MERGERS AND ACQUISITIONS TRANSACTIONS:

IMPACT OF SHAREHOLDER ACTIVISM ON

CORPORATE GOVERNANCE

Naman Devpura and Varnik Yadav*

ABSTRACT

Mergers and Acquisitions (M&A) has evolved into an important corporate

transaction for responding to ever increasing global competition, rapid expansion
into new markets and economic survival of corporations. Sound governance
practices in such transactions add to their effectiveness while creating higher value
additions to the involved parties. Through the lens of corporate governance
mechanisms, this paper aims to analyze this coincidence of M&A transactions
and shareholder activism, a relatively new phenomenon in the Indian corporate
landscape. While analyzing the major mechanisms for governing M&A
transactions, this paper dives deeper into the advent of shareholder activism, its
development in India and wave of regulatory reforms associated with it. Further,
the paper signifies the role of Proxy Advisory Firms (PAF) in relation to
M&A transactions by promoting activism amongst institutional investors and
retail investors. With due reference to the hybrid model of Indian corporate
market, the paper discusses four different models of shareholder activism, covering
both externally and internally regulated systems, in relation to such transactions
and recommends certain preliminary implications from this comparative analysis.
The paper concludes by suggesting broad incentive-based policy and procedural
*The authors are 3rd year students at Gujarat National Law University, Gandhinagar,
Gujarat.
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framework for a sophisticated development of shareholder activism in India,

paving way for increased effectiveness in corporate transactions such as M&A
while fulfilling the objective of establishing enhanced governance mechanisms.

I. INTRODUCTION

The fundamental goal of corporate law and governance rests in

improving outcomes for various stakeholders in business organized
and structured as corporations which can be achieved through
regulation of significant corporate transactions such as Mergers and
Acquisitions. By regulating such transactions, the corporate law and
governance eyes towards value addition to such transactions and
care and loyalty towards the corporate decision makers involved in
such transactions. The milestone of interface of corporate
governance and M&A was marked by proposition ―market for
corporate control‖, where it was suggested that firms with
inefficient management attracts takeovers by other firms with more
efficient management, reflecting in the former‘s lower stock prices.1
Much water has flown since this analysis, marking for stronger
governance mechanisms.

The consolidation of two or more firms and their assets

constitutes Merger and Acquisitions. While the former specifically
involves forming of a new entity, the latter involves purchase of one

1George H. Manne, Mergers and the Market for Corporate Control, 73 J. POLIT. ECON. 110-
120 (1965).
2021] Journal on Governance 155

firm by another. In both the cases, value maximisation is the

inherent motive2 while also involving strategic actions such as
reduction of competitors, invention of industry3 or creating
synergies or economies of scale.4 The phases involved in M&A
transactions are due diligence, negotiation, and integration.5 M&A
transactions can be divided into asset purchases, stock purchases,
and mergers as per their legal nature. In India, stock purchases are
the dominant M&A transaction which involves owning the business
or stock rather than the assets such as Vodafone‘s acquisition of
67% of Hutchison and Vedanta‘s acquisition of 59% of Cairn
India.6

The 21st century has marked the crest of corporate governance

when WorldCom and Enron scams in the US led to the enactment
of the Sarbanes Oxley Act, 2002. In India, the Satyam scam forced
the Ministry of Corporate Affairs to revise governance regulations
to protect the shareholders. Similarly in Australia, CLERP reforms
were made while the Palamat failure in Italy forced various

2 M.C. Jensen, Agency Cost of Free Cash Flow, Corporate Finance, and Takeovers, 76(2) AM.
ECON. REV. 323-329 (1986).
3 J. L. Bower, Not All M&As Are Alike–and That Matters, 79 Harv. Bus. Rev. 93-101

(2001).
4 Andrade Gregor, Mark Mitchell & Erik Stafford, New Evidence and Perspectives on Mergers,

15(2) J. E. P. 103-120 (2001).

5 M. Zollo & H. Singh, Deliberate learning in corporate acquisitions: post‐acquisition strategies and

integration capability in US bank mergers, 25(13) STRATEG. MANAG. J. 1233-1256 (2004).

6 John C. Coates IV, Mergers, Acquisitions and Restructuring: Types, Regulation, and Patterns of

Practice in THE OXFORD HANDBOOK OF CORPORATE LAW AND GOVERNANCE (Jeffrey

N. Gordon and Wolf-Georg Ringe eds., July 2015).
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regulatory reforms.7 The ongoing spate of crisis and scandals has led
to greater legislative reforms which call for strengthening the
presence of institutional and retail shareholders in corporate
transactions such as M&A, as analysed in this paper. The
requirement becomes even prominent in India where controlling
shareholders or promoters rule the corporate landscape. The
phenomenon of shareholder activism, although not a widely
practised phenomenon in India, has found its rapid mark on various
M&A transactions and turns out to be a larger force of corporate
governance in the Indian corporations. With the demands of greater
efficiency associated with M&A transactions8, we discuss and
analyse the interface between such transactions and the impact of
corporate governance in the following sections.

This paper is divided into four parts. The paper, first, discusses
the existing mechanisms of corporate governance in Mergers and
Acquisition transactions. The paper then narrows upon the impact
of shareholder activism on M&A transactions. The paper traces its
growth in India, the various regulatory reforms in its relations and
the journey of Proxy Advisory Firms in upbringing shareholder
activism in India. The paper then takes upon a multi-national
perspective and discusses four shareholder activism models covering

7 Surbhi Bedi & Sandeep Vij, The Interface of Corporate Governance with M&A: Research
Themes, 15(3) THE IUP JOURNAL OF BUSINESS STRATEGY 19-38 (2018).
8 M. Jensen, Takeovers: their causes and consequences, 2(1) J. E. P. 21-48 (1988).
2021] Journal on Governance 157

United States, United Kingdom, Germany and Japan. The paper

concludes by putting forth preliminary, policy based and practical
implications upon the subject area to address the underlying and
forthcoming issues for the Indian corporate governance landscape.

