LEGAL ISSUES AND
TAKEOVER CODE
Presentation by
Mohit Saraf
Partner
Luthra & Luthra
Law Offices
Nov. 6, 2001
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Agenda
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Overview of Takeover Regulations
Salient Definitions
Types of Takeovers
Required Disclosures
Takeover code Trigger
Exempted Categories
Takeover at a Global Level
Takeover and Disinvestment
Advantages
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Overview of Takeover Regulations
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“Takeover” is a transaction whereby a person (individual, group of
individuals or company) acquires control over the assets of the
company either:
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directly by becoming the owner of those assets; or
indirectly by obtaining control of the management of the company .
Takeover can be of a listed or an Unlisted company
In case of Takeover of an Unlisted and closely held company –
Companies Act, 1956 to apply.
In case of Takeover of a listed company, the following legal framework
to apply:
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Overview of Takeover Regulations
(Cont’d.)
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SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997
issued by the Securities and Exchange Board of India (SEBI);
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Companies Act, 1956; and
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Listing Agreement
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“Take Over” – taking over the control of management
•
“Substantial acquisition of shares or voting Rights”- acquiring
substantial quantity of shares or voting rights
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SEBI Regulations for the first time introduced in 1994, but found
inadequate to control hostile takeovers or regulate competitive offers
and revision of offers.
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Overview of Takeover Regulations
(Cont’d.)
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The Takeover Code came in for a fair amount of criticism due to the
various loopholes which surfaced.
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Example:
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Torrent group and Bombay Dyeing
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Under the 1994 Takeover Code - an acquisition resulting in the acquirer's
share holding exceeding 10% - a public announcement to acquire at least
20% of their existing share holding to be made.
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The Torrent group made an open offer to acquire 20% in Ahmedabad
Electricity Company ("AEC") at Rs. 65 per share.
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Overview of Takeover Regulations
(Cont’d.)
– This was followed by Bombay Dyeing's offer to acquire a majority stake in
AEC at a price of Rs. 90 per share on an all or none basis.
– SEBI rejected Bombay Dyeing's open offer on technical grounds as the bid
was not made within the 14 day period following the public announcement
by Torrent.
– Torrent raised its offer price to Rs. 132 per share, but shareholders failed to
respond in anticipation of a new bid by Bombay Dyeing. The Torrent offer
flopped receiving only about 1% response.
– Bombay Dyeing did not follow up with a revised bid as it felt that the revised
price of Rs. 132 was too high.
– AEC scrip flared up from Rs. 70 to a high of Rs. 170 in just a couple of
months.
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Overview of Takeover Regulations
(Cont’d.)
• The takeover of Damania Airways is an example of a company
failing to deliver due to insufficient funds.
• The Khemkas of the NEPC group, after acquiring management
control in Damania Airways made an open offer to acquire 20% in
the company at Rs. 19.60 per share.
• The ruling price was then Rs. 15.50.
• SEBI pressure forced Khemkas to revise price of open offer to Rs.
35.25
• NEPC group unable to make payments to all the shareholders.
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Overview of Takeover Regulations
(Cont’d.)
• SEBI issued show cause notice to NEPC for its failure to meet
commitments to shareholders who responded to the open offer.
• Current status: Khemkas have been barred from accessing the
capital market for 5 years for violating the takeover regulations.
• Bhagwati Committee appointed under the chairmanship of
Justice P N Bhagwati for plugging loopholes. On the basis of
recommendations suggested SEBI notified 1997 regulations.
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Salient Definitions
•
Acquirer” has been defined as any person who directly or indirectly acquires
or agrees to acquire:
– shares or the voting rights in the target company; or
– control over the target company
either by himself or with any person acting in concert with the acquirer
“Target Company” means a listed company whose shares or voting rights or
control is directly or indirectly acquired.
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Salient Definitions (Cont’d.)
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Control has been given an inclusive definition and includes:
a)
b)
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the right to appoint the majority of the directors.
To control the management or policy decisions.
Persons acting in concert (“PAC”) has been defined as:
any person established to have, with the acquirer, the common
objective of buying:
a substantial amount of shares; or
voting rights in a company; or
gaining control of a company
following an agreement or understanding (formal or informal) or by
cooperating with the acquirer, directly or indirectly.
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Salient Definitions (Cont’d.)
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The concept of PAC assumes significance in the context of take overs:
– acquisition made by the acquirer remains below the threshold limit
– taken together with the voting rights of persons acting in concert, the
threshold may exceed.
•
Example:
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Bajoria – Bombay Dying Tussle.
