May 14, 2012
Hostile bids continue to be a popular M&A strategy both domestically and internationally. Moreover, the gradual erosion of staggered boards and other antitakeover defenses in the U.S. under the pressure of corporate governance groups and activist shareholders has left many companies vulnerable to a hostile overture and less prepared to fend off such attacks. All potential targets should understand the first steps to be taken upon receiving an unsolicited offer.
A takeover battle rarely commences with an outright public bid by the potential acquiror. A more common strategy is a progressive escalation of pressure tactics on the part of the bidder, typically commencing with informal approaches to management and board members. If these efforts are unsuccessful in kick starting a sale process, bidders may escalate their efforts by submitting one or a series of private written indications of interest to the target’s board of directors. In its most aggressive version, such private indication of interest — or private “bear hug letters” — may signal in no uncertain terms that if no positive response is received by an arbitrary deadline, the bidder is prepared to “bring its proposal directly to shareholders” (i.e., the bidder is prepared to make a public announcement of its offer or even commence a tender offer). A bidder’s decision to make a public bid is driven by various strategic considerations, including the expectation that once the bid is made public the pressure from institutional holders and risk arbitrageurs, combined with the prospects of an extended legal and public relations battle, will force the target to the negotiating table.
The following are some steps that a potential target in a takeover fight should undertake immediately upon the receipt of the first indication that a third party may be interested in submitting an unsolicited bid. Taking these proactive steps will help the board be better prepared to effectively manage a potential takeover fight and ultimately act in a manner that best serves the interests of the company and its shareholders.
Assembling the Team. A successful response to an unsolicited bid will require the prompt gathering of the right team of professional advisors seasoned in M&A matters, particularly contests for corporate control. The team should include:
Keeping the Board Engaged and Informed. The board of directors should be kept adequately informed of any material developments regarding a possible or actual takeover bid. If a credible formal proposal is submitted to the board, the board and its advisors should meet promptly to review the matter, but should then take adequate time to gather all relevant information, carefully scrutinize the proposal and make a thorough and well-informed decision as to the proper steps to be undertaken in response to such proposal. The board should be advised not to rush to reach a decision, but instead take the time it needs to build a careful and thorough record reflecting careful consideration of all matters relevant to its decision, including the company’s existing business plan and the potential value of the company as a standalone entity.
Managing Communications. In responding to a hostile bid it is extremely important that the company speak with one voice and send a consistent message to all relevant constituencies, including shareholders, employees and customers. At the first sign that an unsolicited bid may be made public — either directly by the bidder or as a result of a leak — the company should establish clear channels for responding to employee and outside inquiries and should make it clear that only designated members of management are authorized and permitted to speak on behalf of the company regarding the matter. All inbound inquiries should be routed through these designated persons. Furthermore, all such communications must be reviewed by legal counsel with regard to both legal considerations and the impact such statements may have on the strategy the company may wish to take in the face of a hostile takeover bid.
The nature and scope of communications in response to a hostile bid will be driven by the stage of the process and various strategic considerations. As a general matter, absent a public bid a company will want to follow a “no comment” posture. If there is a public unsolicited bid the company will want to coordinate closely with its outside advisors before making any written or oral statement on the matter, as it is imperative that the board of directors be given an opportunity to first carefully review the offer and all pertinent information to make an informed decision on the matter before any substantive statement is made on behalf of the company regarding the merits of the offer. Federal securities laws also impose restrictions and filing requirements regarding materials that are disseminated in connection with a tender offer, thus highlighting the need for close coordination with legal counsel.
Revisit the Company’s Defensive Profile. Prior to any hostile bid, companies that are potential targets should have conducted with outside counsel a comprehensive review of their defensive profiles to assess and understand what vulnerabilities they have and what defense mechanisms are available. A superficial “check the box” analysis, while convenient and inexpensive, may fail to uncover subtle vulnerabilities in a company’s defenses. A company may believe it has the defensive protection provided by a particular provision in its organizational documents (such as a staggered board), but if that provision is not properly drafted, a hostile bidder may be able to exploit a flaw and render the protection useless before the company has time to react. For example, the protections of a staggered board are severely weakened if shareholders can unilaterally expand the size of the board and fill the newly created vacancies. Similarly, in the case of a Delaware corporation, a bylaw purporting to limit the ability of shareholders to act by written consent is ineffective unless the corporation’s charter sets forth the restriction.
All companies should understand that they cannot take at face value a provision written in a certificate of incorporation or bylaw without further legal analysis of its enforceability and a thorough legal analysis of potential loopholes.
In the face of a hostile bid, companies should revisit and update the review in light of the bid; and if they have not previously conducted such a comprehensive review, promptly take steps to do so.
For information about Gibson, Dunn & Crutcher’s Hostile M&A and Shareholder Activism Practice, please visit
Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you work or any of the following:
Dennis J. Friedman – New York (212-351-3900, [email protected])
Jonathan K. Layne – Los Angeles (310-552-8641, [email protected])
Eduardo Gallardo – New York (212-351-3847, [email protected])
Barbara L. Becker – New York (212-351-4062, [email protected])
Jeffrey A. Chapman – Dallas (214-698-3120, [email protected])
Christopher D. Dillon – Palo Alto (650-849-5325, [email protected])
Stephen I. Glover – Washington, D.C. (202-955-8593, [email protected])
Amy L. Goodman – Washington, D.C. (202-955-8653, [email protected])
Lois F. Herzeca – New York (212-351-2688, [email protected])
Michelle Hodges – Orange County (949-451-3954, [email protected])
Robert B. Little – Dallas (214-698-3260, [email protected])
James J. Moloney – Orange County (949-451-4343, [email protected])
Adam H. Offenhartz – New York (212-351-3808, [email protected])
© 2012 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.