[Rajat Maloo is a III year B.A., LL.B. (Hons.) student at the National Law School of India University, Bangalore]
In 2019, the L&T-Mindtree hostile takeover battle revitalised the dialogue on the market for corporate control in India, which has until date witnessed only a few hostile takeovers. Apart from the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (‘Takeover Regulations’), a takeover attempt also triggers provisions of the Competition Act, 2002 (‘the Act’) regulating combinations. In this post, I argue that although the existing competition law framework governing combinations is not conducive to hostile takeovers, the proposed amendments to the Act, to a certain extent, smoothen the regulatory path for hostile takeovers, such as L&T-Mindtree. First, I describe the connection between competition law and a hostile takeover; secondly, analyse the current competition law framework on hostile takeovers; and, lastly, examine the effect of the proposed amendments to the Act on the market for corporate control.
Hostile Takeovers’ Interface with Competition Law
More often than not, a hostile takeover attempt begins with a toehold acquisition where the acquirer seeks to acquire as many shares as possible in the target before attracting the attention of the regulators. In what ways can competition or antitrust law and agencies affect a possible hostile takeover attempt?
Although hostile takeovers are uncommon in India, they are prevalent in other jurisdictions such as the United States. In hostile takeovers, when a target company is being acquired without its consent, it seeks to adopt certain defences known in the commercial parlance as poison pill, shark repellent tactics, etc. In such a case, shrewd target entities in the United States have time and again adopted the defence of an antitrust lawsuit. Such lawsuits are filed by the target company itself or through its shareholders to stave off the potential unwanted takeover. These antitrust lawsuits generally need extensive discovery, and the regulatory agency may take years to investigate. Thus, the antitrust laws, unintentionally, often create an effective defence against a takeover, as the time horizon becomes too long for the acquirer to conclude the hostile takeover. Moreover, an antitrust lawsuit gives the target firm sufficient time to employ other defences, consequently compelling the acquirer to withdraw its bid. Commentators have argued this to be an abuse of the real objective and purpose of antitrust law.
In India, regulation 3 of the Takeover Regulations requires a hostile acquirer to make an open-offer upon obtaining 25% of voting rights in the target or acquiring ‘control’ under regulation 4. Simultaneously, sections 5 and 6 of the Act are triggered, thereby mandating the acquirer to seek the approval of the Competition Commission of India (CCI) regarding the open offer. Regulation 18(11) of the Takeover Regulations obligates the acquirer to obtain all statutory approvals. In this regulatory structure, delays in the CCI’s approval may offer enough time for target companies to employ other defences (or mutations thereof in the Indian context) to make the target less appealing. Meanwhile, this time period also provides an opportunity to the target to negotiate a better deal.
Current Competition Law Framework Governing Hostile Takeovers
Any potential merger or acquisition that falls within the criteria laid down under section 5 of the Act must be compulsorily notified to the CCI. Upon receiving the notice from the acquirer, the CCI proceeds under section 6 to determine whether such combination causes or is likely to cause any appreciable adverse effect on competition in India. If not, the combination shall be approved by the CCI. Moreover, section 6(2A) of the Act prohibits the consummation of any combination until the passage of 210 days from the date of notice, hence imposing a standstill obligation. Presently, the same general framework regulating combinations also applies to hostile takeovers in India, whereby an acquirer, prior to making the open offer mandated by the Takeover Regulations, is required to seek the CCI’s go ahead.
The limited regulations specific to hostile takeovers can be found in the Competition Commission Of India (Procedure In Regard To The Transaction Of Business Relating To Combinations) Regulations, 2011 (the ‘Combination Regulations’). Regulation 5(8) dilutes the requirement of ‘other document’ needed by the CCI under section 6(2)(b) of the Act from a hostile acquirer to indicate its decision to acquire an enterprise without its consent. Moreover, regulation 9(2) implicitly recognises that an acquirer might not be able to procure all information required by the CCI to give its decision under section 6 and, hence, allows the acquirer to furnish such information as is available to it.
