Hostile takeover of companies

Mar, 03 2022

Contents:

Entrepreneurs sometimes conclude such a type of transaction as a takeover. At the same time, one party to the contract acquires more than 30% of the authorized capital or a controlling stake, and in the future joins the absorbed business to its own enterprise. It is good if this happens by mutual consent of the parties. But sometimes you have to deal with an unfriendly takeover of a company when the owners are actually forced into a deal.

What is a hostile takeover of a company?

This term refers to a situation when an outside person or group seeks to establish control over a business without the consent of its real owners and managers. Do not confuse an unfriendly takeover of a company with raiding. The purpose of the raider takeover and takeover is the same: to take control of the business. But the raiders use obviously illegal methods, whereas in the second case we are talking about quite legitimate actions, for example, buying shares on the open market or gradually attracting members of the board of directors to their side.

However, even during the takeover, the “buyer” may use some illegal methods, but they always remain hidden. For example, your competitor may pay a bribe to an official, etc.

What is the goal of an entrepreneur who consciously goes for a hostile takeover of a company? The motives may be different. One of the most common is the desire to eliminate a strong competitor or an enterprise that supports the work of the aggressor company. Also, the goal may be to expand your own business – in such a situation, the sphere of activity of the aggressor and the absorbed business may not even overlap. However, the aggressor company plans to develop a new direction for itself in the future or to further implement a successful business for profit.

Finally, internal conflicts may also be the reason for the takeover. Competitors are not always the aggressors, sometimes they are people inside the business. For example, one of the top management representatives or a shareholder may purchase shares of his own company through front persons to gain full control over it.

Signs of preparation of a hostile takeover of the company

To absorb a business, the aggressor must obtain complete information about its owners, financial situation and other aspects. As a rule, such information begins to be collected not from open sources, but among the employees of the enterprise and its shareholders.

The main methods of hostile takeover of the company

  • Purchase of shares. Most often, the aggressor company begins to buy shares from owners who do not receive significant dividends from them. It offers favorable prices, and many shareholders agree, because for them the deal is profitable. However, the aggressor may act differently: he may bribe the shareholders, pressure the board of directors. The purpose of such manipulations is always the same: the replacement of the company’s management. Loyal managers then conclude the deal needed by the aggressor or withdraw assets.
  • Bribery of managers. Buying shares is a legal action, which cannot be said about bribing the CEO or other representatives of top management. If they are bribed, it is to organize a deliberate bankruptcy, which is illegal. Nevertheless, the aggressor may take a risk, since in this case it is often necessary to bribe only one person.
  • Hindering the work of shareholders. It is not always possible to buy shares, and then aggressors can initiate inspections by regulatory authorities, start lawsuits and interfere with the work of the shareholders’ meeting by other methods. The methods may be quite legitimate in themselves, sometimes they even involve the active involvement of journalists, but this does not change the essence of the matter: the top management is deprived of the opportunity to perform their duties normally.
  • Bribery of officials. Another illegal method of unfriendly takeover of a company, which consists in influencing officials to issue documents with deliberately false information. This allows you to sue the company, achieve a change of management, and sell assets.
  • Bankruptcy. The aggressor buys up the company’s debts to then make demands on it. As a rule, competitors deliberately wait for the moment when the business will not be able to pay off all the debts and will be forced to declare bankruptcy. After that, you can purchase the company for little money.
  • Purchase of a controlling stake. Aggressors often act through minority shareholders, that is, holders of shares who do not receive significant benefits from them. However, there is another way to gain control of the business: to acquire a controlling stake in legal entities.

Hostile takeover of companies: when protection is needed

Business owners should contact lawyers if one of the major shareholders seeks to sell his share – this situation is always fraught with risks. Requests for primary documentation from one of the minority shareholders should be even more alert – they may signal that the aggressor is collecting information about the company.

Unfriendly takeover of a company: preventive protection

The state cannot act as a defense against a hostile takeover of a company because aggressors often act by legal methods or carefully disguise their illegal actions. The only effective way to prevent such actions is corporate protection with the involvement of professionals.

It is important to ensure business security even before a threat appears. We recommend releasing no more than 40% of the shares to the free market and distributing the rest within the company. It is equally important to cooperate with friendly creditors and regularly monitor the composition of the company so that its members do not resell shares to third parties. To prevent the aggressor company from gaining control of the business through shares, you should not sell more than 10% to one person.

However, it is best to develop an individual plan of protective measures with the help of qualified lawyers. VALEN specialists will help you protect yourself from an unfriendly takeover of the company and effectively develop your business.

Methods of preventing a hostile takeover of a company

  • Verification of the constituent documentation. Lawyers will check how confidential information is protected at the level of the main documents.
  • Audit of security systems. All digital systems that businesses use is also checked to prevent leakage of important data.
  • Debt control. It is also better to entrust it to qualified lawyers who will be able to indicate in time if there is a risk that the company can be used for an unfriendly takeover of the company.
  • Stock audit. It involves analyzing how shares are distributed within the enterprise, what percentage of them are released to the free market, whether too many assets are concentrated in one hand.
  • Development of technical security measures. The larger the company, the higher the risk of encountering industrial espionage, and only comprehensive measures can protect against it.

Strategies to protect against an unfriendly takeover of the company

As we have already noted above, it is better to develop unique measures for each case to protect against a hostile takeover of the company. However, there are also general strategies to avoid problems. For example, even when drafting statutory documents, you can try to reduce risks.

Lawyers recommend fixing a rule in the company’s charter so that all transactions with large assets like shares take place with the participation of a certain notary or lawyer from a clearly designated district. The law also allows you to prescribe in the charter preferential rights to purchase shares or shares, so that they cannot be acquired by third parties without your knowledge.

Be sure to specify the procedure for extraordinary meetings of shareholders, as well as ways to change the constituent documents, the powers of executive bodies. If these nuances are not worked out in the charter, in the future the aggressor company will be able to use the shortcomings for a hostile takeover of the company.

What if, despite all the precautions, you notice an increased interest in your shares? You can resort to retaliatory buying of the company’s shares. This is effective but requires large financial investments and for this reason is not always possible. Therefore, it is better to provide in advance in the constituent documents the opportunity to increase the authorized capital at the expense of additional shares. Then, even if the aggressor buys a significant part of the shares on the free market, you will be able to weaken his influence.

In critical situations, they resort to asset restructuring. It does not allow you to maintain control over the company as such, but it can protect your finances and property through the withdrawal of assets to other companies. Track attempts to make changes to the constituent documents – this is the most eloquent signal that competitors are interested in business.

Author of the article
Hostile takeover of companies
Valentina Khlavich
Managing Partner
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