Hostile takeovers have been relatively uncommon in India compared to Western jurisdictions. However, it has been observed in recent times that the trend is slowly but surely catching up in India as well. While the Takeover Code and the Companies Act mandate several disclosure requirements which make it considerably difficult for hostile raiders to acquire target companies, the extant legal framework also renders Indian target companies unarmed against any well executed hostile takeover attempts. The Takeover Regulations Advisory Committee Report (TRAC Report), 2010 reveals that out of 4,054 listed companies, promoter stakes in 584 companies are below 25%.[1] Further, out of these 584 companies, promoter stakes in 340 companies are below even 15%.[2] Thus, while most listed companies in India have a promoter shareholding of roughly 51% and are fearless of hostile takeovers, there are several companies which are in a highly vulnerable position as the current legal framework under the Takeover Code enables private investors to discreetly acquire 25% of the shareholding of one of these companies and make a minimum offer of 26% to acquire the company and gain control. Moreover, industry experts argue that in a volatile M&A market, trading prices of many firms may not be very high.[3] This will make it all the more easier for raiders to aggressively acquire defenseless targets. Mature markets like the USA have elaborate mechanisms in place which allow companies to defend themselves against hostile takeovers in a multitude of ways. These defensive strategies have evolved from significant jurisprudence in the sphere of hostile takeovers especially in states like Delaware which has been a trend setter in international corporate governance. It is submitted that the lack of legally enforceable defense mechanisms in India make it an acquirer’s market or a ‘pro-acquirer market’ as opposed to some other jurisdictions which afford a higher degree of protection and adopt a more balanced policy.
The poison pill or a shareholder rights plan is perhaps the most commonly used defense to ward off hostile acquirers. It is in essence, a scheme for allotment of shares issued by the Board of Directors of the target company upon detecting a threat of a hostile takeover. In such circumstances, the Board has two options- the ‘flip in’ or the ‘flip-over’. The former is a pre takeover strategy and is more popular. A flip in plan enables existing shareholders to buy additional stocks at a discount, thereby diluting the acquirers shareholding and making it more difficult and unattractive to acquire the company. The flip over plan is a post takeover strategy which is more dangerous to the acquirer. In such plans, the shareholders are entitled to buy shares of the company after the acquisition at a discounted price. This essentially dilutes the stock of the acquirer post-merger thereby making it difficult for the acquirer to run the company and realize pre-envisaged synergies.
As discussed previously, the Indian regulatory framework virtually disables the effective use of a poison pill to ward of hostile acquirers. However, some Indian entrepreneurs have still managed to find novel ways and invent a variant of the poison pill after navigating through the restrictive barriers present in the Takeover Code. The Tata Group, has been successfully using the ‘brand pill’ to avoid hostile takeovers for decades.[4] Similar to the traditional poison pill, the brand pill too strives to make the acquisition less attractive to the acquirer. However, unlike the poison pill, the brand pill’s modus operandi is different in so far as it does not operate as a shareholder rights plan, rather it is similar to an intellectual property right. By laying down a clause in the Articles of Association, the company retains its brand name and associated trademarks even in the event of a hostile takeover. The rationale behind the success of this strategy is based on the fact that the core value of highly reputed entities like Tata is concentrated on the brand name and the brand image. Hence, excluding the brand aspect from the deal would significantly lower the deal value and negate several post-merger synergies. Thus, a hostile acquirer would be forced to rethink his decision on acquisition of the target’s shares in light of this unfavorable climate, thereby fulfilling the role of the brand pill.
Hence, it is argued that the stringent pro-acquirer regulatory regime has resulted in the birth of new and innovative home grown defense strategies in the Indian market. However, commendable as these innovations may be, they are still inadequate in providing effective protection in most instances. In light of recent instances where shareholder activism has taken the color of hostile takeovers coupled with the rise in the role of proxy advisory firms, the need for defensive strategies becomes vital for sound corporate governance. The much criticized Takeover Code must be dissected and reworked to include adequate and legitimate takeover defenses such as shark repellents, staggered boards, poison pill, etc. which Indian targets can use.
[1] TRAC Report, Annex II
[2] TRAC Report, Annex II
[3] http://archive.indianexpress.com/news/new-takeover-code-india-inc-may-have-to-live-with-hostile-bids-now/824605/
[4] http://www.thehindubusinessline.com/news/variety/family-company-gets-a-global-dna/article4245780.ece
