Introduction
The Indian Mergers and Acquisitions (“M&A”) landscape has predominantly been marked by friendly acquisitions and takeovers. However, for more advanced economies like the United States of America (“US”) and United Kingdom, the prevalent modes of corporate acquisitions have also included hostile takeovers entailing multi-billion-dollar deals. In a simplified understanding, as opposed to friendly takeovers, hostile takeovers are situations where when one company (“Acquirer”) acquires a controlling stake in another company (“Target”), with the Target being an unwilling participant. Hostile takeovers can be effected either by the Acquirer directly approaching the shareholders of the Target by making a secondary market offering (“Open Offer”) or by displacing the management of the Target to get the acquisition approved. 2019 was a landmark year for the Indian M&A space with the first ever hostile takeover of an IT services company in India in the form of L&T Group’s (“L&T”) takeover of Mindtree Ltd. (“Mindtree”). This article attempts to examine hostile takeovers in India from a historical standpoint and analyse the attendant legalities.
A Brief History
The 1980s in the US was a period of heightened activity in the hostile takeovers and leveraged buyouts. The easy availability of funds combined with a hands-off antitrust policy led to a crowded, rapidly shifting M&A space. A statement case in point being the leveraged buyout of RJR Nabisco by investment bank KKR in 1988, considered one of the most expensive takeover battles in history. Hostile takeovers and leveraged buyouts fostered the break-up of conglomerates and the sell-off of divisions to buyers in the same industry. This era invited a reasoned legal treatment of hostile takeovers in the corporate governance debate with ‘stakeholder interest vs. shareholder interests’ as its central pillar. Federal laws like the Securities Exchange Act of 1934 and the Williams Act of 1968 together with the law of the incorporation State of the Target now govern a hostile takeover process in the US.
India on the other hand has had a highly fractious process qua hostile takeovers, inviting strong, typically negative reactions from all quarters. The conventional structure of companies in India Inc. has largely been promoter centric with 2/3rd of all businesses still being family run. This has left hardly any elbow room for non-negotiated acquisition of shares in such promoter driven companies, which is in stark contrast to the management-driven approach that most companies espouse in more developed economies. Furthermore, the pre-liberalization government policies of socialist economic development that curbed the concentration of economic power through legislations like the Industrial Development and Regulation Act, 1951, MRTP Act, 1969 and FERA Act, 1973 made hostile takeovers mostly failed attempts.
The viability of hostile takeovers by foreign enterprises is even lesser owing to (i) the high incidence of controlling promoter shareholding in Indian corporations and the significant shareholding of Indian financial institutions that generally side with controllers, (ii) the requirement of obtaining onerous government approvals, and (iii) provisions in the Indian Takeover Code favouring existing controlling shareholders.
The earliest hostile takeover attempt in India was in 1983 by London-based industrialist Swaraj Paul who sought to control the management of two Indian companies, i.e. Escorts Limited and Delhi Cloth Mills Limited by picking up their shares from the stock market. This triggered pails of nationalistic sentiments and anxieties in the then naïve Indian business environment and after attracting bad press and government intervention, the takeover attempt failed. 1998 saw a protracted takeover spectacle when India Cements Limited (“ICL”), bid for Raasi Cements Limited (“RCL”). The battle that ensued between ICL, RCL and the financial institutions (“FIs”) invested in RCL, saw the intervention by the Securities and Exchange Board of India (“SEBI”) when RCL promoters sold their stake to ICL leaving the FIs as shark-bait. The parties eventually reached a negotiation point and ICL acquired RCL.
Other contentious hostile bids in India were Abhishek Dalmia’s Open Offer to acquire 45 percent of share capital in Gesco Corporation in early 2000, Emami Group’s takeover of Zandu in 2008 and Essel Group’s bid for IVCRL in 2012. In effect, the past 25 years have seen only 25 successful hostile takeovers in India.
