Strategies and Defences in Hostile Takeovers and Anti-Takeover Measures: A Comprehensive Analysis within the Framework of Mergers and Acquisitions

Abstract
This abstract explores the concept of hostile takeovers and anti-takeover bids within the framework of mergers and acquisitions (M&A). It delves into the evolution of M&A in India, highlighting its history and various forms, including horizontal, vertical, and conglomerate M&A, as well as cross-border transactions. The focus then shifts to hostile takeovers, particularly in the Indian context, elucidating the legal framework and notable aspects such as open offers, regulatory approvals, fair pricing, poison pills, legal challenges, shareholder activism, and proxy battles.

The abstract also examines anti-takeover measures adopted both in India and abroad. It covers strategies such as the poison pill, refusing to register shares, the white knight strategy, golden parachutes, and anti-takeover amendments. Each strategy is analyzed in terms of its effectiveness and successful cases. The abstract concludes by suggesting strategies that might suit Indian companies to legally defend themselves against hostile takeovers, taking into consideration the Indian legislative context.

In essence, this abstract provides a comprehensive overview of hostile takeovers and anti-takeover measures, shedding light on their implications, effectiveness, and relevance in the dynamic landscape of mergers and acquisitions.

Introduction
Mergers and acquisitions (M&A) refer to the processes of combining two or more companies. A merger involves the mutual agreement of two companies to merge and form a new entity. An acquisition, on the other hand, involves one company purchasing another, often resulting in the acquired company becoming a subsidiary of the acquiring company. M&A activities can be strategic moves to expand market share, gain new capabilities, or achieve synergies.

A takeover in acquisitions refers to one company acquiring another by purchasing a controlling stake in its shares or assets. This can be done through various methods such as a friendly merger, where both companies agree to the acquisition, or a hostile takeover, where Takeovers are often strategic moves to expand market share, access new technologies, or achieve synergies between the two entities.

In the context of acquisitions, a takeover refers to one company acquiring another company by purchasing a significant portion of its ownership, usually through buying its shares. This can lead to a change in control, where the acquiring company gains control over the operations, management, and assets of the target company. Takeovers can be friendly, where the target company's management and shareholders agree to the acquisition, or hostile, where the target company resists the takeover attempt.

Mergers and acquisitions (M&A) can take various forms, including:

1. Horizontal M&A: Companies in the same industry and at the same stage of the production process combine. Example: Exxon and Mobil merger.
2. Vertical M&A: Companies at different stages of the production process or in related industries merge. Example: A car manufacturer merging with a tire producer.
3. Conglomerate M&A: Companies in unrelated industries merge to diversify their portfolio. Example: Berkshire Hathaway's acquisitions in various sectors.
4. Market Extension M&A: Companies target the same market but with different products or services. Example: Procter & Gamble's acquisition of Gillette.
5. Product Extension M&A: Companies with related products merge to expand their offerings. Example: Google's acquisition of YouTube.
6. Reverse M&A: A smaller company acquires a larger one, or a private company acquires a public company.
7. Cross-Border M&A: Companies from different countries merge or one acquires the other.
8. Hostile Takeover: When one company's management resists a merger or acquisition attempt, but the acquiring company goes ahead without their approval.
9. Joint Ventures: Two companies collaborate on a specific project or venture without fully merging.

Each type of M&A has its own strategic rationale and implications.

Hostile Takeover
In India, a hostile takeover refers to the acquisition of a target company by an acquiring entity without the approval or consent of the target company's management or board of directors. Such takeovers often involve direct and deliberate engagement with the target company's shareholders.

The legal and regulatory framework for hostile takeovers in India is primarily governed by the Securities and Exchange Board of India (SEBI) regulations, including the Takeover Code. This code outlines the procedures and disclosure requirements for acquiring substantial stakes in publicly listed companies.

Some notable aspects of hostile takeovers in India include:

1. Open Offer: An acquirer who accumulates 25% or more of the target company's shares must make a mandatory open offer to acquire an additional 26% from the public shareholders.
2. Regulatory Approvals: Hostile takeovers require regulatory approvals from SEBI and other relevant authorities.
3. Fair Price: The open offer price should not be lower than the highest price paid by the acquirer for shares in the 52 weeks preceding the open offer announcement.
4. Legal Challenges: Target companies may challenge hostile takeovers through legal means if they believe the acquirer's actions are unfair or not in the best interests of shareholders.
5. Shareholder Activism: Activist shareholders can play a role in hostile takeovers by supporting or opposing the acquirer's efforts.
6. Proxy Battles: Acquirers might attempt to replace the target company's board members with individuals who are more amenable to the takeover.

Anti-Takeover Measures Adopted In India And Abroad
Following are the anti-takeover measures adopted in India and Abroad:

Poison Pill Strategy:
A controversial but popular defense mechanism against hostile takeover bids is the creation of securities called "poison pills". These pills provide their holders with special rights exercisable only after a period following the occurrence of a triggering event such as a 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 costly to acquire control of the issuer, or the target firm.

