A takeover is the process of one company acquiring and controlling another company that they are not associated with. Takeovers are usually covered by the media when it involves public companies. However, it occurs on all levels of business from stay at home operations through to multinational corporations. The Australian Government has a Takeovers Panel for this area and guide anyone interested in a step by step process. This is a peer review body that regulates corporate control transactions in widely held Australian entities, primarily by the efficient, effective and speedy resolution of takeover disputes.
There are essentially four types of takeovers that occur in the business environment; friendly, reverse, backflip or hostile. The focus of this article will be on hostile takeovers.
A friendly takeover is when the acquiring company informs the target company’s management of their proposal. Essentially, giving them notice beforehand and if the board feels that accepting the offer is in the best interests of the shareholders it advises the shareholders to do so.
A reverse takeover is when a private company acquires a public company. Often occurring through purchasing a large fraction of the public company’s stock and by getting majority votes to replace the board of directors and CEO.
A backflip takeover occurs when the acquiring company turns itself into a subsidiary of the purchased company. Often happens when a larger but less known company purchases an established brand that is struggling. SBC takeover of the struggling AT&T and subsequent rename to AT&T.
A hostile takeover is the opposite of a friendly takeover whereby the target company’s management disagrees with the proposed offer. There are essentially two methods within hostile takeover that occur; tender offer or a proxy fight.
A tender offer is when the acquiring company targets outstanding shareholders with a premium stock price as compared to the current market price. Important to note that with these tender offers to purchase the shares there is usually a time frame to accept. With the premium being an attractive incentive for those shareholders to sell to the acquiring company.
Whereas with a proxy fight, the acquiring company attempts to persuade the outstanding shareholders to use their proxy votes for the appointment of new management. Doing this by highlighting issues with the current management and campaigning for their candidates to be placed on the board. Once they have those candidates on the board, it favours their decisions to be actioned at the target company. This has become a popular method with hedge funds to institute change.
There are a few hostile takeover defences that the target company can implement pre or post an attempt. Some of the preemptive defences include:
- Differential voting rights (DVR) – establish stocks with less voting rights but pay higher dividend making it an attractive investment.
- Employee stock ownership program (ESOP) – employees own substantial stock in the company who are more likely to vote with the current management
- Crown jewel – provision of the company’s constitution require the sale of the most valuable assets if there is a hostile takeover thus making the company less attractive for takeover
Some of the reactive defences include:
- Poison pill – allowing existing shareholders to buy newly issued stock at a discount if one shareholder has bought more than the stipulated percentage of stock. Used broadly to include a range of defences that refer to issuing additional debt or stock.
- People pill – provides for the resignation of key personnel in the event of a hostile takeover
- Pac-Man – target company aggressively buy stock in the acquiring company attempting the hostile takeover
With these instances of an acquiring company targeting a company for a hostile takeover make sure to consult a Mergers & Acquisitions Lawyer for advice on how to navigate the different scenarios that may occur. From both an acquiring or target company’s perspective, you should be aware of what is available and how to take advantage of those options.
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