Hostile Bids and Defensive Tactics

• Author: Christopher C. Nicholls
• Profession: Faculty of Law, University of Western Ontario
• Pages: 195-282

195

Cha pter 7

HOSTILE BIDS AND

DEFENSIVE TACTICS

a. Int roduCtIon

When one corporation decides to combine with another, the trans -

action is usually undert aken following negotiation. Members of the

management of each of the two corporate parties hammer out a deal,

working with the co-operation of their respective boards of directors

and anticipating both boards’ enthusiastic endorsement of the f‌inal

agreement. Such deals are often descr ibed as “friendly” tr ansactions,

not because the mood at the negotiating t able is invariably chummy or

non-confrontational, but to distinguish this sort of mutually voluntar y

deal from “hostile” or “unsolicited” acquisitions in which the m anagers

of the company to be acquired are actively opposed to the t ransaction.

Frequently, the impetus for friendly transactions is not the acquisi-

tive desires of the “buying” corporation, but rather a tottering “selling”

corporation’s struggle for self-preservation. (Schumpeter’s “creative

destruction”1 has more intuitive appea l for f‌irms offering creativ ity

than for f‌irms undergoing dest ruction.) Corporations facing competi-

tive pressures will occasionally announce publicly that t hey are “pur-

suing f‌inancial or strategic alternatives.” This genteel code phrase

sometimes signals a state of increasing desperation to sell major assets

to raise much-needed cash, and sometimes—more dramatically—is a

1 Joseph Alois Schump eter, Capitalism, Socialism and Democracy (New York:

Ha rper, 1942).

MERGERS AND ACQUISITIONS196

transparent appeal to prospective buyers to bid for the very company it-

self. Indeed, it is sometimes said t hat by the time a corporation publicly

announces its “pursuit of altern atives,” it has already exhausted efforts

to f‌ind a suitable strategic part ner or buyer behind the scenes. In these

latter cases it is a s if the company has hung a virtual “for sale” sign on

its doors. It is soliciting offers. And the (hoped for) parade of potential

buyers will be a welcome sight for the hapless target company’s direc-

tors and off‌icers.

There are many advantages to pursuing a de al in a “friendly” way.

Not the least of these advantages is that a friendly tran saction may be

structured in a mutually favourable way. The players enjoy the luxury

of selecting strategically from the menu of M & A structure options

referred to elsewhere in thi s book (amalgamations, plans of arra nge-

ment, reorganizations, takeover bids) to take ful l and careful account

of accounting, tax, securit ies law, and other considerations.

But not all transactions are f riendly or “solicited” by the managers

of target companies. Sometimes one corporation wi ll decide it wishes to

acquire control of another very much against the wishes of that target

corporation’s board of directors and management. Such a tran saction

is referred to colloquially as a “hostile” takeover (or sometimes —par-

ticularly by sanctimonious bidders themselves and their well-heeled

(and well-paid) advisors—as an “unsolicited” bid). Hostile t akeovers

can come about in a number of ways. Often, a bidder will initially ap-

proach a prospective target hoping to pursue a friendly deal; but when

these advances are rebuffed by t he intended target, the bidder may

switch tactics and “go hostile” instead. Or, again, a hostile takeover

may be launched by a bidder immediately after the intended target has

announced its own intention to complete a frie ndly deal with a differ-

ent party. The fact that a company has chosen to undertake a friendly

acquisition is typically understood in the business community to have

placed that company on the market, or “in play.”2 Having essentially

declared itself to be up for auction, a company in such a position wi ll

not be surprised to see rival bids emerge, though these interloping bids

may by no means be welcome. Indeed, part ies to friendly deals fre-

quently go to some lengths to guard thei r transaction jealously from

such outside interference. More will be said about such “deal protec-

tion measures” later in this chapter.

2 This is not to sugge st that every proposed bus iness combination invar iably

signals t hat either or both prospecti ve parties to that tra nsaction are “in play.”

The phrase in play an d its ambiguous meaning i n the takeover law lexicon are

discus sed in somewhat greater deta il later in this chapter.

Hostile Bids a nd Defensive Tactics 197

The remainder of this chapter w ill focus on hostile bids although it

should be said that the distinction between hostile and friendly bids in

the real world can be a little blurred. For example, many transactions

that are concluded and reported in the press a s friendly deals actually

start as hostile transactions; only when it becomes clear to the t arget

that no better alternative c an be found do negotiations b egin, leading to

a transaction ulti mately endorsed by the target board of directors. And

some hostile bids begin as f riendly transactions. Alas, negotiations t hat

begin well may encounter some stumbling block and break down, but

not before one of the parties has concluded that an acqui sition would

make such good business sen se that the deal is worth pursuing even

without the blessing or co-operation of the t arget board.

Empirical resea rch on hostile bids has suggested that they have

always represented a minority of t akeover deals. Summari zing empir-

ical studies on the matter, for example, Becht, Bolton, and Röell report:

“Even at their pre-1990 peak hostile bids never represented more than

30% of all USA deals. . . . Between 1990 and 1998 only 4% of all USA

deals were hostile at some stage and hostile bidders acquired 2.6% of

the targets.”3 Weston and Weaver, studying data for the period 1985 to

2000, conclude that “the median level of hostile M & A activity to the

total worldwide value of transactions i s 3.3 percent.”4 Recent empir ical

work by Rossi and Volpin indicates that hostile bids are more frequent

in countries that offer sha reholders better protection. They suggest that

this observation might be explained by the fact th at “good protection

for minority shareholders makes control more contestable by reducing

the private benef‌its of control.”5

In 2011, Allen & Over y reported an apparently dramatic “776% in-

crease in value of public hostile acquisitions.”6 However, on closer scru-

tiny this apparent ly remarkable jump in hostile deal activit y becomes

rather less eye popping. The reported 776% increase is based on a com-

parison of the total va lue of all hostile acquisitions in the f‌irst half of 2011

with the value of hostile acquisit ions for the same p eriod in 2010. In each

3 Marco Becht, Pat rick Bolton & Ailsa Röell, “Cor porate Governance and Cont rol”

in George M. Consta ntinides et al., ed s., Handbook of the Economics of Finan ce, vol.

1A (Amsterdam : Elsevier, 2003) 1 at 51 [notes and references omitted].

4 J. Fred Weston & Samuel C. Weaver, Mergers & Acquisit ions (New York:

McGraw-Hill, 2001) at 114.

5 Stefano Rossi & Paolo Volpin, “Cross -Country Determi nants of Mergers and Ac-

quisitions,” ECGI Working Paper Ser ies in Finance, Working Paper No. 25/20 03

(September 2003) at 3, online: http://ss rn.com/abstract_ id=395020.

6 Al len & Overy, The Allen & Overy M & A Index H1 2011, online: www.allenov-

er y.co m.