This article has been written by Anjana Pasumarthi and edited by Shashwat Kaushik.
It has been published by Rachit Garg.
Table of Contents
Takeovers can be broadly classified into two types-
- Friendly takeovers, and
- Hostile takeovers.
Friendly takeovers are those that are negotiated in good faith, wherein the consent of the board of directors has been obtained and both companies are in agreement with the deal. In this article, we will discuss in detail what hostile takeovers are, the strategies put forth by acquiring companies to achieve them, and the defence mechanisms employed by target companies to defend their company against the acquisition.
What are hostile takeovers
A hostile takeover, as the name suggests, is when a company attempts the takeover without the consent of the target company’s board of directors for the arrangement; this is done through a tender offer or a proxy vote.
The company being acquired in a hostile takeover is called the target company, while the one executing the takeover is called the acquirer. In a hostile takeover, the acquirer goes directly to the company’s shareholders or fights to replace the management to get the acquisition approved.
In the sphere of mergers and acquisitions, companies often attempt a hostile takeover, yet only a few emerge successful with the hostile takeover; this could be either due to the strong defences planned and implemented by the target company or due to the financial impediments of the acquiring company.
Strategies for a hostile takeover
There may be many strategies to achieve a hostile takeover, yet the tender offer and proxy vote are the most prominent, legal and commonly used approaches to a hostile takeover.
A tender offer is an open offer presented to all the shareholders of the target company. This offer presents the special premium price at which the acquiring company would like to purchase the shares of the target company. This premium price for shares is offered publicly to invite shareholders to sell their shares. Tender offers may require a minimum threshold of shares to be tendered for the offer to proceed. This allows the company to deploy its financial resources towards the purchase of shares only if a predetermined number of shares are agreed to be sold.
The bear hug approach and a tender offer are similar but not identical; both methods involve an offer to buy shares, but the bear hug takeover bid is a generous amount offered to the management of a company, which the shareholders would not refuse considering the vulnerabilities and other circumstances of the company. The bear hug approach leverages the possibility of making an open offer as a means to exert pressure on the management.
While the entire idea of a hostile takeover is unsolicited, since this offer is presented to the board of directors or the management without concurrence on the matter between the companies or any prior communication to them for that matter, this approach has a slightly aggressive demeanour. By making a highly attractive offer, the acquiring company aims to create a basis for further discussions and encourage the target company’s management to consider alternative paths, such as engaging in friendly merger talks or exploring other strategic options.
The acquiring entity seeks to gain control of the target company’s board of directors by soliciting proxy votes from shareholders to replace the current board members with individuals more favourable to the takeover. When there is dissonance amongst the stockholders regarding the functioning of management, each opposing group tries to lure other shareholders into allowing them to exercise their proxy votes. These proxy voting rights are exercised to accept a proposal for the takeover bid.
Accumulating shares or street sweep
In this method, the acquiring entity buys many shares on the open market, gradually increasing its ownership stake in the target company.
This involves entering into alliances with powerful companies to weaken the market position of the target company and subsequently buying out the weakened target company.
Defence mechanisms against hostile takeovers
Every company under the threat of a hostile takeover plans, frames and implements a defence mechanism and tries its best to protect and safeguard the company and keep its integrity, structure and essence intact. These defence mechanisms may vary from company to company due to their differential nature and conditions that may be unique to each company. However, these defence mechanisms can be broadly categorised into eight types-
This is generally the company’s last resort to thwart a takeover. A crown jewel is a defence strategy employed by the target company in which a strategically important and valuable asset or division of the company is sold to portray the takeover as a less appealing option. This strategy follows the saying, “Cut off one’s arm to save the body.”
Employee stock ownership programme
Examining the core idea or concept of ESOP, it could be comprehended as a scheme through which the company gives its employees an interest in the company in the form of shares. As a result, the employees may own a substantial interest in the company. Now, this scheme, if implemented by the management of a company under threat, could serve as an excellent defence tactic, as the employees are now more likely to support the management that formulated and implemented the ESOP rather than voting them out and allowing for a hostile takeover.
Shareholders rights plan also known as poison pill
Poison pill strategies can be of two types-
- The flip-in poison pill is a defence mechanism employed wherein the targeted company weakens the stake of the acquiring company by diluting its interest. Here, the target company offers its existing shareholders, other than the acquiring company, additional shares at a discounted price.
- The flip-over poison pill is a technique in which the shareholders could purchase the shares of the acquiring company as soon as the takeover is successful; this is a discouraging prospect for the acquiring company, which makes it an effective strategy to deter any company from a hostile takeover attempt.
In pursuance of this strategy, the target company issues bonds that encourage holders to buy them at a high price. This drastic cash drain makes the prospect of a takeover of such a company rather unattractive.
