This article is written by Nishish Mishra who is pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.
What is a Hostile takeover?
Any takeover which isn’t recommended, supported or agreed to by the management of a takeover target may be a takeover. A traditional scenario would be where the management of a corporation desirous of acquiring another simply approaches the management of a target and both negotiate and comply with the acquisition and terms. Alternatively, they might simply agree for the acquisition to not proceed.
In an unlisted takeover target, this game takes a special format, because the acquisition might be investor driven. albeit the founders who are a neighbourhood of the management don’t comply with a purchase, an investor who has invested a big chunk of cash could be calling the shots on account of the ‘drag-along or ‘tag-along rights within the shareholders’ agreement. a possible acquirer thus has got to get on the favourable books of the lead investor and it’d be possible for the acquirer to only get its way.
In the case of a listed target, the hostile acquirer and therefore the persons acting together can simply make an open offer for an outsized chunk of the company’s shares, thus inviting attention from other potential investors that the corporate is up purchasable. This will happen overnight, without the management of the target even having a touch that it’s likely to happen.
Why do hostile takeovers get to be regulated?
Where the management of a target entity acts entirely within the interests of the shareholders and supports a tender offer that is useful to the shareholders while rejecting the one that’s inadequate, things would work well. But where the control is sought to be retained for the explanations that the founders don’t want to abandon of the control or that the management fears losing their jobs, this is often not really taking care of their fiduciary duties.
For an acquirer, if the acquisition seems to form business sense to its shareholders and is fair to the shareholders of the takeover target in providing them with an appropriate exit opportunity, this works well. But again, if the intention is to shop for the corporate cheap and kick out the shareholders then sell all the assets, this is often an aggressive strategy that could not bode well for the shareholders or employees of the target. it’s therefore required that takeovers are appropriately regulated.
Takeover defence mechanisms
Indian economy isn’t home to the aggressive business strategies as seen within the US / UK and thus, hostile takeovers are relatively rare. Further, the wants of the regulations got to be complied with once the precise percentages are exceeded. Unless the acquirer finds the target attractive enough to spend that quantity 7 time and money in ensuring the compliances, it’s not getting to work.
Following are some takeover defence mechanisms that may be deployed if a corporation becomes subject to a takeover bid:
The takeover target can sell its highly profitable assets or business divisions which could have tempted the acquirer in the first place. With the sale of such assets, the acquisition becomes less attractive to an acquirer.
However, the regulations require that the target companies shouldn’t alienate their material assets without the approval of the shareholders by a special resolution and a postal ballot. Even the businesses Act 2013 requires that the shareholders’ consent is required for the sale, lease or disposal of the entire or substantially the entire undertaking of the corporate. If the shareholders are in support of this step, it is often implemented.
A White Knight will be another company who also makes an open offer, and therefore the Board of directors will make it clear to the shareholders that they recommend this offer and not the hostile one. This strategy is often used when the management of the corporate is of the opinion that the offer from the hostile acquirer is insufficient and undervalues the corporate. It could enter into negotiations with another entity that could be willing to enter the takeover war and acquire the target at a better price.
Here, share warrants which are convertible into shares are often issued to extend the floating stock and make the corporate very expensive for an acquirer. Though there are not any specific prohibitions within the regulations for the issue of share warrants, the SEBI (Disclosure and Investor Protection) Guidelines, 2000 (the DIP Guidelines), specifically Chapter 13, imposes several restrictions on the issuance of warrants.
First of all, the issue of warrants at a reduction isn’t possible because the warrants need to be priced at a minimum price determined in accordance with the DIP Guidelines with regard to the market value of the shares.
Secondly, such warrants are often outstanding just for a period of months after which they might automatically lapse (unless exercised) Companies will find it difficult to return to shareholders every 18 months to hunt a renewal of the shareholder rights plan. For these reasons, the shark repellent doesn’t work efficiently as a defence within the Indian context.
It is the undervaluation of the shares which primarily attracts an acquirer and a share buyback is employed to bring the valuation of the shares in line with its assets. However, any such sorts of changes to the capital structure can’t be made while within the midst of a tender offer unless approved by the shareholders by a special resolution and thru postal ballot. Additionally, the rules for the buyback of the shares need to be complied with, which adds time and price to the method. This is often therefore not a really attractive defence.
Here, the management of the takeover target gets help from a corporation or group of companies to put a tender offer on the acquirer itself, thus making the acquirer busy defending itself and take its attention off the takeover target .
Here, rather than getting help from others, the promoters of the takeover target themselves start acquiring sizeable holding within the acquirer/raider company, threatening to accumulate the raider itself.
This makes the acquirer run cover and forces him to thrash out a truce. This tactic is feasible in India before the acquirer hitting the trigger for an open offer and making the general public announcement thereof. Also, the takeover target promoters have to lookout that it doesn’t trigger the open offer for the acquirer’s company.
The takeover target or the prevailing promoters arrange through friendly investors to accumulate a large stock of its shares with a view to boosting its market value. This makes the takeover very expensive for the raider. In India, this is often possible; however, if it’s wiped out such a fashion that the nexus between the prevailing promoters and friendly investors who are accumulating the stock is proved.
The friendly investors could also be considered persons acting together and this might trigger an open offer by the prevailing promoters themselves. Sometimes the prevailing promoters of the takeover target comply with repurchase the shares being accumulated by the raider at a considerable premium. Reciprocally the raider agrees that neither he nor his associates shall acquire a sizeable stake in target for a stipulated period. This is often referred to as “Standstill Agreement.
In this case, the takeover target makes special amendments to its articles of association that become active only attempt is announced. The target of those special amendments is to form the takeover less attractive to the acquirer. Examples of shark repellents are:
- A special charter of bylaws – that are activated when a takeover attempt Is encountered.
- Macaron! Defence – A firm may issue an outsized number of bonds with the supply that, if the firm is appropriated. They need to be redeemed at the stipulated high price.
- SuperMajority Provision – this need obtaining a better degree of votes within the general meeting to approve the change of control than that prescribed within the regulations, thus to form it difficult for the acquirer to manoeuvre or proceed.
- Staggered Board of Directors – This makes it difficult for the company raider to put in a majority of directors on the board of the target, thus making the management difficult for it.
In this, a contractual guarantee of a reasonably large sum of compensation is issued to the highest and/or senior executives of the takeover target whose services are likely to be terminated just in case the takeover succeeds. However, though this does make takeover expensive for the acquirer since it’s to pay the compensation, this method is quite wont to make sure that the management which has put in efforts to create the corporate is taken care of within the event of a takeover bid.
- https://www.nishithdesai.com/fileadmin/user_upload/pdfs/Ma Lab/Takeover Code Dissected.pdf
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