Let s try to understand what is takeover before going for discussion on Anti take over strategies.

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1 Let s try to understand what is takeover before going for discussion on Anti take over strategies. What is a Takeover? A takeover occurs when an acquiring company makes a bid in an effort to assume control of a target company, often by purchasing a majority stake. If the takeover goes through, the acquiring company becomes responsible for all of the target company s operations, holdings and debt. When the target is a publicly traded company, the acquiring company makes an offer for all of the target s outstanding shares. Types of Corporate Takeovers: There are several different types of takeover. The main types are: 'Friendly Takeover' - the company bidding will approach the directors of the other company to discuss and agree an offer before proposing it to the shareholders of that company. The bidding company will also have an opportunity to look at the accounts of the business they want to buy - a process known as due diligence. 'Hostile Takeover' - the company bidding has their offer rejected or does not approach the board of the company they wish to buy before making an offer to shareholders. This also means they will not have access to private information about the company - increasing the risk of the takeover. Banks are usually more cautious about lending money for hostile takeovers.

2 'Reverse Takeover' - the final common type of takeover is the reverse takeover. This happens when a private (not traded on the stock market) company buys a publicly-traded company as a means of acquiring public status without having to list itself. HISTORY OF HOSTILE TAKEOVER ACTIVITY IN INDIA Swaraj Paul- Escorts/ DCM In 1980s London-based NRI Swaraj Paul sought to control the management of two Indian companies, Escorts Limited and DCM (Delhi Cloth Mills) Limited by picking up their shares from the stock market. [3] Though Swaraj Paul failed to fulfill his dream of controlling Escorts and DCM, but was successful in highlighting how particular families were able to exercise managerial control over large corporate entities despite holding a minuscule proportion of the concerned company's shares. Paul finally retracted his bid. While he was ultimately unsuccessful, Paul s hostile threat sent shockwaves through the otherwise complacent Indian business world. Raasi Cements-India Cements-Sri Vishnu Cement Ltd. India Cements Limited ("ICL") in its hostile bid for Raasi Cements Limited ("RCL") made an open offer for RCL shares at Rs. 300 per share at the time when the share price on the Stock Exchange, Mumbai ("BSE") was around Rs [4] The tendency of the Indian

3 FIs has till recently always been to protect the existing promoters in case of a hostile takeover bid. However, in this case they felt cheated as the promoters themselves sold out their stake to the acquirer leaving little room for them to tender their stake to the acquirer during the open offer. However, ICL also bought out the FIs in the open offer and thereby increased their holding in RCL to 85%. There was another interesting twist to this deal, which made matters more complicated. Raju transferred 39.5% stake of Shri Vishnu Cement Limited ( SVCL"), which was an subsidiary of RCL, to nine investment companies owned by Raju and his family barely days after the purchase by ICL of Raju s shares in RCL. This was in violation of Regulation 23(1) (g) of the Takeover Code, which prohibits a target company from transferring its significant assets after a public announcement has been made by the acquirer to make an open offer for purchase of shares from the public. Since SVCL was the crown jewel of RCL, and in fact the primary reason for ICL s interest in RCL, the matter was taken to SEBI, which held that the transfer was not valid. The matter was ultimately sorted out through a negotiated deal by which Raju s associates sold their shares of SVCL to ICL. Gesco Corporation In October 2000 Abhishek Dalmia, made an open offer to acquire 45% of the share capital in Gesco Corporation.at Rs. 23 per share at a total. This transaction entered in to a drama of hostile takeover until the promoters of Gesco corporation and the Dalmia group announced to have reached an amicable settlement in the battle for Gesco, with the former buying out Dalmias' 10.5% stake at Rs 54 per share for a total consideration of Rs 16 crore. The Gesco Corporation takeover drama showed that a bidder with admittedly poor financial resources could talk up a share only to exit later with a huge profit via a negotiated deal. A transaction or a series of transactions whereby a person acquires control over the assets of a company, either directly by becoming the owner of those assets or indirectly by acquiring control of the management of the company. A takeover is the purchase of one company (the target) by another (the acquirer, or bidder). 1. In October, Tata Steel acquired corus for $ 12.8 billons. 2. In January, Mahindra completes 51% takeover in Peugeot Motocycles.

4 TAKEOVER DEFENCE STRATEGIES: The need for growth and expansion always leaves scope for takeover attempts, and this necessitates managers to remain alert for threats of a hostile takeover. Companies therefore employ several safeguards to counter this threat. No defensive measure can be said to be full proof, and some may be disadvantageous as well, depending on the particular situation of a corporation; however every tactic affords some negotiation leverage and time to formulate strategies for safeguard. Takeover defensive strategies may be adopted both at a pre-bid stage, or a post-bid stage. Described below are some of the commonly employed tactics to counter hostile takeover bids. POISON PILLS The result of the above analysis is robust even when the increase in average premium received by firms with poison pills is quadrupled from 6% to 24% and when the risk (reduction in the probability of success) due to the use of poison pills is reduced to only 7% (down to 7% from 30%). In appendix 3, using decision trees, the expected values at the indifference points on adopting a poison pill or not adopting are shown. It is reached only when the average increase in premium due to the pill more than quadruples to 26.4% from 6% or when the risk (due to lowering of the probability of bid s success) is reduced to a negligible level of 6.9%. Also referred to as a shareholder rights plan, poison pills are triggered when a hostile bidder acquires a certain percentage of the target s voting stock, upon which the target shareholder becomes entitled to new shares of the target at a heavy discount, making the target company s shares expensive and the deal becomes unattractive for the bidder. This does not

