Unveiling Hostile Takeovers in India: The Case of Mindtree and Larson & Toubro

15th October, 2024 - 6:55 am Categories: Legal Case 0 Comments

INTRODUCTION

The Mergers and Acquisition in respect of Indian realm is greatly marked by acquisitions whether friendly or otherwise. Acquisition is a takeover of one company by another. There are majorly two kinds of takeovers namely Friendly Takeovers and Hostile Takeovers. Later ones are such takeovers where the target company is grudgingly or unwillingly transfers the management to the acquiring company. In the hostile takeovers the target company is unwilling participant unlike friendly takeovers and the acquiring company takes over the controlling stakes in the company. Hostile takeovers come into force either by making an open offer or by displacing the management of the target company to assent to the takeover.  In the India’s M&A realm the year 2019 marked a history with the first hostile takeover of Mindtree Ltd, an Indian IT services company by Larson & Toubro (“L&T”) Group.

EVOLUTION OF AGGRESSIVE ACQUISITION STRATEGIES: HOSTILE TAKEOVERS AND LEVERAGED BUYOUTS

In the history of India corporate takeovers, India has witnessed only a small percent of successful hostile takeover attempts one being the hostile takeover by Indian Cements of Raasi Cements in 1998. India has a highly unruly process qua hostile takeovers, provoking unfavourable responses from each side. The traditional corporate structure in India has mostly been promoter-centric, with nearly seventy-five percent of all enterprises continuing to be family-run. In sharp distinction to the management driven model that most corporation adopt in more developed nations, this has left very little leeway for non-negotiated acquisition of shares in such promoter led enterprises.[1] Additionally, the socialist economic development goals of the government prior to liberalisation, which were implemented through laws such as FERA Act, 1973, MRTP Act, 1969 and the Industrial Development and Regulation Act, 1951 restricted the concentration of economic power and rendered hostile takeover bids mostly unsuccessful.

The ability of hostile takeovers by foreign corporates in India is less due to various reasons like-

1. The large percentage of Indian Financial Institutions shares, which often support controllers, and the high prevalence of governing promoter holdings in Indian firms.
2. The necessity of obtaining government sanctions and,
3. Provisions that benefit current controlling stockholders under the Indian Takeover Code.

Hostile takeover in India was initially attempted in the year 1983 by Swaraj Paul a London based industrialist who gathered shares from the stock market in an attempt to take control of the two Indian firms namely Delhi Cloth Mills Limited and Escorts Limited. The acquisition effort failed due to negative publicity and government interference, since this incited a great deal of patriotic feelings and gears in the then adolescent Indian corporate climate. Another aggressive and nonetheless controversial bid in India was an Open Offer made by Abhisekh Dalmia in the early 2000 to purchase forty-five percent shares in Gesco Corporation, the 2008 acquisition of Zandu by Emami Group and the 2012 offer for IVCRL by Essel Group. In actuality, there have only been twenty-five successful hostile takeovers in India[2] during the last quarterly decade.

THE PARTIES

Mindtree:  Mindtree is a technology company which was founded by a group of almost 10 co-founders that included Wipro, Lucent Technologies etc. the very first person to invest in Mindtree was Late V.G Siddhartha, founder-promoter of Café Coffee Day also known as CCD. He was the single non-promoter shareholder of Mindtree with a holding of 20.32% of the company’s shares. Aiming to reach an internal goal of $1 Billion, Mindtree has twice fallen short of mark. This is mostly because of its aggressive shift to digital income, which came about as a result of its solid product engineering foundation and made it an appealing target for any company trying to expand its market. The founders of the Mindtree another widely held business, possess just around thirteen percent of the company’s stake which by and large owned by public investors, FIIs and Mutual Funds.

Larsen & Toubro: L&T is a very large company which mainly operates in the EPC business which is heavily dependent on economy. To balance this kind of business fluctuation, L&T has been expanding a services segment which in its chief offer technology, property and monetary services.

