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Can Poison Pill be used in India?-

Submitted by: Manasi Jain, 23A

Poison Pill is a strategy employed by publicly held target companies which are up for a hostile takeover.

It was the landmark ruling of the Delaware Supreme Court in 1985 which upheld the legality of thismechanism. Prior to that, corporate boards had to live in the terror of hostile acquirers striking them

any day. Gradually, Poison Pill became a takeover law and the base of pre-emptive defenses of the

target company.

The Takeover CodeIn India, SEBI Regulations 1997 (Substantial Acquisition of Shares and Takeovers), commonly referred to

as the Takeover Code, makes it difficult for a hostile acquirer to pull a sneaky move on the target

company. Under the act, the acquirer has to make a public disclosure of his shareholding or voting rights

once they exceed a certain limit, hence facilitating the target to know about his approaching acquirer in

advance. But, apart from this, the code does not present any substantial barrier to a stubborn acquirer.

Also, in case the acquirer wishes to acquire control over a target company, he has to make a public

announcement of the same, stating lucidly various details of the bid including his intention of

acquisition, his identity, details of offer price and number of shares to be acquired from public, future

plans (if any), change in control over the target company, amongst others. This paves way for an

informed decision as well as planned course of action.

In contrast, Regulation 23 of the Takeover Code imposes prohibition on corporate activities such as

transferring assets, entering into material contracts or issuing authorized but unissued shares. For such

purposes, a permission has to be obtained from the general body of shareholders. This prohibition has

certain exceptions but none of them help the case of the target company to administer the poison pill.

Further, even in those exceptional cases, the law does not permit the board to make any fresh issues

without shareholders consent a process which can be very time consuming and hence would negate

the entire purpose of issuing a poison pill as an immediate measure to the approaching acquirer.

SEBI DIP guidelinesThe terms and methods of issue of share by a public listed company is regulated by the SEBI Disclosure

and Investor Protection Guidelines, 2000. The DIP imposes several restrictions on preferential issue of

share warrants by a listed company. Under these regulations, it is not possible for any company to issue

shares or warrants which later convert into shares at a discount. This is because the minimum issue

price is decided on the basis of the market price prevailing on the day of issue or when the options are

exercised. Such issue also has to be approved by the shareholders. This basically diminishes the

effectiveness of the simplest implementation of the Poison Pill, as planned by the target company.

Further, the warrants assigned have to be exercised within 18 months post which they would lapse. So

the target company will have to revert to the shareholders to issue a new shareholder rights plan after

18 months.

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This is a major obstacle in using Poison Pill as a deterrent in India. Unless an amendment is incorporated

in the current guidelines which allows companies to issue shares at a discount, there is not much that

the target companies can do. These amendments would need to balance the interest of the

shareholders while allowing the target companies to fend off hostile acquirers.

Opportunities for Poison Pill in IndiaOne of the basic advantages of Poison Pill is that is very generic. Hence, companies can fabricate a

number of ways and methodologies to administer the defense strategy, apart from the most basic one

the shareholders rights plan.

Some ways to get both SEBI and the hostile acquirer off your tail are

1. Backend Plans SEBI places no pricing restrictions on securities (bonds, non-convertible

preference shares, non-convertible debentures, notes or certificates of deposits) with backend

rights which permit the shareholder to exchange the rights or shares for the securities (with a

backend value as fixed by the board) when the acquirer crosses a threshold of shareholding in

the target company. This works out in two waysa.

Since most of the takeovers are facilitated by debt, the backend rights reduce the

profitability of the takeover due to rising interest rates thus deterring the acquirer.

b.

Also, it sets the minimum takeover price which now becomes equal to the price at

which the shares have been exchanged for securities.

2. Brand PillsCompany could also put a provision in its articles which says that even if the hostile

acquirer does manage to acquire the company, he will be prohibited from using the companys

established brand name. By depriving the right to use the brand name, the acquirer loses out

on a considerable portion of the target companys valuation and this serves as an acquisiti on

deterrent.

For example, it is believed that several different Tatacompanies have this sort of an agreement

with the holding company Tata Sons which restricts any hostile acquirer to use the Tata brand

name.

3. Employee Stock Options Scheme (ESOS) which is again governed by the SEBI guidelines,

permits the company to issue shares to its employees as ESOS at a pre-determined exercise

price, albeit adhering to the accounting policies. Hence, wherever the company has the right to

set the share prices, it can come up with an effective poison pill.

ConclusionThe rationale behind Poison Pill defense strategy is to protect shareholder value while fending off

entities such as asset strippers which do not have the best interest of the company in mind or add any

value. Indian companies need to ensure that it is not misused by a mischievous management but at thesame time should consider leveraging the benefits of the strategy.

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