A hostile takeover is a type of corporate merger transaction. When a business is bought or sold, it is usually by mutual agreement of the buyer and seller and both parties’ boards of directors and management teams agree to the terms. The boards then recommend the transaction for a shareholder vote to approve the board’s decision. In private companies, the board members and shareholders are often the same individuals and board approval goes hand in glove with shareholder approval.
These acquisition transactions may be referred to as “friendly” takeovers, in which an “acquirer” or “bidder” takes over a “target” company. By contrast, a hostile takeover is a takeover transaction where the target’s management does not approve of the merger or takeover. In some instances the target board may reject an acquirer’s bid.
A hostile takeover usually takes on one or both of two forms: (i) a tender offer; (ii) a proxy battle.
In a tender offer the bidder directly approaches the target company’s shareholders, usually with a public offer. The offer is to pay an above market share price to shareholders who agree to “tender” their shares. For example, if target Company T’s shares are valued at $8/share, bidder Company B may offer tendering shareholders $10 per share (a 25% premium). The goal of a tender offer is to acquire a controlling stake of a target company, usually over fifty percent (50%). Therefore, many tender offers are conditioned on enough shareholders agreeing. In our example, bidder Company B would approach target Company T’s shareholders with a tender offer at 25% premium, valid only if a majority of shareholders agree to tender. If enough Company T shareholders agree, the sale purchase is completed and Company B owns a controlling stake of Company T.
In a proxy battle, the bidder Company B tries to convince target Company T’s shareholders to vote out board members or management opposed to the merger, replacing them with friendlier management. Proxy battles, also known as proxy contests or proxy fights, occur when shareholders clash with management and exercise voting rights to directly oppose preferred management or board policies, for example at a company’s annual general meeting. This can be a technique for initiating a hostile takeover by removing objecting management.
Some well-known hostile takeovers include AOL’s takeover of Time Warner in 2000 (at $350 billion, the largest merger in U.S. history) and Oracle’s takeover of PeopleSoft in 2004. The 2008 hostile takeover of Anheuser Busch by Euro-Brazilian company InBev illustrates both tender offer and management contest techniques to force a takeover. The takeover tactics began when InBev made a tender offer to buy Anheuser-Busch for $65 a share, valuing target Anheuser-Busch at $46 billion.
Anheuser-Busch escalated takeover defense maneuvers, resulting in both sides filing lawsuits. As part of its legal strategy, InBev sought a consent solicitation of Anheuser’s shareholders under Schedule 14A of the Securities Exchange Act, requesting them to oust the current board and replace it with InBev’s 13 nominees, threatening a proxy battle. Anheuser-Busch was vulnerable to this maneuver because its board had been declassified in 2006. In a classified, or staggered board, board members serve staggered terms so that not all of them are up for an election in a given term. In a declassified board, all board members are up for election on one-year terms. Moreover, the Busch family members did not own supervoting shares, preventing family control and ultimately resulting in intra-family conflicts concerning the negotiations. InBev and Anheuser Busch eventually reached agreement at $70/share. The merged entity Anheuser-Busch Inbev (BUD) merged again in 2016 with its rival SABMiller in a deal worth $104.3 billion.
Recently, JetBlue acquired Spirit Airlines in a hostile tender offer takeover begun after Spirit Airlines and Frontier Airlines announced merger talks. JetBlue made a tender offer at $30/share, valued at $3.2 billion dollars. When Spirit rejected the offer JetBlue directly appealed to shareholders to accept JetBlue’s offer over Frontier’s “inferior, high risk, and low value” bid. JetBlue also accused Frontier Airlines Chairman, the former Chairman of Spirit of swaying the Spirit Board and preventing the JetBlue merger. At the end of July, 2022, Spirit Airlines changed course accepting a higher JetBlue offer at a value of $3.8 billion. The deal is currently under Department of Justice review.
Hostile takeovers are not always legal. During the first half of the 20th century, Courts and government agencies generally disapproved so-called “horizontal mergers” (i.e. the purchase of a competitor). These decisions reflected concerns about monopolistic activity under the Sherman Antitrust Act of 1890, heightened under the Clayton Antitrust Act of 1914. During this time, much potential hostile takeover and acquisition activity was not legal under antitrust law.
The history of the modern tender offer begins with Louis Wolfson, described as a “corporate raider,” in part, after his 1951 takeover of Merritt-Chapman & Scott. Wolfson rose to national prominence with a failed hostile takeover attempt of Montgomery Ward and Co. (Wolfson also served a prison sentence relating to charges of selling unregistered securities and obstruction of justice). In addition to creating the modern tender offer, Wolfson laid the groundwork for the “leveraged buyout,” where a bidder finances its acquisition of the target through borrowed funds.
Today, the hostile takeover and horizontal merger are much more accepted practices in modern corporate law but these transactions may still require review by the Department of Justice, Federal Trade Commission and Courts to ensure compliance with antitrust law. Moreover, directors and management must bear in mind their legally enforceable fiduciary duties to shareholders in navigating these transactions. If they violate these duties in pursuing or accepting a hostile takeover shareholders may be able to successfully challenge the transaction in Court.
In parallel with Wolfson’s creation of the modern hostile tender offer, emerging scholarship in law and economics began to question whether antitrust law as then applied by Courts actually promoted competition. In a now seminal 1965 paper, scholar Henry Manne first made the case that a bidding market for corporate control would have positive impacts in promoting competition. He theorized that company bidding for control of competitors would improve target company management performance, increasing shareholder value (Manne, Henry Mergers and the Market for Corporate Control 73 J. Pol. Econ. 110 (1965)). Manne argued that Court skepticism towards horizontal mergers was not justified, re-examining the logic of Supreme Court decisions like United States v. E. I. Du Pont de Nemours and Co., 353 U.S. 586 (1957) and Swift and Co. v. FTC, 8 Fed. 2d 595, 599, rev’d on other grounds, 272 U.S. 554 (1925).
Manne’s publication led to a flood of theoretical and empirical research examining the issues raised in his paper. Some findings support Manne’s hypotheses that hostile takeovers discipline corporate management and create shareholder value by improving the operating performance of acquired companies. Others have questioned the strength of this effect, pointing to factors such as increased shareholder involvement and better board incentives as more relevant to shareholder value. Hostile takeovers often result in workforce disruption and other research focuses on mismatched corporate cultures as the primary reason for merger failure to deliver shareholder value.
While research findings are not unequivocal, Manne’s paper and the groundswell of law and economics research in antitrust law did create a sea change in legal approaches to antitrust enforcement over the twentieth century, including to hostile takeovers. Today, Courts, federal agencies and market observers see hostile takeovers as part of corporate mergers and acquisitions activity, not necessarily good or bad.
There are several well-known hostile takeover defenses, including:
When considering any takeover defenses, it is important to keep in mind that directors and management of a company owe duties to shareholders, including to maximize shareholder value. Target company directors and management are often removed in a hostile takeover and their personal interests may be to oppose the takeover. However, even where management roles are at risk, fiduciary duties to the shareholders may require accepting a tender offer under the “Revlon Rule,” named for the formative case of Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986). At other times, fiduciary duties to shareholders may require sophisticated takeover defense to protect shareholder interests. For inexperienced target management, bidders may hope to leverage the fears that a tender offer can generate to induce target management into a bad deal or to confuse management into making rash decisions that harm shareholders.
Both bidders and target companies should consult experienced attorneys and experts to evaluate options in a hostile takeover, to advance stakeholder interests and to protect shareholder value. Contact us for a consultation.