RECENT TRENDS IN TAKEOVER LAWS IN INDIA

Shreya Patel1

1 The author can be contacted to shreyapatel23112001@gmail.com

Electronic copy available at: https://ssrn.com/abstract=4769924

 Abstract

Takeover laws have witnessed significant evolution in recent years, driven by global economic
dynamics and regulatory reforms. This paper examines the latest trends in takeover regulations
in India, comparing certain aspects of it to U.S.A, U.K and Singapore. Further on, the paper
analysis the recent hostile takeover and craves out a possible tactics used for such hostile
takeover and if there are defence mechanisms available to fight such acquisitions.

It highlights the common theme of importance of disclosure, fairness and shareholder

protection. Additionally, it explores differences in approaches, enforcement mechanism and the
impact of takeovers. To conclude, this study provides insights for policymakers, investors, and
corporate stakeholders navigating the complexities of cross border M&A transactions in an
increasingly interconnected global economy.

Table of Content
Introduction..............................................................................................................................................3
Technology driven acquisitions................................................................................................................3
Foreign Direct Investment & Foreign Acquirer ......................................................................................3
Unsolicited acquisitions or hostile takeover............................................................................................4
Hostile takeover tactics............................................................................................................................4
The Adani-NDTV case .............................................................................................................................6
Defence Strategies ...................................................................................................................................7
Conclusion .............................................................................................................................................12

Electronic copy available at: https://ssrn.com/abstract=4769924

 Introduction

The last 5 years have witnessed major boost and dynamic changes such as changes in stock
market valuation, macroeconomic changes and developments, the financial crises, policy
changes and the effect of COVID-19 pandemic in legal framework governing acquisitions,
tender offer and other major transactions. One of the reasons for M&A growth can also be
asserted to tax incentives and exemptions that are granted to all registered start up. The
pandemic period and post pandemic period show the high rate of acquisitions majorly in tech
companies and pharma sector. One of the best examples is acquisition of Uber Eats by Zomato
and acquisition of Thyrocare a publicly listed company by PharmEasy a tech-pharma
company2.

Technology driven acquisitions

As global economy got affected by COVID-19 the tech startups and companies were still
thriving and in fact growing largely. For the purpose technology integration and talent
acquisition many MNC acquire small company or start up. In 2022 Infosys has acquired a
German based marketing agency oddity. This acquisition led Infosys to strengthen creative
branding and experience design capabilities 3.

Foreign Direct Investment & Foreign Acquirer

Foreign Direct Investment and Hostile Takeover Over the past few years, India has witnessed
relaxed norms for FDI from foreign institutions, investors, venture capitalists, and start-ups.
These FDI norms in India were developed with the view of attracting more amount of foreign
investment in India. However, due to the Covid-19 situation, the share valuations of domestic
companies in India are at a low level. As the valuation of the domestic companies' shares
lowered, it attracted attention from foreign acquires. One such move that triggered government
of India to consider the Foreign Direct Investment Amendment in India is scenario of Bank of
China's increasing it's stake in HDFC Bank by 1% to more than 1%. The government of India
in the awake of this government of India brought forth certain rules which imposed mandatory

2 Megha Chaturvedi, ‘Recent Trends in Mergers and Acquisition’ (2021)

<https://hklawoffices.in/2022/02/22/recent-trends-in-merger-and-acquisitions/ > accessed 4th March 2024
3
Wachtell, Lipton, Rosen & katz, ‘Takeover Law and Practice’ (2022)
<https://www.wlrk.com/webdocs/wlrknew/ClientMemos/WLRK/WLRK.28044.22.pdf > accessed 4th March
2024

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government approval to be taken for Investment done by an entity from border sharing
country4.

Unsolicited acquisitions or hostile takeover

Hostile takeovers constitute a mechanism, by which a company (the bidder) seeks to gain
control over another corporation (the target), without the consent of the latter’s board of
directors or its management. The reasons behind such an opposition may stem either from the
valuation of the transaction as unprofitable or detrimental for the target company and its
shareholders, or from the managers and directors’ personal interests, namely the fear of being
replaced.

Hostile takeovers generally occur in publicly listed companies. The reason for the same can be
anticipated by their dispersed shareholding pattern wherein in private companies’ shares are
held by a limited number of shareholders, therefore, the bidder usually negotiates directly with
them.

Hostile takeover tactics

Every takeover process comprises of series of small transactions performed sequentially to lead
to a specific result leading to acquisition. After the acquirer determines the goal and identifies
the target companies it proceeds with certain hostile takeover tactics such as the Saturday night
offer, the proxy contest, the toehold position, the tender offer and the two-tier tender offer.

