Hostile Bids and Defensive Tactics

• Author: Christopher Nicholls
• Pages: 223-323

223

CHA PTER 7

HOSTILE BIDS AND

DEFENSIVE TACTICS

A. INTRODUCTION

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 par ties hammer out a deal,

working with the co-operat ion of their respective boards of directors

and anticipating both boards’ enthusiastic endorsement of the final

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

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

non-confrontational, but to disting uish 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 transact ions is not the acquisi-

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

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

destruction”1 has more intuitive appea l for firms offering creativity than

for firms undergoing destruction.) Corporations facing competitive pres-

sures will occ asionally announce publicly that they are “pursuing finan-

cial or strategic altern atives.” This genteel code phrase someti mes signals

a state of increasing desp eration to sell major assets to raise much-needed

cash and sometimes — more dram atically — is a transparent appeal to

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

Ha rper, 1942).

MERGERS AND ACQUISITIONS224

prospective buyers to bid for the very company itself. Indeed, it is some-

times said th at by the ti me a corporation publicly announces it s “pursuit

of alternatives,” it has already exh austed efforts to find a suitable stra-

tegic partner or buyer behind t he scenes. In these latter cas es, it is as if

the company has hung a vir tual “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 directors and officers.

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

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

structured in a mutually favourable form. The players enjoy the lux-

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

referred to elsewhere in this book (amalgamations, plans of arr ange-

ment, reorganizations, take-over bids) to take full and careful account

of accounting, tax, securities law, and other considerations.

But not all transactions are friendly or “solicited” by the man-

agers of target companies. Sometimes one corporation will 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

transaction is referred to colloquially as a “hostile” takeover (or some-

times — particularly by sancti monious bidders themselves and their

well-heeled (and well-paid) advisors — as an “unsolicited” bid). Hos-

tile takeovers can come about in a number of ways. Often, a bidder

will initi ally approach 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 ow n intention to complete a frie ndly deal with

a different party. The fact that a company has chosen to undertake a

friendly acquisition is t ypically understood in the business community

to have placed that company on the market, or “in play.”2 Having essen-

tially declared it self to be up for auction, a company in such a position

will not be surpr ised to see rival bids emerge, though thes e interloping

bids may by no means be welcome. Indeed, parties to friendly deals

frequently go to some lengths to guard their transaction jealously from

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

tion measures” later in th is chapter.

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

should be said that the distinction between hostile and friendly bids i n

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

signals t hat either or both prospective p arties to that tra nsaction are “in play.”

The phrase in play and it s ambiguous meaning in t he takeover law lexicon are

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

Hostile Bids an d Defensive Tactics 225

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

that are concluded and reported in the press as friendly deals actu ally

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, negotiat ions th at

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 target 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 deal s. . . . 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 per iod 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 Empirical work

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

countries that offer shareholders better protection. They suggest t hat

this obser vation might be explained by the fact that “good protection for

minority shareholders make s control more contestable by reducing the

private benefits of control.”5

Although hostile bid activity worldwide did seem robust some

year s ago,6 a recent report on M & A activity by Dealogic indicated that

hostile bids in the first nine months of 2019 had fallen to their lowest

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

in George M Consta ntinides et al, eds, Handb ook of the Economics of Finance, 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 Determin ants of Mergers and

Acquisition s,” ECGI Working Paper Serie s in Finance, Working Paper No

25/2003 (September 20 03) at 3, online: ht tp://ssrn .com/abst ract_id =395020.

6 For example, in 2011, Allen & Overy reported a n apparently dramatic “776%

increase i n value of public hostile acquisition s”: Allen & Ove ry, The Allen &

Overy M & A Index H1 2011, online: www.allenovery.com. Of course, when abso-

lute numbers are sm all to begin with, a rel atively modest increase i n number

can represent a l arge, headline-grabbin g percentage increase.