Swapneshwar Goutam

Anti-takeover Amendments: An overview: as merger management techniques in public M&A deals

ANTI-TAKEOVER AMENDMENTS| AN OVERVIEW: AS MERGER MANAGEMENT TECHNIQUES IN PUBLIC M&A DEALS SWAPNESHWAR GOUTAM B.A. LLB (HONOURS)
Email: swami_swami1986@yahoo.co.in;swapneshwarg@gmail.com

Abstract : This article provides explorative study covering under five heads; Firstly, introductory approach on Anti-takeover Amendments; secondly, Types of Anti-Takeover Amendment, stress has been laid on the four major types of anti-takeover amendments. Thirdly, the analysis of tactical strategies provisions under Indian Companies Act, 1956 as one of the only measures to tackle threat of takeover bid. Fourthly, Anti-takeover as a means of authorization of preferred stocks used by management and lastly, antitakeover amendment as a tool of corporate policy and lastly, why there is a need of sound environment.

INTRODUCTION It is often proposed that the best defense mechanism is anti-takeover amendments to the company's article of association, popularly called 'shark repellants'. Thus by the amendments of the AOA of a company, the antitakeover mechanisms is used as quality means of technique as of the sophisticated means of takeover defence in cultivating the sound environment by

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Swapneshwar Goutam

Anti-takeover Amendments: An overview: as merger management techniques in public M&A deals

amending AOA have to be voted on and approved by shareholders. This practice consists of the companies changing theirs regulations, rules, byelaws etc., to be less attractive corporate bidder. Generally, it can be said one of the safest techniques of protecting managerial control of the firm through merger, tender offer or by replacement of the board of directors. This paper also highlights the need of sound regulations under the code elevating and molding sound business environment in public M&A deals. Overall study is based on 'Anti-Takeover Amendments' defence mechanism and how far the Indian laws & regulation's governing with M&A dealing call for more adequate defense techniques and restructuring for public M&A deals and promoting sound governance to domestic as well cross border M& A, deals taking place in domestic market. The sound defence mechanism techniques absence can be easily felt and found under present takeover code. Restructuring and reorganization mechanism in India is lacking from adequate quality defense technique that have been kept separate from the increasing developed strategies and the framework to demonstrate, how the entire dazzling panoply of activities can be employed as takeover defense against the increased value of corporate restructuring and organization. In a hostile tender offers made directly to a target company's shareholder, with or without previous overtures to the management, has been considerable interest in devising defense strategies by actual and potential targets. Defense can take the form of fortify one self, i.e., to make the company less attractive to takeover bids or more difficult to take over and thus discourage any offer being made. By and large, defensive mechanisms are restored to perceived threat against the company, ranging from early intelligence that a 'rider' or any acquirer has been accumulating to the company's stock to an open tender offer. Adjustments in asset's and ownership structure may also be made even after a hostile takeover

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Electronic copy available at: http://ssrn.com/abstract=1717769

Swapneshwar Goutam

Anti-takeover Amendments: An overview: as merger management techniques in public M&A deals

bid has been announced. A mounting defense mechanisms like 'antitakeover amendments' which are used by the company's amending their constitutions/ Article of Association, which is popularly called as 'shark repellents'. Thus by amending AOA of a company, the antitakeover amendments can be implied which have to be voted on and approved by the shareholder. The practice consists of the company changing the articles, regulation, bye laws, etc, to be less attractive to the corporate bidders. This article purports, to examine the utility and affluence of exercising anti-takeover amendment which are also known as "Shark Repellants", it is one of the defensive mechanisms used to protect a company management. This defense is against the takeover bid, anti-takeover amendment is to be exercised by companies as a one of the tactical strategies to stave off takeover bid. It's one of the swift modes which have been increasingly utilized by the BOD or directors, by exercising their statutory power as protective strategies in the company from take-overbids which will consequently facilitate to check them and thwart away the bids. It will also implement new conditions on the transfer of managerial controls over the firm through a merger, tender offer, or by replacement of board of directors. It is one the most utilized strategies adopted in USA and raising one in India by the companies by changing and amending their bye-laws and regulations to be less attractive for the corporate raider company. Overall approach is to highlight the critical issues of this defensive mechanism used by companies, the impact of anti-takeover amendment on the financial performance and long term managerial decision making. AN INTRODUCTORY APPROACH ON; "ANTI-TAKEOVER AMENDMENT" THE CONCEPT Anti-takeover provisions took on a variety of forms, with an corporate charter/constitution or articles of associations as one of the means for