II. GOVERNANCE MECHANISMS IN M&A

TRANSACTIONS

A mergers and acquisition transaction marks a significant

watershed in the life of any company. There are various business
and economic factors that influence the M&A decisions such as
managerial hubris,9 winner‘s curse or over-pricing of the deals.10 A
more serious concern arises in cases pertaining to confidentiality and
speedy procedure where the decisions rest with the Chief Executive
Officer and top-management, without wider consultation of
stakeholders.11 However, endurance of sophisticated and mature
governance mechanisms would diminish the risk of failed
transactions. In this regard, various well-established mechanisms can
be identified in the context of Mergers and Acquisitions.

9 Richard Roll, The Hubris Hypothesis of Corporate Takeovers, 59 J. BUS.197-216 (1986).

10 Donald C. Langevoort, The Behavioral Economics of Mergers and Acquisitions, 12 TENN. J.
BUS. L. 853, 860-65 (2011).
11 Umakanth Varottil, Corporate Governance in M&A Transactions, 24 Nat'l L. Sch. India

Rev. 50-62 (2012).

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A. BOARD OF DIRECTORS

An important function of board of directors is decision-making

in relation to an M&A transaction by analyzing the merit and
demerits of such a transaction.12 The board plays an important role
in providing strategic inputs and performing monitory functions
during the period of M&A transactions which involve analysis of
due diligence reports, addressing capital structure and legal
documentation and the fairness in price to shareholders. The board
acts as a substantial internal governance mechanism for protecting
shareholders‘ interests.13In the current times of global financial
crisis, the board‘s actions are subjected to strict scrutiny. In this
regard, a board should not only act, but also be seen to act thus
involve in creating greater responsibility and duties to the
stakeholders.14 Therefore, the objectivity of the board of directors
and their business acumen play a vital role in the evaluation of the
proposed M&A deals.15 The structure of board, however plays a

12 Martin Lipton & Andrew J. Nussbaum, Corporate Governance and Cross-Border M&A: Key
Challenges and Responsibilities, Third International Conference, ―Global Capital Markets and
Corporate Governance: Quest for Global Standards‖ (2012).
13 Eugene Fama & Michael Jensen, Separation of ownership and control, 26 J. LAW ECON.301-

325 (1983).
14 Varottil, supra note 11, at 57.
15 S. A. Zahra & J. A. Pearce, Boards of Directors and Corporate Financial Performance: A Review

and Integrative Model, 15(2) J. MANAGE.291-334 (1989).

2021] Journal on Governance 159

major role in determining the threshold of governance with higher

independence playing a major variant in active takeover markets.16

B. INDEPENDENT DIRECTORS

The representation of interest of shareholders plays a very

important role in M&A transactions. Thus, independent directors
who play the role of ―watchdogs‖ help to mitigate the agency
problems in between shareholders and management and perform a
significant monitoring role in large scale transactions such as
mergers and acquisitions.17 Independent directors bring a larger
breath of experience to the board and add to its effectiveness.18 In
cases of related party transactions, this role of independent directors
gains even greater force. The presence of independent directors on
audit committees and special committees help to arrive at a deeper
vie of such transactions. An increase in the number of independent
board members raises the efficiency of M&A deals.19

16 James Brickley & Christopher James, The takeover market, corporate board composition, and
ownership structure: The case of banking, 30 J. LAW ECON.161-180 (1987).
17 Id. at 170.
18 P. B. Firstenberg & B.G. Malkiel, Why corporate boards need independent directors, 69(4) J.

MANAG. REV. 26-38 (1980).

19 James Cotter, Anil Shivdasani, & Marc Zenner, Do independent directors enhance target

shareholder wealth during tender offers?, 43 J. FINANC. ECON. 195-218 (1997); J.W. Bryd, &
K.A. Hickman, Do outside directors monitor managers? Evidence from tender offer bids, 32 J.
FINANC. ECON.195-222 (1992).
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C. MANAGERIAL SHARE OWNERSHIP

Share ownership by managers is another significant determinant

of merger market efficiency.20 Increased managerial ownership
encourages diligence and leads to reduction in poor decisions. There
is also a lesser managerial resistance where greater share ownership
by managers leads to a larger managerial gain.21Clearly, managerial
ownership is a strategic governance mechanism for aligning the
interests of management with those of the shareholders.22 Larger
proportion of share ownership by managers intensifies firm value
and thus leads to larger purchase premium in such transactions.23

D. GATEKEEPERS

Various external organizations such as investment banks and

accounting firms paves road for higher fairness in M&A
transactions with increased regularity.24 They help to balance the
biases of directors and decision-makers of such transactions.25 Not
only institutional organizations but lawyers involved in such

20 Wayne Mikkelson & Megan Partch, Managers‘ voting rights and corporate control, 25 J.
FINANC. ECON.263-290 (1989).
21 James Cotter & Marc Zenner, How managerial wealth affects the tenders offer process, 35 J.

FINANC. ECON. 63-97 (1994).

22 Randal Morck, Andrei Shleifer & Robert Vishny, Management ownership and market

valuation: An empirical analysis, 20 J. FINANC. ECON. 293-316 (1988).