5 require a shareholder vote to promulgate, since the board has the absolute discretion of issuing shares as dividends. However, one of the disadvantages of poison pills is that it helps in entrenching the board by giving an opportunity to raise the offer price, thereby discouraging a genuine takeover bid, which could be beneficial for the shareholders. However, there are impediments on this poison pill in India imposed by the DIP guidelines and not the takeover code. Instead takeover code under section 23 prohibits the issue or allotment of authorized but unissued securities during the voting period without shareholder approval, it makes an explicit exception for the right of a target company to issue or allot shares upon exercise of warrants as per pre-determined terms of conversion. However, for the poison pill strategy to work best in the Indian corporate scenario certain amendments and changes to the prevalent legal and regulatory framework are required. Importantly, a mechanism must be permitted under the Takeover Code and the DIP Guidelines which permit the issue of shares/warrants at a discount to the prevailing market price. These amendments would need to balance the interests of the shareholders while allowing the target companies to fend off hostile acquirers. SHARK REPELLENTS A specific type of defence strategy which can be adopted simply by amending the corporate charter or by-laws. These are put in place largely to reinforce the ability of a firm s board of directors to remain in control. Mechanisms such as Staggered or Classified Board structure may be adopted whereby only a specified number of directors are re-elected to the board while others have a fixed tenure, thereby forcing a hostile bidder to wait for the entire circle until he gets full control of the board. In India, as per the Companies Act actually requires companies to maintain staggered boards by default i.e. only one-third of a company s directors are re-elected per year. The disadvantages of shark repellents are that although they afford a strong protection, but they can be circumvented by altering the size of the board, or acquiring a super-majority shareholding in the company. Besides, it also provides enormous opportunity to provide safety-net for the management so that it is more comfortable if the bid fails, or even if it succeeds, he is let-off with a huge compensation. DUAL-CLASS STOCK : Also known as super-voting or dispute-class stock, these shares are issued to existing shareholders as dividend or as a part of an exchange offer. These stocks have disproportionately high voting rights, but low liquidity or dividend rights.

6 KILLER BEES: Killer bees are firms or individuals that are employed by a target company to fend off a takeover bid; these include investment bankers (primary), accountants, attorneys, tax specialists, etc. They aid by utilizing various anti-takeover strategies, thereby making the Target Company economically unattractive and acquisition more costly. WHITE KNIGHT: The white knight, refers to the friendly acquirer of a target firm in a hostile takeover attempt by another firm. The intention of the acquisition is to circumvent the takeover of the object of interest by a third, unfriendly entity, which is perceived to be less favourable. The knight might defeat the undesirable entity by offering a higher and more enticing bid, or strike a favourable deal with the management of the object of acquisition Severstal almost acted as a white knight to Arcelor as the merger negotiations were in place between Arcelor and Mittal Steel. WHITE SQUIRE: A white squire is similar to a white knight, except that it only exercises a significant minority stake, as opposed to a majority stake. A white squire doesn't have the intent to take over a company, but rather serves as a figurehead to a defence to a hostile takeover. The white squire may often also get special voting rights for their equity stake. An example of a white squire might be Warren Buffett. PAC-MAN DEFENSE: The Pac-Man defence is a defensive option to stave off a hostile takeover in which a company that is threatened with a hostile takeover acquires its would-be buyer. The most quoted example in U.S. corporate history is the attempted hostile takeover of Martin Marietta by Bendix Corporation in In response, Martin Marietta started buying Bendix stock with the aim of assuming control over the company. Bendix persuaded Allied Corporation to act as a "white knight," and the company was sold to Allied the same year. The incident was labelled a "Pac-Man defence" in

7 retrospect. The name refers to the star of a video game in which the hero (Pac-Man) is at first chased around by certain enemies of which he has no power over. However, after eating an "Energizer" (also known as a "Power Pill"), he is able to chase and devour these enemies which were previously pursuing him. The term (though not the technique) was coined by buyout guru Bruce Wasserstein. Precautionary Measures for takeover can be as follow: Having Early Warning Systems Monitoring Shareholding Trading Patterns Poison Pills Flip-over Flip-in Back-End plans Voting Plans Shadow Pill Chewable pill Corporate Charter Amendments Staggered terms of the board of director Supermajority power Fair Price Provision Dual Capitalisation Golden Parachutes Conclusion:- Take-overs have always been characterized by the underlying greed and selfishness of their participants. The cold and competitive realm of corporate business promotes only those behaviours which foster growth and profit. As a consequence, take-overs are often the site of battlefields which, in time, become strewn with the bodies of its victims. It is the role of take-over legislation to prevent such meaningless deaths. Continuously striving to protect the rights and claims of offerors, offerees and shareholders. Although the abuse of anti-takeover defensive tactics by management has threatened to destroy this balance by depriving corporations and shareholders of the independence to make their own decisions, evolving case law promises to eliminate this peril.

8 Contributed by: Ms. Jaya Sharma-Singhania & Mr. Raj Purshottam Pokar Jaya Sharma and Associates, Practising Company Secretary Firm, Mumbai. Bibliography: Investopedia.com Businessjargons.com Wikipedia Mint newspaper Articles on takeover Icsi.edu.