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Swapneshwar Goutam

Anti-takeover Amendments: An overview: as merger management techniques in public M&A deals

implementing effecting defense mechanism popularly called as shark repellant. Anti-takeover amendments are among the most common anti-takeover provisions which are most frequently in used as defense in corporate defence mechanism.1 Generally, it's believed that role of antitakeover amendments in influential determination of managerial investment behavior. Antitakeover amendments are one of the means by which long-term employment contracts may be created.2 Several other factors, such as insider ownership and insider representation on the board of directors, which could help to create long-term employment contracts, are not explicitly examined in this study. Some proponents of antitakeover amendments believe that such contracts protect management from the potentially disruptive effects of takeovers, enabling them to focus on long-term strategic decisions without the threat of either loss of firm control or job displacement. Therefore, antitakeover amendments reduce the number of myopic decisions made by managers.3 Critics of antitakeover amendments argue that by removing the threat of takeover, anti-takeover amendments also remove the disciplining mechanism of the takeover market.4 Anti takeover amendments must be voted on and approved by shareholders. Although 95% of anti takeover amendments proposed by management are ratified by shareholders, this might be because a planned amendment might not be introduced if management is unsure of its success.5 Failure to pass might be taking as a vote of no confidence in incumbent management and may provide a platform for a proxy fight or takeover attempt where none had existed before. The evidence provided that institutional shareholders such as banks and insurance companies were more likely to vote with management on anti takeover amendments than others such as mutual funds and college endowments. Brickley, Lease and Smith, in their research found that block holders more actively participate in voting than non-blockholders and might oppose proposals

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Swapneshwar Goutam

Anti-takeover Amendments: An overview: as merger management techniques in public M&A deals

that appear to harm shareholders.6 Amendments having the most negative effect on stock price (amendments other than fair-price amendments) are adopted by firms with the lowest percentage of institutional holdings and the highest percentage of insider holdings. Jarrell and Poulsen, suggested that these results helped explain how harmful amendments receive approval of shareholders. The evidence also suggested that block holders do playa monitoring role. Institutional holders are sophisticated and well informed, so they vote in accordance with their economic interest more consistently than less well informed small investors. 7 As discussed above rationale can to be drawn that, antitakeover amendments are generally to impose new conditions on the transfer of managerial control of the firm through a merger or tender offer or by replacement of the board of directors. Anti takeover defenses: With a high value of hostile takeover activity in recent years, takeover defenses both premature and reactive have been restored to by the companies. Anti-takeover amendments, which both facilitate managerial entrenchment and provide protections supporting informal agreements, are beneficial overall. 8 Anti takeover defenses are widely disputed as anti investor. These strategies can be costly to the firms like increasing the leverage, selling firm's important asset to make the target firm unattractive. Regulator's ambiguity on this issue can be best understood from the Euro-Shareholder Guidelines (2000)9, which states that "anti-takeover defenses or other measures which restrict the influence of shareholders should be avoided".10 In my understanding apropos, of using antitakeover amendments as defensive mechanism is one of dynamics character framework which is adopted by the corporate firms as a defensive step, when it comes to know that corporate raider as has been making efforts for takeover. TYPES OF ANTI-TAKEOVER AMENDMENTS MECHANISMS; A CRITICAL APPROACH

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Swapneshwar Goutam

Anti-takeover Amendments: An overview: as merger management techniques in public M&A deals

This part deals with the various other mechanisms available as modes for the corporate firm's corporate character. Strategic measures which are available under the anti-takeover amendment which are apropos to be used as a defense mechanism. There are four major types of anti-takeover amendments which are used an effective means of antitakeover amendments which are highlighted in this part. SUPERMAJORITY Supermajority provisions typically increase the shareholder approval requirement for a merger to the range, thus superseding the approval requirement of the charter of the state in which the firm is incorporated.11 Supermajority requirements may block a bidder from implementing a merger even when the bidder controls the target's board of directors, if the bidder's ownership remains below the specified percentage requirement.12 Supermajority provisions raise the cost of a hostile takeover and encourage potential bidders to deal directly with the target company's board of directors, which typically has the option to waive the provision if a majority of directors approves the merger (a so-called `boardout provision'). Pure supermajority provisions would seriously limit the management's flexibility in takeover negotiations.13 POISON PILLS The classic 'poison pill strategy' (the shareholders' rights plan) is the most popular and effective defense to combat the hostile takeovers. Under this method the target company gives existing shareholders the right to buy stock at a price lower than the prevailing market price if a hostile acquirer purchases more than a predetermined amount of the target company's stock. Poison pill provisions are the most recent and perhaps the most controversial of the antitakeover provisions. Poison pill provisions provide target shareholders the right to purchase additional shares at a discount or to sell shares to the target at a

