Hostile Takeover In India: An Analysis

Taking in view the most recent successful attempt of L&T to acquire Mindtree in a rather hostile manner has piqued the interest of many law enthusiasts in knowing what makes these kinds of acquisitions hostile. So, without further ado, let’s understand the intricacies of this type of takeovers.  

We all know that mergers and acquisitions are a common trend in the present corporate era. Acquisitions can be either friendly or hostile. A friendly acquisition occurs when the target company’s controlling group sells its shares to the acquirer willingly. If the target company’s management refuses to engage, the acquirer can approach the company’s shareholders directly and make an open offer- this is called hostile takeover. While the number of mergers and acquisitions in India has increased in recent years, hostile takeover attempts have been limited owing to restrictive government policies.

THE LAW ON HOSTILE TAKEOVER

In India, takeovers are primarily governed under the Takeover Code- that goes by the name SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. The Code defines an Acquirer as a person who, directly or indirectly, acquires shares or voting rights or control over a Target Company by himself or through persons acting in concert with him. Further, Regulation 3 permits such Acquirers to make a public announcement of an open offer in case they aim to acquire more than 25% of the voting rights of the Target Company. It is easy to conclude that the Takeover Code provides no legal protection against a hostile takeover. Furthermore, there is no distinction in the Code between a friendly and hostile takeover. More so, the Code contains no onerous requirements for hostile takeovers that would undermine the aim of such a bid. Despite the lack of a legal structure forbidding hostile takeovers, India appears to be reluctant to engage in shark-bait takeovers. One of the reasons for this reluctance could be the way our corporate houses have traditionally been constituted, with most Indian companies being closely controlled by their promoters in contrast to the management-driven strategy that most corporations in developed nations take.

INSTANCES OF HOSTILE TAKEOVER

In the history of Indian business, there have been very few hostile takeovers. Some of them are:

1. In 1983, Swaraj Paul, a London-based industrialist, attempted to seize control of the management of two Indian companies- Escorts Limited and DCM, by purchasing their stock on the stock market. Following lengthy legal proceedings, the parties reached an agreement through mediation, with Swaraj selling his shares back to the promoters of the respective companies at a mutually negotiated price.
2. In 1998, India Cements Limited (ICL) made a hostile bid for Raasi Cements Limited (RCL) with an open offer at Rs. 300 per share at a time when the share price on the BSE was Rs. 100. The investors felt cheated as the promoters themselves sold out their stake to the acquirer, leaving little room for them to tender their stake to the acquirer during the open offer. However, ICL further moved ahead to buy out the Financial Institutions of the company in an open offer and increased their holding in RCL to 85%.
3. In 2008, Emami acquired 24% in Zandu from Vaidyas, co-founders of Zandu at Rs. 6,900 per share. Along with that, an open offer of 20% stake was presented to Parikh- another co-founder at Zandu’s. After four months of futility to save the company, Parikh also gave in their 18% stake. With this, Emami acquired Zandu’s 72% stake in the company.
4. In 2000, Abhishek Dalmia made an open offer to acquire 45% of share capital in Gesco Corporation. The promoters of Gesco and the Dalmia group reached an amicable settlement in the battle for Gesco, with the former buying out Dalmias’ 10.5% stake.
5. In 2012, Essel Group attempted to take control of IVRCL, an infrastructure company. IVRCL was just 11.2% owned by the target company’s promoters. After acquiring a 10.7% position in IVRCL, Essel Group reversed course and opted to sell its shares in the target firm.
6. In 2019, L&T’s acquired Mindtree, which is considered as the first hostile takeover in the IT Sector of India. L&T acquired 20.15% of the Emerging Voting Capital of Mindtree by entering into a sales purchase agreement with Coffee Day Enterprises, who was an equity shareholder in Mindtree. Further, L&T made a purchase order of 15% of the Emerging Voting Capital on recognised stock exchange, which as per the SEBI Regulations initiated an open offer. The promoters of Mindtree were unwilling to participate, however, L&T successfully managed to takeover. Today L&T holds 60.55% of the total share capital of Mindtree.

REMEDIAL MEASURES TO AVOID HOSTILE TAKEOVER

There has been progress in defenses to prevent hostile takeovers since the time hostile takeovers piqued the interest of aggressive corporate acquirers. A corporation has a number of methods for avoiding a hostile takeover such as Poison Pill, Sale of Assets, The White Knight, Shark Repellents, Pac-man Defense, Greenmail to name a few.

• Poison pill: The takeover is made more expensive for the acquirer through Poison Pill, in which the Target Company dilutes its shares in such a way that the Acquirer cannot get a controlling position without paying high cost.
• Sale of Assets: Through Sale of Assets, the most appealing assets of the target firm are sold off so that the acquiring company lose interest and pull out of the hostile takeover. These are few examples with the help of which the target company repel hostile takeover proposals.
• The White Knight: If the target company’s board believes it won’t be able to stop a hostile acquisition, it looks for a friendly company to buy controlling position of them before the hostile bidder does.
• Pac-man Defense: When the target company buys stock in the acquirer company and eventually takes control of the acquirer, we call it as pac-man defense. It is used to thwart a takeover.
• Shark Repellents: Special adjustments to the company’s legal charter are made that can only take effect if a takeover attempt is made. These changes are being made to ensure that the board of directors does not lose control of the company.
• Greenmail: This is a defense in which the Target Company buys back its own shares from the Acquirer at a higher price.

Conclusion:

Depending on the details of the case, hostile takeovers might be advantageous or harmful. In some circumstances, the acquirer may be drawn to the target company because of its assets, technology, and distribution capabilities and wish to incorporate it into its existing business operations. The target company’s shareholders may receive a premium above the current stock price, while the acquirer may end up paying more for the company by making a direct offer to the shareholders against the management’s will. There have been instances where hostile takeovers have benefited both parties. However, on the other hand, these takeovers have also typically destroyed value and resulted in a major corporate bloodbath.

YLCC would like to thank Shivani Bharti for her valuable contribution in this article.