A golden parachute is an arrangement or a provision that grants the top executives and its employees financial compensation and benefits in case a hostile takeover attempt is successful and there is a change of control. This essentially works to incentivise them to resist the takeover. However,this approach is criticised, arguing that the senior executives are already paid hefty amounts and that the executives, inherently given their position in the company, have the impetus to protect the company.
Pac man defence
The pac-man defence is a plan formulated by the target company, adhering to which the company purchases back its own shares at a premium to rule out any possibility of a hostile takeover. This, however, is reckoned to be an expensive affair, as the company may or may not have such exorbitant amounts available at the moment. The defence can either be funded by external financing or drawn from the war chest of the company.
Green mail defence
This defence involves the target company making a counter-bid for the acquiring company. Here, the target company purchases the shares of the acquiring company, which forces the company to defend itself. This facilitates the stave-off of the takeover.
The white knight
When a company under threat of hostile acquisition approaches and enters into an arrangement of a kind with a company to outbid the acquiring predator company, then the target is said to have employed a defence strategy called the White Knight. The company that steps in and rescues the target company is referred to as the white knight. Here, the companies enter into reasonable and mutually beneficial terms. This arrangement with another company allows the target company to potentially secure its extended control over the company even after the acquisition by the white knight. One of the drawbacks that are apparent with this strategy is finding a suitable white knight. This process is rather challenging and time-consuming and there is no guarantee of a successful alternative deal. This puts the target company in a vulnerable position during the negotiation period.
A staggered board, also known as a classified board, is a corporate governance structure in which the members of a company’s board of directors are divided into different classes, and each class serves a different term length. This is a powerful anti-takeover approach.
Takeovers in India are primarily governed by the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Code”).
It defines an Acquirer as “any person who, directly or indirectly, acquires or agrees to acquire whether by himself, or through, or with persons acting in concert with him, shares or voting rights in, or control over a Target Company.” Further, Regulation 3 permits such Acquirers to make a public announcement of an open offer for acquiring shares, which will entitle the Acquirers to acquire more than 25 percent of the voting rights of the target company.
Example of a successful takeover
The Adani takeover of NDTV could be delineated as a successful hostile takeover. It is pertinent to understand the underlying facts, events that occurred and arrangements agreed to. These could be traced way back to 2009 and have acted indirectly as stepping stones to achieve the aforementioned takeover.
In 2009, the promoters of NDTV, through their company RRPR, borrowed a sum of Rs. 350 crore from VCPL. Among other terms,the relevant terms and conditions of the loan are:
- RRPR will issue a convertible warrant to VCPL, convertible into equity shares aggregating to 99.99% of the fully diluted equity share capital of RRPR at the time of conversion and convertible at any time during the tenure of the loan or thereafter.
- VCPL shall have the right to purchase from the promoters all the equity shares of RRPR at par value.
- VCPL and its affiliates cannot purchase shares of NDTV, which will increase their holding to more than 26%, without the consent of the promoters.
- One of the conditions precedent to the execution of the agreement was sale of 11,563,683 shares of NDTV from the promoters to RRPR, such that RRPR holds 26% of NDTV.
In August 2022, a wholly owned subsidiary of Adani Enterprises, AMG Media Networks Ltd., acquired VPCL. Subsequently, the right to acquire a 99.5% stake in RRPL, the promoter entity of NDTV, that was then a term of the loan, was now exercised by Adani. Since the stake in NDTV held by RRPL is greater than 26%, AMG Media Networks was obligated under Regulation 3 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Code”) to issue an open offer for an additional 25% stake in NDTV, and they have offered a discounted price of Rs. 294 per share.
That open offer extended by the Adani group led to a hefty transaction of about 53 lakh shares, even at the discounted price offered for them. The ownership interest of Adani Group equates to about 64.71%, which is constituted by stakes acquired through RRPR holdings, open offer acquisitions, and buying 27.26% from Roys, the company’s promoters. This acquisition was sealed and done on December 30, 2022, in the block deal window of the NSE.
Example of an unsuccessful takeover
In the year 2000, the Dalmia Group, which had a 10.5% stake in GESCO Group, made an open offer to purchase 45% of the shares in the company. However, the companies entered into an amicable agreement, which ended with Dalmia selling its stake to Sheth-Mahindra. The failure of this takeover could be credited to the aforementioned defence strategy adopted by GESCO, namely “White Knight.”
Understanding hostile takeovers is important in today’s business realm. A hostile takeover is a representation of class between the interests of the target company and the acquiring company and its shareholders. It is important to understand that hostile takeovers are not always good or bad; sometimes they may serve as a means for promoting competition, increasing corporate governance, and increasing shareholder value. Sometimes they may lead to people losing their jobs due to a poor corporate environment and poor company strategies. Understanding its implications is important for shareholders and investors to make the right decision. Companies must remain watchful and implement proper defence strategies to prevent hostile takeovers.
- Book- Takeover Games and SEBI Takeover Regulations -Taxmann
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