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Swapneshwar Goutam

Anti-takeover Amendments: An overview: as merger management techniques in public M&A deals

premium if certain ownership changes occur, such as the acquisition of a specified percentage of the firms shares by a bidder considered hostile by current management.14The target shareholder's right to purchase shares at a discount is known as a flip-over plan.15 Moreover, a poison pill is important discussing how a company could put in a provision in its articles whereby a hostile acquirer who succeeds in taking control of that company and/or its subsidiaries is prohibited from using the company's established brand name. It is believed that different Tata Companies have in place an arrangement with the Tata Sons holding entity, whereby any hostile (or otherwise) acquirer of any of those entities is not permitted to make use of the established Tata brand name. Consequently, the bidder might be able to takeover the target Tata Company but will be shortchanged as it will not be entitled to a significant bite of its valuation -the valued brand name. 16 The right to sell shares at a premium is known as a `back end plan'.17 The poison pill is considered the most potentially harmful antitakeover measure since shareholder approval is not required to adopt poison pill provisions and management has full discretion in determining when the poison pill provision is applicable.18 The purpose of this move is to devalue the stock worth of the target company and dilute the percentage of the target company equity owned by the hostile acquirer to an extent that makes any further acquisition prohibitively expensive for him. FAIR PRICE AMENDMENT Fair-price amendments are supermajority provisions with a board-out clause and an additional clause waiving the supermajority requirement if a fair price is paid for all purchased share. The fair price commonly is defined as the highest price paid by the bidder during a specified period and sometimes is required to exceed an amount determined relative to accounting earnings or book value of the

[31 Charted Accountancy Practice Journal 553 (2010)]

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Swapneshwar Goutam

Anti-takeover Amendments: An overview: as merger management techniques in public M&A deals

target. Thus, fair-price amendments defend against two-tier tender offers that are not approved by the target's board. A uniform offer for all shares to be purchased in a tender offer and in a subsequent cleanup merger or tender offer will avoid the supermajority requirement. Because the two-tier tender offer it is not essential in successful hostile takeovers, the fair-price amendment is the least restrictive in the class of supermajority amendments.19 CLASSIFIED BOARDS Another major type of Antitake over amendment provides for staggered or classified boards of directors to delay effective transfer of control in a takeover. To delay effective transfer and control in a takeover, variations on anti-takeover amendment relating to the board of directors include provisions prohibiting the removal of directors. Except for cause and provision fixing the number of directors allowed preventing "packing" the board.20 AUTHORIZATION OF PREFERRED STOCK The board of directors is authorized to create a new class of securities with special voting rights. This security, typically preferred stock, may be issued to friendly voting rights. The security preferred stock, may be issued to friendly in a control contest. Thus, this device is a defense takeover bid, although historically it was used to provide the board of directors with flexibility in financing under changing economic conditions. Creation of a poison pill security could be included in his category but generally it's excluded from and treated as a different defensive device. ANTITAKE TAKEOVER AMENDMENTS IN INDIA Anti-takeover provisions under Indian law could prevent or deter an entity from acquiring the Company. Indian takeover regulations contain certain provisions that may delay, deter or prevent a future takeover or change in control of the

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Swapneshwar Goutam

Anti-takeover Amendments: An overview: as merger management techniques in public M&A deals

Company. These provisions may discourage a third party from attempting to take control of the Company. Consequently, even if a potential takeover of the Company would result in the purchase of the equity shares at a premium to their market price or would otherwise be beneficial to shareholders, it is possible that such a takeover would not be attempted or consummated because of Indian takeover regulations. In Indian company law regime, the scope for such amendments is highly restricted. Sec. 255 of the Companies Act, 1956, which says about the appointment of director at general meeting; it says appointment of directors at general meeting, it is designed to eradicate the mischief Caused by perpetual managements. At an AGM only one-third of the directors of the company, whose offices are determinable by retirement, will retire. Therefore putting the example in the Indian context, in case of 9 directors, 3 can be made permanent directors by amending the articles i.e. one-third can be given permanent appointment, under Section 255.21 Thus the acquirer would have to wait for at least three annual general meetings before he gains control of the board. But this is subject to Section 284, which provides that the company may by an ordinary resolution, remove a director before the expiration of his period of office. Thus any provision in the articles of the company or any agreement between a director and a company by which the director is rendered irremovable from office by an ordinary resolution would be void, being contrary to the Act. Therefore, to ensure domination of the board of the target management, there needs to be strength to defeat an ordinary resolution.22 PREVIOUS UNDER DIP GUIDELINES The DIP Guidelines also provide that the right to buy warrants needs to be exercised within a period of eighteen months, after which they would automatically lapse. Thus, the target company would then have to revert to the

