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LEGAL ASPECTS OF CORPORATE TAKEOVERS AND ANTI-TAKEOVER DEFENSES

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This article is written by Madhavi Sharma of 7th semester of Haveli Institute of Legal Studies and Research, Silvassa, an intern under Legal Vidhiya.

Abstract

This article with the title legal aspects of corporate takeovers and anti-takeover defenses has many aspects of key solutions and challenges. The title has even a contradiction associated with it in many aspects. Here, the meaning of these two terms can be well clearly understood, and this mentions ways of corporate takeover and anti-takeover defenses. Companies often pursue takeovers for strategic reasons like increasing market share, entering new markets, accessing new technologies, achieving economies of scale, acquiring intangible assets, diversifying operations, eliminating competition, and pursuing advantageous acquisitions to eliminate threats and strengthen their market position. Understanding the legal aspects of corporate takeovers and anti-takeover defenses is crucial for all stakeholders to ensure a smooth, fair, and successful takeover process. Legal aspects of corporate takeovers and anti-takeover defenses are crucial for companies to protect shareholder interests, prevent hostile takeovers, maintain control, preserve business strategy, and minimize disruption.

Keywords

Anti-takeover Defenses, Legal Aspects, Corporate Takeover

Introduction

Corporate takeovers involve a company acquiring control of another company through either a friendly or hostile takeover. Companies often pursue takeovers for strategic reasons such as increasing market share, entering new markets, gaining access to new technologies, achieving economies of scale, acquiring intangible assets, diversifying operations, eliminating competition, and pursuing advantageous acquisitions. A friendly takeover occurs when the target company’s management and board of directors consent to the acquisition, while a hostile takeover occurs when the acquirer takes control without the target company’s consent. Anti-takeover measures are strategies used by companies to prevent or deter unwanted takeovers. Common anti-takeover strategies include poison pills, pac-man defenses, and golden parachutes.

Key issues in corporate takeovers and anti-takeover defenses include takeover premiums and shareholder value, board neutrality and fiduciary duties, disclosure requirements and transparency, anti-takeover defenses’ legitimacy, and regulatory oversight and enforcement. The Securities and Exchange Board of India (SEBI), Ministry of Corporate Affairs (MCA), and National Company Law Tribunal (NCLT) regulate mergers and amalgamations, ensuring fair treatment of creditors and shareholders, protection of minority interests, and transparency and accountability.

A Corporate Takeover: Meaning

A corporate takeover occurs when one company acquires control of another company. This can happen in two main ways:

  1. Friendly Takeover: A friendly takeover is a merger or acquisition that occurs when the management and board of directors of the target company consent to the acquisition by the acquiring company. It is a transaction backed by mutual agreement.
  2. Hostile Takeover: A hostile takeover is a type of acquisition where a company (the acquirer) takes control of another company (the target company) without the approval or consent of the target company’s board of directors.

An Anti-Takeover: Meaning

Anti-takeover measures are strategies employed by a company to prevent or deter unwanted takeovers. These measures can be continuous or implemented when a takeover threat is perceived. Common anti-takeover strategies include:

Anti-Takeover Protect the Interest of all Stakeholders: Defenses

  1. Poison Pill: A poison pill is a tool used by corporate boards to make an acquisition intolerably expensive. The way that a poison pill works is by setting a trigger or threshold in the terms of stock ownership which, if reached or surpassed by a particular shareholder, will result in the dilution of that shareholder’s interest in the company.

    This strategy makes the company’s stock less attractive by allowing existing shareholders to buy more shares at a discount, diluting the value of the shares held by the potential acquirer.

    2. Pac-Man Defense: A situation occurs when a company attempts to acquire another business, but the second business prevents this attempt by buying shares in the first company.

      3. Golden Parachutes: A golden parachute, in mergers and acquisitions (M&A), refers to a large financial compensation or substantial benefits guaranteed to company executives upon termination following a merger or takeover. Benefits include severance pay, cash bonuses, and stock options.

      These measures aim to protect the company from being acquired against its will, often so as to maintain its current management and focus on strategy.