23 John McConnell & Henri Servaes, Additional evidence on equity ownership and corporate value,

27 J. FINANC. ECON.595-612 (1990).

24 Joan MacLeod Heminway, A More Critical Use of Fairness Opinions as a Practical Approach

to the Behavioral Economics of Mergers and Acquisitions, 12 TENN. J. BUS. L. 81 (2011).

25 Andrew Tuch, Multiple Gatekeepers, 96 VA. L. REV. 1583 (2010).
2021] Journal on Governance 161

transactions also assist in enhancing value and diminishing risks in

M&A transactions by performing their advisory functions.26

E. SHAREHOLDER ACTIVISM

Shareholder activism acts as corrective mechanism for

governance of corporate bodies.27 Although India stood at a
difficult position with lack of prominent shareholder activism in the
past,28 the recent trends and reforms have managed to bring a
change in this position as discussed in the next section. A serious
role in corporate governance of M&A transactions is played by large
shareholders or blockholders, who own 5% or more shares of the
firm.29 There shareholders who are generally institutional investors
have greater motives for monitoring and influencing the managers
owing to their large holdings, and use their powers to impend for
takeovers or replacement of management.30 While dealing with
M&A transactions, the presence of blockholders in targeted firms
positively impacts the acquisitions and also lowers the acquisition

26 Marc I. Steinberg, Counsel Conflict Dilemmas in Mergers and Acquisitions, 47 S. TEX. L. REV.
3 (2005).
27 Paul Rose & Bernard S. Sharfman, Shareholder Activism as a Corrective Mechanism in

Corporate Governance, 2014 BYU. L. REV. 1014 (2014).

28 Umakanth Varottil, A Cautionary Tale of the Transplant Effect on Indian Corporate

Governance, 21(1) NAT. L. SCH. IND. R. 1 (2009).

29 C. G. Holderness, The myth of diffuse ownership in the United States, 22(4) REV. FINANC.

STUD. 1377-1408 (2009).

30 J. E. Bethel, J. P. Liebeskind & T. Opler, Block share purchases and corporate performance,

53(2) J. FINANC.605-634 (1998).

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premium.31 These shareholders are also prodded by SEBI in past for

greater active participation.32 Minority shareholders although having
minuscule holdings also play a major role in determining the
efficiency of such transactions. With the emergence of proxy
advisory firms, corporate transactions such M&A have higher merit
owing to their advisory function to institutional investors and also
affecting the retail investors.33 The subsequent section deals with
various aspects of shareholder activism in detail with such
transactions.

III. SHAREHOLDER ACTIVISM IN M&A

TRANSACTIONS

M&A transactions have long been the center ring and main tool
for shareholder activism while emerging as a dominant tactic in the
present economy. From 1942, which marks the first instance for
shareholders being granted an opportunity to submit resolutions34 to
2019, which marks 209 activist campaigns launched against sizeable

31 A. Shleifer, & R. W. Vishny, Large shareholders and corporate control, 94(3) J. POLIT. ECON.
461-488 (1986).
32 Circular for Mutual Funds No. 18/198647/2010, Security Exchange Board of India,

2010.
33 Bhuma Srivastava, Proxy advisory firms give a boost to shareholder activism, The Mint (Jun. 29,

2012, 12:57 AM),

https://www.livemint.com/Companies/HeuG8SPSw3zXE4sUYhecqN/Proxy-
advisory-firms-give-a-boost-to-shareholder-activism.html.
34 E. M. Reid & M. W. Toffel, Responding to public and private politics: Corporate disclosure of

climate change strategies, 30 STRATEG. MANAG. J. 1157-1178 (2009).

2021] Journal on Governance 163

company globally,35 the landscape of shareholder activism has

evolved drastically. A range of approaches in regard to the activities
involve pushing for break-up or sale of a company or opposing
vulnerable transactions.

Shareholder Activism can be defined as set of actions of any

shareholder or shareholder group with the purpose of bringing a
change within the company without gaining control.36 Often
perceived as a tool for activist shareholders for changing corporate
behavior or internal governance rules owing to dissatisfaction,37 it
contradicts the passive shareholder‘s actions who intend to only sell
their shares, thereby, denominating a ―wall street walk‖.38
Shareholder Activism can also be bifurcated as performance driven
activism because hedge fund activists and corporate governance aim
at long-term value addition, executive compensation and social
policy, which further leads to higher buyout values or increase in
premium in M&A transactions.39 There exist encouraging signs in
M&A market for shareholder activism with the advent of publicly-
35 Lazard, Lazard Ltd Reports Full-Year and Fourth-Quarter 2019 Results, LAZARD (Jan. 30),
https://www.lazard.com/media/451147/lazard-ltd-reports-full-year-and-fourth-quarter-
2019-results.pdf.
36 Stuart L. Gillan & Laura T. Starks, The Evolution of Shareholder Activism in the United

States, 19 J. APPLIED CORP.FIN.55, 55-73 (2007).

37 Roberta Romano, Less is More: Making Institutional Investor Activism a Valuable Mechanism

of Corporate Governance, 18 YALE J. ON REG. 174 (2001).

38 Jayne Elizabeth Zanglein, From Wall Street Walk to Wall Street Talk: The Changing Face of

Corporate Governance, 11 DEPAUL BUS. L. J. 43 (1998).

