Meaning
Hostile takeover refers to a forceful acquisition or takeover of a company by another company. Such a takeover is referred to as hostile because the takeover often is a forceful one and is against the wish and approval of the Board of Directors. The Company which is acquiring the other company is referred to as the Bidder and the company whose takeover is taking place is referred to as the target company. In such a scenario, Bidder holds a dominant position.
Ways of Hostile Takeover
Two Ways in which a hostile takeover may take place are:
- Tender offer
A tender offer is presented to the board of directors to acquire the company at a premium price higher than the market price which may or may not be accepted by the board of directors. Afterward, the offer is presented to the shareholders who may accept the offer due to the personal monetary benefits involved.
- Proxy fight
In a proxy fight, the bidder tries to get the board of directors of the target company replaced who is against the acquisition.[i]
Hostile Takeovers in India
As far as India is concerned, there were only two hostile takeovers that took place successfully. The first-ever hostile takeover in India was that of Raasi Cements by India Cements Limited in 1998, an open offer was made by India Cements Limited to RCL for 20% of shares at ₹300 per share when its share price was ₹100 per share in the stock exchange. Financial Institutions also held a considerable stake in RCL leading to a protracted battle ensuing between ICL, RCL, and the Financial Institutions. During the negotiations regarding the open offer, the promoter of RCL sold his 32% stake to ICL at a price lower than the open offer price. Subsequently, the shares held by financial institutions were also brought by RCL leading to an increase in their stake in RCL to 85% percent.[ii]
The next successful hostile takeover in India was that of Mindtree and Larson & Turbo (L&T) Company, The major stake of Mindtree Company was with the shareholders, and one of the shareholders, V.G Siddhartha to cut down his debt sold his share of 20% which was purchased by L&T at the rate of ₹981 per share. The total shareholding of L&T now counted to 29% considering the 9% shares previously acquired by it. L&T then made an open offer for the purchase of 31% of shares. After acquiring shares through the open offer, the total shareholding of L&T reached around 60% gaining them control over the board and management of the target company.[iii]
Laws Governing Hostile Takeover in India
There are three sets of laws in India that regulate hostile takeovers which are:
COMPANIES ACT, 2013: The companies act, 2013 broadly lays down the framework for any kind of mergers, acquisitions, and takeovers and primarily applies to private and unlisted companies. Section 186 of the Companies act lays down the procedure for acquisitions of shares, sets maximum limits for investment that can be made by the Board of Directors, and prescribes the procedure for availing shareholder approval for any acquisition beyond the limits. Acquisition of shares by insiders (the existing shareholders holding more than 75% of the total share capital) is covered under section 230(11) of this particular act. Section 235 deals with companies that want to acquire the shares of another company. There is no threshold limit of shares set per se but the members holding 9\10th of the value of shares of the target company must vote in favor of the resolution. Sec. 236 is concerned with shares acquired by majority shareholders by way of a squeeze-out of a minority shareholding, with 90% of majority shareholding and price evaluation by a Registered Valuer.[iv]
THE SEBI (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) REGULATIONS, 2011 (SAST REGULATIONS): Acquisition of shares and takeovers of listed companies in India are primarily governed by SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 also referred to as Takeover Code.
Reg. 3(1) – mandates an acquirer to make a public announcement of an open offer after he acquires 25% or more voting rights.
Reg. 3(2) – The regulations under reg. 3(2) apply to the acquisition between 25% to 75% of shares or voting rights of the target company. In such cases, an open offer must be made by the acquirer whenever he acquires more than 5% of shares.
Reg. 4 – This provision with gaining control of the target company with or without the acquisition of shares. It includes the power to appoint the new Board of Directors.[v]
Also Read - A Legal Perspective on Hostile Takeovers in India
THE COMPETITION ACT, 2002, also known as anti-trust/anti-competitive regulates competition in the markets. The main aim of The Competition act is to curb unfair trade practices like bid rigging, unfair pricing, abuse of dominant position, and other anti-competitive practices.
Sec. 5 of the Competition Act is concerned acquisition and merger of entities, which cross certain thresholds. In such scenarios, authorization by the Competition Commission of India (CCI) needs to be obtained by the acquirer.
The Business Combination Regulations are the only regulations that regulate hostile takeovers in India. Reg. 5(8) of the Business Combination Regulations provides that in case of a hostile takeover, the documents in possession of the acquirer may be submitted at the time of making such notice.[vi]
Conclusion
The Takeover Code does not impose any statutory barriers to a hostile takeover. Moreover, no provision in the Takeover Code draws a line between a friendly and hostile takeover. The most probable reason for such an acquisition is that it may look like the target company is undervalued and the bidder wants to earn profits from it in the long run or desires to enter the business sector in which the target company operates. On the other hand, such takeovers also disrupt the normal functioning of the target company. The target Company may employ various defensive strategies to prevent a hostile takeover.
Author – Neha Dulani
BA.LL.B – University of Rajasthan
Want to get the notified as we post an internship or an event?
Join our WhatsApp Groups (Click Here)
[i] https://blog.ipleaders.in/much-takeover-laws-matter-light-last-decades-hostile-takeover/
[ii] https://taxguru.in/corporate-law/hostile-takeovers-india-overwatch.html
[iii] https://www.legalserviceindia.com/legal/article-9274-hostile-takeover-in-india.html
[iv] The Companies Act, 2013
[v]https://www.indiacode.nic.in/handle/123456789/1890?sam_handle=123456789/1362
[vi] Competition Act, 2002