[Kashish Khattar and Siddharth Kumar are students of Amity Law School, New Delhi, and Vivekananda School of Law and Legal Studies, New Delhi, respectively.]
"To unfailingly take what you attack, attack where there is no defence. For an unfailingly secure defence, defend where there is no attack."
– Tsun Zu (The Art of War)
We are in the middle of a hostile takeover between the technology and engineering giant Larsen & Toubro (L&T) and Mindtree Limited, an IT services firm. While takeovers are common in the Indian M&A space, hostile takeovers are not. For L&T, this acquisition represents a strategic move towards expansion; for Mindtree, the rug has been pulled from under its feet. While L&T vehemently marches on to the sound of its own drum to acquire Mindtree, the latter has shown clear disapproval and disdain for L&T’s move and has tried its best to fight its would-be usurper.
In this article, the authors analyse L&T’s pursuit of Mindtree for a hostile takeover vis-a-vis certain key moves made on either side of the takeover and their implications under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeover) Regulations, 2011 (Takeover Code).
L&T plans to buy out 66.2% stake in the Mindtree through a three-pronged strategy. Firstly, L&T bought out Mr VG Siddhartha’s 20.32% stake for Rs. 3,369 crores. This supposed stake acquisition from Mr Siddhartha can be seen as a start to series of unfortunate events for Mindtree Ltd. Secondly, L&T announced in their press release that they intended to buy 15% of Mindtree shares from the market through their broker subject to various regulatory approvals. Competition Commission of India (CCI) has since approved the said deal in record time. Finally, L&T came up with their offer of buying 31% of the company through an open offer.
The board then convened a meeting to discuss a share buyback to fend off the takeover. It has since announced interim, final and special dividend amounting to Rs. 27 per share. Till date, L&T has acquired a 28.45 % share in Mindtree.
While the entirety of the tussle between L&T and Mindtree over the ultimate fate of the latter is gripping, the authors would like to highlight one move each from either side of the takeover, which would raise interesting questions of law under the Takeover Code.
Mindtree’s Poison Pill?
A takeover defence mechanism or tool is an attempt by the management of the target company to thwart the hostile takeover attempt of the acquirer. Arguably, the most effective means of fighting a hostile takeover is the poison pill tool. It is a tool which the target company employs for making itself less desirable to potential acquirers or making it too expensive for acquisition. While the pill has the potential to be very effective, it is called a 'poison pill' for the reason that it may also lead to erosion of shareholder value and/or create hardships for the management in the future.
Mindtree’s ‘poison’ of choice and its effects
Coming to the facts at hand, Mindtree had announced interim, final and special dividend amounting to Rs. 27 per share (Rs. 3, Rs. 4 and Rs. 20 respectively). While the interim dividend of Rs. 3 per share would be payable to its shareholders with a record date of April 27, the final and the special dividend of Rs. 4 and Rs. 20 respectively would be given after receiving shareholders’ approval in its next annual general meeting (AGM). This move is going to lead to the alienation of Rs. 530 crores (including dividend distribution tax) from its cash reserves which stand at Rs. 1100 crores as on March 2019. In totality, the public shareholders of Mindtree are set to receive a sum of Rs. 384.3 crores as total dividend. The original promoters in the shareholding are set to receive Rs. 59 crores.
Poison pills and the Takeover Code
Regulation 26 of the Takeover Code puts an obligation on the board of directors of the target company to ensure that during the offer period, the business of the target company is conducted in the ordinary course consistent with past practices. The Report of the Takeover Regulations Advisory Committee states that material transactions outside the ordinary course of business cannot be undertaken during the offer period, either at the level of the target company or at the level of any subsidiary of the target company without the approval of shareholders of the target company. This includes alienation of material assets, affecting any material borrowing, implementing a buy-back of shares or any other change in capital structure, etc.
Legality of Mindtree’s move
While the alienation of Rs. 530 crores form the reserves of the company does amount to an ‘alienation of material assets’ and may have a negative effect on the acquirer’s takeover attempt, it is not the be-all-end-all of the present analysis. The Securities and Exchange Board of India (SEBI) has also questioned Mindtree’s move of announcing this hefty special dividend at this time.
