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Defending against a hostile acquisition

On Behalf of | Feb 17, 2019 | Mergers & Acquisitions

According to the Corporate Finance Institute, a hostile acquisition, which is more commonly known as a hostile takeover, is the acquisition of one company—the target company—by another by going through the company’s shareholders. The acquirer is able to acquire the target company by proxy vote or a tender offer. The difference between a hostile takeover and a friendly acquisition is that the target company’s board of directors does not approve of the transaction. If the initiation of a hostile takeover is imminent, the target Florida business has a few defense options. 

Investment Bank shares a few viable defenses against a hostile acquisition. The first is the poison pill defense. This defense involves the target company diluting its stock shares to ensure the hostile bidder cannot acquire a domineering share without first paying an exorbitant price. This defense prevented Netflix from succumbing to a hostile acquisition attempt in 2012.

Another defense is the staggered board defense. Under this defense, the target company protects the board seats of a company by splitting its board of directors into groups and allowing only a handful to go up for reelection at any one point. What this means is that a hostile bidder cannot vote the board out straight away.

A target company may also attempt the white knight defense. This defense involves selling the company or key assets to a friendly firm. Companies should consider this defense when a sale is imminent. More often than not, friendly acquirers restructure acquired firms and find places for senior management.

The greenmail defense is an effective one, but many companies do not allow it. Greenmail refers to the repurchase of a shareholder’s stock by the company to prevent an unfriendly acquisition attempt. The reason many companies have anti-greenmail policies is to prevent management from using company money to pay for stock to save themselves.

Differential voting rights is one of the most common defenses to hostile takeover attempts. DVR’s shares are the same as normal shares except that they give holders less voting rights. To counter the reduced voting rights they provide, DVRs typically trade at a discount.

Employee stock ownership plan is the last type of defense against a hostile takeover. An ESOP is a benefit many companies offer employees in their retirement plans. Though management cannot tell employees how they must vote, the theory is that the more shares the staff owns, the more votes management and board members will receive in its favor.