The bear hug tactic adopted when the initial approach of the target is considered unsuccessful
or when the targets management is unclear regarding potential takeover. The bidder therefore
at first makes formal offer followed by public announcement. The offer made concerns the
acquisition of the targets shares at substantial premium to their current stock value and demands
a rapid decision. Saturday night offer is similar tactic where offer made on Friday or Saturday
and it is only open for short period.

In the proxy contest or proxy fight, the proxy fight occurs when a group of dissident
shareholders which is typically a non-controlling group seeks to obtain representation on the
board of directors or to bring other changes in the company by obtaining the right to vote on

4Varun Hariharan, ‘Foreign Direct Investment Amendment in Light of Hostile Takeovers’ (Septembet 2022) <
https://enterslice.com/learning/foreign-direct-investment-amendment-in-light-of-hostile-takeovers/ > accessed
4th March 2024

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behalf of other shareholders. Such dissident shareholders use their proxy in favour of takeover
or to replace incumbent board of directors who are against takeover.

This proxy fight mechanism though very expensive and time consuming it can be very
effective. Another tactic is toehold position. Under this tactic, the bidder after purchasing a
small fraction of the target shares in the open market becomes a minority shareholder of the
target company. This toehold position entails voting power for the bidder which is great in
proxy contest as it gives power to influence target company. It also leads to decrease in cost of
the acquisition allowing the bidder to acquire a part of the targets stock anonymously, without
paying the premium required in a formal bid.

The most common hostile takeover mechanism is hostile takeover offer or takeover bid. This
method enables the bidder to circumvent the targets board and management and address
directly the shareholders by publicly offering for a specific price which based on their fair
market value. Another similar practice is two-tier tender offer under which the offeror
purchases a certain number of shares which are required to gain targets control, whereas at a
later date the bidder acquires the remaining shares at a lower price.

In US such practice like two-tier tender offer is deemed to be illegal due to fair and equal
treatment principle being followed by state regulations5.

The main rationale behind such takeovers whether friendly or hostile are mainly considered as
effective tools to increase corporate value and shareholders wealth as well as efficient capital
markets and managerial discipline. Hostile takeover in particular can enhance the
competitiveness of the bidding company by efficiently exploiting the target company’s
capabilities such as innovative technologies or an experienced workforce. Therefore, the
motives behind the hostile takeovers can segmented into three categories: strategic, operational
and managerial. Operational motives, including synergy gains in both operating and financial
aspects, play a crucial role in the success of such takeovers. Additionally, it can instigate
managerial discipline prompting improvements in the target company’s performance to deter
potential bidders. Overall, these mechanisms tend to contribute to market efficiency by

5Eleni I. Gkountakou,’Hostile Takeovers. An overview based on the U.S legislation and the directive 2004/25/EC
on takeover bids’(2017)
<https://repository.ihu.edu.gr/xmlui/bitstream/handle/11544/15920/e.gkountakou_llm_28-05-2017.pdf >
accessed 7th March 2024

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allowing the acquisition of potentially undervalue corporations, even though disadvantageous
at first.

The Adani-NDTV case

Adani's "back-door" entry into the NDTV management occurred with the Adani-NDTV
takeover. Adani's takeover of the company is considered hostile in the Indian market because
it did not obtain the directors' approval prior to purchasing a controlling interest. The Adani
Group's acquisition of AMG Media Networks Limited (AMNL) is only the application of the
fine for breaching the terms of the contract.

What led to such takeover is pre-existing contractual obligation which were entered by both
founders. They duly signed the loan agreement between RRPR Holding Private Limited
(RRPR) and Vishvapradhan Commercial Private Limited (VCPL). The promoters willingly
signed a contract that would result in losses for the business in the event of a violation. The
odd loan arrangement and the fact that the warrant or call option would affect the business's
operations if exercised marked the start of the Adani-NDTV takeover's difficult journey. This
financing arrangement was disguised as a "stake sale agreement" and signed by the promoters.
The promoters consented to a conditional share purchase deal by accepting the disadvantageous
but lawful terms of the financing agreement. They were taking on a 403-crore rupee debt
secured by warrants worth 10 crore rupees. They were taking up a loan to VCPL in the amount
of INR 403 crores secured by RRRR warrants worth INR 10 crore. This created an indirect sale
of the equity shares together with the right to buy, setting up a prerequisite for carrying out the
sale purchase clause. Due to this now, Adani has a significant share of more than 55% in the
NDTV deal. Thanks to the "open-offer" strategy and the indirect acquisition of 29% of the
company, Adani now controls a majority stake in NDTV through its subsidiary AMNL 6.

