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DEFENSIVE TACTICS VIS A VIS HOSTILE TAKEOVER: AN INDIAN PERSPECTIVE (By-Rukhsaar Dhaliwal & Vanshika Tuteja)
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Article Details
DEFENSIVE
TACTICS VIS A VIS HOSTILE TAKEOVER: AN INDIAN PERSPECTIVE
Authored By-1. Rukhsaar
Dhaliwal
2. Vanshika Tuteja
1. Abstract
One
of the most effective ways to accomplish corporate prosperity is through
Mergers & Acquisitions. However, to ensure regulated advancement, in India
these endeavors are monitored and regulated by the SEBI and the Takeover Code.
While the legislative set-up in India for Takeovers has been amended over
twenty times since its outset, however several noteworthy issues are yet to be
addressed. Hostile takeover, an important strategy in the world of acquisitions
is rather uncommon and unusual in India. However, the expanding global
corporate world has opened doors to adverse antagonistic competition
This
paper commences with the history of hostile bids in India, and examines how the
laws pertaining to the corporate takeovers and hostile acquisitions have been
defined and redefined over the years. Its transverses the process of evolution
of the law and deliberates upon the array of defenses deployed by the target
firms which are endorsed by the laws prevalent in our country. Towards the end
of the paper the authors have examined the takeover of Mindtree Limited by
L&T Limited, and have scrutinized and assessed the modus operandi of the
hostile bidders along with examination of the predicament of the target
corporations. Furthermore, the authors have analyzed the hostile bid undertaken
by L&T, and evaluated the rationale behind an adverse and inimical
takeover.
KEYWORDS- HOSTILE
TAKEOVER, TAKEOVER CODE, DEFENCES, CORPORATE GOVERNANCE, MERGERS &
ACQUISTION.
I.
Introduction
In 2019, India saw
its first ever-hostile takeover in the information technology sector. Larsen
and Turbo, India’s one of the biggest engineering giants made a hostile bid to
acquire Bengaluru based IT company, Mindtree, and set the stage for a riveting
drama in the Indian corporate sector.
It all started when V.G. Siddhartha, a shareholder in
Mindtree, offered to sell his stake of 20.30% in the company. On 18 March 2019,
a share purchase agreement was executed amongst L&T and Siddhartha through
which L&T acquired 20.32% stake in the latter. The other promoters of
Mindtree were not in favour of this merger. Hence, making the acquisition a
hostile takeover. They tried all the defences possible to fend off the
acquirer. However, L&T managed to acquire 60% stake in the company.[1]
The mergers and acquisitions (“M&A”) market has
certainly seen a boom in the past few years. There is much more competition in
the economy, which stimulates a plethora of change in the structuring and
management of the companies functioning in the present market. India has
witnessed numerous takeovers in the past which have played a significant role
in shaping the takeover law. Currently, the takeover in India is primarily
regulated under by the Securities and Exchange Board of India (Substantial
Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Code”). A
takeover is considered to be hostile when the company, which is being bought,
does not intend to merge with the host company. Under these circumstances, the
acquirer instead of negotiating with the target company goes directly to the
shareholders and makes an open offer to buy their shares. In India, there have
been only a handful instances of hostile takeover. While the M&A market has
prominently seen friendly takeovers. However, this does not imply that the
companies are safe from hostile takeovers. The present market conditions, with
the liberalisation policies that are being followed by the government have
provided the much-required stimulus to the activities in the M&A market,
but in turn the takeover regimedoes not create any unassailable impediments to
protect the companies from such hostile takeovers. The Indian companies now
face a real threat from hostile takeovers because most of the regulations make the
use of takeover defences almost impossible, leaving the companies more
vulnerable to acquisitions.
In this paper, the authors will discuss the various
defences that are available to prevent a hostile takeover and the legal
position of these anti-takeover mechanisms in India. In the second half the
paper, the authors will discuss the case study of the L&T- Mindtree
takeover to illustrate as to how companies face a threat of hostile takeovers
in present market conditions.
II.
Major Historical Incidents Pertaining To
Hostile Bids
When the chronicles of hostile takeovers
are narrated, they are unambiguously close to thrillers. The world has seen
several heart racing hostile acquisitions of high-end corporations like
Vodafone[2],
Arcler[3]
and Cadbury[4].
