The terms “mergers” and “acquisition” refer to the methods that firms utilise to acquire, sell, and recombine businesses. Not all mergers and acquisitions take place voluntarily and amicably in the modern world when there is fierce competition in every industry. Therefore, the idea of takeovers without consent is best described as hostile takeovers. Hostile takeovers have a history that dates back to the 1980s, when the US Supreme Court issued a landmark decision in Edgar v. MITE Corp. declaring the Illinois Business Take-Over Act’s anti-takeover provisions to be unconstitutional.
A hostile takeover occurs when a buyer purchases shares of a company without the management’s knowledge in order to gain control of it. Thus, a hostile takeover occurs when a potential buyer quietly and unilaterally attempts to take over a business against the wishes of the present management. A hostile takeover is an effort by an outsider to seize power from an existing management.
There was a period, perhaps 20 years ago, when hostile acquirers terrified company boards. There wasn’t much that the board of a corporation could do to halt the bloodbath if wealthy dealmakers wanted to take over a company in a hostile purchase, bite it into pieces, and then spin those pieces off for a profit. Poison pills and other anti-takeover tactics were first thought of at that time. The anti-takeover tactics created during that time period drastically changed the takeover law and strengthened corporate preventative measures.
Shark repellents and defensive measures against hostile takeovers
To stop a hostile takeover, there are a number of defences. The best techniques are ones that include built-in safeguards that make a business hard to seize. Shark repellents refer to all of these techniques as a whole.
The most common and successful defence against hostile takeovers is the traditional “poison pill technique” (shareholders’ rights plan). In this strategy, if a hostile acquirer buys more shares than a predefined quantity of the target firm’s equity, the target business grants current shareholders the option to buy stock at a price below the going market rate.
This action is intended to reduce the target firm’s stock value and reduce the hostile acquirer’s ownership stake in the target company to the point where it would be prohibitively expensive for him to undertake any additional acquisitions. Another sort of defence is the “White Knight.” In this instance, a third business approaches the target of a hostile takeover with a friendly takeover offer. This is a popular strategy where the target firm locates a rival business to enter the picture and buy them off the market and away from the one making the hostile offer. Better acquisition conditions, a greater partnership, or better long-term success prospects are just a few of the many reasons why businesses want to be acquired by a third party. These “white knight” firms occasionally do nothing more than assist the target company in negotiating better terms with the hostile bidder. Severstal, which behaved as a “white knight” in the Arcelor-Mittal deal and caused a 52.5% rise in the Mittal bid, is a very good example.
The targeted company may also use the following other sorts of defences:
- Pac-Man Defense, where a target company blocks a takeover offer by purchasing shares of the acquiring company, which is then taken over.
- Staggered Board: It is seen to be most effective when used in conjunction with the “Shareholder’s Rights” scheme. This strategy prolongs the takeover procedure by preventing the simultaneous replacement of the entire board. The directors are divided into classes, and each class runs for office at the annual general meeting. It precludes replacing the whole board at once.
Indian Legal and Regulatory Framework
The SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997, must be followed for any acquisition in India (Takeover Code). Understanding the numerous terminologies used in the takeover and their definitions as stated in the Takeover Code is crucial.
It is difficult for a hostile buyer to just walk up to the target company because of the Takeover Code. It warns the company against the advances of an acquirer by requiring the acquirer to publicly disclose his shareholding or voting rights to the company if he acquires shares or voting rights above a certain limit. However, a motivated hostile acquirer will not find the Takeover Code to be an impassable obstacle.
The Takeover Code, via Regulation 23, also forbids the target firm from taking certain actions during the offer period, including the transfer of assets, the signing of significant contracts, and even the issuance of any authorised but unissued securities. These decisions, however, may be made with the consent of the majority of shareholders.
The rule does, however, allow for a few exceptions, such as the power of the firm to issue shares with voting rights following conversion of already-issued debentures or upon exercise of an option against warrants, subject to the conversion’s or the option’s exercise’s predetermined terms.
When a hostile acquirer makes a takeover offer, it may be crucial for the Board to act immediately to defend itself or to pressure him into a negotiated stance. Obtaining the shareholders’ authorization in such a situation may take time and be challenging, particularly if the company’s ownership and management are separate entities.
The SEBI (Disclosure & Investor Protection) Guidelines 2000 (DIP Guidelines), the nodal regulations for the procedures and conditions of issuing shares or warrants by a listed Indian firm, must be read with the Takeover Code. They place a number of limitations on a listed company’s ability to issue share warrants or allocate shares in a preferential manner. According to the DIP rules, it is not possible to issue shares at a discount or warrants that convert to shares at a discount because the minimum issue price is based on the share’s market price on the day of issuance or the date the option against the warrants is exercised. The shareholders’ rights plan, which calls for the preferential issuance of shares at a discount to current shareholders, is hampered as a result.
The DIP guidelines further provide that the right to purchase warrants must be used within eighteen months of being granted; else, they will expire. Thus, in order to extend the shareholders’ rights plan, the target firm would have to go back to the shareholders after the initial eighteen-month period.
An Indian firm would not be able to reduce the ownership of the hostile acquirer without the flexibility to provide discounted shares or options in exchange for warrants, making the shareholders’ rights plan ineffective as a takeover deterrent.
Additionally, the FEMA Regulations and the FDI policy have provisions that prohibit non-residents from purchasing listed shares of a firm directly from the open market in any sector, including industries covered by the automatic route. There are additional limitations on the private acquisition of shares by non-residents through the automatic method. This is only authorised if Press Note 1 of 2005 read with Press Note 18 of 1998 does not apply to the non-resident acquirer. Any hostile takeover of any Indian company by a non-resident has been effectively eliminated as a result of this.
However, some modifications and adjustments to the current legal and regulatory framework are necessary for the poison pill strategy to function well in the Indian corporate environment. Importantly, a method that allows the issuance of shares or warrants at a discount to the going market price must be approved under the Takeover Code and the DIP Guidelines. The shareholders’ interests would need to be balanced with the ability of the target corporations to fend off potential hostile takeovers in these revisions.
Indian businesses need to switch from frantic defensive manoeuvres to preparing for the offensive. Employing the poison pill defence serves to protect shareholder value and interest while delaying actions by organisations like asset strippers that do not act in the best interests of the firm or add any value to it. Companies must, however, take precautions to prevent bad management from abusing this argument. Today, plainly, it seems that changing the management’s attitude and approach toward poison pills is more necessary than eradicating them.
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