If a tale of poison pills, dawn raids and shark repellents were to be narrated, one could reasonably assume that the tale would feature at least one jaded well-heeled spy. And it would not fall very far from the truth, as hostile takeovers have typically been imbued with the intrigue of a classic thriller.
Takeovers, or acquisitions, are when one company (“Acquirer”) acquires a controlling stake in another company (“Target Company”). This process can either be friendly or hostile. Friendly takeovers are when the management of the Target Company is on board with the transaction and both the Acquirer and the Target Company consider it beneficial. Hostile takeovers, on the other hand, involve a situation where the Target Company is an unwilling participant, or simply, shark-bait. Hostile takeovers can be effected by the Acquirer directly approaching the shareholders of the Target Company by making an open offer or by fighting to replace the management to get the approval for the acquisition.
Globally, hostile takeovers have become an accepted phenomenon in the corporate world. Some of the largest acquisitions have been undertaken through hostile bids for control. The leveraged buyout of RJR Nabisco by investment bank KKR in the 1980s is considered one of the most prominent examples of hostile takeovers.
India, however, has remained rather averse to the idea of hostile takeovers. Restrictive government policies in the pre-liberalisation era i.e. pre-1991, made hostile takeovers a difficult proposition to achieve. Even post-liberalisation, corporate India has been witness to very few battles for wresting control. One of the most famous cases of a hostile takeover bid in the Indian context, took place in the early 1980s where Swraj Paul, a London-based businessman, sought to gain control of two Indian companies, Escorts Limited and Delhi Cloth Mills (“DCM”). On April 14, 1982, the Reserve Bank of India issued a circular laying out, among other things, the procedure through which NRIs could invest via a portfolio investment scheme. Vide the circular and subsequent amendments to it, NRIs were permitted to make portfolio investments in shares traded on the capital invested and income earned thereon, provided that such shares were purchased through a stock exchange and that the purchase of shares in any one company by each NRI did not exceed 1 percent of the paid-up equity capital. In order to circumvent the rule capping investment at 1 percent of an Indian company’s shares, Swraj Paul used 13 different companies registered in the Isle of Man, to acquire 13 percent of DCM shares, while the Shri Ram family (the promoters) jointly controlled 10 percent (the remaining shareholding was with public financial institutions). Swraj Paul utilised the same tactic for the acquisition of 7.5 percent shares in Escorts, while the Nanda family (the promoters) controlled less than 5 percent (as in the case of DCM, the remaining shareholding was with public financial institutions).Swraj Paul’s brazen move caused a fear of similar hostile takeovers being attempted, and Indian businesses, in a bid to allay such fears, approached the government seeking help in preventing Swraj Paul from acquiring control of DCM and Escorts. In May 1983, an overall ceiling of 5 percent of the paid-up capital of a company under the above-mentioned scheme was established.After long drawn out proceedings, a mediation was effectuated between the parties which ultimately led to Swraj Paul selling his shares back to the promoters of the respective companies at a mutually agreed price.
Yet another unsuccessful hostile bid was attempted in 2000 for the acquisition of a controlling stake in GESCO. On October 19, 2000, a takeover attempt was mounted by Abhishek Dalmia of the AH Dalmia Group for a 45 percent stake in GESCO at Rs. 23 a share. The price of the open offer was less than half the book-value of the company, which was at Rs. 54.50. After a series of offers and counteroffers, Renaissance Estates Limited (“REL”) raised the offer price to Rs. 45 per share. REL acquired a 10.5 percent share in GESCO through the open market route. GESCO roped in Mahindra Realty and Infrastructure Developers Ltd., which bought out the entire block of shares from REL at a price of Rs. 54 each, thus rendering the takeover bid ineffective.
The only instance of a successful hostile bid in the Indian context occurred in February 1998, when India Cements Limited (“ICL”), bid for Raasi Cements Limited (“RCL”), and made an open offer for 20 percent of RCL’s shares at Rs. 300 per share when RCL’s share price was at Rs. 100 on the stock exchange. Financial Institutions also held a considerable stake in RCL, and so a protracted battle ensued between ICL, RCL and the Financial Institutions. During the term of the public offer, the promoter of RCL reached a deal to sell his 32 percent stake to ICL at a price which was lower than the open offer price. Subsequently, ICL also bought out the Financial Institutions in an open offer and increased their stake in RCL to 85 percent.
Takeovers in India are primarily governed by the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Code”). It defines an Acquirer as “any person who, directly or indirectly, acquires or agrees to acquire whether by himself, or through, or with persons acting on concert with him, shares or voting rights in, or control over a Target Company”. Further, Regulation 3 permits such Acquirers to make a public announcement of an open offer for acquiring shares which will entitle the Acquirers to acquire more than 25 percent of the voting rights of the Target Company. It can be perceived that the Takeover Code does not present any statutory barriers to a hostile takeover.There is no provision in the Takeover Code which draws a line between a friendly and hostile takeover. The key import of the regulations under the Takeover Code is that nowhere do they contain onerous prescriptions for hostile takeovers which may defeat the purpose of such a bid.
Despite the lack of a prohibiting framework for hostile takeover, India seems to persist in its shyness from engaging in these corporate blood-battles. One of the reasons for such hesitance may be located in the way our corporate houses have traditionally been structured. Most Indian companies are held closely by their promoters, which is in stark contrast to the management-driven approach that most companies espouse in developed economies.
Since the time that hostile takeovers fired the imagination of aggressive corporate Acquirers, there have developed defences to prevent such a hostile takeover. Some popular defences, and their appropriately dramatic names include:
The Poison Pill: The Poison Pill is where the Target Company dilutes its shares in a way that the Acquirer cannot obtain a controlling share without incurring massive expenses.
The White Knight: As the name suggests, this is the Target Company’s knight in shining armour. If the board of the Target Company believes that it shall be unable to prevent a hostile takeover, it can seek a friendlier company to buy a controlling stake in the Target Company before the hostile bidder can do so. Interestingly, this was the defence used by GESCO to ward off Renaissance Real Estate, and their white knight was Mahindra and Mahindra.
Sale of Assets: If a board feels threatened, it may also sell off key assets and reduce operations so as to make the transaction less attractive to a hostile bidder.
Shark Repellents: A company can make special amendments to its legal charter that get activated only in case of a takeover being attempted. These amendments are made with a view to protect the board of directors from losing control of the company.
Pac-man defence: True to its nomenclature, the pac-man defence is when the Target Company buys stock the Acquirer company and ultimately gains control of the Acquirer, thus preventing a takeover.
Greenmail: Greenmail is a defence in which the Target Company buys its own shares back at a premium from the Acquirer.
This revival of interest in hostile takeovers has been triggered by L&T’s open offer to purchase a controlling stake in the multinational information technology company, Mindtree. L&T launched an open offer to for an acquisition of 31 percent of the voting share capital of Mindtree, a development which has been met with vehement protests from the promoters of Mindtree, who insist that this will result in a value destruction for the shareholders. Initially, L&T executed a Share Purchase Agreement with Mr. V G Siddhartha and his related entities, to acquire 20.32 percent stake in Mindtree at a price of Rs. 980 per share. Following this acquisition, L&T also placed with its stock broker a purchase order of 15 percent stake in Mindtree at Rs.980 per share. The open offer for the acquisition of 31 percent shares of Mindtree is to commence on May 14, 2019 and end on May 27, 2019. It will be interesting to note the outcome of the open offer.