In India, there are very few cases of acquisition that have been witnessed. Acquisition as defined by the SECURITIES AND EXCHANGE BOARD OF INDIA (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) REGULATIONS, 2011, Section 2(1)(b) ‘means, directly or indirectly, acquiring or agreeing to acquire shares or voting rights in, or control over, a target company’ [1]
A hostile takeover in layman’s terms is a type of acquisition when there is no inclination of the target company to be purchased at all or by that particular bidder. There is no specific definition provided in the regulations of the Securities and exchange board of India. ‘The hostile bid is generally understood to be an unsolicited bid by a person, without any arrangement or MOU with persons currently in control.’ 2
The takeover attempts by companies have not been successful. E.g. in 1983 when the Indian Government announced that foreign investors could buy the shares of Indian companies it gave rise to the first ever battle of hostile takeovers in the country. Caparo Group’s Swaraj Paul wished to acquire Escorts LTD. And DCM Group. But his desire was not fulfilled as he faced Government intervention on behalf of other Indian promoters who feared a similar fate.
Another unsuccessful attempt was made by Larsen And Toubro to acquire Reliance and Birla, also by Abhishek Dalmia when he endeavored the takeover of GESCO Group but Mahindra came to the aid of the target company.
Larsen and Toubro’s acquisition of Mindtree
The first ever successful hostile takeover transpired in 2019 by Larsen and Toubro (L&T). L&T was one of the leading and booming infotech companies in 2019. For LTI it was a pure business deal when they decided to takeover Mindtree. Certain sectors such as Retail, Consumer Packaged goods, Media, and Technology are underachieving for LTI where Mindtree has a formidable presence. Mindtree would help LTI explore geographies in Europe that so far were unexplored.’2
The non-executive director of Mindtree and founder-promoter of Coffee Day Enterprises V. G Siddhartha who owned a 21% stake in Mindtree and was under a lot of debt, approached L&T to sell his shareholding in Mindtree. ‘L&T saw this opportunity to take full control of the target company. The acquisition of Mindtree would help LTI significantly expand its presence, with operations in key markets across the world. Mindtree’s portfolio has strong capabilities and clientele that are complementary to LTI. Mindtree’s strong presence in the Media and Technology industries was the main attraction for L&T where it had yet to make a mark.’ The acquisition of Mindtree was a path to the Europe market for L&T.
For L&T to take complete control of the shareholding of the target company the main question that arose was what is the maximum that can be acquired and how to put the strategy into action successfully. In Indian Corporate Law 75% is the magic number of shareholdings of a company. It represents the maximum voting power that you need to make things happen in an Indian company. The decision-making power in a company lies with the board and some decisions require the approval of shareholders. Under Indian securities law for a company to remain listed you have to have at least 25% of shares of the Indian limited company held by the public. With 75%, you become the promoter in a company, and anyone who is not a promoter becomes a public shareholder. At least 25% needs to be held by the public.
Three important elements for L&T to acquire Mindtree were
Price
Strategy of how to acquire
One willing shareholder that had a large block became very important
It became a perfect storm that enabled L&T to acquire this company in the way that it did. When you decide to acquire control of a company under our securities law one must make an open offer. An open offer is triggered on 2 accounts:
Acquire 25% or more
Acquire control
By virtue of shareholders
By virtue of rights in a company
There were no rights to be given to L&T and since it was a hostile takeover promoters were not willing to give rights to L&T. They showed a lot of resistance. Therefore, the acquisition of control happened through shareholding.
‘20.32 percent stake of V. G. Siddharth worth about `32 billion was acquired. 15 percent was acquired through open market purchases.
31 percent was acquired in an open offer worth `50 billion. The total value of the deal was pegged at around `100.7 billion at `980 per share. This deal has been tagged as the first hostile takeover in the Indian IT space. LTI declared that it intended to have a total stake of 66.32 percent in the company and, on 6 June 2019, increased its stake to 28.90 percent.’ 2
Mindtree opted for a defense mechanism as an attempt to thwart the hostile takeover by L&T i.e. the poison pill tool. ‘It is a tool which the target company employs for making itself less desirable to potential acquirers or making it too expensive for acquisition. While the pill has the potential to be very effective, it is called a 'poison pill' for the reason that it may also lead to erosion of shareholder value and/or create hardships for the management in the future.’
The Report of the Takeover Regulations Advisory Committee states that material transactions outside the ordinary course of business cannot be undertaken during the offer period, either at the level of the target company or at the level of any subsidiary of the target company without the approval of shareholders of the target company. This includes alienation of material assets, affecting any material borrowing, implementing a buy-back of shares or any other change in capital structure, etc.
On 12 June 2019, amidst all the drama and hostility between both companies, a report of the independent directors of Mindtree came out. This report claimed that the offer of `980 per share made by LTI was a fair offer. This again was a thumbs-up sign for LTI that had maintained that its offer was anything but hostile and Mr. A. M. Naik, Group Chairman of L&T, even said that the directors of Mindtree were in fact perpetrating hostility and not the other way around. Initially, LTI had offered a price of `1,150 per share with a caveat that the management cooperated in the acquisition. But since the management did not take kindly to the deal, LTI had to take the market route.
--
REFERENCES
the SECURITIES AND EXCHANGE BOARD OF INDIA (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) REGULATIONS, 2011
Mistry, J., 2020. Larsen & Toubro Infotech’s Hostile Bid for Mindtree Ltd.: Much Ado About Nothing! A Teaching Case. Emerging Economies Cases Journal, 2(1), pp.24-33.
This article is written by Samraddhi Bhardwdaj of Bharati Vidyapeeth New Law College.