As highlighted above, three necessary conditions must be fulfilled for Mindtree’s move to be declared valid. The authors are of the opinion that the said conditions are fulfilled in Mindtree’s move for the following reasons:
Mindtree’s move consistent with past business practices - Going by the company’s past practice, Mindtree has declared special dividend on four separate occasions in the last 10 years in the range of Re. 1 to Rs. 5 per share. Furthermore, the interim and final dividends also fall in line with their past business practices.
Alienation is in the ordinary course of business - While arguably, the announcement of a special dividend of Rs. 20 per share is a substantial alienation of its assets, it does fall in line with its ordinary course of business and past practices. Firstly, in the course of the past decade, Mindtree has declared a special dividend 4 times in the 10 years. Furthermore, Mindtree claims that the special dividend is not a reaction to the L&T acquisition but rather a commemorative effort of the management upon the completion of 20 years of operation of the company and hitting the billion dollars a year revenue mark. Secondly, experts have opined that the quantum of dividend offered is not substantial enough to raise concern.
Approval of the shareholders - The issue of the special dividend has been made contingent upon the approval of the same by the shareholders of the company in its AGM this year. This falls in line with the requirement of approval of the shareholders by way of a special resolution.
L&T’s Conditional Open Offer that Wasn't
In India, under the Competition Act, 2002 (Competition Act), there is a prohibition on entering into any merger and acquisition which causes or is likely to cause an appreciable adverse effect on competition within the relevant market in India. Any merger or acquisition that falls within the criteria set under Section 5 of the Competition Act must be notified to the CCI. The CCI then determines whether such combination causes or is likely to cause any appreciable adverse effect, then such a combination shall be prohibited and if not, the combination shall be permitted.
In making its market purchase of shares contingent upon regulatory approvals, L&T has emulated the provision of an ‘open offer contingent upon regulatory approvals’ available in various jurisdictions though impliedly excluded under the Takeover Code.
What is a Conditional Open Offer?
A ‘conditional open offer’ amounts to an open offer that is made subject to certain conditions being fulfilled. This implies that the acquirer will only become obligated to uphold its obligations under the open offer if certain conditions laid out in the open offer, on which it is contingent are met out. In Singapore, the Singapore Code on Take-overs and Mergers under Rules 14.2 and 15.1 read with Appendix 3 stipulates various conditions such as minimum acceptance condition, condition as to the receipt of conformation by Competition Commission of Singapore, condition as to the approval of the acquisition by the shareholder of the acquirer, etc. are available to acquirers.
Regulation 19 of the Takeover Code states that an open offer may be made conditionally but only upon the minimum level of acceptance of the offer by the public shareholders, and where the law provides specific directions as to the exercise of a power, it impliedly excludes other means from its ambit.
Legality of L&T’s Move
The use of wits by L&T arises from the interplay between the combination of acquisition, market purchase and open offer of equity shares that it has employed by it. Where the first acquisition is made to be below 25% of the voting rights, the acquirer would not be saddled with additional shares of the company that it had acquired in pursuance of the mandatory open offer. Where further market purchase has been made contingent upon regulatory approval, receipt of these approvals clears the way for the acquirer to complete its plan of acquisition without any road blocks. Thus, L&T has made a ‘conditional market purchase offer’ that emulates a ‘conditional open offer’, a strategic move towards this hostile takeover.
While this move by L&T is a legally valid one, it goes to show the importance of such a provision. It must be noted that the Takeover Code does provide for the withdrawal of an open offer by the acquirer where the relevant statutory approvals are finally refused in an acquisition under Regulation 23(1)(a) of the Takeover Code. However, this still comes at material procedural cost and further potential liability towards the accepting shareholders and inconvenience to the investors cannot be discounted. Therefore, SEBI must look to global best practices and allow conditional open offers on more grounds that would be reasonably applicable in the Indian setting.
L&T took India Inc. by surprise when it announced its acquisition of 20.6% share in Mindtree and expressed its desire to gain 'control' over the latter. This takeover soon turned hostile when Mindtree expressed its disdain and rejection towards L&T’s move. While Mindtree did try to make some David and Goliath contests to fight off this hostile takeover, these attempts have largely been ineffective and it can only be said that its fate is sealed at this point. Nevertheless, the game of wits may not yet be over between the two companies and only time can really tell what lies next. Nonetheless, this takeover will surely have substantial implications on the M&A space in India.