In this blog post, Tanvi Amlani, a student of GGSIP University, who is currently pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses the concept of buyback of securities and the regulations regarding the same. 

Before discussing the regulations regarding buyback of securities, we must first understand the meaning and need of buyback of securities. Buyback of Securities is discussed in Sections 68, 69, 70 of the Companies Act, 2013. The regulations regarding the same are also mentioned under Rule 17 of the Companies (Share Capital and Debenture) Rules, 2014.

Introduction

Sometimes a company may purchase its shares or other specified securities out of its:

1) Free reserves; defined under Section 2 (43) of Companies Act, 2013

2) Securities Premium Account

3) Proceeds of the issue of any shares or other specified securities. There is also an exception in this case in which it is clearly laid down that the proceeds of an earlier issue of the same kind of shares and securities specified are not permissible.

Sub-section 2 of Section 68 also lays down the conditions of the buyback. The conditions are:

1. a) Authorization under the articles of the company.
2. b) Special resolution at company’s general meeting is to be passed.

Further a proviso lays down that this would not prevail in a case when

1. The buyback is 10% or less of the total paid-up equity capital and free reserves of the company.
2. The board has authorized buyback using resolution passed at its meeting.

• Buyback should be 25% less than the aggregate paid-up capital and free reserves of the company.
• The ratio of aggregate secured and unsecured debts of a company not twice the paid-up capital and its free reserves. Central government may change the ration for a specific class.
• Buyback of shares or specified securities to be fully paid up.
• Buyback of securities of listed stock exchange according to the SEBI regulations.
• Buyback of Securities should be according to the rules specified in the Act.
• Notice of a meeting regarding the discussion of buyback of securities should always be given with an explanatory statement. An explanatory statement must consist of the following facts.

1. Material facts disclosed
2. The need for buyback of securities.
3. Class of shares and securities to be purchased.
4. Amount to be invested under buyback.
5. Time limit for the completion of this process.

• Time limit for completion of the buyback as specified. According to the special resolution or board.
• Who may indulge into the buyback of Securities

1. Existing shareholders or securities holders.
2. Open market.
3. Purchasing securities issued to employees of the company pursuant to a scheme of the stock option.

• Filing with Registrar and the Securities Exchange Board
• A declaration of solvency by 2014 rules. Two directors should sign this declaration out of which one may be a managing director.
• Bought shares to be extinguished within seven days of the last date of the completion of the buyback.
• There should be a detailed registration.

The Section corresponds to Section 77 A of the earlier Companies Act 1956. The buyback is also prohibited under certain cases stated under Section 70 of the present act. Compliance with provisions of Section 92, 123, 127, 129 is a must.

Certain norms are stated in Rule 17 of the Companies (Share Capital and Debenture) Rules, 2014 regarding

1. Explanatory statements and its contents
2. Forms are specified
3. Relevant signatories
4. Dispatching the letter of offer
5. Time limit for opening of letter of offer
6. Requirement to be fulfilled after completion of Officer
7. Time limit for completion of verification
8. Proper records to be maintained
9. Submission to the Registrar and securities exchange board

Conclusion

Thus, we see that buyback of securities is a technical process and permits the company to buyback or repurchase its shares issued by them. It is done through re-absorption of ownership previously distributed amongst public and private investors.

Buy back carries with it many benefits such as:

1) Ownership consolidation

2) Boosting financial ratios

3) Undervaluation

4) Voting rights

5) To avoid pain for the privilege, they do not have access to

6) Reduction of overall cost of capital

7) Reissuing on correct prices

8) Making business looks more attractive to investors

9) Earnings per share ratio are increased.

In this blog post, Saurodeep Dutta, a student of University of Calcutta, who is currently pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, writes about the importance of stamp duty levied on legal documents during investment transactions and further goes on to write about the provisions under the Delhi Stamp Act. 

Preliminary

Stamp Duty is a tax that is levied on documents, especially legal documentation. Historically, it included a majority of transactions including cheques, receipts, military commissions, marriage licenses and land transactions. Issuance of documents with actual physical stamps was common in earlier times, but that has changed in recent times with most documents not requiring physical stamps anymore.

The importance of stamp duty when it comes to investments arises because paying stamp duty grants legal documents recognition, turning it into a document which can be used in case of any litigation that arises out of the investment, assisting an investor in securing his investment.

