UNIVERSITY INSTITUTE OF LEGAL

STUDIES (UILS)
SUBJECT : MERGERS AND ACQUISITION
(LBT-515)
Ms. Suzanna Augustine George
Topic: Takeover Defenses - I

DISCOVER . LEARN . EMPOWER

 TAKEOVER DEFENCES
• A hostile tender offer made directly to a target company’s shareholders, with or without
previous overtures to the management, has become an increasingly frequent means of
initiating a corporate combination.
• As a result, there has been considerable interest in devising defense strategies by actual
and potential targets.
• Defenses can take the form of fortifying one self, i.e., to make the company less attractive
to takeover bids or more difficult to take over and thus discourage any offers being made.
• These include, inter alia, asset and ownership restructuring, anti-takeover constitutional
amendments, adoption of poison pill rights plans, and so forth.
• Defensive actions are also resorted to in the event of perceived threat to the company,
ranging from early intelligence that a “raider” or any acquirer has been accumulating the
company’s stock to an open tender offer.
• Adjustments in asset and ownership structures may also be made even after a hostile
takeover bid has been announced.
• Takeover defenses include all actions by managers to resist having
their firms acquired.
• Attempts by target managers to defeat outstanding takeover proposals
are overt forms of takeover defenses.
• Resistance also includes actions that occur before a takeover offer is
made which make the firm more difficult to acquire.
• The intensity of the defenses can range from mild to severe. Mild
resistance forces bidders to restructure their offers, but does not
prevent an acquisition or raise the takeover price substantially.
• Severe resistance can block takeover bids, thereby giving the
incumbent managers of the target firm veto power over acquisition
proposals.
• It is difficult to determine it priori whether takeover defenses are good
or bad for stockholders.
• But one way to assess a takeover defense is to examine the rationale
for resistance.
• Managers resist takeovers for three broad reasons:
(1) They believe the firm has hidden values;
(2) They believe resistance will increase the offer price; and
(3) They want to retain their positions.
 DEFENSIVE MEASURES
Adjustments in Asset Anti takeover
The Crown Jewel
and Ownership amendments or Shark
Strategy
Structure Repellants

Golden
The Packman Defence
Parachutes

Targeted Share Repurchase or Buyback

 ADJUSTMENTS IN ASSET AND
OWNERSHIP STRUCTURE
• Firstly, consideration has to be given to steps, which involve defensive
restructuring that create barriers specific to the bidder. These include
purchase of assets that may cause legal problems, purchase of
controlling shares of the bidder itself, sale to the third party of assets
which made the target attractive to the bidder, and issuance of new
securities with special provisions conflicting with aspects of the
takeover attempt.
• A second common theme is to create a consolidated vote block allied
with target management.
• A third common theme is the dilution of the bidder’s vote percentage
through issuance of new equity claims.
 THE CROWN JEWEL STRATEGY
• The Crown Jewel Defense strategy is when the target company of a hostile takeover sells
its most valuable assets to reduce its attractiveness to the hostile bidder.
• Crown jewels are the most profitable or valuable corporate units or assets that belong to
the company. In essence, crown jewels are the company’s most prized or valuable assets
in terms of profitability, future business prospects, or asset value.
• A company’s crown jewels depend on the industry and nature of the business
• The crown jewel defense is a last-resort defense since the target company will be
intentionally destroying part of its value, with the hope that the acquirer drops its hostile
bid.
• In a lot of cases, the target company will sell its most valuable assets to a friendly third-
party (a white knight). When the hostile bidder drops its bid, the target company will
purchase back these assets from the friendly third party at a predetermined price.
Therefore, a crown jewel defense does not always destroy the target company.
• However, the practice in India is not so flexible.
• The Companies Act has laid down certain restrictions on the power of
the Board. The Board cannot sell the whole or substantially the whole
of its undertakings without obtaining the permission of the company in
a general meeting.
• However, the SEBI (Substantial Acquisitions and Takeover)
Regulations, 2011 vide Regulation 25 prescribes general obligations
for the Board of Directors of the target company. Under the said
regulation, it will be difficult for any target company to sell, transfer,
encumber or otherwise dispose of or enter into an agreement to sell,
transfer, encumber or for dispose of assets once the predator has made
a public announcement. Thus, the above defense can only be used
before the predator/bidder makes the public announcement of its
intention to takeover the target company.
 PACKMAN DEFENSE
• Under this strategy, the target company attempts to purchase the shares of the raider company.
• This is usually the scenario if the raider company is smaller than the target company and the target company
has a substantial cash flow or liquidable asset.
• The target must have the finances available to purchase enough shares of the potential acquiring company to
be a credible threat to the acquirer’s control of its own firm.
• The resources needed for the strategy are usually made available through:
1. Selling its own assets: The target company can use existing cash or cash equivalent assets, or it can sell off
non-vital assets to generate enough money to buy large amounts of shares of the acquirer.
2. Selling non-core business units: The company can sell off non-core business units to generate cash.
3. Borrowing cash: The company can borrow cash from lenders or by issuing bonds or additional stock shares.
The latter method of financing offers the additional benefit of diluting the target company’s outstanding stock
shares, so the acquirer would have to purchase more shares in order to obtain 50%+ of the total outstanding
stock of the target company.
4. War chest: A war chest is a cushion of cash stored by the company in the event of adverse events – a sort of
emergency expenses fund. It typically includes assets that can be easily liquidated to produce cash such as
bank deposits and T-Bills. Using war chest financing for a Packman Defense is essentially just saying that the
target company is using its excess cash or cash reserves.
 TARGETED SHARE REPURCHASE or
BUYBACK
• This strategy is really one in which the target management uses up a part of the
assets of the company on the one hand to increase its holding and on the other it
disposes of some of the assets that make the target company unattractive to the
raider.
• The strategy therefore involves a creative use of buyback of shares to reinforce its
control and detract a prospective raider.
• “buyback” is used when the excess money with the company neither gives it
adequate returns on reinvestment in production or capital nor does it allow the
company to redistribute it to shareholders without negative spin offs.
• The offer once made cannot be withdrawn unlike a public offer under the
Takeover Regulations. This means that if the raider withdraws its public offer it
would imply that the target company would still have to go through with the
buyback.
• This is an expensive proposition if the only motivation to go for the buyback was
to dissuade the raider.
 GOLDEN PARACHUTES
• Golden parachutes refer to the “separation” clauses of an employment contract
that compensate managers who lose their jobs under a change-of-management
scenario.
• The provision usually calls for a lump-sum payment or payment over a specified
period at full and partial rates of normal compensation.
• Payments as compensation for the loss of office is allowed to be made only to the
managing director, a director holding an office of manager or a whole time
director.
• payment of compensation is expressly disallowed if in the case of a director
resigning as a consequence of reconstruction of the company, or its amalgamation
with any other corporate bodies.
• There exists a maximum limit as to the quantum of the compensation, subject to
the exclusionary categories, to the total of the remuneration the director would
have earned for the unexpired residue of term of office, or three years, whichever
is less.