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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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