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 this
mechanism. 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 Code
In 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 guidelines
The 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.
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 India
One 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 ways
a. 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 Pills Company 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 acquisition
deterrent.
For example, it is believed that several different Tata companies 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.
Conclusion
The 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 the
same time should consider leveraging the benefits of the strategy.