Mindtree X Larsen & Toubro: Although L&T has made a few purchases in the past, none have come close to the scale and scope of Mindtree. A 2.4-billion-dollar IT services company with many verticals of scales would be created via a merger with L&T.

UNRAVEILING OF HOSTILE TAKEOVER OF MINDTREE

Before jumping to sequence of events of takeover of Mindtree it is pertinent to know what is actually “Takeover” is. “Takeover implies acquisition of control of a company (‘Target Company’) which is already registered through the purchase or exchange of shares by another company (‘Acquirer’)”[3].

Takeovers are of different types but particularly in legal realm they are of two types-

1. Friendly Takeovers: When the Target Company’s management voluntarily permits the Acquirer to take over the business.
2. Hostile Takeover: when the Target Company’s management does “not” voluntarily permit the acquirer to take over the business and requires the acquiring company to wrestle off the Target Company.

Mindtree’s hostile takeover is an elaborate case that reveals how financial problems among companies, industry takeovers and regulatory frameworks among corporate governance. VG Siddhartha, the non-executive director of Mindtree and the founder of Café Coffee Day Enterprises (“CCD”) possessed rather a large 20% stake in Mindtree, while the other promoters held merely 13.32%. the financial burdens faced by Siddhartha, largely due to the debts picked up by CCD, demanded the liquidation of his shares in Mindtree. Desperate for funds to pay off the CCD debts, he sold his shares to L&T drilling the aperture in the company’s history.

In 2019, L&T increased its ownership of Mindtree by purchasing the share of Siddhartha at Rs. 981 per share. The purchase was also followed by a public announcement for the open offer to buy a further 31% of the shares, this was another move made to get control over the company.

It is mandated by the Regulation 6(1) of the Securities and Exchange Board of India (“SEBI”) Substantial Acquisition of Shares and Takeover (SAST) Regulations that a “Voluntary” Open Offer can only be initiated by an entity between 25% and 75% of the voting rights exercised. In order to resolve the navigation of the regulatory landscape, L&T committed to open market purchases, elevating its stake to 28.9% before receiving the nod from SEBI on the open offer.

The regulatory framework mandated that when an acquirer acquires 25% or more of the total voting rights in a company, it has to be announced in public to allow the public to choose a way out when an imminent change in control and management is expected. In action to this rule, L&T proceeded with its open offer that called for 31% of the Mindtree’s voting share capital to be sold, which was necessary step for the company to control the board and the management. This acquisition has resulted as follows:

1. L&T has bought directly around 20% of total shares belonging to Siddhartha, which was then complemented by the purchase of around 9% through the market, concluding to a total shareholding of about 60%, thus making it the main shareholder in Mindtree.

THE RATIONALE OF THE ACQUIRING & TARGET COMPANY

A coherent argument in favour of the acquisition of Mindtree was that, the company L&T presented its vision in the offer letter submitted to SEBI, stating that the purchase would increase its power to provide the top-grade IT services all over the world, as well as improve its technology portfolio among the other top IT firms. With large reserves of money to fall back on for the takeover, L&T perceived that the acquisition was a strategic move to diversify its IT services and thus create value investors.

But the Mindtree promoters disagreed with the takeover, and therefore the transaction became hostile. Promoters opposed this takeover, publicly on 18^th March, 2019 where they expressed their viewpoints saying that the takeover would landslide all their decades of progress and developments that the Mindtree has achieved over the years. Mindtree was set up by a group of IT professionals and practiced a unique corporate culture that allowed for flexibility, innovation, and a high level of employee participation. This organizational culture was clear and understandable in several instances such as instances of financial difficulty when the senior staff of the company decided to voluntarily take a pay cut instead of firing some of their colleagues[4]. Thus, giving a deep commitment to coworkers and the welfare of the company. In the case of Mindtree, the company created a work environment that gave one the opportunity to express oneself which, in some cases, young workers showed great support by helping to make important decisions that were clearly the different corporate ethos of L&T and the more traditional and conservative nature of their business approach.