However, when it comes to India, it has
not witnessed many hostile takeovers, as the pre liberalization era had
stringent and anarchic laws which made hostile acquisitions impossible to
achieve. In 1991, when the Narashima Rao Government opened Indian markets for
foreign players, it also relaxed policies which exposed the Indian businesses
to adverse foreign competition.
The first attempt of a hostile takeover
in India was made by an England based NRI, Swaraj Paul, when he attempted to
take over Delhi Cloth Mills (DCM) and Escorts Limited[5]in
the year 1983 The DCM promoter, the Bharat Ram family owned about 10%of the
stock, while the Nanda family, the promoters of Escorts Limited, had 5%of total
shareholding in the corporation. The newly formed procedure by the Reserve Bank
of India in 1982 restricted an NRI from purchasing more than one percent
shareholding in any Indian company, and such purchases could be made only
through a portfolio investment. Lord Paul overcame this hindrance by using
thirteen different companies to a acquire 13% of stake of the DCM shares, and
7.5%of Escorts Limited[6].
This lead to a widespread panic among the Indian companies and the matter was
taken up to the
Supreme Court. The Supreme Court’s
verdict[7]was
in favor of the promoters of the respective companies, following which
extensive meditations took place between Lord Paul and the target
companies which resulted in Swaraj Paul
selling his share to respective promoters and pulling out of the Indian
markets.[8]
Nearly two
decades later, in 1997 another British Company, British Paints Major ICI PIC,
bought 9.1%of Atul Choksey’s shareholding in Asian Paints, much to the
disapproval and disappointment of the other four promoters. The remaining three
promoters held over 42%of share in the company and refused to approve the
transfer of shares by citing clearance hurdle by the Foreign Investment
Promotion Board (FIPB)[9].
The FIPB policies necessitated that all the board of directors of a company
must approve the foreign acquisition. The British Paints Major didn’t manage to
get the board’s approval, and had to give up its share to two of the promoters
and to the Unit Trust of India (UTI), a mutual fund owned by the
government, hence rendering the acquisition a blunder.
One of the first successful hostile
takeovers in India was in 1998 by Indian Cements Limited when they made an open
offer to buy the shares of Raasi Cements and Shri Vishnu Cements at INR 300 per
share which was extremely high compared to the market value of the shares which
were priced at INR 100 in stock exchange[10]. This
led the market into a frenzy and the shares were frozen at INR 188.30 per
share. The market mania came to end which ICL buying 85% of the holding in the
company and resulted in a successful hostile takeover.
III.
Defenses
Following are a few widely popular takeover defences
available to public target companies
A.
Staggered Board
Staggered boards are extremely
important elements of the modern corporate organization. A staggered board
consists of three or five distinct classes or groups of directors[11]. These
directors serve for different lengths of time and during the annual elections
only one of these classes is open for appointment. Thus, implying that each
class of directors has elections in different years and one third all the
directors of the board retire annually.[12]A
staggered board is distinct from a normal board as in the latter’s case all the
directors are appointed at once.
Such classification of directors makes
it onerous for the hostile bidder to acquire the company. A bidder can acquire
a corporation only if it manages to control the board of directors, and a
staggered arrangement of the board makes it an extremely dreadful hurdle. An
efficient staggered board defers the hostile bidder to gain control of the company
by a substantial amount of time. Thus, if a bidder were to emerge it would take
at least a year to gain control of the corporation, which is considered tedious
in the world of hostile takeovers.[13]
Furthermore, staggered board is
considered an efficient takeover defense as other than cost damage rendered by
the bidder, he is also required to win at least 2 elections which are rather
far apart in time[14]. The
requirement of winning two elections loses itself as a hurdle for the bidder.
Indian Legal Position
Section 152[15] of the
Companies Act, 2013(“Companies Act”) mirrors the elements
of a staggered board as it states that out of the entirety of the board of
directors in a public
company (or of a private company which
is a subsidiary of a public company),a minimum of 2/3rd must retire
in rotation. Thus, only a one-third of the directors do not retire Clause (3)
of the Section 152 further goes on to substantiate that 1/3rd of the
directors subjected to retirement by rotation are to retire each year.
While the staggered board proves to be
an efficient anti-takeover shield against hasty bidders, it turns out to be
quite fruitless and ineffectual in the Indian corporate sector. Under Section 169
of the Companies Act[16], the
shareholders have the capacity and the right to remove all the directors in a
single shareholders meeting. Thus, a hostile bidder who acquired majority of
shares and balloting rights has the capacity to easily replace the board of
directors and overpower the staggered board defense.
