Advanced Financial Management · Mergers, Acquisitions and Corporate Restructuring

Takeover Defence and Regulatory Framework for CA Final AFM

Updated 5 October 2026 · Fact-checked

Takeover defence means the steps a target company's management takes to resist an unwanted bid, such as poison pills, white knights, greenmail and golden parachutes. In India, SEBI's Takeover Regulations govern open offers and the Companies Act governs schemes. To solve questions, identify the tactic or trigger, apply the rule, then conclude.

Understand Takeover Defence and Regulatory Framework

A takeover is the acquisition of control over a company. It is friendly when the target board agrees. It is hostile when the board opposes the bid and the acquirer goes directly to shareholders or buys shares in the market.

Hostile bidders use a few common tactics. A bear hug is an offer at a price so attractive that the board finds it hard to reject. A tender offer is a direct public offer to shareholders to buy their shares. A proxy fight is an attempt to win shareholder votes to replace the board. A creeping acquisition is buying shares gradually, within the limits the law allows, to build up control.

Defences come in two groups. Preventive defences are put in place before any bid. Active defences are used once a bid arrives. Know the main names and what each one does:

Poison pill: gives existing shareholders (other than the acquirer) rights to buy shares cheaply, or to sell back at a premium, once an acquirer crosses a set holding. It is put in place beforehand, but it is triggered only after the bidder crosses the threshold. It dilutes the bidder and raises the cost.
White knight: a friendly company that the target invites to buy it on better terms, instead of the hostile bidder.
White squire: a friendly party that buys a large block of shares, but not control.
Greenmail: the target buys back the raider's shares at a premium so the raider goes away.
Golden parachute: large exit payments to top managers if they lose their jobs after a takeover.
Crown jewel defence: selling the most valuable asset so the target becomes less attractive.
Pac-Man defence: the target makes a counter-bid for the bidder.
Staggered board: only a part of the board retires each year, so control takes longer to win.
Shark repellent: charter or bylaw changes that make a takeover harder, such as supermajority voting.

In India, the main control is the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. They require an open offer to public shareholders when an acquirer crosses certain thresholds or acquires control. The aim is to give all shareholders a fair exit at a fair price. After the public announcement of the open offer, the target's board cannot sell or dispose of material assets, or issue shares, outside the ordinary course of business without shareholder approval by special resolution. There are limited exceptions, such as obligations the target had already undertaken before the announcement.

For mergers and demergers, the Companies Act, 2013 requires a scheme of arrangement to be approved by the NCLT after approval from creditors and members by the required majority. Listed companies also need to follow SEBI's rules on schemes. Keep your answers on the principle and the process, and avoid quoting section numbers you are unsure of.

Key rules to remember

Open offer trigger: substantial acquisition: Acquirer with persons acting in concert crosses 25% of voting rights → open offer; Applies to acquiring shares or voting rights that take the holding to 25% or more. Always check the facts for the combined holding with persons acting in concert.
Open offer trigger: change of control: Acquisition of control, whatever the shareholding → open offer; Control can pass without crossing 25%, for example through the right to appoint a majority of directors.
Creeping acquisition limit: Holding between 25% and 75% → can add up to 5% in a financial year without an open offer; Applies to an acquirer who already holds 25% or more but not more than the maximum permitted non-public holding of 75%.
Minimum open offer size: Open offer size ≥ 26% of the total shares of the target company; This is the minimum size of the open offer under the SEBI (SAST) Regulations, 2011. It is a percentage of the target's total shares.
Takeover cost after a poison pill: Dilution factor = shares after rights issue ÷ shares before rights issue; Use it to show how the acquirer's percentage holding falls: new holding % = acquirer shares ÷ total shares after the issue.

How to solve Takeover Defence and Regulatory Framework questions

Use the same sequence for a theory or case question on takeover defence and regulation.

1Read the case and mark the facts: who is the bidder, who is the target, the holding percentages and whether the bid is friendly or hostile.
2Name the situation: tactic by the bidder, defence by the target, or regulatory trigger.
3State the rule or the meaning in one or two lines, with its conditions.
4Apply the rule to the numbers or facts given. Add the holding of persons acting in concert before you test any threshold.
5If a number is needed, compute it in steps: shares after issue, new percentage, or cost of the offer.
6Conclude clearly: open offer required or not, which defence applies, or what the board may or may not do.
7Add one line on the effect on shareholders or on the target, if the question asks for a comment or evaluation.

Quickest way: Trigger-test-conclude

When to use it: Use this when time is short, especially in case-based MCQs on open offers and defence names.

