SEBI's Takeover Code: Safeguarding Shareholder Interests

The Substantial Acquisition of Shares and Takeover Regulations of 2011, popularly known as the Takeover Code, represent a comprehensive framework established by the Securities and Exchange Board of India (SEBI). The primary purpose of this code is to regulate the acquisition of shares and the takeover of companies, with a strong emphasis on ensuring fairness and equality among shareholders, especially in the context of target companies being taken over. This regulatory framework, through its provisions, seeks to achieve SEBI's overarching objective of safeguarding shareholders' interests. Particularly notable are Regulations 3 and 4 of the code, which delineate three pivotal scenarios mandating an open offer to the remaining shareholders of the target company.

The first instance pertains to the acquisition of 25% or more of voting rights by an acquirer in the target company. The second scenario is triggered when an acquirer, who already holds 25% or more of the target company's voting rights, acquires an additional 5% of voting rights within a financial year. Lastly, the code stipulates that an open offer must be made when an acquirer gains direct or indirect control over the target company. The essence of this legislation is to provide protection to public shareholders in situations where there is a change in control of the target company. Consequently, the open offer operates as a regulated mechanism akin to a tag-along right. In essence, if a promoter sells their shares to an acquirer, public shareholders have the privilege to sell their shares to the same acquirer, under the same terms and at the same price as offered to the promoter.

Defending Against Hostile Takeovers: An Omitted Aspect

While the Takeover Code is laudable in its commitment to protecting shareholders' rights, it is essential to note that it lacks a direct provision for safeguarding companies against hostile takeovers. This shortcoming becomes evident when contrasting the legal landscape of friendly takeovers, where mutual negotiations take place, with the possibility of hostile takeovers. According to the Supreme Court's interpretation in the case of Pramod Jain and Others vs. SEBI, a hostile takeover occurs when a target company is unwilling to engage in negotiations with the acquiring entity. In such cases, the acquirer can approach the shareholders directly through an open offer. This highlights the need for companies to develop defense strategies against hostile takeovers, one of which is the White Knight Strategy.

The White Knight Strategy: A Shield Against Hostile Takeovers

The White Knight Strategy is a notable defense mechanism against hostile takeovers that has emerged within the corporate landscape. When an acquirer announces an open offer, the target company seeks a trusted entity, referred to as the "white knight," to purchase its shares while committing to maintain the existing management structure. The white knight then presents a competing bid against the original acquirer's offer, sparking a competitive bidding war. This strategy shifts the battleground to a scenario of bidding wars, where the white knight and the original acquirer vie to outbid each other, resulting in an elevated share price. The ultimate victor secures control over the target company. The essence of the White Knight Strategy lies in its capacity to empower the target company's management to select a preferred acquirer and enhance shareholder value through the competitive bidding process.

A Case in Point: GESCO Corporation and Renaissance Real Estate

Illustrating the White Knight Strategy's efficacy is the case of GESCO Corporation and Renaissance Real Estate. In 2000, GESCO, an emerging real estate entity within the Sheth group, found itself vulnerable to a potential takeover due to its modest market capitalization and limited promoter stake. Abhishek Dalmia, Chairman of Renaissance Estates Limited, recognized this opportunity and acquired a substantial portion of GESCO's stock. This move set the stage for a hostile takeover attempt. GESCO's management, wary of relinquishing control, sought the assistance of Mahindra Realty and Infrastructure Developers, positioning them as the white knight. The white knight, along with the Sheth group, initiated a competing bid against Dalmia's offer, culminating in an intense bidding war.

Ultimately, a resolution was reached, with the Sheth group and Mahindra Realty and Infrastructure Developers acquiring Dalmia's stake at a premium price. This successful implementation of the White Knight Strategy safeguarded GESCO from a hostile takeover, upheld the target company's existing management, and maximized shareholder value.

Legal Framework and the Empowerment of Competing Bids

The White Knight Strategy operates within the framework of the Takeover Code, particularly Regulation 20. This regulation grants the liberty for entities other than the initial acquirer to present competing offers that match or surpass the original acquirer's stake. Moreover, the code permits acquirers to revise their offer prices upward before the commencement of the tendering period, reinforcing the notion of dynamic and competitive bidding. Regulation 20(9) further underscores this principle, affirming the acquirer's prerogative to increase the offer price up to three working days before the tendering period's onset. These provisions facilitate a landscape where competitive bids drive share prices upward, thereby aligning with the overarching goals of SEBI and shareholder protection.

SEBI's Strategic Oversight: Fostering Competitive Dynamics

While SEBI's Takeover Code may lack a specific provision directly guarding against hostile takeovers, its regulatory framework inadvertently fosters an environment conducive to competitive bids through the White Knight Strategy. By promoting a scenario in which white knights and acquirers engage in bidding wars, the code encourages higher share prices and protects target companies from hostile takeovers. The case of GESCO and Renaissance Real Estate exemplifies the symbiotic relationship between competitive bidding and shareholder value maximization. Through carefully crafted regulations, SEBI has established a mechanism that empowers target companies to choose their potential acquirers and effectively thwart hostile takeover attempts.