Even hostile acquisition is welcome when it is meant to replace inefficient or weak management in the target company for the benefit of shareholders or investors.
Hostile takeover of a poorly performing target company in mature industries is common particularly when its management is averse to the proposition of quitting or selling off the company voluntarily.
Where the incumbent management is unable to adapt in tune with changing times, the concerned company becomes vulnerable to corporate hostile takeovers, which is a means of ushering in desired changes there.
Corporate acquisitions through hostile take over bid of the target company either through a proxy contest or tender offer for purchase of its shares.
In a proxy battle the acquirer collects proxies from the shareholders of the target company. A proxy is an authority from a shareholder to vote for and on his behalf in company meetings. So a proxy holder can vote on behalf of the original shareholder. The acquirer tries to gather enough proxies in order to vote out and replace the incumbent management of the company.
In contrast, a tender offer is a bid with the same purpose to buy out voting stocks of the target company usually at a premium above the current market price from its shareholders directly or through purchase in the secondary market of the stock exchanges.
Management of target companies tries to checkmate such hostile take over bids by the predator in order to protect their self interests or in an attempt to extract still higher price.
Often legal anti take over mechanisms are put in place in the charter of companies to repel take over bids that is likely to result in failed hostile takeovers.
With the provision for staggered board of directors, only one third of the total strength of the board is appointed and replaced every year. So the acquirer cannot immediately wrest control of the board even despite owning majority shares of the target company.
Moreover, super majority provisions in the charter may require the approval of a merger by a higher percentage than 50%, which may even be two thirds or 80% majority. Such clauses tend to make acquisition a difficult proposition.
The target company issues rights to existing shareholders that can be used to purchase its additional shares at a substantially discounted price, usually half the market value; in the event a bidder manages to acquire a certain percentage of the voting shares (generally 15-25%). This dilutes the percentage shareholding of the bidder and makes hostile corporate takeovers difficult to achieve for him.
Under the dual class recapitalization scheme, shares with disproportionate or higher voting rights are given to the present management of a company in order to enable them retain majority control even without holding majority shares. This arrangement stands in the way of hostile company takeovers.