Although the Combination Regulations, to a certain extent, take into account the peculiarity of a potential hostile takeover, they do not suffice to create a conducive competition law framework for them. For instance, a potential acquirer, while waiting for the approval of the open offer by the CCI, might inevitably provide the target with sufficient time to either adopt a hostile takeover defence (or a mutation thereof in the Indian context) or make the target less appealing for the acquirer. Hence, the existing competition law framework, while working in favour of the target, can create an unintentional barrier to hostile takeovers in India.
The Competition (Amendment) Bill, 2020 – Impact on Hostile Takeovers
In the L&T-Mindtree takeover, the CCI on 4April 2019 gave its approval to L&T allowing it to continue with the open offer in about two weeks from the date of notice. Although such an approval was given in an arguably swift manner, it prompted the competition policymakers, specifically the Competition Law Review Committee (‘CLRC’) to look for potential competition law impediments in hostile takeovers in India. The CLRC in its report in July 2019, soon after the CCI’s order in the L&T-Mindtree case, identified that ‘…mandating a standstill on acquiring of shares pending the approval of the combination may hamper the viability of acquisitions via public bids’. Presently, the Act does not permit parties to acquire any shares in a proposed combination pending approval from the CCI. Moreover, the prevalent international practices in jurisdictions such as the European Union and Brazil allow acquirers to go ahead with an open offer or mandatory bid while ensuring that, during the pendency of the approval, the acquirer cannot exercise ownership or voting rights. Thus, the CLRC recommended that the standstill obligations should be diluted in case of hostile takeovers to facilitate such transactions and promote the ease of doing business in India.
Pursuant to the recommendations, the Ministry of Corporate Affairs, through the proposed Competition Amendment Bill, 2020, sought to do two things. First, it seeks to add an explanation to section 6(2) of the Act, which is identical to regulation 5(8) of the Combination Regulations, diluting the requirement of ‘other document’. Secondly, and more importantly, the Bill proposes the insertion of section 6A in the Act (which is similar to article 7(2) of the EC Merger Regulation). Section 6A, specifically for open offers, provides that the standstill obligation under section 6(2A) of the Act, which requires an acquirer to wait for CCI’s approval before implementation of the open offer, will not be applicable when an open offer is implemented through a ‘…series of transactions on a regulated stock exchange’. Resultantly, an acquirer in a hostile takeover may continue with the open offer without waiting for the CCI’s approval, provided that (a) the acquirer notifies CCI about the acquisition, (b) the acquired securities are maintained in the specified manner (which is yet to be determined) and (c) the acquirer cannot exercise any beneficial rights (such as voting rights).
Thus, the CCI’s ex ante approach in regulating combinations is still safeguarded by these three requirements, which ensure that the acquirer cannot exercise effective control. If this Bill passes in the Parliament, it will be able to achieve three-fold objectives. First, section 6A allows the CCI to regulate acquisitions made through open offers while ensuring that the acquirer, in the meantime, is not able to exercise effective control over the target. Secondly, it ensures that any target will not be able to use the standstill time-period to its advantage in defending a hostile takeover. Lastly, it will make Indian competition law conducive for a market for corporate control by allowing some flexibility for hostile takeovers. Moreover, as the open offer can be initiated without approval, regulation 26 obligations will apply over the target.
However, the amendments leave a vacuum in the law as to what will happen to the acquired shares if the CCI rejects the combination. This will need to be resolved through amendments to the Takeover Regulations as well as the Combination Regulations. The CLRC suggests that the securities should be placed in an escrow account pending the CCI’s approval. This will ease the reversal of the entire arrangement in case the CCI rejects the combination.
It can be argued that a preferable solution would have been to provide for expedition of the CCI’s approval procedure. However, the CCI may take a significant amount of time in determining whether a combination results in appreciable adverse effect on competition. Hence, this will not be fully able to solve the existing problems.
The proposed amendments to the Competition Act recognize the uniqueness of regulation of a hostile takeover under the existing framework. Although India is not a jurisdiction with a prevalent market for corporate control yet, and successful hostile takeovers are few and far between, the amendments’ foresight is essential for the market’s growth. Thus, the legislature will be better off in achieving its objectives of improving the ease of doing business in India by replacing the currently obstructive competition law framework for hostile takeovers and, resultantly, facilitate the market for corporate control in India.
– Rajat Maloo