Open Offer Framework
PAYMENT OF CONSIDERATION
Regulation 21 stipulates, for the amount of consideration payable in cash, the acquirer shall open a special escrow account with a banker to an issue registered with the Board and deposit therein, such sum as would, together with cash transferred under clause (b) of sub- regulation (10) of regulation 17, make up the entire sum due and payable to the shareholders as consideration payable under the open offer, and empower the manager to the offer to operate the special escrow account on behalf of the acquirer for the purposes under these regulations.
Subject to provisos to sub-regulation (11) of regulation 18, the acquirer shall complete payment of consideration whether in the form of cash, or as the case may be, by issue, exchange or transfer of securities, to all shareholders who have tendered shares in acceptance of the open offer, within ten working days of the expiry of the tendering period.
Any unclaimed balances lying to the credit of the special escrow account referred to in sub-regulation (1) at the end of seven years from the date of deposit thereof, shall be transferred to the Investor Protection and Education Fund established under the Securities and Exchange Board of India (Investor Protection and Education Fund) Regulations, 2009.
COMPLETION OF ACQUISITION
Under Regulation 22 (1), the acquirer shall not complete the acquisition of shares or voting rights in, or control over, the target company, whether by way of subscription to shares or a purchase of shares attracting the obligation to make an open offer for acquiring shares, until the expiry of the offer period:
Provided that in case of an offer made under sub-regulation (1) of regulation 20 of these regulations, pursuant to a preferential allotment, the offer shall be completed within the period as provided under sub-regulation (1) of regulation 170 of the Securities and Exchange Board of India (Issue of Capital and Disclosure requirements) Regulations, 2018, subject to the non-obstante clause in sub-regulation (4) of regulation 7 of these regulations.
Provided further that in case of a delisting offer made under regulation 5A, the acquirer shall complete the acquisition of shares attracting the obligation to make an offer for acquiring shares in terms of sub-regulation (1) of regulation 3, regulation 4 or regulation 5, only after making the public announcement regarding the success of the delisting proposal made in terms of sub-regulation (4) of regulation 17 of the Delisting Regulations.
Notwithstanding anything contained in sub-regulation (1), subject to the acquirer depositing in the escrow account under regulation 17, cash or providing unconditional and irrevocable bank guarantee issued in favour of the manager to the open offer by any scheduled commercial bank, subject to the approval of the Reserve Bank of India, of an amount equal to the entire consideration payable under the open offer assuming full acceptance of the open offer, the parties to such agreement may after the expiry of twenty-one working days from the date of detailed public statement, act upon the agreement and the acquirer may complete the acquisition of shares or voting rights in, or control over the target company as contemplated.
Explanation. - For the purpose of sub-regulation (2), bank guarantee shall only be issued by such scheduled commercial bank having ‘AAA’ rating from a credit rating agency registered with the Board, on any of its long term debt instrument.
Provided that in case of proportionate reduction of the shares or voting rights to be acquired in accordance with the relevant provision under sub-regulation (4) of regulation 7, the acquirer shall undertake the completion of the scaled down acquisition of shares or voting rights in the target company.
Under Regulation 22(2A), notwithstanding anything contained in sub-regulation (1), an acquirer may acquire shares of the target company through preferential issue or through the stock exchange settlement process, subject to,-
i. such shares being kept in an escrow account,
ii. the acquirer not exercising any voting rights over such shares kept in the escrow account:
Provided that such shares may be transferred to the account of the acquirer, subject to the acquirer complying with requirements specified in sub-regulation (2).
Under Regulation 22(3), the acquirer shall complete the acquisitions contracted under any agreement attracting the obligation to make an open offer not later than twenty-six weeks from the expiry of the offer period:
Provided that in the event of any extraordinary and supervening circumstances rendering it impossible to complete such acquisition within such period, the Board may for reasons to be published, may grant an extension of time by such period as it may deem fit in the interests of investors in securities and the securities market.