Mindtree Unravelling
The seeds of the Mindtree hostile takeover in fact germinated in the debt crises of another entity, Cafe Coffee Day Enterprises Ltd. (“CCD”). Founded in 2000 by 10 co-founders from Wipro, Cambridge Technology Partners Inc. and Lucent Technologies, Mindtree was first invested into by the Late V.G. Siddhartha. In the next decade, on the back of sound financials, steady growth and a high-touch business a large number of foreign and domestic institutional investors like Singapore based Nalanda Capital, UTI Mutual Fund and Franklin Templeton invested into Mindtree. In 2007 Mindtree went public and since 2011, the shareholding of the promoters has been 13.32%, making it a low-hanging fruit for a takeover. However, not until the Late Siddhartha had to sell his 20.4% stake in Mindtree to finance his debt in CCD, did the prospect of a takeover arise for the company.
For L&T, who entered into a share purchase agreement (“SPA”) with Siddhartha, Mindtree has been a sizeable pound of flesh to add their IT services portfolio (L&T’s two listed technology firms, L&T Infotech Ltd. and L&T Technology Services Ltd.). This has offered L&T a golden opportunity to shed its ‘construction company’ tag and play the catching game with Infosys and Tata Consultancy Services. Futhermore, the callthe calling came for L&T ng came for L&T when it when it was exploring alternative options to generate value for its shareholders after SEBI rejected its plan for INR 9,000-crore buyback in 2019. Chronologically, the transaction played out in the following stages:
- The clearance from the Income-tax Department, vide its letter dated February 13, 2019 for withdrawal of the provisional attachment issued on January 25, 2019 under section 281 B of the Income Tax 1961 for the transfer of charge of 22,20,000 and 52,70,000 equity shares of Mindtree Limited by Coffee Café Enterprise Limited and VG Siddhartha held by them respectively. Subsequent SPA entered into with L&T.
- L&T placing an open market purchase order with its stockbroker for acquiring up to 2,48,34,858 (15%) equity shares at per equity share price of not more than INR 980 per share and for an overall consideration amount not exceeding Rs. 2434 crore.
- With an intention to acquire control of Mindtree, the public announcement was issued by Axis Capital Limited and Citigroup Global Markets India Private Limited on 18th March 2019 pursuant to Regulation 3(1) and Regulation 4 read with Regulation 13(1) and Regulation 15(1) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. L&T thereof made an Open Offer for INR 980 per share to acquire 5,13,25,371 equity shares of the Target Company aggregating to 31% of the voting share capital of Mindtree.
Along with retail investors, most foreign and domestic institutional investors of Mindtree have sold their stake to L&T and after attaining SEBI and the Competition Commission of India approval, L&T now holds a majority stake upwards of 60% in Mindtree. Interestingly, with this acquisition, life for L&T has come a full circle which itself fended off multiple hostile takeover attempts on it by the Ambanis of Reliance and the Birla Group in late 1980s and early 2000s, respectively. It achieved this by devising a strategy that makes L&T the most uniquely structured large corporate of India. It was A.M. Naik, the current group chairman of L&T who ring-fenced the company from future takeovers by creating the L&T Employees Welfare Foundation and thereby transferring majority ownership into the hands of the employees. Other corporate strategies for defending a company from a hostile takeover include the Poison Pill, the White Knight defence, Staggered Board of Directors, Pac-man defence, Golden Parachute and Greenmail.
Post takeover layoffs and status of IT Sector employees in India
Downsizing, layoffs and the concomitant increase in workloads are some aspects of the systematic change that a Target and its staff face post a takeover. A plethora of academia has posited that changes in management and layoffs are more common an occurrence in a hostile takeover than a friendly one. More than 50% of hostile takeovers lead to the Acquirer undertaking a consolidated restructuring to realize business synergies and justify the Target premium. This is primarily achieved by asset sell-offs and identifying redundancies in both, blue and white collar employees. With the L&T Mindtree takeover being seen a harbinger for attaining potential synergies and economies of scale in the IT sector in India, it is relevant to examine the legal implications on the employees in this sector.
