Legal Implications of Takeovers: Hostile vs. Friendly

Corporate takeovers are always a very common tool for companies to expand their market share, acquire resources, or set up a competitive advantage. Takeovers can be friendly or hostile depending on the approach and the answer of the targeted company. Companies often grow by taking over their competitors, acquiring a hot startup, or merging with the competition. Public companies need the approval of their shareholders and board of directors to get a deal done. This article considers the definition, legality, and the stakeholders affected by hostile and friendly takeovers in the Indian business environment.

What is Hostile Takeover?

A hostile takeover is one in which an acquiring corporation attempts to take over another corporation called the target corporation without the consent of the board of directors. In hostile takeover, the acquirer appeals directly to the shareholders of the target company or gains controlling interest in other means usually against the wish of the board of directors in the target company.

Common Methods of Hostile Takeovers

1. Tender Offer: In this case, the acquiring company makes an offer in the public domain to the shareholders directly to sell their shares at a premium price to induce them to sell their shares, despite the objection of the management.
2. Proxy Contest: The acquirer convinces shareholders that the existing board members must be voted down for, and a new set of board members in its favor, be appointed.
3. Shares acquisition on an open market: In this case, the acquirer buys many more shares on the open market to have a majority interest, a takeover that the target’s management may not easily resist.

What is a Friendly Takeover?

A friendly takeover, on the other hand, is an agreed acquisition in which the management and board of directors of the target company are in support of the transaction. Both acquirer and target companies work in unison to seal the takeover hitch-free. If you are a working professional, law courses will help you to understand this in more detail. The negotiations will be based on terms that will benefit both sides. Such takeovers are less messy and less disruptive; therefore, post-acquisition integration will be smoother.

Typical Process of a Friendly Takeover

1. Negotiation and Agreement: In this stage, both the acquirer and target agree and negotiate on the terms of the acquisition. Probably, the amount or purchase price, deal structure, and transition plan are all negotiated here. Of course, the parties would have to reach a mutually good agreement.
2. Due Diligence: Through due diligence, an acquirer gets elaborate and critical information regarding the target company on aspects such as its financial health, assets, liabilities, and all aspects concerning any compliance. The stage finally clears the ground for the risk and the expected payoffs involving the two entities.
3. Board and Shareholder Approval: After an agreement is reached, the board of directors of the acquired company takes the offer to its shareholders for approval. In most cases, friendly takeovers gain board and shareholder support, making it less difficult a process.

Legal Implications of Takeovers

Legal considerations of takeovers differ significantly between hostile and friendly approaches. Hostile takeovers are complex in terms of legal requirements because, most of the time, they are disputed and require litigation, regulatory intervention, and shareholder disputes. As per corporate law courses, Friendly takeovers are easy because both parties agree, and most likely have fewer legal issues. The following are the main legal implications of hostile and friendly takeovers.

Shareholder Rights & Protections

• In hostile takeovers, shareholders play a crucial role, as they decide whether to accept the acquirer’s offer or support the existing management. Legal issues arise regarding shareholders’ rights to fair information, transparency, and the right to vote.
• Key Implications: Shareholders may file lawsuits against the management if they feel their rights are being infringed upon. Regulations ensure that minority shareholders receive fair treatment and are not forced to sell at unfair prices.
• Solution: Transparent communication with shareholders can help protect their interests and avoid legal disputes.

Regulatory Compliance

Hostile as well as friendly takeovers must follow the regulatory regime, like SEBI and CCI. In hostile takeovers, however, there are normally more hurdles because the deal is contested.

• key regulatory requirements: Fair treatment to the shareholders and the requirement of disclosure for acquisitions of public companies by SEBI and subject to CCI review so that there is no anti-competition practice and the market remains fair.
• Solution: Engage legal experts for negotiations on regulatory requirements and achieve full compliance with SEBI and CCI guidelines by which all sort of legal issues could be averted.

Board Fiduciary Duty

As seen in both hostile and friendly takeovers, the target company’s board has a fiduciary duty to consider what is in the best interests of shareholders. However, this position becomes complicated in hostile takeovers in that the interest of the shareholders competes with protecting the company’s future.

• Key Implications: To prevent an unwanted takeover, the board might use defensive measures like a poison pill or a golden parachute. If the board is self-serving as well as obstructive, an offense in law can be the breach of their fiduciary duty.
• Solution: The board should be transparent and keep the interests of shareholders as its prime concern while it only takes defensive measures when necessary.

Due Diligence & Information Disclosure

In both forms of takeovers, due diligence is very essential but hostile takeovers however have information disclosure problems. The management of the target company might not be ready to provide in-depth information about the financials to an acquirer they may oppose.

• Key Implications: For hostile takeovers, disclosure regulations need to be followed in order to safeguard the rights of information of the shareholders. In a hostile takeover where limited access to information may cause a valuation dispute or challenge post-acquisition.
• Solution: Due care and procedure should be taken in due diligence, and then legal professionals should make sure the disclosure requirements are satisfied, so no unnecessary dispute arises.

Impact on Employees & Corporate Culture

The process of a hostile takeover frightens and demoralizes employees of the acquired company to such an extent that it can adversely affect the corporate culture. On the contrary, friendly takeovers can be less confrontational; therefore, they can limit employee resistance.

• Legal Issues: Hostile Acquisitions: Workforce reorganization resulting from hostile acquisitions might require compliance with labor legislation and employees’ contracts. A hostile acquisition may pose a greater risk in terms of cultural differences within the workforce that could lead to employment practice-related legal issues.
• Solution: Some of the issues that companies can overcome under bankruptcy include addressing the grievances of the employees, communicating how companies will be made transition and fair severance.

Conclusion

Takeovers, hostile or friendly, have immense legal importance that impacts shareholders, management, employees, and the entire regulatory framework. While hostile takeovers fall within heavy legal scrutiny owing to their aggressive nature, friendly takeovers progress smoother, fewer legal hurdles there are. These differences are indispensable in making a company along with its investors and professionals involved in M&A make the correct choice in terms of strategy. With the legal elements in mind, an acquirer in hostile or friendly takeover might have a successful takeover that benefits shareholders, employees, and the market in general.