The legislations/regulations that mainly govern takeover is as under

1. SEBI (SAST) Regulations 2011

2. Companies Act, 1956
3. Listing Agreement

When promoters of a company desire to expand, they take a

quick view of the industrial and business map. If they find there
are opportunities, they will always yearn for capitalizing such
opportunities. Compared to the efforts required, cost and time
needed in setting up a new business, it would make sense to
them to look at the possibilities of acquiring an existing entity
SEBI (Substantial Acquisition of Shares and Takeovers) 2011
prescribes disclosure requirements, open offer thresholds and
other procedural aspects to takeover.
Section 230-240 of Companies Act, 2013 are not yet notified and
accordingly the provisions of Companies Act, 1956 are dealt in this lesson.
Takeover, an inorganic corporate growth device whereby one company
acquires control over another company, usually by purchasing all or a
majority of its shares. Takeover implies acquisition of control of a
company, which is already registered, through the purchase or exchange
of shares. Takeovers usually take place when shares are acquired or
purchased from the shareholders of a company at a specified price to the
extent of at least controlling interest in order to gain control of that
company.
Takeover of management and control of a business enterprise could take
place in different modes. The management of a company may be acquired
by acquiring the majority stake in the share capital of a company. A
company may acquire shares of an unlisted company through what is
called the acquisition under Section 395 of the Companies Act, 1956.
Where the shares of the company are closely held by a small number of
persons, a takeover may be effected by agreement with the holders of
those shares. However, where the shares of a company are widely held by
the general public, it involves the process as set out in the SEBI
(Substantial Acquisition of Shares and Takeovers) Regulations, 2011.
Ordinarily, a larger company takes over a smaller company. In a reverse
takeover, a smaller company acquires control over a larger company.
The takeover strategy has been conceived to
 Improve corporate value,
 Achieve better productivity and
 Profitability by making optimum use of the available resources in
the form of men, materials and machines.

KINDS OF TAKEOVER
Takeovers may be broadly classified into three kinds:
(i) Friendly Takeover: Friendly takeover is with the consent of taken over
company. In friendly takeover, there is an agreement between the
management of two companies through negotiations 122 PP-CRVI and
the takeover bid may be with the consent of majority or all
shareholders of the target company. This kind of takeover is done
through negotiations between two groups. Therefore, it is also called
negotiated takeover.
(ii) Hostile Takeover: When an acquirer company does not offer the target
company the proposal to acquire its undertaking but silently and
unilaterally pursues efforts to gain control against the wishes of
existing management.
(iii) Bail Out Takeover: Takeover of a financially sick company by a profit
earning company to bail out the former is known as bail out takeover.
There are several advantages for a profit making company to takeover
a sick company. The price would be very attractive as creditors, mostly
banks and financial institutions having a charge on the industrial
assets, would like to recover to the extent possible. Banks and other
lending financial institutions would evaluate various options and if
there is no other go except to sell the property, they will invite bids.
Such a sale could take place in the form by transfer of shares. While
identifying a party (acquirer), lenders do evaluate the bids received,
the purchase price, the track record of the acquirer and the overall
financial position of the acquirer. Thus a bail out takeover takes place
with the approval of the Financial Institutions and banks.
TAKEOVER BIDS
“Takeover bid” is an offer to the shareholders of a company, whose shares
are not closely held, to buy their shares in the company at the offered price
within the stipulated period of time. It is addressed to the shareholders with a
view to acquiring sufficient number of shares to give the offeror company,
voting control of the target company. A takeover bid is a technique, which is
adopted by a company for taking over control of the management and affairs
of another company by acquiring its controlling shares.

OPEN OFFER AND DISCLOSURE

REQUIREMENTS
An 'open offer' is the offer made by a potential acquirer to the public
shareholders of the company. The purpose behind the concept of an open
offer is that in case of a change of management of a listed company, the
public shareholders must be given an opportunity to exit the company. An
 open offer is made by the acquirer for a minimum of 26% of the share
capital of the company. Since, as an initial trigger, the open offer is to be
made only when the shareholding of the acquirer hits 25%, the offer to
purchase a further 26% would lead the acquirer to have a simple majority
of 51% of the company. This would enable the acquirer to replace the
board of directors and to change the management structure of the
company.
When making an open offer, an acquirer is ordinarily required to offer to
purchase at least 26% of the share capital of the company. However, if the
offer were to be successful in its entirety, there may be a situation,
wherein the public shareholding may be reduced to below 25%. In such
cases, the open offer may be made for a number of shares which would
take the shareholding of the acquirer beyond the maximum permissible
non-public shareholding limit. But the acquirer would be required to
increase the public shareholding within 1 year of the open offer. The par
ties would be required to make the following disclosures under Chapter V
of the Takeover Code to the stock exchanges where the shares of the
Target Company are listed and to the SEBI:
(1) Disclosure of every acquisition of shares in excess of 2% of the shares of
the Target Company where the acquirer holds more than 5% of the shares
and
(2) Annual disclosure of the aggregate shareholding of the promoters of the
Target Company and of shareholders holding more than 25% of the shares of
the Target Company

Open offer thresholds (Regulation 3)

The following are the shareholding/voting rights thresholds that trigger a
mandatory open offer
Acquisition of 25% or more shares or voting rights: An acquirer, who (along with
PACs, if any) holds less than 25% shares or voting rights in a target company and
agrees to acquire shares or acquires shares which along with his/PAC’s existing
shareholding would entitle him to exercise 25% or more shares or voting rights
in a target company, will need to make an open offer before acquiring such
additional shares.
Acquisition of more than 5% shares or voting rights in a financial year: An
acquirer who (along with PACs, if any) holds 25% or more but less than the
maximum permissible non-public shareholding in a target company, can acquire
additional shares in the target company as would entitle him to exercise more
than 5% of the voting rights in any financial year ending March 31, only after
making an open offer.

