When outsiders attempt to induce a takeover via Tender Offer (TO) of a public company, there are a number of protections available to avoid the foreseen “hostility.” Unfortunately, some of the takeover defenses require contracts and statues implemented long before a unsolicited acquirer starts buying-up shares of the company’s stock on the public market. Knowing the options can help public firms plan ahead.
This M&A blog is very much focused on the when, how, what, why and who of M&A. However, sometimes in the world of business, M&A activity is not always your choice. A hostile takeover is when someone forces you to sell or at least tries to. Corporate takeovers are always complex. A hostile takeover adds additional complexities, but pre-emptive measures can be put in place to protect management. Defences are common, but you will need to seek out sell-side M&A expert that focuses specifically on these techniques.
Most corporate takeovers are friendly in nature. Friendly in business means that the majority of the company’s stakeholders support the acquisition. However, corporate takeovers can sometimes become hostile. The definition of a hostile takeover is when one business attempts to take control over a public company against the consent of existing management or the company’s board of directors. We will publish a blog shortly on how to initiate a hostile takeover if you are that way inclined. In this blog, we focus on the ways to defend against them.
A typically successful defensive strategy in preventing a hostile takeover is something referred to as a shareholder rights plan. Established as a mechanism in 1982, the shareholder rights plan is often more pleasantly referred to as the “poison pill.” In a “poison pill” defense, existing company shareholders have the right to purchase additional shares in the company at some discount. This has the immediate effect of diluting the interest of any new shareholders intent at nefarious ends. Rights plans are often triggered or can go into effect once a single individual or entity acquires a threshold percentage of the shares.
A great example of the “poison pill” defense occurred in 2012 when Carl C. Icahn acquired a 10% stake in Netflix. Around that time, the company announced a shareholder rights plan that allowed existing shareholders to acquire two shares for the price of one in the event that more than 50% of assets were planned to be sold in a merger or other sale transfer.
Shareholder rights plans have proven very effective at discouraging hostile and monopolistic takeovers of public companies. They also put the power back in the hands of the company board and existing shareholders as well as put large competitors at bay who may find a Tender Offer or hostile takeover an appealing route if a smaller public company has a bad quarter and sees significant decreases in the value of its stock.
The “poison pill” defense can unfortunately dilute stock values and existing shareholders may find they need to buy more shares just to maintain equal ownership. This can be expensive. Large institutional investors may shy away from significant investments if the company has terse and harsh defenses in place. Finally, in some cases a hostile takeover that may have ultimately improved the company by ousting poor managers and executives is ultimately thwarted due to this type of defense. In some cases, it may be in the shareholders’ best interest to allow a hostile takeover to occur. The Berkshire Hathaway shareholders, for instance, would have been the net losers had they been able to enact a shareholder right plan to thwart Warren Buffett’s acquisition of the company in 1962. The outcome for those shareholders would have been entirely different.
With a staggered board, a director has a staggered three-year term and because only one-third of the directors are elected at each annual meeting, it is extremely difficult to change through a proxy contest. Because it takes both the approval of the company board as well as a proxy shareholder vote to enact a significant change such as a merger or hostile takeover, staggering board elections helps current management and shareholders to maintain majority control of the board of directors. While not as dramatic or seemingly harsh as the “poison pill” takeover defense previously mentioned, maintaining this type of control is essential for thwarting a rapid hostile takeover attempt from an unwanted suitor.
If not waived, control share acquisition statutes can delay or complicate an otherwise smooth takeover process. Such a statute will restrict the ability of a bidder to expand their ownership stake in the business without restriction to other rights given to typical shareholders. These right restrictions typically include voting restrictions which have the effect of significantly limiting an unsolicited acquirers ability to enact significant change within the organization after quickly seizing a control block of the company’s stock.
For more information, Morrison Foerster has a great outline of takeover and control defenses on the company website. It also dives deep into anti-trust and monopolistic issues relating to takeovers of public corporations. Well worth the read.
The takeover of a public company is no easy feat. In some cases, this is unfortunate as management can be a significant barrier to a much more successful and operationally efficient company. The virtues, vices and legitimacy of hostile takeover bids will always be a hotly debated topic.
If a hostile party approaches the board, and they want to defend against it, they can seek a friendlier firm to save the day. If a sale is imminent, it might be in your best interests to sell to a friendly company. A slightly different approach is when the board may sell off key assets to a friendly buyer in order to make the company less attractive to the bidder.
Following a white knight defense, the ‘friendly’ acquirer often restructures and finds a place for senior management and possibly places several members on the board.
Greenmail refers to a targeted repurchase of stock, generally where a company buys stock from another shareholder, usually at a premium, with the aims to eliminate an unfriendly takeover attempt. While the anti-takeover process of greenmail is effective, some companies have implemented anti-greenmail provisions in their corporate charters. Mainly to protect shareholders from the board using company cash and paying too much for stock simply to save management.
Having stock securities with differential voting rights (DVRs) is one of the most common pre-emptive lines of defense against a hostile corporate takeover. DVR’s shares are the same as ordinary shares, however, they provide fewer voting rights. For this reason, they usually trade at a discount or pay a higher dividend in order to counteract the lesser voting rights. For example, for every 200 shares owned you might only get 1 vote. In other words, this means not all shares are equal in voting and a hostile party might be able to buy the shares, but not control the company.
An employee stock ownership plan (ESOP) is a common benefit offered to staff as part of a firms retirement plan package. They offer a tax saving to both the company and its shareholders. This is a slightly risky defence because the corporation can not control how its staff vote. However, the theory here is that the more of the company owned by the staff, the more votes in favor of the board and management. Be sure to treat staff nicely if you have this in your bag of defense tricks.
The Williams Act is a federal law that was enacted in 1968. Among other things, it defines the rules of acquisitions and tender offers. The act was passed due to the increase of “corporate raiders” in the 1960’s. A corporate raider is simply a financier who made their practice of executing hostile takeover bids; either for control, to remove competition or to resell them for a profit. In short, the act tries to block people making cash tender offers for stocks they owned. Cash tender offers can, and generally, do destroy value by forcing shareholders to tender shares on a shortened timetable.
The act requires mandatory disclosure of information concerning takeover bids. It instructs that bidders must include all details of a tender offer in filings to the Securities and Exchange Commissions (SEC) and the target company. The filing must include the offer terms, cash source and the bidder’s plans for the company after the takeover.
If you own a company that is scaling up, but you don’t own a clear majority of the equity, you might want to implement (or try to) one of the many hostile takeover defense mechanisms at your disposal. You will need to seek out sell-side expert, and there are ones that focus specifically on these techniques. It is better to set these defense techniques up as early as possible, and whilst your shareholder list is small and friendly. Given the level of hostile corporate takeovers that have taken place in the U.S. over the last few years, even if you think you may not be a target for acquisition, it may be prudent for you to put one of these defenses in place.