Furthermore, shareholders have a legal
right to replace the directors, making it easy for the majority shareholder to
subdue the staggered board.
White Knight
The white
knight is another anti-takeover defense for companies exposed to hostile
bidders. A white knight typically is an individual investor or a company that
acquires the target company in order to rescue it from an unwanted hostile
takeover. In other words, a white knight is an amiable and proffered acquirer,
as against hostile competitors colloquially referred toas the black knight.[17]
The reason the target companies often
prefer white knights as anti-takeover defence is because these friendly
acquirers preserve the essence of the target company by retaining the existing
management and board of directors. The white knight not only invests in the
target company to save it from hostile bids but also conservesthe core schema,
the vision and the values of the company.[18]Awhite
knight salvages a
company at the brink of being taken
over forcefully by acquiring the corporation, buying out the corporate raider
or simply by striking a deal with the management and the board of directors of
the target company.[19]
White Squire
A white squire is very similar to the
white knight and is referred to a friendly investor or a company. The white
squire buys a considerable stake in the company that prevents the hostile
takeover, however, unlike the white knight it does not acquire the company and
has no intention of owning it.[20] In case
of the white squire the target company remains independent as the white
squire buys only partial shares, just enough to hinder the corporate raider
from taking over the target corporation.
One of the most remarkable examples of
a white knight was when a consumer goods company tried to acquire Prithvi Raj
Singh Oberoi’s EIH Limited, and the Reliance Industries turned white knight by
acquiring 14.12% shareholding in EIH Limited.[21]In 2001,
cigarette company, ITC Limited played a white knight by making a counter offer
to British American Tobacco Industries which was at the brim of a hostile
takeover by Radhakrishan Damini’s ITC offered a better value to the
shareholders and subsequently outbid Damini.[22]
B.
POISON PILL
Poison pill, also known as the
shareholders right plan, is a defence tactic used by target company to make its
shares unappealing. Underthis scheme, the shareholders of the target company
are offered shares of the company at a discounted price in the event of a
hostile takeover. This offer is made as soon as the acquirer makes an open
offer or when a shareholder crosses the threshold of the percentage of
ownership shares (i.e., 25%) without prior consent. All the shareholders are
offered the shares at a discounted price except the hostile bidder. This
dilutes the stake of the hostile bidder in the company thus increasing the cost
of acquisition. This is known as the flip-in poison pill.[23]
Another kind of poison pill is the
flip-over. Under the flip-over poison pill scheme, the shareholders of the
company are given an option to buy the stocks of the company at a discounted
price after the merger. This way the wealth of the acquirer is transferred to
the shareholders of the target company.
Indian Legal Position
Poison pill doesn’t have much use in
the Indian context due to the Takeover Code and SEBI Disclosure & Investor
Protection Guidelines 2000 (“DIP Regulations”)
An Indian company can issue a warrant
as soon as any shareholder crosses the threshold limit. However, the DIP
regulations read with the Takeover Code prohibit the companies to use these
warrants to sell shares at a sizeable discount, making the process of poison
pill ineffective. According to Regulation 26 of the Takeover Code[24],
the target company cannot issue any of its authorised and unissued shares
during the course of the offer period. However, they can be issued with prior
consent of the shareholders. Although, during the process of a hostile takeover
the company needs to respond quickly, and seeking prior consent of the
shareholders would be a time-consuming process, which would render the
shareholders, right plan ineffective.
Also, as per the DIP guidelines, the
shares and the warrants cannot be issued at discount, as the price has to be
determined in accordance with price in the market on the date it has to be
issued.
For this strategy to work, important
amendments need to be made to maintain balance and give the target company a
fair chance to get a fair buy out price or save the company from a hostile
takeover. It is suggested that the guidelines should be relaxed and the
companies should be allowed to sell securities at substantial discounted
prices.
This being said, there are some
advantages to the poison pill strategy. This tactic does not come in a
straightjacket formula and can be altered to suit the circumstances. The
guidelines do not prohibit issue of non-convertible securities like debentures,
preference shares, etc. A poison pill can be structured in a way where the
shareholders are backed with rights to exchange securities held for senior
securities[25].
These securities are issued to the shareholders when a hostile takeover bid is
in play.
The use of this scheme shoots up the
cost of acquisition due to increasing cost of interest in the borrowings.[26]
Further, a poison pill can also be
structured in a way where the target company add certain clause in its articles
of association, which prohibit the acquirer to use the brand name of the target
company.