Open offer Process

1. Appointment of Manager to the offer Prior to making of a public
announcement, the acquirer shall appoint Merchant Banker registered with the
Board, who is not an associate of the acquirer, as manager to the offer.
2. The public announcement of the open offer for acquiring shares required
under these regulations shall be made by the acquirer through such manager to
the open offer.
3. Public announcement.
SEBI (SAST) Regulation, 2011 provides that whenever Acquirer acquires the
shares or voting rights of the Target Company in excess of the limits prescribed
under Regulation 3 and 4, then the Acquirer is required to give a Public
Announcement of an Open Offer to the shareholders of the Target Company.
During the process of making the Public Announcement of an Open Offer, the
Acquirer is required to give Public Announcement and publish Detailed Public
Statement.
The term ‘offer period’ pertains to the period starting from the date of the event
triggering open offer till completion of payment of consideration to shareholders
by the acquirer or withdrawal of the offer by the acquirer as the case may be.
The term ‘tendering period’ refers to the 10 working days period falling within
the offer period, during which the eligible shareholders who wish to accept the
open offer can tender their shares in the open offer.
Withdrawal of open offer (Regulation 23)
An open offer once made cannot be withdrawn except in the following
circumstances:
• Statutory approvals required for the open offer or for effecting the acquisitions
attracting the obligation to make an open offer have been refused subject to
such requirement for approvals having been specifically disclosed in the DPS and
the letter of offer;
• Any condition stipulated in the SPA attracting the obligation to make the open
offer is not met for reasons outside the reasonable control of the acquirer,
subject to such conditions having been specifically disclosed in the DPS and the
letter of offer;
• Sole acquirer being a natural person has died;
• Such circumstances which in the opinion of SEBI merit withdrawal of open offer

Exemptions from open offer (Regulation 10)

Exemption may be Automatic Exemption (under Regulation 10)
Exemption by SEBI (Regulation 11)
Voluntary Offer (Regulation 6)
A voluntary open offer under Regulation 6, is an offer made by a person who
himself or through Persons acting in concert ,if any, holds 25% or more shares or
voting rights in the target company but less than the maximum permissible non-
public shareholding limit.

Conditional offer (Regulation 19)

An offer in which the acquirer has stipulated a minimum level of acceptance is
known as a ‘conditional offer’. ‘Minimum level of acceptance’ implies minimum
number of shares which the acquirer desires under the said conditional offer. If
the number of shares validly tendered in the conditional offer, are less than the
minimum level of acceptance stipulated by the acquirer, then the acquirer is not
bound to accept any shares under the offer. In a conditional offer, if the
minimum level of acceptance is not reached, the acquirer shall not acquire any
shares in the target company under the open offer or the Share Purchase
Agreement which has triggered the open offer.

Competing offer (Regulation 20)

Competitive offer is an offer made by a person, other than the acquirer who has
made the first public announcement. A competitive offer shall be made within 15
working days of the date of the Detailed Public Statement (DPS) made by the
acquirer who has made the first PA. If there is a competitive offer, the acquirer
who has made the original public announcement can revise the terms of his open
offer provided the revised terms are favorable to the shareholders of the target
company. Further, the bidders are entitled to make revision in the offer price up
to 3 working days prior to the opening of the offer. The schedule of activities and
the offer opening and closing of all competing offers shall be carried out with
identical timelines.
The term 'competing offers' refer to an offer given by any other person
(Competing Acquirer) after an offer has already been given by an acquirer to the
shareholders of the Target Company to acquire the shares held by [Link]
example: If 'A' (Acquirer) has already given an open offer in terms of SEBI (SAST)
Regulations, 2011 to the shareholders of X Ltd. (Target Company) and
subsequently during the relevant period, B (any other person) also gives the
similar offer to the shareholders of the Target Com pany, then offer given by B
shall be termed as 'Competing Offer' in terms of these regulations. Regulation 20
of SEBI (SAST) Regulations, 2011 deals with the concept of competing offer. As
per Regulation 20(1), upon a public announcement of an open offer for acquiring
shares of a Target Company being made, any person, other than the acquirer
who has made such public announcement, shall be entitled to make a public
announcement of an open offer within 15 working days of the date of the
detailed public statement (DPS) issued by the acquirer who has made the
first public announcement.
The highlights are:
(1) Competing offer can be made within 15 working days from the date of
DPS made by the acquirer who makes the first public announce ment;
(2) Unless the first open offer is a conditional offer, the competing offer cannot
be made conditional as to the minimum level of acceptance;
(3) A competing offer is not regarded as a voluntary open offer and
therefore all the provisions of SEBI (SAST) Regulations, 2011 would also apply in
case of competing offer;
(4) Upon public announcement of competing offer, an acquirer who had made a
preceding offer is allowed to revise the terms of his open offer; if the terms
are more beneficial to the shareholders of the Target Company and
(5) There shall be no induction of any new director to the board of directors
of the Target Company during the pendency of competing offers.

