Hostile takeover
A hostile takeover allows a bidder to take over a target company whose management is unwilling to agree to a merger or takeover. The party who initiates a hostile takeover bid approaches the shareholders directly, as opposed to seeking approval from officers or directors of the company.[3] A takeover is considered hostile if the target company's board rejects the offer, and if the bidder continues to pursue it, or the bidder makes the offer directly after having announced its firm intention to make an offer. Development of the hostile takeover is attributed to Louis Wolfson.[4] Hostile takeovers are relatively rare; by one estimate, only 40 takeovers (out of 3,300) in 1986 were hostile.[5] An SEC working paper tracking hostile takeovers from 1965 to 2013 found that such deals accounted for about 40% of total M&A activity in the late 1960s but declined to around 5% by 2013, making them a small share of overall takeover activity by the 2000s.[6]
A hostile takeover can be conducted in several ways. A tender offer can be made where the acquiring company makes a public offer at a fixed price above the current market price.[7] An acquiring company can also engage in a proxy fight, whereby it tries to persuade enough shareholders, usually a simple majority, to replace the management with a new one which will approve the takeover.[7] Another method involves quietly purchasing enough stock on the open market, known as a creeping tender offer or dawn raid, to effect a change in management. In all of these ways, management resists the acquisition, but it is carried out anyway.[7]
In the United States, a common defense against hostile takeovers is to seek an injunction under Section 16 of the Clayton Act. The target company argues that the acquisition would violate Section 7 of the Act, which prohibits transactions that may substantially lessen competition or create a monopoly.[8]
The main consequence of a bid being considered hostile is practical rather than legal. If the board of the target cooperates, the bidder can conduct extensive due diligence into the affairs of the target company, providing the bidder with a comprehensive analysis of the target company's finances. In contrast, a hostile bidder will only have more limited, publicly available information about the target company available, rendering the bidder vulnerable to hidden risks regarding the target company's finances. Since takeovers often require loans provided by banks in order to service the offer, banks are often less willing to back a hostile bidder because of the relative lack of target information which is available to them. Under Delaware law, boards must engage in defensive actions that are proportional to the hostile bidder's threat to the target company.[9]
A well-known example of an extremely hostile takeover was Oracle's bid to acquire PeopleSoft.[10] As of 2018, about 1,788 hostile takeovers with a total value of US$28.86 billion had been announced.[11]