It is worth noting here that there are different duties on various documents in different States. Each state has its authority in the collection of stamp duty and thus varying it in different states. The power to levy Stamp Duty is, however, divided between the Union and the States. The Central Government levies stamp duty on the instruments specified under Article 246 of the Constitution, read with Schedule VII, List I, Entry 91. The State Governments levy stamp duty on the instruments specified under Article 246 of the Constitution read with Schedule VII List II, Entry 63.

Levy of stamp duty

Stamp duty is levied on documents in accordance with Schedule 1 of the Indian Stamps Act, 1899. The Indian Stamp Act, 1899 is a Central enactment and States have powers to adopt the Indian Stamp Act, 1899 with amendments to the same to suit the transactions peculiar to each State. Section 3 of the Indian Stamp Act, 1899 is the charging Section and stipulates that stamp duty has to be paid on the instruments provided in Schedule I to the Indian Stamp Act, 1899. Certain States have introduced Schedule IA to the Indian Stamp Act, 1899 being the stamp duty payable in that State.[1] Delhi has the Indian Stamp (Delhi Amendment) Act, 2007 along with the original pan-India legislation.

Transferability of shares and stamp duty

A share is regarded as a movable property, as has been laid out in Section 44 of the Companies Act, 2013. A share of a company is transferable according to the rules laid out for the same in the concerned Company’s Articles of Association. For the transfer of a share to take place, the current holder of the share must make a deed of transfer of the share in favour of the incumbent holder, and the proper transfer of a share requires the transfer deed to be duly executed and stamped in accordance with the Stamp Act provisions, in order for it to constitute a proper transfer of shares.

Issuance of shares and stamp duty

A Company’s issuance of shares is a practice that is undertaken to raise capital for the particular Company. Every such issue of share to a shareholder requires the Company to issue a share certificate to the holder, certifying the person to be the holder of the shares. This is a statutory function required under Section 44 of the Companies Act. In this stead, Section 3 of the Indian Stamps Act requires every valid share certificate to be duly stamped. The Company issuing this share must pay the stamp duty within 30 days of the issue of the certificate.

Provisions under the Delhi Stamp Act

For any investment relating to the issue and transfer of shares in Delhi, the provisions of the Delhi Stamp Act (“the Act”) will be activated. This can be discussed under two headers.

Issuance of shares

Under the terms of the Act, Stamp rates are payable for any certificate or other document evidencing the right or title of the holder thereof, or any other person, either to any shares, one thousand stock in or of any incorporated Company or other body corporate or to become proprietor of shares, script or stock in or of any such Company or body.

The rate of stamp duty has also been specified under the Act. Stamp duty will be levied at Rupees one for every one thousand or part thereof of the value of the share, script or stock, including the premium.

Transfer of shares

For transfer of shares, the stamp duty applicable is 0.25% of the market value of the share[2]. An important point to note here is that the duty is applicable on the market value of the share and not on the nominal value. Any calculation of stamp duty has to be made in accordance with the market value of the share at that particular time, and not on the nominal value.

Section 29 of the Act requires the costs of the stamp to be borne by both parties involved in the transfer transaction, in the absence of any agreement between the two. However, in the case of Union of India vs. Kulu Valley Transport Ltd,[3]it was held that in the case of stamp duty arising out of the transfer of shares, the seller would be responsible for the payment of stamp duty. Section 17 of the Indian Stamp Act requires the payment of stamp duty before the registration of the certificate of transfer of shares.

Following the establishment of the Depositories Act and the emergence of trading in dematerialised form, stamp duty is payable only on the physical transfer of shares. Demat trading does not qualify for Stamp Duty; provided issuer pays stamp duty on the consolidated total number of securities.

Conclusion

Stamp duty is an important part of the revenue of the Government, and payment of stamp duty is necessarily required. Non-payment of stamp duty and underpayment of stamp duty often leads to charges. It is thus important to pay stamp duties as and when required.

Payment of stamp duty has the added benefit of making investments in Companies by way of shares much more secure, lending them the ability to be used in courts of law in litigation.

Footnotes:

[1]http://taxguru.in/finance/levy-of-stamp-duty-in-India-types-of-stamp-in-India-important-provisions-of-stamp-duty.html

[2] Article 62, Schedule 1 of the Act

[3] 28 Comp. Cas. 29 (1958)

In this blog post, Rashi Chandoke, an Associate with ANA Law Group, Mumbai, and a student, pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, describes how a foreigner can be a Director of an Indian Company. 

