MERGERS AND ACQUISITIONS - 2

1. Introduction

Merger or takeover or acquisition can be achieved by following different means such as purchase of assets or shares of a target company by means of scheme of arrangement following the procedure laid down under the Companies Act, 1956 under section 391 to 396A. In this programme, discussion is confirmed to explain the techniques adopted by the corporate enterprises to acquire shares with objective to gain control over the management of the target company to accomplish merger or takeover or acquisition of such target company through the purchase of all or a substantial part of the shares of a target company to which the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997 shall apply. In other words, this lesson would discuss acquisition by taking over the shares listed or any stock exchange in India. Transactions in such shares mare subject to the conditions of listing agreements entered into between the target company and the recognised stock exchange pursuant to the requirements laid down in section 21 of the Securities Contracts (Regulation) Act, 1956 and rule 19 of' the Securities Contracts (Regulation) Rules, 1957.

The corporate world exits within the competition and by the competition which, paradoxically, gives rise, on the one hand to threads and cross-fire, trade rivalry and collision, antagonism and impugnation resulting into sickness and closure of corporate enterprises and one the other hand, business enterprises flourish and expand with cooperation and concert, collusion and combination, federation and confederation in 'esprit de corpe'. Hospitality and friendliness is the nature of man who manages the corporate enterprise. Although constituted as a juridical person with separate legal entity still the corporate enterprise carries bias with it along with the man who manages its affairs. In this background, hostility and friendliness amongst corporate units is discernible and mergers and takeovers in corporate world are the natural outcome of the humanly bias and dispositions influencing the corporate behaviour. Mergers and takeovers are motivated and negotiated under the dominance of these pressures and influences are the accordingly classified as friendly mergers and hostile mergers. The raids, bids and defences are the outcome of human moods. Corporate wars and offensive postures can be avoided and the war moods of opponents can be stalled through defensive steps.

2. Scope of SEBI Takeover Regulations

It does not apply to overseas transactions towards friendly or peaceful takeover. Acquisition of Sesa Goa by Mitsui is an example to be noted:

Japanese trading giant, Mitsui, has acquired Sesa Goa indirectly because Finsider International of UK, a wholly- owned subsidiary of Mitsui, Early Guard, holds 51% stake

in Sesa Goa which has transferred its shareholding in Sesa Goa to Mitsui which establishes takeover by Mitsui of Sesa Goa.

A minority shareholder of Sesa Goa, Mr. Harinarayan G. Bajaj, had field a writ petition in Bombay High Court demanding that Mitsui should make a public offer to the shareholders of Sesa Goa after its takeover.

Mitsui had contended that the SEBI Act and the takeover code only apply to companies registered under the Indian Companies Act and listed on the Indian stock exchanges. It has argued that since Finsider is incorporated in the UK and not listed on Indian stock exchanges it does not satisfy these tests. According to Mitsui, the transaction of shares by Early Guard is an overseas transaction and does not relate to the acquisition of shares in a 'company' as defined under the listing agreement and takeover code. It has also stated the SEBI Act is only confined to the territory' of India.

Overseas transactions have been excluded from the purview of the SEBI Act and regulations.

Sesa Goa has also echoed the views that the takeover code is not applicable to the transaction.

Bombay High Court directed SEBI who was investigating the matter to pass order within three months from December 19, 1996. Following these directions SEBI acquitted Mitsui & Company on March 7, 1997 from the charge of violating its old takeover regulations, or clause 40A of listing agreement while assuming control of Sesa Goa through its holding company, Finsider International. According to SEBI old regulations did not apply to Finsider International as it did not acquire shares of Sesa Goa, the target company.

3. Types of takeovers or acquisition

There are two types of takeover bids, viz. (1) friendly takeover or merger; and (2) hostile takeover or merger, as briefly discussed below:

(1) Friendly mergers

Mergers and takeovers could be through negotiations i.e. with willingness and consent of acquiree company executives or Board of Directors. Such mergers are called friendly mergers. These mergers are negotiated mergers and if the parties do not reach to an agreement during negotiations the proposal of merger stands terminated and dropped out.

(2) Hostile takeovers

An acquirer company may not offer to target company the proposal to acquire its undertaking but silently and unilaterally may pursue efforts to gain controlling interest in it against the wishes of the management. There are various ways in which an acquirer company may pursue the matter to acquire the controlling interest in a target company. Such acts of acquirer are- known as "raids" or "takeover raids" in the corporate world. These raids, when organised in systematic ways are called "takeover bids". Both the raids and bids lead to -merger or takeover. A takeover is hostile when it is in the form of 'raid'.

The forces of competition and product failure provide strength and weakness of the rivals in the industry, trade or commerce. The battle to win the competitive field settles those strengthful ones who walk courageously in foul and unfair weathers "and stand to face the wind of challenges". This happens in the hostile acquisitions. Indian industry is full of such adventures time and again.

Based on the forces of competition, it was in 1988, a decade long dogfight had ended with the takeover of Universal Luggage Manufacturing Co. Ltd. by the rival Blow Plast Ltd. There was "unrelenting price war" between the two long time foes which had resulted in the industry being driven to the verge of sickness. With this deal, Blow Plast had brought 45% equity share in the arch rival Universal Luggage, captured 88% share of growing market and put an end to cut-throat competition series of price wars.

A few takeover raids are summarised below which depict hostility.

Sesa Goa Ltd., a Goa based mining company had faced corporate raid in later part of 1989. The share price shot up in the stock exchange on account of open market purchase of its shares. The share price had moved from a low Rs. 17 to a high Rs. 78 for the year 1989 (till December). It was reported in the press that all India financial institutions had unloaded their 6% stake in the company to the raiders. Open market cornering of shares was estimated at around 20-25% of the Rs. 5.14 crores equity capital of the company. It is interesting to note that the company was earlier a wholly owned subsidiary of Finisider SPA of Italy which in turn, is owned by the Italian Government controlled conglomerate. Istututo per La Ricostruzion Industries (IRI). The Finsider had 40% stake in the company which was delinked in 1981 through a public issue. Press reports indicated possibilities of Ruias’ interest in Sesa Goa in the year 1989 but in 1997 the target company has been taken over by Mitsui, Japanese trading giant.

