27 Jul How to prevent a hostile takeover
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.
Hostile takeovers in summary
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.
Typical hostile takeover defenses / pre-emptive measures
There are several common defense strategies that can be set up by management, in advance, to deter unwanted acquisition advances. Without these strategies in place, it can often be impossible to stop the aggressive buyer. Below the list the most common of these strategies.
- Poison Pill Defense
This defense is more commonly known as a shareholders’ rights plan. This defense is contentious and many countries limit its application. Effectively, to execute a poison pill a targeted company dilutes its own shares, thereby ensuring the hostile bidder cannot obtain a controlling share without paying an extortionate price.
A recent example of this defense was seen in 2012 when Carl Icahn announced that he had purchased nearly 10% of Netflix’s shares in a hostile takeover attempt. Netflix’s board of directors defended this attack by instituting a shareholder-rights plan, making this and any future attempt excessively costly.
- Staggered Board Defense
More straightforward than the poison pill, this protects the board seats of a company. A company can split its board of directors into groups, and only put a handful up for re-election at any one meeting. This effectively means a hostile bidder cannot acquire equity and vote the board out straight away. There are ways around this, like shareholders calling a special meeting, but these are time-consuming and hard to get across the line.
- White Knight Defense
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 Defense
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.
- Differential Voting Rights
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.
- Employee Stock Ownership Plan
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 (USA)
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.