Introduction

A company, being an artificial person, is managed and controlled by its officers called the directors of the company. According to the inclusive definition under the Companies Act, 2013, a Director means a Director appointed to the Board of a company.[1] The Directors are the head of a company. They are the supreme authority controlling the managerial and other affairs of the company. They are jointly known as the Board of Directors (BOD) of a company under Section 2 (10) of the Companies Act, 2013. The BOD oversees the management activities of the company as well as protects the long-term interests of the shareholders of the company.

The company’s law in India does not bar foreign nationals to become directors in Indian companies. A foreigner or a non-resident Indian can become an executive or a non-executive/independent director of Indian companies whether public or private. Following are the relevant laws applicable to a foreign national as a director in an Indian company:

Foreign National as a Director under Companies Act, 2013

Appointment of directors under Companies Act, 2013

Under Indian Companies Act, 2013, six types of Directors are appointed in a company, i.e., Women Director, Independent Director, Small Shareholders Director, Additional Director, Alternative and Nominee Director. The Act does not bar a foreign national to be appointed as any of the above-mentioned directors in Indian Companies by complying with the Companies Act, 2013 (hereinafter referred as “The Act”) read along with the Companies (Appointment and Qualifications of Directors) Rules, 2014 (hereinafter referred as “The Rules”)

Following are the criteria that are to be fulfilled by a person (including a foreign national) to become a Director of a company under the Act:

• Every person (including a foreign national) shall be allotted with a Director Identification Number (DIN) before appointed as a director;[2]
• Every person (including a foreign national) to be appointed as a Director shall furnish his DIN and shall declare that he is not disqualified from becoming a Director under this Act;[3] and
• The person (including a foreign national) appointed as a Director shall not act as a Director unless he gives his written consent to act as director in Form DIR-2. Such consent has to be filed with the Registrar within 30 days of his appointment.[4]

Application & Allotment of Director Identification Number (DIN)

DIN is allotted by the Central Government to the person intending to become the Director of a company[5]. Every person (including a foreign national), intending to become a Director of a company, shall make an application to the Central Government for allotment of DIN under Section 153 of The Act. The Central Government allots the DIN to the applicant within one month from the receipt of the application.[6]

An applicant (including a foreign national), shall make an application for obtaining DIN in electronic Form DIR-3 to the Central Government along with fees of Rs.500 as provided under The Rules. The Central Government will provide an electronic system to facilitate submission of the application for allotment of DIN through the portal on the MCA (Ministry of Corporate Affairs) website.[7]

The Form DIR-3 has to be downloaded from the portal. It has to be filled and signed by the applicant using his/her own Digital Signature Certificate and shall be submitted electronically. Following are the documents required to be attached to the application:

• Photograph;
• Proof of identity;
• Proof of residence;
• Verification by the applicant for applying for allotment of DIN in Form DIR-4; and
• Specimen signature duly verified.[8]

In the case of foreign national applying for DIN to become a director in an Indian company, details of a valid passport should be filled in Form DIR-3, and a certified copy of same should be attached with DIN application. All supporting documents including photograph should be certified by the Indian Embassy or a notary in the home country of the applicant or by the Managing Director / CEO / Company Secretary of the company registered in India, in which applicant is a director. If a foreign director has a valid multiple entry Indian visa or Person of Indian Origin card or Overseas Citizen of India card, then the attestation could also be done by Public Notary / Gazetted Officer in India or a practicing chartered accountant / company secretary / cost accountant.[9]

The Form DIR-3 shall be digitally verified by:

• A chartered accountant in practice or a company secretary in practice or a cost accountant in practice; or
• A company secretary in full-time employment of the company or by the managing director or director of the company in which the applicant is to be appointed as director.[10]

Immediately after submitting the DIN application online, a provisional DIN is generated automatically. Provisional DIN shall not be utilized until it is approved and confirmed by the Central Government. The Central Government processes the application so received and decides whether to accept or reject the DIN and communicate the same to the applicant within one month from the date of receiving the application. If the Central Government finds any defect or incompleteness in the application, then it shall communicate the same, by placing it on the website and by emailing it to the applicant, directing to rectify the errors within 15 days from the date of such placing it on the website and email.[11]

In case the errors are partially corrected, or the rectified information is still defective, then the Central Government shall reject the application and direct the applicant to file a fresh application for DIN. In case the information is not rectified within a given time, then such application shall be held invalid by the Central Government. On rejection of the application, the provisional DIN shall automatically lapse, and the fees paid shall neither be refunded nor adjusted with any other application. The DIN so obtained by the applicant shall be valid till the lifetime of the applicant.[12]