Another tactic that maybe used by the
companies is that of issuing employee stock options. Under this scheme, the
employees are offered shares of the company at a discounted price. Use of this
technique during a hostile takeover would dilute the share of the acquirer in
the company. Hence, saving it from a prospective hostile takeover.
C.
GREENMAIL DEFENCE
Under this defence, the target company
offers the acquirer to buy back the shares acquired by the acquirer at a
premium price, which is above the market price of shares. The target company
makes this offer after conducting a cost benefit analysis.
It is often considered as blackmail;
the acquiring company buys the shares of the target company and then threatens
them with a hostile bid. In response the target company offers to buy back
these shares at premium in order to defend any further hostile behaviour.[27]
Typically, after the target company buys its shares back, the acquiring company
signs an agreement with the target company to not make another takeover attempt
for an agreed period of time.
For instance, the Renaissance Estates
Limited (REL) led by Abhishek Dalmia as he attempted to take over the GESCO
Corporation (GESCO) made an attempt at a hostile acquisition. Abhishek Dalmia
attempted to buy 45%of the stake in the company at a price of INR 23 which was
only a fraction of the actual value shares priced at INR 54.50. REL later
raised the offer to INR 27 for 55% of shareholding in the corporation. In
ordered to avoid a hostile takeover, GESCO’s promoter of Mahindra Reality and
Infrastructure Developers (MRID) and made a counter offer to buy the company’s shares
at INR 36 per share. After extensive lobbying and counteroffers, REL bought
10.5% stake in GESCO for INR 45 per share only to sell it to MRID at INR 54 per
share. Thus, the joint share of GESCO promoters went to a total of 30%.[28]In
this case, Abhishek Dalmia instead of
dislodging the promoters of the target
company sold his shares at a profit. This was a failed hostile takeover attempt
and a successful use of the defence of greenmail defence tactic. [29]
Another example of the use of
greenmail would be the case of Arjun Bajoria and Bombay Dyeing. In the year
2000, 5% of Bombay dyeing’s shares were brought by Arjun Bajoria. It was only
in June 2000, Bombay dyeing noticed Bajoria’s attempt of a takeover. They filed
a complaint with SEBI, Bombay Stock Exchange and Company Law Board. Bajoria
claimed to have sent a notice to company. After, a lot of speculation relating
to Bajoria’s intentions with the target company, he finally sold his shares to
Mr. Nusli Wadiaat a profit. [30]
D.
GOLDEN PARACHUTE
A golden parachute is a relief or compensation payable to
the top executives of a company in case of a takeover. This clause is part of
the contractual agreement between the top executives and the company which
results in a hefty payment that has to be made to the top executives in case of
termination of their contract. This severance packages is opted by a lot of big
and wealthy companies. The companies face a reduction in the amount of their
assets when they make such payments. This makes the target company less attractive
and also increases the cost of acquisition.
Moreover, this places the mangers and
the shareholders of the target company on the same side and reduces the
conflict between them as fulfilment of the clause of golden parachute has an
impact on the premium that has to be paid by an acquirer. Therefore, they fight
alongside the shareholders in order to get higher premiums. Various studies
have been conducted to show a positive correlation between golden parachute and
the amount of premium paid that is offered to the shareholders.[31]
Indian Legal Position
In India, Section 196 read with
Schedule V of the Companies Act provides for payments and appointment of
directors. Under this section, the permissible limit of remuneration that can
be given to a director without the approval of the Central government is not
much. Therefore, it is not enough to defend a takeover even if the company is
supposed to pay the maximum limit.
According to Section 197 of the
Companies Act[32],
a director can only aid 11% of the total profits.
However, the clauses relating to a
golden parachute are administered by Section 202[33]of
the Companies Act, 2013. As per these provisions, only the whole-time directors[34]
and an office manager[35]
are eligible for severance packages. However, a director is not eligible to be
paid in case he resigns from office when a company amalgamates with another
entity or due to reconstruction. These provisions are not applicable to
directors who are dismissed after a resolution has been passed in the board meeting.
Further, Clause 3 of Section 202 puts restriction on the amount of compensation
that is payable to the director.[36]
E.
CROWN JEWEL
A crown jewel refers to the most
beneficial assets of a corporation. A crown jewel of a company can varies
across an array of spheres both tangible and intangible as it could be a
department that renders the most profits, a particular team in research and
development or an extravagant chain of shares. The crown jewel is also used as
an anti-takeover defence in case of hostile mergers and acquisitions[37].
