Hostile Takeover

What is a Hostile Takeover?

A hostile takeover is a type of acquisition in which the acquirer attempts to take control of a target company without the consent of the target company’s board of directors. This differs from many acquisitions in which the takeover of a target company is accomplished through negotiations with the target company’s board of directors. In hostile takeovers, the aggressor bypasses the target’s management and instead approach a company’s shareholders directly. However, when a hostile takeover is attempted, the board of directors of the target company will typically implement defensive strategies to prevent the hostile takeover from occurring. There are two common methods for hostile takeovers, tender offers and proxy fights.

What is a Tender Offer?

The first method of implementing a hostile takeover is referred to as a tender offer. Typically, the acquiring company will build up enough cash for the financing of the acquisition. The acquirer may then try to purchase the target company’s stock on the open market anonymously. Since a purchase of more than 5% of a class of stock can trigger disclosure and filing requirements with the Securities Exchange Commission, the acquirer might only purchase up to 4.9% of the ownership interest. After reaching the threshold, the acquirer then makes a public offer to the shareholders for as much of the target’s stock as is needed to gain control of the target company. If the tender offer is successful and controlling interest is obtained, the acquirer will then typically try to gain the target’s remaining outstanding stock.

What is a Proxy Fight?

The second method for a hostile takeover is referred to as a proxy fight. Under a proxy fight, the acquirer will try to solicit the target’s shareholders in getting them to vote for the acquirer’s slate of directors and managers. The “fight” is between the acquirer and the target board of directors; each want to elect a certain group of directors. A proxy fight is usually harder than a tender offer since it would require shareholders to vote out the company’s current management and it does not produce the same monetary incentive as an above market price tender offer does.

Defense Strategies

​There are a number of defense strategies that target companies can implement to prevent a hostile takeover. One is a shareholder rights plan, which may be referred to as a poison pill. Although the poison pill can take different forms, typically, when a tender offer is made public or an acquisition reaches a certain threshold, certain additional rights of target shareholders are triggered. Bylaw provisions can require for a super-majority vote by shareholders to approve a merger or vote out directors. Golden parachutes are provisions that require certain ousted directors, officers, and employees to be compensated a large amount of money, making the transaction potentially too expensive for the acquirer. The target company might also turn around and makes a tender offer to the potential acquirer or sell off valuable assets to make its company less attractive in order to thwart the takeover attempt.

If you have any questions or want assistance with information relating to hostile takeovers, please reach out to one of our attorneys at McNeelyLaw LLP by calling (317) 825-5110.

This McNeelyLaw LLP publication should not be construed as legal advice or legal opinion of any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.