Independent Director

An independent director of a company means a director who is not a promoter nor related to the promoter of the company; or has no pecuniary relationship nor related to any person having pecuniary relationship with the company, its holding or subsidiary or associate company; neither himself nor his relative is a key managerial personnel or any employee in the company.[13]

A foreign national can be an independent Director of a company if he possesses skills, experience, and knowledge in one or more fields of finance, law, management, sales, marketing, administration, research, corporate governance, technical operations or other disciplines related to company’s business.[14]

Managing Director or Whole-Time Director

A foreign national, intending to become a managing or a full-time director, should be a resident of India i.e. who has been staying in India continuously not less than twelve months, immediately preceding the date of his appointment.[15] He should not be less than twenty-one years of age nor more than seventy years of age. If the person is of seventy years of age, by passing a special resolution, can be appointed so. The person should not be insolvent; nor has he, at any time, suspended payment to his creditors; or has, at any time been convicted of an offense and sentenced for more than a period of six months.[16] Such appointment is approved by the BOD at a meeting which shall be a subject of approval in the next general meeting by passing a resolution. Approval from Central Government is needed if the person does not comply with the above-mentioned conditions.

Foreign National as a Director under Foreign Exchange Management Act (FEMA), 1999

As per Companies Act and FEMA, there are no restrictions for a foreign national to become a director in an Indian Company. He is eligible for sitting fees, remuneration, commission, travel expenses just like any other director.[17] But, according to FEMA, a foreign national cannot acquire a property situated in India.[18]    

A foreign national as a director in an Indian company can hold and maintain a foreign currency account with a bank outside India and receive or remit the whole salary payable to him for his services.[19] Where foreign nationals are engaged by Indian companies, the Indian companies shall make an application for remittance of remuneration to authorized dealers with a statement and undertaking certificate regarding payment of Income Tax. A foreign national intending to become a director in an Indian company shall hold a valid employment visa.[20]

Foreign National as a Director under Income Tax Act, 1961

Any income earned in India is subjected to Income Tax. Similarly, in the case where a foreign national earns as a director of an Indian company is subjected to income tax under Income Tax, 1961. The required TDS shall be deducted from their remuneration or commission as per the provisions of Income Tax Act.[21]

LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join:  

https://t.me/joinchat/J_0YrBa4IBSHdpuTfQO_sA

References:

[1]Section 2(34) of the Companies Act, 2013

[2]Section 152 (3) of The Act

[3]Section 152 (4) of The Act

[4]Section 152 (5) of The Act read along with Rule 8 of The Rules

[5]Rule 2 (d) of The Rules

[6]Section 154 of The Act

[7]Rule 9 (1) and (2) of The Rules

[8]Rule 9 (3) of The Rules

[9]FAQs on DIN by the Ministry of Corporate Affairs; available at: http://www.mca.gov.in/MinistryV2/DIN1-4_faq1.html

[10]Supra note 8

[11]Rule 10 of The Rules

[12]Supra note 11

[13]Section 149 (5) of The Act

[14]Rule 5 of The Rules

[15] Schedule V of The Act

[16] Section 196 (3) of The Act

[17] Part D of the Exchange Control Manual; available at https://www.rbi.org.in/scripts/ECMUserChapterDetail.aspx?Id=325&CatID=13

[18] Acquisition and Transfer of Immoveable Property In India by a person resident outside India; available at https://www.rbi.org.in/scripts/FAQView.aspx?Id=33

[19] RBI Notification on Foreign Exchange Management (Foreign currency accounts by a person resident in India) Regulations, 2015; available at: https://rbi.org.in/scripts/NotificationUser.aspx?Id=10266&Mode=0

[20] Supra note 17

[21] Section 192 and 115A(1)(b) of Income Tax Act, 1961

Lion’s Gate Take Over Bid by Icahn: Poison Pill or Just A Hard Candy?

Mad Men, Saw, Weeds, Nurse, Jackie and Kick-Ass. These are some of the shows and feature films of the Hollywood studio Lions Gate – which has just been the subject of a classic takeover attack, albeit one which eventually failed. Carl Icahn, a former green-mailer and now predator who became famous in the 1980s with his takeover bid of Texaco, often used the services of the junk-bond King Mike Milken, to raise finance. This gives a wonderful opportunity to analyse the most frequently used takeover defense, the poison pill, deployed this time by Lions Gate. It also points out how interests of majority shareholders may run contrary to interests of minority shareholders and directors. Towards the end, you shall find a part which explains what could possibly happen in India in a similar situation.