WITHDRAWAL OF OFFERS

Once an offer is made, then even if it is voluntary offer, acquirer is not free to
withdraw it at any point of time and on any circumstance. The new Takeover
Regulations contain the provision relating to withdrawal of an open offer.
Regulation 23 starts with a negative command, that as a gen-eral rule, a
public offer once made shall not be allowed to be withdrawn, but in
exceptional circumstances, it can be withdrawn.
Achuthan Committee on withdrawal of an open offer had observed that:
"Once an open offer is made, its inexorable conclusion ought to be the
completion of of the open offer. However, there could be circumstances
where the open offer cannot be completed. These circumstances can be
classified into two types: Viz:
(1) Where it is rendered impossible for the open offer to continue. For
example: death of an acquirer who is an individual or rejection of any
statutory approval required for the offer, and
(2) Non-attainment of any condition stipulated in the agreement that
attracted the open offer obligation for reasons beyond the control of the
acquirer, resulting in the agreement itself not being acted upon."
Therefore, a Voluntary Open Offer can be withdrawn only when there is a (1)
Statutory refusal, (ii) Death of the acquirer and (iii) Circumstances meriting
the withdrawal. In statutory refusal and death of the acquirer, SEBI will allow
withdrawing the offer on proof of the above fact. How-ever, in case of
circumstances meriting the withdrawal, SEBI has discretion whether the
grounds as mentioned by the applicant are sufficient to withdraw the offer or
not. Recently, SEBI has held that a voluntary offer once made under the
 Takeover Code can only be withdrawn under exceptional circumstances and a
mere delay in the public offer coupled with a fall in market price or
devaluation of earning per share cannot be reasons to permit the withdrawal
of a public offer.

Obligations of the acquirer.(Regulation 25)

Prior to making the public announcement of an open offer for acquiring shares,
the acquirer shall ensure that firm financial arrangements have been made for
fulfilling the payment obligations under the open offer and that the acquirer is
able to implement the open offer, subject to any statu-tory approvals for the
open offer that may be necessary. In the event the acquirer has not declared an
intention in the DPS and the letter of offer to alienate any material assets of the
Target Company or any of its subsid-iaries whether by way of sale, lease,
encumbrance or otherwise outside the ordinary course of business, the acquirer,
where he has acquired con-trol over the Target Company, shall be debarred from
causing such alien-ation for a period of 2 years after the offer period. Provided
that in the event the Target Company is required to so alienate assets despite
the intention to alienate not having been expressed by the acquirer, such
alienation shall require a special resolution passed by shareholders of the Target
Company. The acquirer shall ensure that the contents of the public
announcement, the DPS, the letter of offer and the post offer advertise-ment are
true, faig and adequate. The acquirer and persons acting in con-cert with him
shall not sell shares of the Target Company held by them during the offer period.
(1) Prior to making the public announcement of an open offer for acquiring
shares under these regulations, the acquirer shall ensure that firm financial
arrangements have been made for fulfilling the payment obligations under the
open offer and that the acquirer is able to implement the open offer, subject to
any statutory approvals for the open offer that may be necessary.
(2) In the event the acquirer has not declared an intention in the detailed public
statement and the letter of offer to alienate any material assets of the target
company or of any of its subsidiaries whether by way of sale, lease,
encumbrance or otherwise outside the ordinary course of business, the acquirer,
where he has acquired control over the target company, shall be debarred from
causing such alienation for a period of two years after the offer period: Provided
that in the event the target company or any of its subsidiaries is required to so
alienate assets despite the intention to alienate not having been expressed by
the acquirer, such alienation shall require a special resolution passed by
shareholders of the target company, by way of a postal ballot and the notice for
such postal ballot shall inter alia contain reasons as to why such alienation is
necessary.
(3) The acquirer shall ensure that the contents of the public announcement, the
detailed public statement, the letter of offer and the post-offer advertisement are
true, fair and adequate in all material aspects and not misleading in any material
particular, and are based on reliable sources, and state the source wherever
necessary.
(4) The acquirer and persons acting in concert with him shall not sell shares of
the target company held by them, during the offer period.
(5) The acquirer and persons acting in concert with him shall be jointly and
severally responsible for fulfillment of applicable obligations under these
regulations.

Obligations of the board/target company.(Regulation 26)

Upon a public announcement of an open offer for acquiring shares of a Target
Company being made, the board of directors of such Target Com-pany shall
ensure that during the offer period, the business of the Target Company is
conducted in the ordinary course consistent with past prac-tice. During the offer
period, unless the approval of shareholders of the Target Company by way of a
special resolution by postal ballot is obtained, the board of directors of the
Target Company shall not:

(1) alienate any material assets whether by way of sale, lease, encum-brance or
otherwise or enter into any agreement therefore outside the ordinary course of
business;

(2) effect any material borrowings outside the ordinary course of busi-ness;
(3) issue or allot any authorized but unissued securities entitling the holder to
voting rights;

(4) implement any buy-back of shares or affect any other change to the capital
structure of the Target Company;

(5) enter into, amend or terminate any material contracts to which the Target
Company is a party outside the ordinary course of business;

(6) accelerate any contingent vesting of a right of any person to whom the
Target Company may have an obligation;

(7) Upon receipt of the DPS, the board of directors of the Target Com-pany shall
constitute a committee of independent directors to pro-vide reasoned
recommendations on such open offer and

