Elon Musk’s hostile bid for Twitter and the subsequent developments are expectedly grabbing front-page headlines. Apart from the fact that both are well known and large brands, hostile takeovers by themselves invariably garner public attention for many reasons.
Firstly, they usually result in the share price rising because a bid is usually at a premium to the market price. Speculation is rampant and a category of investors called arbitrageurs, who make rich profits by betting on how the bid will develop, get into action. Finally, the ensuing corporate fight can make for a compelling soap opera even for bystanders. Accusations and counter-accusations – bitter and occasionally even below the belt – are often traded, making for more gossip.
What are hostile bids and why are they called hostile even when they can be shareholder friendly? Why are they a rarity in India and is that a good thing?
Are things changing so that hostile bids may become more common in India? Some recent events suggest that a partial version, if not a full and successful hostile bid, is likely to become more common.
Firstly, hostile bids are called so because they are against the wishes of a company’s present management. Typically, a change in management and controlling shareholding happens by friendly negotiations. The current management is expected to negotiate a fair deal for themselves, public shareholders and other stakeholders. A friendly bid also helps in due diligence by the acquirer and a smooth transition from existing to new management.
Takeover defence
A hostile bid is just the opposite. It is without the consent – even against the wishes – of the present management. A chunk of shares is acquired and an offer is made to the public for their shares, typically at a significant premium. If the bid succeeds, the bidder gets controlling interest and replaces the management. Executives could lose their jobs and the perks of money and power.
In the West, where hostile bids have been common, there is a thriving takeover defence specialist sector. Many companies actually kept some of the best such specialists on an annual retainership only to ensure they are not hired by a hostile bidder.
However, hostile bids can be friendly to shareholders for obvious reasons. One is the significant premium offered for shares. The rationale for the bidder may be that the current management is inefficient and the bidder could manage it better, leading to profit for him and a higher price for the market.
This, however, is not always so and some bidders are known to be asset strippers (made notorious by Gordon Gekko in the movie Wall Street) who sell the company’s major assets, often leading to closure of the businesses and unemployment. They have a short-term view.
Significant, long-term investors also resist such bids, believing that they will get a far higher value in due course. This is also reportedly happening in the recent bid for Twitter.
Hostile bids in India are rare for an important reason – the shareholding pattern is in sharp contrast with that in the West. Typically, the promoter group holds a controlling interest, often 50 percent or more. This makes a hostile bid practically impossible since the bidder won’t be able to get a favourable majority vote. Resistance from the existing management and the possibility of the takeover bid getting tied up in litigatory knots discourage bidders. A recent attempt by certain large shareholders to remove the existing management saw several judicial twists and turns.
However, things are changing. At one time, the law enabled existing promoters/management to create hurdles in the transfer of shares to a bidder. This hurdle was removed, though for a reason that has nothing to do with enabling hostile takeovers: to enable the transfer of shares held in dematerialised form.
Shareholder activism
Secondly, institutional shareholding is on the rise and so is shareholder activism, ably helped by proxy advisors. Even if this does not enable hostile takeovers, some results akin to those may happen. The so-called control of promoters would not be absolute and decisions that are not in the interest of public shareholders would be difficult to implement.
The law has also undergone several shareholder-friendly changes. The earlier ban on certain transactions and the requirement of seeking Central government approval for others have been replaced with the need to seek approval of the shareholders and that too by a special resolution. This gives a group of shareholders holding more than a 25 percent stake a direct say on many decisions. Moreover, particularly in related-party transactions, the promoters/interested parties are simply not allowed to vote.
In case of a takeover bid, the rules require the target company to form a committee of independent directors who should give reasoned recommendations on the offer. Such recommendations must be published so that the shareholders get impartial advice.
Importantly, conditional bids are allowed. This means that a bidder can make it clear in advance that the shares offered will be accepted only if a minimum percentage is achieved. Attempts by the existing management to sabotage the company by selling material assets or taking heavy borrowings face restrictions.
India now also has the concept of companies with no identifiable promoters. These can be easy targets for hostile bids.
All things considered, the high and controlling promoter holdings in most companies, coupled with the possibility of prolonged contentious litigation, will ensure that hostile bids will remain a rarity.
Indian shareholders will have to live with shareholder activism or vote with their boots – i.e., sell the shares – neither of which compares with the benefits of a hostile bid. Or even the potential looming threat of one.
Jayant Thakur is a chartered accountant.
Views are personal and do not represent the stand of this publication.
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