The FT has reported that hostile takeover bids are making up the greatest proportion of global deal activity in 14 years – but what are hostile bids, why are they currently on the rise and how do lawyers get involved? Herbert Smith Freehills associate Sophie Tobin explains…
What is a hostile takeover offer?
A typical “takeover offer” is an offer by a person (a ”Bidder”) to acquire the shares in a UK registered public company whose shares are traded on the London Stock Exchange or Alternative Investment Market.
The Bidder offers to buy the shares at a specific price and on the same terms from all shareholders, following a timetable and process that is regulated by the Panel on Takeovers and Mergers (the ”Panel”).
Usually, before launching a takeover offer, the Bidder approaches the board of directors of the company it wishes to acquire (the ”Target”) to request that the board recommends its offer to Target shareholders.
A “hostile takeover offer” is an offer which is not recommended by the board of directors of the Target. Generally, the main reason for not recommending an offer is that the board of directors believes that the offer price undervalues the business and does not represent good value to shareholders. However, the board of directors can take other factors into account when considering whether to recommend an offer to its shareholders.
Why is there an increase in hostile bids at the moment?
In the years following the global financial crisis, the economy has been slow to recover, and so companies have tried to avoid large and risky transactions. Hostile takeovers are relatively high-risk in terms of potential for the transaction to fail, resulting in negative publicity relating to the Bidder’s failed offer. The Bidder’s failed offer may also result in its board of directors being exposed to shareholder criticism, and the Bidder itself may become the subject of a takeover.
As companies become more optimistic about the economic climate, they are more likely to consider larger acquisitions because they are more confident about their future prospects and may look to expand their business. One of the quickest ways to expand a business is to acquire another existing business.
Many companies also have cash on their balance sheets as a result of the extended period of slower economic activity, and debt is also relatively cheap, therefore many companies have the ability to fund large acquisitions.
How are the lawyers involved?
Lawyers will advise either the Bidder or the Target.
When advising the Bidder, lawyers will be involved in drafting press announcements and offer documentation, and also in discussing tactics with the Bidder in relation to timing, any acquisitions of Target shares (to build up a stake in the Target), and any discussions with the Target board.
When advising the Target, lawyers will be involved in discussing defence tactics available to the Target board, advising the board in light of the Bidder’s actions and during negotiations with the Bidder. Lawyers will also draft press announcements and defence documentation to be sent out to shareholders.
In both cases, lawyers will also advise the directors of their duties in a takeover situation, in particular the duty to promote the success of the company for the benefit of its members as a whole, having regard (among other things) to the likely consequences of any decision in the long term, the interests of employees, and the company’s reputation for high standards of business conduct.
All advice needs to be given in accordance with the provisions of the City Code on Takeovers and Mergers (the ”Code”), which sets out the rules applicable to takeover situations. The Panel oversees Code compliance and lawyers, together with financial advisers, will liaise with the Panel in relation to the Code’s application to a particular transaction.
What else should I know?
Secrecy is paramount when advising clients in respect of takeovers. There are consequences in the Code where secrecy is breached, including requiring companies to make press announcements, when they may not be ready to go public with their intentions.
As listed companies, Targets are generally large companies with many shareholders, and so the takeover is likely to generate a lot of interest in the press, and may also result in political comment, or the involvement of trade unions, depending on the nature of the Target’s business.
Sophie Tobin is a senior associate at Herbert Smith Freehills.