6 Aditi Singh and Saloni Neema, ‘The ignored Conundrum of Competition Law during Hostile Takeovers in India’
(2023) <https://www.irccl.in/post/the-ignored-conundrum-of-competition-law-during-hostile-takeovers-in-
india > accessed 6th March 2024

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Defence Strategies

The prevention to such acquisitions is adopting a takeover defence. When the takeover takes
place in a hostile manner against the wish of target company, the target company often adopts
certain measures to prevent or discourage the acquirer from taking over the target company. A
hostile tender offer made directly to a target company’s shareholders, with or without previous
overtures to the management has become an increasingly frequent means of initiating a
corporate combination. And therefore, there has been considerable interest in and energy
expended on devising defenses strategies by actual and potential target. Globally one of the
largest hostile takeovers is the 200 billion takeovers of German Co. Mannesmann by Vodafone.

Self-Fortification

One type of defense is self-fortification, which involves making the business harder to acquire
or less appealing to takeover bids in order to deter potential acquisitions. Among them are, for
example, asset and ownership reorganization, constitutional amendments preventing takeovers,
the implementation of poison pill rights programs, and so on. When there is a perceived threat
to the company, defensive measures are also taken; these might include an open tender offer or
the use of early warning signs that a "raider" or other acquirer has been buying up the
company's stock. It is also possible to make changes to ownership and asset arrangements even
after a hostile takeover offer has been revealed.

Adjustment in assets and ownership structure

1. Purchase of controlling shares of the bidder itself

2. Sale to the third party of assets which made the target attractive to the bidder,

3. Issuance of new securities with special provisions conflicting with aspects of the
takeover attempt.

4. Issuance of securities via private placement to parties friendly or in business alliance

with management or to the management itself.

5. Repurchase of publicly held shares or buy back of shares to increase an already sizable
management. This is also incorporated under Companies Act, 1956.

6. The last adjustment which can or may be adopted by companies is dilution of the
bidders vote percentage trough issuance of new equity claims.

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The Crown Jewel Strategy

The "crown jewel strategy," which involves selling the major operating unit that the bidder is
most interested in, is a key component of this type of plan. The main motivation behind the
hostile bid is taken away from the acquisition offer. An alternative to the "crown jewel strategy"
is the radical "scorched earth approach," as it is more often known. Using this creative tactic,
the target devalues the crown gem by selling off properties in addition to it.

The demerit of this strategy is the divestiture of assets by the target company in the face of a
hostile takeover bid will send wrong signals to the market. Consequently, the benefits derived
from such divestiture might be minimal.

The Packman Defense

Under this strategy, the target company attempts to purchase the shares of the raider company.
This is usually the scenario if the raider company is smaller than the target company and the
target company has a substantial cash flow or liquid asset.

Pac-Man Defense

In this strategy, if a target company’s board believes that it won’t be able to stop the hostile
takeover. In such event the target company will look for a friendly company which is willing
to buy a controlling share in the target company and sell such shares to that friendly company
to prevent hostile acquisition.

Golden Parachutes

Golden Parachutes refers to the ‘separation’ clauses of employment contract that compensate
managers who lose their jobs under a change of management scenario. The primary provisions
concerning it are sections 318-320 which provides the compensation for loss of office. Such
compensation is only provided to the managing director, a director and a director holding an
office of manager or a whole-time director. However, the golden parachute contract with senior
management is allowed in US but restricted in India. As per the notification of the Company
Law Board and Section 310 the payment of any sum to a past or retiring managing director or
whole-time director if goes beyond certain limit as per schedule XIII requires the approval of
the state government.

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Anti-takeover Amendments or Shark Repellants

A most commonly used defense tactic is to make amendments to the company’s constitution
or articles of association popularly called shark repellants. Thus, as with all amendments of the
articles of association of a company, the anti-takeover amendments have to be voted on and
approved by shareholders. This practice makes the company look less attractive to the bidder.
The power to alter articles of association is given under Section 32 of Companies Act, 2013
which states that every company has the clear power to alter its articles of association by a
special resolution .

There are certain types of Anti-takeover Amendments

a. Supermajority Amendments

These amendments require shareholders approval by at least two thirds vote and sometimes as
much as 90% of the voting power of outstanding capital stock for all transactions involving
change of control. However, such supermajority agreements can be executed by board to
determine when and how supermajority provisions will be in effect.

b. Fair-Price Amendments

This is a clause where if a fair price is paid for all shares purchased it will waive the
supermajority requirement. Thus, fair price amendments defend against two-tier tender offers
that are not approved by the target’s board.

c. Classified Boards

Another type of anti-takeover amendment provides staggered or classified board of directors

to delay effective transfer and control in a takeover. In US the legal position of this is flexible
but in India it is restricted and regulated.

d. Authorization of preferred stock

The board of directors are authorized to create a new class of securities with special voting
rights. This security can be preferred stock. Although this tactic was used by directors in
financing the company’s project, it can also help company to survive its position.