Match the description to the defence by its key phrase: friendly rescuer = white knight, buy back at premium = greenmail, exit payout to managers = golden parachute, counter-bid = Pac-Man, sell key asset = crown jewel.
For an open offer MCQ, add the acquirer's holding and the new purchase, including persons acting in concert.
Compare with 25% for the trigger and with the 5% yearly limit if the holding is already 25% or more.
Check whether control changes even when no percentage is crossed.
Pick the option that matches the rule and its conditions, and reject options that ignore the combined holding.

Common mistakes in Takeover Defence and Regulatory Framework

Mixing up white knight and white squire
Both names suggest a friendly party.
Fix: A white knight takes over the target. A white squire only buys a block of shares and does not take control.
Calling greenmail a poison pill
Both are meant to stop a raider and both raise cost.
Fix: Greenmail is a buyback of the raider's shares at a premium. A poison pill is a rights mechanism that dilutes the raider.
Testing the 25% trigger on the acquirer's holding alone
Students forget persons acting in concert.
Fix: Always add the holdings of persons acting in concert before testing any threshold.
Saying an open offer is needed only when 25% is crossed
The percentage test is learned well, the control test is not.
Fix: State both triggers: crossing the threshold and acquiring control, even with a lower holding.
Applying the 5% creeping limit to a holder below 25%
The limit is remembered without its condition.
Fix: The limit is for an acquirer who already holds 25% or more. Someone below 25% who would cross 25% needs an open offer.
Writing section numbers from memory in the regulatory answer
Students try to look more precise.
Fix: Describe the rule and the process in words. Use a section number only when you are certain of it.

Worked examples

Example 1

Raider Ltd holds 20% of Target Ltd. Its group company, acting in concert, holds 3%. Raider Ltd now buys another 4% from the market. Does it need to make an open offer? Give the reasoning.

Show the solution

Combined holding before purchase = 20% + 3% = 23%.
Combined holding after purchase = 23% + 4% = 27%.
The threshold for a substantial acquisition is 25%. The holding moves from below 25% to above it.
The 5% yearly creeping route is not available because the holding was below 25% before the purchase.
Therefore the acquisition triggers an open offer.

Answer: Yes. The combined holding rises from 23% to 27%, crossing 25%, and the creeping route does not apply, so Raider Ltd must make an open offer to public shareholders.

Example 2

Target Ltd has 10,00,000 shares. Hostile Ltd holds 2,00,000 of them. Target's poison pill lets every shareholder except Hostile Ltd buy one new share for each share held, at a nominal price, once an acquirer crosses 15%. Calculate Hostile Ltd's holding after the rights are exercised in full, and explain the effect.

Show the solution

Holding before the pill is triggered = 2,00,000 ÷ 10,00,000 = 20%. This is above the 15% trigger, so the pill, which was put in place earlier, is now triggered.
Shares held by others = 10,00,000 − 2,00,000 = 8,00,000.
New shares issued to others = 8,00,000 × 1 = 8,00,000.
Total shares after issue = 10,00,000 + 8,00,000 = 18,00,000.
Hostile Ltd's new holding = 2,00,000 ÷ 18,00,000 = 11.11% (approx.).
To get back to 20%, Hostile Ltd would now need 3,60,000 shares, which means buying 1,60,000 more at market price.

Answer: Hostile Ltd's holding falls from 20% to about 11.11%. The pill dilutes the bidder and raises the cost of gaining control. The pill is a preventive defence because it is put in place before the bid, but it is triggered and exercised only once the bidder crosses the threshold.

Exam tips

Learn the defence names in pairs with a one-line meaning. Case MCQs usually describe the action and ask for the name.
Always add persons acting in concert in open offer cases. Examiners build the trap into the facts.
Write theory answers in rule, facts, conclusion form and give both pros and cons when asked to evaluate a defence.
For poison pill numbers, show shares before, new shares, total shares and the new percentage in separate lines.
For schemes of merger and demerger, state the sequence in words: board approval, meetings with creditors and members, NCLT sanction, filing the order.

Practice questions from Mergers, Acquisitions and Corporate Restructuring

Takeover Defence and Regulatory Framework in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Takeover Defence and Regulatory Framework: frequently asked questions

What is a poison pill in simple words?

A poison pill is a pre-planned step that makes a hostile takeover costly. It usually lets existing shareholders, other than the bidder, buy shares cheaply once the bidder crosses a set holding. This dilutes the bidder's stake.

What is the difference between a white knight and a white squire?

A white knight is a friendly company that takes over the target instead of the hostile bidder. A white squire only buys a large block of shares to support management and does not take control.

When does the SEBI Takeover Code require an open offer?

An open offer is needed when an acquirer, with persons acting in concert, crosses 25% of voting rights or acquires control. A holder at 25% or more can add a limited percentage each year without an offer, subject to the rules.

How much of this topic is numerical?

Mostly it is theory and case application. Numbers usually test holding percentages, dilution after a rights issue, or the cost of an open offer. Practise showing each step clearly.