WITHRAWAL OF OPEN OFFER
An open offer for acquiring shares once made shall not be withdrawn except under any of the following circumstances,—
a. statutory approvals required for the open offer or for effecting the acquisitions attracting the obligation to make an open offer under these regulations having been finally refused, subject to such requirements for approval having been specifically disclosed in the detailed public statement and the letter of offer;
b. the acquirer, being a natural person, has died;
c. any condition stipulated in the agreement for acquisition attracting the obligation to make the open offer is not met for reasons outside the reasonable control of the acquirer, and such agreement is rescinded, subject to such conditions having been specifically disclosed in the detailed public statement and the letter of offer; or
Provided that an acquirer shall not withdraw an open offer pursuant to a public announcement made under clause (g) of sub-regulation (2) of regulation 13, even if the proposed acquisition through the preferential issue is not successful.
d. such circumstances as in the opinion of the Board, merit withdrawal
Explanation. — For the purposes of clause (d) of sub-regulation (1), the Board shall pass a reasoned order permitting withdrawal, and such order shall be hosted by the Board on its official website. In the event of withdrawal of the open offer, the acquirer shall through the manager to the open offer, within two working days,—
a. make an announcement in the same newspapers in which the public announcement of the open offer was published, providing the grounds and reasons for withdrawal of the open offer; and
b. simultaneously with the announcement, inform in writing to,—
i. the Board;
ii. all the stock exchanges on which the shares of the target company are listed, and the stock exchanges shall forthwith disseminate such information to the public; and
iii. the target company at its registered office
OTHER OBLIGATIONS
DIRECTORS OF THE TARGET COMPANY
Under Regulation 24, during the offer period, no person representing the acquirer or any person acting in concert with him shall be appointed as director on the board of directors of the target company, whether as an additional director or in a casual vacancy:
Provided that after an initial period of fifteen working days from the date of detailed public statement, appointment of persons representing the acquirer or persons acting in concert with him on the board of directors may be effected in the event the acquirer deposits in cash in the escrow account referred to in regulation 17, the entire consideration payable under the open offer:
Provided further that where the acquirer has specified conditions to which the open offer is subject in terms of clause (c) of sub-regulation (1) of regulation 23, no director representing the acquirer may be appointed to the board of directors of the target company during the offer period unless the acquirer has waived or attained such conditions and complies with the requirement of depositing cash in the escrow account.
Where an open offer is made conditional upon minimum level of acceptances, the acquirer and persons acting in concert shall, notwithstanding anything contained in these regulations, and regardless of the size of the cash deposited in the escrow account referred to regulation 17, not be entitled to appoint any director representing the acquirer or any person acting in concert with him on the board of directors of the target company during the offer period.
During the pendency of competing offers, notwithstanding anything contained in these regulations, and regardless of the size of the cash deposited in the escrow account referred to in regulation 17, by any acquirer or person acting in concert with him, there shall be no induction of any new director to the board of directors of the target company:
Provided that in the event of death or incapacitation of any director, the vacancy arising therefrom may be filled by any person subject to approval of such appointment by shareholders of the target company by way of a postal ballot.
In the event the acquirer or any person acting in concert is already represented by a director on the board of the target company, such director shall not participate in any deliberations of the board of directors of the target company or vote on any matter in relation to the open offer.
OBLIGATIONS OF THE ACQUIRER
Prior to making the public announcement of an open offer for acquiring shares under these regulations, the acquirer shall ensure that firm financial arrangements have been made for fulfilling the payment obligations under the open offer and that the acquirer is able to implement the open offer, subject to any statutory approvals for the open offer that may be necessary.
In the event the acquirer has not declared an intention in the detailed public statement and the letter of offer to alienate any material assets of the target company or of any of its subsidiaries whether by way of sale, lease, encumbrance or otherwise outside the ordinary course of business, the acquirer, where he has acquired control over the target company, shall be debarred from causing such alienation for a period of two years after the offer period:
Provided that in the event the target company or any of its subsidiaries is required to so alienate assets despite the intention to alienate not having been expressed by the acquirer, such alienation shall require a special resolution passed by shareholders of the target company, by way of a postal ballot and the notice for such postal ballot shall inter alia contain reasons as to why such alienation is necessary.