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PAC in case of Bajoria:
Mega Resources, Mega Stock, Hooghly Mills, Ms Pooja Bajoria,
Ms Mohini Devi Bajoria, Ms Lata Devi Bajoria and Ms
Meenakshi Jatia
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Salient Definitions (Cont’d.)
• Bajoria together with PAC acquired more than 15%.
• Parking – Collusion were several different parties act in concert
to buy equity.
•
Example:
• Reliance
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Types of Takeover (Cont’d.)
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Takeover bids may be classified as under:
1)
2)
3)
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Hostile takeover
Friendly takeover
Bailout takeover
Hostile takeover
• The method of trying to take the control of the company without
the knowledge of the existing management is known as “hostile
takeover”.
• Example:
- Bombay Dyeing and Manufacturing Co Ltd -Bajoria struggle
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Types of Takeover (Cont’d.)
• Bajoria together with people acting in concert acquired more than 5%
of shares in Bombay Dyeing without making appropriate disclosures,
required at the 5% level under the Takeover Regulations.
• Complaint filed by Bombay Dyeing before SEBI and CLB.
• Petition before CLB – praying for rectification of register of members
in respect of all shares above 5%. Bajorias having validly transferred
shares above 5% during pendency of petition - no rectification
• SEBI –barred Bajoria, along with persons acting in concert, from
accessing the capital market for one year with immediate effect.
• CII, FICCI and Assocham –Introduction for Promoter friendly
amendments
• Creeping acquisition limit raised from 5% to 10% with effect from
October 25, 2001
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Types of Takeover (Cont’d.)
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Tendency of Financial Institutions (FI) to help out Promoters in hostile
takeovers
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However, in Raasi Cements Limited (RCL) and India Cements Limited
(ICL), FIs felt cheated.
•
ICL in its hostile bid for RCL made an open offer for RCL shares at Rs.
300 per share when the share price was at Rs. 100.
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Promoters of RCL sold out its 32% stake to ICL in a negotiated deal
during the term of the open offer at price ranging between Rs.200 to
Rs. 286 per share
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ICL had full control of RCL without having to purchase single share
from from the institutional investors.
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Types of Takeover (Cont’d.)
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Friendly takeover
 Management of a company may face serious financial
problems or threats of hostile takeover
 Unable to ward off the takeover attempt.
 A friendly corporate body or group of companies may come to
the rescue by buying shares of the company in the open market
and/or by pumping resources to help the management.
• Example:
• Sterlite Industries Limited (“SIL”) – Indian Aluminum Company
Limited (“Indal”).
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Types of Takeover (Cont’d.)
• SIL made an open offer to purchase 10% of the shares of Indal
from the Public. (Takeover trigger at 10% then)
• SEBI came up with ruling of public offer of not less than 20%.
• SIL required to increase its public offer to 20%.
• Indal, feeling vulnerable to a takeover threat from SIL, requested its
foreign collaborator Alcan to come to its rescue.
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SIL made a cash offer at Rs. 115 per share and Alcan made a bid
for Rs.175.
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Types of Takeover (Cont’d.)
• SIL thereafter announced its intention to acquire 52% and
revised it price to Rs.221 per share.
• In this case FIs were a key element holding 36% of the
equity.
• On the day of closure of the offer period, FIs struck a deal
with Alcan for Rs. 200 per share.
• Indal with the help of Alcan was succesful in wardinf of the
hostile threat.
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Types of Takeover (Cont’d.)
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Bailout takeover
Taking over of the management of such weak companies
for nurturing them back in normal activities by a company
having expertise and resources is known as “Bailout
takeover”
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Example:
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Disclosure under Takeover Code
• 5% or more shares or voting rights:
– An Acquirer, who along with the PAC, acquires shares or voting
rights of a company which shareholding together with his existing
shareholding exceeds 5% of shares or voting rights in a company
– disclose his aggregate shareholding or voting rights within four
working days of receipt of intimation of allotment or acquisition of
shares or voting rights, as the case may be.
– Such company shall disclose to all Stock Exchanges on which its
shares are listed, the aggregate number of shares held by each of
such person within 7 days of receipt of information.
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Disclosure under Takeover Code
(Cont’d.)
• More than 15% shares or voting rights
– Any acquirer along with PAC holding more than 15% but less than
75% of shares or voting rights in a company shall disclose to the
company upon acquiring a further:
• 5%; or
• 10%
of shares or voting rights during any period of 12 months.
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Disclosure under Takeover Code
(Cont’d.)