39 James R. Copland, Yevgeniy Feyman & Margaret O‘Keefe, Proxy Monitor 2012: A

Report on Corporate Governance and Shareholder Activism, CTR. FOR LEGAL POLICY AT THE
MANHATTAN INST. 11 (2012).
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contested M&A transaction of Fortis Healthcare, where minority

shareholders succeeded in removing a director.40

A. DEVELOPMENT IN INDIA

Post-independence, the Indian corporate landscape had shallow

equity markets with negligible holdings of retail investors.41
Significant control was exercised by leading Indian houses, leaving
retail investors with no influence on the controlling shareholders
who usually ignored such minority voices.42 This was further marked
with lack of legal mechanism for enforcing the minority rights.43
With remotely located registered offices and physical company
meetings at specific location, the passivity was further enhanced.44
The institutional investors who had larger holding also maintained a
passive position owing to bureaucratic control and governmental
influence that stood in complete support of decisions of
management.45

40 Nikhil Narayan, The Shareholder Rights and Activism Review, THE LAW REVIEWS (Oct.
2020), https://thelawreviews.co.uk/edition/the-shareholder-rights-and-activism-review-
edition-5/1232580/india.
41 John Armour & Priya Lele, Law, Finance, and Politics: The Case of India, 43 LAW & SOC‘Y

REV. 491, 496.

42 Umakanth Varottil, The Advent of Shareholder Activism in India, 1(6) JOURNAL ON

GOVERNANCE 592, 582-639 (2012).

43 Id.
44 Id.
45 Omkar Goswami, The Tide Rises, Gradually: Corporate Governance in India, OECD (2000),

http://www.oecd.org/corporate/corporateaffairs/corporategov
ernanceprinciples/1931364.pdf.
2021] Journal on Governance 165

However, post liberalization, this position of large stocks of

institutional investors started to decrease and statuts quo was finally
instilled with the disclosure of Satyam scam.46 This led to various
regulatory reforms and activism amongst institutional investors for
closely monitoring their investments. With the blossoming of proxy
advisory firms in 2010, the trend of inclusion of monitoring and
activism functions in M&A transactions has seen an uplift.
Although, shareholder activism still lacks its true position in the
Indian landscape, these factors seek to bring a greater dawn of the
phenomenon.

B. REGULATORY REFORMS

These past decades have seen several reforms in India for

inducing greater participation in shareholder decision-making and
monitoring corporate transactions such as M&A. This has been
executed through a bit by bit approach that tends to various aspects
of investor activism. Indian law confers special powers on minority
shareholders in M&A situations by preventing the board from
taking frustrating actions.47 M&A transactions can also be structured
through court schemes with approval of at least 3/4th value in
shares.48

46 Varottil, supra note 42, at 595.

47 SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, Reg. 26.
48 Companies Act, 2013, No. 18 of 2013, § 230(6) (India); Companies Act, 2013, No. 18

of 2013, § 232(1) (India).

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1. Voting Method

Voting plays a critical role in M&A transactions as with lower

institutional ownership, high agency costs and high deal risk can lead
to bypass in shareholder voting in acquirer‘s firm.49 Various
methods of voting are being adopted to involve more shareholders.
One of them is postal ballot that was introduced in 2001.50 Under
this voting method shareholders can send their votes through and
they need not be present personally attending a meeting to a cast
their vote about any resolution.51 This method of voting was
expected to bring a new tide of involvement as it was a great
opportunity for shareholders to mark their presence in such
corporate transactions, where attending physical meetings was cost-
incurring affair in terms of time and money. Although, removing
various procedural difficulties for shareholders, this method turned
out to be a failure with lack of activism due to lack of consultations
before casting their votes marking greater extensive issues of lack of
concerns, non- reliability and aggregate activity amongst
shareholders. This insufficient working led to technical
advancements and use of e-voting.

49 Kai Li, Tingting Liu & Juan (Julie) Wu, Vote Avoidance and Shareholder Voting in Mergers
and Acquisitions, ECGI Working Paper Series in Finance no. 481/2016 (2018).
50 The Companies (Passing of the Resolution by Postal Ballot) Rules, 2001.
51 Companies Act, 2013, No. 18 of 2013, § 192.
2021] Journal on Governance 167

Section 108, Companies Act, 201352 provides for electronic

voting on resolutions53 and allows minority shareholders to have
their say, while avoiding arduous tracks to far-flung locations, or use
of age-old postal ballots. SEBI also made it mandatory for top 500
listed companies at BSE and NSE to follow e-voting.54 While
exercising the option of e-voting, a shareholder is not restricted
from attending the general meeting.

2. Voting as responsibility

Shareholding voting leads to higher acquirer announcement

return along with lower premium offers.55 Shareholding in an
organization is viewed as a heap of rights. One such right presented
is to take an interest in M&A transactions through the activity of the
democratic force. As clearly stated under Section 47, Companies
Act, 201356, every member of a company limited by shares and
holding equity share capital therein, shall have a right to vote on
every resolution placed before the company. Further appointment
of proxy57 and related rules58 mark the higher inclusion of voting
responsibility. Subsequently, shareholders can't, by and large, be

52 Companies Act, 2013, No. 18 of 2013, § 108.

53 Clause 44, Security Exchange Board of India (Listing Obligation and Disclosure
Agreement), 2015; Rule 20, Companies (Management and Administration Rules), 2014.
54 Circular No. CIR/CFD/DIL/6/2012, Security Exchange Board of India, 2012.
55 Becht, Marco, Andrea Polo, & Stefano Rossi, Does mandatory shareholder voting prevent bad

acquisitions?, 29 REV. FINANC. STUD. 3035–3067 (2016).

56 Companies Act, 2013, No. 18 of 2013, § 47.
57 Companies Act, 2013, No. 18 of 2013, § 105.
58 Rule 19, Companies (Management and Administration Rules), 2014.
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constrained to practice their democratic rights in any way, or by any

stretch of the imagination. Thus, marking an essential feature of
shareholder activism in corporate governance.

