Ethical issues and governance book ethic in takeover and issue

Ethics

1. Unit-2 Ethical issues in Takeovers

2. Takeover- Meaning A takeover refers to a situation where one company (acquirer) gains control over another company (target). This is usually done by purchasing a significant portion of the target company's shares, either with or without the consent of the target company's management. Takeovers can be friendly (when both companies mutually agree) or hostile (when the acquiring company directly approaches shareholders or uses other means to gain control against the target company's wishes ). Takeovers are commonly seen in business restructuring, consolidation, and expansion strategies. Companies engage in takeovers to achieve benefits such as economies of scale, increased market share, access to new technology, and enhanced profitability.

3. Ethical Issues in Takeover Insider Trading and Unethical Information Use One of the most serious ethical issues in takeovers is insider trading , where individuals with access to confidential information about a potential acquisition use it for personal gain before the takeover is publicly announced. This could involve company executives, financial advisors, investment bankers, or government officials who may use their knowledge to buy or sell shares before the deal is made public . For example, if an insider knows that a company is about to be acquired at a higher price, they may purchase shares beforehand to benefit from the price surge after the announcement. This is unfair to ordinary investors who do not have access to the same information. SEBI (Securities and Exchange Board of India) strictly prohibits insider trading , but it remains a major ethical concern in high-profile takeovers.

4. 2. Job Losses and Employee Exploitation Takeovers often result in mass layoffs and significant changes to employment conditions. When an acquiring company takes over a target firm, it may restructure operations to reduce costs, leading to downsizing, termination of contracts, or relocation of employees . The ethical issue arises when these decisions are made without considering the well-being of employees or without providing adequate compensation and support for those affected. Employees who have worked for years in the company may suddenly lose their jobs without proper severance pay or retraining opportunities . This is particularly problematic in industries where workers have specialized skills that may not be easily transferable to new jobs.

5. 3. Exploitation of Minority Shareholders Minority shareholders often get unfair treatment in takeovers, especially when acquirers focus on securing control rather than protecting all investors' interests. If an acquirer gains a majority stake (over 50%) , they can make decisions that benefit majority stakeholders while neglecting the rights of minority shareholders . In some cases, companies even force minority shareholders to sell at a lower price, a practice known as squeeze-outs . 4. Overleveraging and Debt Risk Many takeovers are financed through large amounts of debt , which can place both the acquirer and target company at financial risk. 🔹Some companies use leveraged buyouts (LBOs) , where they borrow huge sums to acquire another firm. If the deal does not generate expected profits, the burden of debt can lead to financial instability, layoffs, and even bankruptcy.

6. 5. Consumer Exploitation Due to Reduced Competition Some takeovers create monopolies , reducing consumer choice and leading to higher prices or lower-quality services . 🔹When a large company takes over its competitor, it can control market prices unfairly, leading to price hikes and poorer service for consumers . 6. Ethical Concerns in Cross-Border Takeovers Foreign takeovers of domestic firms raise national security, employment, and strategic concerns . 🔹If a foreign company takes over an Indian firm, concerns arise about data security, control of critical infrastructure, or job losses .