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Swapneshwar Goutam

Anti-takeover Amendments: An overview: as merger management techniques in public M&A deals

shareholders after the period of eighteen months to renew the shareholders' rights plan. Without the ability to allow its shareholders to purchase discounted shares/options against warrants, an Indian company would not be able to dilute the stake of the hostile acquirer, thereby rendering the shareholders' rights plan futile as a takeover deterrent.23 As seen above in the previous chapters, on the discussion of various amendment defenses mechanism for the poison pill strategy to work best in the Indian corporate scenario certain amendments to the prevalent legal and regulatory framework are required. Importantly a mechanism must be permitted under the Takeover Code and the before amendment of DIP Guidelines which permits issue of shares/warrants at a discount to the prevailing market price. These amendments would need to balance the interests of the shareholders while allowing the target companies to fend off hostile acquirers. 24 That said, history is ripe with examples of how a little legal ingenuity and a few pre-emptive strategies can fend off the advances of the most ardent hostile acquirers. As mentioned earlier in this article series, one of the advantages of the poison pill strategy is that there is no rigid structure to it and it can be tailored to suit the particular needs of a company; as a result, Indian companies are not restricted to adopt the classic version of the pill i.e., the shareholders' rights plan.25 UNDER THE ICDR REGULATION, 2009 New provision which are included by caring out amendment under the new ICDR Regulations, 200926; the AOA and MOA of the company must comply with the DIP guidelines Disclosure about the name and type of organization, brief description of the business of the entity concerned and nature and extent of interest of the promoters shall be given in a tabular form in respect of the following entities irrespective of whether they are under the same management as per Section 370(1B) of the Companies Act. Under the heading of related party

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Swapneshwar Goutam

Anti-takeover Amendments: An overview: as merger management techniques in public M&A deals

transaction enterprises in which a substantial interest in the voting power is owned, directly or indirectly, by any person described in (c) or (d) or over which such a person is able to exercise significant influence. This includes enterprises owned by directors or major shareholders of the issuer. Under Clause 4.51 of ICDR regulation which added up by the amendment to the Takeover Regulations and Listing Agreement that promoters are required to make disclosure about the pledged shares. The Existing provisions of the DIP Guidelines reflects the decision of the Board taken having regard to the changed circumstances. Accordingly, this recommendation of the Committee is not incorporated in the ICDR regulations. Under the recently SEBI(ICDR) Regulations, the exercise price of the warrants must be the average of the weekly high and low of the closing price during the six months or the two weeks preceding the date when the general meeting of the shareholders is held to consider the proposed issue. Additionally, the ICDR Regulations require 25% of the price payable for the warrants to be made upfront, which amount is forfeited if the warrants are not allotted within a period of 18 months.Anti-takeover amendments are basically traditional takeover defenses Indian Companies. EMPLOYEE STOCK OPTIONS SCHEME (ESOS) Another variation of the poison pill that may be explored in India brings the Employee Stock Options Scheme (ESOS) into action. ESOS is governed by the SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1997, whereby a company granting options to its employees pursuant to ESOS have the general freedom to determine the exercise price, subject to the adherence to the accounting policies prescribed under the SEBI guidelines in this regard. Thus, an effective poison pill defence may be achieved by issuing ESOS at a discount, which would serve to dilute the share value of the hostile acquirer over the target company. Indian companies need to shift from

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Swapneshwar Goutam

Anti-takeover Amendments: An overview: as merger management techniques in public M&A deals

desperate defensive play to sitting ready on the offensive. It is time we introduce the poison pill to the Indian business world and adapt it to make it our own. However, the reason for utilizing the poison pill defence is to protect shareholder value and interest while stalling entities such as asset strippers that do not have the best interest of the company in mind or add any value to it. RECENT AMENDMENT TO TAKEOVER REGULATIONS; ANTI TAKE OVER AMENDMENTS Securities and Exchange Board of India (SEBI), in its letter dated July 21, 2009, sent to all stock exchanges, has prohibited public listed companies from issuing shares with superior voting rights or dividends. As all existing listed companies have to remain compliant with the listing agreement, as amended from time to time, SEBI's move will imply that companies with "differential voting rights" DVR shares or shares with differential dividends will now be required to bring them at par with other shares.27 However, no time period for such action has been provided, and such an amendment is likely to be contentious in the case of companies that have already issued DVR shares. The proposed change in the Companies Bill means that companies will no longer have choice of instruments to suit various investment paradigms of investors. Generally, investors desire greater financial flexibility and/or management control. The proposed change in the Companies Bill also denies the controlling shareholder in a company the ability to attain greater degree of control to wardoff takeover threats. DVR shares were held to be legitimate anti-takeover tools by the Company Law Board in its order dated March 12, 2009, when it approved the validity of special series equity shares carrying nil dividends and 20 voting rights per share. These shares allowed Mr Karamjit Jaiswal to gain majority control over Jagatjit Industries Ltd. and successfully abort the takeover of the company by his relatives.

