The Significant Role of Hedge Fund Activists vis-à-vis Minorities’ Rights Protection in M&A regime

[Jayanti is a student at OP Jindal Global University.]

The rise of agency theory and the growing emphasis on shareholder protection have contributed to the increasing prominence of shareholder activism, both in India and globally. As shareholders are the true owners of a company, it is essential that they possess effective mechanisms to influence corporate decision making and safeguard their interests. Under the company law regime in India, the Companies Act 2013 allows for various measures where shareholders can assert their rights, especially while passing key resolutions. Even in the cases of oppression and mismanagement, there are rights and protections accorded to minority shareholders. These provisions not only empower shareholders but also promote greater accountability within corporate governance structures.

In order to further promote shareholder activism, hedge fund activists have emerged as key players. They employ sophisticated strategies to influence corporate actions and provide investors with information regarding potential mergers and acquisitions. 

Mergers and acquisitions (M&A) deals directly impact shareholder value not only by affecting share prices but also by influencing shareholders’ decisions on whether to continue holding their shares or to exit the company. In recent years, hedge fund activists have become increasingly involved in these scenarios, especially in areas like merger arbitrage, which offer the potential for high returns. This article examines the growing role of hedge fund activists in shaping corporate outcomes, and the impact that such strategies can have on minority shareholders. 

Merger Arbitrage in M&A Transactions

Merger arbitrage or also called as risk arbitrage refers to a mechanism where investors strive to earn profit by profiting from the price difference that occurs post the completion of a merger. Prior to completion of the merger, they take a “long position” in the target by purchasing more of its shares and take a “short position” in the acquirer as its share prices tends to decline. In the target company, they take a “long position” as buying its shares in anticipation that the stock price will rise once the merger is completed. Simultaneously, they may take a “short position” in the acquiring company’s stock, which often sees a decline in price due to the premium it usually pays.

It is calculated on the basis of price difference, which is also called spread. The price difference occurs between current trading price of target company and the price that is offered by the acquirer. It also reflects the market's perception of the risks associated with the deal such as regulatory hurdles, shareholder approval, or the possibility of the merger falling through. The target company’s stock prices increase as the price paid is usually above the market price. The profit for the arbitrageur is the price at which they sell at the share price post the completion of the deal, which is greater than what it was prior to the completion of the merger. Conversely, if the deal fails, the target’s share price typically falls back to its pre-announcement level, resulting in losses for arbitrageurs. So, the investors seek to acquire the shares at this price so that once the deal gets completed, the stock prices will further go up, hence earning a profit. This has opposite effect for the acquirer company as it is paying a premium, which is an increased cost of acquisition, it is seen as overpaying to fund the buyout. Hence, its stock prices reduce. Merger arbitrageurs use this mechanism to profit from expected increase in stock prices after a merger is complete. 

Shareholder activism in M&A transactions is mostly driven by information provided by proxy advisory firms and analysts who advises institutional investors on how to exercise their voting rights effectively to be able to influence key informed decisions of the company, especially on M&A deals and proposals. They conduct their research, collate information and offers advice to investors. They have become important as a key provider of such information to institutional investors which can have a significant impact on M&A deals. A key factor in determining whether a merger will go through is the voting behaviour of institutional shareholders, who often hold significant stakes in the companies involved. As these proxy advisory firms can have a huge sway on how institutional shareholders exercises their voting power, their recommendations are also a key factor for merger arbitrageurs.

JM Financial has identified some companies undergoing mergers and restructuring in 2025, pointing out the exchange ratios and potential arbitrage gains. Among included, Coforge and Cigniti Technologies have announced a share swap ratio of 1 COFORGE share for every 5 CIGN shares, with an estimated arbitrage gain of 11.5%. This deal, expected to conclude within 11–12 months, presents an attractive opportunity for traders adopting a long CIGN, short COFORGE strategy. Similarly, the Ambuja Cement and Sanghi Industries merger, approved in December 2024, offers 12 ACEM shares for every 100 SNGI shares, which can lead to a potential 6.1% arbitrage gain. The Gujarat Gas and Gujarat State Petronet merger also stands out, offering a 10:13 ratio and 8.5% arbitrage gain, with spreads ranging between 1.8% and 9.7%. 

Other examples include the Jet Airways-Sahara Airways merger deal announced in 2006 where there was a buyout to make the merged entity largest domestic air carrier with around 42% market share. It was reported that due to this merger, the deal announcement led Jet’s shares (the acquirer company) to be dropped by nearly 30-40%. This was majorly due to market skepticism, potential overvaluation of Air Sahara, and regulatory delays. Although Air Sahara (the target company) was not listed on the stock exchange, hypothetically, if it had been, its share price would likely have risen after the deal announcement due to investor speculation and merger arbitrage. 

However, the growing influence of merger arbitrageurs in M&A transactions may often sideline the interests of minority shareholders. Merger arbitrageurs, whose sole objective is to profit from short-term price differentials, have no fiduciary duty to the company or even to its shareholders. 

When the merger is announced, the stock price of the target company drops, which often creates an arbitrage opportunity. This behaviour can influence minority shareholders, who may be enticed to invest in the target company solely for potential short-term profits, rather than evaluating the long-term implications of the merger. However, the promise of immediate profit does not guarantee that the deal is in the best interests of the company or all its shareholders. Their strategies may push deals forward even when valuations are contested or when the merger is not in the long-term interest of the company. In such cases, the entire governance process may reflect the preferences of arbitrageurs rather than a fair and deliberative evaluation. The minority shareholders may still not agree with the higher price if they believe that it might harm the interests of the company, or if they believe that the valuations methods are flawed, because hedge funds are not interested in company’s or even the majority shareholders’ benefit except their own. 

