hostile takeover in respect to india

8/14/2019 Hostile Takeover in respect to india

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"The game of profession investment is

intolerably boring and over exciting to any

one who is entirely exempt from the

gambling instinct, whilst who has it must pay

to this propensity the appropriate toll---John Maynard Keynes

Hostile Takeover


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Understanding keyConcepts

AMALGAMATION

"blending together of

two or more

undertakings into one

undertaking, the

shareholders of each

blending company,

becoming, substantially,

the shareholders of the

blended undertakings.

There may beamalgamations, either by

transfer of two or more

undertakings to a new

company, or to the

transfer of one or more

companies to an existingcompany.

MERGER

Its an arrangement,

whereby the assets of

two companies become

vested in, or under thecontrol of, one company

(which may or may not

be one of the original

two companies), which

has as its shareholders

all, or substantially all,the shareholders of the

two companies.

ACQUASITION

An acquisition, also

known as a

takeover, is the

buying of one

company (the

target) by

another. An

acquisition may be

friendly or hostile

Acquisition usuallyrefers to a

purchase of a

smaller firm by a

larger one.


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Area of presentation

Understanding Hostile Takeovermodus operandi of Hostile Takeover

Available defenses

Supporting legal provision


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Understanding Takeover

The expression takeover implies acquisition of control of a company which is alreadyregistered through the purchase or exchange of shares. Takeover takes place usually by

acquisition or purchase from the shareholders of a company their shares at a specified

price to the extent of at least controlling interest in order to gain control of the company .


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In the context ofbusiness

Horizontal Takeover- Takeover of one company by another

company in the same industry. The main purpose behind this kind oftakeover is achieving the economies of scale or increasing the market

share. E.g. takeover of Hutch by Vodafone.

Vertical Takeover - Takeover by one company with its suppliers or customers. The

former is known as Backward integration and latter is known as Forward

integration. E.g. takeover of Sona Steerings Ltd. By Maruti Udyog Ltd. is backward

takeover. The main purpose behind this kind of takeover is reduction in costs.

Conglomerate takeover: Takeover of one company by another

company operating in totally different industries. The main purpose

of this kind of takeover is diversification


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legal perspective.Friendly or Negotiated

TakeoverFriendly takeover means

takeover of one company

by change in its

management & control

through negotiations

between the existingpromoters and

prospective investor in a

friendly manner. Thus it

is also called Negotiated

Takeover. This kind of

takeover is resorted tofurther some common

objectives of both the

parties. Generally,

friendly takeover takes

place as per the provisions

of Section 395 of theCom anies Act 1956

Bail Out TakeoverTakeover of a financially

sick company by a

financially rich company

as per the provisions of

Sick Industrial

Companies (SpecialProvisions) Act, 1985 to

bail out the former from

losses.

Hostile takeover-IT is a takeover where

one company unilaterally

pursues the acquisition of

shares of another

company without being

into the knowledge ofthat other company. The

most dominant purpose

which has forced most of

the companies to resort

to this kind of takeover is

increase in market share.The hostile takeover

takes place as per the

provisions of SEBI

(Substantial Acquisition

of Shares and Takeover)

Regulations, 1997


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Characteristics ofvulnerability to a takeover

The firm seems to be undervalued Low Q-ratio

Low P/EPS ratios

Subsidiaries or properties that could be sold

off without significantly impairing cash flow

Relatively small stockholdings under the

control of incumbent management


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Hostile Takeovers

most mergers are negotiated by the two firms top

management and boards of directors

if this fails, the acquirer can go over the heads of

the target firms management

and appeal directly to its stockholders

hostile takeover


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Hostile Takeoverthe technique

In general, three strategies for hostile

takeovers can be distinguished:

Bear hug

Proxy fight

Tender offer

Mostly accompagnied by some preliminary

steps

Increasingdegree ofhostility


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Preliminary Takeover Steps

Toehold

Initial accumulation of targets shares

Reduces number of target shares that mustbe purchased at a costly premium

Casual pass

Informal first contact to targetcompany to test reactions

Could alert target


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Takeover Strategies

Bear Hug least aggressive of hostile takeovers

works well when the target is not strongly opposed to the

merger contact the targets board with expression of interest in

acquiring the target

sometimes accompanied by public announcement of

bidders intent to make a tender offer


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Proxy Fight

the buyer doesn't attempt to buy stock. Instead, they try toconvince the shareholders to vote out current management

or the current board of directors in favour of a team that will

approve the takeover. The term "proxy" refers to the

shareholders' ability to let someone else make their vote forthem -- the buyer votes for the new board by proxy.

target management actually or probably reluctant to merge

acquirer seeks the support of target firms shareholders atnext annual meeting in addition to own votes

not very expensive, but in general not very successful in

mergers


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Contd.

