M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Friday, February 26, 2010

Overview of Indian Takeover Regulation

Sandeep Parekh at IIM recently posted a paper that includes a short introduction to takeover regulation in India, Indian Takeover Regulation - Under Reformed and Over Modified.  Given the recent increase in cross-border transactions involving India, this paper is worth taking a look at. 

Abstract: The takeover of substantial number of shares, voting rights or control in a listed Indian company attracts the provision of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997. The regulations have been amended nearly 20 times since inception, though the amendments have mainly concentrated on areas which needed no amendment. At the same time a vast number of obvious problems have not been rectified in the regulations. The large number of amendments have also created requirement of a compulsory tender offer of such unnecessary complexity as to make it virtually unintelligible to even a well qualified professional.

This paper argues that the complexity in the trigger points for disclosure and tender offer introduced over the years lacks a philosophy, and most of the amendments can not only be deleted but a very simple structure can be introduced making compliance of the regulations straight forward and easy to understand by management of listed companies. Certain other areas which need amendments have also been discussed. Chief amongst these are the provisions relating to consolidation of holdings, conditional tender offers, hostility to hostile acquisitions, definitional oddities, payment of control premium in the guise of non compete fees, treatment of differential voting rights, treatment of Global Depository Receipts and disclosure enhancements.

This paper does not try to portray a particular combination of numbers as the best possible set of trigger points and compulsory acquisition numbers but advocates that whatever numbers are adopted should not be changed for several decades. Arguments that state that the changing economic condition requires constant changes with these numbers, it is argued is wrong.


February 26, 2010 in Asia, Takeovers | Permalink | Comments (0) | TrackBack (0)

Thursday, February 25, 2010

Hummer Deal Finally Dies

So it's hardly a surprise to anyone paying attention that GM's deal to seller its Hummer unit to an unknown privately owned company from the interior of China died yesterday.  (GM announcement here)  GM announced that it would begin to immediately shut down Hummer and its operations.   

Though the terms of the proposed deal haven't been made public, I'm assuming the sale agreement included a customary regulatory condition to closing.  Such a condition would permit either party to refuse to close and then terminate the transaction in the event the required regulatory approvals were not obtained by the deal's drop dead date.  The way these conditions are often written, the parties can then walk away without either party paying a fee.  

However, given the importance of Chinese regulatory approval to making this deal happen and the high degree of risk that was so evident early on, the parties (or GM) would have been smarter to include a reverse termination fee tied to the Chinese buyer's failure to secure approval for the deal.  Or, at the very least, they should have considered including a "ticking fee" after the deal's first deadline passed without an approval.  Hummer was always a money losing transaction venture for GM.  The longer it kept it going in hopes of this deal closing, the more money GM lost.  We'd have all been better off if the buyer had to pay for the delay.  Of the two, the buyer was in the better position to bear the risk of China not approving the proposed deal.  Were there a fee in place, the buyer would have been forced to make a decision sooner about the likelihood of this deal going forward rather than simply let it float along and cause further damage to GM.  

In any event, this is an example of a transaction that may be sensitive from a regulatory perspective.  In such transactions, reverse termination fees or ticking fees might play a useful role in efficiently shifting onto buyers the risks of the deal collapsing.


February 25, 2010 in Asia, Miscellaneous Regulatory Clearances | Permalink | Comments (0) | TrackBack (0)

Wednesday, February 24, 2010

Limits on Termination Fees

While Delaware does not take a brightline rule approach to limiting the size of termination fees, other do.  Last week, I referred to a paper from John Coates comparing Delaware's standards with respect to termination fees with the UK's rule-based approach.  Well, last week, the Takeovers Panel in Australia, the Takeover Panel's cousin down under adopted new guidance on termination fees (break fees), limiting their size in most circumstances to no more than 1% of equity value of a transaction. 

In its guidance on lock-up devices, the Panel also warned against the potentially anti-competitive effect of what they call no-due-diligence obligations, particularly those that provide initial bidders with information rights in the event a second bidder happens along.  I blogged about the potentially anti-competitive effects of this kind of weak-form rights of first refusal before.  Delaware, however, is clearly okay with them (see Toys R Us).

One supposes that the announcement of a brightline rule with respect to termination fees in Australia provides a nice opportunity for a natural experiment.


February 24, 2010 in Takeover Defenses | Permalink | Comments (0) | TrackBack (0)

Tuesday, February 23, 2010

Takeover Panel to Rewrite Rules?