Successful Cases:
Making the Poison Pill Legal: Moore Corp. v. Wallace Computer Service [898 E. Supp 108 (D. Del. 1995 )]

In 1995, The Delaware Supreme Court ruled to support to companies using poison pills as a defense. Wallace was able to use a poison pill to thwart Moore's offer. There were other relevant issues such as

Wallace's staggered board and the apparent support by Wallace's shareholders for the hostile bid.

Nonetheless, this decision supported the director's use of such defenses, including poison pills Netflix adopts Poison Pill to fend off Carl Icahn

Netflix's "stockholder rights plan" was designed to thwart campaigning shareholders from initiating hostile takeovers. This strategy can be clearly classified as a "Poison Pill Plan". The proposed plan recommended that if an individual or group attempted to purchase a substantial portion of the company without the agreement of Netflix's internal board, the company has the right to use a technical scheme to flood the market with shares, making any takeover excessively costly. The poison pill is automatically activated if an investor obtains 10% or more of company shares. Deals not supported by Netflix's board will not be further entertained.

There have been similar cases, where Gain Capital used Poison Pill against FXCM and Pier 1 Import used it against Hedge Fund Alden Global Capital LLC by issuing more shares at a cheaper rate to the shareholders.

In Mathrubhumi Co. Ltd. v. Vardhaman Publishers Ltd
In Para 40, the Kerala High Court held that:
The articles of a public company can be used to confer absolute discretion on the board of directors to refuse to register transfer of shares. The object of such a provision is to arm the directors with powers to be exercised in special and exceptional circumstances where the transfer may be found to be undesirable in the interests of the company. Such a provision does not amount to a restriction on the free transfer of shares, as in the case of private companies. The power is fiduciary in nature and must be exercised bona fidely in the interests of the company.

In V. B. Rangarajan v. V. B. Gopalakrishnan
In para 6 The Supreme Court held that "the vendee can be denied registration of shares purchased by him on a ground stated in the articles. Thus, refusal to register on the grounds mentioned in the articles is within the meaning of 'sufficient cause' under Section 111(2) proviso of the Companies Act, 1956.

Going by the precedent, Refusing to register shares in the name of acquirer can be one of the best defenses against hostile takeover.

The White Knight Strategy:
A white knight strategy enables a company's management to thwart a hostile bidder by selling the company to a bidder they find more friendly. The company sees the friendly bidder as a strategic partner, one who will likely keep the current management in place and who will provide shareholders with a better price for their shares. In general, a white knight defense is seen as beneficial to shareholders, particularly when management has exhausted all other options to avoid a takeover. However, exceptions to this are when the mergerprice is low or when the combined value and performance of the two companies fail to achieve the anticipated financial benefit.

Successful Cases
L&T successfully defended itself from Manu Chhabria followed by Ambani and Birla.
It all started in 1980 when Manu Chhabria came to know about L&T which was the then largest engineering company In India. Manu Chhabria acquired 1.5% stakes in the company from open market and was rumored to acquire it. Dhirubhai Ambani emerged as a White Knight acquiring 12.5% stakes from open market.

He later increased his stakes to 18% and was invited to join the board of L&T. After Manu Chhabria, now the ambani's were eyeing for L&T since it was a cash-rich company. Soon enough, in 1989, the government intervened, making sure the Ambanis were out of the company, and they were forced to resign from the board. In 2001, to make a dramatic exit, Ambanis sold their entire 18% stake to Kumar Mangalam Birla. And now, Birla had eyes on the cement division L&T had. His Grasim Industry was neck to neck in competition with L&T Cement.

To save the company, A M Naik (CEO and MD of L&T) brought the synergies of all the employees and asked them to become the owners of the company. So, the L&T's employee trust was formed. After months of negotiations and discussions, In 2003 Birla agreed to exit its stake in L&T and it was sold to the employee trust. In return, Birla received L&T cement division, and this way Ultratech Cement was born. The L&T trust emerged as a White Knight to save L&T from getting acquired by Birla.

Buy-Back of shares by the Target Company
Buy-Back is one strategy, which the company can use to reduce the risk of hostile takeover by the Acquirer. Buying back of its own share have many benefits. Firstly, it offers a premium price for the normal shareholders to sell their stakes. After the buy-back is completed, it will increase the shareholding of the current shareholders. These shareholders are usually those people/institution who opposes takeover of the company, For example: Promoter, Promoter group, Friendly investor, Institutions etc.

This makes the target company less attractive for acquisition for the following reasons:
Since the shareholders left after the buy-back are generally those who are unlikely to go for acquisition. Even if the acquirer somehow convinces the shareholders to sell the stake, the acquirer will have to offer a very premium price for the shares.

