In this second article in the series, the authors (Vishnu Dutt, Partner, Practice Lead – Equity Capital Markets and Mehul Jain, Partner, Bharucha & Partners) examine the range of defensive strategies available to target companies and their promoters to counter hostile takeover attempts in India and assess the extent to which the prevailing regulatory framework permits or forecloses their effective deployment.
Defenses to Hostile Takeovers
Certain measures that target companies and their promoters could adopt to mitigate the risk of a hostile takeover are set out below:
White Knight
The White Knight strategy involves identifying a friendly entity, whether a strategic investor, financial investor, or friends or family of the promoter), willing to acquire a substantial shareholding in the target company, through a primary market acquisition, a secondary market acquisition, or a combination of both. The efficacy of this strategy rests upon the white knight investor exercising its voting rights in support of the incumbent promoters, thereby enabling them to retain effective control over the target company.
While the White Knight strategy is comparatively less resource-intensive for the target company and its promoter and promoter group, it is not without risk. In addition to regulatory risks arising from the potential classification of the white knight investor as a member of the promoter group or as a person acting in concertsubject to meeting certain thresholds, there remains a material commercial risk that the white knight may, if it determines that the success of the hostile takeover would yield a superior return, decline to act in support of the incumbent promoters and instead tender its shareholding or otherwise facilitate the acquirer’s bid.
Crown Jewel
The Crown Jewel defence involves the target company’s divestment of its most strategically valuable asset, with the aim of diminishing the target’s attractiveness to the hostile acquirer. Any such divestment would, however, be subject to the approval requirements prescribed under the Companies Act, 2013 and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
In addition to the requirements under the Companies Act, 2013, the SEBI SAST Regulations prohibit a target company from alienating any material asset, whether by way of sale, lease, encumbrance, or otherwise, or from entering into any agreement outside the ordinary course of business during the offer period, without the approval of its shareholders by way of a special resolution passed through postal ballot. Accordingly, this strategy would be difficult to implement once the public announcement for the hostile takeover is made. The shareholders of the target company who view the acquisition favourably may object to the divestment of the company’s most prized asset and contest the efficacy or necessity of the process.
The deployment of this defence is further complicated by financing considerations. Where the crown jewel asset is subject to an encumbrance in favour of lenders, consent to its disposal is unlikely to be forthcoming. Even in the absence of such encumbrance, financing documents typically impose restrictions on the sale of significant assets, necessitating prior lender consent.
While the Crown Jewel defence may deter or defer a hostile takeover attempt in the short term, its long-term implications for the target company could be severe. The divestment of its most coveted asset may have a material adverse impact on the target’s revenues, profitability, and operational continuity, and may raise questions as to its ability to continue as a going concern.
Hybrid Jewel
The Hybrid Jewel strategy combines the White Knight and Crown Jewel defences. Under this approach, a friendly investor comes to the aid of the target company but, in contradistinction to the conventional White Knight defence, does not acquire or subscribe to equity shares of the target company. Instead, the investor acquires the target company’s crown jewel asset. The strategy typically incorporates an arrangement under which the target company retains the option to re-acquire the asset within a prescribed timeframe, subject to the condition that no change in the target company’s management or control has occurred in the intervening period.
Golden Parachute
Golden Parachute provisions are contractual separation clauses which form part of the employment contracts of a company’s senior management, stipulating the payment of substantial compensation to such executives upon a change in management or control. While Golden Parachute provisions are unlikely to prevent a hostile takeover, they increase the overall cost of the acquisition for the hostile acquirer, thereby making the target company a less attractive proposition.
From the target company’s perspective, golden parachute provisions do not create any immediate cash outflow or financial exposure. Their financial impact is deferred until the executives entitled to such benefits leave the organisation following a change in control. The compensation payable under these arrangements remains subject to the limits on remuneration, fees, and compensation prescribed under the Companies Act, 2013 and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
Poison Pill
A ‘poison pill’, as the nomenclature suggests, is a defensive mechanism designed to render a hostile takeover bid more onerous for the hostile acquirer by making the target company less desirable and the overall acquisition materially more expensive. A well-recognised variant of this strategy, as widely employed in other regulatory jurisdictions, is the ‘flip-in poison pill’. This mechanism typically involves granting existing shareholders of the target company the right to subscribe to equity shares of the target company at a discount to the prevailing market price upon the occurrence of a specified trigger event – ordinarily, the consolidation of a defined percentage of the non-promoter shareholding. The underlying implication of this strategy being that the shareholders of the target company would derive greater value in exercising such a right than they would if they were to sell their shares to a hostile acquirer. This strategy has the benefit of consolidating the promoter and promoter group shareholding in the target company as well increasing the cost of any bid made by a hostile acquirer.
In addition, target companies may also consider increasing the shareholding of the promoter and promoter group through primary market acquisitions – including preferential allotments and rights issues – as well as through open market secondary acquisitions. A buyback of equity shares, structured to exclude the participation of the promoter and promoter group, may similarly serve to increase the proportionate shareholding of the promoter and promoter group in the target company.
Conclusion
Hostile takeover attempts of listed companies have remained rare in India for several decades. Notwithstanding the absence of any express prohibition on hostile takeovers under the SEBI SAST Regulations, the concentrated promoter shareholding structures that characterize a significant proportion of listed companies in India, wherein promoters retain majority control, and public shareholding is dispersed across a large retail investor base, have operated as a practical deterrent to unsolicited acquisition attempts. The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 reinforces the structural insulation available to certain listed companies by permitting their promoters to hold shares carrying superior voting rights, while listing ordinary shares through an initial public offering. This framework, though subject to prescribed limitations, including coattail provisions and restrictions on the exercise of superior voting rights in dividend decisions, may afford additional protection to such companies against hostile acquisition attempts.
Notwithstanding the foregoing, hostile takeovers have, on occasion, been successfully attempted in India, typically in circumstances involving discontentment among institutional investors holding a significant stake in the target company, or where structural fissures within the promoter group have created an opening for an external acquirer. The cases of Raasi Cements Limited, Mindtree Limited, and NDTV are illustrative in this regard. While the initiation of a hostile takeover in India remains structurally and regulatorily challenging, once a hostile takeover attempt is underway, the defensive arsenal available to target boards is, in practice, considerably constrained – a reflection of a regulatory framework that does not distinguish between friendly and hostile acquisitions, and that, by design, prioritises the rights of public shareholders over the interests of the incumbent management.