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Swapneshwar Goutam

Anti-takeover Amendments: An overview: as merger management techniques in public M&A deals

In brief by highlighting dominant points which have come up as enthralling by recent aforesaid decision of principle company law board, New Delhi., in the case of Anand Pershad Jaiswal and Ors. v. Jagatjit Industries Limited 28, the petitioners representing 11.5% of the Issued Share Capital of the Company filed a Petition under Section 397 and 398 of the Companies Act, 1956, aggrieved on account of certain alleged acts of oppression and mismanagement in the affairs of the Company (Jagatjit Industries Limited (JIL), The following relief's were claimed before the board as follows:a) Board of Respondent No. 1 stands superseded and appoint an Administrator to take charge of the management and affair of the Company and its books, papers, records and documents for ensuring smooth and proper functioning of the Company. b) Frame a scheme for management, administration and control of the affairs of the Company on such terms and conditions. c) Declare that the allotment of 25,00,000 Equity Shares of the Respondent No. 1 to the Respondent No. 7 Company, by the Board Resolution dated 30.4.2004 read with the resolution dated 16.6.2004 passed at the EGM of the Respondent No. 1 company is null and void and cancel the same; d) the transfer of shares held by Respondent No. 1 in L.P. Investment to group companies of Respondent No. 2 to be null and void and restitute the same investments in the hands of Respondent No. 1. Hon'ble chairman of the board formed the view that there was no merit in the challenge to the allotment of shares with differential voting rights on the facts as also legally and the preferential allotment of the shares made by the Company on 16.5.2004 was legally permissible in view of the provisions of Section 86 of the

[31 Charted Accountancy Practice Journal 553 (2010)]

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Swapneshwar Goutam

Anti-takeover Amendments: An overview: as merger management techniques in public M&A deals

Companies Act, 1956 as amended by the Companies Amendment Act, 2000, read with the Companies (Issue of Share Capital with Differential Voting Rights) Rules, 2001. After the amendment to the Companies Act by the Amendment Act of 2000 the issue of shares with DVR is permissible under the provisions of the Companies Act, 1956. With regard to the Articles of Association of the Company I am of the view that in view of the provisions of the "Capital" clause in the Memorandum read along with the Articles of Association of the Company the Respondent No. 1 was authorized to issue shares with DVRs. In contemplating the facts more critically a settlement was planned between Jagajit Industries Ltd. and L.P. Jaiswal & sons pvt. Ltd., they were to be purchased at Rs. 36,50,00,000/- (Rupees Thirty Six corer fifty lakhs) for each. Further development of the case which was not in favour of appellant the respondent company buyback the shares, and appellant contested against them claiming action amount to be against the order passed amounts to oppression and mismanagement, and preferential allotment of shares and DVR is legally permissible. However, regulators can argue that DVR shares distort the balance between rights and corresponding duties for a class of shareholders. DVR shareholders could oppress the minority or obstruct legitimate participation by other shareholders. Having voting power without commensurate economic interest in a company poses the threat of (a) mismanagement (since the board may be easily replaced); (b) misuse of voting power as little or no financial loss may be incurred; and (c) poor corporate governance.29 On the hand the development Clause 28A is inserted after clause 28 of the Listing Agreement: The company agrees that it shall not issue shares in any manner which may confer on any person, superior rights as to voting or dividend vis--vis the rights on equity shares that are already listed SEBI further amended Clause 19 of the Listing Agreement by inserting a sub-clause (d) after sub-clause (C).30 Accordingly

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Swapneshwar Goutam

Anti-takeover Amendments: An overview: as merger management techniques in public M&A deals

Clause 19 (d) is inserted after clause 19 (C) of the Listing Agreement:that in case of a further public offer to be made through the fixed price route, the company shall notify the stock exchange, at least 48 hours in advance, of the proposed meeting of its Board of Directors convened for determination of issue price. Companies Bill means that companies will no longer have choice of instruments to suit various investment paradigms of investors. Generally, investors desire greater financial flexibility and/or management control. While in India, the notable examples of companies that have issued DVR Shares are Tata Motors and Pantaloon Retail, in the US, DVR shares have been issued by Google, Ford and Berkshire Hathaway. DVR shares were held to be legitimate anti-takeover tools by the Company Law Board in its order dated March 12, 2009, when it approved the validity of special series equity shares carrying nil dividends and 20 voting rights per share. DVR shareholders could oppress the minority or obstruct legitimate participation by other shareholders. Availing voting power without commensurate economic interest in a company poses the threat of; (a) Mismanagement (since the board may be easily replaced); (b) Misuse of voting power as little or no financial loss may be incurred; (c) Poor corporate governance. While the regulators' effort to balance the interests of majority and the minority shareholders is commendable, the rationale for limiting the ability to issue DVR shares by private companies or closely held public unlisted companies is not clear.31 As regards the current amendment the proposed change in the Companies Bill also denies the controlling shareholder in a company the ability to attain greater degree of control to ward-off takeover threats. Other amendments in Companies Act, 1956 to the effect changes might create factors for combating takeover