3. Approval of Related Party Transaction

As per Section 188, Companies Act, 201359 a resolution is

required to be passed by the board of directors before a company
can enter into any transaction involving M&A arrangements with
related party. Details of such transactions should be alluded in
board‘s report to the investors along with the clarification for
entering into such contract or transaction or arrangement. Where
any contract or course of action is entered into by a director or
some other representative, without acquiring the consent of the
board or endorsement by an special resolution in the comprehensive
gathering and in the event that it isn't sanctioned by the board or, all
things considered, by the investors at a gathering inside a quarter of
a year from the date on which such transaction was entered into,
such transaction will be voidable at the alternative of the Board and
if the contract or course of action is with a related party to any
director, or is approved by some other director, the directors
concerned will have the duty of indemnifying the company against
any misfortune brought about by it.

59 Companies Act, 2013, No. 18 of 2013, § 188.

2021] Journal on Governance 169

4. Oppression and Mismanagement

Minority shareholders can seek relief against oppression and

mismanagement by the majority on grounds of affairs being
conducted in prejudicial manner and can also initiate an
investigation by applying to National Company Law Tribunal
(NCLT) in certain circumstances with at least 10% shareholdings or
100 members.60Further as per section 241, Companies Act 201361
states that any individual from a Company (counting minority
investors) can document an application before the Tribunal if the
issues of the Company are being directed in harsh and biased
manner.

5. Shareholders Class Action Suit

As per Section 245 of the Companies Act, 2013, Minority

shareholders can also institute a class action suit against such
transactions or affairs, if the same are being prejudicial to the
interests of company or its shareholders. Incorporation of class
action suit leads to Indian Corporate law moving far from restrains
of exceptions laid in English law.62 Tribunals are further vested with
power to protect the rights of minority shareholders under Section
24263 and 244 of the Act.64 However, given the state of litigation in

60 Companies Act, 2013, No. 18 of 2013, § 213.

61 Companies Act, 2013, No. 18 of 2013, § 241.
62 Foss v. Harbottle, (1843) 2 Har 361.
63 Companies Act, 2013, No. 18 of 2013, § 242.
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India, this remedy remains to be effectively seen in M&A

transactions.

6. Appointment of Director by Minority

Shareholder

Section 151 of the Companies Act 2013 necessitates that a

company that is listed ought to have one director chosen by
minority investors in such a way and with such terms and conditions
as laid down by the Central Government. Presence of such an
independent director on the board leads to significant contributions
of minority shareholders in M&A transaction.

These regulations clearly pave a way for greater shareholder

participation especially in essential corporate transactions such as
M&A. The shareholder activism can also be seen to be promoted by
inclusion of research analysts and Proxy Advisory Firms who play a
significant role by acting as advisors directly to institutional investors
and indirectly to retail investors and monitoring M&A transactions.

C. PROXY ADVISORS FIRMS

Proxy Advisory Firms (PAF) are significant corporate

governance intermediaries who advice institutional investors on
exercising their votes especially in M&A proposals by analyzing such

64 Companies Act, 2013, No. 18 of 2013, § 244.

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proposals and making recommendation to these investors.65 These

recommendations, being public are also utilized by retail investors.66
With international footprint, PAF has become a force to be
reckoned with, especially in more matured markets such as U.S67
although having relatively new impact in Indian market while
covering M&A transactions.68 With SEBI forcing various corporate
governance standards through Clause 49, Listing Agreement, 2000,
PAF have turned into an impactful intermediary in keeping up with
corporate governance strategy in such transactions.69 PAF reduce
the costs of performing monetary functions by the investors
themselves while adding value to M&A transactions.

Prominent instances of role of PAFs involve the Akzo-Nobel

merger case, where the recommendation given by a prominent PAF,
against the proposal of merger of 3 over-valued subsidiaries,
influenced the voting of institutional investors.70 Similarly, in case of
merger of Vedanta Aluminium Limited (VAL) with Sesa Goa and
Sterlite India, various facts regarding human rights issues and
65 Paul Rose, On the Role and Regulation of Proxy Advisors, 109 MICH. L. REV. FIRST
IMPRESSIONS 62 (2010).
66 Id.
67 James R. Copland, Yevgeniy Feyman & Margaret O‘Keefe, Proxy Monitor 2012: A

Report on Corporate Governance and Shareholder Activism 22 (2012).

68 Naren Karunakaran, Proxy firms wade through proposed resolutions, THE ECONOMIC TIMES,

Nov. 29, 2011, https://economictimes.indiatimes.com/proxy-firms-wade-through-

proposed-resolutions/articleshow/10913732.cms.
69 Vandana Gupta, R. K. Mittal & V.K. Bhalla, Role of the credit rating agencies in the financial

market crisis, 2 J. DEV. AGRIC. ECON. 286 (2010).