The most famous recent proxy fight was Hewlett-Packard's takeover of Compaq. The deal was valued

at $25 billion, but Hewlett-Packard reportedly spent

huge sums on advertising to sway shareholders. HPwasn't fighting Compaq -- they were fighting a

group of investors that included founding members

of the company who opposed the merge. About 51

percent of shareholders voted in favour of the

merger. Despite attempts to halt the deal on legal

grounds, it went as planned.


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Tender Offer

the most unfriendly offer directly to shareholders of target firm

two-tiered offers (also: front end-loaded tender offer)

provide superior compensation for a first-step purchase

(often cash)

inferior compensation for second-step purchase

exerts pressure on shareholders to be in the first tier

two-tiered takeover bids. Note that a two-tiered takeover bid

occurs when an acquirer offers a higher price during the first

tender, with a built-in threat of a lower bid targeting

shareholders who do not vote favourably right away.


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Preoffer and PostofferDefenses

Preoffer defenses(preventative

antitakeover

measures)

much more effective

Post offer defenses(active antitakeover

measures)

take its place after the

takeover attempt is

started


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Preoffer Defenses

Poison Pills A poison pill can take many forms, but it basically

refers to anything the target company does to make

itself less valuable or less desirable as anacquisition. There are two common types of poison

pills:

theflip-in pilland flip-over pill.


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The common poison pill is a provision that allows

current shareholders to buy more stocks at a steepdiscount in the event of a takeover attempt. The

provision is often triggered whenever any one

shareholder reaches a certain percentage of totalshares (usually 20 to 40 percent). The flow of

additional cheap shares into the total pool of shares

for the company makes all previously existingshares worth less. The shareholders are also less

powerful in terms of voting, because now each share

is a smaller percentage of the total.

Flip-in poison pill


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works in the opposite direction, whereby the target companys shareholders have the right to buy shares

in the acquirer, also significantly below their market

price. There is also something referred to as the

dead-hand provision, where target companys

board of directors holds the ultimate right to allowor cancel apoison pill. In essence, without the boards

prior approval, the takeover of a target company could

become prohibitively expensive for an acquirer technique

The flip-out poison pill


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Poison Puts

existing bond holders can demand repayment

if there is a change of control as a result of a

hostile takeover

The bonds put price usually above par

cashing of the bonds creates large cash

demands for the merged firm - makes the

takeover prospects unattractive


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Contd. Dual-class stock:

allows company owners to hold onto voting stock, while thecompany issues stock with little or no voting rights to the

public. Investors can purchase stocks, but they can't have

control of the company.

The Power of Supermajority Vote:

Many target companies, sensing that predators might be circling

the wagons, change their charters and by-laws to include

supermajority voting provisions. These provisions usuallyrequire that at least 80% of voting shareholders approve of the

takeover, as opposed to a simple 51% majority. Such a

requirement can make it nearly impossible for an acquirer to

obtain enough votes approving the takeover.


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Contd.

Fair Price Amendments: This type of amendment to atarget companys charter provides for some minimum

threshold below which an offer of a takeover is

automatically rejected without even being presented before

the target companys shareholders. By establishing a floorvalue bid, target companies are effectively protected against

temporary price volatilities, as well as against two-tiered

takeover bids. Note that a two-tiered takeover bid occurs

when an acquirer offers a higher price during the first

tender, with a built-in threat of a lower bid targeting

shareholders who do not vote favourably right away.


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Waiting Period

unwelcome acquirers must wait for a specified

number of years before they can complete themerger

Golden Parachutes

special - lucrative - compensation agreementsthat the target company provides to uppermanagement

provides payments on termination ofemployment


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Post offer Ddefenses

Greenmail

Greenmailinvolves a target company buying back its

own shares from the acquirer, but typically above the

stocks market price. Sometimes this repurchase canbe quite costly, but at least there is an agreement that

the acquirer would not go for another takeover offer.

