Hostile Takeover Defenses: How to Protect Yourself and Your Company
Valued at 67.85 billion U.S dollars, the acquisition of Express Holding Co. by Cigna Corp., became the largest merger and acquisition deal of 2018.
However, not all takeovers and acquisitions are friendly. Sometimes there are disagreements between shareholders and the acquirer resorts to a hostile acquisition. Generally, the objective behind this is to overthrow the current management and increase profits for the company.
Even so, as the management, you still have some takeover defenses in your arsenal. Here are 5 things you can do.
1. The Poison Pill (Shareholder’s Rights)
As one of the more controversial defenses, this requires the target company to dilute their shares, making any kind of takeover very expensive for the acquiring company. Once the flow of cheap shares begins, it automatically makes other shares worth less as well.
This makes it difficult for the acquirer to get a hold of a controlling share.
2. The White Knight Defense
When a company opts for a white knight defense, they get a friendlier, more trusted company to buy a controlling share from the target company. Generally, an agreement is made to sell the shares at a premium to the white knight company, and restructuring will occur in concurrence with the target management’s support.
3. Staggered Board
The staggered board approach employs a method of dividing the directors of the company board into separate segments. This allows the re-election of only a certain segment of directors at any given meeting. This prolongs the process of voting out the entire management at once.
4. Differential Voting
Establishing stock securities that have differential voting rights can be a great defense against a takeover. While in essence, differential voting right shares (DVRs) are the same as ordinary shares, they allow for discounted trades and lower voting rights.
These kinds of provisions require the shareholders to own a significant amount of shares before they are able to vote.
In situations like these, hiring a corporate lawyer can help immensely.
5. The Greenmail Defense
The greenmail defense requires the target company to buy its own shares at a substantially higher market value from the hostile acquirer. The acquirer then agrees to not pursue an acquisition. This, however, is not an ideal situation for targets to be in.
In fact, a lot of companies have banned the use of this defense altogether, to prevent the misuse or mismanagement of company funds.
Using Takeover Defenses to Protect Your Company
Understanding the nuances of company law and other legalities that surround mergers and acquisitions can be difficult. Takeover defenses only work when you know which one to use in alignment with your circumstances.
Even if you don’t foresee an acquisition, it is always smart to make sure you have a few defenses in store, just in case.
Schedule a free consultation with our experienced corporate attorneys at Manfred law, and let’s explore what we can do to help you!