[31 Charted Accountancy Practice Journal 553 (2010)]

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Swapneshwar Goutam

Anti-takeover Amendments: An overview: as merger management techniques in public M&A deals

riders

and

facilitate

restructuring

the

corporate

to

increase

global

competitiveness, by introduction of non voting shares, inter corporate investments within the limits specified under section 372A to enable it to over come liquidity, domestic financial institutions and safe guard of new article, are different strategic modes adopted by amending charter/constitution of Company as too, preventive measures for defence or other precautionary measures as maintaining friction of shares as strongest mood of defense. ANTI-TAKEOVER AMENDMENT AND FUND RAISING ISSUES THE GOVERNANCE ISSUE This part deals with the empirical studies carried to critic over the use of antitakeover amendment and their rationale in governance of public offering. At the time of their IPO, the effect of staggered boards on hostile bids, the relation between poison pills and takeover premia, legislatively imposed staggered boards, and shareholder voting on staggered boards. According to an empirical study by Robert Daines and Michael lausner, about 40% of IPO companies have staggered boards.32 Another 20% do not have staggered boards, but only about 10% of the companies have stricter antitakeover defenses, such as dual-class stock, and none restrict the ability of boards to adopt a poison pill make it difficult to remove directors between annual meetings.33 About 30% of the companies permit removal of directors between annual meetings, thereby basically adopting a shareholder choice regime. Only about 10% of the companies have stricter antitakeover defenses, such as dualclass stock, and none restrict the ability of boards to adopt a poison pill. It is noteworthy that, for a long time, it was widely believed that the governance structure at the IPO stage reflects the terms that maximize the value of the company.34 In the 1980s, mainstream academic opinion took it as a given that

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Swapneshwar Goutam

Anti-takeover Amendments: An overview: as merger management techniques in public M&A deals

governance rules set at the time of an IPO are likely to be efficient and was distrustful of rule changes after a company had gone public ("mid-stream" changes).35Academic opinion started to shift in the late 1990s. The Factors : The findings that IPO charters regularly include antitakeover provisions brought to the fore the inconsistency of two cherished academic views: the efficiency of the IPO market and the inefficiency of antitakeover provisions. Increased stock ownership by institutional investors arguably improved the quality of voting decisions. Academics noticed that, although investors regularly purchase shares of companies with antitakeover provisions at the IPO stage,36 they often vote against new antitakeover provisions mid-stream. Thus, Email from antitakeover devices are correlated to the average number of parties making acquisition bids in a firm's history. They argue that a target needs less bargaining power when it can entice a competing bid and use the average number of bidders in a target's industry is a proxy for competition. They find that antitakeover defenses are positively correlated with the average number of bidders, which is inconsistent with their interpretation of the bargaining power theory. However, as discussed, the extent of potential competition is only one of several factors that determine the optimal selling strategy and the average number of bidders in an industry is, at best, a rough proxy for the degree of competition for a specific target. An empirical research conducted by Daines and Klausner, try to test the validity, of the bargaining hypothesis by examining whether the antitakeover devices are correlated to the average number of parties making acquisition bids in a firm's history. They argue that a target needs less bargaining power when it can entice a competing bid and use the average number of bidders in a target's industry is a proxy for competition. They find that antitakeover

[31 Charted Accountancy Practice Journal 553 (2010)]

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Swapneshwar Goutam

Anti-takeover Amendments: An overview: as merger management techniques in public M&A deals

defenses are positively correlated with the average number of bidders, which is inconsistent with their interpretation of the bargaining power theory. However, as discussed, the extent of potential competition is only one of several factors that determine the optimal selling strategy and the average number of bidders in an industry is, at best, a rough proxy for the degree of competition for a specific target.37 Structure at the IPO stage reflects the terms that maximize the value of the company. In the Antitakeover rules and are set at the time of an IPO are likely to be efficient and was distrustful of rule changes after accompany had gone public ("mid-stream" changes).38 Its one of the defense has, improving corporate governance could be a strategy for outperforming competitors in financial markets throughout world in India under listing agreement the amendment rule are mentioned which are to be necessarily followed by the Companies. Rather antitakeover are distinct on that issues. ANTITAKEOVER AMENDMENTS VIS--VIS CORPORATE POLICY The effects of antitakeover statutes on firm leverage were studied by Garvey and Hanka,39 in their empirical studies, the analysis was based on a sample of 1,203 firms and covering data for the period 1983 to 1993. It states about the firstgeneration antitakeover laws that in Edgar v. MlTE were ruled to be preempted by the federal 1968 Williams, Act. In 1987, the Supreme Court reversed in Dynamics v. CTS. ruling that state antitakeover laws are enforceable as long as they do not prevent compliance with the Williams Act. After all this ruling, a majority of the states passed new anti takeover statutes between 1987 and 1990. The second generation of laws with a control sample of firms in states without such laws. Protected firms substantially reduced their debt ratios compared to the control group over a period of 4 years. The results arc not int1uenced by variations in size, industry, or profitability. In their research analyses they found

