Open Access Research Article
HOSTILE TAKEOVERS IN INDIA
Published Paper
Article Details
HOSTILE TAKEOVERS IN INDIA
AUTHORED BY - DIPANSHI GOEL
Introduction
The term "takeover" refers
to the acquisition of control over an existing company through the sale or
exchange of shares. To seize control of a corporation, a takeover often entails
purchasing shares of that company from its owners at a certain price in order
to obtain at least a controlling interest.
A larger corporation may attempt to
buy a smaller company through a hostile takeover, which entails buying the
company despite opposition from the smaller company's management. In contrast
to a merger, an acquisition typically involves the acquiring firm offering the
target firm's shareholders a cash price per share, or the acquiring firm's
shares, in accordance with a predetermined conversion ratio. In either case,
the purchasing corporation buys the target company outright for its
shareholders, thereby financing the transaction.
Hostile Takeover: What Is It?
Hostile takeovers are when one
company is acquired by another against the former's will. In a hostile
takeover, the firm being acquired is referred to as the target company, and the
party carrying out the takeover is known as the acquirer. In a hostile
takeover, the assailant goes straight to the company's shareholders or fights
to oust the management to get the acquisition approved. A tender offer or a
proxy fight are typically used to approve a hostile takeover.
In a hostile takeover, the target
company's management disapproves of the agreement. When a party tries to take
over a company without the support or cooperation of the target company's board
of directors, it makes this kind of bid. Instead of receiving board permission
from the target company, the potential buyer could instead:
·
Make
a bid offer.
·
Use
a proxy battle
·
Try
to purchase the required company stock on the open market.
The board of directors has the right
to reject a tender offer made by a corporation, investor, or group of investors
to buy shares of another company at a price over the CMV. If the offer is made
to the shareholders at a sufficient premium to market value or if they are
dissatisfied with the current management, they may accept it. Tender offers are
governed by the Williams Act of 1968, which also mandates the disclosure of
all-cash tender offers.
In a proxy dispute, competing
stockholder organisations convince other stockholders to use their shares'
proxy votes in their favour. A firm that makes a hostile takeover proposal may
use the proxies it has obtained to vote in favour of the offer if it obtains a
sufficient number.
Causes Of Hostile Takeovers
I.
Management Motives: Due to the administration of one of the organisations' thought
processes, either the ardent want to expand a commercial sphere or individual
compensation or, on the other hand, the yearning to make the organisation
bid-proof.
II.
Increasing the Capital of the Offeror: The offeror provides precise justifications for
increasing its capital base. These include buying a company with a high
resource backing from a company whose market capitalization includes a lot of
goodwill and securing a company with a large portion of assets that are liquid
or practically feasible as opposed to issuing rights.
III.
Technique for Market Entry: It is a seductive strategy for the offeror to enter a new
market on a sizable scale.
IV.
Trade Advantage or Synergy: It is generally agreed that bringing the two organisations
under a single control will result in the consolidated venture producing more
profit per share. This trade advantage or synergy (for example, a good impact
on total profit by reducing expenses and expansion in income) exists.
A Hostile Takeover's Defences
Poison
Pill Defence: In the 1980s, New York was where the poison pill
tactic first appeared. The New York-based law firm Wachtell, Lipton, Rosen and
Katz created it. It alludes to the poison pills that spies once carried around
in case they were discovered by their enemy. They would take the poison pill if
they were discovered so that their attackers wouldn't question and torture
them.
This
defending tactic significantly reduces the acquirer's ownership stake in the
company. As a result, the acquisition is not advantageous for the acquirer.
Additionally, this strategy makes sure that the management is in charge and
that the company is protecting the minority shareholders.
Crown
Jewel Defence: By requiring the sale of the company's most
valuable assets in the event of a hostile takeover, a clause in the bylaws is
used as the company's "crown jewel defence," making it less appealing
as a target for takeover attempts. The last line of defence is frequently
regarded as being this.
Programme
for Employee Stock Ownership (ESOP):
A
tax-qualified plan is used to create an employee stock ownership programme
(ESOP), in which employees hold a sizable stake in the business. Employees
might vote more frequently in favour of management. As a result, this is a
viable defence.
Such
scams have, however, come under investigation in the past. Defensive ESOPs have
occasionally been declared illegal by courts on the basis that management
rather than shareholders were the intended beneficiaries of the plan.
Cases
In India
1.
The unsuccessful bids for Escorts and
DCM by Swaraj Paul
Before
the Indian economy had advanced or the Takeover Code had been established in
1984, British businessman Swaraj Paul tried to gain exclusive control of
Escorts Limited and DCM, two Indian corporations. The two organisations
rejected Paul's takeover attempts and each hampered the exchanges by refusing
to register his recently acquired shares, despite the fact that he had acquired
more than the advertisers of each firm (typically 7.5% and 13% stakes in
Escorts and DCM, respectively).
Though
Paul had ties to Prime Minister Indira Gandhi, the sponsors used their
political influence against him. The Life Insurance Corporation of India, a
government-controlled financial institution that owned a small investment in
the organisations, did not back Paul either. Finally, Paul withdrew his offer.
Paul's menacing threat was ineffective, but it nonetheless shocked the Indian
business community.
Current
Indian law unusually requires a target organization's ability to decline to
enlist shares. Organisations may not refuse to enrol shares unless the Indian
Company Law Board deems the action to be in violation of the law, according to
an amendment to the Companies Act that allows for free adaptation of offers.
2.
Raasi Cements and India Cements
In
1998, when BV Raju sold his 32% ownership in Raasi Concretes to India Cements,
a hostile bidder successfully completed the most extreme takeover in Indian
history. India Cements launched an open offer for Raasi bids, and it received
almost 20% on the open market, but it ran into opposition from the company's
founders and from Indian financial institutions who also had sizable holdings
in the company.
Raju
eventually agreed to a private sale to India Cements after a protracted battle
that featured question-and-answer sessions showcasing the children and
grandchildren of the founding family who were opposing the hostile bid.
Conclusion
A
hostile takeover has both advantages and disadvantages, thus it may be
difficult to categorise it in such a way that it should be encouraged or
opposed. It is a widely held idea that hostile takeovers enable target company
investors to determine the optimum price for their investment or, in the end,
they increase financial efficiency by shifting ownership of corporate assets
from an ineffective administration to an effective one.
While
it is true that hostile takeovers increase the value of the target
shareholders, some hostile takeovers may also advance expertise, result in a
poor distribution of financial resources, or be neutral in terms of financial
productivity. Also, not only poorly managed companies can be targets of hostile
takeovers; very well managed companies can also do so. This is especially true
when the primary goals of the takeover are to achieve union, business synergy,
and growth in size and volume. When a well-managed company is acquired by
another similarly well-managed company, the takeover may be neutral in terms of
economic efficiency.
REFRENCES:
Article Information
HOSTILE TAKEOVERS IN INDIA
Authors: DIPANSHI GOEL
- Journal IJLRA
- ISSN 2582-6433
- Published 2023/06/05
- Volume 2
- Issue 7
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
- Access Open Access
- License CC 4.0
All research articles published in International Journal for Legal Research and Analysis are open access and available to read, download and share, subject to proper citation of the original work.
Disclaimer: The opinions expressed in this publication are those of the authors and do not necessarily reflect the views of International Journal for Legal Research and Analysis.