PROTECTION OF TARGET COMPANIES AND MINORITY

SHAREHOLDERS FROM TAKEOVER

V.Ramanah,BC0160031

INTRODUCTION
In corporate sector there are many controversies and arbitrariness and one among them is at the
time of acquisition and takeovers, where the rights of minority shareholders are being oppressed
by the majority shareholders and the Board of Directors. This paper will deal about the takeovers
and what is the need for Takeover Code. The corporate world has adopted this majority rule in
decision making process and management of the companies. Statutory provisions in this regard
have been provided under the Companies Act, 2013. Even though, when there many regulations
and provisions which protects the best interest of the shareholders still they are being deprived
from their rights.

Takeover transactions are often the most significant activity affecting corporations and their
shareholders. Accordingly, there are intense debates about the value and impact of takeovers and
the extent to which law should regulate such transactions. One area of focus for takeover
regulation has been the potential impact of takeovers on minority shareholders. The focus on
minority shareholders is not surprising as research suggests that laws which protect minority
shareholders are associated with stronger financial markets.

In many countries like U.K. and U.S. the Board of Directors oppress the minority shareholders
by not treating them equally and fairly, Board doesn’t let them be part of any decision taken by
them or any negotiation carried out.

In India outsider model is followed where the majority shareholders are dominant in nature and
suppress other minority shareholders not only that the decision making power is solely in their
hands and no one can deprive them from as families of the big companies are the majority
holder.
WHAT CAN MINORITY SHAREHOLDER DO WHEN A COMPANY
WANTS TO TAKEOVER ANOTHER COMPANY AND ALL THE
PROCEEDING AND NEGOTIATIONS ARE ONLY DISCUSSED BY THE
MAJORITY SHAREHOLDERS.

“In a takeover the target board discusses on terms of negotiation with the majority shareholders,
unless otherwise provided by the way of shareholders agreement or the constitutive documents
of the target. Generally none of the target board has any obligation to involve the minority
shareholders in the negotiations, provided that they otherwise act in a manner which is consistent
with the law, rules and regulations.

During takeover’s minority shareholders usually gets oppressed and doesn’t have any role to
play but there is some protection provided to these minority holders. Basically, the primary
objective of the Takeover Code is to ensure fair and equal treatment of all shareholders in a
takeover or merger situation.”1

“According to the Singapore Code on Takeover and Mergers the protection it gives to the
minority shareholders are: -2

1. Equality of Information: - Information regarding the offer should be made available not
only to the selective ones. It should be shared equally to all the shareholders of the
company as per the regulation under the Takeover Code. Shareholders must be given
sufficient information, time and advice to enable them to reach an informed decision on
the offer and also the price or the value of the securities is also required to be promptly
disclosed under the Listing Manual.
2. Equality of Treatment: - An offeror is required to treat all shareholders of the same class
in the Target equally. The Takeover Code prohibits an Offeror from striking special deals
or arrangements concerning the acceptance of an offer with favorable conditions which

1
COMPARATIVE TAKEOVER REGULATION: GLOBAL AND ASIAN PERSPECTIVES, Afra Afsharipour,
Professor of Law, UC Davis School of Law.
2
What can minority shareholders do when a company wants to take over another company but the negotiations are
discussed only with the major shareholders and not with the minority shareholders? | Lexology Lexology.com,
http://www.lexology.com/library/detail.aspx?g=94aee196-d3bb-4400-981e-693617ff1b33
 are not being extended to all shareholders, save in the strictest circumstances and with the
approval of the Securities Industry Council.
An action by either the directors or some shareholders of the Target, which is oppressive
or found to be unfairly discriminatory or prejudicial against other shareholders may also
be reviewed and remedied by the court under the Companies Act.
3. Duty of Directors: - Directors should act in the best interest of the company which is their
fiduciary duty, to act fairly and equally. They should take advice of the shareholders and
discuss about the offer put forth, under the Takeover Code, to have regard to the interests
of the shareholders as a whole in advising the shareholders in a takeover situation.
4. Independent Financial Adviser: -The Takeover Code requires the Target Board to have an
independent advice from an independent financial adviser (IFA) which will discuss about
the offer in fair and reasonable manner. Director’s recommendation will almost always
make reference to the opinion of the IFA. IFA are strictly required to make their advice to
the independent directors and those directors accordingly under the Takeover Code will
declare and discuss the same with the shareholders. Therefore, this gives the shareholders
the right to take action against the IFA under the common law for their breach of duty
towards the shareholders.

In India before the Companies Act, 1956 the minority shareholders were being oppressed, the
minorities have been incapable or unwilling due to lack of time, recourse or incapability of
financial activities. This has resulted in the minority to either let the majority dominate and
suppress them or squeeze them out of the decision making process of the company and
eventually from the company.” Companies Act, 2013 has brought many new reforms which
gives protection to the minority shareholders rights.3

“India follows the insider model which gives the power to the dominant majority shareholders
not even the Board of Directors. As families like Ambani are the majority shareholders of the
company who are dominant in nature and there arose the agency problem between majority and
minority shareholders.

