Most acquisition scenarios assume that the target company is interested in the buyer’s offer, and is a willing participant in the acquisition process. This is not necessarily the case. The buyer may attempt a hostile acquisition, where it tries to make a purchase despite the wishes of the target’s management team. This is extremely difficult to do when the target is privately held, since the management team usually owns the company, and can cheerfully spurn all offers. However, if the target is publicly held and ownership is widely dispersed, then the buyer may be able to complete a hostile takeover.
A buyer usually conducts a hostile takeover through a tender offer. This means that the buyer goes around the target’s management to contact the target’s shareholders, and offers to buy their shares. The rules for tender offers were defined in the 1968 Williams Act, which amended the Securities Exchange Act of 1934. In essence, the buyer sends a packet of information to the target’s shareholders that includes a purchase offer, a deadline, and a letter of transmittal. The letter of transmittal outlines the method for transferring shares to the buyer. The buyer has the right to reject stock if an excessive amount is tendered, or if not enough is tendered (e.g., there are not enough shares to gain control of the target). The buyer also has the right to terminate its tender offer. A shareholder can withdraw any tendered shares during the tender offer period by submitting a letter of withdrawal, along with a signature guarantee verifying that the signature of the submitting party is that of the shareholder.
The tender offer contains a termination date, beyond which the buyer does not intend to accept additional shares of the target’s stock. It can extend the tender offer, but must announce the extension no later than 9 a.m. on the business day following the date when the tender offer expires. The announcement must also state the approximate amount of securities that the buyer has already acquired, which gives everyone a good estimate of the progress of the tender offer, and the likelihood of the buyer’s ultimate success.
If the buyer obtains at least 90 percent of the target company’s stock, then it can adopt a merger resolution on behalf of the target company, accepting the takeover offer. Any uncommitted shareholders will receive the same compensation as all other shareholders who accepted the tender offer; however, these shareholders also retain appraisal rights, where a court can determine an objective fair value for their shares. A shareholder only exercises his appraisal rights if he feels that the tender offer undervalues his shares.
In addition, the buyer must document the tender offer in a filing with the SEC, including a term sheet which summarizes the material terms of the tender offer, the buyer’s identity and background, the source of funds for the acquisition, and the buyer’s history with and plans for the target company.
As an alternative, the buyer may engage in a proxy fight, where it solicits proxies from the target’s stockholders, and votes those shares at a stockholder’s meeting that is called for the purpose of voting on the acquisition. The proxy solicitation must comply with federal securities laws, so it is best to hire a proxy solicitation service to handle this aspect of the acquisition on behalf of the buyer.
A hostile takeover is usually an intense and protracted affair, which fully involves the managements of both involved companies. This can detract severely from their conduct of daily business activities. Also, it is a reasonable assumption that the target’s management will not be cooperative in the event of a takeover, so the buyer must be prepared to completely replace them, which makes subsequent integration efforts much more difficult. For these reasons, a buyer should have very good reasons for proceeding with a hostile takeover.
The Hostile Takeover