Hostile Takeovers

What is meant by Hostile Takeover?

Hostile Takeover is a type of acquisition in which, the company being purchased (Target Company) does not want to be purchased at all, or does not want to be purchased by a particular buyer (Acquirer) that is making a bid. In other words, the Acquired intends to gain control of the Target Company and force it to agree to the sale. The word ‘hostile’ in dictionary means ‘unfriendly, aggressive’.

Hostile Takeovers is a type of method used for Corporate Restructuring. There are other methods like Mergers & Acquisitions, Leveraged Buyout, Spin offs, etc. through which Corporate restructuring may be done.

In India, hostile takeover is a dreaded word, may be since it is a method used which is not democratic in nature and somewhat unpleasant for the management of a target company.

Why a hostile takeover?

There are several reasons why a company might want or need a hostile takeover. The major reason may be of financial gain instead of economic or business gain.

The acquiring company may think that the target company can generate more profit in the future than the selling price. E.g. If a company can make $100 million in profits each year, then buying that company for $200 million makes sense. That is why it is observed that so many corporations have subsidiaries that do not have anything in common — they were bought purely for financial reasons.

Legal Angle:

Companies Act 1956 does not expressly mention about takeovers or acquisitions. It primarily, only talks about Mergers & Amalgamations through Section 391-396.

SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 1997 has been enacted by the Securities and Exchange Board of India which deals with acquisition of shares, takeovers, etc.

Neither the term ‘takeover’ nor the term ‘hostile’ has been expressly defined under the said Regulations, the term basically envisages the concept of an:


) taking over the control

) or management of the target company

) acquires substantial quantity of shares or voting rights of the target company.

Here the term ’substantial acquisition of shares’ attains a very vital importance, irrespective whether the corporate restructuring is through merger / acquisition / takeover.

The said SEBI Regulations have discussed this aspect of ’substantial quantity of shares or voting rights’ separately for two different purposes:

(I) For the purpose of disclosures to be made by acquirer(s):

(1) 5% or more shares or voting rights:

A person who, along with ‘persons acting in concert’ (PAC), if any, acquires shares or voting rights (which when taken together with his existing holding) would entitle him to more than 5% or 10% or 14% shares or voting rights of target company, is required to disclose the aggregate of his shareholding or voting rights to the target company and the Stock Exchanges where the shares of the target company are traded within 2 days of receipt of intimation of allotment of shares or acquisition of shares.

2) More than 15% shares or voting rights:

An acquirer, who holds more than 15% shares or voting rights of the target company, shall within 21 days from the financial year ending March 31 make yearly disclosures to the company in respect of his holdings as on the mentioned date. The target company is, in turn, required to pass on such information to all stock exchanges where the shares of the target company are listed, within 30 days from the financial year ending March 31 as well as the record date fixed for the purpose of dividend declaration.

(II) For the purpose of making an open offer by the acquirer:

(1) 15% shares or voting rights:

An acquirer, who intends to acquire shares which along with his existing shareholding would entitle him to more than 15% voting rights, can acquire such additional shares only after making a public announcement (”PA”) to acquire at least additional 20% of the voting capital of the target company from the shareholders through an open offer.

(2) Creeping limit of 5%:

An acquirer, who is having 15% or more but less than 75% of shares or voting rights of a target company can consolidate his holding up to 5% of the voting rights in any financial year ending 31st March. However, any additional acquisition over and above 5% can be made only after making a public announcement.

However in pursuance of Reg. 7(1A) any purchase or sale aggregating to 2% or more of the share capital of the target company are to be disclosed to the Target Company and the Stock Exchange where the shares of the Target company are listed within 2 days of such purchase or sale along with the aggregate shareholding after such acquisition / sale. An acquirer who has made a public offer and seeks to acquire further shares under Reg. 11(1) shall not acquire such shares during the period of 6 months from the date of closure of the public offer at a price higher than the offer price.

(3) Consolidation of holding:

An acquirer who is having 75% shares or voting rights of a target company can acquire further shares or voting rights only after making a public announcement specifying the number of shares to be acquired through open offer from the shareholders of a target company SEBI.

Trade Away This Bad Negotiating Technique

As I look around my basement, I realize that maybe I’m hanging on to too much stuff. When I trade for goods and services (some call that “negotiating”), I realize I’m also pretty good at hanging on to my profit when I’m the seller, and my money when I’m the buyer. How good are you at hanging on to what you already have? One simple technique can make you much better at it.

This works even when no money is trading hands. Perhaps just your time is involved. Maybe your boss wants you to take on “just one more thing.” Or you’ve been scheduled for one more meeting. Pretty soon you’re overwhelmed and kicking yourself for saying “Yes” a few too many times. Maybe you can’t say “No” either, but there is another option.