70 Role of Proxy Advisory Firms in India, INGOVERN,
www.ingovern.com/2015/02/shareholder-activism-in-india/
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leveraged balance sheet were raised by the proxy firms.71 Various

other transactions such as selling of wholly-owned subsidiary of
Siemens AG and related parted transactions between United Spirits
and Diageo PLC were also rejected by shareholders based on
recommendations by PAFs.72 Further, issues such as royalty
payments to Holcim by Gujarat Ambuja and ACC, Pantaloon
demerger due to par values of DVR shares with equity shares and
opposing to restructuring of Escorts have been successfully
undergone by PAFs in India.73

However, PAFs working involve various issues such as

independence and impartiality of recommendations, profit earning
through consultancy from companies, creation of a potential or
actual conflict of interest and metrics errors.74 SEBI has previously
worked upon mitigating such issues.Regulation 2(i)(p) of Securities
and Exchange Board Of India (Research Analysts) Regulations,
2014, defined a proxy advisor as: ―proxy adviser means any person
who provide advice, through any means, to institutional investor or
shareholder of a company, in relation to exercise of their rights in
the company including recommendations on public offer or voting

71 Id.
72 Id.
73 Shriram Subramanian, Role of Proxy Advisory Firms in India, INGOVERN,

http://www.ingovern.com/2013/06/role-of-proxy-advisory-firms/.
74 Paul Rose, The Corporate Governance Industry, 32 J. CORP. L. 887-926 (2007).
2021] Journal on Governance 173

recommendation on agenda items‖.75 Moreover, regulation 2376 read

with regulation 1977 deals with disclosures to be made by PAF.
These are further elaborated with two recent circulars by SEBI.78
These regulations are incorporated for ensuring commitment79 and
for diminishing conflict of interest where such PAF represent both
the shareholders and management and raising efficiency of
corporate transactions such as M&As. Thus, within a given legal
framework, PAFs can highly contribute towards efficiency of M&A
transactions while promoting good governance practices.80

IV. COMPARATIVE MODELS OF SHAREHOLDER

ACTIVISM

There is an abundant presence of academic research on the

advantages and loopholes in shareholder activism.81 Since, the
activism of shareholders in M&A transactions is not limited to a

75 Securities and Exchange Board of India (Research Analysts) Regulations, 2014, Reg.
2(i)(p).
76 Securities and Exchange Board of India (Research Analysts) Regulations, 2014, Reg.

23.
77 Securities and Exchange Board of India (Research Analysts) Regulations, 2014, Reg.

19.
78 Procedural Guidelines for Proxy Advisors (Procedural Guidelines), 2020; ‗Grievance

Resolution between listed entities and proxy advisors' (Grievance Resolution Circular),
2020.
79 Rose, supra note 65, at 62.
80 Srivastava, supra note 33.
81 Stephen M. Bainbridge, Response, Director Primacy and Shareholder Disempowerment, 119

HARV. L. REV. 1735, 1744–51 (2006); William W. Bratton & Michael L. Wachter, The
Case Against Shareholder Empowerment, 158 U. PA. L. REV. 653, 657–59 (2010); Justin Fox &
Jay W. Lorsch, What Good Are Shareholders?, HARV. BUS. REV. 49-51 (2012); Henry T. C.
Hu & Bernard Black, The New Vote Buying: Empty Voting and Hidden (Morphable) Ownership,
79 S. CAL. L. REV. 811, 821-824 (2006).
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given jurisdiction, but is a global corporate governance affair, it is

important to understand different models of interventions and legal
regimes for a mature development of the phenomenon and crucial
policy decisions.82 Given to the nature of market in India, which is
taken to be a hybrid of external dominated market systems such as
US and UK, and insider dominated based systems of Germany and
Japan,83 following are respective models.

A. UNITED STATES

The financial institutions mark large equity holdings in corporate

market in United States of America. Shareholder activism in U.S.
therefore majorly involves Hedge fund activists who threaten
portfolio companies, launch proxy fights,84 or use legal remedies to
seek injunctions against M&A proposals or request public
declarations of the same.85 However, since the core intention of
such an activism lies only in maximizing their interests, hedge funds
activism also accompanies the drawback of short term value

82 Yaron Nili, Missing the Forest for the Trees: A New Approach to Shareholder Activism, 4
HARV. BUS. L. REV. 157- 203 (2014).
83 J. Sarkar& S. Sarker, Large Shareholder Activism in Corporate Governance in Developing

Countries: Evidence from India, 1(3) INT. REV. FINANCIAL ANAL.161-194 (2000).
84 John Armour & Brian Cheffins, The Rise and Fall (?) of Shareholder Activism by Hedge

Funds, 14 J. ALT. INVEST. 17 (2012).

85 William Alden, Einhorn‘s Apple Suit Fits a History of Public Calls, N.Y. TIMES DEALBOOK,

Feb. 7, 2013, http://dealbook.nytimes.com/2013/02/07/taking-on-apple-einhorn-has-a-

history-of-publiccalls.
2021] Journal on Governance 175

extraction at cost of long-term plans such as mergers.86 U.S. capital

markets also exhibits activism by private equity funds that use
extreme activism by involving in such M&A transactions to take the
firms private and parachute their own managers for supervising the
corporation.87 They are however, long-term oriented as opposed to
hedge fund activists.88

A collaborative model is used by traditional financial institutions

in U.S. who informally interact with the management and influence
its decisions.89 They are more political driven actors rather than
holding an economic interest.90 Activism through social actors also
marks their vital role in corporate governance of M&A transactions
by proposing resolutions in voting91 and using public relations and
media to impact such transactions.92 The efforts of Friends of the
Earth to torpedo a merger of Exxon with Mobil by protesting at

86 Jeremy C. Stein, Efficient Capital Markets, Inefficient Firms: A Model of Myopic Corporate
Behavior, 104 Q. J. OF ECON.655-664 (1989).
87 Josh Lerner, Felda Hardymon & Ann Leamon, VENTURE CAPITAL AND PRIVATE

EQUITY: A CASEBOOK (3rd ed. 2005).

88 William W. Bratton, Hedge Funds and Governance Targets 1375–1433, ECGI Law Working

Paper No. 80 (2007).

89 Marcel Kahan & Edward B. Rock, Hedge Funds in Corporate Governance and Corporate

Control, 155 U. PA. L. REV. 1021, 1072-1087 (2007).