Note that greenmail was very popular during the fourth

wave of the M&A activity during the 1980s. However,an amendment to the U.S. Internal Revenue Code

effectively put a stop to it when acquirers were

slapped with a 50% tax on greenmail profits.


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Litigation

One of the options available to target companies is to file a

lawsuit and allege violations of securities and/or antitrust

legislation. However, unless there are serious

grounds/evidence indicating such violations, litigation rarelysucceeds in preventing a takeover. On the plus side, lawsuits

buy time needed to develop a plan B, although, truth be told,

more often than not, there is no plan B. Lawsuits alleging

securities violations are usually taken care of with additionaldisclosures. And, as for lawsuits alleging violations of

antitrust laws, these typically work better if initiated by

antitrust regulators, rather than by target companies.


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White Knight and White Squire

Techniques:

Employing a white knightdefence is often the best solution available

to target companies. It involves finding a third party, a white knight,

that a target company can partner with and which is considered a good

strategic fit with the target. Finding such a white knight can result in

justifying higher market capitalization of the target and making it

more difficult/expensive for an acquirer to go through with the bid

White Squire

modified form of white knight

a firm that consents to purchase a large block of the targets stock

white squire will not sale to hostile bidder


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Pac Man

target makes an offer to buy the acquirer very costly and can have serious financial effects for both players

Buying Back

Instead of negotiating a greenmail deal, target companies could

address other shareholders and start buying back their own shares notheld by an acquirer.

For instance, a target company could announce a cash tender offerof

its own outstanding shares, the consequence of which could

potentially increase the target's stock market price and/or force theacquirer to increase its own bid.

Another option is to effect a leveraged buyout, whereby a target

company obtains debt funding from a private equity firm, buys out all

of its shares, and effects a


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Selling the Crown Jewel:

In certain instances, a target company may employ a tacticthat can be summarized as, if I cant have it, no one can.

In other words, in an effort to avert a hostile takeover bid,the target company could sell one or more of its highly

successful subsidiaries that is/are considered its crownjewel(s) and that is/are likely the reason for the takeover tobegin with.

Without the crown jewel(s) in the crown, an acquirer may

very well withdraw its offer. However, courts are also quitelikely to deem this strategy illegal and disallow the saleand/or hold the target company legally accountable.


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Legal Framework

Clause 40 of

listing Agreement

Companies

Act !956

SEBI (Substantial

Acquisition of Shares &

Takeovers)Regulations, 1997

Li ti A t Cl 40


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Listing Agreement Clause 40: The first attempt to regulate take over were made in a limited way by

incorporating a clause, (viz., clause 40) in the listing agreement

which provided for the public offer to the share holder of a company byany person who sought to acquire 25% for more of the voting rights in a

public company.

But the clause used to be easily circumvented and its basic purpose were,

often been frustrated by the acquire , simply by acquiring a little below of

the 25% rider, Further in India it was possible acquire control only by

holding 10% of the voting rights.

Thus an Amendment was inhabitable, via this:

Lowering level to 10% form 25% was done

Minimum of20% has to be acquired from shareholder.

Stipulation as to minimum price.

Mandatory discloser requirement.

These changes helped in making the process of acquisition of shares and

takeovers transparent. Amendment to clause 40 of Listing Agreement 1990


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Companies act 1956 Part IV chapter (v) of the act deals scheme of arrangement and

reconstruction, sec 394 to 396 A lays down foundation for it. But sec 395 which clearly envisages scheme of takeover shares of

one company by other, the effect of this section is to dilution of class

holding less than 10%, it require following to be complied with:

1. Scheme should be approved by the holderof 9/10th

of the value ofshares transferor company with in 4 month

2.Notice to be served to the dissenting share holder(DSH) with in two

month of the above mention period

3. DSH after receiving the notice within one can apply to the courtfor cancellation of scheme, failing compulsory acquire

In case no such restriction transferee company can acquire share

and pay for the same.

SEBI (S b t ti l A i iti f Sh & T k )


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SEBI (Substantial Acquisition of Shares & Takeovers)

Regulations, 1997 The term takeover nor the term hostile has been expressly defined under

the said Regulations, the term basically envisages the concept of an: Acquirer: taking over the control or management of the target company

acquires substantial quantity of shares or voting rights of the target company.

The term substantial acquisition of shares attains a very vital importance,

irrespective whether the corporate restructuring is through merger /

acquisition / takeover.