Bad Negotiating Exemplified

Let’s imagine for a moment you’re a seller engaged in a dialog with a potential buyer that goes like this:

– Buyer: “You’re higher than your competition. What can you do when you sharpen your pencil?”

– Seller: “I am authorized to match our competition’s price.”

– Buyer: “Great! Unfortunately, I see your standard shipping is 2 weeks, and I need it on Tuesday. Can you do that?”

– Seller: “I can expedite shipping for you. You can have it by Tuesday if you order now.”

– Buyer: “Nice! But I won’t be able to use it without the accessories kit. Will you include it at no charge if I buy?”

– Seller: “Sure, I’ll do that just for you, because you’re special.”

Let’s stop our example there, although the dialog (and the concessions) certainly didn’t stop there. Notice that at no time did the Buyer commit to the purchase, despite the fact that the Seller has discounted away profit and increased costs by expediting shipping and giving away accessories. The Buyer is “on a roll”; why wouldn’t they keep asking for more concessions?

They will, because they are grinding, a negotiating technique that enables them to continue to sweeten the deal until they either take pity on the Seller and stop, or the Seller makes them stop.

A Fair Turn

Stopping a grinder is easy. Simply replace concessions with trades. Whenever you are asked to give something up, prepare to trade for something of perceived value.

When your boss asks you to do “just one more thing,” ask what can come off your current projects list to make room for the new one. When one more meeting comes up, ask which deadline can be pushed back to accommodate the new unplanned need for your time. When your buyer asks for a price concession, ask for… well, what CAN you trade?

Bring In Your Trade-Offs

When negotiating, it can literally pay to be prepared. Anticipate the potential concession requests you may encounter. As a seller, you can prepare a list of possible trade-offs, which might include:

– Reduced feature set

– Slower (less expensive) shipping

– Accepting delivery (and making payment) sooner

– Faster payment terms

– Cash instead of credit

– Adding a “bonus” instead of reducing the price

– Increasing the order size

– Testimonial letter

– Referral to a new prospect

– Booking the order NOW

Partnerships, Alliances and Joint Ventures

In this age of partnerships, alliances, and joint ventures, the need for skilled negotiators is more important than ever.

Partnership ventures can really complicate a relationship. They certainly require special negotiations.

There will be issues where both parties seriously disagree. There will be benefits and contributions that involve unknown or uncertain sharing requirements. Partnership ventures require assumptions – many of which will be wrong. There will always be an imbalance of power between the two parties in the sharing of benefits and contributions. The right formulas must be negotiated.

What are acceptable labor, overhead costs, and profits?

Can the supplier sell new designs, techniques, software, and components to a competitor?

When one party runs into trouble what happens? Who picks up the work? Costs?

What accounting system is used? Does each party have the right to audit the other?

How are changes handled? Priced? Rejected or accepted?

What further complicates these types of negotiations is that the original negotiators who established the partnership venture often move on. Project managers, engineers, technical staff, sales people, and operational staff then have the responsibility to make the venture work. This requires hundreds of negotiations and re-negotiations over the life of the venture.

Things often go wrong, or do not provide the originally intended results. One of our clients just told us about a partnership they have with a foreign company to deliver software, computer and engineering services. The original agreement was based on a set of assumptions that would make the venture equally profitable for both companies, based upon a split of the work over the next five years. Not long into the project, our client realized that the work formula would not provide an equitable split of the profits. Using a sophisticated negotiating approach, they were able to successfully re-negotiate the agreement. The modified work allocations assure each party will get the originally intended share of the profits.

Those who are most outspoken against negotiating usually base their dislike on two assumptions: (1) each side should tell the other everything, and (2) both sides in a venture will instinctively be fair and reasonable. I think such assumptions are absolutely naive – particularly in partnerships.

There are a lot of people who will not tell you everything you want to know. In most business transactions there will be issues that will require difficult negotiations. People who say “put everything on the table”-even in a partnership-are simply being naive. There are two important traits of any good negotiator-tact and discretion. A negotiator must think: What should I say? How much should I say? When should I say it? And in partnering-which I compare to a good marriage-there are things I say, things I say partially, things I say later, and things that are never said because they would only cause tension.

In a partnership roles change. Participants become contract managers and a relationship managers rather than just buyers, sellers, designers or engineers.

And, there will always be issues involved in the breaking of the partnership. Once the marriage ends, there must be a divorce. What happens at termination? How are costs settled? Is there a non-compete clause to protect secrets and techniques? How about trademarks, copyrights, patents, tooling, warranties, software, designs, drawings, data, customer lists?

Partnering is not the end of negotiations; it’s just the beginning. Be prepared.

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