (35%); financial institute 1 (5%); B ltd (5%); C ltd. (20%). Say, Z ltd purchases 15% of the promoter group, 5% of the public shareholding, and buys out the rest 31% from others entering into a Share Purchase Agreement. Z ltd. now has 51% of the shareholding in A ltd. Z ltd. now has a controlling stake in A ltd. without the willingness of remaining promoters holding 20% in A ltd. This is a hostile takeover. A hostile takeover can also be affected without intervening in the promoters’ shareholding.
Background
India has seen only handfuls of hostile takeovers or even hostile takeover attempts. The first attempt dates back to the pre-liberalized era where an English businessman Swaraj Paul scared the businessmen in India. He acquired 13% and 7.5% of shares in DCM and Escorts respectively. Whereas, the Nanda family and Shri Ram family, the controlling shareholders, were left with less than 5% and 10% of the shareholding in their respective companies. However, a request was made to the Government of India by a group of FICCI including J.R.D. Tata, H.P. Nanda, Bharat Ram, and a few others, businesses who were concerned about a hostile takeover. The Government of India capped the portfolio investment by NRI at 5%. The hostile takeover was saved by the Government and it was later mediated where Swaraj Paul agreed to sell back the shares at a mutually agreed price.
Much later SEBI enacted SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 to regulate the acquisitions in India. It was later repealed and was replaced by SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (the “Takeover Code”).
Defences
Shark Repellent
Commonly known as anti-takeover amendments. In this strategy, the company amends its constitution i.e. Article of Association (AoA) to make the takeover nearly impossible for the acquirer. Some provisions are added to the AoA of the company to prevent the takeover. Shareholders have absolute power under the Companies Act, 2013 to amend the AoA by passing a special resolution. A Company may amend the AoA by adding provisions such as a supermajority approval mechanism which will trigger in case of takeovers or a fair price provision.
Poison Pill
This is also known as shareholders’ rights plan. In this strategy, the company issues the securities with special rights excisable only on the occurrence of a triggering event. These securities grant special rights to existing shareholders to purchase additional stock at a discounted price on that triggering event say 20% acquisition. The poison pill is not a full-proof method against hostile takeover as it is still not impossible for the acquirer. Poison pills only make it expensive for the acquirer. Netflix used poison pill to banish the acquirer.
The poison pill is a mootable strategy as some experts are of the view that it creates inequality among shareholders.
Crown Jewel
Crown Jewel in this strategy means the core assets of the company. The company sells off the core assets to make the target unattractive to the acquirer. However, under Section 180 of the Companies Act, 2013, a company cannot sell its undertaking without prior approval of shareholders with a special majority in a general meeting. Also under Takeover Code, during the offer period, the board of directors unless prior approval of shareholders by special resolution is obtained cannot alienate any material assets whether by way of sale, lease, encumbrance, or otherwise[1].
Crown Jewel is not the best method to banish the acquirer as the market value of the business falls drastically. Also, the purchaser of the asset is in a better position to negotiate the price and can easily manage to keep it to the minimum.
Usually, the money is used to buy back the shares to increase the public shareholding but as a business decides to sell the core assets of the company, the price skyrockets.
Another thing to consider here is that even if the transaction fails this is a huge loss to the company only. To tackle this, the asset is sold to a white king (explained below).
White King
In the white king, the company goes to another friendly company to be acquired. The white king is an ultimate and final defence strategy. It is done with the view that the board or the promoter may buy back the company from the friendly acquirer later.
Perfect example of this is East India Hotels (“EIH”) case. EIH is controlled by Oberoi family and they faced a hostile takeover in 2010. However, Reliance Industries stepped in and turned into a white king by acquiring 14.12% stake in EIH.
Pacman
The company tries to buy the hostile acquirer back. Pacman is seen in the rarest of rarest cases as this generally includes two prime factors 1) both the companies are nearly as big; and 2) both the companies operate in the same sectors. Cadbury used Pacman against Kraft hostile takeover.
Refusal to register the shares
This is one of the simplest ways to avoid the takeover. However, not the best way because the illegality of the act may be challenged in the court of law resulting in years of legal tussle. According to the Companies Act, 2013, a company may refuse to register the transfer of shares but only with the sufficient cause. The legality of refusal to register the transfer of shares has already been challenged before various courts and now it is a settled position that the company may refuse to register the transfer of share but the act must be done with reasonable cause without any malafide intention. In Mackintosh Burn Limited v. Sarkar and Chowdhury Enterprises Private Limited [2] (the “Mackintosh Case”), the apex court observed that “sufficient cause” for refusing to register the transfer of shares can be on other than the ground of violation of the law. Conflict of interest in a given situation can also be a cause.
The Mackintosh Case involved a public unlisted company that refused the registration of the transfer of shares to its competitor. It was observed “…The Company Law Board, it appears, was of the view that the refusal to register the transfer of shares can be permitted only if the transfer is otherwise illegal or impermissible under any law. Going by the expression “without sufficient cause” used in section 58(4), it is difficult to appreciate that view. Refusal can be on the ground of violation of law or any other sufficient cause. Conflict of interest in a given situation can also be a cause…”
L&T and Mindtree Takeover
This might be the most famous hostile takeover in the history of hostile takeovers in India. Larsen and Toubro Limited (“L&T”) went all out after Mindtree Limited (“Mindtree”) to expand its portfolio and enter into the technology and research and development services space.
L&T entered into a Share Purchase Agreement (“SPA”) with V.G. Siddhartha and other shareholders and also informed the stockbroker to purchase more shares of Mindtree. Refer to the charts below to understand the pre-acquisition shareholding and post-acquisition shareholding of the company[3]:
L&T entered into a SPA with V.G. Siddhartha and other sellers and acquired 20.15% of shares from them. Along with the SPA, L&T has also put a purchase order with the stockbroker. These combined triggered the open offer announcement requirement under the Takeover Code[4]. L&T made an open offer for approx. 31% of shares, the offer was oversubscribed and the acquirer ended up buying shares proportionally. In my opinion, this takeover is the cleanest in India.
Conclusion
In my view, Legislature in India is doing a decent job of protecting the companies from hostile takeovers. The government of India since the Swaraj case has been very diligent and meticulous. Takeover code is also being updated from time to time and all the amendments have been in the right direction. Economy of scale is also a factor that is responsible for less hostile takeovers in India. Even in absence of a good legislature, a company has a plethora of strategies to defend against a hostile takeover. Not only before the attempt even after an attempt a company can protect itself. However, it is upon the company to choose the right method suiting the structure of the company.
[1] Regulation 26(2)(a) of Takeover Code
[2] (2018) 5 SCC 575
[3] The total percentages do not add up to 100% since the calculation is based on the Emerging Voting Capital.
[4] Regulation 3(1) of the Takeover Code
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