LEGAL ASPECTS OF CORPORATE TAKEOVERS AND ANTI-TAKEOVER DEFENSES IN INDIA

This article is written by Ishika Jaiswal of St. Xaviers University, Kolkata, an intern under Legal Vidhiya

Abstract

Takeovers have become an important phenomenon in today’s business environment as they enable corporations to extend their markets, technologies and, thus, the value of their shareholders. However, the process is not very easy and problematic due to various legal issues and regulations especially in the Indian context. This article will review the current legal provisions that regulate corporate takeover in India, the instruments that facilitate the takeovers as well as the spirited anti-takeover mechanisms employed by some firms. Thus, this article seeks to give a general outlook of what constitutes Intellectual Property law by analyzing the statutory provisions, case laws and the trends.

Keywords

Corporate Takeovers, Anti-Takeover Defences, India, Companies Act, SEBI Regulations, Competition Act, Hostile Takeovers, Friendly Takeovers, Legal Framework

Introduction [1]

In the present globalised and highly competitive business environment, corporate takeover has emerged as one of the significant sources of organisational growth and diversification. However, absorbent often results in conflicts in-between managers and shareholders hence the need to regulate the whole process. Legal regulation of takeovers has emerged and changed considerably in India during the last few decades influenced by both domestic and international experience. This article aims at discussing the legal issues connected with takeover of companies, the legal regulation, the takeover methods and the antitakeover mechanisms utilised by the target companies.

Historically defined as shareholders unrest trying to reverse managerial decisions, the modern-day picture of shareholder activism has greatly evolved. It presently encompasses a vast network of stakeholders, ranging from institutional investors, hedge funds to the general public through retail investors who put pressure on the corporate management to bring change that is advantageous to the network. These changes, however, are part of the broader trends which took place in the investments environment where more and more companies and investors want to get not only the financial value but also they want to invest with the ‘’holistic’’ perspective including ethical, social, and governance factors (ESG).

The purposes of shareholder activism have also changed gradually and campaigns were launched for a number of reasons which include not only the companies’ operational strategies, such as restructuring and executive remuneration but also the more socially responsible topics such as environment and diversity. Hence, activist shareholders have assumed leadership roles in determining corporate policies and the conduct of managerial corporations. In this paper, the issues of shareholder activism will be discussed on the background of its historical evolution, modem techniques, and consequences for the corporate management system. This research seeks to explore the use of shareholder activism to bring about change in shareholder management and corporate boards through the presentation of diverse case studies and legal analysis.

In the end, this study shall improve knowledge in the current status of corporate governance practice and advocate for efficient conceivable mechanisms that may ensure the interests of different stakeholders while promoting accountability and transparency. Thus, understanding shareholder activism is significant for current and future business as corporate activity becomes more and more involved with society in general.

Legal Framework Governing Corporate Takeovers in India

Companies Act, 2013[2]

As already stated, Companies Act, 2013′(hereinafter referred as Act) is the building block of corporate governance structure in India. Key provisions relevant to takeovers include: Key provisions relevant to takeovers include:  

• Section 230-240: These sections form the basis of schemes of arrangements by which companies can reorganise their affairs which would include, takeovers.
• Section 238: Focusses on NCLT’s ability to only sanction schemes that relate to takeovers of shares or mergers.

It has to be noted that most of the information made available to the public in India pertaining to mutual funds are in accordance with the Securities and Exchange Board of India (SEBI) Regulations.  

The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (hereinafter referred to as the “Takeover Regulations”) play a pivotal role in governing takeovers:

The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (hereinafter referred to as the “Takeover Regulations”) play a pivotal role in governing takeovers: [3]

• Regulation 3: Requires the notification of the share acquisition beyond a certain level that is 5% and 10%.
• Regulation 4: The rule that mandates that an open offer has to be launched where a person gains over 25% shares or voting rights of a target company.
• Regulation 11: Contemplates situations under which a person may be relieved from the requirement to make the open offer. 1. 3. Competition Act, 2002

The consumers and competition protection is done by the Competition Act, 2002 which deals with mergers and acquisitions that can be harmful to competition in the market. Business corporations are under obligation to inform the Competition Commission of India (CCI) in case they have proposed to acquire an enterprise of a certain size.  

The FEMA is short for the Foreign Exchange Management Act, 1999 that regulates the management and trading of the foreign exchange.

