Guidelines for Takeovers

The Securities and Exchange board of India has issued detailed guidelines for regulating substantial acquisition of shares and takeovers. The key guidelines are:

* The acquirer should intimate the target company and the concerned stock exchange as soon as its holding reaches 5 percent of the voting capital of the target company.
* No sooner the holding of the acquirer reaches 15 pr cent of the voting capital of the target company, it should intimate the concerned stock exchange and offer to other shareholders of the company to buy a minimum of 20 per cent of the voting capital the target company through an offer document at a price that is subject to a floor, as determined by certain guidelines.
* The offer document should give financial information of the offer company (acquirer) disclose the intentions of the offer company about the proposed changes in the business of the target company, and provide long term commercial justification for the proposed offer.

The purpose of guidelines is to (a) impart greater transparency to takeover deals, (b) ensure a greater amount of disclosure through public announcement and offer documents and (c) protect the interest of small shareholders.

Anti-Takeover Defenses:

A wide range of anti-takeover defenses have been employed by target companies to ward off bidders, particularly in the US which has a long and colorful history of takeovers. These defenses, which fall into two broad categories viz., pre-offer defenses and post offer defenses are briefly described below.

Pre-offer Defenses:
Staggered board: The board comprises three equal groups of directors. Each year one group is elected.

Super majority clause: A very high percentage of votes, usually 80 percent or so, is required to approve merger.

Poison pills: Existing shareholders are granted the right to buy bonds of preference stock that get converted into the stock of the acquiring firms, in the event of a merger, on very favorable terms.

Dual class recapitalization: A new class of equity shareholders which enjoys superior voting right is created.

Golden parachute: The incumbent management is entitled to eceive fabulous compensation in the event of takeover.

Post offer Defenses:

Pacman defense: The target company makesa counter bid for the stock of the bidder.
Litigation: The target company files a suit against the bidding company for violating anti-trust or securities laws.
Asset restructuring: The largest company sells its most precious assets, the crown jewels and/or buys assets the bidder does not want or that may pose anti-trust problems for it .
Liability restructuring: The target company repurchases its own shares at substantial premium or issues shares to a friendly third party.

Most Americans firms employ at least one anti-takeover defense. The two popular defenses are the staggered board and the poison pill. The former is employed by nearly 60 per cent of the large companies to prevent an acquirer from hanging the entire board at will. The latter, employed by about 50 per cent of the large companies, makes a company a prohibitively expensive target.

Anti-takeover Defenses India: Companies in India have fewer anti-takeover defenses available to them, compared their American counterparts. In order to ward off a takeover attempt, companies in India presently invoke one for more of the following defenses.

Make Preferential Allotment: A company may allot equity shares or convertible securities on a preferential basis to the promoter group so that its equity stake is enhanced.

Effect Creeping Enhancement: As per SEBI guidelines, the promoter group can raise its equity holding by creeping enhancements, subject to limits, without invoking the provision to make an open market offer.

Amalgamate Group Companies: Two or more companies promoted by the same group may be amalgamated to from a larger company other things being equal, a larger company is less vulnerable to a takeover in comparison to a smaller company.

Sell the crown Jewels: If the raider is tempted by certain valuable assets of the target company, the target company may sell those assets to make it self unattractive.
Search for a White Knight: A company under siege may look for support and help from its friends. It may solicit a white knight to rescue if from the clutches of the raider.