When the target company faces a threat from a corporate raider, they may take
the radical step of selling off their most profitable and valuable assets also
known as the ‘crown jewel’. This dire
step by the target company will render the company less attractive and
invaluable in the eyes of the corporate raider which will impel them to
withdraw the bid[38].
Once the most profitable assets of a firm a sold, the prospective acquirers
foresee a disoriented business and tend to pull out of the deal. This
self-preservation technique by a target company is mostly seen as a last resort
as it dismantles and severs the most valuable assets of the target company. The
sale of crown
jewels leaves a business with grim
prospects of growth which is why the target companies often look for a friendly
third part to sell off its crown jewel to. The friendly third party also known
as the white knight (as discussed above) is likely to sell
back the crown jewel to the target company at a premeditated price once the
corporate raider has disengaged itself from the bid.[39]
Indian Legal Position
Regulation 26[40]of
the Takeover Code provides for requirements by the board of directors and
managers of a target company. Under this said regulation, it is rather demanding
and problematic for the target company to sell, transfer, trade, eject or enter
into any contract to, transferor dispose off assets once the corporate raider
has made a public bid. Thus, the crown jewel defence can only be employed prior
the public announcement by the hostile bidder to take over the target company.
The Companies Acthas contrived
constraints on the power of the board. As per Section 180[41]
of the Companies Act, the board cannot sell the whole or substantially the
whole of its undertakings without obtaining the authorization of the
shareholders in a general meeting. However, there are no restrictions on the
sale of a single immovable property, which does not form an undertaking. Hence,
primarily there are no restrictions on the power of the board to deal with the
properties of the company, unless they are opposed to the interests of the
company.
IV.
The Case Study Of L&T InfoTech And Mind tree
Parties to the Transaction
THE ACQUIRER
Larsen & Toubro Limited (L&T),
a publicly
listed company and a fragment of Larsen & Toubro Group, is a Mumbai based
global IT Services Company. It is a company with miscellaneous services
variegated across technology, engineering, construction, manufacturing and
financial services, with global operations. L&T holds 74.58 % stake in Larsen
& Toubro Infotech Limited, an
IT company offering services across the globe. L&T’s expansion in the
information technology was perhaps one of the critical factors in its interest
in the acquisition of the Target Company.
Ø THE TARGET COMPANY
Mindtree Limited (Mindtree) is a publicly listed corporation
engaged in the business services related to Information Technology and
distributing digital and transfiguration.
A Bangalore based software service company, it
offers application development, and constitutes as one of the few companies to
sense and seize opportunities by expanding their business through artificial
intelligence, machine learning and automation.
Rationale of L&T
According the statements given by L&T’s top
management personnel, it has a software services business under L&T
Infotech and this acquisition was aimed at providing the best IT services to
its clients worldwide which could take its technology portfolio among the top
tier IT companies of the country.[42].
Mindtree was expected to expand client liaison and business ventures for
L&T. Consolidation of these two entities was assumed to render $2.4
billion.[43]
Since, there were no instances of overlap between the functioning of these two
companies, as L&T Infotech primarily functions in BSFI (Banking, financial
services and insurance) and manufacturing whereas Mindtree has a strong
presence in hi-tech media, retail and consumer packaged goods.[44]
This amalgamation was expected to help in expanding client base by decreasing
client concentration. However, post the acquisition their client concentration
was predicted to be brought down to mere 8.5 %.[45]Hence,
this amalgamation was a major step to expand the client base and uplift
L&T’s position in the IT sector.
Another aspect, which made the acquisition of Mindtree
attractive to L&T, was the likelihood of increased return on equity. This
acquisition would help increase the profits and expand sources of revenue in
the information technology and technology service sector.
Rationale of Promoters of Mindtree
The promoters of Mindtree were averse to the idea of a
takeover. According to Mindtree, there was no strategic advantage of this
takeover and it was a threat to Mindtree’s unique setup. Krishnakumar Natarajan,
the chairman of Mindtree wrote a letter to L&T board to urge against a
hostile takeover and he expressed his shock with regard to the attempts of a
hostile acquisition. He also emphasized that management does not want to be
part of an institution that is anthropologically different from Mindtree
and that amalgamation of the two organizations will not
render benefits for any of the two.
