Hostile takeover

A hostile takeover is an acquisition attempted against the wishes of the target's board of directors. Rather than negotiating with the board, the bidder appeals directly to shareholders or seeks to replace the directors who are blocking the deal.

Tactics

• Tender offer — a public offer to buy shares directly from shareholders at a premium, bypassing the board.
• Proxy fight (proxy contest) — soliciting shareholders' proxy votes to replace the board with directors who will approve the deal.
• Toehold / creeping acquisition — quietly accumulating shares in the open market (subject to disclosure thresholds such as the U.S. 5% Schedule 13D rule) to build a stake before bidding.
• Bear hug — a public letter proposing a generous price, designed to pressure the board to negotiate by putting the offer in front of shareholders.

Defenses

Targets deploy a range of defenses, set up in advance or in response:

• Poison pill (shareholder rights plan) — dilutes a bidder that crosses an ownership threshold.
• Staggered (classified) board — directors elected in rotating classes, so a bidder cannot replace the whole board in one vote.
• White knight — a friendlier alternative acquirer invited to make a competing bid.
• Golden parachutes — large executive payouts on a change of control.
• Recapitalisation, asset sales ("crown-jewel defense"), or buying a business to create antitrust problems for the bidder.

Fiduciary duties

In the United States, a board's use of defenses is constrained by fiduciary duties and Delaware case law. Courts apply enhanced scrutiny (the Unocal and Revlon standards): defenses must be reasonable relative to the threat, and once a sale or break-up becomes inevitable, the board's duty shifts toward maximising value for shareholders.