[Arya Alexander & Raul Mazumder are the students of National Law University, Jodhpur]
Introduction
In the realm of corporate dynamics, a hostile takeover refers to the acquisition of control in a company, where the existing management staunchly opposes the takeover. The question arises: Is a hostile takeover inherently negative? The answer, it appears, is subjective. While widely acknowledged for delivering excellent value returns to stakeholders, particularly public shareholders, the perception of its goodness or badness depends on one’s standpoint.
When contemplating a hostile takeover, the intricacies of the board’s role come into focus. While the day-to-day operations and management fall under the purview of the directors, reshaping the board becomes a crucial step for the acquirer. This process, often protracted and expensive, may even escalate into litigation.
Understanding the nuances of hostile takeovers reveals a complex interplay of regulations, board dynamics, and the acquirers strategic vision. It’s a landscape where the pursuit of control is both challenging and potentially rewarding, creating a dynamic tension within the corporate world.
Regulations for Hostile Takeover
In the context of regulations, the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997 (Takeover Code) comes into play. Interestingly, there is no explicit provision under this code, or any other legislation in India, that prohibits hostile takeovers. The Takeover Code provides for a situation where an individual manages to acquire 25% of the shares, it could trigger a mandatory open offer. However, even after triggering the mandatory offer, an acquirer may make a voluntary offer and consolidate stakes. This means that, theoretically, anyone can attempt a hostile takeover, subject to certain conditions. Hence, the takeover code doesn’t explicitly cater to the intricacies of a hostile takeover. This regulatory gap effectively permits the pursuit of such takeovers within the Indian corporate environment.
Despite the regulatory openness to hostile takeovers in India, the occurrence of such events is relatively rare. The dominance of promoter families, holding substantial ownership ranging from 60% to 75%, acts as a deterrent. Any attempt at a hostile takeover becomes an exercise in futility when a significant portion of shares is virtually unavailable for purchase.
As a result of this lacunae, it becomes pertinent to explore various defences that have been employed by corporations.
Defence Strategies
Hostile takeovers pose a significant threat to corporate stability and shareholder value. In response, companies deploy a spectrum of defensive measures to fortify their positions. This article examines four prominent defence strategies i.e., Poison Pill, Pacman, Crown Jewel and White Knight, delving into real-world case studies to elucidate their strategic applications. We shall delve into these 4 particular defence mechanisms and explore case studies to understand their practical applications.
Poison Pill: This involves the issuance of shares to existing promoters at a substantial discount. The 'poison pill' strategy involves reducing the value of a company's shares, aiming to impose significant costs on activist investors attempting hostile takeovers. Additionally, this approach introduces complexity to the acquisition process forcing the acquirer to eventually give up. Case Study: The most popular example of the poison pill is Twitter. Twitter implemented a shareholder protection strategy that would be activated if an entity acquires a 15% or higher stake. Under this plan, current shareholders, excluding the acquiring entity (such as Mr. Musk in this instance), are given the opportunity to buy additional shares at a discounted rate. This strategy complicates the acquirer's attempt to establish a majority stake in the company. Moreover, it aims to diminish the chances of an entity gaining control of the company without offering other shareholders a suitable premium. The intention behind this move was to provide the company's board with more time to make well-informed decisions and take actions that align with the best interests of the shareholders.
Pacman: This strategy entails the target company acquiring the hostile acquirer. However, this is only feasible when both entities are listed. Essentially one prevents a hostile takeover by initiating a reverse takeover. The target company initiates the process by extending an offer to acquire the company that originally launched the takeover bid. To facilitate the reverse takeover bid, the target company may utilize its reserve of resources or seek external financing. Case Study: In 1982, Bendix Corporation made a move to acquire Martin Marietta, a company specializing in aggregates and heavy building materials, by gaining a controlling interest in Martin Marietta stock. In response, Marietta’s management sold several business portions and in a countermove acquired 50% of Bendix’s stock through a tender offer. This led to severe financial struggle for both companies and Allied Corporations (a neutral third party) intervened as White Knight and acquired Bendix Corporation.
Crown Jewel: The strategy entails the target corporation separating its prized possession, often the most lucrative or strategically significant unit, to diminish the appeal of the acquisition for the potential acquirer. This prized asset might represent the company's most profitable segment, a crucial element for future profitability, or the producer of the company's flagship product. Case Study: In August 2020, Veolia attempted a hostile takeover of Suez, a waste management rival. Veolia acquired a 29.9% stake from Engie, seeking control. Suez's response involved a dual crown jewel defense: selling non-core assets for financial strength and highlighting the strategic importance of its water business to discourage rivals and gain government support. This defense succeeded, as the asset sales bolstered Suez's finances and the emphasis on water's importance led to government intervention, blocking Veolia's takeover bid. The Veolia-Suez case highlights the effectiveness of selective asset divestment, strategic asset highlighting, and the role of government in hostile takeovers.
White Knight: In this approach, a friendly third party holds shares until the hostile takeover attempt is resolved. Essentially, A "white knight" is a company that aids a target facing a takeover by buying its shares, supporting the existing board. The acquisition is approved by the target company's board under favorable terms. Once gaining control, the "white knight" prevents hostile takeovers, with the existing board maintaining control. Identifying a "white knight" involves offering shares to friendly investors, often in the same industry. These actions are a last resort for besieged companies and are seldom used. Case Study: While this defence is seldom used, it is one of the most popular defences used in India. In 1987, in response to a potential foreign takeover threat, a Dubai-based businessman named Manu Chhabria acquired a 1% stake in L&T. Faced with the challenge, NM Desai, the former chairman of L&T, approached renowned business tycoon Dhirubhai Ambani to strategically secure a higher stake than Chhabria in the company. Dhirubhai Ambani assumed the role of a White Knight and safeguarded L&T by acquiring an 18.5% stake, amounting to approximately ₹190 crore, over the subsequent two years.
Conclusion
The landscape of hostile takeovers in corporate dynamics is multifaceted, with subjective perspectives on its inherent negativity. Driven by the acquirer's belief in the undervaluation of the target, the corporate world experiences a dynamic tension in pursuit of control. In India, regulatory openness to hostile takeovers coexists with challenges posed by dominant promoter families. In response to this, various defence strategies exist revealing the importance of strategic thinking, quick action, and effective communication in thwarting hostile takeover attempts.
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