Another interesting example is Superior Air Products Ltd. which faced takeover raids on four occasions. The last raid was in early 1990 which led to the spiraling of its share price from a modest Rs. 38 in first week of February, 1990 to Rs. 78 by the mid of February 1990. The main attraction for the raiders were the strong fundamentals of the company viz. the company a small equity base of Rs. 99 lakhs with annual sales of over Rs. 3.95 crore and gross profit of Rs. 1.3 crore, profit after tax Rs. 87 lakhs. Earning per share Rs. 10.97,

profit: earning ratio 27.17% and debt: equity ratio below 0.5 and book value Rs. 40.38 during. 1989-90 at the time of the raid. The company had two manufacturing units one at Faridabad (Haryana) and the other at Port Blair in Andaman Islands. The earlier three raids made on the company in 1970 and 1980 had failed partly due to larger equity holding of the present management and partly because of early warning it had about the impending raid. The first raid was made in 1977-78 by the Calcutta based Jalan Group of Companies which failed due to stiff resistance from the management. The second abortive attempt was made by Calcutta based Bangures in 1983-84. The third attempt was made in 1988 by an NRI. To ward off these raids management had claimed a shareholding of nearly 30% with a view to discourage any wishful thinking on the part of raiders.

Takeover, at times, is completed very slilently. NRl Mahendra Mehta's Bermuda based Mehta International Group (MIG) had paid £ 30.4 million (Rs. 112 crores) to Inchcape PLC of UK for the controlling interest in Assam Company (India) Ltd. in Assam. Assam company is one of the leading tea companies in the country with an excellent tract record. In 1989-90, the company made a profit before tax (PBT) of Rs. 23 crore on a turnover of rs. 66 crore (according to the unaudited figures, in 1991-91, the turnover was Rs. 77 crore and the profit before tax Rs. 24.22 crore). The company's networth at the end of march 1990 was Rs. 38 crore (of which Rs. 24 crore was free reserves) while its borrowings were only Rs. 11 lakh. MIG succeeded in the takeover bid out of half a dozen Indian and non-resident Indian (NR1) companies in the race to purchase from Inchcape PLC of UK the 74 per cent of the indian company's equity, when it decided to sell its stake. Inchcape, through its subsidiary, Assam Investments Ltd.; held 10.3 million equity shares of Assam Co. out of the total of 1.4 million equity shares of Rs. 10 each. Among the bidders, the prominent names were the Hindujas of UK, the Sarafs of Hongkong, S. Krishna Pathak from Dubai, the Mehtas, the Singhanias of the JK Group, the Jajodias of Delhi, the Ruias of UK and Rajan Pillai of Singapore.

The floor price was fixed by Inchcape at £ 24 million. The Hindujas according to sources in London were willing to go up to £ 27 million (about Rs. 100 crores) but the Mehtas outbid them offering £30.4 million (about Rs. 112 crores). In a package deal, the Mehtas bought over three subsidiaries of Inchcape -Assam Investment (which owned 74 per cent of Assam Co) Duncan Macneill (Inchape's UK selling agents) and Hankow Batchelor Tea (a blender and packager of tea).

4. Government attitude towards takeover bids

The Central Government has favoured mergers and amalgamations and takeovers when such combinations of two or more companies are in the interest of general public and for promotion of industry and trade. But it is the policy of the Government to safeguard the interest of shareholders and investors. Conforming to this policy framework, the Government has taken successive steps, time and again, as briefly indicated below:

The Central Government had amended twice clause 40 of the Listing Agreement of stock exchange and brought down the cut-off point for disclosure of shareholding from 25% per cent to 5 per cent.

Under the new rules, if “any person" acquires or agrees to acquire shares of a company which gives more than 5 per cent of the voting stock, the stock exchange authorities will now have to be informed of such purchases within two days. Previously, the cut-off point for such disclosures was at 25 per cent of the voting shares.

This was done to prevent clandestine takeover bids and as a government announcement claimed to protect the interests of minority shareholders.

The new rule further provided that a person holding less than 10 per cent of the voting stock would not acquire fresh scrip which might take his voting strength to 10 per cent or more, without giving prior notice to the stock exchange authorities.

The liability for purchase of shares from minority shareholders also appears, to have been lowered. The purchaser (that is, the company which seeks to acquire control) will be required to make a similar offer of purchase to the minority holders "at a price not lower than either the highest price during the immediately preceding six months or the negotiated price whenever a takeover bid is made.

The bidder will be obliged to acquire from the minority shareholders an aggregate minimum of 20 per cent of the total stock, though such offer should not reduce public shareholding to less than 20 per cent of the voting capital. From individual shareholders accepting such an offer, the purchaser shall acquire 100 shares of Rs. 10 face value and 10 shares of the face value of Rs. 100 at the maximum.

These norms provided virtually, a detailed code for company takeovers and follows closely the city code of London in many respects.

The amended clause 40B of listing agreement further provided that the takeover offer shall be placed in the first instance before, the board of directors of the offeree company and shall contain information on detailed terms of offer, identity of the offeror, details of existing shareholding, audited statement that the offeror has the resources to satisfy full aceptance of the offer.

The new rules further restrain the board of directors of the offeree company from issuing any authorised but unissued shares, or sell and dispose of assets of substantial amount without approval of the general body.

The above steps were announced by the Government to support the institutional approach to discourage takeover bids whenever these combinations create threat to public interest.

In view of the adequate provisions made in the SEBI regulations (new Takeover Code) clauses 40A and 40B of the listing agreement have been amended to make them in consonance with the Takeover Code.

5. Steps of the Government

The above efforts made from time to time by the Government had materialised into a code to regulate the takeover bids through SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1994 which has been replaced by new code i.e. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

6. Observations of FICCI on takeovers

Business houses in India became cautious about the attempted raids made by the NRIs and OCBs to takeover the profit earning concern in India as has been earlier discussed about Swaraj Pauls and Chhabrias bid of DCM and Escorts, respectively. In view of these developments, Federation of' Indian Chambers of Commerce and Industry (FICCI) Executive Committee discussed the issue of takeover of companies particularly by non-residents Indians and suggested following measures on the role or financial institutions, that:

(1) The overall ceiling of 5 per cent on investment by NRls and OCBs (other corporate bodies) should not be raised further and new instruments like non-voting rights shares should be introduced for NRI investments in excess of the existing limits.

(2) The financial institutions can playa crucial role in the matter of takeover, because they have large shareholdings in most of the companies in the country. They may exercise their right to prevent any takeover which in their view may not be in the interest of the company.

(3) Financial institutions must act as developmental agencies and not as market operators. The institutions should also alert the existing management when approached by bidders for a takeover. They should accept the price offered in writing with adequate earnest money, and provide a pre-emption right to the existing promoters and management at the price, to stop the destablisation move.

