A hostile takeover is the acquisition of a corporation by another, usually larger corporation. For simplicity sake, we’ll refer to the corporation initiating the hostile takeover as the acquiring corporation and the corporation which is subject to the hostile takeover as the target corporation. Hostile takeovers usually take place when the acquiring corporation is interested in purchasing the target corporation, but friendly negotiations to purchase have not succeeded. As the name suggests, hostile takeovers are usually against the wishes of the target corporation’s board of directors and other involved members (i.e. shareholders, officers).
A method that is usually implemented by the acquiring corporation to carry out a hostile takeover is to go “over the heads” of the board of directors and make an offer directly to the shareholders of the target corporation. Such offers are usually above market value and enticing for the targeted shareholders. At this point, depending on corporate rules in place, the targeted shareholders may sell their shares or put pressure on their board of directors to sell to the acquiring corporation. In the alternative, the acquiring corporation may also contact the majority shareholders of the target corporation and convince them to vote out the existing board of directors and replace with a takeover-friendly board. Another option for the acquiring corporation is to use the creeping tender offer method, whereby the acquiring corporation gradually accumulates shares of the target corporation through the open market.
This is not to say that target corporations are defenceless. Certain tactics can be employed by the target corporation to avoid a hostile takeover. An example of this is the Pac-man defence, wherein the target corporation switches the roles and purchases shares of the acquiring corporation. This is an effort to fend off the acquiring corporation. More particularly, to handicap the acquiring corporation by purchasing its shares and changing the voting balance within the corporation. There are several other defences that can be implemented by a target corporation, however these are outside of the scope of this blog. This blog is only intended to be an introductory and conceptual explanation of hostile takeovers.
A famous example of a hostile takeover, although not based in Canada, is Kraft Foods’ acquisition of Cadbury in 2009. The takeover was heavily opposed Cadbury’s executive team and Cadbury put in place a defence committee to prevent the hostile takeover. In addition, the Government of the United Kingdom stepped in to defend the organization and prevent a hostile takeover. Such efforts were not fruitful and Kraft Foods was able to carry out the hostile takeover of Cadbury.
Please be advised that nothing in this article constitutes legal advice. Please speak to a lawyer regarding hostile takeovers to understand the laws that surround this concept. If you need any assistance with corporate law, feel free to contact our lawyers at info@falconlawyers.ca.
Deep Toor
Legal Assistant
Falcon Law PC