The acquirer shall ensure that the contents of the public announcement, the detailed public statement, the letter of offer and the post-offer advertisement are true, fair and adequate in all material aspects and not misleading in any material particular, and are based on reliable sources, and state the source wherever necessary.
The acquirer and persons acting in concert with him shall
i. not sell shares of the target company held by them, during the offer period.
ii. be jointly and severally responsible for fulfillment of applicable obligations under these regulations.
OBLIGATIONS OF THE TARGET COMPANY
Following are the obligations of a target company –
1. Upon a public announcement of an open offer for acquiring shares of a target company being made, the board of directors of such target company shall ensure that during the offer period, the business of the target company is conducted in the ordinary course consistent with past practice.
2. During the offer period, unless the approval of shareholders of the target company by way of a special resolution by postal ballot is obtained, the board of directors of either the target company or any of its subsidiaries shall not,—
(a) alienate any material assets whether by way of sale, lease, encumbrance or otherwise or enter into any agreement therefor outside the ordinary course of business;
(b) effect any material borrowings outside the ordinary course of business;
(c) issue or allot any authorised but unissued securities entitling the holder to voting rights:
Provided that the target company or its subsidiaries may,—
i. issue or allot shares upon conversion of convertible securities issued prior to the public announcement of the open offer, in accordance with pre-determined terms of such conversion;
ii. issue or allot shares pursuant to any public issue in respect of which the red herring prospectus has been filed with the Registrar of Companies prior to the public announcement of the open offer; or
iii. issue or allot shares pursuant to any rights issue in respect of which the record date has been announced prior to the public announcement of the open offer.
(d) implement any buy-back of shares or effect any other change to the capital structure of the target company;
(e) enter into, amend or terminate any material contracts to which the target company or any of its subsidiaries is a party, outside the ordinary course of business, whether such contract is with a related party, within the meaning of the term under applicable accounting principles, or with any other person; and
(f) accelerate any contingent vesting of a right of any person to whom the target company or any of its subsidiaries may have an obligation, whether such obligation is to acquire shares of the target company by way of employee stock options or otherwise.
3. In any general meeting of a subsidiary of the target company in respect of the matters referred to in sub-regulation (2), the target company and its subsidiaries, if any, shall vote in a manner consistent with the special resolution passed by the shareholders of the target company.
4. The target company shall be prohibited from fixing any record date for a corporate action on or after the third working day prior to the commencement of the tendering period and until the expiry of the tendering period.
5. The target company shall furnish to the acquirer within two working days from the identified date, a list of shareholders as per the register of members of the target company containing names, addresses, shareholding and folio number, in electronic form, wherever available, and a list of persons whose applications, if any, for registration of transfer of shares are pending with the target companyProvided that the acquirer shall reimburse reasonable costs payable by the target company to external agencies in order to furnish such information.
6. Upon receipt of the detailed public statement, the board of directors of the target company shall constitute a committee of independent directors to provide reasoned recommendations on such open offer, and the target company shall publish such recommendations: Provided that such committee shall be entitled to seek external professional advice at the expense of the target company. Provided further that while providing reasoned recommendations on the open offer proposal, the committee shall disclose the voting pattern of the meeting in which the open offer proposal was discussed.
7. The committee of independent directors shall provide its written reasoned recommendations on the open offer to the shareholders of the target company and such recommendations shall be published in such form as may be specified, at least two working days before the commencement of the tendering period, in the same newspapers where the public announcement of the open offer was published, and simultaneously, a copy of the same shall be sent to,—
i. the Board;
ii. all the stock exchanges on which the shares of the target company are listed, and the stock exchanges shall forthwith disseminate such information to the public; and
iii. to the manager to the open offer, and where there are competing offers, to the manager to the open offer for every competing offer.
8. The board of directors of the target company shall facilitate the acquirer in verification of shares tendered in acceptance of the open offer.
9. The board of directors of the target company shall make available to all acquirers making competing offers, any information and co-operation provided to any acquirer who has made a competing offer.
10. Upon fulfilment by the acquirer, of the conditions required under these regulations, the board of directors of the target company shall without any delay register the transfer of shares acquired by the acquirer in physical form, whether under the agreement or from open market purchases, or pursuant to the open offer.