(4) Financial institutions should lay down certain norms as to how they will unload their stake. The government too on its part, it is further suggested, should frame certain

norms with a view to narrowing down their discretionary powers and placing on them the onus of protecting the interest of public, shareholders and the present management.

Justice Bhagwati Committee while revising and reviewing the SEBI Takeover Code, 1994 had taken into consideration all the suggestions put forth by the representative bodies of trade and commerce and industry including FICCI, CII and others. However, the ceiling on investments by NRIs and OCBs has been enhanced to ensure free flow of foreign funds for investment in Indian industry but the other issues raised by FICCI a few years back find relevance even today as far as the role of financial institutions is involved.

7. Scope of discussion

In the following pages a global view is presented as to how the techniques of corporate raids or takeover are used in the context of the scale of success they had met while tried in India by the corporate enterprises. Corporate raiders would always try to overtake or bypass the regulatory frame work in their attempt to get success in their endeavours. This lesson in a sense, enlightens the takeover aspirants and presents an interesting academic exercise.

8. Techniques of raid

The acquirer company can follow either of the two techniques to acquire control of another company viz. (1) takeover bid; (2) tender offer.

(1) Takeover bid

A takeover bid gives impression of the impression of the intention reflected in the action or acquiring shares of a company to gain control of its affairs.

A bid has been distinguished under the City Code as mandatory bid and partial bid.

A. MANDATORY BID

SEBI Takeover Regulations, 1997 contain provision for .making public announcement i.e. mandatory bid vide Regulations 10 and 11 in the following cases viz.:

(i) for acquisition of 15% or more of the shares or voting rights. (ii) For acquiring additional shares or voting rights to the extent of 10% or more

shares or voting rights in any period of 12 months if such person already holds not less than 15% but not more than 750% of the shares or voting rights in a company.

(iii) For acquiring shares or voting rights along with persons acting in concert to exercise more than 75% of voting rights in a company.

Conditions for Mandatory bid

(i) Consideration offered should be in cash and if in other securities the same be undertaken for cash offer.

(ii) Offer price must be highest price which offeror paid in past 12 months for the same class of shares.

B. PARTIAL BID

Partial bid is understood when a bid is made for acquiring part of the shares of a class of capital where the offeror intends to obtain effective control of the offeree through voting power. Such bid is made for equity shares carrying voting rights.

Partial bid is also understood when the offeror bid for the whole of the issued shares of one class of capital in a company other than equity share capital carrying voting rights. Generally this bid might cover all the issued non voting shares in a company.

Regulation 12 of SEBI Takeover Regulations, 1997 qualifies partial bid in the form of acquiring control over the target company irrespective of whether or not there has been any acquisition of shares or voting rights in a company. For such acquisition, it is necessary to make public announcement in accordance with the Regulations.

C. COMPETITIVE BID

Competitive bid can be made by any person within 2 1 days of public announcement of the offer made by the acquirer. Such bid shall be made through public announcement in pursuance of the provisions of regulation 25 of the SEBI Takeover Regulations, 1997. Such competitive bid shall be for the equal number of shares or more for which first offer was made. No competitive bid can be made .for acquisition of shares of a financially weak company where lead financial institution has accepted the bid of the acquirer on public announcement in terms of Regulation 35 of SEBI Takeover Regulations, 1997.

(2) Tender Offer

The acquirer pursues takeover without consent of the acquiree company by making a tender offer directly to the shareholders of the target company to sell (tender) their shares. This offer is made for cash. The buyer gains control of target company by inducing in large number the shareholders of target company to sell their shares to it at the offered price

which is more than the market price of the target shares and thus having acquired strength forces merger on the reluctant target company management. The tender offer is open for a limited period, a few weeks, within which the shares must be tendered by the holders. Takeover by Tata Tea of Consolidated Coffee Ltd. (CCL) was an example of the tender offer where more than 50% of the CCL's shareholders offered to sell their holdings to Tata Tea at the offered price which was much more than the investment price.

After enforcement of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 i.e. w.e.f. 20-2- 1997, public announcement is necessary as mandatory bid for tender offer to acquire the shares or control in the target company if such tender offer is more than the limits of shareholdings outlined in Regulations 10,11 and 12 of SEBI Takeover Regulations, 1997.

9. Procedure of organising takeover bids

The procedure for organising takeover bids as narrated in the following paragraphs is based on international practices in particular the City Code. However, once an understanding is developed, the procedure should be streamlined in terms of the SEBI Takeover Regulations, 1997 which, of course, do not lay down the procedure but prescribe a restrictive drill to safeguard the interests of the investors and shareholder.

Takeover bids are organised in a systematic way by one company offering to acquire shares of another company to gain sufficient shares and voting control of the company. The following steps generally take place in a takeover bid.

(1) Collection of relevant information and its analysis

The potential bidder should collect all possible relevant information on the target or offeree company, analyse the information through experts from financial, accounting, tax and legal angles, and keep the information and appraisal results top secret.

(2) Examine shareholders' profile

Potential bidder should examine the share register of the target company and see the profile of the shareholders i.e. the number and weight of institutional investors and small shareholders. If the directors of the target Company cooperate, it can also trace the dividend register to find out number of shareholders not traceable to design the course of its bid.

(3) Investigation of title and searches into indebtedness

Potential bidder should also have the searches carried out in Land Registry Office and Registrar of Companies office to find out the extent of encumbrance on offeree's properties and the indebtedness.

(4) Examining of articles of association

The offeror should also examine the Articles of Association of the offeree company to ascertain the extent of power of directors with regard to borrowing restrictions, etc.

(5) Representation on board

The potential bidder should ensure first his entry or representation on the board of the offeree company and should win over some of the directors on the board to the suggested changes and explore possibility of offer being successfully discussed on the board for takeover bid on convenient terms. This will ensure friendly takeover.

(6) Press announcement

Once the board of the offeree company shows a sympathetic view, the joint preliminary announcement could be made for awareness of shareholders of the main terms of the offer.

(7) Approval under FEMA

Necessary approvals under the Foreign Exchange Management Act, 1999 are required to be take by the companies, primarily under Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000.

(8) Recommendations to shareholders

Once the board of the offeree company agrees to the takeover bid it can bring to the notice of shareholders through circular, the merits of the takeover or merger and the advantages which will accrue to them from such amalgamation. In case the board does not approve of the move, the directors can also bring the fact tot he notice of the shareholders.

