Introduction
In today’s rapidly changing era of corporate word , Merger and Acquisition (M &A) are most common and deliberated form of growth and expansion of companies. However, not all acquisitions happen with mutual consent. A hostile takeover refers to an acquisition attempt by a company or an individual to take control of another company against the wishes of its existing management. Unlike friendly mergers where both companies agree upon the deal, a hostile takeover bypasses the target company’s board and directly approaches the shareholders.
In India, although hostile takeovers are not very frequent compared to western economies like the US, the growing competitiveness and liberalisation of the Indian market have increased their possibility. Therefore, understanding the legal safeguards available to Indian companies to prevent or resist hostile takeovers becomes crucial for corporates, management, and law professionals.
What is a Hostile Takeover?
Generally, a hostile takeover happens when an acquiring company try to take all the control of largest company without any approval of the board of directors of the targeted company. It is usually executed by:
- Tender Offer: The acquiring company offers to buy shares directly from shareholders at a premium price to gain controlling interest.
- Open Market Purchase: The acquirer purchases a significant number of shares in the open market to gain control.
- Proxy Fight: In this method, the acquiring company attempts to remove the current management by convincing the shareholders to elect a new group of directors who will support the takeover.
Notable Example in India
One of India’s landmark hostile takeover attempts was the Larsen & Toubro (L&T) and Reliance Industries Limited (RIL) case in the late 1980s, where RIL acquired a substantial stake in L&T through its investment company. Although the attempt failed due to government intervention and legal complexities, it set the tone for the importance of legal frameworks and strategic defences in India.
Another notable event was Emami’s acquisition of Zandu Pharmaceutical Works in 2008, which began as a hostile bid but converted into a negotiated deal after initial resistance.
Legal Framework Governing Takeovers in India
Securities and Exchange Board of India (Substantial acquisition of Shares and Takeover) Regulations, 2011 are the regulator of Hostile Takeover and its also known as SEBI Takeover Code. Key features include:
Trigger Point (25% Rule): Any person acquiring 25% or more voting rights in a listed company must make an open offer to acquire at least an additional 26% from public shareholders.
Open Offer Process: Ensures transparency and gives minority shareholders an exit option at a fair price.
Creeping Acquisition: Allows promoters to increase their shareholding by up to 5% per financial year without triggering an open offer, subject to conditions.
Despite these regulations, Indian companies have historically lacked robust poison pill mechanisms as used in the US, due to the regulatory restrictions under Indian corporate law.
Legal Safeguards Available to Indian Companies
Indian companies adopt various legal and strategic safeguards to protect themselves from hostile takeovers. Some key methods are:
- Shareholding Structure and Promoter Holding
In India, most companies are promoter-driven with significant shareholding held by founders or promoter groups, often exceeding 50%. This concentrated holding acts as a natural defence against hostile takeovers, as an acquirer would find it difficult to buy a controlling stake without promoter consent.
- Differential Voting Rights (DVR)
As per the provisions of the Companies Act 2013 section 43(a)(ii) A can issue share with differential voting rights. This enables promoters to maintain control with lesser economic ownership. For example, Tata Motors has issued DVR shares with 1/10th voting rights but higher dividends, which prevents dilution of promoter control.
- Staggered Board
Indian companies may adopt a staggered board structure, where only a part of the board is elected each year, making it difficult for a hostile acquirer to replace the entire board at once. However, under SEBI’s Listing Obligations and Disclosure Requirements (LODR), listed companies usually appoint directors annually, limiting this defence.
- Poison Pills (Limited in India)
In US law, poison pills (shareholder rights plans) are a popular defence mechanism. However, Indian law does not permit classic poison pill structures due to restrictions on issuing new shares without shareholder approval. Companies still use similar strategies by:
Issuing preferential shares to friendly investors (white knights)
Creating employee stock option plans (ESOPs) to dilute hostile holdings
- White Knight Strategy
When facing a hostile bid, a target company may look for a white knight – a friendly company or investor who acquires a stake or merges with the target to rescue it from the hostile bidder. For example, in the L&T-Reliance case, the government intervened to prevent Reliance from taking control.
- Golden Parachute:
These are attractive severance deals given to top executives, ensuring they receive substantial compensation if they lose their positions because of a takeover.. While not directly preventing a takeover, but it increases the cost that restraint the acquirer for hostile takeover.
- Buyback of Shares
Section 68 of the Companies Act, 2013 allows companies to buy back their own shares, reducing the number of shares available for the hostile acquirer. This increases promoter holding percentage and control.
- Strategic Alliances and Cross Holdings
Companies often enter into strategic alliances or cross-shareholding agreements with group companies or friendly corporates, making it difficult for an external bidder to gain control.
Judicial and Regulatory Safeguards
The SEBI Takeover Regulations and Companies Act provisions act as the primary legal safeguards. Additionally, Indian courts have consistently upheld:
The board have to acts in the interest of the shareholders and the companies it is a fiduciary duty of the board.
Minority shareholder rights to ensure fair treatment in case of open offers
In SEBI v. Sterlite Industries Ltd. (2003), the Supreme Court highlighted that takeover regulations are meant to protect investors’ interests and ensure fair, transparent acquisition processes.
Challenges in Hostile Takeovers in India
Despite the above mention these are the also safeguard that remains rare hostile takeover in India are:
High promoter holding
Cultural resistance to hostile acquisitions
Regulatory complexity
Limited access to poison pill tactics
Judicial delays in takeover disputes
The Road Ahead
With increasing foreign investment and evolving corporate practices, India may witness more hostile takeover attempts in the future. Companies need to:
Regularly review shareholding structures
Strengthen corporate governance practices
Keep ready a legal and strategic defence plan against unsolicited bids
Ensure board awareness and training on takeover laws and defensive mechanisms
Conclusion
Hostile takeovers, though uncommon in India currently, are an inevitable possibility in the liberalised and competitive market. Legal safeguards under SEBI regulations, the Companies Act, and strategic defences like DVRs, white knights, and share buybacks provide companies with the necessary tools to resist or prevent hostile bids.
As India continues to integrate deeper into the global economy, companies must equip themselves legally and strategically to protect their independence and shareholder interests while ensuring they remain competitive and growth-oriented in the long run.
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