V.G Siddhatha’s part in the
takeover developments
VG Siddhartha, the founder
of Café Coffee Day (CCD) and one of the promoters of Mindtree disposed of his
stake of 20.32% in Mindtree to Larson and Turbo Limited. The private equity
firms including Baring PE Asia, Chrys Capital, and KKR refused to buy VG Siddhartha’s
share as these companies wanted to secure the controlling stake in the company
just like L&T Infotech.
Siddhartha sold his share
in Mindtree to pay off his debt of Coffee Day Enterprises (CDE – holding firm
for CCD) and other ventures[46]. The
total debt of CDE amounted to INR 6550 crores before the sale of its Mindtree
stake. Siddhartha’s stake in the company
was pledged by to various banks and financial institutions. In order to release
these shares Coffee Day Group entity, Tanglin Retail Developments Private
Limited issued non-convertible debentures of INR 3000 Crore with tenure of a
year and one month. This arrangement was made to ensure that the share transfer
materialized easily and the hassle of obtaining no-objection certificate from
several lenders could be avoided.[47]
Transaction
The acquisition took place in a three-fold process.
It all started when V.G Siddhartha offered to sell his
20.30% stake in Mindtree. The takeover was initiated when a share purchase
agreement was signed between L&T and Siddhartha. Under this agreement,
Siddhartha sold 33,360,229 equity shares of Mindtree aggregating to 20.15% of
shareholding of Mindtree at INR 980 per share.[48]
Since this was below the threshold limit, the need for an
open offer was not triggered. However, L&T further placed an order to buy
15% more shares in Mindtree through a broker. They bought 24,834,858 more
shares, which accounted for 15% equity shares in the voting capital.
After acquiring 15% more equity shares, L&T exceeded
the threshold limit and were required to make an open offer, as mandated by the
Takeover Code. L&T made an open offer to purchase 51,325,371 Equity
Shares amounting to 31.00% of the share capital. As per
Regulation 19(1) of the Takeover Code, there were no conditions imposed on the
offer as to the amount of minimum subscription. The open offer was however
oversubscribed, following which the shares were allotted on proportionate
basis. [49]
Defences Used By Mindtree
The promoters of Mindtree opposed this acquisition from
the very beginning. The promoters never wanted to sell their shares to a third
party. The promoters had an emotional connect with the company and opposed the
idea of a third party intervening and controlling the affairs and events of
their company. The promoters believed that a third party would not lead this
company in the right direction and were of the opinion that Mindtree and
L&T are very different companies with remarkably distinctive goals and were
therefore not compatible. The promoters
also outlined the negative consequences of a takeover in the present market
conditions. They believed that Mindtree would lose all the progress it had made
because a takeover could potentially ruin client relationships. Therefore, it
wasn’t considered to be profitable deal for the shareholders.[50]
The promoters of Mindtree planned a board meeting and
informed the stock exchange about the same. The meeting was particularly set to
discuss the buyback of shares. The buyback of shares is a commonly used defence
strategy to protect a target from a possible takeover as a buy back increases
the cost of acquisition and dilutes the number of shares available for purchase
(buy back of shares as a defence strategy
has been discussed in detail above).
According to Section 68 of the Companies Act, a special
resolution needs to be passed in case of the buy back, however, under the
exemption’s clause, 10% of the shares can be issued for buy back without a
special resolution. Further this section imposes a limit of 25% of shares that
can be bought back but only after a special resolution is passed by the
company.
However, in the present case, this defence rendered
itself to be ineffective. Mindtree’s worth was INR 27,414.00 million which
implied that INR 2,741.40 million could be bought back without a special
resolution and INR 6,853.50 million after a special resolution[51].
Even after this, there were 163,900,000 equity shares outstanding. This implied
that even if the company passed a special resolution to buy back 25% shares,
the outstanding share capital would only be reduced by 4.20%. This was not
enough to save the company from takeover. Moreover, a buy back at such a later
stage is discouraged.
Further, the company resorted to the defence of white knight. Underlying idea being that
a third party enters the negotiation by making a competing offer, which
provides a fair chance to shareholders to choose the better offer. The target
company approached individuals with high net worth hoping for a friendly
takeover. However, no competing offers were made.
Another tactic that could have been used by the target
company was that of crown jewel. Since, the company is part of the IT sector
most of its assets are intangible. The target company could have sold off major
chunks of its assets to make the deal look unattractive. However, Mindtree
could not use this defence since the promoters of the company held a very small
percentage of shares and did not have the ultimate power.