(9) Improvement of conditions by offeror

In case a. group of shareholders oppose the proposal for bid, the offeror can circularise its rejoinder to the criticism of the bid and alternatively can announce improvement of the bid conditions through press.

(10) Information about acceptance

The takeover offer is open for a limited time within which it should be accepted by the shareholders. The offeror should announce information about the acceptance for the knowledge of shareholders to know the response in its favour and make their own judgement.

(11) Despatch of consideration

With a view to complete the transaction with the shareholders of the offeree company the bidder should despatch consideration for the shares in the offeree company to the shareholders who have accepted the offer and submitted valid acceptances with the share certificates or other documents of title. The offeror will take further steps for registration of shares in its own name as per provisions of the Companies Act, 1956 Stock Exchange Rules & Regulations, etc.

10. INFORMATION IN THE OFFER DOCYMENTS

The offer document should contain the following information for the shareholders of the offeree company about the offer:

(1) General information

Should cover the write up about offeror's intention to continue business, employment of existing employees, major changes to be intgroduced, justification for the offer.

(2) Identity and financial means of the offeror

Offer document must disclose fullidentity of the person making offer, their business connections and means of finance, etc., ability to run the company's business for the good of the shareholders.

(3) Terms of the offer

Should state the acquisition of shares free from all lien, charges and encumbrances, total consideration offered for the shares in cash or kind, and the mode of payment, the basis for arriving at the said consideration like net assets value, etc., duration for which the offer to remain open, conditions attached to the offer like minimum number of shares, share –for-share offer with condition of approval of shareholder required in general body, share-for-share (new share being admitted on list by stock exchange), etc. etc.

(4) Information on strength of offeror

Information regarding offeror company and its shares ranking of shares for dividend, listing status, market price financial information, etc.

(5) Comparative view of offeree

Information about offeree companyand its shares listing status, market price, financial information, etc. in comparison with offeror's own strength be furnished.

(6) Profit forecast and asset valuation about offeror

The projections should be reasonable and supported by the future growth plans of the offeror.

(7) Existing shareholdings in offeree company

The offerer should give details of its existing shareholdings in the offeree company.

(8) Information on management pattern

Information relating to directors of offeeror and offeree company, their shareholdings, emoluments, professional skills, achievements, etc.

(9) Arrangement for acceptance

The offerer should spell out for convenience of the shareholders of offeree the various arrangements it has made to materialise the acceptance viz. underwriting arrangements, appointment of merchant bankers who on behalf of offeror shall make offer to purchase from accepting shareholders for cash at a stated price, the shares and/or loan stock in the offeree company, etc.

The above information should cover the following particulars required to be made in public announcement vide regulation 16 of SEBI Takeover Regulations, 1997:

(i) the paid up share capital of the target company, the number of fully paid up and partly paid up shares;

(ii) the total number and percentage of shares proposed to be acquired from the public, subject to a minimum as specified in sub-regulation (I) of Regulation 21;

(iii) the minimum offer price for each fully paid up or partly paid up share;

(iv) mode of payment of consideration;

(v) the identity of the acquirer(s) and in case the acquirer is a company or companies, the identity of the promoters and, or the persons having control over such company(ies) and the group, if any, to which the company(ies) belong;

(vi) the existing holding, if any, of the acquirer in the shares of the target company, including holding of persons acting in concert with him;

(vii) salient features of the agreement, if any, such as the date, the name of the seller, the price at which the shares are being acquired, the manner of payment of the consideration and the number and percentage of shares in respect of which the acquirer has entered into the agreement to acquire the shares or the consideration, monetary or otherwise, for the acquisition of control over the target company, as the case may be;

(viii) the highest and the average price paid by the acquirer or persons acting in concert with him for acquisition, if any, of shares of the target company made by him during the twelve month period prior to the date of public announcement;

(ix) object and purpose of the acquisition of the shares and future plans, if nay, of the acquirer for the target company, including disclosures whether the acquirer proposes to dispose of or otherwise encumber any assets of the target company in the succeeding two years, except in the ordinary course of business of the target company:

Provided that where the future plans are set out the public announcement shall also set out how the acquirers propose to implement such future plans;

(x) the ‘specified date’ as mentioned in Regulation 19;

(xi) the date by which individual letters of offer would be posted to each of the shareholders;

(xii) the date of opening and closure of the otter and the manner in which and the date by which the acceptance or rejection of the offer would be communicated to the shareholders;

(xiii) the date by which the payment of consideration would be made for the shares in respect of which .the offer has been accepted;

(xiv) disclosure to the effect that firm management for financial resources required to implement the offer is already in place, including details regarding the sources of the funds whether domestic i.e., from banks, financial institutions, or otherwise. or foreign i.e. from Non-resident Indians or otherwise;

(xv) provision for acceptance of the offer by person(s) who own the shares but are not the registered holders of such shares;

(xvi) statutory approvals, if any, required to be obtained for the purpose of acquiring the shares under the Companies Act, 1956 (1 of 1956), the Monopolies and Restrictive Trade Practices Act, 1969 (54 of 1969), the Foreign Exchange Regulation Act, 1973 (46 of 1973), and/or any other applicable laws;

(xvii) approvals of banks or financial institutions required, if any;

(xviii) whether the offerer is subject to a minimum level of acceptances from the shareholders; and

(xix) such other information as is essential for the shareholders to make an informed decision in regard to the offer.

In addition to the above tl1e offer should contain the following information also:

(a) Specified date for the purpose of determining the names of the shareholders to whom the letter of offer should be sent. Such date shall not be later than 30th

day from the date of public announcement (see regulation 19).

(b) Minimum offer price should be stated as payable and shall be ascertained in terms of regulation 20.

(c) Minimum number of shares to be acquired as specified in regulation 21 of the SEBI Takeover Regulations.

(d) The officer shall observe the general obligations laid down under regulation 22 of the SEBI Takeover Regulations.

It has been prescribed vide regulation 17 of SEBI Regulations, 1997 that public announcement of the offer or any other advertisement, circular, brochure, publicity material or letter of offer issued in relation to the acquisition of shares shall not contain

any misleading information. Within 14 days from the date or public announcement, the acquirer shall file through its merchant banker with the SEBI the draft of letter of offer containing disclosures as specified by SEBI alongwith the fee of Rso 50,0000. The letter of offer shall be dispatched to the shareholders not earlier than 21 days from its submission to SEBI In case SEBI had suggested some changes, the same shall be incorporated in letter of offer before dispatch to shareholders.