90 Roberta Romano, Public Pension Fund Activism in Corporate Governance Reconsidered, 93

COLUM. L. REV. 795 (1993).

91 Miguel Rojas, Bringing About Changes to Corporate Social Policy Through Shareholder Activism:

Filers, Issues, Targets, and Success, 114 BUS. & SOC‘Y REV. 217, 231-32 (2009).
92 Id. at 218.
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latter‘s shareholder meetings marks one such instance.93 Thus, U.S.

marks a culmination of varied range of activists, with some interest
in reducing managerial costs of such transactions while others for
ripping short term gains.

B. UNITED KINGDOM

Similar to U.S., U.K. also has widely held public corporations,

thus giving space for shareholder activism as a critical issue for
corporate governance94 and higher involvement of financial
institutions for day-to-day governance with lesser restrictions and
progressive approach of corporate laws in U.K. towards shareholder
power.95 However, as opposed to U.S., the social and minor actors
have limited participation in M&A proposals due to higher
solicitation costs and ownership requirements limits.96 Thus, it leads
to a greater day-to-day involvement in influencing managerial
decisions.97

Governance of M&A transactions through shareholder activism

in U.K. is similar to that of U.S. for most parts such as inclusion of

93 Terrence Guay, Non-Governmental Organizations, Shareholder Activism, and Socially

Responsible Investments: Ethical, Strategic, and Governance Implications, 55 J. BUS. ETHICS 125,
134-35 (2004).
94 John Armour, Enforcement Strategies in U.K. Corporate Governance: A Roadmap and Empirical

Assessment, ECGI Working Paper No. 106 (2008).

95 Bonnie Buchanan, Shareholder Proposal Rules and Practice: Evidence from a Comparison of the

United States and United Kingdom, 49 AM. BUS L. J. 739, 800 (2012).
96 Id.
97 Id.
2021] Journal on Governance 177

economic interests and voting rights, however it differs from the

latter due its continual defensive activism98 which involves
coordination between several institutional investors. There is larger
involvement of institutional investors as opposed to the
involvement of unregulated players in the U.S. market. Thus, the
combination governance laws and institutional players in M&A
transactions marks a further divergent model of activism.

C. GERMANY

Germany‘s corporate ownership structure can be marked as

family-owned similar to that of India. The German corporations
with previously strong institutional influence of banks has seen
decline in recent years with rise in foreign investors.99 Despite this
backdrop, the banks who act as dual agent (shareholder and debt
holder) play a major role as activists in governing M&A transactions
by use of voting powers and composition of board through their
nominees.100

98 Eric Berglöf & Ernst-Ludwig von Thadden, The Changing Corporate Governance Paradigm:
Implications for Transition and Developing Countries, Ann. World Bank Conf. on Dev. Econ.,
Wash. D.C., Conference Paper (1999).
99 Patrick C. Leyens, German Company Law: Recent Developments and Future Challenges, 6

GERMAN L. J. 1415-1420 (2005).

100 Klaus J. Hopt & Patrick C. Leyens, Board Models in Europe – Recent Developments of

Internal Corporate Governance Structures in Germany, the United Kingdom, France and Italy, 1 EUR.
CO. & FIN. L. REV. 135 (2004).
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Rights of minority shareholders are also significant as they can

add proposals to existing items101 and call for new items or special
meetings in such transactions upon reaching five percent
threshold.102 Shareholders with 1% shareholding can file suits
against members of the board103 while bearing the risk of litigation
costs and prior requirement of succeeding in preliminary court
proceedings for preventing abusive actions.104 The German Code
also allows for appointment of special representative (besonderer
Vertreter) who can enforce claims against members of management
(Vorstand), supervisory boards (Aufsichtsrat) and controlling
shareholder.105 This governance mechanism marks a high threshold
of activism with rights vested in not only institutional investors,
minority shareholders but also in employees and bondholders.106

D. JAPAN

Japan has witnessed significant corporate market reforms from

historically concentrated ownership structure to a foreign and local

101 Peter Cziraki, Shareholder Activism Through Proxy Proposals: The European Perspective, 16
EUR. FIN. MGMT. 738, 744 (2010).
102 John M. Bizjak & Christopher J. Marquette, Are Shareholder Proposals All Bark and No

Bite? Evidence from Shareholder Resolutions to Rescind Poison Pills, 33 J. FIN. & QUANT.
ANALYSIS 499 (1998).
103 Oberlandesgericht M¨unchen [Higher Regional Court of Munich] ZIP 2008, 73.
104 Paul A. Carsten, Derivative Actions under English and German Corporate Law – Shareholder

Participation between the Tension Filled Areas of Corporate Governance and Malicious Shareholder
Interference, 7 EUR. CO. & FIN.L.R. 98 (2010).
105 Landgericht M¨unchen [Munich District Court I], ZIP, 1809 (2007).
106 Kaal A. Wulf & Richard W. Painter, Initial Reflections on an Evolving Standard: Constraints

on Risk Taking by Directors and Officers in Germany and the United States, 40 SETON HALL L.
REV. 1433, 1472–73 (2011).
2021] Journal on Governance 179

player fueled market.107 Cross-ownership or Keiretsu, which

previously stood as an antitakeover defense has seen a decline along
with the banking sector losing their grips.108 This was market with
corporate governance reforms similar to that of U.S. with greater
involvement of independent directors109 and vesting rights amongst
shareholders to put resolution on the company‘s agenda.110 In recent
times, the Japanese market marks with aggressive stock purchases
and hostile takeovers111 leading to self-imposing model of activism.

