Anti-Takeover Mechanisms: Defenses Against Hostile Takeovers

In the high-stakes world of corporations, companies often face the threat of hostile takeovers—unwanted bids to seize control. To protect themselves, they use clever strategies known as anti-takeover mechanisms. 

This blog will explore these tactics and how they help companies stay independent.

Hostile Takeover – An Overview

A hostile takeover is when a company acquires more than 50% of another company’s voting shares without the management’s consent or knowledge of the target company.

In India, hostile takeovers are primarily governed by the Companies Act 2013 and SEBI.

Anti-takeover mechanisms work like building a moat and castle around a company to defend it from an unwelcome takeover attempt.

Examples in India

While hostile takeovers are uncommon in India, compared to other countries, there have been instances that serve as interesting examples.

1. Adani Group’s takeover of NDV.
2. India Cements acquisition of Raasi Cements.
3. Larsen & Toubro’s acquisition of Mindtree Limited.

Types of Anti-Takeover Mechanisms

Dual Class Shares

Companies use it to give founders or controlling investors more power over the company, even if they do not own a majority of the total shares.

How does it work?

Under this mechanism, the company issues two classes of shares,

Class A shares have multiple votes per share, and Class B shares only have one vote per share.

Founders and early investors often hold Class A shares, which gives them disproportionate control over the company relative to other investors, who hold Class B shares with limited voting power.

Staggered Board

A staggered board mechanism makes it more difficult for a hostile bidder to gain control of a company by acquiring a majority of shares.

How does it work?

The Board of Directors is segmented into distinct classes, commonly consisting of three, although occasionally five or more classes. Each class generally lasts two or three years. Elections are conducted periodically to fill the vacancies of expiring seats on the board.  

Staggered Boards can function as a defensive measure to discourage hostile takeovers because it takes several election cycles to replace most of the board, so buyers cannot quickly take control.

Poison Pill

How does it work?

A poison pill is an inactive anti-takeover strategy where a company issues new shares to existing shareholders at a discount, except for the hostile bidder. The activation of this mechanism is prompted by a specific occurrence, such as an acquisition of a defined proportion of the company’s shares by a hostile bidder, commonly around 15-20%. Once triggered, it allows the current shareholders to buy more company shares at a low price when there is a hostile takeover bid. This practice dilutes the value of the shares held by the acquirer, making the takeover more expensive and thus less attractive.

White Knight

The ‘white knight’ can be another company in the same industry or a private equity firm willing to make a more favorable offer to the target company than the hostile bidder. 

How does it work?

The target company, facing a hostile takeover bid, identifies a white knight. This could be a competitor, a financial institution, or any other company interested in acquiring the target company. The white knight offers to acquire the target company at a fair or even premium price, generally higher than the hostile bidder’s offer. This approach enables the target company to effectively retain a certain degree of authority over its future by deliberately selecting a buyer who exhibits a greater correlation with its core value, objectives, or strategic direction.

Crown Jewel Defense

This mechanism is used by companies facing a hostile takeover to make themselves less attractive to the acquirer. It is like selling off your most prized possessions (the crown jewels) before a thief breaks in.

before a thief breaks in.

How does it work?

The target company identifies its most valuable assets, often called ‘crown jewels.’ These assets can be tangible, such as factories or property, or intangible, such as intellectual property, patents, or trade secrets. In response to a hostile takeover threat, the company initiates measures to divest itself of these precious assets to a third party, often characterized as a friendly buyer. An alternative option is to spin off the crown jewels into a separate, independent entity. The loss of these ‘crown jewels’ makes the target much less suitable.

Greenmail

Greenmail involves a target company buying back its shares at a premium from an acquirer who has garnered a significant ownership percentage, intending to obtain control, and the company pays the acquirer to leave.

How does it work?

A ‘greenmailer’ has a high ownership in the company. Instead of implementing other defensive measures, the target company offers to re-purchase the greenmailer’s shares at a high price. This allows the greenmailer to make a quick gain by selling his shares back to the company at an inflated price, and the company avoids the risk and uncertainty of a hostile takeover.  

Pac-Man Defense

The Pac-Man defense involves the target company turning the tables on the hostile bidder by attempting to acquire the bidder instead. Named after the video game character that eats its enemies, this tactic involves the target company using its own resources to purchase shares of the acquirer, effectively making a counteroffer.

How does it work?

Instead of assuming a passive defense stance, the target company actively assumes the role of a predator by attempting to acquire the company that is trying to take over, similar to Pac-Man gobbling up the ghosts in the iconic video game.

Read Also: What is Securitization? Methodology, Types, Advantages, and Disadvantages

Conclusion

The world of mergers and acquisitions can sometimes feel like a battleground, especially when it comes to hostile takeovers. It can be quite intense! But do not fear; companies have a wide range of defenses available to them. Remember, the best defense is to have multiple layers. Before selecting anti-takeover measures, companies should analyze their specific circumstances and the risks they may encounter. It is important to consult legal and financial professionals to ensure that the defenses are implemented correctly and comply with regulations. So, the next time you hear about a hostile takeover, keep in mind that it is more than just a fight; it is about the strategic defense companies implement to protect their future.

Frequently Asked Questions (FAQs)