Moreover, merger arbitrage is inherently speculative. It relies on the uncertainty of deal completion, betting on future outcomes based on current market signals. This creates risks for minority shareholders. For instance, if a deal fails or its terms are renegotiated unfavorably, the target company’s share price can fall significantly, exposing minority shareholders to unexpected losses. While some shareholders might be lured by the potential short-term profit in arbitrage situations, this may discourage the exercise of appraisal rights, which otherwise allow shareholders to challenge undervaluation and seek a fair price through legal recourse.

This highlights the need for stronger safeguards and effective minority protection mechanisms. Also, the target company’s share price might fell drastically, hampering the minority shareholders in the long run. Hence, minority protection can become an important factor to consider in such arbitrage systems. Hence, for them, appraisal rights can come as a better alternative to get a fair value out of such deals. 

Appraisal Rights and Minorities’ Protection 

Appraisal rights give protection to the minority shareholders to demand a “fair value” in situations where they oppose a merger or corporate action perceived to be against their interests. Through this, they can demand that fair valuation should be given to them. Appraisal rights have been developed in Delaware, but they have not become common in India. In the following section, it argues that appraisal rights can become an effective remedy for shareholders who do not agree with the merger, or the valuation done. 

Under Sections 241 and 242 of the Companies Act 2013, minority shareholders can approach the National Companies Law Tribunal (NCLT) in cases of oppression and mismanagement, where the minority shareholders’ interests are being prejudiced by majority shareholders. Valuers are also appointed to provide a valuation for the merger or acquisition. Moreover, the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations 2011 mandate that an open offer should be given to minority shareholders when there is a substantial change of control of the company. Therefore, appraisal rights can be said to be implicitly available through remedies like Sections 241-242 or court-approved schemes under Section 230-232, but India does not have an explicit mention of "appraisal right" in the statute akin to Section 262 of the Delaware General Corporations Law. The NCLT may intervene on a case-by-case basis, but the lack of a structured regime limits the effectiveness of appraisal.

Appraisal rights are sought by filing for a judicially determined fair value. This value takes into account various factors like financial position of the company, assets and liabilities, the merger price, an estimation on whether the company’s value will be increased or decreased post-merger or amalgamation, etc. It has been held that the NCLT’s role is to modify or supervise the scheme, but will not interfere neither will they question the expertise of the valuation done by the valuer. However, if the minorities are not satisfied with the valuation done, then they can approach the court to determine a ‘fair value’ out of the said deal. In doing so, they can demand a re-evaluation of the share price under judicial scrutiny. 

In the Indian corporate structure, appraisal rights can provide an additional layer of protection for minority shareholders, allowing them to formally object and seek an independent review or judicial determination of the share value. Thus, they can also bring valuations to scrutiny by the courts. 

Why not Appraisal Arbitrage?

With more and more evolving role of the NCLT in cases of minority shareholders’ protections, appraisal rights should be statutorily defined to provide for a more effective and efficacious remedy. While appraisal rights should be acknowledged, the related concept of appraisal arbitrage is something which should be tread with caution. 

Appraisal arbitrage occurs when hedge funds buy shares after a merger is announced just to exercise appraisal rights and profit from the court-determined higher value. Therefore, while appraisal rights are seen as pro-minority, the appraisal arbitrage itself relegates it to an inferior status. Therefore, the author argues that it forms a closed loop – merger arbitrage creates pressure on green signaling key M&A transactions, which is sought to be corrected by appraisal rights by providing minority shareholders a judicially determined ‘fair value’, which in turn gets exploited by hedge funds through appraisal arbitrage, hence, turning a protective tool into a profit vehicle. The appraisal value, though slightly higher, may not reflect long-term value but simply offers an exit for arbitrageurs. Ultimately, genuine minority interests may be sidelined once again, this time under the guise of shareholder activism.

Moreover, these activists also strategize and are keen in getting involved in a deal which has poor negotiated deals where they believe they can make a case for undervaluation. These investors buy shares after the merger is announced or opposes the merger to classify themselves as dissenting shareholders. This enables them to “cherry-pick” those particular transactions where they feel they have the means to earn profits. 

Therefore, while appraisal rights as developed in the United States, should be adopted in India, the simultaneous speculative, litigation-driven appraisal arbitrage should not be encouraged. The Indian corporate system, which is already cautious about shareholder litigation, could suffer from floodgates of speculative claims if appraisal arbitrage gains traction.

Conclusion

The significant influence of hedge fund activists in the M&A regime have significantly altered the corporate governance in India. While they provide mechanism for key deals to go through, they are also able to suppress minority voices in a company which can take the form of their parochial focus on short-term profit maximization. Appraisal rights, therefore, offer an essential counterbalance by enabling dissenting shareholders to challenge undervaluation and assert their interests. However, as seen in Delaware, appraisal arbitrage poses new threats by converting this protective tool into a vehicle for speculative gains. 

Appraisal rights offer an ex-ante remedy. Appraisal rights should be designed to prevent appraisal arbitrage from coming up. This could be done through limiting appraisal rights to shareholders who held shares before the merger was announced, and that they should have held their shares continuously throughout the voting and appraisal process. India can strengthen corporate democracy and minority protections by adopting carefully designed appraisal rights, while closing the door to speculative appraisal arbitrage. This balanced approach would align Indian corporate law with global best practices while respecting its institutional and market realities.

Therefore, while appraisal rights have positive consequences in Indian corporate law landscape, the same should not become a gateway for hedge fund activists to dominate and manipulate every stage of the transaction process for their own gain. To prevent this, it is crucial to develop safeguards that preserve the integrity of appraisal rights while limiting their misuse through speculative or opportunistic strategies.