(8) The board of directors of the Target Company shall without any delay register
the transfer of shares acquired by the acquirer in physical form.
(1) Upon a public announcement of an open offer for acquiring shares of a target
company being made, the board of directors of such target company shall
ensure that during the offer period, the business of the target company is
conducted in the ordinary course consistent with past practice.
(2) During the offer period, unless the approval of shareholders of the target
company by way of a special resolution by postal ballot is obtained, the board of
directors of either the target company or any of its subsidiaries shall not,— (a)
alienate any material assets whether by way of sale, lease, encumbrance or
otherwise or enter into any agreement therefor outside the ordinary course of
business;
(b) effect any material borrowings outside the ordinary course of business;
(c) issue or allot any authorised but unissued securities entitling the holder to
voting rights:
Provided that the target company or its subsidiaries may,—
(i) issue or allot shares upon conversion of convertible securities issued
prior to the public announcement of the open offer, in accordance with
pre-determined terms of such conversion;
(ii) issue or allot shares pursuant to any public issue in respect of which
the red herring prospectus has been filed with the Registrar of
Companies prior to the public announcement of the open offer; or
(iii) issue or allot shares pursuant to any rights issue in respect of which
the record date has been announced prior to the public announcement
of the open offer;
(d) implement any buy-back of shares or effect any other change to the
capital structure of the target company;
(e) enter into, amend or terminate any material contracts to which the target
company or any of its subsidiaries is a party, outside the ordinary course of
business, whether such contract is with a related party, within the meaning of
the term under applicable accounting principles, or with any other person;
and
(f) accelerate any contingent vesting of a right of any person to whom the
target company or any of its subsidiaries may have an obligation, whether
such obligation is to acquire shares of the target company by way of
employee stock options or otherwise.
(3) In any general meeting of a subsidiary of the target company in respect of
the matters referred to in sub regulation
(2), the target company and its subsidiaries, if any, shall vote in a manner
consistent with the special resolution passed by the shareholders of the
target company.
(4) The target company shall be prohibited from fixing any record date for a
corporate action on or after the third working day prior to the commencement
of the tendering period and until the expiry of the tendering period.
(5) The target company shall furnish to the acquirer within two working days
from the identified date, a list of shareholders as per the register of members
of the target company containing names, addresses, shareholding and folio
number, in electronic form, wherever available, and a list of persons whose
applications, if any, for registration of transfer of shares are pending with the
target company: Provided that the acquirer shall reimburse reasonable costs
payable by the target company to external agencies in order to furnish such
information.
(6) Upon receipt of the detailed public statement, the board of directors of the
target company shall constitute a committee of independent directors to
provide reasoned recommendations on such open offer, and the target
company shall publish such recommendations: Provided that such committee
shall be entitled to seek external professional advice at the expense of the
target company.
(7) The committee of independent directors shall provide its written reasoned
recommendations on the open offer to the shareholders of the target
company and such recommendations shall be published in such form as may
be specified, at least two working days before the commencement of the
tendering period, in the same newspapers where the public announcement of
the open offer was published, and simultaneously, a copy of the same shall
be sent to,— (i) the Board; (ii) all the stock exchanges on which the shares of
the target company are listed, and the stock exchanges shall forthwith
disseminate such information to the public; and (iii) to the manager to the
open offer, and where there are competing offers, to the manager to the open
offer for every competing offer.
(8) The board of directors of the target company shall facilitate the acquirer in
verification of shares tendered in acceptance of the open offer.
(9) The board of directors of the target company shall make available to all
acquirers making competing offers, any information and co-operation
provided to any acquirer who has made a competing offer.
(10) Upon fulfillment by the acquirer, of the conditions required under these
regulations, the board of directors of the target company shall without any
delay register the transfer of shares acquired by the acquirer in physical form,
whether under the agreement or from open market purchases, or pursuant to
the open offer.

S. Viswanathan v. East India Distilleries and Sugar Factories Ltd.

(Madras High Court, 1956) involved a challenge under Section 395 of the
Indian Companies Act, 1956. The petitioners opposed a scheme whereby East
 India Distilleries and Sugar Factories Ltd., through Parry and Co. Ltd., sought
to acquire shares from dissenting minority shareholders after approval by an
overwhelming majority. The Court dismissed the petition, holding that the
scheme was lawful, not improper, and that the majority shareholders’
statutory power to acquire minority shares under Section 395 was valid and
not unconstitutional.
Das Saraf And Ors. v. Dalmia Dadri Cement Ltd. And Anr. (1958)
involved minority shareholders, led by Benarsi Das Saraf, petitioning for the
rectification of their company's share register under Section 155 of the
Companies Act, 1956. They challenged a scheme by a new company,
Swadesh Nirman Private Limited, to compulsorily acquire their shares under
Section 395. The court ruled that the share transfer was validly carried out
under Section 395, and the shareholders' recourse was through the statutory
process of Section 395, not Section 155, thus denying the petition for
rectification.

Due Diligence in Takeovers

Meaning and Scope
Due diligence in a takeover is a systematic investigation of the target company
to evaluate its financial, legal, tax, commercial, and operational standing before
acquisition.
Purpose: To ensure informed decision-making, identify risks, and assess whether
the proposed acquisition is in the best interests of the acquiring company.

Types of Due Diligence

Financial Due Diligence
Examines financial health and valuation.
Revenue trends, balance sheets, profit and loss statements.
Verification of accounting practices, debt, and tax return compliance.
Legal Due Diligence
Review of governance structure, contracts, shareholder agreements.
Ongoing or past litigation, liabilities, CSR compliance.
Intellectual property, licenses, regulatory approvals.
Tax Due Diligence
Verification of tax returns, pending liabilities, and compliance with tax laws.
Assessment of tax planning and exposure to future liabilities.
Commercial / Market Due Diligence
Market positioning, competition, and customer base.
Brand value, product quality, pricing strategy, distribution logistics.
Operational Due Diligence
Evaluation of efficiency in day-to-day operations.
Supply chain, procurement, HR policies, IT systems, customers/vendors.
Environmental Due Diligence
Ensures compliance with environmental laws.
Identifies risks of penalties, liabilities, and reputational damage.
Cross-Border Due Diligence
Special considerations in international deals.
Differences in legal regimes, cultural practices, taxation, foreign exchange rules.