What is the role of the target company in the open offer process?
Once a PA is made, the board of directors of the Target Company is expected to ensure that the business of the target company is conducted in the ordinary course. Alienation of material assets, material borrowings, issue of any authorized securities, announcement of a buy- back offer etc. is not permitted, unless authorized by shareholders by way of a special resolution by postal ballot.
The target company shall furnish to the acquirer within two working days from the identified date, a list of shareholders and a list of persons whose applications, if any, for registration of transfer of shares, in case of physical shares, are pending with the target company. After closure of the open offer, the target company is required to provide assistance to the acquirer in verification of the shares tendered for acceptance under the open offer, in case of physical shares.
Upon receipt of the detailed public statement, the board of directors of the target company shall constitute a committee of independent directors to provide reasoned recommendations on such open offer, and the target company shall publish such recommendations and such committee shall be entitled to seek external professional advice at the expense of the target company.
The recommendations of the Independent Directors are published in the same newspaper where the Detailed Public Statement is published by the acquirer and are published at least 2 working days before opening of the offer. The recommendation will also be sent to SEBI, Stock Exchanges and the Manager to the offer.
Obligations of the Manager to the Open Offer
Regulation 27 provides for obligations of the manager to the open offer.
They are:
1) Prior to public announcement being made, the manager to the open offer shall ensure that,— a. the acquirer is able to implement the open offer; and b. firm arrangements for funds through verifiable means have been made by the acquirer to meet the payment obligations under the open offer.
2) The manager to the open offer shall ensure that the contents of the public announcement, the detailed public statement and the letter of offer and the post- offer advertisement are true, fair and adequate in all material aspects, not misleading in any material particular, are based on reliable sources, state the source wherever necessary, and are in compliance with the requirements under these regulations.
3) The manager to the open offer shall furnish to the Board a due diligence certificate along with the draft letter of offer filed under regulation 16.
4) The manager to the open offer shall ensure that market intermediaries engaged for the purposes of the open offer are registered with the Board.
5) The manager to the open offer shall exercise diligence, care and professional judgment to ensure compliance with these regulations.
6) The manager to the open offer shall not deal on his own account in the shares of the target company during the offer period.
7) The manager to the open offer shall file a report with the Board within fifteen working days from the expiry of the tendering period, in such form as may be specified, confirming status of completion of various open offer requirements
DISCLOSURES OF SHAREHOLDING AND CONTROL
Regulation 25 provides for Disclosure-related provisions. This regulation stipulates that, the disclosures under this Chapter shall be of the aggregated shareholding and voting rights of the acquirer or promoter of the target company or every person acting in concert with him.
For the purposes of this Chapter, the acquisition and holding of any convertible security shall also be regarded as shares, and disclosures of such acquisitions and holdings shall be made accordingly.
It may be noted that – “Convertible Security” means a security which is convertible into or ex- changeable with equity shares of the issuer at a later date, with or without the option of the holder of the security, and includes convertible debt instruments and convertible preference shares. [Regulation 2(1)(f)]
For the purposes of this Chapter, the term “encumbrance” shall include,-
(a) any restriction on the free and marketable title to shares, by whatever name called, whether executed directly or indirectly;
(b) pledge, lien, negative lien, non-disposal undertaking; or
(c) any covenant, transaction, condition or arrangement in the nature of encumbrance, by whatever name called, whether executed directly or indirectly. Upon receipt of the disclosures required under this Chapter, the stock exchange shall forthwith disseminate the information so received.
Disclosure of Acquisition and Disposal
According to Regulation 29 any acquirer, together with persons acting in concert with him acquiring shares or voting rights in a target company, which taken together aggregates to five per cent or more of the shares of such target company, shall disclose their aggregate shareholding and voting rights in such target company in such form as may be specified:
Provided that in case of listed entity which has listed its specified securities on Innovators Growth Platform, any reference to “five per cent” shall be read as “ten per cent”
Any person together with persons acting in concert with him, holds shares or voting rights entitling them to five per cent or more of the shares or voting rights in a target company, shall disclose the number of shares or voting rights held and change in shareholding or voting rights, even if such change results in shareholding falling below five per cent, if there has been change in such holdings from the last disclosure made under subregulation (1) or under this sub-regulation; and such change exceeds two per cent of total shareholding or voting rights in the target company, in such form as may be specified.
