Hostile Takeover Law

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 What Is a Hostile Takeover?

A hostile takeover is a corporate action in which one company, called the acquiring company, attempts to gain control of another company, called the target company, without the target company’s approval or consent.

This is typically done by purchasing a significant portion of the target company’s shares on the open market or by offering shareholders a premium price for their shares in a tender offer. Hostile takeovers are a part of the larger field of mergers and acquisitions (M&A).

Issues present when one company looks to acquire another include:

  • Resistance from the target company’s management: In a hostile takeover, the target company’s management and board of directors often resist the attempt, as they may believe the acquiring company’s offer undervalues the company or is not in the best interest of shareholders. This resistance can take the form of public statements, legal actions, or the implementation of defensive measures.
    • For example, during the attempted takeover of Yahoo by Microsoft in 2008, Yahoo’s board of directors rejected Microsoft’s offer, believing it undervalued the company and its growth prospects.
  • Negative impacts on the target company’s employees: Hostile takeovers can create uncertainty and anxiety among the target company’s employees, who may fear job losses or changes to their working conditions.
    • For example, when Kraft Foods acquired British confectionery Cadbury in a hostile takeover in 2010, the employees of Cadbury were concerned about potential job losses and the erosion of their company’s distinctive corporate culture. In some cases, these concerns turned out to be well-founded, as Kraft closed some Cadbury factories, leading to job losses.
  • Possible disruption to the target company’s ongoing business operations: The process of a hostile takeover can be time-consuming and distracting for the target company’s management, which may negatively impact ongoing business operations.
    • For instance, during the hostile takeover attempt of Airgas by Air Products in 2010-2011, Airgas’s management was preoccupied with defending the company, which may have affected their ability to focus on the company’s core operations and growth opportunities.
  • Challenges in integrating the two companies: A hostile takeover often results in the integration of two distinct companies with different corporate cultures, management styles, and business operations. This can create challenges in harmonizing the various aspects of the combined entity, leading to decreased efficiency and increased costs.
    • For example, when AOL and Time Warner merged in 2000, the two companies faced significant challenges in integrating their different corporate cultures and business models, ultimately contributing to the eventual dissolution of the merged company.
  • Potential regulatory issues and scrutiny from government authorities: Hostile takeovers often attract regulatory scrutiny from government authorities, who may be concerned about potential antitrust issues, market concentration, or the impact of the takeover on consumers and the wider economy.
    • For example, in 2016, the U.S. Department of Justice filed a lawsuit to block the hostile takeover attempt of Monsanto by Bayer, citing concerns about reduced competition in the agricultural sector and potential harm to farmers and consumers.

Mergers and acquisitions law provides the legal framework for such transactions, including regulations and guidelines for tender offers, disclosure requirements, and antitrust laws. These laws aim to protect the interests of all parties involved, including shareholders, employees, and the companies themselves.

Are Hostile Takeovers Legal?

Hostile takeovers are legal as long as the acquiring company follows the rules and regulations set by the relevant authorities, such as the Securities and Exchange Commission (SEC) in the United States. However, certain aspects of a hostile takeover may lead to legal disputes, especially if the acquiring company is believed to have violated securities laws, fiduciary duties or engaged in unfair practices.

A hostile takeover lawsuit may be filed by the target company or its shareholders if they believe that the acquiring company has breached any laws or engaged in wrongful conduct. These lawsuits can involve claims of inadequate or misleading disclosures, violation of fiduciary duties, or antitrust violations.

What Can Be the Result of a Hostile Takeover?

The result of a hostile takeover can vary depending on the specific situation, but some possible outcomes include:

  1. The acquiring company successfully taking control of the target company.
  2. The target company successfully defending itself through various strategies, such as adopting a poison pill or finding a white knight.
  3. A negotiated outcome where the target company agrees to a friendly merger or acquisition with the acquiring company or another bidder.
  4. Negative consequences for the target company, such as decreased market value, loss of key employees, or damage to the company’s reputation.

What Steps Can I Take To Avoid a Hostile Takeover of My Business?

To prevent a hostile takeover, especially for a public company, consider the following steps.

Adopt a Staggered Board of Directors

A staggered board of directors is a corporate structure in which only a portion of the board members are up for re-election in a given year, usually around one-third. This corporate structure makes it more difficult for an acquiring company to gain control quickly, as they would need to win multiple elections over several years to replace a majority of the board members.

This can deter potential hostile bidders, as it prolongs the takeover process and increases the chances of the target company successfully defending itself.

Implement a Poison Pill Strategy

A poison pill is a defensive mechanism that deters hostile takeovers by making it prohibitively expensive for an acquiring company to buy a controlling stake in the target company. One common form of a poison pill is the shareholder rights plan, which allows existing shareholders to purchase additional shares at a discounted price if an acquiring company buys a certain percentage of the target company’s shares.

This dilutes the ownership and voting power of the acquiring company, making the takeover more difficult and less attractive.

Maintain a Strong Relationship with Shareholders

By keeping shareholders informed and engaged, target companies can reduce the likelihood of them supporting a hostile bidder. Regular communication, transparent financial reporting, and attentiveness to shareholder concerns can help maintain shareholder loyalty, making it harder for an acquiring company to convince shareholders to sell their shares or vote in favor of the takeover. Shareholder support can also be crucial in defending against a hostile takeover through proxy contests or other shareholder actions.

Monitor Your Company’s Stock Ownership

By keeping a close eye on the company’s stock ownership and being aware of potential acquirers, management can detect early signs of a hostile takeover attempt and take preemptive action.

Preemptive action may involve engaging in dialogue with potential acquirers to understand their intentions or implementing defensive measures to deter a takeover. Staying informed about market trends and competitor activities can also help management anticipate potential threats and respond proactively.

Establish Alliances

Forming alliances with other companies or investors can make it more difficult for an acquiring company to gain a controlling stake in the target company. These alliances can take various forms, such as cross-ownership arrangements, joint ventures, or long-term supply agreements.

By aligning the interests of the target company with those of other stakeholders, these alliances can create a network of support that helps the target company defend against hostile takeover attempts. In some cases, an ally might also serve as a “white knight,” a friendly acquirer that makes a competing bid for the target company to thwart the hostile bidder.

Should I Consult a Business Attorney if I Am at Risk of a Hostile Takeover?

Yes, if you believe your business is at risk of a hostile takeover or you are facing a potential takeover attempt, it is highly recommended that you consult with an experienced business attorney. They can help you understand your rights and responsibilities, develop defensive strategies, and ensure compliance with relevant laws and regulations.

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