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Preserving Your Business: How to Prevent a Hostile Corporate Takeover

Does your company have an attractive cash flow? Is your income statement conservative? Do you have high profits?

Surprise! You may be an excellent target for a hostile takeover.

While most corporate takeovers in the US are agreeable, hostile takeovers occur when one company targets the takeover of another without the consent of its board of directors.

One company may be determined to gain control of another because they see the potential for significant revenue enhancement. They may also be looking to reduce their operating costs or improve their tax benefits.

How can you safeguard against such a takeover? Let’s take a look.

Methods for Corporate Takeover

Most hostile takeovers occur when an acquiring company offers to purchase shareholders’ shares in the target company at a price higher than market value in order to become a majority stakeholder.

Acquiring companies may also seek a takeover through proxy vote. In these cases, individuals try to persuade existing shareholders to vote out the management of the current company so it will be easier to take over. The goal here is to install new board members who will be more open to a change in ownership.

Poison Pill

One of the most well-known methods for preventing a corporate takeover is the poison pill. Through this method, management can make stocks less attractive to the acquiring company by offering only existing shareholders the opportunity to purchase additional stocks at a discount price.

The poison pill works to dilute any interest a new shareholder would have in the company.

Legal Action

The target company can engage the acquiring company in legal actions, such as alleging securities violations. You can speak to a corporate attorney, who may highlight other ways in which a client may prevent or dissuade a hostile takeover.

Crown Jewels

Through this method, the company will sell off the most valuable parts of its business, thus making it less attractive to the acquiring company.

SuperMajority Amendment

You can amend your company’s charter to require a supermajority of shareholders to approve of a merger. This means that up to 90% of shareholders will have to vote “yes” before the acquiring company can get control.

Golden Parachute

This method guarantees an excessive amount of benefits to important members of management if they are removed from the company. This will decrease the amount of assets the acquiring company will gain if they take over, and reduce the amount they are willing to pay for shares.

Greenmail

In greenmail, the target company offers to buy back an investor’s shares at a premium. These are seen as payments to ensure against an unfriendly takeover.

White Knight

In order to avoid a takeover by an unfriendly company, the target company may seek the help of a kinder firm, who will intercede and buy up any controlling interest before the hostile bidder can.

The white knight firm agrees to allow the current management to remain in control. It may pay a premium above the aquirerer’s offer, or offer to restructure the target company in a way that is supported by the current management after the takeover is complete.

Get Ready

A great legal team, a supermajority amendment, or a golden parachute are all ways that you can prevent a hostile corporate takeover before it starts.

For more information, contact us today. 

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