Provided that in case of listed entity which has listed its specified securities on Innovators Growth Platform, any reference to “five per cent” shall be read as “ten per cent” and any reference to “two per cent” shall be read as “five per cent”.
The disclosures required under sub-regulation (1) and sub-regulation (2) shall be made within two working days of the receipt of intimation of allotment of shares, or the acquisition or the disposal of shares or voting rights in the target company to,—
(a) every stock exchange where the shares of the target company are listed; and
(b) the target company at its registered office.
For the purposes of this regulation, shares taken by way of encumbrance shall be treated as an acquisition, shares given upon release of encumbrance shall be treated as a disposal, and disclosures shall be made by such person accordingly in such form as may be specified:
Provided that such requirement shall not apply to a scheduled commercial bank or public financial institution or a housing finance company or a systemically important non-banking financial company as pledgee in connection with a pledge of shares for securing indebtedness in the ordinary course of business.
Explanation. - For the purpose of this sub-regulation, -
A. a “housing finance company” means a housing finance company registered with the National Housing Bank for carrying on the business of housing finance and is either deposit taking or having asset size worth rupees five hundred crores or more; and
B. a “systemically important non-banking financial company” shall have the same meaning as assigned to it in the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018.
TAKEOVER BIDS
A takeover bid may be a “friendly takeover bid” or a “hostile takeover bid”.
Bids may be mandatory/competitive bids. Mandatory Bid The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011, require acquirers to make bids for acquisition of certain level of holdings subject to certain conditions.
A takeover bid is required to be made by way of a public announcement issued to the stock exchanges, followed by a Detailed Public Statement in the newspapers.
Such requirements arise in the following cases:
a. for acquisition of 25% or more of the shares or voting rights;
b. for acquiring additional shares or voting rights to the extent of 5% of the voting rights in any financial year beginning April 01, if such person already holds not less than 25% but not more than 75% or 90% of the shares or voting rights in a company as the case may be;
c. for acquiring control over a company.
DEFENSE STRATEGIES TO TAKE OVER BIDS
A hostile bid made directly to the shareholders of the target company with or without previous overtures to the management of the company has become a means of creating corporate combinations. Hence, there has been considerable interest in developing defense strategies by actual and potential targets. Defenses can take the form of fortifying oneself, i.e., making the company less attractive to takeover bids or more difficult to takeover and thus discourage any offers being made. Defensive actions are also resorted to in the event of perceived threat to the company ranging from early intelligence that an acquirer is accumulating shares.
FINANCIAL DEFENSE MEASURES
Firstly, consideration has to be given to developing defense structures that create barriers specific to the bidder. These include purchase of assets that may cause legal problems, purchase of controlling shares of the bidder itself, and sale to their party of assets which made the target attractive to the bidder and issuance of new securities with special provisions conflicting with the aspects of the takeover attempt.
It must however be borne in mind that as per the Regulation 26(2) of the SEBI (SAST) Regulations, 2011, the target company cannot alienate its assets, make any material borrowings, issue any new shares with voting rights or terminate any material contract during the offering period (which commences once the public announcement is made) except with the approval of shareholders by way of a special resolution passed by Postal Ballot. Hence it would be almost impossible to bring about adjustments in Assets and Ownership structure in India
2. A second common method is to create a consolidated vote block allied with target management. Thus securities are issued through private placements to parties friendly or in business alliance with management or to the management itself. Moreover another method can be to repurchase publicly held shares to increase an already sizeable management block in place.
It must however be borne in mind that as per the Regulation 26(2) of the SEBI (SAST) Regulations, 2011, the target company cannot, issue any new shares with voting rights or terminate any material contract during the offering period (which commences once the public announcement is made) and can also not make a buy-back of shares from the public shareholders except with the approval of shareholders by way of a special resolution passed by Postal Ballot. Hence it would be almost impossible to bring about adjustments in Assets and Ownership structure in India. However in anticipation of a perceived threat of takeover, the management can issue shares or convertible securities beforehand so that they can be converted once the public announcement for an open offer is made.