In India FEMA controls the investment by the foreign players in India based companies. Keeping with FEMA is a necessity for any foreign entity that wants to undertake takeovers, in regard to sectoral caps as well as the entry points.

Types of Takeovers

Friendly Takeovers

Compared to the hostile takeover, friendly takeover is where the target management will endorse the takeover. This usually takes time and also entails consultations together with getting the support of the board of directors.  

Hostile Takeovers

Hostile takeover on the other hand takes place when the acquiring company does not go through the management of the target company, for instance directly or indirectly going to the shareholders. This approach may cause many conflicts and legal issues may be encountered.

Reverse Takeovers  

This form of acquisition follows the trend where the company acquiring the public company is a private firm, though after the transaction there will be a public company to be identified through this method of reversing instead of going through an initial public offer.  

Process of Takeovers [4]

Due Diligence  

Investigations are inevitably a part of the takeover process as involved companies end up sharing their data with each other. In this process, the acquiree analyses the target company’s financials, its legal status, and its management’s ability to perform business operations. As a result, this process defines specific risks and liabilities that might be inherent in the organization.  

Valuation

The first pitfall of providing an offer is the accurate assessment of the target company’s worth. Some of the common methods which are used include the DCF model, comparable company analysis and precedent transaction analysis.

Open Offer  

So, in accordance with the Takeover Regulations, if the acquiring company crosses the 25% limit for the target company’s share ownership, it is required to launch an open offer to purchase other shares belonging to the members of the public.  

Approval Process

The takeover has to be approved by the shareholders and in some circumstances necessity of consent from SEBI and the CCI.  

Anti-Takeover Defences [5]

Anti-takeover measures are measures put in place by firms, or the management of a target firm which seek to counter acts of hostile takeover. These mechanisms can be categorized into several types:

These mechanisms can be categorized into several types:

Poison Pill [6]

The poison pill strategy consists in releasing new stocks in the ownership of existing shareholders at a preferential rate which reduces the proportion controlled by the approaching company. This can even increase the cost of acquisition greatly since followers may not be extremely engaged and therefore may not be keen on visiting the page often and buying the products advertised.

White Knight  

In this strategy, the target company engages a friendly investor referred to as the white knight to bid for the purchase of the company’s stake thus preventing the hostile bidder. This can be a useful strategy in order to achieve a better result for the target company.

Crown Jewel Defense

In a crown jewel defense, the target firm divests its cash producing assets in a bid to become unattractive to the unwanted shareholder. The former insulates the firm against takeovers while the latter may decrease the strength of the firm in the long run.  

Staggered Board  

Staggered board of directors imply that not all directors are elected each year rather it is done in stages. This may prove a challenge to an acquirer for example, who wants to have full control over the board immediately.  

Legal Challenges

The targets may also employ legal ways to prevent or frustrate a takeover bid by the acquirer firms may employ. This can include legal action for ascertain the legitimacy of the offer or seek orders against the existing firm.

Case Law [7]

1. Tata Sons Pvt. Ltd V/s Ratan Tata- This case helped to reaffirm the fact that corporation’s operations and director’s roles require detailed examination in the situation of takeovers. The Supreme Court stressed that issues regarding takeovers must be clear to all and be free from bias.
2. SEBI v. Rakesh Agarwal [8]– In this case the SEBI enhanced its supervisory powers on takeover bids and explained the disclosure requirements and procedures of the acquiring entity under the Takeover Regulations.

Challenges in Takeover Regulation

Regulatory Ambiguities

However, there are at times, certain legal loopholes which cause significant problems to the acquirer and the target firm. This may result in disagreements and the use of law suits, and thus affects the efficiency of the takeover.

Enforcement Issues  

It is however worth to note that actual implementation and enforcement of takeover regulations still presents some kind of difficulty. Non-compliance and slow regulatory actions contribute to loss of market confidence as well as the interruption of economic activities.

Impact of Globalization

Due to the increased activity in cross border acquisitions, it has become imperative for the regulatory framework to allow island hopping and incorporate humane international norms which makes it a little difficult for Indian companies.  

Trends in Corporate Acquisition [9]

Increased Scrutiny  

 SEBI and recently CCI control M&As by examining compliance to antitrust laws to try and maintain the quality of the country’s market.