Under the Indian Laws, Buy-Back can only be done through Free Reserves, Securities Premium & proceeds of the issue of any shares other specified securities. Potential acquirers (who are in search for cash rich companies like L&T) are less likely to pursue firms with substantial excess cash, which could be used to adopt highly aggressive share repurchase program.

Under Section 68 of the Companies Act, 2013 and SEBI (Buy Back Regulation), 2018, the maximum limit for buy back by a company is:

• If approved by BOD: 10% of its paid-up capital and free reserves
• If approved by Shareholders: 25% of its paid-up capital and free reserves. (SR)

Depending upon the circumstances, a Company may opt for Buy Back as a defense against hostile takeover.

PACMAN
In simple terms, Pacman occurs when the target makes an offer to buy the raider in response to the raider's bid for the target. Because of its extreme nature, this defense is considered a "doomsday machine." Thus, instead of raider trying to acquire the target, the target company initiates a hostile takeover on the acquirer.

Successful case
Chesapeake's used Pacman against Shorewood Corp.

In 1999, Chesapeake Corporation made a responding bid for Shorewood Corporation, made a $480 million bid to purchase Chesapeake Corp., a rival packaging company. The combination of the Pac-Man offer along with a very aggressive legal defense enabled Chesapeake to stay independent while, as a result of Chesapeake's tender offer, Shorewood was ultimately acquired by a third party and Chesapeake ended up acquiring 15% stake in Shorewood Corp.

Greenmail
Greenmail is a buyout by the target of its own shares from the hostile acquirer with a premium over the market price, which results in the acquirer's agreement not to pursue obtaining control of the target in the near future. It is like blackmail, where the raider asks for a ransom amount to release the control of shares over the target company. One should keep in mind that the raider has no intention of buying the target company, but it just wants to profit from the costly premium it demands from the target company.

Leverage Buy-out by the Management:
Leveraged buyout is a purchase of the target by the management with the use of debt financing. This defense burdens the target with the debt. In such a case, the management becomes a bidder and competes with a hostile acquirer for control over the target. The purchaser puts up a very small amount of equity as part of their purchase. Typically, the ratio of an LBO purchase is 90% debt to 10% equity.

Crown Jewel Strategy
Under this strategy, the target company tries to sell off its most valuable assets in order to become a less attractive acquisition target in the market and to avoid a hostile takeover. The valuable assets of the target company are sold to a third party and this third party is known as 'white knight'. This strategy compels the hostile bidder to withdraw from the bid. Crown jewel strategy is a self-destructive strategy and after the hostile bidder withdraws from the bid, the target company again purchases the assets from the third party at a predetermined price.

Successful case
Tussle between Taro Pharma Ltd. and Sun Pharma Ltd.
There was an agreement between Sun Pharmaceuticals Industries Ltd. and Israeli company Taro Pharmaceuticals Industries Ltd. and a merge of Taro Pharmaceuticals Ltd. in May 2007. As per Taro

Pharmaceuticals Industries Ltd., some violations of terms unilaterally terminated this agreement with Sun Pharmaceuticals Industries Ltd. Despite acquiring a 36% stake for ₹470 crores. The Supreme Court of Israel has injected Sun Pharmaceuticals Ltd. for non-closure of the deal. Taro Pharmaceuticals Industries Ltd. has implemented various defense strategies like crown jewels defense and sold off its Irish unit along with non-disclosure of financials to keep away Sun Pharmaceuticals Industries Ltd.

Golden Parachute Strategy
A golden parachute is a contract between the company and its employees. Usually, the top management receives significant benefits such as cash bonuses, medical benefits, stock options, severance pay, a retirement package, etc., if their employment in the company is terminated due to any corporate restructuring activity.

Successful cases
Golden parachute payment of $23.5 M. to six officers of Beatrice Companies in connection to its leveraged buyouts. One of its officers received a $2.7 M. package even though he had been with the company for 13 months. Another received a $7 M. package after being called from retirement 7 months before.

Golden Parachute payment of $ 44 million (In Cash and Stock option) to Marissa Mayer if Verizon removes her after acquiring Internet Giant Yahoo.

Also in 1985, the Chairman of Revlon received a $35 M package consisting of severance pay and stock options. The golden parachutes received by the top management is nearly 1% of the total deal value.

Anti-takeover amendments or "Shark Repellant"
This is a widely used strategy by the target company to avoid a hostile takeover from the acquirer. In this defense strategy, the target company amends the article of associations to make the process for acquisition of shares by the bidder harder. This may be done by introducing clauses, stating a higher voting right percentage for acquiring the target company. This however have two major drawback. Under Section 14 of the Companies Act, 2013, the target company would require to pass a special resolution to alter the AOA of the company The clause shall not violate provisions of Companies Act, 2013.

