Quick Reaction Force (QRF) Litigation Team
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Acquiring companies that pursue a hostile takeover will use any number of tactics to gain ownership of their target. These include making a tender offer directly to shareholders or engaging in a proxy fight to replace the target company's management. To defend itself against the acquirer, a target company can also deploy a variety of strategies. Some of the more colorfully named tactics are the Pac-Man defense, the crown-jewel defense, or the golden parachute.
Should your company find itself the target of a hostile takeover, our attorneys can immediately put together a hostile takeover defense team. In the preliminary stages of a client’s evaluation of a potential unsolicited bid, our lawyers:
Once a determination is made to proceed with an unsolicited bid, our lawyers:
In addition, our litigators are actively involved from the outset in planning for and implementing the optimal litigation strategies in connection with hostile takeover bids.
A hostile takeover is accomplished by going directly to the company’s shareholders either by making a tender offer or through a proxy vote or fighting to replace management to get the acquisition approved. A hostile takeover is the opposite of a friendly takeover, in which both parties to the transaction are agreeable and work cooperatively toward the result.
1. Tender offer
A tender offer is an offer to purchase stock shares from Company B shareholders at a premium to the market price. For example, if Company B’s current market price of shares is $10, Company A could make a tender offer to purchase shares of company B at $15 (50% premium). The goal of a tender offer is to acquire enough voting shares to have a controlling equity interest in the target company. Ordinarily, this means the acquirer needs to own more than 50% of the voting stock. In fact, most tender offers are made conditional on the acquirer being able to obtain a specified amount of shares. If not enough shareholders are willing to sell their stock to Company A to provide it with a controlling interest, then it will cancel its $15 a share tender offer.
2. Proxy vote
A proxy vote is the act of the acquirer company persuading existing shareholders to vote out the management of the target company so it will be easier to take over. For example, Company A could persuade shareholders of Company B to use their proxy votes to make changes to the company’s board of directors. The goal of such a proxy vote is to remove the board members opposing the takeover and to install new board members who are more receptive to a change in ownership and who, therefore, will vote to approve the takeover.
Example of a Hostile Takeover
For example, Company A is looking to pursue a corporate-level strategy and expand into a new geographical market.
1. Company A approaches Company B with a bid offer to purchase Company B.
2. The board of directors of Company B concludes that this would not be in the best interest of shareholders in Company B and rejects the bid offer.
3. Despite seeing the bid offer denied, Company A continues to push for an attempted acquisition of Company B.
In the scenario above, despite the rejection of its bid, Company A is still attempting an acquisition of Company B. This situation would then be referred to as a hostile takeover attempt.
The poison pill technique, sometimes also known as a shareholder rights plan, is a technique by which the target company seeks to make itself less desirable to potential acquirers by making the stocks of the target company less attractive by allowing current shareholders of the target company to purchase new shares at a discount. This will dilute the equity interest represented by each share and, thus, increase the number of shares the acquirer company needs to buy in order to obtain a controlling interest. The hope is that by making the acquisition more difficult and more expensive, the would-be acquirer will abandon their takeover attempt.
Poison pill tactics may also be employed to soften the blow of a hostile takeover. As often is the case in hostile acquisitions, the acquiring company will employ abusive takeover tactics, or use its dominant position to put the target company in a very bad position. In these cases, poison pills may be utilized to force the acquirer into a position to negotiate, instead of simply forcing acquisition on the target.
The Crown Jewel Defense
when the target company of a hostile takeover sells its most profitable or valuable corporate units or assets to reduce its attractiveness to the hostile bidder, thereby deterring the hostile takeover. The crown jewel defense is a last-resort defense since the target company will be intentionally destroying part of its value, with the hope that the acquirer drops its hostile bid.
Supermajority amendment: An amendment to the company’s charter requiring a substantial majority (67%-90%) of the shares to vote to approve a merger.
This is a large financial compensation or substantial benefits employment contract that guarantees expensive benefits be paid to key management or company executives if they are removed from the company following a takeover. The idea here is, again, to make the acquisition prohibitively expensive.
This defense involves the target company repurchasing shares the acquirer has already purchased, at a higher premium, to prevent the shares from being in the hands of the acquirer. For example, Company A purchases shares of Company B at a premium price of $15; the target, Company B, then offers to purchase shares at $20 a share. Hopefully, it can repurchase enough shares to keep Company A from obtaining a controlling interest.
The target company purchasing shares of the acquiring company and attempting a takeover of their own. The acquirer will abandon its takeover attempt if it believes it is in danger of losing control of its own business. This strategy obviously requires Company B to have a lot of money to buy a lot of shares in Company A. Therefore, the Pac-Man defense usually isn’t workable for a small company with limited capital resources.