A hostile takeover occurs when a separate corporation acquires or takes over a company without seeking or obtaining the approval or consent of the board of directors. The acquired company is the target company. The acquirer executes the takeover. Hostile takeovers are legal, but many legal barriers can manifest during the takeover.
How does a hostile takeover happen in a company?
The acquirer will first attempt to make a friendly offer to the board members to buy the target company or gain significant control over it. When the company’s management and board of directors reject the proposal, the acquirer will go directly to the target company’s shareholders. A hostile takeover can happen in the following ways:
Tender offers: A tender offer is when the acquirer offers to purchase the target company’s shares at a premium price above market value. The acquirer will only pay that price in exchange for the majority of the shares.
Proxy vote: A proxy vote is when the acquirer convinces the shareholders to replace board members by voting them out of management. The aim is to remove opposing board members and replace them with people who support the acquisition. It is an effective way to eliminate obstacles to the acquisition.
Other Takeover Tactics
The acquirer might also look for ways to lessen your company's public appeal. This can involve a range of tactics designed to undermine confidence in your company among shareholders, customers, and the general public. For instance, the acquirer might spread false or misleading information about your company's financial health, management practices, or product quality. These devious tactics can create uncertainty and fear, leading to a drop in stock prices as investors lose confidence. Additionally, the acquirer might engage in unethical business practices such as corporate espionage, where they gather confidential information and use it to their disadvantage. They could also attempt to disrupt your supply chain or create barriers to market entry for your products. By employing these fraudulent and manipulative strategies, the acquirer aims to drive down the value of your stocks and shares, making your company more vulnerable and increasing its chances of successfully taking over at a reduced cost.
You need preemptive measures and a solid defense strategy
If you believe your company could be a victim of a hostile takeover, you can implement preventive measures to protect the company. Similarly, you can use legal defense strategies to stop the hostile takeover before it finalizes. The poison pill defense strategy can reverse the takeover or make the acquisition less attractive. However, it could have adverse effects if you do not apply it appropriately and accurately.
The Poison Pill
The poison pill defense strategy can reverse the takeover or make the acquisition less attractive by diluting the acquirer's ownership stake and increasing the cost of the takeover. This strategy typically involves issuing new shares to existing shareholders, excluding the acquirer, which effectively reduces the value of the shares already acquired by the hostile bidder. As a result, the acquirer's ownership percentage decreases, making it more expensive and difficult for them to gain control of the company. Additionally, the poison pill can include provisions that allow existing shareholders to buy shares at a discount, further discouraging the takeover attempt by increasing the acquirer's financial burden.
However, the poison pill defense must be applied with careful consideration and precision. If not executed appropriately, it can have significant adverse effects. For example, the issuance of new shares can lead to shareholder dilution, which might upset existing investors and lower their confidence in the company's management. This could result in a decrease in stock prices, harming the company's market value. Moreover, a poorly implemented poison pill might trigger legal challenges from shareholders or the acquirer, leading to costly and time-consuming litigation. It could also damage the company's reputation and relationships with shareholders, customers, and partners. Therefore, while the poison pill defense can be an effective tool in warding off hostile takeovers, it requires strategic planning and expert legal and financial guidance to ensure it does not backfire and cause more harm than good.
Be Prepared for a Hostile Takeover
You should also see if certain threats or scares to your company have merit. Remember that you always have numerous options, and it is imperative to choose the best route to safeguard the interests of your company. Contact us online or call our law firm at (800) 358-0305