Supermajority Amendments
These amendments require shareholder 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. In most existing cases, however, the supermajority agreements have a board-out clause which provides the board with the power to determine when and if the supermajority provisions will be in effect. Pure or inflexible supermajority provisions would seriously limit the management's scope of options and flexibility in takeover negotiations.

Fair-Price Amendments
These are supermajority provisions with a board out clause and an additional clause waiving the supermajority requirement if a fair-price is paid for the purchase of all the shares. The fair price is normally defined as the highest priced paid by the bidder during a specified period. Thus, fair price amendments defend against two-tier tender offers that are not approved by the target's board.

Analysis:
Anti-takeover bids play a significant role in safeguarding the corporate world by providing companies with a range of defensive mechanisms against hostile takeover attempts. These bids are strategies and tactics employed by target companies to thwart unsolicited acquisition efforts. Here's a brief analysis of their role:

Protection of Shareholder Interests Anti-takeover measures are often implemented to protect the interests of shareholders. Hostile takeovers can lead to value destruction and loss of shareholder wealth, as acquiring companies might undervalue the target company or implement aggressive cost-cutting measures. Anti-takeover measures can ensure that shareholders have a say in whether the company should be acquired or not.

Preservation of Company Culture Hostile takeovers can disrupt the existing corporate culture and management style of the target company. Anti-takeover defenses can help maintain the company's identity, values, and strategic direction, which might otherwise be compromised under new ownership.

Long-Term Strategic Planning Anti-takeover mechanisms can provide the target company's management with the time and flexibility to pursue long-term strategic plans without being pressured by short-term profit demands of the acquiring firm.

Negotiation Leverage The presence of anti-takeover measures can give the target company negotiating leverage. If the acquiring company knows that their efforts will likely be met with resistance, they might be more inclined to engage in discussions and negotiations to reach a mutually beneficial agreement.

Stability in Industries with High Volatility In industries prone to rapid changes and high volatility, anti-takeover defenses can help maintain stability and prevent disruptive takeovers that could negatively impact the industry as a whole.

Protection of Jobs Hostile takeovers often lead to layoffs and restructuring as the acquiring company seeks to eliminate redundancies and reduce costs. Anti-takeover measures can help safeguard jobs and prevent immediate workforce reductions.

Encouragement of Innovation Anti-takeover strategies can encourage innovation by allowing the target company to focus on long-term research and development efforts without fearing the disruption that a takeover might bring.

Preservation of Local Economies: In cases where the target company is a major employer in a local community, anti-takeover defenses can help prevent the negative economic impact that widespread layoffs could cause.

.However, it's important to note that anti-takeover measures can also be controversial. Critics argue that they might entrench underperforming management, limit shareholder choice, and discourage market efficiency. Balancing the interests of shareholders, management, and the broader business environment is crucial when considering the implementation of anti-takeover defenses.

In conclusion, anti-takeover bids serve as safeguards in the corporate world by providing target companies with the tools to resist hostile takeover attempts. They aim to protect shareholder interests, maintain company culture, and facilitate long-term strategic planning while offering negotiating leverage and stability in volatile industries. Yet, their implementation should be carefully considered to strike a balance between protection and market efficiency.

Conclusion:
Since there are various strategies formulated to defend a target company against hostile takeover. Not all the defenses prescribed above will suit to the Indian Legislation. Following are the strategies that might suit the Indian Corporates to legally defend themselves against a hostile takeover.

Following are a more suitable strategies Indian Companies can adopt:
Poison Pill (Issuing new shares under section 62(1) to existing shareholders can dilute the shareholding of raider. Additionally, a board resolution Is sufficient to initiate right issue)

Refusing to register shares While this strategy work best when the promoter and promoter group holds majority of the shares, there have been quite a few Indian Precedent where the board has refused to register shares

White Knight This strategy can works the best when the shares are transferred to the employee trust fund

Buy-Back (While there is cap of 10% beyond which shareholders' approval is required, a cash rich company (which is a primary target of the raider) can use its cash to provide high premium to the shareholders to buy-back upto 25% of the total paid-up and free reserve).

Authorization of Preferred stock (or DVR in India): This can help the promoter and promoter group to raise capital without diluting much of their holding, with less stocks outstanding in the market, such companies become unattractive for takeovers.

End-Notes:

• Lexology  https://www.lexology.com/library/detail.aspx?g=c6f36713-87fc-4108-8f8f-fd8f07f89b2 c [last visited on 22nd August, 2023]
• NY Times, https://www.nytimes.com/1988/11/06/business/retailer-under-fire-edward-a-brennan-shieldingsears-from-would-be-raiders.html  [last visited on 24th August, 2023]
• Wall Street Mojo, https://www.wallstreetmojo.com/greenmail/  [last visited on 21st August, 2023]
• AIR 1992 SC 453