3. A third common theme has been the dilution of the bidders vote percentage through issuance of new equity shares. However, this option will not work in India due to the strict procedures laid down in Regulation 26(2) of the SEBI (SAST) Regulations, 2011.
4. The “Crown Jewel” Strategy The central theme is this strategy is to divest the most coveted asset by the bidder, commonly known as the “crown jewel”. Consequently the hostile bidder is deprived of the primary intention behind the takeover bid. A variation of the crown jewel strategy is the more radical “scorched earth approach”, vide which approach, the target sells off not only the crown jewel, but also properties to diminish its worth. Such a radical step may however be self-destructive and unwise in the company’s interest.
However as per the Companies Act, 2013, selling of whole or substantially the whole of its undertaking requires the approval of the shareholders in a general meeting by way of a special resolution and Regulation 26(2) of the SEBI (SAST) Regulations, 2011, the target company cannot alienate any of its material assets during the offering period (which commences once the public announcement is made) and can also not make a buy-back of shares from the public shareholders except with the approval of shareholders by way of a special resolution passed by Postal Ballot. Hence it would be almost impossible to use the “Crown Jewel” Strategy as a defense mechanism in India.
5. The Pacman Defence This strategy although unusual attempts to purchase the shares of the raider company. This is usually the scenario if the raider company is smaller than the target company and the target company has a substantial cash flow or liquidable asset.
Regulation 26(2) of the SEBI (SAST) Regulations, 2011, however prohibits the target company to enter into any agreement which is not in the ordinary course of business during the offering period (which commences once the public announcement is made) except with the approval of shareholders by way of a special resolution passed by Postal Ballot. Hence it would be almost impossible to use the “Pacman Defense” Strategy as a defense mechanism in India.
6. Targeted Share Repurchase or “Buy-back” This strategy is one in which the management of the target company uses up a part of the assets of the company on the one hand to increase its holding and on their hand it disposes of some of the assets that make the target company unattractive to the raider. The strategy therefore involves a creative use of buyback of shares to reinforce its control and detract a prospective raider. But “Buyback” would involve the use of the free reserves of the company and would be an expensive proposition for the target company. Further as per Regulation 26(2) of the SEBI (SAST) Regulations, 2011, the target company cannot implement a buy-back during the offer period except with the approval of shareholders by way of a special resolution passed by Postal Ballot. Hence it would be almost impossible to use this defense mechanism also in India.
7. Golden Parachutes These are separation clauses of an employment contract that compensate managers who lose their jobs under a change of management scenario. The provision usually calls for a lump-sum payment or payment over a specified period at full and partial rates of normal compensation. Target Companies invoke this provision and pay off a huge compensation to large number of employees so as to make themselves unattractive to the raider.
However section 192 and Section 202 of the Companies Act, 2013 provide for compensation to be paid for loss of office only to a Managing Director, Whole Time Director or a Manager and not the entire senior management, as is the practice in the United States of America. Hence this defense mechanism is of no consequence in India.
ANTI-TAKEOVER AMENDMENTS
An increasingly used defense mechanism being used is anti-takeover amendments to the company’s constitution or articles of association, popularly called as “shark repellants”. This practice consists of changing the articles of associations, regulations, bye-laws, etc. to be less attractive to the raider / hostile bidder. This again may not work out in India as any change to the Articles of Association or the Memorandum of Association would require approval of the shareholders.
1. Supermajority Amendments
These amendments require shareholder approval by at least 2/3rds vote and sometimes as much as 90% of the voting power of outstanding capital for all transactions involving change of control. In most existing cases, however the super majority agreements have a board out clause which provides the board with the power to determine when and if the super majority provisions will be in effect. Pure or inflexible super majority provisions would seriously limit the management’s scope of options and flexibility in takeover negotiations.