Reasons for the takeover

As a shareholder of Lions Gate (Icahn owned 18.6 percent of the shares), he was dissatisfied with the existing management of the company – the share price had touched a high of 12 US dollars in 2007, but was hovering around 6.91 presently. The figure could potentially dampen the enthusiasm of a shareholder, who is primarily interested in the increase in the value of the shares of the company he owns. Therefore, Icahn decided to stage a takeover of the company at 7 US dollars per share.
Note that whenever a person or a company attempts a takeover, the price offered by it is generally slightly over the market price. This is because transfer of a large number of shares, as compared to a smaller number, transfers the element of control, and so the additional price offered over the market price is known as the premium, which is paid for the control. In this case, Icahn was offering a premium in the range of 15 percent over the closing price. His total takeover bid amounted to 825 million US dollars, a huge amount by all standards.

The Classic Takeover Defense

As would be expected in any takeover, Lions Gate sought to protect itself and resorted to an oft used takeover defense – a poison pill. For those who are not familiar with what it is, lets just say it would have the effect that if Icahn sought to buy any more shares of the company, it would trigger an automatic grant of right to the existing shareholders to buy more shares at a cheap (discounted) price which are to be issued for that purpose specifically, thereby diluting Icahn’s acquired stake and keeping the shareholding percentage of existing shareholders either unchanged or making it higher than it could otherwise be. This doesn’t make acquisition impossible, but it means Icahn would have to buy more shares and thus shell out much more money than he would otherwise have had to, which would make it more difficult for him to gain control of the company.

Regulators in favour of the Free Market

A poison pill is implemented by the Directors to secure their employment and control over the company. A person willing to stage a takeover offers an additional amount, known as the premium (in the return of gaining ‘control’) in corporate parlance, over and above the existing market price of the shares. The British Columbia Securities Commission (the securities markets regulator in Canada), however, invalidated the poison pill, and a Canadian Court (the British Columbia Court of Appeal) upheld this ban.

The Views of the Free Market

The Court’s decision striking down the poison pill in effect gave Icahn a carte blanche to continue his onward march towards gaining control of Lions Gate. While the adoption of a poison pill by a Board is ordinarily expected to be against shareholder interest, the Board of Lions Gate then chose to go ahead and took a shareholder vote on the pill. 56 percent of the shareholders, voted in favour of the pill in this case, implying that they would not wish Icahn to gain control. That was a clear majority vote, although not by a very small margin.

How the pill works – An example

Let us assume that the acquirer has the finances needed to shell out the amount necessary to acquire the desired percentage of shareholding. Say, for example, there is a company which has two and a half million (2,500,000) shares. Now, say the acquirer wanted to attain a 40% shareholding of this company, for which he would have to purchase a million shares. After the poison pill, say, seven and a half million (7,500,000) additional shares are issued. Thus, the company now has ten million (10,000,000) shares totally, and the acquirer would require purchasing four million (4,000,000) shares to attain the desired 40% level of shareholding, which will require him to fork out four times the amount he was initially planning. With the existing level of money, he will only be able to get a 10% shareholding in the company, which would not give him the desired level of control. This is a simplistic example, in a real-life scenario issuance of a small number of additional shares can make it difficult for an acquirer to arrange additional finance.

Consequences of a poison pill – the tug of war between the Board and the Shareholders

Poison pill often reduces shareholder value. Looking at it one way, implementation of a poison pill by the Board without consent of shareholders identifies a conflict situation in corporate governance between the Board of Directors (managers) and the shareholders (owners) of a company. Ideally, the Board, or the managers are expected to act in the interest of the owners, and could be expected to be their agents. Some writers on corporate governance identify the duties of Directors as extending beyond shareholders to a wider category of stakeholders in the market, say, for example, customers. However, in either case, when the Board acts in its own interest, it can be visualised as violating such a duty.

The Tug of war between the Majority and Minority

Now, let’s look at a situation where implementation of a poison pill is approved by the shareholders. This requires a simple majority, that is, 51% of shareholders. As we saw, this shall make it difficult for the acquirer to acquire the desired level of shares. This situation is different from the one described above, as it demarcates a line of tension between the majority and the minority shareholders. In the case of Lions Gate, this line is pretty sharp – with 56% favouring the pill and 44% against it.

