The word “hostile takeover” has recently been extensively tossed about the media world thanks to the manipulations of a specific billionaire. However, although having long since entered the common vernacular, “hostile takeover” has an aura of ambiguity — and legalese obscurity. A hostile takeover happens when a firm — or a person — tries to take control of another company against the target company’s management’s desires. That’s the “hostile” part of a hostile takeover: merging with or purchasing a firm without the board of directors’ agreement.
A company (let’s call it “Firm A”) submits a bid-offer to buy a second company (let’s call it “Company B”) for a (fair) price. The board of directors of Company B rejects the offer because it is not in the best interests of shareholders. Company A, on the other hand, tries to compel the merger by one of many methods: a proxy vote, a tender offer, or a substantial stock purchase. Company A persuades shareholders in Company B to vote out Company B’s opposing management using the proxy vote mechanism. This might require making changes to the board of directors, such as appointing members who are openly in favor of the acquisition.
It isn’t always a simple road. Proxy solicitors – the expert businesses engaged to assist obtain proxy votes — can dispute proxy votes, in addition to the task of mobilizing shareholder support. This pushes out the takeover date. As a result, an acquirer could make a tender offer instead. A tender offer is when Company A proposes to buy stock from Company B shareholders at a higher price than the market rate (e.g., $15 per share against $10), with the intention of purchasing enough voting shares to control Company B. (typically over 50 percent of the voting stock).
Tender offers are usually expensive and time-consuming. If the acquisition is successful, the purchasing business is obligated by US law to reveal the terms of its offer, the source of its funding, and its projected objectives. The law also establishes timelines for shareholders to make judgments, as well as adequate time for both corporations to present their reasons. Alternatively, Company A might make an open market purchase of the requisite voting shares in Company B (a “toehold acquisition”). They might even make an unwanted offer public, a tactic known as a “bear hug.”