Judicial Principles
Business Judgment Rule (BJR)
Protects directors’ decisions made in good faith, with due care, and in the best
interests of the company.
Not absolute—protection denied in cases of fraud, gross negligence, breach of
fiduciary duty, or lack of due care.
Burden of proof lies on the person alleging absence of due diligence.
Relevant provisions:
Section 245: Class action suits—remedy for affected shareholders.
Section 462: Court’s power to grant relief.
Case Law
Meher H. Mafatlal v. Mafatlal Industries
Issue: Whether amalgamation scheme was prejudicial to minority shareholders.
Holding: Court will not interfere if directors act reasonably, fairly, and in good
faith, consistent with a prudent business decision beneficial to the company.
Needle Industries (India) Ltd. v. Needle Industries Newey (India)
Holding Ltd.
Court upheld directors’ decision to issue equity shares, holding it was in good
faith and thus protected under the Business Judgment Rule.

Key Takeaways
Due diligence in takeovers ensures transparency, risk assessment, and
compliance.
Covers financial, legal, tax, commercial, operational, and environmental aspects.
In cross-border deals, additional layers of complexity arise.
Courts generally respect directors’ business decisions if taken in good faith and
in the company’s interest.
Shareholders’ remedies exist under statutory provisions (e.g., Section 245) but
must prove lack of due diligence.

Corporate governance
Corporate governance broadly refers to the system of rules, practices, and
processes by which a company is directed and controlled.
In the context of takeovers (or substantial acquisitions), governance concerns
become critical: change of control can affect minority shareholders,
stakeholders’ rights, transparency, and fairness.
Takeover regulations aim to balance the interests of acquirers, promoters, and
existing shareholders (especially minorities), ensuring that acquisitions are
conducted with integrity, disclosure, and procedural fairness. NLSIU
Repository+3Nishith Desai Associates+3International Bar Association+3

Key Regulatory Frameworks & Rules

SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
(“Takeover Code”)
The Takeover Code is the central Indian regulation governing takeovers of listed
companies. Its main corporate governance role in takeovers includes:
Disclosure requirements
Any person acquiring ≥ 5% shares or voting rights in a listed company must
disclose to the company and stock exchanges within 2 working days.
Scribd+3Bhatt & Joshi Associates+[Link]+3
Subsequent changes of 2% or more (increase or decrease) must also be
disclosed promptly. Bhatt & Joshi Associates+2Nishith Desai Associates+2
Promoters must disclose encumbrances (e.g. pledges) on their shares. Bhatt &
Joshi Associates+1
Triggers for Open Offers / Mandatory Tender Offer
Acquisition that pushes shareholding to 25% or more triggers a mandatory open
offer. International Bar Association+2Bhatt & Joshi Associates+2
If an acquirer already holds > 25% and less than 75%, acquiring an additional
5% or more in a financial year triggers an open offer (i.e. “creeping acquisition”)
International Bar Association+2Bhatt & Joshi Associates+2
Acquisition of control, even absent share acquisition, can trigger obligations.
International Bar Association+1
Fair Treatment & Exit Opportunity
The Code ensures minority shareholders are given an “exit opportunity” at a fair
price when control or substantial stake changes. Nishith Desai
Associates+2International Bar Association+2
Pricing formula: the offer price is governed by prescribed methods (e.g. highest
of comparable price, negotiated price, etc.). International Bar
Association+2Nishith Desai Associates+2
Non-compete fees to promoters are regulated / banned to prevent unfair
advantage. Nishith Desai Associates+2Bhatt & Joshi Associates+2
Timelines, procedural safeguards & compliance
Strict timelines for making public announcements, publishing detailed public
statements, completion of offers, etc. International Bar Association+1
Conditions such as minimum acceptance thresholds, withdrawal rights,
competing offers etc. International Bar Association+1
Exemptions & carve-outs
Certain transfers (e.g. inheritance, gift among relatives, inter-promoter transfers)
may be exempted from open offer rules. Nishith Desai Associates+1
Corporate restructuring / court-approved schemes may also get permitted
relaxations. Nishith Desai Associates+1
The Takeover Code thus embeds corporate governance safeguards: “fairness”,
“equal treatment”, “exit option”, full disclosure, and procedural constraints.
Nishith Desai Associates+2Scribd+2

Other Corporate Governance Rules & Regulations

Listing Agreement / Clause 49 / subsequent Corporate Governance norms
Listed companies in India are (or were) bound by corporate governance
provisions under the Listing Agreement (e.g. Clause 49). [Link]+2Wikipedia+2
Clause 49 mandated independent directors, audit committees, disclosures of
related-party transactions, CEO/CFO certifications, etc. Wikipedia+[Link]+2
With the Companies Act, 2013 and SEBI listing regulations, many of these
governance obligations are now embedded in statutory law and SEBI regulations.
[Link]+1
Companies Act & Corporate Law Reforms
The Companies Act, 2013 introduced provisions such as mandatory independent
directors, stricter disclosure obligations, related party transaction rules, audit
committees, etc., strengthening overall corporate governance. (Though not
specific only to takeovers, these rules support better governance in takeover
contexts.)
Amendments (for instance, Companies (2nd Amendment) Act 2017) have refined
provisions related to related parties, penalties, definitions to further reinforce
governance. Wikipedia
Voluntary / ESG / Business Responsibility Reporting
Indian “National Voluntary Guidelines on Social, Environmental and Economic
Responsibilities of Business (NVGs)” encourage responsible governance
practices. Wikipedia
SEBI mandates (for top listed firms) Business Responsibility Reports, ESG
disclosures, which increase transparency. Wikipedia+1

Governance Principles & Strategies in Takeovers

Below are key corporate governance strategies and principles particularly
relevant when a takeover is contemplated:
Principle /
Essence / Role in Takeovers
Strategy

All material information (financials, liabilities, future plans)

Transparency &
must be disclosed so shareholders can make informed
Full Disclosure
decisions.

