On Tuesday, Gautam Adani-led Adani Group announced that it has acquired a 29.18% stake in NDTV and will launch an open offer to acquire another 26% soon. NDTV's owners have stated that it was done without their consent.

The acquisition has again brought forth the debate around hostile takeovers. While some call this acquisition an example of a hostile takeover, others disagree.

What is a hostile takeover?

A hostile takeover happens when a company (acquirer) sets its eye on another company (target) and goes on to acquire it without the agreement of the board of directors of the target company.

The acquirer makes an offer to the target company's shareholders to bypass the management to get the required stake. This is called a tender offer. Also, an acquirer may start a proxy fight to replace the target company's management.

Why does a company initiate a hostile takeover?

The reasons for a company to take over another company may be diverse. One reason may be that the acquirer considers the target undervalued and hopes to benefit from this in the long run. Another reason could be that the acquirer wants to enter the sector in which the target company operates.

What are some examples of hostile takeovers in the past?

One of the famous hostile takeovers is the acquisition of Cadbury by Kraft Foods in 2009. In September 2009, the CEO of Kraft Foods, Irene Rosenfeld, announced her intentions to acquire Cadbury. It offered $16.3 billion for the deal. However, Cadbury's chair Roger Carr rejected the offer.

Carr appointed a hostile takeover defence team. The UK government also opposed the offer and said the British company must get its due respect.

In 2010, Karr offered $19.6 billion for the deal. Cadbury finally relented, and in March 2010, the takeover was finalised.

In 1993, textile tycoon Nusli Wadia tookover Britannia as its Chairman after a hostile takeover from Rajan Pillai. Pillai had held the stake in Britannia through Danone. Wadia made Danone to switch sides and in total held 38 per cent stake in the company, taking over the control from Pillai.

India has also witnessed some hostile takeovers in the past. India Cements' acquisition of Raasi Cements in 1998, Emami's acquisition of Zandu in 2008 and Larsen & Toubro's acquisition of Mindtree Limited via Cafe Coffee Day's VG Siddhartha are some examples.

Can the target company prevent a hostile takeover?

The target company's management may employ certain strategies to stop the takeover. These include the golden parachute, the Pac-Man defence, the crown-jewel defence and the poison pill.

In April 2022, Twitter initiated the Poison Pill strategy to prevent the hostile takeover of the company by Elon Musk. Under the strategy, the management puts a cap on the number of shares a person can buy. The additional shares are distributed among the shareholders, except the acquirer, at discounted rates. This dilutes the holdings of the new, hostile investor.

Indian Legal and Regulatory Framework

Any takeover in India needs to comply with the provisions of SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997 (Takeover Code). It is important to understand the various terms associated with the takeover and there meaning explained in the Takeover Code.

The term 'Target company' refers to is a listed company, whose shares or voting rights are acquired/being acquired or whose control is taken over/being taken over by an acquirer either directly or by acquiring control of its holding company or a company which is controlling it, which is not a listed company.

s per regulation 2(1)(b), the term acquirer means any person who, directly or indirectly, acquires or agrees to acquire control over the target company, or acquires or agrees to acquire control over the target company, either by himself or with any person acting in concert with the acquirer. The term acquirer has been given a wide meaning as the definition takes into account not only substantial acquisition of shares by a person, but also takeover of control of the company.

As regards the term control, there is no exhaustive definition. It is dependent on the circumstances of the case which determines who has control over the organization. However the term control shall include:
1)The right to appoint majority of the directors or,
2) To control the management or policy decisions exercisable by a person or persons acting individually or in concert directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.

An explanation was inserted in the definition of the term control vide SEBI (Takeovers) Second Amendment, Regulations, 2002. The explanation provides that transfer from joint control to sole control over a company is not to be considered as change in control if it has been effected in accordance with regulation 2(1)(e), i.e., through inter se transfer of shares among promoters.

The Takeover Code makes it difficult for the hostile acquirer to just sneak up on the target company. It forewarns the company about the advances of an acquirer by mandating that the acquirer make a public disclosure of his shareholding or voting rights to the company if he acquires shares or voting rights beyond a certain specified limit. However, the Takeover Code does not present any insurmountable barrier to a determined hostile acquirer.

The Takeover Code, vide Regulation 23, also imposes a prohibition on the certain actions of a target company during the offer period, such as transferring of assets or entering into material contracts and even prohibits the issue of any authorized but unissued securities during the offer period. However, these actions may be taken with approval from the general body of shareholders.

However, the regulation provides for certain exceptions such as the right of the company to issue shares carrying voting rights upon conversion of debentures already issued or upon exercise of option against warrants, according to pre-determined terms of conversion or exercise of option. It also allows the target company to issue shares pursuant to public or rights issue in respect of which the offer document has already been filed with the Registrar of Companies or stock exchanges, as the case may be.

However this may be of little respite as the debentures or warrants, contemplated earlier must be issued prior to the offer period. Further the law does not permit the Board of Director, of the target company to make such issues without the shareholders approval either prior to the offer period or during the offer period as it is specifically prohibited under Regulation 23.

During a takeover bid, it may be critical for the Board to quickly adopt a defensive strategy to help ward of the hostile acquirer or bring him to a negotiated position. In such a situation, it may be time consuming and difficult to obtain the shareholders' approvals especially where the management and the ownership of the company are independent of each other.

The Takeover Code is required to be read with the SEBI (Disclosure & Investor Protection) Guidelines 2000 (DIP Guidelines), which are the nodal regulations for the methods and terms of issue of shares/warrants by a listed Indian company. They impose several restrictions on the preferential allotment of shares and/or the issuance of share warrants by a listed company. Under the DIP guidelines, issuing shares at a discount and warrants which convert to shares at a discount is not possible as the minimum issue price is determined with reference to the market price of the shares on the date of issue or upon the date of exercise of the option against the warrants. This creates an impediment in the effectiveness of the shareholders' rights plan which involves the preferential issue of shares at a discount to existing shareholders.

The DIP guidelines also provide that the right to buy warrants needs to be exercised within a period of eighteen months, after which they would automatically lapse. Thus, the target company would then have to revert to the shareholders after the period of eighteen months to renew the shareholders' rights plan.
Without the ability to allow its shareholders to purchase discounted shares/ options against warrants, an Indian company would not be able to dilute the stake of the hostile acquirer, thereby rendering the shareholders' rights plan futile as a takeover deterrent.

Also, the FDI policy and the FEMA Regulations have provisions which restrict non-residents from acquiring listed shares of a company directly from the open market in any sector, including sectors falling under automatic route. There also exist certain restrictions with respect to private acquisition of shares by non-residents, under automatic route, is permitted only if Press Note 1 of 2005 read with Press Note 18 of 1998 is not applicable to the non-resident acquirer. This has practically sealed any hostile takeover of any Indian company by any non-resident.

However, for the poison pill strategy to work best in the Indian corporate scenario certain amendments and changes to the prevalent legal and regulatory framework are required. Importantly, a mechanism must be permitted under the Takeover Code and the DIP Guidelines which permit the issue of shares/warrants at a discount to the prevailing market price. These amendments would need to balance the interests of the shareholders while allowing the target companies to fend off hostile acquirers.

(Only the headline and picture of this report may have been reworked by the LatestLaws staff; the rest of the content is auto-generated from a syndicated feed.)

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