– A promoter or every person having control of a company shall
within 21 days from the financial year ending March 31, or /and as
well as the record date for the purpose of declaration of dividends,
disclose the number as well as percentage of shares or voting
rights held by him along with PAC in that company to the Target
Company.
– Every listed company shall within 30 days from the end of financial
year on March 31, as well the record date for declaration of
dividends make disclosure to the stock exchange(s) with changes,
if any, on which its shares are listed in respect of holding of persons
mentioned above.
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Takeover Code Trigger
•
The Takeover Code is triggered under the following circumstances:
•
15% shares or voting rights:
– Acquirer intending to acquire shares which along with his existing
shareholding would entitle him to more than 15% voting rights
– such additional shares can be acquired only through an open offer.
– open offer for acquiring a minimum of 20% of the shares of a target
company.
• Exception:
• If the Acquirer is already holding less than 75% or more of voting
rights/shareholding; and
• Has deposited in the escrow account 50% of the consideration in cash.
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Takeover Code Trigger (Cont’d)
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Creeping Limit of 10%
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Acquirer holding 15% or more but less than 75% of the shares or
voting rights of the company
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Can consolidate his holding upto10% in any period of 12 months.
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Acquisition of shareholding beyond 10% through an open offer
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Open offer for acquiring a minimum of 20% of the shares of the
Target Company
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Takeover Code Trigger (Cont’d)
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Consolidation of holding
– An Acquirer who is having 75% shares or voting rights of a target company
– Can acquire additional shares through an open offer
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Public Announcement (PA)/Open Offer
– An open offer is made by a Public Announcement
– Announcement given in the newspapers by Acquirer disclosing his intention
to acquire a minimum of 20% shareholding from existing shareholders
through an open offer
– PA is made to ensure that the shareholders of the Target Company are
aware of the exit opportunities available to them in case of a take over.
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Takeover Code Trigger (Cont’d)
• Competitive Offer
– Any third person other than the acquirer who has made the first
public announcement can make a competitive bid or a counter
offer;
– within 21 days of the public announcement of the first offer.
– Upon the public announcement of this competitive bid, the original
acquirer shall have the option to either revise the original offer or
withdraw it.
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Exempted Categories
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The public offer provisions of the Takeover Code will not be apply in
the following cases:
– Allotment in pursuance of an application made to a public issue;
– Allotment pursuant to an application made by the shareholder for rights
issue, subject to such rights issue not resulting in change in control and
management of the company;
– Sick company;
– Preferential allotment of shares, subject to the condition that at least 75%
of the shareholders of the company shall have approved the preferential
allotment and that sufficient disclosures relating to the post-allotment
shareholding pattern, offer price etc., have been made to the
shareholders;
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Exempted Categories (Cont’d.)
- Allotment to the underwriters pursuant to any underwriting
agreement;
- Issue of American Depository Receipts and Global Depository
Receipts or Foreign Currency Convertible Bonds, till such time as
they are not converted into equity shares;
- Shares held by banks and financial institutions by way of security
against loans;
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Takeover Code at a Global Level
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Global level arrangements - whether it attracts Takeover Code
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Under 1994 takeover code
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Example:
– Sesa Goa-Mitsui
– In 1996, Mitsui of Japan acquired the parent company of Sesa-Goa India
Limited.
– As a result of this acquisition Mitsui indirectly became the single largest
shareholder of Sesa-Goa.
– Mitsui applied to SEBI stating that the Take over code should not be
triggered as the change in control of Sesa-Goa was a result of acquisition of
its parent
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Takeover Code at a Global Level (Cont’d.)
– Mitsui applied to SEBI stating that the Takeover Code should not be
triggered since the change in control of Sesa-Goa was a result of its
acquisition of Sesa-Goa's parent.
– Case evaluated under the 1994 takeover code
– Ministry of Finance ruled that under the 1994 takeover code, SEBI had no
jurisdiction over the developments abroad and therefore could not pass
sentence on something that happened outside its jurisdiction and thereby
no open offer was required.
•
Last three years:
– With respect to transactions taking place outside India (Global
Level arrangements), quite a few cases have been decided with
regard to global-level developments.
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Takeover Code at a Global Level (Cont’d.)
•
Examples:
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Schenectady International Inc.
–
Schenectady International Inc. of USA (the "acquirer"), the acquirer filed
an application with SEBI seeking exemption from the application of public
offer provisions of the Takeover Code for its acquisition of 51% of the equity
capital of Dr. Beck & Co. (India) Limited (the "target").
– The Takeover Panel rejected the above application and accordingly SEBI
ordered the acquirer to make open offer for 20% to the public.
