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What to do when facing a hostile takeover

On Behalf of | Apr 15, 2021 | Blog, Business & Commercial Law |

If you own or are involved in managing a small to midsized business in New Jersey, it may be a good idea to familiarize yourself with hostile takeovers and how to fight them. A hostile takeover is when one business gains control of a public company against its existing management’s consent. Typically, the buying company purchases a controlling stake of the targeted company’s stock, giving the buying company power to dictate corporate policy. If your company is facing a hostile takeover, it is a good idea to seek legal counsel to help you understand your avenues for defense.

Make a strategy

Hostile takeovers happen, but there are tactics that targeted companies can employ to prevent them. The poison pill defense and its two main variations, the “flip-in” and “flip-over,” are common, though controversial, defense tactics. A “flip-in” is when the targeted company issues preferred shares that are buyable only by current shareholders with the intent to dilute the buying company’s majority share purchase. A “flip-over” allows current shareholders to buy more shares at a discount, making the takeover transaction more expensive.

The targeted company can also break up its board of directors into different groups for the sole purpose of making it more difficult for the buying company to install its management team, which is known as a staggered defense. The white knight defense is another option and essentially means selling your company’s controlling stake to a friendlier firm before the hostile buyer can act.

Preemptive measures

Some companies decide to issue stocks with differential voting rights, diluting corporate voting rights and making a hostile takeover less appealing to a potential buyer. Employee stock ownership plans can be another deterrent because they help give your employees more ownership in your company and thus more voting rights, which could deter a buyer looking to consolidate voting power.

Be prepared

Federal laws like The Williams Act don’t always guarantee takeovers are both fair and orderly. It may be a good idea to employ an experienced legal team’s services to discern the best strategy for your company to contest or even deter a hostile takeover.