Takeover Defenses

Jeet R.Shah
M.Com, CFP CM
 What is meant by Hostile Takeover?

Hostile Takeover is a type of acquisition in

which, the company being purchased
(Target Company) does not want to be
purchased at all, or does not want to be
purchased by a particular buyer (Acquirer)
that is making a bid. In other words, the
Acquirer intends to gain control of the
Target Company and force it to agree to the
sale. The word ‘hostile’ in dictionary means
‘unfriendly, aggressive’.

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 Why a hostile takeover?

financial gain instead of economic or business
gain.

The acquiring company may think that the target
company can generate more profit in the future
than the selling price. E.g. If a company can make
Rs.100 crores in profits each year, then buying
that company for Rs.200 crores makes sense. That
is why it is observed that so many corporations
have subsidiaries that do not have anything in
common -- they were bought purely for financial
reasons.

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 Legal Angle

Companies Act 1956 does not expressly mention about takeovers or
acquisitions. It primarily, only talks about Mergers & Amalgamations
through Section 391-396.

SEBI (Substantial Acquisition of Shares & Takeovers) Regulations,
1997 has been enacted by the Securities and Exchange Board of India
which deals with acquisition of shares, takeovers, etc.

Neither the term ‘takeover’ nor the term ‘hostile’ has been expressly
defined under the said Regulations, the term basically envisages the
concept of an:

Acquirer:
[i]) taking over the control
[ii]) or management of the target company
[iii]) acquires substantial quantity of shares or voting rights of the target
company.

Here the term ‘substantial acquisition of shares’ attains a very vital
importance, irrespective whether the corporate restructuring is through
merger / acquisition / takeover.

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 SEBI Regulations of ‘substantial
quantity of shares or voting rights’
(I) For the purpose of disclosures to be made by acquirer(s):
(1) 5% or more shares or voting rights:

A person who, along with ‘persons acting in concert’
(PAC), if any, acquires shares or voting rights (which
when taken together with his existing 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 to the 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 acquisition of shares.

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 2) 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 financial year ending March 31
make yearly disclosures to the company in respect
of his holdings as on the mentioned date.

The target company is, in turn, required to pass on
such information to all stock exchanges 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 the
acquirer:
(1) 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% of the voting capital of the target
company from the shareholders through an open
offer.

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 (2) Creeping limit of 5%:

An acquirer, who is having 15% or more but less than 75% of shares or
voting rights of a target 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.

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.

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 3) 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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 Methods of hostile takeover

A tender offer is a public bid for a large chunk of
the target's stock at a fixed price, usually higher
than the current market value of the stock.

The purchaser uses a premium price to encourage
the shareholders to sell their shares.

The offer has a time limit, and it may have other
provisions that the target company must abide by
if shareholders accept the offer.

The bidding company must disclose their plans for
the target company and file the proper documents
with the SEBI as explained above.

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In a proxy fight, the buyer doesn't attempt to buy stock.

Instead, they try to convince the shareholders to vote out
current management or the current board of directors in favor of
a team that will approve the takeover.

The term "proxy" refers to the shareholders' ability to let
someone else make their vote for them -- the buyer votes for the
new board by proxy.

Often, a proxy fight originates within the company itself.

A group of disgruntled shareholders or even managers might
seek a change in ownership, so they try to convince other
shareholders to band together.

The proxy fight is popular because it bypasses many of the
defenses that companies put into place to prevent takeovers.

Most of those defenses are designed to prevent takeover by
purchase of a controlling interest of stock, which the proxy fight
sidesteps by changing the opinions of the people who already
own it.

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 Defence Considerations

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 Takeover Defenses
White Knight - Friendly potential acquirer sought
by a target company threatened by an unwelcome
suitor.
Shark Repellent - Amendments to a company
charter made to forestall takeover attempts.
Poison Pill - Measure taken by a target firm to avoid
acquisition; for example, the right for existing
shareholders to buy additional shares at an
attractive price if a bidder acquires a large holding.

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 Takeover Defenses – Preoffer

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 Takeover Defenses – Postoffer

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 Be Prepared World is not Fair

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