Another rationale of the target company was, that L&T, is a company that specializes in engineering and construction and has a wide-ranging portfolio managed a structurally hierarchical and methodical work culture with more focus on standardization. The underlying principle of this conservative line of action is stability and risk extinction that may curtail the diversity and agility prevalent in Mindtree’s work setting. Since L&T wanted Mindtree to be a part of its operations, the latter’s deviation from its culture became an important issue.[5] The leadership team at Mindtree voiced their worries that the takeover would spoil the growth they had realized in the years and introduce a different culture at the same time. The anxiety was further increased with the confrontation among the ranks of Mindtree’s management and was complicated by the attachment which the founders and employees had to the sort-of-living organism Mindtree, as it were, who consequently were all-of-a-sudden very resolute about joining a conglomerate that was totally different in corporate culture.[6]

STRATEGIES USED BY THE PARTIES

The main idea from the discussion of the hostile takeover bids is that it is not the difficult path to get a company. The acquirers should have a clear and thought-out strategy in place to “go after” their target companies masterfully. The two key offensive strategies that are used by the acquiring company are:

1. Tender offer: In this case, A formal offer is made by the acquirer to purchase the bulk of the target company’s shares at a price higher than the going rate. Usually more than 50% of voting shares are needed to gain control of the business. The deal may contain further information, such as an expiration date, and is often only good for a certain amount of time. The acquirer is required to provide documentation to the Securities and Exchange Commission (“SEC”) along with an overview of their plans for the target business.
2. Proxy Fight: The primary goal of the acquirer here is to oust the board members who are the ones that stand by and oppose the takeover. The means of doing that are persuading the existing shareholders to withdraw their support for the current management. Compared to tender offer, this is an intensified method.

Equally, the target company at the same time can also use certain methods to fix itself. Some of the widely applied methods are:

1. White Knight: A “white knight” refers to the person or a business who makes a quick bid for a target company just before the “black knight,” or hostile or unfriendly acquirer, takes over it, thus preventing the hostile takeover. The white knight takes over the control of the target company and there is no change in the management of the of the company. Specifically, in the case of Mindtree, Mindtree’s promoters were in contact with a number of PE firms such as Chrys Capital and KKR & Co. Inc. Although none of the PE companies were interested in being the white knight because they wanted a higher control in a company like L&T, which is why Mindtree’s white knight defence was not operational.
2. Pacman Defence: In Pac-Man, the target firm attempts to defend itself during the hostile takeover by switching roles; that is, the target company starts buying shares of the acquiring company and threatens to buy the acquirer or raider itself. The raider is forced to negotiate a truce as a result of being preoccupied with preserving itself.
3. Crown Jewels: In this instance, the target firm poses as something the acquiring company finds less appealing. By doing this, the target firm divests itself of its most valuable asset, which may have been the initial impetus for the acquiring company’s takeover. This tactic is used in tandem with White Knight, when the target firm demerges its assets and sells them to White Knight, from whom the target company may subsequently purchase them at a set price.[7]
4. Golden Parachute: in this instance, major benefits are provided to executive employees if in case the company is taken over by other company and as its consequence their employment is terminated. This defence offers workers who occupy specific roles in the target organisation a soft landing. The major goal is to safeguard the interests of the workers who contributed to the firm’s development even when doing so would cost the acquiring company more money.
5. Buyback: In this case, the management gave with for the purpose of SEBI LODR Regulations, 2015, Regs 29(1) (b) and 29(2) with the view to staving off the takeover by engaging in a share repurchase. However, because the buyback would not have been achieved the purpose of repurchasing a significant interest to prevent a hostile takeover, the board chose not to proceed with the proposed execution of share buyback.

LEGALITY OF HOSTILE TAKEOVERS

The main legal regulations in India that govern hostile takeovers comprise of the Companies Act of 2013, SEBI rules such as take-over code and Competition Act of 2002. Although the SEBI has made the rules and regulations that include the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 regarding the chance and means via which a person or a firm can acquire a substantial quantity of stakes in the listed companies, yet the Companies Act provides the basic structure for corporate governance and shareholders’ rights.