The primary legislations governing termination of employees in India are:
(a) the Industrial Disputes Act, 1947 (“ID Act”); and
(b) provincial shops and establishments acts.
The ID Act, is a federal statute that is India’s most important labour law governing employer-employee relationships as it prescribes the mechanism to be followed by employers for retrenchment (i.e. termination) of “workmen” and the compensation payable upon such termination. The ID Act protects only those employees who are categorized as “workmen”. A workman, as per ID Act, is any person employed in an industry to do any manual, unskilled, skilled, technical, operational, clerical or supervisory work for hire or reward. The definition, however, excludes an employee employed in the managerial or administrative capacity; or in a supervisory capacity drawing wages exceeding INR 10,000 (Indian Rupees Ten Thousand) per month. All IT establishments, either electronic data processing or computer software development companies fall under the definition of “industry” under the ID Act.
The scope of the term workmen has been highly litigated in India and more so for employees in the IT sector. Developments in the last few years have seen the Union government extend provident fund and social security benefits under various provisions of labour laws to IT start-ups. Furthermore, courts in Tamil Nadu have categorically directed IT sectors majors such as TCS and HCL to extend application of the ID Act to their employees. This was followed by the Tamil Nadu government permitting IT sector employees to form trade unions. In the case of M/s Sonepat co-operative Sugar Mills Ltd Vs Ajit Singh (2005 LLR 309 SC), the Supreme Court concluded that a person doing a job which requires creativity, innovation and application of mind, cannot be categorized as a workman.
In effect, an employee with a technical job portfolio requiring application of imaginative and creative faculties for performing the job will be excluded from the purview of the definition of a workman. Although a Software Programmer, Developer, Web designer, Content Writer may be doing a technical job, but the nature of such a job entails the use of creative and imaginative faculties and hence these classes of IT sector professionals ought not to be treated as workmen under the ID Act. In software Industries the general intake are Engineers who study and gain mastery over the subject and put to extensive training before they are deputed to handle assignments or projects.
In summation, consideration must be afforded on a case-by-case basis, whether a person is in a supervisory role and not simply on the basis of designation. However, uncertainty shall prevail in this sector till a case is put to judicial scrutiny determined on its merits.
References
Conyon, M., Girma, S., Thompson, S. and Wright, P. (2001). ‘Do hostile mergers destroy jobs?’ Journal of Economic Behavior and Organization.
Bhagat S, Shleifer A. and Vishny R. (1990). ‘Hostile Takeovers in the 1980s: the Returns to Corporate Specialisation’, Brookings Papers on Economic Activity: Microeconomics.
Shleifer, A. and Summers, L. (1988). ‘Breach of trust in hostile takeovers’, In A.Auerbach (ed.) Corporate Takeovers: Causes and Consequences, University of Chicago Press.
Sudarsanam, P. and Mahate, A. (2006). ‘Are friendly acquisitions too bad for shareholders and managers? Long-term value creation and top management turnover in hostile and friendly acquirers’, British Journal of Management.
O’Shaughnessy, K. and Flanagan, D. (1998). ‘Determinants of layoff announcements following M&As: an empirical investigation’, Strategic Management Journal.
Azimjon Kuvandikov, Andrew Pendleton, and David Higgins (2012). ‘Causes Of Employment Reductions After Corporate Takeovers’, University Of York Management School, United Kingdom.
https://www.businessmanager.in/are-it-professionals-workmen-under-the-industrial-disputes-act.php
ABOUT THE AUTHOR
Shaleen Tiwari
Shaleen Tiwari is a 2016 B.A., LL.B. (Hons.) graduate from Hidayatullah National Law University, Raipur currently working as an Associate with Cyril Amarchand Mangaldas Mumbai. He can be reached at shaleen.hnlu23@gmail.com.
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