11. DEFENCE AGAINST TAKEOVER BID

The Directors of the company hold command of the affairs of a company. They owe moral responsibility to protect the interest of the shareholders and also safeguard the existence of the company ensuring continuity of its business activity on profitable footing and warding off the unscrupulous corporate raiders striving to take over possession of its assets and control of its affairs. They hold fiduciary position in the company and should place all facts about tile company before the shareholders. The power of management delegated to the board must be exercised bona fide in the interest of the company.

In takeover bids, it is the responsibility of the directors to take defensive measure to check them and thwart away the bids. London ‘City Code’ places very stringent obligation upon the directors of an offeree company faced with an offer. They must accurately, fairly and promptly place before their shareholders all the facts necessary for forming an informed judgment as to the merits and demerits of the offer. Directors must secure their position of control against the imminent change attempt.

Directors have been vested with powers under section 111 of the Companies Act, 1956 to refuse registration of shares in the circumstances when it is not in the interest of the existence of the company in takeover bids, etc.

Besides the above statutory power the company can take the following defensive measures to thwart away takeover bids;

(1) Advance preventive measures for defence. (2) Defence in face takeover bid.

(1) Advance preventive measures for defence

Offeree company should take precautions when it feels that takeover bid is imminent through market reports and available information so that the attempt of takeover bid by the corporate raider could be avoided successfully. Some of the prominent advance measures as derived from the experiences of the advanced nations and the prevalent laws and practices in India are discussed below.

A. JOINT HOLDINGS OR JOINT VOTING AGREEMENT

Two or more major shareholders may enter into agreement for block voting or block sale of shares rather than separate voting or separate sale of shares. This agreement is entered into in collaboration with or with the cooperation of offeree company’s directors who wish to exercise effective control of the company.

B. INTERLOCKING SHAREHOLDINGS OR CROSS SHAREHOLDINGS

Two or more group companies acquire shares of each other in large quantity or one company may distribute shares to the shareholders of its group company to avoid threads of takeover bids. Such companies shall fall within the same management control and attract provisions of section 372 of the Companies Act, 1956. If the interlocking of shareholdings is accompanied by joint voting agreement then the joint system of advance defence could be termed as ‘pyramiding’ as most safe device of defence.

C. ISSUE OF BLOCK OF SHARES TO FRIENDS AND ASSOCIATES

With a view to forestall a takeover bid, the directors issue block of shares to their friends and associates to continue maintaining their controlling interest and as a safeguard to the threads of dislodging their control position. This may also be done by issue of rights shares.

D. DEFENSIVE MERGER

The directors of a threadtened company may acquire another company for shares as a defensive measure to forestall the unwelcome takeover bid. For this purpose they put large block of shares of their own company in the hands of shareholders of the friendly company to make their own company least attractive for takeover bid.

E. SHARES WITH NON-VOTING RIGHTS LIKE PREFERENCE SHARES

In India, so far, non-voting right shares are only of one variety i.e. preference shares or cumulative convertible preference shares as against a wide variety of restricted or weighted voting rights equity shares under English Company Law. Management may retain shares with voting rights so that takeover bid could be thwarted away without voting support. Non-voting shares are a convenient method of providing for any desired adjustment of control on a merger of two companies.

F. CONVERTIBLE SECURITIES

To make the company less attractive to corporate raiders, it is necessary that its capital structure should contain loan capital by way of debentures either convertible in part or full or non-convertible. This is so because any successful bidde can’t acquire compulsorily convertible securities, options or warrants because liability towards repayments of principal and payment of interest discourages takeover bids.

G. DISSEMINATION TO SHAREHOLDERS OF FAVORABLE FINANCIAL INFORMATION

To make the investors and the shareholders aware, it is necessary that true earning position of the company should be told to them through press media or direct communications to ensure continuity of their interest in the management set up of the company. The dissemination of information about the company’s favourable features of operations and profitability go a long way in bringing the market price of share nearer to its true assets value. This type of behaviour on the part of the directors of the company elicit confidence of shareholders in their management and control which will in many ways help prevent any takeover bid to set in or to succeed.

H. DEFERMENT OF SHAREHOLDERS CONTROL OVER THE COMPANY’S ASSETS

Prudent board of directors make the chances of any takeover bid in near future dim by making the possession of the company’s assets less attractive. This is possibly dine by putting the assets outside the control of the shareholders by entering into various types of financial arrangements like sale and lease back, mortgage of the assets to financial institutions for long-term loans, keeping the assets in trust for security of debenture, loan, etc. This is done with the specific approval of shareholders in their general meetings in pursuance of sections 293(1) (a) and (b) of the Companies Act, 1956.

I. LONG-TERM SERVICE AGREEMENTS

Directors having specialised skills in any specific technical field may enter into contract with the company with specific approval of shareholders and/or the Central Government under the Companies Act, 1956 or the rules framed thereunder for rendering service over a period of time. There are two significant aspects of such an agreement viz. the prospective bidder would not be attracted due to the fear of non-cooperation by such directors if the company is acquired without personal involvement of such directors and secondly, the bidder will have to pay handsome compensation for terminating the agreement or the technical assistance or services provided under the said agreement might not be made available by any other outside party. In view of these circumstances the takeover game becomes unattractive to the bidders.

J. OTHER PREVENTIVE MEASURES

The companies take various other preventive and precautionary measures to thwart away acquisition bids in future viz. (i) maintaining a fraction of share capital uncalled which can be called up during any emergency like takeover bid or liquidation threat. This strategy is known as “Rainy day call”, (ii) companies may from a group or cartel to fight against any future bid of takeover against any of their member companies and maintain a pool of funds to use it to counter the takeover bids. This technique is known an anti-takeover cartel.

To sum up, the above preventive measures are only illustrative and not exhaustive as in different circumstances appropriate measures are adopted which continue adding up to the above list.

It may be noted that SEBI Takeover Regulations, 1997 facilitate takeover bid ensuring safeguard to the interest of the investors/shareholders. The general obligations prescribed under regulation 23 for the board of directors of the target company should be taken into consideration while using the above preventive measures as defence against takeover bids. These general obligations are operative only after the date of public announcement of the offer. As such, the above measures can be carefully adopted to thwart away the advances of the predators.

(2) Defence in face of takeover bid

A company might be caught by surprise when a takeover bid is made by some outside to acquire control of its management. A company is supposed to take defensive steps when it come to comes to know that some corporate raider has been making efforts for takeover. In different circumstances, different devices for defence device or in multiple of two or more devices suiting the defence strategy planned and adopted by the board of directors of the offeree company.