•
Bausch & Lomb acquisition by Luxottica
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Takeover Code at a Global Level (Cont’d.)
– In global acquisition in April 1999, the Luxottica group had acquired the
sunglasses business of Bausch & Lomb (B&L), USA, for $640
million.
– The takeover of the Indian Operations of (B&L) also followed.
– B&L, USA had a 44% stake in B&L India
– When global deal took place, the control of B&L, India went to
Luxottica.
– The deal resulted in change of management of B&L, India
– No open offer was made.
– SEBI is probing into a possible violation of the provisions of the
takeover code by Luxottica Spa while acquiring B&L of India last
year
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Takeover Code at a Global Level (Cont’d.)
•
B.P. Amoco plc (Acquirer) and Burmah Castrol plc. (B.C)
– B.P. Amoco Plc. (Acquirer) and Burmah Castrol plc.(B.C),
companies incorporated in U.K entered into an Agreement.
– Castrol India Limited (CIL) and Foseco (India) Limited
(“Target Companies”) are indirect subsidiaries of B>C
(FIL)
– B.C indirectly has a 51% holding of shares in CIL and a 58%
holding of shares in FIL.
– Acquirer made an application to SEBI to seek an exemption from
making a public offer of 20% in respect of shares of Target
Companies.
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Takeover Code at a Global Level (Cont’d.)
– The matter forwarded to the Takeover Panel and the panel
recommended exemption subject to the condition that shareholders
of Indian Target companies passing special resolutions at their
respective meetings permitting voting through postal ballot thereat
ratifying the change in control.
•
Take over of a foreign parent would trigger the Takeover code
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Special exemptions under the Regulations for mereger whether carried
in India or Abroad
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To be examined on a case to case basis whether merger or takeover
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Takeover Code and Disinvestment
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The Takeover Code amended twice
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Restrictions specified under Takeover Code not to apply of takeover of
a PSU:
– prohibition, during the offer period, on the acquirer or PAC to be
appointed on the board of directors of the target company;
– Agreement for sale of shares, which entitles the acquirer 15% or
more of the share capital or voting rights of a PSU along with his
existing shareholding, shall contain a clause to the effect that in
case of non-compliance of any provisions of the Takeover Code,
the agreement for such sale shall not be acted upon by the seller
and the acquirer.
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Takeover Code and Disinvestment
Cont.
• appointment of any representative of the acquirer or any person
having an interest in the acquirer as additional director or as
director to fill in any casual vacancy on its board after the PA has
been made.
• The shares acquired by the acquirer both under the agreement
and/or from the open market can be transferred in the name of
the acquirer and changes in the board of director as would give
the acquirer representation on the board or control over the
company may be done, only after the merchant banker certifies
that all the obligations of the acquirer under the Takeover Code
have been fulfilled.
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Takeover Code and Disinvestment
Cont.
•
An acquirer required to make a PA not later than 4 working days of the
date of execution of Share Purchase Agreement or Shareholders
Agreement with the Central Government.
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No further PA is required at the subsequent stage of further acquisition
of shares if following conditions are satisfied:
a)both the acquirer and the seller are the same in all the stages of
acquisition; and
b) has made the disclosure regarding all the stages of acquisition in
the letter of offer sent to the Securities Exchange Board of India
and the shareholders of such public sector undertaking.
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Takeover Code and Disinvestment
(Cont’d).
• No public announcement for a competitive bid can be made:
– after the public announcement has been made by the acquirer
pursuant to entering of the Share Purchase or Shareholders
Agreement with the Central Government for acquisition of shares or
voting rights or control of the public sector undertaking.
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Advantages
•
The management becomes more accountable.
– Promoters of Indian companies have never been answerable to small
shareholders for their business practices. Even if they had minority holdings
and indulged in mismanagement, Indian promoters didn't contend with
threats of losing control.
•
A powerful corrective mechanism
– In a mismanaged business, the minority shareholder suffers more than the
management. The management lives off expense accounts while profits
erode, dividends dwindle, and share price falls.
•
The management performs because of fear of being replaced.
– The management may also be forced to make an open offer to increase its
own stake. It may have to share powers by allowing minority shareholders
onto the board and thus create greater transparency.
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Advantages (Cont’d)
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The share price automatically climbs. This climb in share prices has
already occurred in Bombay Dyeing, GE Shipping, and East India
Hotels, for instance.
•
The rising share price gives minority shareholders an exit option at
higher prices as well, as an option of siding with potentially better
management in the event of an actual takeover bid.
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