Equitable All shareholders of the same class must be treated equally,

Treatment with no favorable deals to promoters or insiders.

Exit Opportunity / Minority shareholders should have a fair route to exit

Liquidity (through open offers) when control changes.

Takeover offers must be competitively priced, reflecting fair

Adequate Pricing
valuation.

Checks on Control Prevents stealth or sudden change in control without

Transfers oversight via governance safeguards.

Independent
Board committees (audit, takeover committee) help evaluate
Directors &
offers objectively and safeguard interests.
Committees

Robust Internal
Accurate financials, valid contracts, regulatory compliance
Controls /
reduce risks of surprises during takeover.
Compliance

Thorough scrutiny before acquisition to uncover hidden risks,

Due Diligence
liabilities, and obfuscations.

Defensive Target firms may adopt “poison pills,” white knights, or seek
Measures & Fair judicial relief – but must not breach regulatory fairness or
Resistance minority protections.

Judicial / Courts and regulators (SEBI, stock exchanges) act as

Regulatory backstops to correct abusive conduct.
 Principle /
Essence / Role in Takeovers
Strategy

Oversight

Strategies regulations and activities that ensure the sufficient functioning of a

company prior to its integration with another organisation’
Satyam Scandal (2009)
Falsified accounts, inflated revenues, hidden liabilities. Governance breakdown
at board/audit levels.
Led to major regulatory reforms in India: stricter oversight, higher penalties, new
norms for independent directors, enhanced disclosures, etc.
It is often cited as a cautionary example of what poor governance can lead to.
Omnicare, Inc. v. NCS Healthcare was a landmark 2003
Delaware Supreme Court case that held a target company's board of directors
cannot enter into a merger agreement with an absolute "lock-up". It established
that such deals are unenforceable because they illegally restrict the board's
ongoing fiduciary duties to its stockholders. The ruling mandates that all merger
agreements include a "fiduciary out" clause, which allows the board to terminate
the deal under specific circumstance
Revlon incorporated v. Mac Andrews and Forbes holding incorporated
Hostile takeover. The Court observed the Board’s duty to consider multiple bids
and prioritise shareholder value.
A landmark 1986 Delaware Supreme Court case that established the "Revlon
Rule," requiring a board of directors to become auctioneers maximizing
shareholder value when a company is being sold or is facing a hostile takeover
threat that will result in a sale. The case arose when Revlon's board, fearing a
hostile takeover by Pantry Pride, used defensive measures, but ultimately agreed
to sell the company to Forstmann Little in a way that benefited the directors
more than the shareholders. The court ruled the directors breached their
fiduciary duties by abandoning their role as neutral auctioneers, failing to secure
the highest value for shareholders, and improperly using defensive tactics.
Stran holding incorporated v. Prior
The Court observed the Board’s responsibility to ensure a thorough due diligence
process identifies all potential risks associated with the target
Ranbaxy laboratories v. Daiichi sankyo company limited
Dispute arose after Daiichi Sankyo acquired Ranbaxy in 2008, discovering that
the former owners (the Singh brothers) had concealed crucial information about
FDA and DOJ investigations into Ranbaxy's fraudulent practices. Daiichi initiated
arbitration, winning a significant award for fraudulent misrepresentation, which
was upheld by the Delhi High Court, setting precedents on fraud claims and
damages in India.
In re Walt Disney company derivative litigation
The court found that the board had fulfilled its duty by carefully considering the
strategic benefits of the merger and its alignment with Disney’s long term goals,
even though the deal involved a significant financial risk.
Abrams v. Abrams
Involved a controlling shareholder who used his influence to push through a
merger that primarily benefited him financially while harming the interests of the
minority shareholder. This case pointed out the importance of conflict of interest
policies in preventing self dealing and protecting minority shareholders
Deutsche bank v. AIG company incorporated
Alleged misrepresentation in the financial statements of a target company. The
court highlighted the importance of conducting thorough due diligence
particularly focusing on the accuracy of financial statements to avoid post
merger issues.