[31 Charted Accountancy Practice Journal 553 (2010)]

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Swapneshwar Goutam

Anti-takeover Amendments: An overview: as merger management techniques in public M&A deals

weak evidence that protected managers undertake fewer major restructuring programs.40 They also founded that firms eventually covered by antitakeover legislation used greater leverage in the years preceding the adoption of the statutes. This is further evidence of the substitution between increased leverage and protection by the state antitakeover laws. The impact of antitakeover amendments on the financial performance of the firm, the main object is benefiting financial attributes before and after the amendment adoption. Specifically, pre- antitakeover variables based on 3-year averages financial attributes prior to the antitakeover amendment were compared to the postannouncement variables in each of the 5 years after the adoption. Four categories of financial performance were used in the analysis) income (ratio of operating and net income to total assets). expenses (ratio or operating and overhead expenses to sales), investment (ratio of R&D and capital expenditures to sales) and debt (ratio of debt to total assets). Raw and industry-adjusted data changes were analyzed.41 Overall more specifically analyzed it can be correctly said that the effect of antitakeover amendments, or shark repellents, on longterm managerial decision making,42 it can be argued that amendment, do help raising falling R& D by implementing antitakeover amendments. ENVIRONMENT BUILDING VIS-A VIS DEFENCE MECHANISM "To throw your hat in the ring" is for valuation to be a main concern which asks for the quality defence mechanisms will be helpful in protection hostile takeover environment. The side regulations and laws also plays a major role in domestic hostile takeover protection; now quality question that arise before us is under which two major characteristics first is under the lights of games acquisitions which is played for valuation and defence mechanism for better value. Perhaps its does not means that hostile takeover do not create value; it can be said that there is no provision under the Takeover Regulation code of India for the hostile takeover control, and question yet prevails in public M&A regime which need to

[31 Charted Accountancy Practice Journal 553 (2010)]

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Swapneshwar Goutam

Anti-takeover Amendments: An overview: as merger management techniques in public M&A deals

be addressed. Under the code there is no provision to protect hostile acquisition almost nothing; a principle which attracts prevails under takeover code and its combination is social, economic and financial mixture under the code. There are anomalism's in the takeover regulation remains and for sound sophisticated and quality M&A deals the code requires to resolve all the undesirable cookies, and what I personal feel is that if all theses hurdle, and clogging; are resolved will open a ways for sound dealings with takeover which need to be deliberatively dealt with regards to national security and in providing more sound environment and which shall also provide for quality public M&A. CONCLUSION : Overall analogy can be which drawn from the above discussion that considering many of the economic and legal issues concerning takeovers, the question remains: What result? It is often considerably easier to point out problems than it is to provide effective solutions. Yet, the evidence indicates that Indian legislatures are doing something very similar providing solutions to ill-defined problems. The absence of appropriate legislation under Indian corporate laws can be felt, SEBI takeover code with regard to dynamic framework in providing strong propos, defensive strategic against the corporate rider. The perceived problems in the market for corporate charters provide an opportunity for special interests to impose their preferences on the entire nation with the adoption of preemptive. Is strongly arguable!

_____________________________ * BA, LLB (Bachelors in Law) Hons.

[31 Charted Accountancy Practice Journal 553 (2010)]

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Swapneshwar Goutam

Anti-takeover Amendments: An overview: as merger management techniques in public M&A deals