For defence against takeover bid two types of strategies could be suggested which are based on the experience of the developed nations viz. (a) Commercial strategies; and (b) tractical strategies.

A. COMMERCIAL STRATEGIES

(i) Dissemination of favourable information

To have defence against the offeror being critical of the company’s past performance the target company should be ready with profits forecast and performance information to demolish the offeror’s arguments.

The threatened company should keep their shareholders abreast of all latest developments particularly about the financial strength of the company as evidenced by market coverage, product demand, industry outlook and resultant profit forecast and value appreciation, etc. Disclosure of all these favourable aspects will keep the shareholders in good humour and they will always side with the existing management dislodging all the takeover bids. After attempt of takeover bid, the disclosure might miss the reliability and significance and invite criticism of directors keeping the shareholders in dark.

(ii) Step up dividend and update share price record

The fall in the market price of shares might occur due to restrictive dividend policy of the company. The company should, therefore. This will, automatically, bolster up the price of its shares and frustrate the takeover bid, for raising expectations for higher dividend, the

company should in advance declare interim dividend and meet all statutory requirements of stock exchange of giving advance information and deciding date of closure of register of members, etc. In pursuance of the provisions of the Companies Act, 1956 declaration of final dividend is to be done at the annual general meeting of a company but interim dividend can be declared by the board to indicate the clear intentions of the company for stepping up the dividend.

(iii) Revaluation of Assets

Assets shown at depreciated historical costs in financial accounts understate the real value of assets. For defence strategy it is common practice to revalue the assets periodically and incorporate them in the balance sheet. Such valuation should be attested by recognized values.

(iv) Capital structure reorganization

Proper capital structure is essential for enhanced profitability and brightening of the dividend prospects. Capital structure which is under geared or geared with tax inefficient preference capital instead of debenture stock or term loans exhibits poor financial performance of the company and is required to be reorganized for proper gearing and tax efficiency. Company may take suitable steps to replace preference capital by loan capital. In those cases where the company has excess liquidity there are chances of takeover raids. The company should use liquid resources for financial acquisition of assets, replacements, expansion programme, etc. or distribute the surplus to shareholders through bonus and rights issues. The company should have expert advice from financial consultants on the issue of capital restructuring before implementing any conceived plan to thwart away the takeover bid.

(v) Unsuitability of offeror

Research based arguments should be prepared to show and convince the shareholders that the offeror is incapable of managing the business efficiently. The management style, the profit and dividend record of the offeror in existing companies should be focussed particularly, specific losses, skipping of dividend, lower market experience and other similar denouncing factors should be highlighted about the offeror and its associate concerns.

(vi) Other commercial aspects

The target company’s management in its defence strategy should, inter alia, trace out the various discouraging commercial features of the functioning of the offeror company which may convince its own shareholders to thwart away the take over bid and at the same time should highlight own favourable commercial aspects with optimistic and promising futuristic view like new product development, new business avenues, prospects and future growth, etc.

B. TACTICAL DEFENCE STRATEGIES

(i) Friendly purchase of shares

To stave off the takeover bid the directors of the company may persuade their friends and relatives to purchase the shares of the offeree company as they themselves cannot indulge into the game without serious violation of the existing rules and regulations or statutory prescription despite the bona fide defence against the bid. A company under the Indian law cannot purchase its own shares. Hence directors of the company have to take protective steps to persuade their friends to be shareholders in supports of their management and control of the company under threat of takeover bid.

(ii) Emotional attachments, loyalty and patriotism

To ward off takeover bids, the board may make attempt to win over the shareholders through raising their emotions for continued association and attachment with the company as shareholder and raising fearsin their mind towards changes of the name of the company, independence of business and goodwill, etc. Particularly, institutional shareholders might yield to these reasoning. Similarly, takeover bid from a foreign controlled company could be warded off by invoking national interest and emotional feelings. Much will depend upon economic circumstances, political climate and the prospects of the trade in which the company is engaged. Arguments could also be made of the possible consequences which follow on takeover like retrenchment of work force, displacement of managerial, technical and financial executives, shifting work place and all possible miseries resulting from the successful takeover bid. Many times, such appeal works well to raise sentiments of shareholders to support the board of directors and confide with the management.

(iii) Recourse to legal action

To dissuade the corporate raider, the target company can refuse registration of transfer of any of the grounds given under relevant sections of the Companies Act, 1956.

To sum up, it is the responsibility of the directors to accept a takeover bid or thwart it away in the interest of the company. In averting the takeover bid the directors are not absolved of their liability under the law for making any wrong statements and painting in words any unrealistic position into high hopes for the future of the company. For example, profit forecasts made by them in the context of fighting off the takeover bid should be realistic, based on viable assumptions. In other words, they should not indulge in fraudulent acts against the interest of the shareholders.

(iv) Operation ‘White Knights’

‘White knight’ is the term used in UK Financial markets for a bidder in acquisition pursuit. White knight enters the fray when the target company is raided by a hostile suitor. White knight offers a higher bid to the target company than the present predator who might not remain interested in acquisition and hence the target company is protected from losing to

the corporate raid. While using this defence, the provisions of regulation 25 of SEBI Takeover Regulations providing a drill for competitive bids should be adhered to by the ‘white knights’, the target company and the predators.

(v) Disposing of “Crown Jewels”

The precious assets in the company are called “Crown Jewels” to depict the greed of the acquirer under the takeover bid. These precious assets attract the raider to bid for the company’s control. The term “crown jewels” was coined in USA in 1982. The company, as a defence strategy, in its own interest, sells these valuable assets at its own initiative leaving the rest of the company intact. Instead of them or mortgage them to creditors so that the attraction of free assets to the predator is over. This defence is very much in vogue in UK but subject to regulations of ‘City Code’.

SEBI Takeover Regulations vide regulation 23 thereof 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, renumber or otherwise dispose off or enter with an agreement for sale, transfer, encumbrance or for disposal of assets once the predator has made public announcement. Thus, the above defence can be used only before the predator makes public announcement of its intentions to takeover the target company.

(vi) ‘Pac-man' strategy

This term was coined in America in 1982. Under this strategy the target company attempts to takeover the hostile raider. This happens when the target company is quite larget than the predator.

