Hostile takeover: meaning, how it works and more

The business world is not always a bed of roses. Growth-hungry companies have a vast array of opportunities to reach the coveted top positions in their respective industries. One such possibility is a hostile takeover. A takeover is characterized as ‘hostile’ if a third party or shareholder attempts to take over a company without the consent of the management board and/or supervisory board. By means of a bid for more than half of the outstanding shares, the bidder tries to gain control over the target company.

What is a hostile takeover?

A hostile takeover is a takeover that occurs without the approval or consent of the board or management of the company to be acquired. 

Why a hostile takeover?

There are several reasons for deploying a hostile takeover. A common one is that such an acquisition can simply bring about significant growth and can therefore be rewarding. Consider, for example, the strategic takeover of a direct competitor. Since companies are usually not very willing to be bought out by the competitor, a hostile takeover can offer a solution. Not willingly, then unwillingly – is the thought.

As a rule, what makes a company suitable for a hostile takeover is, on the one hand, the potentially strong growth that can be associated with acquisition, and, on the other hand, the relatively weak protective structures of the target company. A furniture company with a market share of 10% and little or no protective constructions is, of course, an attractive target for the competitor with a market share of 30%.

How a hostile takeover works

In a hostile takeover, a party makes an offer for a company’s stock without the company’s request or consent. This phenomenon is known in English literature as greenmailing .

A hostile takeover can occur if the company’s management does not act in favour of the shareholders. In that case, the shareholders choose an option that is best for them, rather than leaving it to management.

For example, if the share price is $30 per share, and the acquiring company believes they can raise it to a value equivalent to double, they can approach the incumbent shareholders with an offer of $40 per share. The shareholders can sell their shares for 10 euros more than under normal circumstances and will agree. The buyer also benefits because he knows that he can increase the value even further to 60. It follows that a low share price makes a company vulnerable to (hostile) takeovers.

A takeover is considered “hostile” if:

1. The board rejects the offer, but the bidder buys the company anyway.
2. The bidder makes an offer for the company without the knowledge of the board.

A hostile takeover can be carried out in several ways. For example, the bidder can prepare a quote offering a fixed price above the current market price. The bidder can also try to get enough shareholders of the target company behind him to replace the management.

How companies can prevent hostile takeovers

Companies can prevent a hostile takeover by, for example, buying back their own shares or merging themselves, forcing the bidding party to take over a larger company. An example is the takeover attempt by Mittal Steel of Sidmar in Ghent , later Arcelor . However, this attempt to prevent the hostile takeover failed; later the takeover went through. Buying back own shares is only possible in most legal systems to a very limited extent, and voting rights are also suspended as long as the company owns these shares.

How a hostile takeover is effected 

The bidder usually tries to convince the shareholders of the target company, who together represent a majority interest, by offering a (much) higher price for their shares than the price. He also often tries to placate them by sketching a brighter future. If the shareholders agree, the incorporation can become a fact. The board should choose eggs for its money, regardless of its displeasure.

Protection against a hostile takeover

Because a hostile takeover is always lurking in the tough business world, a company would do well to set up protective constructions. A common construction is issuing preferred stock to loyal parties. Their voting rights then count more heavily than those of regular shareholders, making a hostile takeover easier to fend off. This is the first protective construction in history and was devised by Shell at the beginning of the twentieth century to prevent a hostile takeover of Standard Oil.

A second protective construction uses a so-called trust office foundation (STAK) for defence. The legal and beneficial ownership of the shares are hereby split. The legal ownership – and therefore the control – remains with the STAK, while the beneficial ownership in the form of depositary receipts for shares goes to the depositary receipt holder. This construction also acts as a shield against an unwanted takeover.

We have seen that a hostile takeover can provide a solution for the growth-hungry company. Whether the bidder succeeds in this depends to a large extent on the protective constructions of the target company. There are apparently only two choices on the way to the corporate top: eat or be eaten.

Conclusion

Shareholders normally have control over a company. They can also usually sell their shares freely, even to a party that does not have the best interests of the company at heart. If that happens, the company’s board can deploy protective measures against the hostile takeover. The possibilities here are very diverse.

In general, it can be said that these protective constructions are permissible unless there is a conflict with the articles of association, conflict with the law or special circumstances. If you have questions about protective constructions (permissibility or implementation), it is wise to consult a lawyer. In this way, you will not be faced with any surprises regarding the validity or consequences of the measures.

Strategies used in a hostile takeover include making a tender offer directly to shareholders, launching a proxy fight to gain control of the target company’s board of directors, and initiating a hostile bid through a public exchange offer.