The hostile takeover

A hostile takeover occurs when an acquirer buys another entity despite the objections of the managers of the target organization. A hostile takeover can be accomplished either through a tender offer or a proxy fight. Both options essentially go around the target's management team, so that shareholders can have a direct say in the matter.

The Tender Offer

An acquirer may resort to a tender offer to appeal directly to the shareholders of the target company. The SEC defines a tender offer as follows:

“A tender offer is a broad solicitation by a company or a third party to purchase a substantial percentage of a company’s … registered equity shares or units for a limited period of time. The offer is at a fixed price, usually at a premium over the current market price, and is customarily contingent on shareholders tendering a fixed number of their shares or units.”

The particular advantage of a tender offer is that the acquirer is under no obligation to buy any shares that have been put forward by shareholders until a stated total number of shares have been tendered. This eliminates the initial need for large amounts of cash to buy shares, and also keeps the acquirer from having to liquidate its stock position in case the tender offer fails. The acquirer can include escape clauses in its tender offer that releases it from the liability to purchase any shares; for example, an escape clause could state that, if the government rejects the proposed acquisition for anti-trust reasons, the acquirer can refuse to buy tendered shares. Such an escape clause is only prudent for the acquirer, which would otherwise have to buy shares that it no longer needs, since the acquisition will not be allowed to proceed.

Another advantage of the tender offer is that the acquirer could potentially gain control of the target company in as little as 20 days, if it can persuade shareholders to accept its offer. This period will be extended if a rival bidder appears or if not enough shares are tendered. Even so, the matter will typically be decided within a few months.

The Proxy Fight

A proxy fight is an attempt by those not in control of a business to use the proxy method of voting to obtain a sufficient number of shareholder votes to gain control of the board of directors. The result is a change in the membership of the board, which then leads to a change in the management of the target company. The new board may approve of being acquired by the entity that initiated the proxy fight.

The term proxy fight is derived from the use of proxies. A proxy is the authorization of shareholders to vote their shares for them at the shareholders meeting. Since shares are voted at the shareholders meeting, and few shareholders bother to appear for that meeting, they instead grant a proxy to someone else who will be attending the meeting to vote their shares, such as the corporate secretary. It is the task of the acquirer to obtain the proxies for as many shares as possible, which it can then vote at the shareholders meeting.

Directors are elected once a year by the common shareholders, at the annual shareholders meeting that takes placed anywhere from two to five months following the end of a company’s fiscal year-end. There may also be a special shareholders meeting for such issues as considering an acquisition offer, if a sufficient percentage of the voting shareholders request the meeting.

In a proxy fight, the acquirer and the target company use a variety of solicitation methods to influence shareholder votes for members of the board of directors. Shareholders must be sent a Schedule 14A, which contains a substantial amount of financial and other information about the target company; if the proxy fight is over a motion to sell the company, the schedule also includes the terms of the proposed acquisition. The basic steps in a proxy fight are:

  1. The acquirer hires a proxy solicitation firm, which is responsible for contacting shareholders.
  2. The proxy solicitor compiles a shareholder list and then contacts shareholders to state the case of the acquirer. In cases where shares are registered in the names of stock brokerages, the brokerages consult with the share owners regarding the voting positions they will take.
  3. Individual shareholders or stock brokerages submit their votes to the entity designated to aggregate the information, such as a stock transfer agent or brokerage. These results are then forwarded to the corporate secretary of the target company just prior to the shareholders meeting. Votes may be scrutinized by proxy solicitors and challenged if votes are unclear, voted multiple times, or not signed.
  4. Directors are approved based on the votes received.

It can be quite difficult to gain the attention of shareholders, since the vast majority of them are completely apathetic in reviewing the options for directors. Instead, they usually agree to the director voting recommendations mailed to them without any examination of qualifications or underlying issues at all. The same level of apathy may apply to acquisition votes. However, a proxy fight might be favorable for the acquirer if the target company has been suffering from poor financial results, which might make shareholders restive. It is especially useful if the acquirer has a concrete proposal for turning around the business or shifting more cash to shareholders, such as through the use of asset sales, sale of the business, or increased dividends.

A proxy fight is not a high-probability option for an acquirer. However, it can still lead to changes, since the board of directors may be sufficiently scared by the proxy fight to enact a few changes to keep from triggering another proxy fight in the future. Examples of preventive changes include unusually large dividends and the sale of assets. In short, the acquirer must consider the low probability of acquiring through this approach and the costs incurred for proxy advisors, communications with shareholders, litigation, and proxy materials.