DEFENSE STRATEGIES TO TAKEOVER BIDS

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.
Most common known takeover out of all is a hostile takeover.
At times, the takeover and hostile takeover are used
interchangeably. The hostile takeover is achieved through a
proxy fight or a tender offer. The management of the target
company has these two options when this takeover is
attempted by an acquirer:
 Sell their company to a third party or the hostile bidder.
 Decide to stay independent and resist the offer through
various defensive measures. In cases where a hostile
takeover is forcefully being conducted, the target company
can adopt strategies which may resist the takeover from
being approved. The strategies that can be put into action
are:

Defensive Measures
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. Thus, securities were issued
through private placements to parties friendly or in business
alliance with management or to the management itself.
Moreover, another method can be to repurchase publicly
held shares to increase an already sizable management-
allied block in place. A third common theme is the dilution
of the bidder’s vote percentage through issuance of
new equity claims. However, this option in India is strictly
regulated vide Section 81A and Regulation 23 of the
Takeover Code, 1997. A hostile bidder in these
 circumstances usually fails in the bid if the bidder has
resource constraints in increasing its interest
proportionately.
The “Crown Jewel” Strategy
The central theme in such a strategy is the selling off
subsidiary investments or business interests of major
operating unit most desired by the bidder commonly
known as the “crown jewel strategy”. Consequently, the hostile
bidder is deprived of the primary intention behind the takeover
bid. A variation of the “crown jewel strategy” is the more
radical “scorched earth approach”. Vide this novel
strategy, the target sells off not only the crown jewel but
also properties to diminish its worth. Scorched earth policy Is a
reaction to a takeover attempt that involves liquidating valuable assets and
assuming liabilities in an effort to make the proposed takeover unattractive to
Such a radical step may however be, self-
the acquiring company .
destructive and unwise in the company’s interest. However, the
practice in India is not so flexible. The Companies Act, 1956 has
laid down certain restrictions on the power of the Board. Vide
Section 293(1), 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, 1997 vide
Regulation 23 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.
Crown jewels are options under which a favored party can
buy a key part of the target at a price that may be less than
its market value. The management of the target company
can identify the major motivation behind the deal i.e a
specific subsidiary or an asset and sell it off to another party.
Imply the most valuable units of a corporation as defined by characteristics
such as profitability, asset value and future prospects.

