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Understanding Corporate Takeovers

In the arena of publicly traded businesses, other companies and private equity firms are always looking for the next big hit – an acquisition that can increase profits over the long haul. Often this will come through a friendly takeover, whereby all parties involved simply agree to a transaction where the target company sells full ownership or a controlling stake of itself to the purchaser. Management and the Board of Directors approve the deal and encourage shareholders to do so on the premise that they will benefit as well.

However, where management and the board refuse a bidder’s offer to acquire a controlling stake, the bidder may choose to still pursue the transaction by means of a “hostile” takeover. This is done through making shareholders an offer they can’t refuse, or through a proxy fight. Sometimes a bidder may simply announce its desire to acquire another company and then make an offer.

How is a Hostile Takeover Carried Out?

Premium Offer

Companies may first present a public offer for shares of the target company. Naturally, this offer will be a higher value than the market price of the shares, as the bidder hopes that the difference – or premium – will entice shareholders to sell and profit. By acquiring more than 50% of the shares in the company, the purchaser can acquire control.

A “creeping offer” is the somewhat gradual purchase of shares that exist on the open market. The acquiring entity buys up as much stock as becomes available to the point where over time the purchaser can acquire significant ownership. The purchaser may acquire a controlling stake, or enough of a stake whereby they can more easily purchase the rest through a friendly transaction, a tender offer with a premium, or a proxy fight.

Proxy Fight

The bidding company or firm can also engage in what is known as a “proxy fight.” Proxy votes in a company are votes held by an individual or another entity as the duly authorized representative of an actual shareholder. Where proxy authorization is concentrated in a certain group of organizations, firms or individuals, that group can act to force changes in management or the board of directors within the target company. The bidding company can work behind the scenes to mobilize proxy groups, or even just a large enough group of shareholders themselves, to force a number of decisions, including voting out executives or directors and replacing them with preferred individuals. Such changes can then lead to a sale of the company or at least the sale of a controlling stake in the company.

As long as a simple majority, meaning more than 50%, of the shareholder votes can support that cause, a proxy fight could be successful. Historically, however, they are not overwhelmingly successful because those in charge on the board or in management can institute bylaws that restrict such tactics or arrange for complicated election cycles for different board positions. Where different directors are up for reelection in different years, it is more difficult to mobilize a simple majority of shareholder votes or proxy votes to unseat more than half the board at one time.

Proxy fights may also occur by shareholders who resist a merger or takeover of their own company. These shareholders look to change the composition of the board and management to prevent such a deal from going through.

By seeking out shareholders looking to sell at a premium, or by manipulating a proxy fight from behind the scenes, companies or investment firms can still accomplish the takeover of another company, albeit by “hostile” means.

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August 2020
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