An M&A Lawyer’s Advice On Surviving Hostile Takeovers

An M&A Lawyer’s Advice On Surviving Hostile Takeovers

Few things stir up the business world quite like a hostile takeover, and 2014 was a good year for the peanut gallery. As confidence ballooned in light of strengthening economies, hostile takeovers rose to a 14-year high last June with 25 unsolicited attempts worth over US$290 billion being made in that year to date period according to Dealogic. All in, hostile bids accounted for 19% of all merger and acquisition activity during those quarters. Businesses need to be aware of this if they’re not already.

For insights on how to handle and prepare your business for hostile takeovers, The DealRoom consulted Thomas Yeo, counsel at international business law firm Torys LLP, who frequently advises on mergers and acquisition. Here’s what he’s learned over the years.

Understand the reality

“If a bid is at a premium – which presumably a hostile bid is going to be – it’s typically hard for the board to convince shareholders not to accept the bid,” he says. “So once the company is put in play, the chances of a change of control transaction are very, very high.”

Prepare the poison pill

Enter the shareholder rights plan – more colloquially known as a poison pill. Devised in the 1980s as a way to keep hostile takeover bidders from negotiation directly with shareholders, a poison pill gives shareholders the right to purchase more shares at a discount if one shareholder snaps up more than a certain percentage.

“So a rights plan – if you’ve got one in place approved by shareholders – would prevent someone from going above 20 per cent without making an offer to all shareholders,” says Yeo, adding that it’s a bit of a deterrent given that the bidder would have to negotiate with the board in order to revoke the plan. “That’s where a company can be proactive in terms of preventing that creeping takeover.”

Typically, a poison pill is reviewed and approved by shareholders every few years.

A board’s guide to hostility

In addition to the shareholder rights plan, Yeo recommends companies create a written manual or detailed processes for responding to a hostile takeover.

“That will go over all sorts of things, from basic stuff like contact information for the lawyers and financial advisors, to thinking about and outlining who would form a special committee of directors,” says Yeo. “Go through and think about what potential transactions you can do in the face of a hostile bid.”

Know your enemy

Yeo also recommends going on the offensive to highlight some of the potential hostile shareholders or would-be bidders. He says to ask yourself and your financial advisers, “Who are the possible hostile bidders lurking out there?”

“You should also be monitoring your stock trading to see who might be accumulating shares in the market,” he adds.

Also, communication with shareholders is important.

“You want to know that you’ve got happy shareholders out there,” he says. “If they’re not, then you’re going to be more vulnerable to a hostile bid.”

Find your white knight before he rides in

“We think of white knights as coming out of the woodwork but typically there’s a reason they’re interested in the company,” he says referring to friendly investors who step in to usurp hostile bidders and offer a higher price for the company.

“A good financial adviser will be able to think about who the potential acquirers are who would be interested in this business,” adds Yeo.

Even if they aren’t top of mind, planning out how that conversation will go when you’re looking for your white knight can be a good defensive strategy.

“There’s lots of planning that can be done in advance as to who those first phone calls might go to if you’re trying to round up interest,” he says.

Prep your data room

Hostile bids have a nasty habit of coming out of left field. Don’t be caught off-guard.

“When you’re faced with a hostile bid, you’re going to be out there trying to solicit other better offers and you’re going to have to be ready to go with a diligence process and have data and information available for other bidders to look at,” he adds. “Having a data room ready, or a plan to get a data room together quickly, in the face of a hostile bid is going to be important.”

Still looking for more? Here is a quick whiteboard video by Marketplace on the definition of a hostile takeover and an example of ways it can play out.