1. Barry D. B, and Henry N. Butler, (1985), "Antitakeover Amendments, Managerial Entrenchment, and The Contractual Theory Of The Corporation". 71 Va. L. Rev. 125 2. Borokhovich.KA, Kelly R. B &Robert P, (1997), "CEO Contracting and Antitakeover Amendments," The Journal of Finance, Vol. 52, No. 4,1495-1517. 3. Harris, E. G., (1990). "Antitakeover Measures, Golden Parachutes, and Target Firm Shareholder Welfare", RAND Journal of Economics 21: 614-625. 4. Johnson, Mark S. and Rao. P.R, (1997), "Does Antitakeover Protection Reduce Myopic Managerial Investment Behaviour?", Journal Of Managerial Issues, 9:147-511. 5. Brickley, Lease, and Smith, (1988), "Ownership Structure & Voting on Antitakeover Amendments", Journal of Financial Economics, 20, 267-292. 6. Id 7. Fred.W.J, Siu. I.A., & Johnson.B, Takeover Reconstruction and Corporate Governance, 3rd Ed, Pretine Hall, 563-569 8. Sandipan Ray, "Dilution Of Voting Right And The Market For Corporate Control", Accessed on 01.Dec.,2009.at 9. Gilson, R., 1981, "A Structural Approach to Corporations: The Case against Defensive Tactics in Tender Offers", Stanford Law Review 33. 10. Id. 11. Linn and McConnell, (1983), "An empirical investigation of the impact of `antitakeover' amendments on common stock prices," Journal of Financial Economics, 11, pp. 361-99.

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Anti-takeover Amendments: An overview: as merger management techniques in public M&A deals

12. McWilliams.B, (1990). "Managerial share ownership and the stock price effects of antitakeover amendment proposals", Journal of Finance, 45, 1627- 40. 13. Wilson, Siu & Johnson, Supra note.7 at 572 14. R. Comment, and G. W. Schwert, (1995). "Poison or placebo? Evidence on the deterrence and wealth effects of modern antitakeover measure" Journal of Financial Economics, 39, 3-43. 15. Malatesta and Walkling, "Poison pill securities: Stockholder wealth, profitability, and ownership structure." Journal of Financial Economics, 20, 34776. 16. Luthra & Luthra, India , News Letter, Can India Inc Swallow the Poison Pill December 2008 available at

http://www.legalink.ch/member_firm_publications_detail.php?aId=351 17. Choi, S. Kamma, and J. Weintrop, (1989), "The Delaware courts, poison pills, and shareholder wealth". Journal of Law, Economics, and Organization, 5, 37593. 18. P. Walsh, and J. K. Seward, (1990). "On the efficiency of internal and external corporate control mechanisms", Academy of Management Review, 15, 421-58. 19. Supra note 7 at 568. 20. Supra note 7 at 572. 21. Majumdar & Kapoor, "Company Law and Practice", 14th Ed, Taxman, pp. 823. 22. "Corporate Restructuring and Insolvency ", ICSI, Model II, Paper 4, pp.209 10.

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Anti-takeover Amendments: An overview: as merger management techniques in public M&A deals

23. http://www.legalink.ch/member_firm_publications_detail.php?aId=351 >.

Luthra,

24. Rajic K Luthra, "Can India Sallow Poison Plls," , Accessed on Dec.02.2009, available ar. 25. Id. 26. SEBI/CFD/DIL/ICDRR/1/2009/03/09 September 3, 2009 27. Why Blanket Ban on shares with different ional voting rights, The Hindu Business life, Aug.19,2009. accessed on Dec.02,2009 from<

http://sify.com/finance/why-blanket-ban-on-shares-with-differential-votingrights-news-news-jitkfRihdjh.html> 28. CP.No. 60. of 2007. Manupatra citation -MANU/CL/0002/2009 29. Supra note 26 30. SEBI vide its circular No.SEBI/CFD/DIL/LA/3/2009/03/09 dated September 03, 2009. 31. See Supra note 26. 32. Daines R & Klausner, M.Do "IPO Charters Maximize Firm Value? Antitakeover Protection in IPOs," 17 J. L. Econ. & Org. 83, 88-89 (2001) 33. Id 34. Id at 83 35. Lucian A. Bebchuk , (1989), "Foreword: The Debate on Contractual Freedom in Corporate Law", 89 Colum. L. Rev. 1395, 1399-1408 36. Supra Note 31

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Anti-takeover Amendments: An overview: as merger management techniques in public M&A deals

37. Khan & Rock, (2003) "Corporate Constitutionalism: Antitakeover Charter Provisions as Pre-Commitment", SSRN accessed on Dec.1, 2009.

http://papers.ssrn.com/abstract=416605 38. Jeffrey N. Gordon, (1989), "The Mandatory Structure of Corporate Law", 89 Colum. L. Rev. 1549, 1553-62 39. Gravey & Hank,(1997) "Capital Structure and Corporate Control: The Effect of Antitakeover statutes on firm leverage, " Jrn'l of Finance & Accounting, 23, pp. 45-63 40. Johnson, Wetson,& Siu, supra note 7 41. Johnson & Rao supra note 4. 42. Meulbroek, Mitchell. Mulherin. Netter. and Poulsen (1990) "Shark Repellant and Managerial Mayopia; An Empirical Test " 98 pp., 1108-17.

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