Relationship-based activism whereby the activist funds work

with top management executives to improve governance operations
also finds its place in influencing mergers.112 Institutional investors
such as Japan‘s Pension fund Association are major activists in the
market by engaging in informal communication and cherry-picking
firms with good governance practices113 thus working on a
constructive-activism model, and making these firms more likely to
be acquirers in M&A transactions. This is in contrast to the

107 Takaya Seki, Legal Reform and Shareholder Activism by Institutional Investors in Japan, 13
CORP. GOVERNANCE: AN INT‘L REV. 377 (2005).
108 Yoshiro Miwa & J. Mark Ramseyer, The Fable of the Keiretsu, 11 J. ECON. & MGMT

STRATEGY 169 (2002).

109 Ronald J. Gilson & Curtis J. Milhaupt, Choice as Regulatory Reform: The Case of Japanese

Corporate Governance, 53 AM. J. COMP. L. 343 (2005);

110 Seki, supra note 107, at 51.
111 Yasushi Hamao, U.S.-Style Investor Activism in Japan: The First 10 Years, 6 Marshall

School of Business Working Paper No. FBE 06-10, 8–10 (2010).

112 Id.
113 Bruce E. Aronson, Japanese CalPERS or a New Model for Institutional Investor Activism?

Japan‘s Pension Fund Association and the Emergence of Shareholder Activism in Japan, 7 N.Y.U. J.
L. & BUS.571-616 (2011).
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confrontational activism model of United States and also reduces

the burden on both retail investors and sophisticated investors for
monitoring firms.

Japan sets a remarkable example for co-existence of

heterogeneous models of activism under the umbrella of similar
market conditions thus providing efficient system for governance of
M&A transactions.

V. IMPLICATIONS AND WAY FORWARD

Although there are certain similarities in the above models and

the corporate ecosystem in India, no appropriate reference point can
be used for Indian regulators.114 However, a broader understanding
of these models can lead to various implications for better
governance mechanisms while incorporating shareholder activism in
essential transactions such as M&A.115 Following are the
implications that can be further incorporated by SEBI and Ministry
of Corporate Affairs, India.

A. PRELIMINARY IMPLICATIONS

The preliminary implication of the above analysis suggests that

various models can coexist under the same exogenous conditions

114 Cyril Shroff, Corporate Governance & Shareholder Activism, INDIA CORPORATE LAW (Apr.
4, 2016), https://corporate.cyrilamarchandblogs.com/2016/04/corporate-governance-
shareholder-activism/.
115 Nili, supra note 82, at 195.
2021] Journal on Governance 181

such as Japan and U.S. Thus, the presence of only one activism
model can be both ineffective and detrimental to other stakeholders
in the M&A transactions. While some shareholders look forward to
shorter profit margins through rise in prices of shares post-mergers
others are bend towards long term stability and profits by creation
of greater entity through M&A transactions. Therefore, attempt
must be made at balancing between two or more models. India can
derive from notable models such as Japanese relationship-based
activism model or U.S. social activism model, owing to its
preliminary stage of shareholder activism. Incorporating these
models would lead to effective M&A transactions while maintain
higher governance standards.

B. POLICY IMPLICATIONS

Lawmakers should aim at direct regulation of controlling

shareholders or promoters for giving leeway to the minority and
institutional shareholders with their presence in the corporate
landscape. Policy interventions must involve incentivizing and
recognizing these activist shareholders for their contributions. Thus,
this function should involve not only negative regulations which
limit the damaging activism as in the case of controlling
shareholders, but also on positive regulation by recognizing
beneficial activism undertaken by retail shareholders and
institutional shareholders. Furthering this argument, an incentive-
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based reform can lead to monetary subsidization to beneficial

activists while penalizing damaging activism. This would also limit
the potential of alternate damaging activists to fill the void. In the
long term, a shift from direct regulation towards incentive regulation
would lead to greater changes in financial environment with gradual
inclusion of shareholder activism in a controlled manner. Thus,
rather than aiming towards band-aid solutions to specific concerns,
lawmakers should take into consideration the above methods of
regulations for being better equipped in the corporate regime.

C. PRACTICAL IMPLICATIONS

On practical aspects, there is a need for shifting focus from

specific measures to broader procedural framework. This can
involve various structures starting from enhancing the power of
minority shareholders by vesting larger powers for appointment of
independent directors to the board and prohibition on voting
powers of controlling shareholders in related party transactions.
German model can throw greater emphasis on minority shareholder
inclusion. Regulation of Proxy Advisory Firms acts as another
practical touchstone, while striking balance between the conflict of
interests and independence of such firms, overregulation would
diminish the very purpose of their existence. Additionally, opening
the financial markets to foreign investors by reducing the regulations
can also bring positive change in the activism. This would
2021] Journal on Governance 183

collectively lead to increased effectiveness of corporate transactions

such as M&A.

Thus, by analyzing the above models and the proposed

framework for Indian market, a more nuance discourse can be
promoted by market participants, regulators and academia.

VI. CONCLUSION

With the understanding that the major objective behind Indian

corporate law is to improve governance and compliance, the ever-
evolving nature of transactions in corporate landscape have taken a
larger meaning than it used to before. In this regard, the advent of
shareholder activism in M&A transactions marks a greater threshold
for good governance and efficient transactions. However, despite
the efforts of lawmakers there still exists a long way for realizing the
full utility of activism in India with presence of controlling
shareholders further cushioning this impact. The Indian landscape
therefore, yearns for an enabling regime which would serve the
shareholders with necessary incentives for activism and enhancing
corporate governance. In today‘s environment sound principles of
corporate governance act as a legal and commercial necessity not
only for M&A transactions but for any corporation involved in
capital markets while attracting mature and sound investments.