How Can My Business Defend a Hostile Takeover in England and Wales?

As a company, you may likely have to defend yourself against a hostile takeover attempt at some point. A hostile takeover is where another company tries to acquire a controlling interest in your company without the approval of your company’s board. As a target company, there are several ways that you can make this process difficult for the hostile bidder, in addition to ways that you can encourage them to avoid buying stock in your business.

This article will explain what a hostile takeover is and some effective ways to defend against one.

What is a Hostile Takeover?

A hostile takeover is where a company tries to acquire a controlling interest in a target firm without the consent of its board of directors. Takeovers can happen for many reasons. For example, a takeover may increase synergies and reduce operating costs. A company may also carry out a hostile takeover, usually through a tender offer or a proxy vote. However, it may be helpful to note that non-hostile takeovers are more common. 

Furthermore, there are different types of takeovers (often mergers or acquisitions). These variations will sometimes fall under the title of: 

• vertical; 
• horizontal; or 
• conglomerate takeovers. 

What is a Tender Offer?

A tender offer is where the acquiring company offers to buy outstanding shares in the company at a premium price. Essentially, a premium price means they pay more for the shares than their value. 

Using a tender offer, the bidder will aim to acquire a controlling interest in the company. Usually, they will acquire enough voting shares to influence decision making processes within the company. Often, a tender offer will depend on the successful hostile takeover attempt. If it is not, the target company’s shareholders may not be able to sell their shares at the premium value to the bidder.

What is a Proxy Vote?

A proxy vote is where the hostile bidder tries to convince the target company’s shareholders into voting out the current management. Ultimately, this means voting out the current directors on the company’s board. The idea here is to remove the target’s board members who oppose the takeover and then replace them with board members who favour the takeover. By doing this, the takeover will no longer be ‘hostile’.

Defending a Takeover

As a target company, there are many ways to defend yourself from a hostile takeover. Some of the most effective and most common methods include:

• poison pill defence;
• differential voting rights;
• white knight defence;
• golden parachute defence; 
• pac-man defence.

Poison Pills

A poison pill strategy is where you use a shareholder rights plan to dilute shares in your company. Therefore, you are making it more expensive to purchase your company while reducing the returns the hostile acquirer will receive from each share. A shareholder rights plan is where you offer shares below their market price to existing shareholders. This can occur either when the takeover bidder acquires shares beyond a certain threshold or after the takeover is complete.

Ultimately, the idea here is that you will disincentivise the hostile acquirer by making your company more expensive to buy.

Differential Voting Rights

Differential voting rights is a preemptive strategy where you give certain shareholders different voting rights to others. As a result, ordinary shareholders have less control over the company’s management. Therefore, it is more difficult for a hostile bidder to use a proxy vote to oust your company’s board. 

Furthermore, you may couple this technique with a staggered board strategy. A staggered board is where your board members are elected at different points across the year, as opposed to in one go. Like differential voting rights, this makes a proxy fight harder for a hostile bidder.

However, some shareholders may not be happy when you reduce their voting rights.

White Knight Defence

A white knight (or strategic partner) defence is where you sell your company to a more friendly company or individual than the hostile bidder. This works best where the friendly company is one you see as a strategic partner and is likely to keep the current management in place.

Golden Parachute Defence

A golden parachute strategy is where you incorporate specific terms into your board director’s employment contracts. These terms may require they receive expensive benefits if the company removes them from their positions following a takeover. Often, this technique will accompany other defence strategies. 

The effect of a golden parachute is not only to deter an acquiring company but also to provide security to board members in case they face termination. 

Pac-Man Defence

Finally, a pac-man defence is where you reverse the roles and attempt to take over a controlling interest in a company’s stock that is making a hostile bid towards you. Generally, companies will use this defence in novel situations and typically requires both companies to be of a similar size. Further, this can be an expensive endeavour. However, at the very least, it may also deter the other company from entering into an unpleasant battle with your company.

Key Takeaways

As a company, you may have to deal with a hostile takeover attempt at some point. This is where a company tries to gain a controlling interest in your company. Usually, this will occur through a tender offer to your current shareholders or a proxy vote. There are many ways a company may defend a hostile takeover, including through a: 

• poison pill defence; 
• golden parachute; or
• a white knight defence. 

When companies use these methods in combination with each other, they can strongly disincentivise a hostile bidder from taking over your company. 

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