SEBI Regulations have discuss the aspect of substantial quantity of shares

or voting rights separately for two different purposes:

(I) For the purpose of disclosures to be made by acquirer(s)

(II) For the purpose of making an open offer by the acquirer

(I) F th f di l t b d b


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(I) For the purpose of disclosures to be made by

acquirer(s)

A. 5% or more shares orvoting rights: A person who, along with persons

acting in concert (PAC), if any,

acquires shares or voting rights

(which when taken together with hisexisting holding) would entitle him to

more than 5% or 10% or 14% shares

or voting rights of target company,

is required to disclose the aggregate

of his shareholding or voting rights tothe target company and the Stock

Exchanges where the shares of the

target company are traded

within 2 days of receipt of intimation

of allotment of shares or acquisitionof shares.

B. More than 15% shares or voting

rights:

An acquirer, who holds more than 15%

shares or voting rights of the target

company,

Shall within 21 days from the financialyear ending March 31 make yearly

disclosures to the company in respect

of his holdings

The target company is, in turn, required

to pass on such information to all stockexchanges where the shares of the

target company are listed, within 30

days from the financial year ending

March 31 as well as the record date

fixed for the purpose of dividend

declaration.


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(II) For the purpose of making an open offer by theacquirer

A. 15% shares or voting rights: An acquirer, who intends

to acquire shares which along with his existing shareholding

would entitle him to more than 15% voting rights, can

acquire such additional shares only after making a public

announcement (PA) to acquire at least additional 20% ofthe voting capital of the target company from the

shareholders through an open offer.

B. Creeping limit of 5%: An acquirer, who is having 15%

or more but less than 75% of shares or voting rights of atarget company can consolidate his holding up to 5% of the

voting rights in any financial year ending 31st March.

However, any additional acquisition over and above 5% can

be made only after making a public announcement.

C td


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Contd. However in pursuance of Reg. 7(1A) any purchase or sale

aggregating to 2% or more of the share capital of the target

company are to be disclosed to the Target Company and the

Stock Exchange where the shares of the Target company are

listed within 2 days of such purchase or sale along with the

aggregate shareholding after such acquisition / sale. An acquirer

who has made a public offer and seeks to acquire further shares

under Reg. 11(1) shall not acquire such shares during the period

of 6 months from the date of closure of the public offer at a price

higher than the offer price.

C. Consolidation of holding: An acquirer who is having 75%

shares or voting rights of a target company can acquire further

shares or voting rights only after making a public announcement

specifying the number of shares to be acquired through open

offer from the shareholders of a target company.


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Public offer provision will not apply: Allotment in pursuance of an application made to a public

issue; Allotment pursuant to an application made by the

shareholder for rights issue, subject to such rights issue not

resulting in change in control and management of the

company;

Sick company;

Preferential allotment of shares, subject to the condition that

at least 75% of the shareholders of the company shall haveapproved the preferential allotment and that sufficient

disclosures relating to the post-allotment shareholding

pattern, offer price etc., have been made to the shareholder


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Allotment to the underwriters pursuant to anyunderwriting agreement;

Issue of American Depository Receipts and

Global Depository Receipts or ForeignCurrency Convertible Bonds, till such time as

they are not converted into equity shares;

Shares held by banks and financial institutionsby way of security against loans


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SEBI(Takeover Code Amendment (II)

2009)

Amendment

Amendment has empowered SEBI to

exemption application from

Regulation 10 to 29A (Discloser

norms ). subject to certain condition.

These are

A) central govt., State Govt. ,or any

other Regulatory Body has remove the

BoD and appointed other person to

hold the office Such persons has devised a plan which

provides transparency in the operation

process and benefit for the stake

holders, and is not gave advantage to a

particular accquir.

Impact on Satyam Case

Now Satyam can apply for

exemption from discloser norms

previously no such leverage was

there

Same has happened with Syatam

New Board is moving in

consonance with the objective.

C d


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Cond. Condition and requirement of

competitive process is fair.

The process provides details

regarding time of Public Offer

and manner in which the

change ion control will be done

Amendment as Regulation

25(2B):

No Public announcement for

competitive bid ( previously, a

bid made under 21 days of

public announcement for equal

number of share)

Working on it

Thus SEBI has exemptedSyatam from :

A) Discloser requirement

B) Public announcement

for competitive bid.

C) and Public offer.


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hostile takeover in respect to india

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