The “Packman” Defence

This strategy, although unusual, is called the packman
strategy. 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. Strategy
used by targeted companies to prevent a hostile takeover. In
the strategy, the target company will turn around and
try to take over the acquirer. The purpose of the Pac-Man
Defense is to make a takeover very difficult for the acquiring
company in an M&A Process. It s a defensive tactic used by a
targeted firm in a hostile takeover situation. In a Pac Man
defense, the target firm then tries to acquire the
company that has made the hostile takeover attempt.
A smaller or equivalent company may avoid a hostile
takeover by using the Pac-Man defense. Pacman is a
target’s tender offer for the acquirer’s shares.
Consider the following example: 1. Company A is attempting
a hostile takeover of Company B by purchasing shares of
Company B for a controlling interest. 2. Company B realizes
this and employs a Pac-Man Defense. 3. Company B uses its
assets or even sells off its non-core business units to
purchase shares of Company A. 4. Company A sees the
potential risk of being taken over by Company B and thus
stops their hostile takeover attempt. Notice that in the
example above, Company A is attempting a hostile takeover
of Company B. Realizing this, Company B attempts its own
hostile takeover of Company A.
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. But
“buyback” the world over 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. An example that demonstrates this contention is
the distribution of high dividends in a particular year if not
followed in the next sends the share prices spiraling down.
Also 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. The provisions which
would govern a “golden parachute” employment contract in
India would be Sections 318-320 of the Companies Act,
1956 which govern the provisions compensation for loss of
office. Thus, a perusal of the said provisions would show that
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. Therefore,
“golden parachute” contracts with the entire senior
management, as is the practice in the U.S., is of no
consequence in India. Moreover, 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. Furthermore,
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.
Anti-takeover amendments or “shark repellants”
An increasingly used defense mechanism is anti-takeover
amendments to the company’s constitution or articles
of association, popularly called “shark repellants”. Thus, as
with all amendments of the charter/articles of association of
a company, the anti-takover amendments have to be
voted on and approved by the shareholders. The
practice consists of the companies changing the articles,
regulations, bye-laws etc. to be less attractive to the
corporate bidder. Anti-takeover amendments generally
impose new conditions on the transfer of managerial
control of the firm through a merger, tender offer, or by
replacement of the Board of Directors. In India every
company has the clear power to alter its articles of
association by a special resolution as provided under
Section 31 of the Companies Act. The altered articles will
bind the members just in the same way as did the original
articles. But that will not give the altered articles a
retrospective effect. The power of alteration of the articles as
conferred by Section 31 is almost absolute. It is subject
only to two restrictions. In the first place, the alteration
must not be in contravention of the provisions of the
Act, i.e. should not be an attempt to do something that the
Act forbids. Secondly, the power of alteration is subject to
the conditions contained in the memorandum of
association i.e. alter only the articles of the company as
relate to the management of the company but not the very
nature and constitution of the company. Also the alteration
should not constitute a ‘fraud on the minority. Shark
repellants are certain provisions in the target’s charter or
bylaws deterring an acquirer’s desirability of a hostile
takeover. This defense typically involves a supermajority
vote
 White Knight
The board of the target company looks for a third party
that has a better fit with the company to buy the target
company in place of the hostile acquirer. The third party is
referred to as ‘White Knight’. It is a strategic merger that
does not involve a change of control and relieves the target’s
management of the responsibility to seek the best price
available. An example is the case of Paramount
Communications, Inc. v. Time Inc.
 White squire
White squire is giving by the target to a friendly party
of a certain ownership in the target. This defense is
effective against acquisition by the hostile party of a
complete control over the target by “freezing out” of
minority shareholders. The board of the target company
asks a third party to buy a substantial but a minority
stake in the target company. This stake would be enough
to obstruct the takeover with no need to sell the company.
 Poison pill
The target company gives its shareholders the right to
buy the stocks of the target company at a large
discount to the stock’s market price. (aka shareholder
rights plan) is a distribution to the target’s shareholders of
the rights to purchase shares of the target or the merging
acquirer at a substantially reduced price. The poison pill is
one of the most powerful defenses against hostile
takeovers. The pills can be flip-in, flip-over, dead hand,
and slow/no hand. With this strategy, the target company
 aims at making its own stock less attractive to the acquirer.
There are two types of poison pills.
The 'flip-in' poison pill allows existing shareholders (except
the bidding company) to buy more shares at a discount. This
type of poison pill is usually written into the company's
shareholder-rights plan. The goal of the flip-in poison pill is to
dilute the shares held by the bidder and make the
takeover bid more difficult and expensive. This common
poison pill is a provision that allows current shareholders to
buy more stocks at a steep discount in the event of a
takeover attempt. The provision is often triggered whenever
anyone shareholder reaches a certain percentage of total
shares (usually 20-40%). The flow of addi-tional cheap shares
into the total pool of shares for the company makes all
previously existing shares worthless. The shareholders are
also less powerful in terms of voting, because now each
share is a smaller percent-age of the total.
The 'flip-over' poison pill allows stockholders to buy the
acquirer's shares at a discounted price in the event of
a merger. If investors fail to take part in the poison pill by
purchasing stock at the discounted price, the outstanding
shares will not be diluted enough to ward off a [Link]
extreme version of the poison pill is the "suicide pill"
whereby the takeover-target company may take action that
may lead to its ultimate destruction. requirement regarding a
merger of the target with its majority shareholder. This
defense also includes other takeover deterrent provisions
in the target’s certificate of incorporation or bylaws.
This non-exhaustive variety of defenses shows that the
possibilities and, consequently, the power of directors in
responding to hostile takeovers are virtually unlimited. Some
defenses are more effective than others. Not all of them are
necessarily “show-stoppers”, nevertheless. The above hostile
takeover techniques and defenses show the unlimited scope of
power that the board enjoys in its antitakeover activity. The
more power requires the higher degree of responsibility
therefore.
Golden handshake
It is when an existing company has to pay a severance package to top
executives in the case of their pre term termination of employment contract.
Golden hello
It is a term assigned to a type of bonus payment that is offered generally by a
hiring firm
Saturday night special
It refers to a surprise takeover attempt
Leveraged buy out
Reverse leveraged buy out
It is an action of offering new shares like initial public offer to the public by
companies that initially went private through past LBO. They are normal equity
share issue of a company taken private in an initial LBO
Down raid
Happens when a firm or broker, on behalf of the firm buys adequate amount of
shares in a particular target company in the morning and as soon as the stock
market open.
Management buy outs (MBO)
They occur when the internal managers and the executives of a company
purchase the controlling interest in a target company from existing shareholders.
Lady Macbeth strategy
Wherein the hostile raider hires a third party.
People pill
The employees and management employees together threaten the company to
exit if acquired by a hostile raider.
Jonestown defence
The company attempts to drive away the hostile takeover by raiders using
tactics so extreme that they threaten the company’s ability to survive. Some of
the more drastic poison pill methods involve deliberately taking on large
amounts of debt that the acquiring company would have to pay off. This makes
the target far less attractive as an acquisition although it can lead to serious
financial problems or even bankruptcy and dissolution. In rare cases, a company
decides that it would rather go out of business than be acquired. So they
intentionally rack up enough debt to force bankruptcy. This is known as the
Jonestown defence.
Bank mail
It is an agreement made between a company planning a takeover and a bank
which prevents other potential acquirers from receiving similar financing
arrangements
Green mail
Occurs when an investor entity accumulates shares of a firm and keeps it with an
intention to sell off later.
Macaroni defence
It is a way by which a target firm intends to thwart away the merger bid as it
does not want to be taken over.
Shark repellant
It is a corporate activity that is undertaken to discourage a hostile takeover such
as golden
parachutes, scorched earth policy or poison pill
Proxy fight
When a group of shareholders are persuaded to join forces and gather enough
shareholder proxies to win a corporate vote
White knight
A company that makes a friendly takeover offer to a target company that is
being faced with a hostile takeover from a separate party
Yellow knight
A company that was once making a takeover attempt but ends up discussing a
merger with a target company.
Grey knight
A grey knight enters the scene in order to take advantage of any problems
between the first bidder and the target company
Black Knight
A company that makes a hostile takeover offer on a target company.
Safe harbour:
It is a legal provision to reduce or eliminate liability as long as the good faith is
demonstrated
Anti takeover amendments
It generally create new conditions for transfer of control or a target firm
Super majority amendment
These amendments require shareholders approval by at least ⅔ votes
 LESSON ROUND UP
• Takeover is a corporate device whereby one company
acquires control over another company, usually by purchasing
all or a majority of its shares.
• Takeovers may be classified as friendly takeover, hostile
takeover and bail out takeover.
• Takeover bids may be mandatory, partial or competitive bids.
• Consideration for takeover could be in the form of cash or in
the form of shares.
• When a company intends to take over another company
through acquisition of 90% or more in value of the shares of
that company, the procedure laid down under Section 395 of
the Act could be beneficially utilised.
• Transferor and transferee companies are required to take
care of the check points as specified in the chapter. Takeover
of companies whose securities are listed or one or more stock
exchanges is regulated by the provisions of listed agreements
and SEBI (Substantial Acquisition of Shares and Takeovers)
Regulation, 2011.
• Financial, accounting, taxation and legal aspects are vital in
planning a takeover and hence covered in detail in the chapter.
• An increasingly used defense mechanism is anti takeover
amendments, which is called “Shark Repellants”.