Since, these three defences were ineffective to protect
the company. The promoters constituted an independent committee to review the
open offer as mandated under Regulation 26(6) of the Takeover Code.
SEBI Guidelines on an Open
Offer
As per Regulation 3[52] of the
Takeover Code, when a company is attempting to acquire another company, it is
required to make an open offer to public when the stake of the acquirer rises
to more than 25%. Furthermore, as per the provisions of the takeover
code, one cannot take control of a corporation unless an open offer is made to
the public to acquire shares.
Whether the Hostile
Takeover of Mindtree is within the bracket of lawLarson and Turbo made a
public announcement as per the terms of Regulation 3[53] and
Regulation 4[54]
of the Takeover Regulations 2011 despite the offer being considered as unsolicited
and hostile. An open offer is normally made on accounts when acquirer wants to
takeover at least 25% of the stake in a company. However, in this case the
offer was of at least 51%, hence there was no need to reach
25% holding before a public
announcement as mandated under Regulation 6(1)[55]for a
voluntary offer.
Outcome of the hostile bid
L&T ended up purchasing
31% additional shares than it had intended to acquire in Mindtree for INR
4,988.82 Crores via an open offer. The offer to acquire 50.9 million shares of
Mindtree from its public shareholders was subscribed 1.2 times on 26 June
2019 and it closed on 28 June 2019. The shareholding of 60% in Mindtree gave
L&T absolute control over the company’s board of directors and its
management. On 3 July 2019, L&T obtained the promoter status in the
software company Mindtree by obtaining majority shares.[56]The
Executive Chairman, the Executive Vice Chairman and Chief Operating Office and
Managing Director of Mindtree resigned as the members of the board of directors
and as employees of the company. They acted as board members and employees till
17 July 2019 as per their employment contracts. Promoters, Mr. Krishnakumar
Natarajan, Mr. Subroto Bagchi, Mr. NS Parthasarathy and Mr. Rostow Ravanan
together hold 13.32% of stake in Mindtree. 60% of shares are now owned by
L&T, and domestic mutual funds and foreign portfolio investors hold the
rest.[57]
V.
Rationale Behind Hostile Takeovers
When an acquirer sees a potential investment, it would
first make an open offer. A takeover bid can either be friendly or hostile
depending upon how it is received by the management of the company.
An acquirer can decide to make a hostile bid for the
following reasons:
A hostile takeover is launched when the initial
negotiations with the target companies do not follow through. More often than
not, the parties involved are unable to land on a consensus to determine the
offer price. This happens mostly because the management of the target company
has access to insider
information. The information available with them helps
them understand the financial position of the company better and reject every
offer they feel is inadequate. Furthermore, the management is likely to reject
all offer in order to retain their job because post-acquisition there exists a
high risk of the management losing their jobs.
An acquirer can also initiate a hostile bid without any
negotiations. This way is opted to avoid
the lengthy process of negotiation to determine the buyout price. This way the
acquirer can set up a new management team without retaining any of the members
of the management before. This would also give the target company an element of
surprise and because of paucity of time the target company would fail to
initiate any defence mechanism against the takeover.
VI.
Conclusion
The pre-liberalisation era did not facilitate hostile
takeovers and ever since the year 1991, a change has been observed in the
manner our country’s bidders operate. The numbers of hostile takeovers are
increasing each day and the plight of the management of the target companies
worsens by day. The employment of defence tactics reduces the playing field of
the hostile bidder tremendously. However, not all defences can be actively deployed
in our country because of legal restrictions. Anti-takeover defences however
play a crucial role in corporate reconstruction once a hostile bid is made.
SEBI has endeavoured to keep its governance in consonance with the market, as
can be seen from the scope of its regulations. However, it is time for the
other substantive laws such as the Companies Act to be a more accommodative
towards anti-takeover defences. Furthermore, legislative steps must be taken to
keep the interests of the shareholders abreast with the board of directors to
ensure equitable growth.
Article Information
DEFENSIVE TACTICS VIS A VIS HOSTILE TAKEOVER: AN INDIAN PERSPECTIVE (By-Rukhsaar Dhaliwal & Vanshika Tuteja)
Authors: Rukhsaar Dhaliwal, Vanshika Tuteja
- Journal IJLRA
- ISSN 2582-6433
- Published 2022/08/23
- Volume 2
- Issue 7
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
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