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Refusal to register transfer of shares

This strategy is crucial to avert a takeover. The power to refuse can be present in the articles of
association. This would bind the company and the members of the company, as an incident of
the contract between them that is the memorandum and articles of association and registration
of transfer or a transmission cannot be insisted upon as a matter of right. The articles of a public
company can be used to confer absolute discretion on the board of directors to refuse to register
transfer if shares. The object of such a provision is to arm the directors with power to be
exercised in special and exceptional circumstances where the transfer may be found to be
undesirable in the interests of the company. This would not be termed as restriction on free
transfer of shares, as it is public listed and not private company.

In case of Bajaj Auto v N.K Firodia where the court interpreted expression discretion in these
words “Discretion does not mean a bare affirmation or negation of a proposal”. Discretion
implies just and proper consideration of the proposal in the facts and circumstances of the case.
In the exercise of that discretion directors will act for the paramount interest of the company
and for the general interest of the share-holders because the directors are in fiduciary position
both towards the company and towards every share-holder. Then again, in the case of Bajaj
Auto Limited v Company Law Board, the court took view that the real reason behind refusal to
register is to be enquired into. It also restricted the scope of judicial review to scrutiny of the
exercise of power of Board of Directors. In this case heavy reliance was placed in Bajaj Auto
Limited v N.K Firodia.

Poison Pill defense

A controversial yet popular mechanism against hostile takeover. These pills provide their
holders with special rights exercisable only after a period following the occurrence of a
triggering event such as tender offer for the control or the accumulation of a specified
percentage of target shares. These rights take several forms but all are difficult and are not cost
effective to acquire control of the issuer. Poison pills also known as ‘shareholders rights’ entails
the creation of a special class of stock designed specifically to discourage or ward off hostile
takeovers by making the ultimate price tag much higher. This also enable existing shareholders
to buy more stock for half price.

Usually, these pills are activated when an adversarial bidder purchases a specific proportion of
the company's shares. At that point, options to purchase additional stock are granted to all

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current shareholders, with the exception of the suitor at a steep discount, dilution the buyer's
stake to prevent a shift in the company's ownership. A company with a traditional flip-in poison
pill in the US distributes special stock warrants or rights to its shareholders to purchase shares
of the company at a substantial discount in the event of a hostile takeover attempt. This would
dilute the value of the bidder’s stake in the company substantially. However, this style of
shareholder rights plan would not function properly under Indian law.

The legality of poison of pill has been questioned in court of law because they later the
relationship of shareholders without their approval by vote 7.

7A.S Dalal, ‘Analysis of takeover defences and hostile takeover’ (2011)

<http://www.commonlii.org/in/journals/NALSARLawRw/2011/6.pdf > accessed 6th March 2024

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 Conclusion

It is pertinent to note the takeover defences that are frequently used by target companies in the
US are restricted by the regulations and acts in India. Certain defence like poison pill are under
judicial scrutiny of US courts though used frequently by target companies. One of recent
example of use of poison pill in US is when Twitter used it for making company unpalatable
to Elon Musk takeover bid. This brings out a clear gap between legislative intent to restrict the
use of such defences and practical implementation. Companies are becoming less inclined to
use takeover defences that not legislatively backed. Luckily India has incorporated many
defences which are legislatively backed such as buy back of shares from public is one of the
most common used defences.

There seems to be proven absence of potential defences such as the poison pill and staggered
board regulators should develop provisions ad principles-based standard in the takeover code
that governs the action that a target board would be permitted to undertake in response to hostile
bid. In US we can see that Delawares well established takeover jurisprudence provides a
compelling blueprint for India to strike a delicate balance in regulating board actions amid the
prospect of hostile takeovers. Delaware courts have extended protection to directors where
genuine threat to their corporate policy and effectiveness is reflected, and the defensive
measures authorized were reasonable in addressing the perceived threat. It would pertinent to
establish such a strong jurisprudence for regulating defences.

The researcher is of the opinion that now is the time for India where emerging market and
frequent acquisitions of small start-ups by big MNC’s is often seen. One of the recent examples
of it is Alia Bhatts start-up sustainability clothes for pregnant women brand: Ed-a-Mamma
acquired by Reliance Retail Ventures Ltd. (RRVL). While the fundamental objective of
takeover laws is to safeguard the interests of shareholders and investors, it must align
harmoniously with competition law to prevent the undue dominance of the market by a single
entity. Achieving a delicate balance between shareholder protection and maintaining a
competitive market is essential for the effective functioning of takeover regulations. This
symbiotic relationship ensures a fair and competitive landscape that benefit both investors and
overall market dynamics.

Electronic copy available at: https://ssrn.com/abstract=4769924

Electronic copy available at: https://ssrn.com/abstract=4769924