2. Classified Boards
Another type of anti-takeover amendments provides for a staggered or classified board of directors to delay effective transfer and control in a takeover. The much touted management rationale in proposing a classified board is to ensure continuity of policy and experience in the USA. The legal position of such classified or staggered boards is quite flexible. An example is when a 9 member board may be divided into 3 categories, with only 3 members standing for election to a three year term each, such being the modalities of the retirement by rotation. Thus a new majority shareholder would have to wait for at least 2 AGMs to gain control of the Board of Directors. Section 152 of the Companies Act, 2013 warrants that 1/3rd of the directors whose office is determinable by retirement will retire. Therefore continuing the example of 9 directors, 3 can be made permanent directors by amending the Articles and therefore the acquirer would have to wait for at least 3 AGMs to gain control over the Board. However the company may by an ordinary resolution remove a director before the expiration of his period of officer. Thus any provision in the Articles of the Company or any agreement between the company and a director by which the director is rendered irremovable from office by an ordinary resolution would be void and contrary to the Act.
3. Authorisation of Preferred Stock
The Board is authorised to create a new class of securities with special voting rights. This security, typically preferred stock may be issued to a friendly party in a control context. This is referred to as issuance of Shares with Differential Voting Rights, which is subject to restrictions under the Companies Act, 2013 and SEBI (ICDR) Regulations, 2009 and hence has been rendered unattractive over a period of time.
4. Poison Pill Defenses
This is a controversial but popular defense mechanism. These pills provide their holders with special rights exercisable only after a period of time following the occurrence of a triggering event. These rights take several forms but all are difficult and costly to acquire control of the issuer or the target company. Poison pills are generally adopted by the Board of Directors without shareholder approval. Usually the rights provided by the poison pill can be altered quickly by the Board or redeemed by the Company any time after they become exercisable following the occurrence of the triggering event. These provisions force the acquirer to negotiate directly with the target company’s board and allow some takeover bids to go through. Many proponents of this mechanism argue that this enhances the ability of the Board of Directors to bargain for a fair price.
CROSS BORDER TAKEOVERS
Cross Border Takeover is a much sort after term in recent years. Competitiveness among the domestic firms forces many businesses to go global. There are various factors which motivate firms to go for global takeovers.
Apart from personal glory, global takeovers are often driven by market consolidation, expansion or corporate diversification motives. Also, financial, accounting and tax related matters inspire such takeovers.
Expansion and diversification are one of the primary reasons to cross the border as the domestic markets usually do not provide the desired growth opportunities. Another main reason for cross border takeovers is to attain monopoly.
Acquirer company is always on the lookout for companies which are financially vulnerable but have untapped resources or intellectual capital that can be exploited by the purchaser. Global takeovers are complex processes. Despite some harmonized rules, taxation issues are mainly dealt within national rules, and are not always fully clear or exhaustive to ascertain the tax impact of a cross-border merger or acquisition.
This uncertainty on tax arrangements sometimes require seeking of special agreements or arrangements from the tax authorities on an ad hoc basis, whereas in the case of a domestic deal the process is much more deterministic.
Cross-border takeover bids are complex transactions that may involve the handling of a significant number of legal entities, listed or not, and which are often governed by local rules (company law, market regulations, self-regulations, etc.). Not only a foreign bidder might be hindered by a potential lack of information, but also some legal complexities might appear in the merger process resulting in a deadlock, even though the bid would be ‘friendly’. This legal uncertainty may result in a significant execution risk and act as a major hurdle to cross-border consolidation.
Going global is rapidly becoming Indian company’s mantra of choice. Indian companies are now looking forward to drive costs lower, innovate speedily, and increase their international presence. Companies are discovering that a global presence can help insulate them from the vagaries of domestic market and is one of the best ways to spread the risks. Indian corporate sector has witnessed several strategic acquisitions. Tata Motors acquisition of Daewoo Commercial Vehicle Company, Tata Steel’s acquisition of Singapore’s NatSteel, Reliance’s acquisition of Flag is the culmination of Indian Company’s efforts to establish a presence outside India.
It is expected that the cross borders takeovers will increase in the near future. The companies will have to keep in mind that global takeovers are not only business proposals but also a corporate bonding for which both the entities have to sit and arrive at a meaningful and deep understanding of all the issues as mentioned above.