3
 Companies Act, 2013: Rise of the Minority Shareholder, ‘ Akshat Sulalit’ , Indian Law Journal.
According to the Section 241-246 the Companies Act, 2013 talks about the provisions of
oppression and mismanagement where the minorities can file an application for relief to the
Tribunal.” It empowers the minority shareholders in corporate decision making.4

NEED FOR TAKEOVER CODE

“In India activities of the companies from the point of view of M&A and takeover can be seen in
term of three waves. First Wave: The first wave of takeover witnessed in India during 80s and in
the beginning of 90s. It was altogether different from current scenario. There were hardly any
regulation and making a tender offer was not compulsory. Takeover was considered as a willing
buyer-seller negotiation. During this period some cases were where acquirer was a strong person
and loser were generally small investors e.g. Tata’s acquisition of Special Steel and HLL’s
acquisition of Stepan Chemicals. During this period Swaraj Paul, RP Goenka, Manu Chabbria,
Ambanis and Murrugappa group were the pioneers.”

“Second Wave: Which was right after the 1991 liberalization, privatization and globalization.
This was the era of Expansion, Consolidation and restructuring and a marked shift from friendly
to hostile takeover was witnessed during this period. In fact liberalization of Indian economy,
dismantling of MRTP and Licensing regime, relaxation under FERA, availability of foreign
funds etc had led to a rise in the number of mergers and takeovers during this period.”

“Third Wave: The wave gaining momentum now is the third wave. It is significantly different
from earlier two because role of Banks and FIS becomes important now.”

“Because of the complexity of the nature of takeover, to protect the interest of small investors as
well as the target company a need was felt to develop a code to regulate the whole process of
acquisition and takeovers based on the principle of transparency, fairness and equal opportunity
to all. The impact of the SEBI’s initiative on the takeover code in the interest of investors seems
to be visible.” According to a presentation made by SEBI in 2001, introduction of takeover code
has resulted in a benefit of Rs. 4250 crores to the shareholders of various companies.5

4
Companies Act, 2013
5
Supra Note 3
“The Takeover Code makes it difficult for the hostile acquirer to just sneak up on the target
company. It forewarns the company about the advances of an acquirer by mandating that the
acquirer make a public disclosure of his shareholding or voting rights to the company if he
acquires shares or voting rights beyond a certain specified limit.” However, the Takeover Code
does not present any impossible barrier to a determined hostile acquirer.6

“The Takeover Code, vide Regulation 23, also imposes a prohibition on the certain actions of a
target company during the offer period, such as transferring of assets or entering into material
contracts and even prohibits the issue of any authorized but unissued securities during the offer
period. However, these actions may be taken with approval from the general body of
shareholders. However, the regulation provides for certain exceptions such as the right of the
company to issue shares carrying voting rights upon conversion of debentures already issued or
upon exercise of option against warrants, according to pre-determined terms of conversion or
exercise of option.” It also allows the target company to issue shares pursuant to public or rights
issue in respect of which the offer document has already been filed with the Registrar of
Companies or stock exchanges, as the case may be.7

Some other types of defenses which are available to the targeted company are: -8
1. “Pac-Man Defense – wherein a target company thwarts a takeover bid by buying stocks
in the acquiring company, then taking the bidder company over.
2. Staggered Board:-It is used generally in combination with ‘Shareholder’s Rights’ plan
and is considered most effective. This method drags out the takeover process by
preventing the entire board from being replaced at the same time. The directors are
grouped into classes; each group stands for the election at each annual general meeting. It
prevents entire board from being replaced at one go.
3. Golden Parachute is a tactics which works in the manner that it makes the acquisition
more expensive and less attractive. It is provision in a CEO's contract, which is worded
such that the CEO gets a large bonus in cash or stock if the company is acquired.”

6
India Takeover Guide.
7
Combating Hostile Takeovers, ‘ Kumar Sumeet’, SLS
http://www.legalserviceindia.com/article/l274-Combating-Hostile-Takeovers.html
8
Ibid.
CONCLUSION
“Even though there are many laws, regulations and provision protecting the rights of the
minority shareholders they are still being oppressed by the Board of Directors and majority
shareholders and this where he agency problem arises. Takeover Code and Regulation gives
many benefits not only to the target company but also to the other members especially minority
shareholders protecting their best interest and rights.

To further protect the rights of the minority shareholders the Board in Annual General Meeting
should discuss about every negotiations with every member of the organization, this will prevent
from mismanagement and oppression of the members.”

“Companies can defend themselves from takeover by becoming the majority and not letting the
acquiring company to take over and other methods are by using mark to market and most oftenly
used is poison pill where the target companies degrade the value of their own assets to show the
acquiring company that they are not doing good financially and this will discourage the acquiring
company form acquiring or preventing from hostile takeover of the target company.”

“Looking at it jurisprudentially the minority were always being suppressed by the majorities,
where Rousseau formed the ‘general will’ of the people to elect one person as their leader and
the majority will prevail eventually, which was criticized by J.S. Mill where he discussed about
the arbitrariness towards the minorities and applied the Harm Principle. He further said that even
minorities shouldn’t be oppressed and when majority is trying to oppress minority then they
should argue, give reasons whatever, minorities and majorities argue upon it should be valid and
only then they can reach to any conclusion of the matter. If we were supposed to think this way
in the corporate sector where the minorities shareholders are being oppressed there rights should
be backed by law.” “So, by including the minorities in every activity which is obviously a
lengthy process the Board and the majority shareholders can listen to the minorities and which
will ultimately led to fairness and equality towards the minority shareholders.”