Technological Impact  

Due diligence, valuation, and transaction execution are increasing where and to the extent technology is used. Data analysis through the use of analytics and Artificial intelligence is being used to enhance the takeover process.

ESG Considerations  

ESG factors are Gradually being accepted as key drivers in decisions to effect takeovers. It has become evident that acquirers are extending the criteria used in the selection of the target firm’s ESG performance.

Anti-Takeover Defences[10]

Anti-takeover defense are strategic measures implemented by companies to protect themselves from hostile takeover attempts. One of the most recognized defenses is the poison pill strategy. This involves issuing new shares to existing shareholders at a discount, which dilutes the potential acquirer’s ownership stake and significantly increases the cost of acquisition. There are two m

ain types: the flip-in pill, which allows current shareholders to buy additional shares when an acquirer reaches a certain ownership threshold, and the flip-over pill, which enables them to purchase shares in the acquiring company at a discounted price if a takeover occurs. While effective, poison pills can attract scrutiny from regulators if perceived as tools for management entrenchment rather than genuine shareholder protection.

Another common defense is the white knight strategy, where a target company seeks out a friendly investor or company to acquire it instead of succumbing to a hostile bidder. This approach can lead to more favourable terms for the target company, and it allows shareholders to potentially realize better value. The negotiation process with a white knight must be carefully managed to ensure alignment of interests, making it essential for the target company to act swiftly and strategically.

The crown jewel defense entails divesting the company’s most valuable assets, thereby making it less attractive to hostile acquirers. This tactic can effectively deter takeovers but may also weaken the company’s long-term operational capabilities. Additionally, structural defenses such as a staggered board, where only a fraction of directors are elected each year, can slow down the process for acquirers looking to gain control. However, such measures often draw criticism for potentially limiting shareholder rights and entrenching existing management.

Ultimately, companies may also resort to legal challenges to contest the legitimacy of a hostile bid or protect shareholder interests. These challenges can create delays and complications for the acquirer, making the process more cumbersome. While anti-takeover defenses serve an important purpose in corporate governance, striking a balance between defending against unwanted takeovers and ensuring shareholder value is crucial for long-term success. As market dynamics evolve, firms must continually assess and adapt their strategies to navigate these challenges effectively.

Conclusion

The legal framework surrounding the process of corporate takeovers in India can be summarised as complex, since it is comprised of several layers of regulations and strategies. There is ample regulation from the Companies Act and SEBI regulations as well as the Competition Act; however, enforcement and compliance present issues. With the trends changing, these issues remain crucial in the market, and it is upon companies to understand them well. Effective anti-takeover defenses coupled with intention to employ clear practices will be (056) important to guarantee successful results in cases involving corporate takeovers.

References

1. Companies Act, 2013, No. 18 of 2013 (India).
2. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, SEBI Notification No. LAD-NRO/GN/2011-12/30/4860 (2011).
3. Competition Act, 2002, No. 12 of 2003 (India).
4. Foreign Exchange Management Act, 1999, No. 42 of 1999 (India).
5. Tata Sons Pvt. Ltd. v. Ratan Tata, (2016) 1 SCC 751 (India).
6. SEBI v. Rakesh Agarwal, (2013) 5 SCC 200 (India).
7. Securities Exchange Act of 1934, 15 U.S.C. § 78a (1934).
8. International Financial Reporting Standards (IFRS), available at <https://www.ifrs.org>.
9. Reserve Bank of India, Guidelines, available at <https://www.rbi.org.in>.
10. Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (2002).

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[1] Reserve Bank of India, Guidelines, available at https://www.rbi.org.in.

[2] Companies Act, 2013, No. 18 of 2013 (India).

[3] SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, SEBI Notification No. LAD-NRO/GN/2011-12/30/4860 (2011).

[4] Reserve Bank of India, Guidelines, available at RBI website.

[5] Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (2002).

[6] International Financial Reporting Standards (IFRS), available at <https://www.ifrs.org>.

[7] Tata Sons Pvt. Ltd. v. Ratan Tata, (2016) 1 SCC 751 (India).

[8] SEBI v. Rakesh Agarwal, (2013) 5 SCC 200 (India).

[9] International Financial Reporting Standards (IFRS), available at https://www.ifrs.org.

[10] Competition Act, 2002, No. 12 of 2003 (India).

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