      Legal and Illegal Takeover as per Companies’ Law in India

      Legal Takeover:

      1. Open Offer (SEBI Regulations, 2011): Acquirer makes a public offer to shareholders to buy a minimum 26% stake.

      2. Voluntary Offer (SEBI Regulations, 2011): Acquirer makes an offer to shareholders to buy shares, with no minimum stake requirement.

      3. Scheme of Arrangement (Companies Act, 2013, Section 230-232): Court-approved merger or amalgamation.

      4. Share Purchase Agreement (Companies Act, 2013, Section 56): Private agreement between buyer and seller.

      Illegal takeover:

      1. Insider Trading (SEBI Regulations, 2015): Using unpublished price-sensitive information for personal gain.

      2. Market Manipulation (SEBI Regulations, 2003): Artificially influencing stock prices.

      3. Fraudulent Acquisition (Companies Act, 2013, Section 447): Acquiring shares through false or misleading statements.

      4. Unauthorized Disclosure (SEBI Regulations, 2015): Disclosing confidential information to gain an advantage.

      Penalties for Illegal Takeover

      Specific Penalties for Illegal Takeover (As per the Provision of Companies Act, 2013):

      1. Section 447: Penalty for fraudulent actions (up to ₹25 crores or imprisonment up to 10 years).

      2. Section 448: Penalty for false statements (up to ₹10 lakhs or imprisonment up to 2 years).

      3. Section 449: Penalty for false evidence (up to ₹10 lakhs or imprisonment up to 2 years).

      4. Section 451: Penalty for non-compliance with orders (up to ₹1 crore or imprisonment up to 3 years

      REASON FOR DIFFERENT TYPES OF TAKEOVER

      Companies often pursue takeovers for several kinds of strategic reasons, such as increasing market share, entering new markets, gaining access to new technologies or expertise, achieving economies of scale, acquiring intangible assets, diversifying their operations, eliminating competition, and pursuing advantageous acquisitions. These reasons include increasing market presence, accessing new markets, obtaining access to innovative technology or knowledge, attaining economies of scale, acquiring valuable brands or patents, diversifying business portfolios, removing competitors, and purchasing undervalued firms. By acquiring a competitor, companies can eliminate threats and strengthen their market position.

      These strategic reasons drive companies to engage in various types of takeovers, whether friendly or hostile, to achieve their business objectives.

      CONCLUSION

      In conclusion, corporate takeovers and anti-takeover defenses require complicated legal concerns. The Indian regulatory framework, which includes the Companies Act of 2013 and SEBI’s Takeover Code, sets criteria for takeover transactions. To protect themselves from hostile takeovers, companies might use a variety of anti-takeover security measures, including shareholders’ agreements and poison pills. However, these safeguards must be in accordance with statutory requirements and legal decisions. Effective understanding of these legal issues is critical for stakeholders seeking to ensure fair treatment, safeguard interests, and allow successful takeovers. As the Indian corporate landscape evolves, knowing the complexities of takeover legislation and anti-takeover defenses will remain essential for companies, investors, and legal practitioners together.

      REFERENCES

      1. Friendly Takeover, WSO, https://www.wallstreetoasis.com/resources/skills/deals/friendly-takeover
      2. Hostile takeover, LII Legal Information Institute https://www.law.cornell.edu/wex/hostile_takeover
      3. The Poison Pill explained, TalksOnLaw, https://www.talksonlaw.com/briefs/the-poison-pill-explained
      4. Golden Parachute, CFI , https://corporatefinanceinstitute.com/resources/valuation/golden-parachute/
      5. Companies Act, No. 18, Acts of Parliament, 2013, (India)

       Disclaimer: The materials provided herein are intended solely for informational purposes. Accessing or using the site or the materials does not establish an attorney-client relationship. The information presented on this site is not to be construed as legal or professional advice, and it should not be relied upon for such purposes or used as a substitute for advice from a licensed attorney in your state. Additionally, the viewpoint presented by the author is personal.

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