(vii) Compensation packages viz: “Golden Parachutes” or “First Class Passengers” strategy

The term “Golden Parachute” again was coined in USA and is very much in vogue since early 1980s. The term is known as “first class passengers’ in UK. The strategy is common in UK and USA and envisages a termination package for senior executives and is used as a protection to the directors of the company against the takeover bids. This strategy is adopted as a precautionary measure by the companies in USA and UK to make the takeover bid very expensive. These compensation packages do exist in the company as both City Code in UK and Securities Exchange Commission in USA.

(viii) “Shark repellent” character

The companies change and amend their bye-laws and regulations to be less attractive for the corporate raider company. Such features in the bye-laws are called “Shark Repellent” character. US companies adopt this tactic as a precautionary measure against prospective bids. For example, shareholders approvals for approving combination proposal is fixed at minimum by 80-95% of the shareholders and to call shareholders meeting for this purpose 75% of the board of directors consent is needed.

(ix) Swallowing “Poison Pills” strategy

There are many variants in this strategy. For example, as a tactical strategy, the target company might issue convertible securities which are converted into equity to deter the efforts of the offeror because such conversion dilutes the bidder’s shares and discourages acquisition. Another example, target company might raise borrowings distorting normal debt: equity ratio.

(x) Green mail

A large block of shares is held by an unfriendly company, which forces the target company to repurchase the stock at a substantial premium to prevent the takeover. In a takeover bid this could prove to be an expensive defence mechanism.

(xi) Poison put

A covenant allowing the bond holder to demand repayment in the event of a hostile takeover.

(xii) Grey knight

A friendly party of the target company who seeks to takeover the predator.

To sum up, the target company may adopt a combination of various strategies for successfully averting the acquisition bid. All the above strategies are experience based and have been successfully used in developed nations, particularly in USA or UK and some of them have been tested in critical times by the companies in India also. Nevertheless, the above list is not exhaustive but only illustrative. In different circumstances and even, the scope for evolving more rapid strategies always remains for the target companies to defend their existence against takeover bids.

12. COMBATING TAKEOVER BIDS

Indian corporates do not have adequate defense mechanism to tackle threat of a takeover bid. However, amendments in Companies Act, 1956 to effect the following changes might create factors for combating hostile takeover and also facilitate restructuring the corporates to increase global; competitiveness, viz.

(1) Introduction of non-voting shares

Companies would be able to raise resources from the capital market without diluting the promoters stake.

(2) Removal of restrictions on inter-corporate investments

Removal of restriction on inter-corporate investments and gains under sections 370 and 372 of the Companies Act, 1956 will facilitate the group companies to come to the rescue of each other in case of takeover threats. This will also help company to overcome the problem of liquidity crunch and grow vertically and horizontally.

(3) Role of domestic financial institutions

In the case of hostile takeover bids, the financial institutions should adopt uniform policy to support the existing companies with good track record and help to ensure that good managements are not destabilised.

(4) Safeguard new projects

Protection will be needed for small viable projects costing Rs. 5 to 10 crores during post implementation period for five years where they are subjected to hostile takeover threats for prospective higher profitability.

(5) Reincarnation of Section 22A of Securities Contracts (Regulation) Act (SCRA)

Section 22A of SCRA was omitted by the Depositories Act, 1996 which made registering the transfer compulsory but the company could approach Company Law Board (CLB) for permission to rectify the register of members. Within a few months of the Depositories Act becoming law, an ordinance amending all depository related statutes was promulgated on January 15, 1997. The Depositories Related Laws (Amendment) Act, 1997 inserted section 111A in the Companies Act, 1956, w.e.f. 15.1.1997, to deal with rectification of register on transfer which was earlier dealt with by section 22A of SCRA. This may however be noted that sections 22A to 22F were inserted in Securities Contracts (Regulation) Act, 1956 by the Securities Laws (Second Amendment) Act, 1999 w.e.f. 16.12.1999.

(6) Threat from MNCs To fight takeover threats from MNCs of Indian blue chip companies, the approval of Foreign Investment Promotion Board (FIPB) apart from the approval of Board and shareholders should be made compulsory.

13. PROXY BATTLES AND TAKEOVER BIDS

Proxy battles take place when the agenda items at the meeting are likely to be opposed by dissident equity shareholders. Management of the company collect proxies to face these opponents in the meetings of the Board of Directors as well as shareholders.

(1) Meaning of proxy

Proxy is defined as a vote in deciding corporate issues in meetings and determining elections.

Section 176 of the Companies Act, 1956 deals with the meaning, use and disposition of proxy, Section 176 is reproduced below:

“176. Proxies – (1) Any members of a company entitled to attend and vote at a meeting of the company shall be entitled to appoint another and vote instead of himself; but a proxy so appointed shall not any right to speak at the meeting:

Provided that, unless the articles otherwise provide:

(a) this subsection shall not apply in the case of a company not having a share capital;

(b) a member of private company shall not be entitled to appoint more than one proxy to attend on the same occasion; and

(c) a proxy shall not be entitled to vote except on a poll.

(2) In every notice calling a meeting of a company which has a share capital, or the articles of which provide for voting by proxy at the meeting, there shall appear with reasonable prominence a statement that a member entitled to attend and vote is entitled to appoint a proxy, or, where that is allowed, one or more proxies, to attend and vote instead of himself, and that a proxy need not be a member.

If default is made in complying with this sub-section as respects any meeting, every officer of the company who is in default shall be punishable with fine which may extend to five thousand rupees.

(3) Any provision contained in the articles of a public company or of a private company which is a subsidiary of a public company which specifies or requires a longer period than forty eight hours before a meeting of the company, for depositing with the company or any other person any instrument appointing a proxy or any other document necessary to show the validity or otherwise relating to the appointment of a proxy in order that the appointment may be effective at such meeting, shall have effect as if a period of forty eight hours had been specified in or required by such provision for such deposit.

(4) If for the purpose of any meeting of a company, invitations to appoint as proxy a person or one of a number of persons specified in the invitations are issued at the company’s expense to any member entitled to have a notice of the meeting sent to him and to vote thereat by proxy, every officer of the company who knowingly issues the invitations as aforesaid or willfully authorizes or permits their issue shall be punishable with fine which may extend to ten thousand rupees:

Provided that an officer shall not be punishable under this sub-section by reason only of the issue to a member at his request in writing of a form of appointment naming the proxy, or of a list of persons willing to act as proxies, if the form or list is available on request in writing to every member entitled to vote at the meeting by proxy.

