Syllabus C. Acquisitions And Mergers C3. Regulatory framework and processes

C3b. The conduct of a takeover 2 / 2

Syllabus C3b)

Identify the main regulatory issues which are likely to arise in the context of a given offer and

i) assess whether the offer is likely to be in the shareholders’ best interests
ii) advise the directors of a target entity on the most appropriate defence if a specific offer is to be treated as hostile.

The conduct of a takeover

The target company may resist the takeover

Will the bidding company's shareholders approve of a takeover?

When a company is planning a takeover bid for another company, its board of directors should think about how its own shareholders might react to the bid. 

A company does not have to ask its shareholders for their approval of every takeover.

  • When a large takeover is planned by a listed company involving the issue of a substantial number of new shares by the predator company (to pay for the takeover), Stock Exchange rules may require the company to obtain the formal approval of its shareholders to the takeover bid at a general meeting (probably an extraordinary general meeting, called specifically to approve the takeover bid).

  • If shareholders, and the stock market in general, think the takeover is not a good one the market value of the company's shares is likely to fall. 

    The company's directors have a responsibility to protect their shareholders' interests, and are accountable to them at the annual general meeting of the company.

A takeover bid might seem unattractive to shareholders of the bidding company because:

  • It might reduce the EPS of their company.

  • The target company is in a risky industry, or is in danger of going into liquidation.

  • It might reduce the net asset backing per share of the company, because the target company will probably be bought at a price which is well in excess of its net asset value.

Will a takeover bid be resisted by the target company?

Resistance comes from the target company's board of directors, who adopt defensive tactics, and ultimately the target company's shareholders, who can refuse to sell their shares to the bidding company.

Resistance can be overcome by offering a higher price.

  • In cases where an unquoted company is the target company, if resistance to a takeover cannot be overcome, the takeover will not take place, and negotiations would simply break down.

  • Where the target company is a quoted company, the situation is different. 

    The target company will have many shareholders, some of whom will want to accept the offer for their shares, and some of whom will not. 

    In addition, the target company's board of directors might resist a takeover even though their shareholders might want to accept the offer.

Because there are likely to be major differences of opinion about whether to accept a takeover bid or not, companies in most jurisdictions are subject to formal rules for the conduct of takeover bids.

Contesting an offer

The directors of a target company must act in the interests of their shareholders, employees and creditors. 

They may decide to contest an offer on several grounds:

  • The offer may be unacceptable because the terms are poor. 

    Rejection of the offer may lead to an improved bid.

  • The merger or takeover may have no obvious advantage.

  • Employees may be strongly opposed to the bid.

  • The founder members of the business may oppose the bid, and appeal to the loyalty of other shareholders.

When a company receives a takeover bid which the board of directors considers unwelcome, the directors must act quickly to fight off the bid.

Defensive tactics

The steps that might be taken to thwart a bid or make it seem less attractive include:

  • Revaluing assets or issuing a forecast of attractive future profits and dividends to persuade shareholders that to sell their shares would be unwise, that the offer price is too low, and that it would be better for them to retain their shares.

  • Lobbying to have the offer referred to the competition authorities

  • Launching an advertising campaign against the takeover bid

  • Finding a 'white knight', a company which will make a welcome takeover bid

  • Making a counter-bid for the predator company (this can only be done if the companies are of reasonably similar size)

  • Arranging a management buyout

  • Introducing a 'poison-pill' anti-takeover device

  • Introducing a 'shark repellent' - changing the company's constitution to require a large majority to approve the takeover