Defensive Strategies against Hostile Takeovers

Keywords: Hostile Takeover, M&A, Takeover Defenses, Cross-border M&A

(Kanisqa Agarwal is a IV year B.B.A.LL.B student at Gujarat National Law University, GNLU)

We have witnessed a rise in shareholder activism over the years in India which has developed a fertile ground for hostile takeovers. Hostile takeovers account for a huge proportion of global deal activity over the last two decades. It is only a matter of time before this trend percolates down to India markets.

The COVID-19 pandemic has wreaked havoc on the world economy and has financially distressed many companies. These dire circumstances bring in the added risk of Hostile Takeovers. It is recommended for companies to consider relevant defenses against such opportunistic activism.

Defenses against Hostile takeover can be broadly classified into:

1. Preventive measures to be applicable before the open offer/bid comes into effect i.e. Pre-offer Defenses;
2. Reactionary measures applicable after the open offer / bid i.e. Post-offer Defenses.

1. PRE-OFFER DEFENCES

• Shark repellent / Embedded Defences

This strategy involves defenses embedded in the Charter documents of the Company. This category of strategies is largely untested in Indian courts. It can be adopted by incorporating certain amendments in the company charter documents which become active only when a takeover is attempted.

• Poison Pill

A Poison Pill can exist, among other forms, as a customized shareholders rights plan. This strategy includes a rights issue i.e. shareholders can purchase shares of the company at a considerable discount or through a two-for-one scheme.

This issue is only triggered if a particular shareholder/shareholder group purchases a specific percentage of equity, by the virtue of which they become a potential takeover bidder. The bidder is excluded from exercising their rights in such an issue. This exercise makes the hostile takeover very tedious and expensive as it would dilute the shareholding of the bidder.

The rights issue can only be introduced and rescinded by the Board and thus the potential takeover bidder has to engage in negotiations with the Board. The negotiations may lead to an agreement on an acquisition price which is mutually acceptable to the parties or the takeover fail altogether if the management of the target company is keen to retain its control and the acquirer withdraws altogether.

• Staggered Board Defense

The strategy involves adding provisions in the Charter documents of a company restricting the number of directors than can be removed/re-elected in a financial year. Alternatively, the target company can specify classes of directors which are re-elected and specifying others which have a fixed tenure. This drags out the whole process of taking over control.

However, this defense is not really effective in India as directors of Indian Companies can be removed by the shareholders through an ordinary resolution in a general meeting (Section 169 of the Companies Act, 2013).

• Brand Pills

Private Companies which are owned and controlled by the promoters own the Brands and/or Critical assets which are licensed or leased respectively to the listed companies.
The listed companies have made provisions in their Charter documents that automatically terminate those license/leasing agreements if the licensee/lessor i.e. the listed company ceases to be in control of the licensee entities. Moreover, an automatic termination of such agreements may not come under the ambit of restrictions imposed by Regulation 26 of the SEBI Takeover Code.

• Golden Parachute

If a new acquirer wants to terminate top management personnel, a huge severance package needs to be paid. This additional compensation is referred to as a Golden Parachute.

An apt example of this would be that of the ex-CEO of Walt Disney, Michael Ovitz who had to be paid a severance package $140 million owing to a golden parachute in his employment. An exorbitant Golden Parachute acts as an effective deterrent for potential corporate raiders.
 

POST-OFFER DEFENSES

• Buyback of shares at a huge premium

This strategy entails the target company purchasing its own shares from the open market. This can be done by intimating the stock exchanges, pursuant to Regulation 29(1) (b) & 29(2) of SEBI LODR Regulations, 2015, prior to the consideration of a Share Buyback in an upcoming board meeting. However, Regulation 26(2) of the Takeover Code doesn’t allow buybacks during the open offer period unless a special resolution is passed.

• Greenmailing

Sometimes Companies are threatened with open offers to extort a payment from the promoters to dissuade the corporate raid. Greenmail refers to the process of having shares bought back from the acquirer itself at a substantial premium. Some companies incorporate special anti-greenmail clauses in their charter documents that prohibit such payments.

In addition to the greenmail, the acquirer can be made to sign a Standstill Agreement. It is an undertaking whereby the bidder agrees not to acquire more shares of the target accompany within a time certain period.

• Asset Restructuring

The Crown Jewels strategy entails disinvesting critical assets of the company in order to make the acquisition seem unappealing to the corporate raider. The targeted company also has the option of purchasing certain assets or undertakings which makes the acquisition undesirable for the bidder or may potentially pose anti-trust issues for it.
A more radical approach to the aforementioned strategy is the Scorched Earth approach which entails selling off most, if not all, properties of appreciable value. However, this would leave the major shareholders of the company in control of a non-appreciating enterprise.

• Pacman Defense

The is a bold and counter-aggressive strategy whereby the target company starts a reverse hostile bid on the acquiring company. The target company needs to have deep pockets to pull this off.

• White Knight Defense

This is the most commonly used defensive maneuver against Hostile Takeovers in India. It involves getting a promoter-friendly party to buy out the company.

Alternatively, the company can employ a variant of this defense i.e. White Squire approach which involves it making a preferential allotment of equity shares or convertible securities to the friendly party, essentially freezing the minority shareholders.

Prominent instances of the White Knight strategy being used in the Indian context:

• British American Tobacco (BAT)-controlled VST Industries employed this strategy by making ITC its white knight to combat a takeover attempt by Radhakishan Damani.
• The promoters of Oberoi group’s EIH employed this strategy by getting RIL as its white knight to quash ITC group’s attempt to make an open offer by increasing its stake in VST by acquiring a 14.8% shareholding.
• Kalindee Rail Nirman Ltd. employed a white knight strategy as Jupiter Metal attempted a hostile bid to acquire it. In order to fend off the takeover attempt, it approved a preferential allotment of equity shares (24.9% of equity) to Texmaco Rail & Engineering promoted by Saroj Poddar. Texmaco and Kalindee subsequently agreed to merge.
• Saroj Kumar Poddar of the Adventz Group also acted as a white knight for Vijay Mallya when Deepak Fertilizer attempted a hostile takeover of UB Group’s Mangalore Chemicals in the form of an unsolicited open offer.
• Mahindra Realty acted as a white knight to the Sheth family-controlled GESCO Corporation, when Abhishek Dalmia of the Renaissance Group tried to acquire it.

•  Regulatory Bottleneck / Litigation

The targeted company sues the corporate raider for violating securities law or anti-trust laws. The Competition Commission of India (CCI) has not yet blocked a merger or an acquisition to this day, and all transactions have been given the green light after a detailed Phase II investigation.

However, it is well within the powers vested in the CCI to do so if the resultant transaction has an appreciable adverse effect on the competition in India

-By Kanisqa Agarwal