(5) The instrument appointing a proxy shall:

(a) be in writing ; and (b) be signed by the appointer or his attorney duly authorized in writing or, if the

appointer is a body corporate, be under its seal or be signed by an officer of an attorney duly authorized by it.

(6) An instrument appointing a proxy, if in any of the forms set out in Schedule IX, shall not be questioned on the ground that it fails to comply with any special requirements specified for such instrument by the articles.

(7) Every member entitled to vote at a meeting of the company, or on any resolution to be moved thereat, shall be entitled during the period beginning twenty four hours before the time fixed for the commencement of the meeting and ending with the conclusion of the meeting, to inspect the proxies lodged, at any time during the business hours of the company, provided not less than three days notice in writing of the intension so to inspect is given to the company.

The provisions in the above section have been adopted on the lines of UK’s Companies Act, 1948 by the Company Law Committee.

The legal position of a shareholder and his proxy is that of a principal and agent. A shareholder can revoke his proxy at any time. A proxy is revoked if the shareholder after giving proxy himself attends the meeting. Proxy must be filled in and be stamped.

(2) Historical background

Proxy battles have a history over the years in developed nations as well as in India.

In UK and USA, proxy wars are engineered to make the takeover bids successful. In India also such wars have been repeated time and again in corporate world. Swadeshi Polytex Ltd. and Larson & Toubro and examples to remember.

Merger of Sandoz (India) Ltd. With Hindustan Ciba-Geigy Ltd. Was opposed by a group of minority shareholders who launched proxy was having been agitated over the proposed swap ratio of 10 shares of Hindustan Ciba (Rs. 10 paid up and after demerger of its speciality chemicals undertaking) for every 17 shares held. Sandoz shares plunged to Rs.

130 in first week of December from Rs. 300 prior to the merger announced in the last week of October, 1996. The merger was approved by High Court subject to appointing one or more values to determine a fair exchange ratio for the merger as the exchange ratio was rejected by the shareholders at the meeting convened by the Bombay High Court.

In UK and USA, the “proxy wars” have become professionalized. Professional experts like “proxy-lawyers” are available to guide corporate units facing problems of dissidents in corporate meetings and corporate matters.

Equity holders who are not in a position to attend personally the meetings of the company, mail their votes in the form proxy. Each proxy equals the number of votes which a shareholder is entitled as per share ownership. Opponents and dissidents solicit proxy from equity holders to win over the battle. Institutional share holders play an important role in proxy wars as they emerge as instruments to tilt the balance in proxy wards to win the battle.

(3) Strategy in proxy wars

To win over proxy wars, where the corporate board or equity holders meetings are exposed to proxy wars, the directors have to adopt strategies based on the steps given below:

(1) Collection of material information(2) Construction of proxy fight team(3) Mass contact with shareholders

Board of Directors of a company while facing a takeover bid have to work hard to defeat such a bid. Therefore they should collect all possible information about the affairs of their own company, competitors, the takeover – bidder and the opponents. Particularly the management of a company with small holdings on their board face stiff problem. In that case the only remedy is to allow board members to increase shareholdings. To face the opponents, the board must use all the material information available for their defence.

The proxy fight team includes experts and persons of experience to help the management in proxy wars. The team could include : (1) Public relations men for media coverage and effective communication with the equity holders, (2) Proxy lawyers to advise management on corporate laws and other delicate issues involving legal expertise (3) Investigators who can collect every possible information about the opponents, takeover bidders (4) Analysts who can analyse the information for the benefit of the company (5) Management spearheading the proxy war. All these persons shall constitute the defence team in proxy battle and do ground work activities in close coordination with each other.

For mass contact with shareholders, it is necessary to collect list of shareholders. Sort out the list area-wise and also by voting structure of individual shareholders, so that each individual shareholder could be contacted and convinced.

Based on the above steps the management should prepare strategy involving close communication with shareholders bringing to their notice complete facts and solicit their vote through proxy.

It may be remembered that communications addressed to the shareholders should not give only one side picture about the failures of the management or the weakness of the company making takeover bid but should also give own plans and programmes to win over their faith in the management under threat of dislodgment. Therefore, the following facts should be carefully considered.

(1) Expose the weakness of the present management of the company which had failed to use the hidden potential of the company. Here, locate the hidden earning potential of the company.

(2) Known the intrinsic position of the management and the operation of the company through workers, trade unions and dealers as the published material may not reveal the problems being faced by the company and the conditions and circumstances in which it is placed.

(3) Analyse the published information of the company and penetrate into weakness as displayed through intensive analysis on following counts:

(1) Unused cash – Locate the quantum of unused cash locked up in short term securities. This will enable liquidity so that inability of management to utilize profitable opportunities rendering the company into low earning grade, because of inefficiency and poor management of assets is reduced.

(2) Accounts receivables - Determine the average age of period of receivables, longer the period of receivables the greater inefficiency of the management in collecting debts. Compare the finding with the industry standard and other competitive firms in the industry.

(3) Deaths leverage – Find out company’s debt bering capacity and the exact use of gearing done by it as could be a reason for failure to raise funds should be located which should show the credibility of the management. A less geared company is easy prey for a corporate raider than a highly leveraged company. As reflected in the inefficiency management in utilizing the company’s resources to the advantage of shareholders as such company can service the shareholders in a comparably better manner.

(4) Assets profile – A company with larger quantities of fixed assets has greater potential of earnings. It can have funds released through sale or sale and lease back of spare assets and deploying such funds for working capital requirements to generate additional earnings. Such company is attractive to corporate raiders for takeover bids. Arguments on management inefficiency could very well be advanced if the company with larger assets profile has unmatched lower earnings.

(5) Ratio analysis – Ratio analysis in other different areas will release information which could be used in both ways to defend against a takeover bid by corporate raider as also the corporate raider can use the information against the management of the company to convince the share-holders and motivate them to support by passing on the controlling interest to them in the company.

14. Avoidance of raids, bids and defences

Mergers and takeover can be arranged through negotiations and in a planned manner. The three phases have been discussed in which merger or takeover can be completed for the advantages of the combining companies without raids or bids or recourse to defences in given eventualities. These three phases are – planning merger or takeover wherein steps and methods have been discussed for negotiated acquisitions. In the second phase known as investigational phase where the process of investigation is assumed by following techniques for valuation, determining exchange ratio and other related aspects. The techniques of valuation and determination of share exchange ratio have been discussed in detail. Thirty, the last phase is implementation phase where all the formalities financial or legal required to be complied with have been discussed to give final tough to takeover and merger.