It seems there may be some blow-back following Kraft's takeover of Cadbury.  Lord Davies, the British Trade Minister and Cadbury's former chairman Roger Carr are suggesting that following Kraft's successful acquisition of British icon Cadbury that the Takeover Panel should make some changes to their rules to ensure this sort of thing doesn't happen again.  Specifically, they suggest:

Among its provisions is a rule that deals must be conditional on at least half of a company’s shareholders accepting the offer.   In his speech earlier this month, Carr said certain changes to the Code may be needed ‘to make hostile bids more difficult to win’. 

He suggested a ‘radical’ change to takeover rules, namely: ‘Raise the acceptance for takeovers above 50%, to dilute the risk of shortterm holders overriding the wishes of a committed longer-term shareholder base by simple majority.’   

This threshold could be lifted to 60%, he argued. Alternatively, Carr said shareholders who buy into a company during a bid could be disenfranchised.

Given that the Takeover Panel has generally taken the position that questions about the ownership of corporations should be left to the stockholders and has eschewed a Delaware-like approach that vests much more power with boards, any move to increase the relative power of boards to resist hostile tender offers is a little disappointing.   Anyway, here's hoping they don't. I like the diversity in approaches.  It gives us academics something to look at!


February 23, 2010 in Europe | Permalink | Comments (0) | TrackBack (0)

Monday, February 22, 2010

Cross-Border M&A and National Pride

This morning I opened my email to see news on two multi-billion dollar deals by Indian conglomerates.  Bloomberg reported that Reliance Industries Ltd., one of India’s largest companies and owner of the world’s largest oil-refining complex, raised its offer for bankrupt LyondellBasell Industries AF to about $14.5 billion.  In addition, India’s Bharti Airtel has been able to line up almost $9 billion in loans for its $10.5 billion bid for Zain’s African assets.  These types of large-scale deals generally receive a lot of positive popular press attention in India, some of it with nationalistic sentiments touting the rise of India Inc.  Whenever I read these stories they make me wonder about a recent paper by Ole-Kristian Hope, Wayne Thomas and Dushyantkumar Vyas, entitled “The Cost of Pride: Why do Firms from Developing Countries Bid Higher?” which examines whether companies from developing countries bid higher (relative to companies from developed countries) in their quest for international expansion and national glory.

Abstract: Using an extensive panel of cross-border M&A transactions between 1990 and 2007, we find that firms from developing countries (versus those from developed countries) bid higher on average to acquire assets in developed countries. We are interested in why these higher bids occur. We find that bids of firms from developing countries are higher in cases where the transaction displays “national pride” characteristics, where national pride is identified through a manual examination of media articles. These results, which are robust to numerous specifications (including alternative measures of national pride) and control variables, are both statistically and economically significant and highlight a source of pride beyond personal hubris which potentially influences corporate decision makers.

In my opinion, the next stage of this research is to see whether deals with national exuberance create positive wealth effects for the shareholders of the bidding companies.


February 22, 2010 in Asia, Cross-Border | Permalink | Comments (0) | TrackBack (0)

PCCW Highlights Corporate Voting Problems

Here's a case out of Hong Kong that is highlighting some of the real problems associated with corporate voting.  If you think Florida is bad (apologies to Florida), then you haven't been paying attention to the deficiencies associated with corporate voting.  In the PCCW case, controlling shareholder Richard Li unsuccessfully attempted a $2.1 billion buyout of the public shareholders.  From Forbes:
Bloomberg reports that the company's offices were searched by police earlier this month, along with those of Fortis Insurance Co. (Asia), a local insurer that was once controlled by Li through his Pacific Century Regional Developments (PCRD).

Hong Kong's Securities and Futures Commission won a court ruling in April, 2009 to block Li’s bid after the regulator alleged that hundreds of people, including Fortis Asia agents, were given shares in the phone carrier to boost support for the deal.

Li, the son of Hong Kong's richest man, Li Ka-shing and a billionaire in his own right with a fortune we estimate at $1.1 billion, has not been implicated in any wrongdoing.
Although minority shareholders were vocally opposed to the transaction, it succeeded at the ballot box.  It's all still a little fizzy what was going on here.  The Hong Kong police have since raided Mr. Li's home apparently and sealed up the ballot boxes.  At this point, there is no indication that Mr. Li violated any laws.   It's an odd situation.  It's hard to imagine the police intervening in a US corporate election, but there you have it.   

While we're on the subject, Marcel Kahan and Ed Rock have a paper, The Hanging Chads of Corporate Voting, that appeared in the Georgetown Law Review a couple of years ago that's worth reading again.


February 22, 2010 in Asia, Going-Privates | Permalink | Comments (0) | TrackBack (0)