1.Legal Framework

As per the SEBI regulations, after an acquirer acquires 25% of the voting rights in a target firm he is required to give a public announcement for an open offer to buy the shares from the other Investors. This requirement has been designed to bring some degree of transparency and to give the minority shareholders an opportunity to exit during a change of control. At the same time, the regulations which may pose certain challenges to a takeover include the requirement for a valuation and provisions regarding minority shareholders and such issues as the fair value of a business where disputes may easily arise. Nevertheless, they contain provisions which can make takeover more problematic, for instance, the requirement for valuation as well as the issues of protection of the minority shareholders’ interests which may become a subject of controversies regarding the question of fair value.

2.Regulatory Challenges

One of the major challenges that were identified on the structural level is the so called ‘dominant promoter ownership structure’, which is typical for a number of companies in India. Another reason is that promoters would generally own a big block of shares and an acquirer will find it hard to gain control without the co-operation of the existing management. This is in rather sharp contrast to markets such as the United States where the phenomenon of hostile takeovers is far more prevalent undertake to the highly fragmented ownership system.

Also, the regulatory framework of India has been quite defensive concerning FDI and its acquisitions to a large extent. The need to seek approval from the government and also with different regulations that environment inhibits potential acquirer especially those from other countries. The Competition Act also comes into picture as it involves consideration of those mergers and acquisitions which are likely to result in a ‘Substantial Lessening of Competition’ in the market.

CONCLUSION

The way things are unfolding reveals that there are many aspects to corporate control struggles in India, particularly if one takes into account the legal environment and the business owners’ feelings about their companies. One of the best examples of how tactical objectives and budgets can be opposing and lead to a hostile takeover scenario are the L&T-Mindtree events. The conclusion of L&T acquiring a controlling stake in Mindtree modified the corporate environment of the two organisations and set the benchmark of hostile acquisitions in the Indian IT sector. The Mindtree by L&T deal case describes the multiplex relationship between financial pressure, strategic planning and motives, legal constraints and regulation, and psychological factors as the circumstances for business consolidation. The case is most valuable when it comes to examining the challenges that companies face when trying to conduct themselves in the hostile takeovers’ process and consequences of such actions from the point of view of the corporation’s stakeholders and the concept of corporate governance. Industry specialists and business analysts will keenly observe the long-term effects that this acquisition will have on both L&T and other organisations, as well as on the IT industry in general as Mindtree is absorbed into L&T’s business structure, thus providing a comprehensive view of the evolving nature of M&A in the Indian corporate world.

Author: Nupur Singh & Gaurav Vatwani, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.

[1] “Hostile Takeover in India: L&T-Mindtree case study from an Employment Law vantage, THE LAW BLOG, https://thelawblog.in/2020/09/05/hostile-takeovers-in-india-lt-mindtree-case-study-from-an-employment-law-vantage/.”

[2] Ibid 1.

[3] “Roshan Mariyam: Unveiling India’s First IT Hostile Takeover Drama, TAXGURU, (Aug. 5^th, 2024. 10:05 AM), https://taxguru.in/corporate-law/l-t-vs-mindtree-hostile-takeover-india.html#google_vignette.”

[4] “Ramesh Dorairaj, Why Mindtree ‘Unique’ and ‘Different’, LinkedIn (Aug. 7, 2024, 11:56 PM), https://www.linkedin.com/pulse/why-mindtree-unique-different-ramesh-dorairaj.”

[5] “Priya, Hostile Takeovers: Understanding the acquisition of Mindtree by L&T Infotech, BlogIpleaders (Aug. 12, 2024, 10:10 AM), https://blog.ipleaders.in/hostile-takeovers-understanding-acquisition-mindtree-lt-infotech/.”

[6] “Roshan Mariyam: Unveiling India’s First IT Hostile Takeover Drama, Taxguru (Aug. 20^, 2024, 11:30 AM), https://taxguru.in/corporate-law/l-t-vs-mindtree-hostile-takeover-india.html#google_vignette.”

[7] Ibid 4.