History is ripe with examples of how a little legal ingenuity and a few pre-emptive strategies can fend off the advances of the most ardent hostile acquirers. One of the advantages of the poison pill strategy is that there is no rigid structure to it and it can be tailored to suit the particular needs of a company. As a result, Indian companies are not restricted to adopt the classic version of the pill i.e., the shareholders’ rights plan.
For example, DIP guidelines do not prescribe any pricing restrictions on the issue of non-convertible preference shares, non-convertible debentures, notes, bonds and certificates of deposit. Thus, we may consider structuring a poison pill in place whereby backend rights which permit the shareholders to exchange the rights/shares held for senior securities with a backend value as fixed by the board, are issued to existing shareholders when the hostile acquirer’s shareholding crosses a predetermined threshold.
As most takeovers are carried out through borrowed funds, the use of backend rights reduces the profitability of the takeover because of the mounting interest rates on borrowings; thus deterring the hostile acquirer and more importantly sets the minimum takeover price, which is the price at which the shares have been exchanged for senior securities.
Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.