What is a hostile takeover?
It is a takeover when one company buys another company despite there is an objection from the target company`s directors. This takeover is just the opposite of a friendly takeover, there is an absence of cooperation between the parties.
This takeover takes place when one organization shows its desire to purchase the cooperation and makes a constant proposal to the said company and in the end, the directors aren’t left with any other option other than accepting the proposal.
Brief history
The 1980s was the period when the US saw the heightening of activity of hostile takeovers, the market was shifting to merger and acquisition space. RJR Nabisco with investment bank KKR in 1988 is considered one of the most expensive takeovers in history(1).
In India it was first done by a London-based businessman swaraj paul (1984) who wanted to take over the control of two companies, Escorts Ltd and DCM (Delhi cloth mill) this was one of the first incidents of takeover by hostility, this was a failure paul afterward withdrew his bid to take over the companies due to several factors, another attempt was made after an unsuccessful one by the swaraj paul hostile offer. ICI, a paint organisation which is settled in the U.K., concurred Atul chokey, co-founder of an Indian paint organisation, but the government with its foreign investment board didn’t let the bid to happen under which the organisation had to acquire endorsement from the top managerial staff of the Indian objective.
The first-ever takeover in India by hostility was done by India Cements in February 1998 where it made a proposal to Raasi Cements Ltd for 20% an open offer, per share being ₹300, confronted with obstruction from Raasi eventually BV Raju sold 32% of the share of Raasi to the India cement in a private deal. (2)
Also Read - A Legal Perspective on Hostile Takeovers in India
India’s stand on hostile takeover
According to the Companies Act 2013 which establishes the ground of merger, acquisition or takeover
Sec. 186 – This section puts a limitation on the board of directors for the maximum investment as well as for obtaining the approval of shareholders and disclosure obligations.
Sec. 230(11) – addresses the purchase of shares by insiders who own more than 75% of the company share capital, the purchase would be only for the remaining shares and does not deal with hostile takeovers in the traditional sense
Sec 235 – It applies to companies who desire to buy a share of another company. No precise threshold restriction is mentioned, but the members who own 9/10th of the target company share must vote in favor.
Sec 236 – deals with the purchase of shares by majority shareholders through the squeeze-out of minority holdings, with 90% majority shareholding and price evaluation by a Registered Valuer. (3)
SEBI
SEBI governs the purchase of shares and takeovers of companies in India. Regulation 11 of the Takeover Code empowers SEBI to grant exemptions from the obligation to make an open offer triggered by an acquisition of shares/control of a target company beyond a prescribed threshold.
Reg. 3(1) – large acquisition when the acquirer crosses 25% of a target’s shares or voting rights and if this threshold crosses then it should make an open offer.
Reg. 3 (2) – This applies to any acquisition between 25% to 75% of shares or voting rights of the target. In such instances, every time the acquirer acquires more than 5%, an open offer is required to be made.
Reg. 6 – the people with a minimum of 25% shareholding in the company can make voluntary open offers and not acquire shares in the target firm for 52 weeks before or 6 months after making a voluntary open offer make a traditional hostile acquisition practically difficult
Regulations also apply to indirect takeover of the company. (4)
The Competition Act 2002
This act is also known as anti-trust or anti-competitive laws which regulate the market competition in a just and fair way prohibiting unfair trade practices such as predatory pricing, abuse of dominant position, or other behaviours which are anti-competitive. This act addresses the hostile takeovers.
Sec. 5 – it includes acquisition and mergers of entities that exceed the threshold. In this case, the acquirer is required to seek authorization from the competition commission (CCI). The acquirer cannot complete the transaction before 210 days have passed since the notice issued by the CCI.
Sec 5 (8) of Business Combination regulations – this weakens the 6(2) provision of the 2002 Act on the submission of the other document (any binding document conveying an agreement or decision to acquire control, shares, voting rights or assets)
Previously foreign direct investment to which RBI traditionally prevented a hostile takeover of an Indian firm by a foreign company but after the liberalisation, this has made possible.
In hostile takeovers, a foreign acquirer may face –
- Foreign direct investment restrictions in the certain industrial sector.
- Approval from one or both of the Reserve Bank of India. (5)
Conclusion
The hostile takeover laws cannot be overstated as it plays a vital role in regulating mergers and acquisition activities. It is becoming more probable in India and so does the Indian takeover code does not impose any barriers to hostile acquisition. Businesses may use some defensive strategies such as Poison Pills, The white Knight, Pac-Man Defense, etc. to guard against the hostile acquisition. In short hostile takeovers could be done in India but under certain rules and regulations framed by the law.
1 Hostile Takeover in India, Legalserviceindia.com (2022), https://rb.gy/rsxs87 (last visited Mar 16, 2023).
2 Hostile Takeovers in India: L&T-Mindtree case study from an Employment Law vantage, The Law Blog (2020), https://thelawblog.in/2020/09/05/hostile-takeovers-in-india-lt-mindtree-case-study-from-an-employment-law-vantage/comment-page-1/ (last visited Mar 16, 2023).
3 THE COMPANIES ACT 2013
4 Securities and Exchange Board of India Act, 1992, Indiacode.nic.in (2019), https://rb.gy/xdex3u (last visited Mar 16, 2023).
5 Competition Act 2002
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