An Investor Overview Of Hostile Takeovers In The United States

A hostile takeover is a transaction in which an acquirer gains control of the target company by going directly to its shareholders without the consent of the target's board of directors.1 It usually starts with a "tender offer" in which the acquirer offers to purchase a sufficient amount of the target company's stock from its shareholders to obtain control.2 After acquiring a majority of the target's shares, the acquirer can vote for directors who are favorable towards the acquirer's offer.3 The new board will then cause the target company to do a cash-out merger to eliminate any remaining shareholders who did not tender their shares in response to the tender offer.4

In general, the following two regulatory schemes govern a hostile takeover process in the U.S.: (a) federal law and (b) the law of the state of incorporation for the target company. This article focuses on the timing and notice requirements under federal law and states' anti-takeover defenses.

federal Regulation The Williams Act (the Act) provides the federal regulatory framework for tender offers and proxy contests.5 The Act is primarily concerned with disclosure and timing issues.

1. Tender Offers: Section 14d and Regulation 14D. Section 14d of the Securities Exchange Act of 1934 (the Exchange Act) and Regulation 14D require a bidder to make specific disclosures to security holders and mandate certain procedural protections.

(1) Tender Offer. While the term "tender offer" has not been clearly defined in any statutory provision or rule, the courts generally have applied the following eightfactor test in determining whether a particular acquisition program constitutes a tender offer.6 However, it is not required to have all eight factors:7

(i) active and widespread solicitation of security holders;

(ii) solicitation for a substantial percentage of the issuer's stock

(iii) offer is at a premium over the current market price;

(iv) terms are fixed as opposed to flexible;

(v) offer is conditioned upon the tender of a fixed number of securities;

(vi) offer is open for a limited period of time;

(vii) offer pressures security holders to respond; and

(viii) public announcements of a purchasing program concerning the target company precede or accompany rapid accumulation of a large amount of target company's securities.

(2) Applicability. Section 14d and Regulation 14D apply to all tender offers for Section 12 registered equity securities made by parties other than the target (or...