How the Approval of the Pill Affects the Minority

Making an open offer for shares indicates that another person wants to take control of the company, and hence presents an opportunity for them to exit from the company by selling off their shares (for consideration). Now, if no shareholder is interested in a predator gaining control over the company, he would simply not sell his share to such predator. If some shareholders want to sell their shares while the others don’t, the predator will acquire only the shares sold by existing sharheolders. Now, let’s see how this process, and the ability of the minority to sell their shares, is altered by a decision of the majority which approves the pill.

When the moolah’s just not there

In a situation where the acquirer is not able to shell out the amount that is required to attain the desired percentage of shareholding, he is likely to abandon the offer, and the shareholders willing to sell off their shares at the price offered by him (which includes the additional premium component for control) will not be able to.

When the money is arranged

Assume, in the case of the example above, a situation where the acquirer has been able to successfully accomplish the Herculean task of arranging for four times the finance required. Under certain jurisdictions, he may have the option of making his offer conditional upon a certain minimum level of acceptance. For example, under the Indian framework, he would have the option to make his offer conditional upon acceptance by a minimum 20% of the shareholders. Let us see what effect the pill would have on that.
Suppose, before the pill was issued, only shareholders holding 500,000 shares (that is, a 20% minority) wanted to sell off their shares. In such a situation, if all these offered their shares to the acquirer, he would have to purchase the 20% shares that were offered to him by the minority, even though he may not be able to attain the desired 40% shareholding. This implies that while the minority who want to sell their shares can sell them for the premium offered by the acquirer, who would have to buy all those shares, even though he would not attain the desired level of control. Of course, he needs to utilise a fraction of the finance he arranged for the entire 40% shareholding, and to that extent, some of his money is freed up.
Now, after the pill is issued, let us assume that the same 500,000 shares are sought to be sold. These represent only a tiny fraction, that is, 5% of the shareholding percentage post the pill. In such a scenario, if the acquirer made the offer conditional upon a minimum 20% acceptance, he would not be required to buy any shares from these shareholders. As a result, they would not be able to sell their shares at the premium offered by him. They would have to sell them at the open market at the price prevailing there.

The Alternatives Available to the Minority

Through the implementation of the pill, the minority cannot sell their shares anymore to the acquirer. Is this unfair? Well, they can sell it to another buyer in the stock market, at the market price. Of course, they would not stand to benefit from the premium component, or the additional price offered by the acquirer. But that should be fair, in light of the fact that it has been decided by the majority to not surrender ‘control’ in the present case.

The justifications

When the minority is not able to sell off its shares at the premium offered by the acquirer, it may not be viewed as unfair because as a general princple, a large number of the company’s affairs are expected to be governed by a majority of the shareholders, and unless there is serious mismanagement or a violation of the individual statutory rights of the minority, it doesn’t have a valid claim in Court.

Exceptions

Note that anomalous situations may occur where the news of a takeover is perceived as so beneficial for the company that the price of its shares shoots up immediately after the announcement of the acquirer to takeover the company, to a level even higher than the ‘premium’ offered by the acquirers for control.

This had happened when the US company Kraft, bid for the takeover of Cadbury. The price of Cadbury shares had risen to a higher level than that offered by Kraft. In such a case, shareholders may not sell their shares to the offeror, as the price he is willing to pay is lower than what is available in the market. This would be a signal to the offeror to increase his offer price for the shares, which is what Kraft had done. On the other hand, the offeror might decide not to buy shares at the newly reached market high, in which case it would be a signal that the acquisition is going to be called off. In such a situation, the prices could fall back to the original level.

Hence, existing shareholders who are contemplating whether to sell their shares, in such a case, have to tread this fine line by, trying to second-guess the move of the acquirer.

At the end, the game is driven by hard economics – the side which believes that the company is worth much more than what it is thought to be by the other side, wins.

Could a poison pill be issued in India?

Under Indian law, if a predator sought to acquire shares in India, the moment he reaches a 15 percent level of shareholding, he has the obligation to make an open offer to buy a minimum of 20 percent additional shares. At this point, the Board of Directors of a company cannot issue additional shares without taking the consent of shareholders. Thus, for practical purposes, a poison pill cannot be used by the Board to perpetuate its position in the company, unless the same is approved by the shareholders. In the case of Lions Gate, we see that shareholders were in favour of not letting Icahn takeover the company. Hence, if a similar occurred in India, a shareholder vote taken prior to the issuance of a pill would have sufficed to fend off a predator.